From Financial Times: Friday 21.30 BST. “Global stocks are rallying as a partial short-selling ban helps European banks rebound – reducing financial system contagion fears – but lingering concerns about global growth and wariness over recent intense volatility are keeping traders twitchy.”
Just the fact that financial stocks rallied when short bans were imposed in France, Spain, Italy and Belgium is evidence enough that the practice should be done away with. How are short sellers any different from the London rioters? They are financial terrorists? Gangs of short sellers can borrow stock someone else owns in order to sell it – based on the expectation the stock can be bought back cheaper. I can’t imagine a more self-fulfilling program. Naked short sellers then spot a riot in progress; confident that the target is already on the defensive and all they have to do is run into the mob, throw a few punches and join in the looting.
The United States had to wrestle briefly with these financial criminals who collectively helped destroy Bear Stearns and Lehman, and now Europe is trying to handcuff the instigators of financial anarchy. And instigators they are, because once they get the mob moving the mass destruction provides a smokescreen that helps disguise the calculated looting that is their true purpose.
You might argue that I can’t compare short-selling to rioting! You’re right in a sense. On the one hand the police can work to identify instigators of riots, capture them and even beat them up a bit before tossing them into jail. But unlike those looters, the most regulators and politicians can do to financial terrorists is impose a short term ban. Imagine walking into the middle of a riot in London (or even after the Vancouver Canucks lost the 2011 Stanley Cup to the Boston Bruins) and politely asking everyone to simply take a break?
The temporary ban, like TARP is a short term fix, not a solution. Once the ban is lifted:
1. The riot resumes
2. The mob moves on to cause grief elsewhere.
Societe Generale (like Lehman) needs capital to survive, but it’s become increasingly clear in recent years that expectations can be manipulated to make (steal) money, but in the process the bank’s capital is literally destroyed – or rather, it has been stolen and put into the hands of the looters. Do we love banks? NO! Do we need banks? Yes! They employ thousands upon thousands of hard working people, and facilitate transactions for both the local and international financial system. Do we really need looters? The argument that they help allocate capital to more productive uses is as absurd as suggesting that the oligarchs in Russia do likewise.
A bank must have enough capital (value of shares times the number of shares outstanding is a big component of capital) to support its debt (loans to people, companies and countries are part of its debt). If financial terrorists gang up and succesfully beat down the market price of the shares, then regulators tell the banks they have to raise more capital…..but how can they? Who wants to buy shares in a bank when rioting short sellers and investors are beating the price down? The downward spiral is devastating. This mob has been terrorizing all sorts of companies in recent decades, but their impact on the financials is especially far-reaching.
Most of us who’ve made a living managing money are well aware of these distortions (and many of my peers have gone to the dark side in order to profit from them). If you’d like a well-written (no jargon, readable) explanation about how legalizing unethical gambling (which is what we’ve got) has managed to screw up the workings of public markets, I’d recommend a good little book called Fixing the Game.
If you believe that describing the short sellers as financial terrorists is extreme, you might want to consider how easy it is for real terrorists to short the markets in front of a lethal terrorist attack and profit from it. What’s the difference really? Only difference in my opinion is that one act of terrorism (shorting) is legal, and the other isn’t.
What’s the downside if they are both illegal? No downside I can figure out. At least the profit motive for the terrorist attack (easy financial gain requiring very little capital, if any at all) would be disposed of.