One maneuver, though much more restricted than it once was, involves selling borrowed securities substantially identical to those already held.
When its counterparties hurriedly returned their borrowed securities and asked for their cash back, American authorities were tapped for a bail-out that ultimately reached $182 billion.
Short sales occur when some market participants sell borrowed securities, hoping to buy them back later at lower prices, and pocket the difference.
If the prices of the shorted stocks fall, as expected, the borrowed securities can be replaced with shares that cost less.
The filing shows how the dark art may have been practised.The SEC rules require traders to locate shares they wish to borrow before selling them short; they must then deliver the borrowed securities to the buyer by a specified date.
In a 1997 paper, "The Limits of Arbitrage", Andrei Shleifer and Rob Vishny noted that the cost of shorting selling borrowed securities in the hope of a fall in price tends to increase, the further above true value that prices rise.
Regulators also fret that assets might not be where they are expected to be as a result of lending activity, particularly if borrowed securities are then used as the raw material for other, unrelated transactions.Hence a slew of new rules.
Inspired by a Fortune magazine account of Floyd Odlum, who became rich by using borrowed securities as collateral for loans to buy undervalued stock, Evans borrowed shares from a Mellon mentor, took out a loan and invested in Gulf Oil stock, then a Mellon enterprise.
The life insurers had been letting hedge funds and other traders borrow securities from their investment portfolios.
In a short sale, a trader makes money by borrowing securities, selling them and later returning the same number of securities at the lower price.
