Ban Short-Selling Fairly

November 21, 2008

Sankarshan Acharya
Pro-Prosperity.Com and Citizens for Development

November 21, 2008

Honorable Chairman

Security and Exchange Commission

Cc:  Honorable President-elect Barack Obama

       Honorable Speaker Nancy Pelosi and Honorable Senator Harry Reid

Sub: Ban Short-Selling: the Illegal Frankenstein Monster Devouring Wealth

Dear Chairman,

Since June 2001, I have argued with the SEC that the pre-Great Depression era practice of short-selling is suboptimal for the vast majority of taxpayers and investors.[1]

Mega banks, their market making arms and allied and internal hedge funds have practiced short-selling of financial securities, ostensibly for hedging, but actually to nibble away pension plans, mutual funds and retail investments according to my rational inference.  Regulatory agencies have tacitly supported the short-selling practice. 

My inference is that systemic short-selling by mega banks has contributed to bankrupting of the vast majority of American households, who are the effective producers of globally competitive goods and services.  These households prop the system of governance including banking and regulation.  They feed and protect the unproductive lot. 

By my reckoning, short-selling of financial securities has contributed to a faster erosion of the retirement savings of the productive households than possible if this practice were nonexistent.  Short-selling of wages (by shipping jobs overseas or by cannibalization) has eroded the wherewithal of these households.  Short-selling may have thus contributed to an irreparable depression in the vast majority of households. 

Depression of producing households saps national competitiveness and economic security.  I am humbled by the foresight about erosion in competitiveness well before 9-11 in 2001 and wrote about banning of short-selling to the SEC and the Federal Reserve. 

The regulators tend to worry little, if not remain entirely complacent, when bankers and rulers are prospering, despite depression faced by the vast majority of households.  The vast majority of producers that loses its hard-earned savings due to short-selling by mega bankers tend to blame luck, God or own missteps for the misfortune.  They have little time to search for the truth, let alone protest. 

The short-selling practice has now proved to be a Frankenstein monster, which is devouring the same mega bankers that once profited immensely from it by driving others penurious. The short-selling monster has fortunately bared the ineffectiveness of the current system of governance, if not of the governors.

The regulators have this year banned short-selling of only banking stocks, not other stocks.  This obviously proves that the regulators are worried only when banking stocks fall, not when the vast majority of other nonbanking companies fall due to short-selling. 

The market capitalization of nonbanking stocks is significantly higher than that of banks. More wealth has thus been stored in nonbanking stocks.  Nonbanking companies are the productive centers.  If bankers systematically destroy the wealth stored in nonbanking stocks for self-enrichment and the governors do not care, then the system is lopsided. 

It is in the best interest of the governors to protect the productive centers at least as well as the banks.  Not doing so is a serious fault in the system of governance.  It would establish that governors do not care to destruct the vast majority of productive centers due to short-selling.

The fault in governance should be corrected to serve the best interest of the real economy and of the real productive centers that feed and secure the banks, governors and the nation: by banning completely the pre-Great Depression era practice of short-selling of any fundamental security by anyone, including banks, market makers, hedge funds and investment banks. 

I hope the SEC would adopt a fair rule on banning the short-selling practice in the meeting of the Organization of Security Commissions on Monday.[2]

With best regards,

Sankarshan Acharya

Sankarshan Acharya



[1]The argument is available in a formal paper on the internet at http://www.pro-prosperity.com/Research/Sub-Optimality%20of%20Short%20Selling.pdf.

[2] SEC calls meeting of world regulators amid crisis, The Associated Press November 20, 2008, 10:02PM ET http://www.businessweek.com/ap/financialnews/D94J2BF80.htm