SLOAN | Legislation sells short sales...short | Columns

August 19, 2021

Kelly Sloan

Kelly Sloan

It’s become axiomatic that politicians of the central-planning inclination have developed a knack for singularly finding problems that no one else even thinks exist, let alone problems that can only be fixed — and must be IMMEDIATELY — by the not-so-invisible hand of government.

U.S. Rep. Maxine Waters (D-CA, of course)is one of those relentlessly on the hunt for something to regulate. She recently found one, revealed to her watchful eye by the GameStop incident, which compelled her to introduce a bill to go after the investing practice of short sales.

You remember the GameStop episode — the firm that saw its stock become ridiculously overvalued earlier this year at the behest of a deluge of orders germinating from a Reddit plea, until the clearing house, Robin Hood, halted trading to allow sanity to re-establish itself. Anyway, in response to that — rather than letting the market work out market-related things like the market did — Ms. Waters decided that nefariousness must have been at play, prompting her to introduce the “Short Sale Transparency and Market Fairness Act.”

Now first of all, experience tells us that anything with the title “Market Fairness” should probably be immediately filed in a locked vault labeled “Open Never” and kept safely there until the final echoes’ of Gabriel’s horn have faded into eternity. Looking deeper, it is simply the reaction to the alarm bells that rang in the minds of the central planners after the GameStop frenzy, who abhor the thought of risk or unpredictability polluting the marketplace.

What this bill does is attempt to regulate short sales. A short sale is a margin transaction, often used by hedge funds who have a fiduciary duty to their investors — usually pensions, retirement funds, that sort of thing — to try and realize a return on investment even in a declining market. Basically, it happens like this: an investor borrows a security, like a stock, that they believe is overvalued, in anticipation of it dropping in price. They then sell that borrowed security at the current price, and wait for it to reduce in value, at which point they buy it back at the reduced price and return it to the original lender, making money off the difference.

It’s a risky strategy, one that relies on good timing and being right about the price trajectory. But it has its benefits: as mentioned, it offers a chance to make money even in a bear market; it also provides some stability (a hedge if you will) during times of market volatility (like, oh I don’t know, a public spending-fueled inflationary typhoon.)

Short sales serve a market signaling function as well, as they can identify potential trouble spots before they create larger problems in the market, such as unrealistically overvalued stocks, bubbles, and so forth – well before (and far more accurately) than any government watchdog could ever hope to.

So why the rush to put the lid on them? Ostensibly, like most such initiatives, it is to protect “the little guy”, the undefined benefactor of government largess and protection. In this case, one supposes that is the fellow who buys overpriced stock.

The leveling compulsion among the left wishes to protect against the assumption of risk. But risk is what makes the market work. In fact, it’s what makes life work. But the leftist abhorrence of risk can be seen everywhere, from the obsession over creating a welfare state, to the near-paralyzing fear and disproportionate reactions to the COVID pandemic.

This also feeds the perpetual War Against The Rich, the reflexive impulse to punish anyone who makes money, because obviously they have done something untoward to get it. Almost all of the most discredited and unsound economic policies – wage-and-price controls, progressive income tax, capital gains tax, the current proposal to raise the corporate income tax rate to higher than China and most European countries – all have their root in the same skewed thinking.

Like these other policies, the people who will be harmed by them are generally precisely the people that the levelers think they are helping. In this case, the hedge funds which typically utilize short sales benefit retirement plans, higher education institutions, and non-profits. In Colorado, hedge fund investments deliver some $13.26 billion into those types of things. More than $5 billion goes into retirement plans, including PERA and the Colorado Police and Fire Pension Fund. At least seven colleges and universities in the state invest more than half a billion dollars into hedge funds.

So it is retirees, pensioners, college students, and non-profit foundations which will be the victims of Waters' bill, a bill introduced out of the fear that someone, somewhere, is making money.

Kelly Sloan is a political and public affairs consultant and a recovering journalist based in Denver.