By Jonathan Weil
In the eyes of European market regulators, it seems there is no such thing as a bad policy when it comes to banning short selling. If stocks rise, it shows the new bans must be working. If they fall, it shows an even bigger crackdown on short selling must be needed.
European bank stocks are in free fall again, notwithstanding last week's decision by France, Spain, Italy and Belgium to temporarily ban investors from shorting the shares of those countries' largest banks. In response to questions from Bloomberg News, Michel Barnier, the European Union's financial services commissioner, today said the recent plunge showed the need for tight restrictions on so-called naked short selling, in which traders sell a security they have not already arranged to borrow. Readers may recall that U.S. regulators in 2008 similarly tried to blame the crash in U.S. bank stocks on naked short sellers. That, predictably, turned out to be a canard.
All this brings to mind a modest proposal from October 2008 by my good friend David Milstead, back when he was a columnist for the now-defunct Rocky Mountain News in Denver. Banning short selling does not go far enough, he wrote. The answer is a ban on selling. All selling.
"Yes, the only securities trades that will be executed will be the ones on the uptick," Milstead wrote. "There will be a ban on all sales of securities at a price lower than the one before. This will clearly disappoint investors who've seen enough of toxic loans and even-more-toxic government. Running to the exits and putting your money under a mattress may be the best answer, but that simply doesn't support our capitalist system."
He made a second suggestion, too: Suspend accounting. Crisis solved.
(Jonathan Weil is a Bloomberg View columnist.)-0- Aug/18/2011 16:31 GMT