In a predictable twist tonight, SEC Chair Chris Cox has said he is going to follow the U.K.’s FSA and institute a temporary ban on financial short-selling. If true, and if it weren’t such a stupid idea, it might be funny, like the U.S. doing a half-way step to Pakistan’s goofball policy of disallowing market declines. Up with markets!
But even if we dismiss price efficiency, consider the practical consequences of making it impossible to short financials (and don’t even get me started about disallowing all shorting): What happens, for example, if you’re running a long/short quant fund with billions of dollars and hundreds of positions? Do you give the money back now that you can’t trade on the short side of your fund? Do you push all the short trades through ETFs? Do you abandon the entire financial sector? And who do you sue when your fund blows up because you’re not sector neutral? Short-only funds are, of course, now, turned into commercial real estate companies.
Absurd. Bad enough to have idiot financial services busting themselves and markets with 30x leverage built on a tissue of toxic CDOs, but now we have frantic and destructive rulemaking to prevent over-levered nitwits from crumbling.