Dumb, dumber, short selling ban

Consider the following: Brazil and Azerbaijan are playing a world cup match. Half-way through the second period (apologies for the Americanism, I’m trying to avoid repeating “half”) Brazil is up 3-nil. So far, so ordinary. Sepp Blatter, however, has big plans for expanding FIFAs footprint in Asia and desperately needs to increase the attractiveness of the beautiful game to the descendants of Ghengis Khan so he can make even more money in bribes. Ergo, the rules of the game get changed and from the 70^th minute onwards Brazil is disallowed a goalie. Miraculously Azerbaijan overcomes all the odds and secures a stunning victory over Brazil after 90 minutes of play. Does that sound like a reasonable story? If yes, then you don’t need to bother continue reading. If, however, you think there’s something rotten in the twisted logic that informed the sudden rule-change then I suggest you turn your attention to the latest act of dirigisme lunacy put in place today.

Sure, a selective short selling ban (focused on “systemically important” banking stock) in a number of European countries seems to have lessened the vigor with which markets eroded the share prices of said banks for the moment. It also demonstrates a comprehensive failure of regulatory bodies and lawmakers to comprehend what they are dealing with. As I might’ve pointed out previously, the whole point of a market is to determine the price of a particular asset given current circumstances as appraised by any number of participants in that market. Consequently, prices can move up as well as down. Not exactly an earthshattering realization one might think (google that phrase and you get approximately 20 million hits for that). Alas, it would appear that that’s not the plan of our betters. No one is allowed to take the view that certain banks are overloaded with toxic debt and are better jettisoned. Well, you are allowed to, but ONLY if you have previously bought them and are willing to crystalize a loss when you sell them for less than you previously bought them. Strangely enough, not a lot of pension fund managers want to do that. Realizing losses is a great way to get yourself fired or worse, forfeit your bonus! Those other who might have caught on to the fact that all is not well without making a stupid investment first are just not allowed to play. Basically the logic goes: if you are smarter than the others (or just willing to put your money on betting against the herd mentality) you are not welcome to play here. This market is for conformist idiots only! Obviously, this escaped the attention of just about everybody, seeing that until now that particular rule didn’t really exist. So far the football simile holds up. Sadly, for the regulators / Sepp Blatters of the financial world this is where the comparison runs out of steam. Why? Unlike a football game there’s not time limit on how long a game runs in the markets. You might be able to secure Azerbaijan’s win over Brazil by rigging the rules of the game because in the end Brazil will run out of time. In markets, however, each day is a re-match. Even if you get to rig the rules on a daily basis, at some point you (the rule rigging regulator, that is) will run out time. The point being that short sellers are not a problem in themselves, but rather a symptom of an underlying vulnerability in the assertion that current stock prices are not incorrectly reflecting the true value of a company. Yes, sure, think of them as the carrion bird of the financial world. But that’s exactly my point. They will come and pick at a carcass, but they are not the ones who will kill the damn cow in the first place! If the cow were healthy, they wouldn’t get to feast and they’d move on. Now, no one really wants the cow dead, but in the end there is no point pretending it’s still alive. But understanding that, clearly seems to be off the agenda for the time being.