Reason behind no shorting on financial stocks?

Barry Ritholz of the Big Picture talking with hedgie Joe Besecker

None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion’s share of shorting was coming out of overseas bourses such as London and Dubai.

That doesn’t mean they are based there, only that they route orders through those exchanges.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Okay, now we’re getting just a lit-tle bit over the top.

Assuming for the sake or argument this were true, wouldn’t it have to be done by some entity with extremely deep pockets? Like a government? Just wondering.

Ritholz wonders if the no-financial-shorts rule conveniently helps McCain. I doubt it. WaMu and others will be going down before the election and the economy stinks.

Also, central banks worldwide are intervening massively, not just here I think they’re terrified. The stock markets in Russia and China have been clobbered much worse. Why would an entity, assuming it had the power, want to bring down the world financial system. After all, it would fall on their heads too. Not to mention creating serious enemies out of major world governments.

No, I think what we’re seeing – and the reason for the ban on some shorting – is a global financial panic. The ban stopped the US market from dropping off a cliff this morning and that’s probably a good thing, if no long-term solution at all. I think they’re just trying to keep the boat from sinking.

  • Would it be too cynical of me to imagine that the “controllers” of world markets (the bubble blowers) sold out their long portfolios at the bubble highs of last year’s markets and promptly established massive shorts just in time to kick the legs out from under the economy and begin reaping the next harvest in the sequence? Trading could be so much more FUN AND PROFITABLE if you held the levers that enabled you to create a bubble and then quickly follow it up with a bust. Why bother with a boring business cycle when you can have the exhilliration and excitement of creating massive bubbles and disastrous busts? If only I were friends with a FED banker…

  • Could be, except the chaos and meltdowns have been worldwide. Sure, investment banks and hedge funds have been doing huge amounts of shorting. They always do.

    But when the companies that own 50% of the mortgages in the US (Fannie and Freddie) are insolvent, when the biggest insurance company on the planet has been taken over by the Feds in a desperation move, when WaMu is actively looking for buyers, and the bond insurers just got downgraded again, something that will trigger defaults. – no, this isn’t just speculation.

    The problem is the trillions of dollars of financial instruments backed by now cratering mortgages. Plenty of the Masters of the Universe were on the wrong sides on that trade. Just look at Bear Stearns and Lehman.

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