'Naked Shorting': Far More Dangerous Than Sexy

'Naked Shorting': Far More Dangerous Than Sexy

Wednesday, July 16, 2008

The business world is forever tossing out colorful phrases. Today's is "naked short."

[Pause for requisite juvenile jokes. Yes, heard that one. And that one. Finished? Good. Back to the story.]

Naked shorting is a particularly skeevy kind of short-selling. It is so potentially harmful to shareholders that the Securities and Exchange Commission yesterday put in new protections to try to prevent naked shorting of mortgage giants Fannie Mae and Freddie Mac and major investment banks.

Regulators think that such doomsday wagering may be artificially depressing stock prices, a process that can end up wrecking a fundamentally sound company.

Regular short-sellers are necessary risk-takers and play a key role in making the stock market work. They borrow stock, gambling it will go down. If it does, they make money. If it doesn't, they lose money.

In naked shorts, shorters sell shares they haven't borrowed or don't intend to borrow. Some even short phantom shares that don't exist. Which is why it's technically illegal, though lightly enforced.

It's a frenetic shadow world of postponed promises, borrowed time, obscured paperwork and nail-biting price-watching, usually compressed into a few high-tension days swirling around the decline of a company.

In short, it's the perfect job for the guy who thinks that the action on an illicit high-stakes card game is too boring, regulated and predictable.

-- Frank Ahrens

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