The Securities and Exchange Commission on Friday issued a temporary ban on short sales of 799 financial stocks, a move against traders who have sought to profit from the financial crisis by betting against bank shares. The temporary ban, intended to bring calm to the markets, follows similar action by Britain on Thursday. The S.E.C. said the “temporary emergency action†would “protect the integrity and quality of the securities market and strengthen investor confidence.â€
So I ask, when the market returns to “normal”, will short selling be OK again? Exactly when is it OK to bet and assist in the demise of a company and undermine capitalism and the economy? And why would the S.E.C then lift the ban, returning to ignoring the integrity and quality of the securities markets and reduce investor confidence? Notice that in some European countries like Germany, short selling of any kind is banned.Â
“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,†the S.E.C.’s chairman, Christopher Cox, said in a statement announcing the measures on the commission’s Web site. “The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets.â€
What, and then it’s back to chaos as speculators are allowed to run wild? And especially naked short selling, which is the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale. When the seller does not then obtain the shares within the required time frame, the result is known as a “fail to deliver.” Why exactly is that legal in the first place? That’s like buying something on credit, and not even having the credit. Or selling an item that you don’t even have.Â
It has often been blamed for forcing prices down in times of market stress, but the level of anger has intensified as the American government has been forced to bail out major financial institutions and the leaders of some investment banks have asked for action to protect their shares.
Now some of these investment banks are asking the government to help protect their share value. Aren’t these the same investment banks that borrowed money on heavy margins, 30x their assets, to put in risky mortgage investment that they knew were a stack of cards? Knowing that mortgages were being sold to people who didn’t even have to verify their income???
Short sellers say that the criticism directed at them, and any restrictions on their activity, are wrong-headed, because they were among the first to raise the alarm about the risky mortgage lending practices that led to the current financial crisis.
This may be true, they were among the first to raise the alarm, and profited in the demise in the process. But the alarm could have equally been raised by pulling existing capital out of these vehicles also.
Senator John McCain, the Republican presidential candidate, said the S.E.C. had “kept in place trading rules that let speculators and hedge funds turn our markets into a casino†and said that the S.E.C.’s chairman, Christopher Cox, had “betrayed the public’s trust.â€
And then that crazy old man you see screaming “Hey kids, get off my lawn” chimes in with his “it’s the other guy’s fault” comment. I’m not sure what Christopher Cox could have done, if anything. And why do I say that? I say that because back in 1999-2000, Congress (who that crazy old guy belonged to) passed legislation specifically banning the regulation of Credit Default Swaps and Collateral Debt Obligations by the S.E.C. Check it out. Basically, congress did the bidding of the banking and investment community to let them run rampant on CDS’s and CDO’s with no checks and balances. Basically, these vehicles are insurance policies that are unregulated. They were not required to keep any capital reserves at all, and that’s what happened to AIG. But hey, I’ll be posting more on this particular subject and how this all happened in layman’s terms in an upcoming post.