Interest Rate Roundup

Tuesday, March 10, 2009

It's not just accounting rules! Evil short-sellers are destroying the financial system, too!

Just when you thought accounting rules were the only reason the financial world was coming unglued, a new bogeyman has now been revealed to all: The evil short sellers. It's not that banks are loaded up with trillions in bad loans and securities, the result of stupid lending and investment decisions made over the course of the biggest credit bubble in world history.

Nope. It's those meanie short sellers ganging up to "falsely" drive bank stock prices lower. And the only way to get 'em is to do things like ban short sales and reimpose the uptick rule (never mind that the SEC's OWN ANALYSTS found that said rule doesn't really accomplish anything in the era of modern trading, as noted in this 2007 release on the rule's repeal):

"On July 28, 2004, the Commission issued an order creating a one-year pilot temporarily suspending the tick test and any short sale price test of any exchange or national securities association for certain securities. The pilot was created so that the Commission could study the effectiveness of short sale price tests. The Commission's Office of Economic Analysis and academic researchers provided the Commission with analyses of the empirical data obtained from the pilot. In addition, the Commission held a roundtable to discuss the results of the pilot. The general consensus from these analyses and the roundtable was that the Commission should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation. In addition, the empirical evidence did not provide strong support for extending a price test to either small or thinly-traded securities not currently subject to a price test."

By the way, how did the government's last go-round at limiting short selling impact the banking system? Did it fix the underlying problems? Did it stop the stocks from falling? For that matter, did the initial announcement of TARP ... the spending of hundreds of billions of dollars on capital infusions ... or any of the other programs to date stem the industry's bleeding?

Above is a chart of the BKX, an index that tracks the stock performance of the leading U.S. banks. I've labelled the gigantic short-term moves that occurred when Washington intervened aggressively in the market (specifically, when the SEC banned short-selling in specific financial stocks in July and when the broad outline of the TARP program was leaked in September). Clearly, these efforts have been a rousing success -- proving without a doubt that the problem with the banking industry isn't its dismal underlying fundamentals, but rather things like accounting rules and short-sellers (sarcasm off).


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