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Short selling ban - Unintended consequences

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1) Short sellers are mostly hedge funds and other highly leveraged speculators, betting using borrowed money.

2) They went short because they anticipated bank failures and they were making huge profits because they were right.

3) Central banks and governments step in and change the rules.

4) Regardless of fundamentals the shorts have to cover, sending shares of insolvent banks higher.

5) The general public believes the market has turned and buys those banks, sending shares even higher and hedgies' losses spiralling.

6) The huge losses the hedgies are taking make them default on their leveraged loans.

7) But think about it, who lent them the money? The same banks they were shorting!

8) More bank collapses follow. Investors get scared and dump their positions. No shorts left means no more short covering rallies during the coming MOTHER OF ALL CRASHES.

 

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1) Short sellers are mostly hedge funds and other highly leveraged speculators, betting using borrowed money.

2) They went short because they anticipated bank failures and they were making huge profits because they were right.

3) Central banks and governments step in and change the rules.

4) Regardless of fundamentals the shorts have to cover, sending shares of insolvent banks higher.

5) The general public believes the market has turned and buys those banks, sending shares even higher and hedgies' losses spiralling.

6) The huge losses the hedgies are taking make them default on their leveraged loans.

7) But think about it, who lent them the money? The same banks they were shorting!

8) More bank collapses follow. Investors get scared and dump their positions. No shorts left means no more short covering rallies during the coming MOTHER OF ALL CRASHES.

 

That about nails it on the head. Has seriously curtailed my ability to profit from this disaster.

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isn't the main issue here liquidity? Banning short selling further reduces something which the markets could really do with right now. Three cheers for Gordon the Incompetent.

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1) Short sellers are mostly hedge funds and other highly leveraged speculators, betting using borrowed money.

2) They went short because they anticipated bank failures and they were making huge profits because they were right.

3) Central banks and governments step in and change the rules.

4) Regardless of fundamentals the shorts have to cover, sending shares of insolvent banks higher.

5) The general public believes the market has turned and buys those banks, sending shares even higher and hedgies' losses spiralling.

6) The huge losses the hedgies are taking make them default on their leveraged loans.

 

6.1 - Central bank creates an institiution to buy and back that loan.

 

7) But think about it, who lent them the money? The same banks they were shorting!

 

7.1 - Institution gurantees the loan.

 

8) More bank collapses follow. Investors get scared and dump their positions. No shorts left means no more short covering rallies during the coming MOTHER OF ALL CRASHES.

 

Very well thought..

 

What if though... there is more tinkering.. as above.

 

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Yet again the UK media mis-inform the public with talk of "shares rallying following measures put in place by the government to stabilise markets"

 

NO! Shares have "rallied" as anyone with a short position was FORCED to cover it.

A more accurate headline would be: "Banking shares rise as the government forces hedge funds to buy them"

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1) Short sellers are mostly hedge funds and other highly leveraged speculators, betting using borrowed money.

2) They went short because they anticipated bank failures and they were making huge profits because they were right.

3) Central banks and governments step in and change the rules.

4) Regardless of fundamentals the shorts have to cover, sending shares of insolvent banks higher.

5) The general public believes the market has turned and buys those banks, sending shares even higher and hedgies' losses spiralling.

6) The huge losses the hedgies are taking make them default on their leveraged loans.

7) But think about it, who lent them the money? The same banks they were shorting!

8) More bank collapses follow. Investors get scared and dump their positions. No shorts left means no more short covering rallies during the coming MOTHER OF ALL CRASHES.

 

Nice. :)

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Very well thought..

 

What if though... there is more tinkering.. as above.

 

I am starting to think dykes and fingers..... :mellow:

 

Edit: You know! The Dutch dyke and the little boy trying to plug all the leaks with his fingers. :lol:

 

[Dyke- a long thickwall built to stop water flooding onto a low area of land]

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Won't all the shorts just cover this morning? Or maybe their volume is so high that as they're covering, it sends the share price so high that their losses are inevitable? I covered just fine this morning, but I'm a small fry.

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1) Short sellers are mostly hedge funds and other highly leveraged speculators, betting using borrowed money.

2) They went short because they anticipated bank failures and they were making huge profits because they were right.

3) Central banks and governments step in and change the rules.

4) Regardless of fundamentals the shorts have to cover, sending shares of insolvent banks higher.

5) The general public believes the market has turned and buys those banks, sending shares even higher and hedgies' losses spiralling.

6) The huge losses the hedgies are taking make them default on their leveraged loans.

7) But think about it, who lent them the money? The same banks they were shorting!

8) More bank collapses follow. Investors get scared and dump their positions. No shorts left means no more short covering rallies during the coming MOTHER OF ALL CRASHES.

 

A colleague at work has pointed out that when pricing an option one of the assumptions is that "it is possible to short sell the underlying stock".

See:

 

http://en.wikipedia.org/wiki/Black-Scholes#The_model

 

If this is not now the case, what will this mean for derivative pricing?

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:blink:

Edit: You know! The Dutch dyke and the little boy trying to plug all the leaks with his fingers.

 

[Dyke- a long thickwall built to stop water flooding onto a low area of land]

 

Where I come from [NZ] this is the classic image used to denote the futility of a situation.

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This is a great listen.

 

Mike 'Mish' Shedlock

What A Week! *AUDIO*

 

SEC bans short selling, Wall Street goes nuts, global coordinated panic... and it's only Thursday!

 

http://www.howestreet.com/audio/mish_2008_0918.mp3

 

A few points mentioned:

 

In spite of the fact no one knows what to do - they are doing all sorts of stuff !

 

Short selling could be the work of terrorism !

 

The last time short selling was banned was 1929 - just before the Great Depression.

This move has the potential of doing the same thing.

 

I didn't think they would do anything this stupid.

 

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The last time short selling was banned was 1929 - just before the Great Depression.

This move has the potential of doing the same thing.

 

Have you a credible reference for that? (Not that I'm saying Mich isn't credible...)

 

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The last time short selling was banned was 1929 - just before the Great Depression.

This move has the potential of doing the same thing.

 

That's a very striking fact, if true.

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That's a very striking fact, if true.

 

Quite... I found this:

 

 

http://business.timesonline.co.uk/tol/busi...icle4783638.ece

In 1929 short-sellers were blamed for driving down share prices in the Wall Street crash. The practice was banned - for a while.

 

And this

 

http://www.tradingday.com/basics/short_selling.html

Short sellers were blamed (probably erroneously) for the Wall Street Crash of 1929. Regulations governing short selling were implemented in 1929 and in 1940. Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a sharp downturn. President Hoover condemned short sellers and even J. Edgar Hoover said he would investigate short sellers for their role in prolonging the Depression. Legislation introduced in 1940 banned mutual funds from short selling (this law was lifted in 1997).

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