Naked Shorts Warned You

Henry Paulson

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When I was doing my piece on naked short selling, one of the things short sellers told me, and will tell anyone who'll listen, is that they provide a floor for the market.

What that means is this: In short selling, you borrow the stock you want to short from someone, sell it at a high price, wait a while, then buy it back at a low price and return it to the person you borrowed from. That buying back is key. If you don't buy it back, you can't return it to the people you borrowed it from, and that would be bad for you. So, while short selling, it's true, might lead people to target certain companies they don't like, it also insures that there will be buyers, since the short sellers will have to enter the market eventually to repurchase the stock they shorted.

Now, during this last week, when the Dow has been dropping like a feather on the moon, there's also, perhaps not coincidentally, been a ban on short selling. Could the short sellers' dire warnings be coming true? By removing them from the normal functioning of the market, Securities and Exchange Commission chairman Christopher Cox might have removed the very people you can rely on to stop a stock market plunge. Has he, in effect, made things worse by trying to make things better? It certainly wouldn't be the first time that's been true of government intervention in the free market.

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