Why ban short selling now?

Marketplace Staff Aug 12, 2011

Why ban short selling now?

Marketplace Staff Aug 12, 2011

JEREMY HOBOSN: Regulators in Belgium, France, Italy and Spain today did something that typically only gets done in a market crisis. They banned the short-selling of some bank stocks. In other words, they’re trying to limit the ability of investors to make money on falling stocks, and thereby keep the stocks from falling so much.

For more on this, let’s bring in our European Correspondent Stephen Beard. He’s live with us in London. Stephen, give us a little refresher on what short selling is.

STEPHEN BEARD: Well, this is where speculators make money on falling stock prices — for example, they sell a share they don’t own and buy it back at a lower price and pocket the difference.

HOBSON: And why are these four European countries doing this — temporarily banning it?

BEARD: Well, this is a direct response to the very sharp falls in share prices this week, especially bank shares. You recall what happened to the big French bank Societe Generale. It fell by 20 percent at one point this week on rumors that the bank was in trouble, and on rumors that the French government would be stripped of its AAA credit rating. Both rumors were denied. It was believed that there was some short-selling of bank shares at the time, so this ban, in the words of the Europe-wide regulatory body that’s coordinating it, will quote restrict the benefits that can be achieved from spreading false rumors.

HOBSON: But the ban is not Europe-wide, it’s just these four countries?

BEARD: It is only four countries that agreed to the measure. The U.K., which is a big player here, it has the biggest financial center, did not agree — neither did the other 22 nations at the EU. And the U.S. has made it clear it will not impose a ban.

HOBSON: OK, Stephen, I’m gonna bring in Peter Boockvar, he’s with the trading firm Miller Tabac in New York. Peter, from your experience, does a short sale ban like this work to calm the markets?

PETER BOOCKVAR: It actually does the exact opposite. If it’s one thing that some of us learned in Economics 101, is that what determines the price is both supply and demand. When you start restricting the supply, it distorts the pricing of assets. A sell decision should be treated no different from a buy decision. Betting on a stock going down should be treated no different than betting on a stock going up. It’s what creates true price discovery, and I think this is nonsensical — it was nonsensical when the U.S. tried it in 2008. And also making it nonsensical is it’s temporary — everyone knows it’s going to revert back, so it really does nothing to stem calm. It actually does the opposite, because the government is getting involved in pricing of assets.

HOBSON: So why do they do it if it just does the opposite?

BOOCKVAR: Why do they do it? Why does government do a lot of things that they do, I can’t really tell you why.

HOBSON: Well, do you think that there’s any chance that the U.S. — if the crisis worsens, that they’ll ban short selling?

BOOCKVAR: I’m hoping that after the experience of 2008, and they realized how ridiculous it was, that they would not revert to that — I guess you can never put anything past a government decision such as this.

HOBSON: Peter, let me just ask you, generally, how does this current crisis, to you, compare to 2008 at this point?

BOOCKVAR: Well, it’s so much similar, in terms of the focus is the banking system. But this time around, unfortunately, the weakness of the banking system in Europe particularly is fed by the weakness in sovereign. Yes, the U.S. banking system is healthier today than it was then. It’s much better capitalized, much less levered, but when you’re dealing with sovereign risk with countries that are the size that they are, it’s extremely worrisome because not only does it impact global asset markets, where the risk free rate is no longer risk free, the predictability of how these government responds also creates an enormous amount of uncertainty.

HOBSON: Great, Peter Boockvar with Miller Tabac, thank you so much. And Stephen Beard, our correspondent in Europe.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.