"WAMU wouldn't have fallen if short selling were illegal. I am learning this from new academic research available on the internet (pro-prosperity[dot]com) which claims that short selling is constitutional and should be made illegal.
My understanding of the new academic research is as follows:
Just imagine that you are in the shoes of the top Wall Street bankers like JPM and that you have been short selling securities that others are buying due to credit growth. What would you do? You will use the insured deposits at your command and borrow more from the Fed, as long as you can, to bring down the markets by selling more securities short.
You may eventually run out of insured deposits and Fed loans to continue your highly leveraged short selling. You then eye on asset rich banks like WaMu with sufficiently large deposit bases. Then you do even naked short selling of WaMu stock to confuse the rating agencies to downgrade all WaMu securities. Then WaMu is unable to raise debt and its equity price doctored by you falls further.
Then you tell the regulators that WaMu is facing a crisis, but that you can acquire only WaMu's assets and no liabilities except the insured deposits. The regulators find this suggestion costless to their agencies and give you a green signal to takeover WaMu's assets and deposits. You do not have to cover the short positions on WaMu.
Now you are the winner. Politicians adore you because you can make good political contributions. The academia will plead for you when you throw some crumbs at them. Then you and the academia prove to the world that the crisis was an act of god.
If short selling were illegal, you could not do the game stated above.
The equity holders here are scolding one Wall Street "god" versus the other Regulatory "god." Fighting for equity right is crucial for a capitalist economy, but it does not solve the real problem that leads to loss of hard earned capital in society. Even jailing a few gods, if they are found guilty, will not solve the main problem.
The rightfully aggrieved losers of their hard-earned capitals should concentrate on solving the main problem that causes such losses. The new academic research says that short selling is unconstitutional because it creates more shares than legally outstanding and authorized by a company. (pro-prosperity[dot]com).
This is my humble opinion. I would like to learn what you think. "
Cited by manipulation_decipher on yahoo messageboard
