SEC Considering Forcing Hedge Funds to Disclose Short Positions

I honestly think the hedge funds did a brilliant job of their sole purpose - maximize profits - in this era. Even if some of their tactics are disgusting. They played the game to perfection. They know the ratings agencies after taking so much heat now shoot first, ask questions later. They know the rating agencies recently begun taking stock price into consideration of their ratings (which is ludicrous - so that means ABC.com in 1999 deserves an AAA rating?) They know by buying up CDSs they can create a panic, which drives down the stock price, which causes the rating agency to downgrade, which leads to a death spiral.

They found the loopholes. But I think they took it one step too far. You simply do not attack Goldman Sachs (GS). Goldman has too many people placed in government. CNBC said this morning, Morgan Stanley (MS) CEO was livid yesterday and had the ears of people in various arms of the government (he was once considered for SEC commissioner) - essentially if Morgan Stanley goes down, this is blood on your hands. In the end it still comes down to who you know. And I think the government is now fully engaged. Again, I think some weak companies (i.e. Franron - I stole this term but I love it - that would be Freddie/Fannie/Enron for newbies) should go to zero but when stock price action clearly has disassociated from fundamentals you no longer have a "fair" market. And this was finally registering by those who matter and can change the rules. Again the irony is the traders at these investment bank firms have benefited from the rules for a long time - only when their Frankenstein partners turned on them did they realize the other side of the trade.

The SEC has been a total disaster but they finally are enforcing a rule on naked short selling they have had on the books since 04 I believe. It's a disgrace what has been done to small company after small company by hedgies who can attack them relentlessly and they are too small to defend themselves. But now that they've targeted the big fish - Goldman - it's going to change. Another thing you might hear a lot is bring back the "uptick rule" - this was taken away a year ago... it was "stress tested" in a bull market - duh. Basically this means you need to wait at least for a "tick up" in the stock price before you can reshort. Frankly I think in this era of quant hedge funds and computer trading the uptick rule is now rendered useless. Let's say I want to short the stock into the ground - these super computer (I am being serious) can put in thousands of trades a minute - all it takes is an alternating system of sell short, then buy 1 share on the upside, sell short, buy 1 share on the upside. Etc. These are some of the brightest minds on earth many with PhDs in the sciences - they can figure it out. So that's a non starter.

However, there are potential game changers on the horizon. This would be a huge one and in fact I am blown away they would consider it. The whole idea of hedge funds is secrecy and being hidden away from regulation. They have to file their positions quarterly like a mutual fund. But only their long positions - I've always wondered why not their short positions? That was a major issue. But even then, in this current era - if you were attacking a stock in a pack - all you would have to do is lift your shorts by the end of day 4 PM on March 31, June 30th, Sep 30th and Dec 31st and no one would know what you were doing (those are your end of quarter dates) But now the pendulum has swung so far - again this is amazing - the SEC is considering rules that hedge funds over $100M in size have to release their short positions DAILY. That's simply a seismic shift if it happens. Because this takes away the entire idea of the secrecy of positions.

Once more - don't mess with Goldman Sachs. They simply are too intertwined with US government. As with all things, in the pursuit of greed - people crack the golden egg. If this rule passes, it simply changes the game.

• The U.S. Securities and Exchange Commission may require hedge funds to disclose their short-sale positions and plans to subpoena the funds' communication records in an effort to stem turmoil in stock markets.
• Hedge funds and investors managing more than $100 million in securities would be ``required to promptly begin public reporting of their daily short positions,'' Chairman Christopher Cox said in a statement late yesterday. The agency will obtain ``disclosure from significant hedge funds'' regarding ``past trading positions in specific securities,'' Cox said.

• Lawmakers including U.S. Senate Banking Committee Chairman Christopher Dodd and executives such as Morgan Stanley Chief Executive Officer John Mack say short sellers may have contributed to the market crisis by spreading false information and using abusive tactics to attack companies. Hedge funds argue that poor business strategies are to blame, not short sellers.

• ``A lot of hedge funds don't like being forced to disclose their long portfolios, so they're really not going to like this,'' said Sean O'Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York. ``There is going to be some push back from hedge funds, but they may not get any sympathy in the current market environment.''

Folks, this is going to be very interesting to watch play out and I can bet you a lot of people are quaking in their boots in NYC and Connecticut. I've said someone is going to go down for this in the past - they will find people - those in cahoots and working together to bring down the Lehmans, Bears, Fannie, Freddies - they will find someone not named Martha Stewart.