By Jonathan Weil
Europe's market regulators should be learning from America's mistakes. Instead they are imitating them.
Effective today, and with less than one day of notice, France, Belgium, Italy and Spain imposed new bans on short-selling financial stocks. The restrictions vary in scope from one country to another. This doesn't necessarily mean the affected companies' shares are unshortable. Many are listed on exchanges outside their home countries, including the New York Stock Exchange. Greece already had introduced a ban on short selling on Aug. 8.
There's no clearer sign of panic than for governments and bankers to start blaming short-sellers, journalists, speculators or credit-rating companies for their problems. Christopher Cox, the former U.S. Securities and Exchange Commission chairman, told the Washington Post in December 2008 that the biggest mistake of his tenure was agreeing in September 2008 to an extraordinary three-week ban on shorting financial stocks.
As Mary Schapiro, Cox's successor as SEC chairman, told the Financial Crisis Inquiry Commission in a March 2010 letter: “We do not have information at this time that manipulative short selling was the cause of the collapse of Bear and Lehman or of the difficulties faced by other investment banks during the fall of 2008.”
Nor has the SEC produced any such information since that letter. There's a simple reason for this, too. The whole notion that short-sellers had anything to do with tearing down Bear Stears, Lehman Brothers, or anyone else for that matter, was a crock.
The European Securities and Markets Authority has chosen to perpetuate this urban legend anyway. In its statement yesterday announcing the new bans, the ESMA said: "While short-selling can be a valid trading strategy, when used in combination with spreading false market rumors this is clearly abusive." The ESMA cited no evidence that this was actually happening, much less that it was responsible for the recent declines in the shares of companies such as the French bank Societe Generale SA.
Jim Chanos, perhaps the world's best-known short-seller, told Bloomberg News: “EU policy makers don’t seem to understand the law of unintended consequences. The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators. The interbank lending market froze up completely in October to December 2008 -- after the short-selling bans.”
France, Italy, Belgium and Spain might as well have just told the world to go short their entire countries.
(Jonathan Weil is a Bloomberg View columnist.)-0- Aug/12/2011 18:57 GMT