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Commentary

They’ve banned them. Why not do it all?

What the US Government is doing:

  • Banning short selling (till Oct 2).

    The Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The U.K. FSA took similar action yesterday.

    The Commission’s action will apply to the securities of 799 financial companies. The action is immediately effective.

    Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets. At present, it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation. Financial institutions are particularly vulnerable to this crisis of confidence and panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business.

    This is really nice, huh? So the price of Lehman brothers should have stayed up right until the second they declared bankruptcy. (They never ever declared bankruptcy because of their stock prices, pls to note). Also with Bear. Oh yes, and Freddie and Fannie were fantastic companies to invest, even at $15 a share, until the US government diluted them 80% and the price ended up at, let’s see, 25 cents or something.

What the US government is NOT doing:

  • Taking profits from Bond funds like Pimco that invested in AIG debt at 33 cents to a dollar, to then get the US government to pay them back 100 cents.
  • Disallowing CDS contracts to be higher than outstanding debt. Heck, we don’t know yet, but Lehman’s 150 billion dollar debt might have had $2 trillion CDS written on it. But the US government is “okay” with that, apparently.
  • Requiring exchanged traded derivatives. Apparently if you remove short sellers, the unbridled leveraging can continue.
  • Noting that they will somehow institute such a law to protect the people that short sold from losing money, by not allowing prices to go up more than say 5% from yesterday’s price. After all, speculation is a bad thing.
  • Taking it’s head out of its ass.

Uncle Sam has to “appear” as if he is doing something. Uncle Sam is currently married to Auntie Taxpayer, but when he’s caught cheating, he’s blaming the weather.

If you think everything above is idiotic, you might just be right.

  • px says:

    >From
    What the US government is NOT doing:

    i beg to question
    do all regulators act like this and find quick shot fixes to show they are sorting the problem

    ps this reminds me of the uti64 crises

  • Anonymous says:

    >It will be interesting to watch the reaction of short sellers who will now shift their atention from Financial Sector to other sectors where shorting ban is not applied.

    It will also be interesting to see if the US Govt. will buy Mortgages from Europe as well.

    Americans were preaching Asians in 1997/98 about “not interfering with Free Market Forces”. But when it comes to themselves they have different set of Morals. That is Western Imperialism.

  • Anonymous says:

    >It’s the Election year syndrom. Politicians believe if they NOT SEEN to be doing something, people will forget them.

  • Abhijit says:

    >Everyone Knew Hank had a bazooka.. Still they were not scared.. So finally he’d to take it out.. Still they were not scared.. He’d no choice, but to fire it now!! It killed some of them (or perhaps a lot of them).

    The biggest problem with banning short selling is – Short selling provides a cushion at the lower levels (ie. if the company is not going bankrupt!). That cushion is now taken away. Wait 2nd October and it will be business as usual (for all you know some of Hanks’ friends might have stuck at a million 1250 SnP calls expiring today).