Scott Rothbort, Founder, ThefinanceProfessor.com Explains The Potential Impact of the SEC's New Short Selling Rules
Monday, July 21, 2008PAUL KANGAS: Speaking of speculators, the Securities and Exchange Commission's emergency order aimed at reigning in abusive or naked short selling in shares of Fannie Mae (FNM) and Freddie Mac (FRE) took effect today. It also covers 17 Wall Street financial firms, including Lehman Brothers (LEH) and Citigroup (C). Joining me now to talk about that order is Scott Rothbort, president of Lakeview Asset Management and founder of the web site thefinanceprofessor.com. And Scott, welcome to NBR.
SCOTT ROTHBORT, FOUNDER, THEFINANCEPROFESSOR.COM: Thanks for having me.
KANGAS: With over $1 trillion in equities estimated on loan right now, this is big business that short selling, is it not, and what impact will this order have?
ROTHBORT: Oh, it's a tremendously big business. I think they're being very narrow in their focus, because the financial stocks have certainly been under a lot of pressure. Look, my opinion is that we need short sellers in the marketplace. There is value to having them. However, there are a lot of abuse of short sellers. And we really need to go beyond just the Fannie and Freddie Mae problem and look at some of the issues that are in the marketplace vis-a-vis abusive short-selling techniques.
KANGAS: So you feel that there is some advantage to having the short sellers around, keeping a better market. Is that it?
ROTHBORT: Yes, I believe it does keep more orderly markets. I think it does keep some of the markets in check. It does create liquidity in the marketplace, which is necessary. I have no problem with short selling. On occasion, I do short sell. It's the abusive practices that I think really need to be outlawed. Let's understand the fact that what we need to do as a matter of public policy is that we need to protect shareholders. And when you have abusive short-selling techniques, the shareholders are the ones who are getting hurt.
KANGAS: When we talk about naked short selling, they just short a stock without finding anyone that they are going to borrow it from first?
ROTHBORT: They just go ahead and short it. They don't look for a borrow. They don't care about a barrow. They basically just do what we call is a bear rate on a stock. They just sell it and sell it down and they create a panic. They spread rumors. They do all those things.
KANGAS: The SEC's emergency order can last up to 30 days, and it only impacts a handful of stocks. Will it really help, or is more action needed, like the restoration of the uptick rule?
ROTHBORT: I think that we're going to go beyond this. I think there's going to be a full-scale investigation both in terms of the SEC, perhaps academically, also on Capitol Hill. I think we will see the uptick rule reinstituted.
KANGAS: Why was it ever.
ROTHBORT: ...in full or in part.
KANGAS: Scott, why was the uptick rule eliminated in the first place? Do you have any idea?
ROTHBORT: You know what, I think it was eliminated based upon some academic research that was performed. I'm not quite sure. I really think the reason that it was eliminated was because there are a lot of pressure being put upon the SEC by hedge funds and other short sellers to make it disappear. The reason we put this rule in place back in the early 1900s was to avoid the catastrophic effects of bear market rates.
KANGAS: Just quickly, do you think that the uptick rule will be restored, yes, or no?
ROTHBORT: Yes, I believe it will. Perhaps not to the same extent that it used to be in place, but certainly will to some extent.
KANGAS: Very good. Scott, I want to thank you for sharing your insights with our viewers. ROTHBORT: My pleasure.
KANGAS: My guest Scott Rothbort of Lakeview Asset Management and thefinanceprofessor.com.
