Sorry, Matt Taibbi, Naked Shorting Didn't Bring Down Lehman Brothers

Naked short selling played no role in the downfall of Lehman Brothers. We know this is true because the government and the New York Stock Exchange measure naked shorting in order to implement a rule called Reg SHO. And Lehman never showed up on the list of stocks subject to large amounts of naked shorting.

Begining in 2005, the Securities and Exchange Commission and the stock exchange began keeping a list of stocks in which there were over 10,000 “fails to deliver” for five consecutive days. A “fail to deliver” may be a sign that a stock has been subject to a naked short sale–that is, sold without being borrowed before hand.  It is the technical term that describes what happens when a stock is purchased by someone but not delivered by the seller within 3 business days of the sale.

Stocks that wind up on the Reg SHO list are subject to extra scrutiny in short sales. The broker for the seller is prohibitted from initiating the sale unless he has a basis for believing the stock can be located and delivered on time.

Lehman Brothers never wound up on the Reg SHO list. And there’s a very good reason for this. Stocks typically only become difficult to borrow when there is heavy buying activity, which is why most naked short sales occur following good news about a company. In the final week of the life of Lehman Brothers, there was no problem locating stocks to short. Plenty of people were willing to sell to people who had shorted the stock earlier.

There was a surge in fails to deliver in the very last days of Lehman Brothers, but it didn’t last long enough to wind up on the Reg SHO list. As many as 32.8 million shares in the company were sold and not delivered to buyers on time, according to data compiled by SEC. But the company’s bankruptcy intervened and shares stopped trading.  The bankruptcy of Lehman wasn’t driven by the stock price but the fact that no one would lend to Lehman over that fateful weekend in 2008.

The naked short selling conspiracy theory lacks any basis in fact. It is pure nonsense.

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