Short selling is not illegal, immoral, or even bad for the market. It provides discipline in the market provided it is done legally and “ethically.” In an honest and ethical market, there is equilibrium between short and long holders of securities. Unfortunately, since July 2007, we have had neither an ethical nor an honest market. The SEC now works for the hedge funds, not for stable markets. John McCain was right to suggest firing Christopher Cox.

Last July, the SEC abandoned the “up tick rule” in place to protect markets since 1933. This was done without public comment and at the strong behest of lobbyists working on the behalf of hedge fund managers. The up tick rule prevented piling on to stocks under stress by waiting for the next short sale until the stock price at least ticked up a smidgen. Since then we have seen huge increases in volatility; in fact, record volatility.

The shorts, no longer constrained by the up tick rule, are now able to pile on and crush the stock prices of select publicly-traded firms or industries. Today, financial firms; tomorrow, auto makers, airlines, everything else.

Short selling is only possible with securities lending. Securities lending is now the biggest profit-maker on Wall Street, often surpassing commissions or fee income, and the retail customers (who actually own the shares) get nothing in the deal. Without securities lending, short sellers are not supposed to be able to short a stock. These securities they are lending are primarily in the retail IRAs, 401(k)s, and pension funds of Americans. The biggest short sellers are hedge funds.

When they lend your securities, they enable firms to bet against your stocks, pushing them down in value. They get profits, most of America gets losses. In fact, we have had nothing less than a wholesale transfer of wealth from Americans’ retirement funds to hedge fund managers. This enables the hedge funds to hire more lobbyists to keep the gravy train going.

Short sellers evade the “naked short” rules by borrowing the stocks for less than three days, closing out their position, then borrowing them again. In fact, they don’t actually borrow them, they just have to identify that they are available to be borrowed. If two hedge funds identify the same shares as available, then you can actually short the same stock twice, further crushing the stock price.

My advice is to get out of mutual funds now until they stop allowing securities lending on your funds. Contact your Representative and Senator to ban securities lending on retirement accounts. Have all retirement assets converted to Class R shares, and ban securities lending on Class R shares. It is a simple legal fix to the looting of America’s retirement accounts.