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Listen Up: Naked Short Selling, Meet Moral Hazard

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Today's podcast is in. We're on about "naked short selling," thanks to Alex Blumberg, and "moral hazard," thanks to Adam Davidson. How did I end up hanging out with these guys?

Download here; subscribe here. More questions answered, next time.

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Just curious - but how does the notion of moral hazard square with the "golden parachute" given to most (if not all) executives. If executives of failing companies can still walk away with millions in bonuses, how is this any less morally hazardous then bailing out stockholders through government action?

Sent by Haldon Ellwood Lindstrom | 7:35 PM | 9-17-2008

This American Life flagged me to the podcast (and I'm pretty sure the "Giant Pool of Money" episode might be the most well produced hour of radio I've ever listened too). The new podcast is amazing. Thank you guys for doing such a fantastic job- please keep it up, it's truly incredible.

Sent by Jason O'Malley | 2:41 AM | 9-18-2008

My hunch is that moral hazard does not, strictly, apply to golden parachutes (does anyone know for sure?).

But it is pretty clear that if chief executives know they are going to make a lot of money even if they destroy a company, well, that doesn't sound like a good idea.

It would be ideal, I'd think, if companies and shareholders came to this conclusion on their own and just refused to write such contracts. If the government imposes this from above, it gives those CEOs an incentive to figure out tricks (there are always lots of tricks) to get paid anyway. But if the company itself imposes the rules, that is less likely to happen.

But, yeah, it sounds morally hazardous.

Sent by Adam Davidson | 6:22 AM | 9-18-2008

The fact is that board members will continue to hand out golden parachutes to their friends - the execs - unless the shareholders kick them out.

And the shareholders are asleep at the wheel.

Sent by dave c. | 12:01 AM | 9-20-2008

A question on short selling (naked or clothed) that a friend and I have been trying to figure out: at the other end of every short sell transaction is a willing long buyer. If you prohibit one half of the transaction you obviously prohibit the other half as well. Thus someone (the buyer) thinks the price will go up, and they might be right. Isn't that how it's supposed to work?

Sent by Adam Kessel | 10:24 AM | 9-20-2008

Just a random thought, but seems as if McCain listens to TAL and decided that firing Cox was the solution we need NOW...who knew?

Sent by rena | 12:38 PM | 9-21-2008

All short selling involves a buyer, but that buyer could be a "market maker" (in NYSE lingo, a "specialist') who is in the business of assuring that there is always liquidity for that stock. A market maker may buy as a matter of contractual obligation with the exchange rather than as an expression of optimism in the stock, and their optimism may well only be that they will be able to turn the shares around in the market fast and make money from their bid/ask spread.

Sent by Bill Cole | 2:43 PM | 9-21-2008

The question I have is: would the long buyer knowingly give their money to a seller for stock that the seller does not own? That is what short selling is. It is lieing to the buyer. It is selling something that you do not own. This is probably why the hedge funds do not like the idea that the SEC wants it to be disclosed when a short position of over a $million is taken on a stock. The way I see it is this ends up with the stock holders thinking they own more stock than exists. Gee sounds like Mel Brooks' "The Producers" to me.

Sent by joseph Marchegiano | 2:39 PM | 9-23-2008