Was 9/15 a new 9/11?

Something I haven't contemplated before now: what kind of leverage over the airlines did the put options provide? Was it some kind of psychological/intimidation move, given that evidently no one ever cashed in? Or one of those dangling clues that could be used as needed in the future -- like the porkchop transfer?

Cramer is not comparing it to pre-9/11 short selling, I think he's talking about the decline in airline stocks AFTER 9/11, which he claims people thought was bin Laden striking again in a different way.

In any case, suggesting that short selling these worthless stocks is anything but a smart investment move is simply an attempt to hide the fact that indeed these things are worthless.  here's a little economics 101...

The short selling process works like this: An investors opens up a margin account with a broker, usually with an initial investment of $10,000. Short selling accounts require a type of security deposit, called a maintenance margin. The margin is required to ensure that the shorted stock can be returned to the borrower. After an account is set up, the investor is ready to short stock in the market. (For more insight, see What are the minimum margin requirements for a short sale account?)



The object, as was stated earlier, is to sell the stock and then buy it back at a lower price than what the price was initially. Any profit that the investor makes is on the difference between those two prices. For example, assume that Joe the investor believes FGH Corp.'s stock is going fall in price. The current market price is $35 per share. Joe takes a short position on FGH and borrows 1,000 shares of the stock at the current market rate. Five weeks later, FGH falls to $25 per share, and Joe decides to purchase the stock, which is called buying to cover. Joe's profits are going to be $10,000 [($35 - $25) x 1,000], less any brokerage fees associated with the short position.



Short selling is risky because stock prices, historically speaking, increase over time; theoretically, there is no limit to the amount a stock price can rise, and the more the stock price rises, the more will be lost on a short. For example, assume Joe the investor makes the same short at $35, but instead the stock increases to about $45. Joe, if he covered at this price, would lose $10,000 [($25 - $35) x 1,000] plus any fees, but there may be nothing stopping FGH's stock price from increasing to $100 per share or even higher!



While the downside of a short is unlimited, the plus side has a calculable limit. Assume that Joe takes the same short with the same stock and price. After a few weeks, FGH falls to $0 per share. The profit from the short would be $35,000 less fees. Here, this gain represents the maximum that Joe can make from this investment.



For further reading, see How does somebody make money short selling? and the Short Selling tutorial.

 It seems that basically investment banks offer customers the opportunity to short sell as a fee-based service.  They don't lose money since the stocks they hold are going to go up or down anyway.  They just let people pay to play a game where if the stock goes down they get to make some money.  Now, when short sellers lose money, it's because the price went up, not down, i.e. they guessed wrong.  When they MAKE money, again, the bank that lent them the stock to sell doesn't lose because they were going to hold that stock anyway, and after the price drops they have it back.  The one who loses then is the sucker who bought it from the short seller.

They have to stop short selling now because since everyone will want to short sell these stocks and NO ONE will want to buy them, their real value ($0) wil be exposed and the whole game will be revealed for the fraud that it is, i.e. why would the government bail out companies that aren't just in trouble but worth nothing?

Friday September 19, 7:07 am ET
By David Goldman, CNNMoney.com staff writer

The U.S. Securities and Exchange Commission took what it called "emergency action" on Friday and temporarily banned investors from short-selling 799 financial companies.

The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

Short sellers borrow stock with the aim of selling it, then buy it back at a lower price, hoping to pocket the difference. The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short selling has contributed to the recent tailspin in the stock market.

"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," said SEC Chairman Christopher Cox in a statement. "The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets."

Cox said the action "would not be necessary in a well-functioning market," and is just one of many actions being taken by the government to jump-start the embattled financial markets.

The SEC also said it would temporarily ease restrictions on companies' ability to repurchase their stock, and force money managers to report their short positions in certain stocks that are not included in the 799 banned companies.

Some market observers, including top bank executives, have also blamed short sellers for the punishing declines in bank stock prices over the past few days. Critics of short sellers have argued that some had been spreading rumors about a company while "shorting" the stock in order to drive the price lower.

The ruling comes after the SEC decided Wednesday to ban the practice of so-called "naked" short-selling, in which investors short the stock without actually borrowing it.

On Thursday, Britain's Financial Services Authority also temporarily banned short-selling for financial companies. The SEC said it is consulting the FSA in the matter.

http://biz.yahoo.com/cnnm/080919/091908_sec_short_selling.html?printer=1