Shorts banned in Greek markets: Greece tries to stop bear by removing shorts
Greece is going down the same road by banning short selling for two months. It is sad because not only is it misplaced it is also ineffective (see below). Via the Economist:
On Wednesday Greece said that it would ban the short-selling of shares for two months to prevent speculators doing further damage to the country’s banks.
The previous day, shares in Greek banks had plunged by nearly 10% and the Athens stockmarket as a whole fell by 6% on fears that the country would soon suffer another downgrade of its debts. Those fears proved entirely justified. After the markets closed Standard & Poor’s heaped indignity on Greece by cutting the rating of its sovereign bonds to “junk” status. It also cut Greece's banks to “junk” because of their hefty exposure to government debt.
The markets still see the risk of a Greek default as highLet's look back at history and see if bans on short sales have worked? On Sept 19, 2008, when the financial companies of America and the world were all collapsing together, the SEC said, let's stop this madness and ban short selling in financial firms.
Although the move to ban short-selling steadied Greece's stockmarket somewhat on Wednesday, the chances of the country defaulting on its debts were still perceived by the bond markets as high. Spreads on Greek government bonds (the risk premium compared with German bonds) reached a 13-year high as investors worried that the proposed rescue plan for Greece could stall. Talks between Greece, the European Union and the IMF got under way last week.
If no one can short sell, the markets should stabilize right? Wrong!! Dead Wrong!! Nothing will come good of this ban on short selling. The market will stop where it stops. It might stabilize tomorrow, or maybe crash with default.
See what an ineffective piece of garbage a short sell ban is.
Exhibit A: Bank of America
Exhibit B: Wells Fargo
I could go over all the financials, from Goldman to JP Morgan, to the home builders. They would all look pretty much the same as what we see here: a bloody mess of falling prices. The short sell ban in hindsight did nothing.
You can also get some of the upside potential buying out of the money puts with short term to maturity. Although, volatility was through the roof, if you had a strong conviction that markets would tank, you would have cashed in like I did. And, you get the bonus that if the short term put matures in the money, you keep the sell position on your book, even though to buy over the counter or from an exchange would be considered illegal.
I did find one stock that didn't sink lower with the ban though.
Exhibit C: Fannie Mae
I just couldn't resist. The SEC was a bit late to the party to save this one.