On Wed, Oct 1, 2008 at 9:46 PM, WJhonson@aol.com wrote:

In a message dated 10/1/2008 6:25:06 PM Pacific Daylight Time, nawrich@gmail.com writes:

I read the article - it says it was published in Forbes, with a few paragraphs added connecting his criticism of naked short selling to the current crisis. It isn't hard to predict a disaster after it has already happened.>>

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Ah but you're ignoring the fact that the SEC issued new regulations curbing naked shorts. So evidently it wasn't only Byrne who felt there was some connection is it?

Byrne was definitely right about one potential risk from naked short selling, though the jury is still out on whether or not he exaggerated the magnitude of the problem. Naked shorting is selling a stock that you don't own, haven't borrowed, and haven't arranged to borrow. If you don't buy or borrow it by settlement, then there is a failure to deliver. Now, the risk is that the naked short seller goes bankrupt before obtaining the stock. In this case, the broker is supposed to cover the loss. But what if the broker goes out of business too?

Seemed like a fairly unlikely scenario a year or two ago, and SIPC is there to cover you (up to $500K, anyway), in that unlikely scenario. But nowadays brokers (and hedge funds, which are probably some of the major naked shorts) are going bankrupt left and right, so the doomsday scenario presented by Byrne (where innocent stockholders find they actually own worthless IOUs) becomes much more possible.

Frankly, if SIPC *doesn't* wind up paying out big time on defaulted FTDs, then Byrne must have exaggerated the magnitude of the problem, because the current liquidity crisis is about as much stress as the markets are ever going to get.