THE unholy trinity of margin loans, short selling and stock lending have combined to cause severe difficulties for certain stocks - and individuals - in recent weeks, and arguably have contributed to a more volatile and less informed market.
Each is a simple concept.
Margin borrowing is taking out a loan to buy more stock than you can afford; or borrowing against shares you own.
Short selling is the reverse of normal share market practice: it is selling a stock first, and buying it later. If the price falls after you sell you profit, as your selling price is more than your buying price.
Stock lending is where the owners of shares lend them out, for a fee, to borrowers who are free to use them in any way they like - although the shares remain owned by the lender, who can recall them from loan at any time.
Right now there are huge foreign/domestic hedge funds, as well as sovereign wealth funds shorting the hell out of companies, especially the commercial finance-based ones. (WaMu, Goldman Sachs, AIG, Morgan Stanley, Merrill Lynch, Lehman Bros.)
Once the share price falls low enough the company gets it's credit rating downgraded, which in turn leads to increased margin requirements and a liquidity crisis. Can we say forced bankruptcy anyone?
Chris Cox and the SEC haven't done a damned thing about it. Either they are complicit in causing this crisis or they are truly a dumb bunch. I suspect the latter to be true.
