It wasn’t long ago when they were saying that naked short selling never happened. They said it simply did not exist, that only wild-eyed conspiracy theorists believed in naked short selling. That was before 2008, when the CEOs of some big banks started hollering that naked short selling was causing the stock prices of their banks to nosedive. With the CEOs of the big banks hollering, the SEC, in June, 2008, issued an Emergency Order banning naked short selling (that previously did not exist) in the stocks of 19 big financial institutions (i.e. the financial institutions that were doing the naked short selling—to each other). But the SEC did nothing about the naked short selling of other stocks because, apparently, that naked short selling existed only in the fevered imaginations of people who believed that their savings were being wiped out by little green men.
Then, in August 2008, the SEC lifted its Emergency Order banning naked short selling of stock in the 19 big financial institutions, and those financial institutions began naked short selling each other again. Their stocks (which had increased in value while the Emergency Order was in place) once again nosedived, and one of them, Lehman Brothers, saw its stock go into a classic death spiral (i.e. a spiral that caused death). Almost immediately after Lehman collapsed, the SEC issued another Emergency Order, this time banning all short selling in financial stocks, and in this new Emergency Order, the SEC stated in plain English that naked short selling can cause stocks to go into death spirals, making it difficult for the targeted companies to raise new capital, and thereby result in bankruptcy. Which, of course, was what had just happened to Lehman, as the SEC knew full well.
Some weeks later, the SEC lifted that Emergency Order and put into effect some new rules governing naked short selling. Ever since, the SEC has maintained that naked short selling rarely occurs, and it certainly has never sanctioned anyone for the naked short selling that (according to the SEC) created an “emergency” in 2008. So once again, the conventional wisdom is that only wild-eyed conspiracy theorists believe that naked short selling occurs, and only UFO abductees with tin foil hats believe that naked short selling occurs in massive volumes, causing damage to the markets.
It has long since been forgotten that CEOs of big banks were, back in 2008, hollering that naked short selling had caused their stock prices to nosedive, and it has long been forgotten that the SEC issued two Emergency Orders in 2008 to save the banks from naked short selling, suggesting in one of those Emergency Orders that naked short selling had contributed to the collapse of Lehman Brothers. And now we know why it has been forgotten. Now we know why the term “naked short selling” has once again been scrubbed entirely from the public discourse in quite Orwellian fashion. It is, of course, because the big banks are still perpetrating (with the full connivance of the SEC, whose data says it isn’t happening) massive volumes of naked short selling. This, anyway, is what we can conclude from a recent FINRA settlement