It is clear from the credit crisis that shorting is one of the many things that governments and regulators do not understand about financial markets. In September, the US SEC, the UK’s Financial Services Authority and several other regulators banned shorting of financial stocksin an attempt to stop the stock markets from deteriorating further and to help protect the capital of financial firms.
Several weeks on, stock markets are still volatile, and the stock prices of financial firms are still falling. It was a stupid move by regulators that will return to haunt them. Pointing the blame at short-sellers was misguided. Are short-sellers to blame for the demise of Lehman Brothers? Or was Dick Fuld and the hands-off oversight of the regulators to blame? Was HBOS pushed into the arms of Lloyds TSB by short-sellers? It is unlikely. Yes 5% of that stock was borrowed but its stock price was driven down by selling, not short-selling. HBOS, Merrill Lynch, Wachovia, WaMu, Dexia, Fortis – these are all household names held by retail investors, pension funds and institutional investors; these investors were sellers of these financial stocks, and they were not short-sellers.
As surely governments and regulators must be aware, short-sellers eventually have to buy in.