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Here Is What Happened When The SEC Banned Shorting Financial Companies In 2008

Tyler Durden's picture





 

There are those who say the upcoming short selling ban in all stocks in Italy and France, which according to CNBC will take place as soon as after the close today, or in one hour, will be beneficial to stocks. Then there are facts. To those who may have forgotten, on September 18, the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued... The same chart is coming to Europe first. End result: 48% drop in under a month.

As for the justification provided by the SEC back in 2008, it has an eerie resemblance to that used today:

Given the importance of confidence in our financial markets as a whole, we have become concerned about recent sudden declines in the prices of a wide range of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis. This crisis of confidence can impair the liquidity and ultimate viability of an issuer, with potentially broad market consequences. Our concerns are no longer limited to the financial institutions that were the subject of the July Emergency Order. As a result of these recent developments, the Commission has concluded that there continues to exist the potential of sudden and excessive fluctuations of securities prices generally and disruption in the functioning of the securities markets that could threaten fair and orderly markets. In these unusual and extraordinary circumstances, we have concluded that, to prevent substantial disruption in the securities markets, temporarily prohibiting any person from effecting a short sale in the publicly traded securities of certain financial firms, which entities are identified in Appendix A (“Included Financial Firms”), is in the public interest and for the protection of investors to maintain or restore fair and orderly securities markets.

End result: LOL

Full SEC letter.

SEC Fin Ban

 


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Thu, 08/11/2011 - 10:38 | Link to Comment yipcarl
yipcarl's picture

Intentional destruction that they pawn off as helping us....

 

LOL.  it's all 911 logic these days..

Thu, 08/11/2011 - 10:43 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

We're getting down to the "vinegar strokes," folks.

Thu, 08/11/2011 - 11:00 | Link to Comment SparkySC
SparkySC's picture

Amazingly/mysteriously Washington Mutual Bank was left off the Short Selling List at that time and days later (though Solvent) it was seized by the OTS.

 

Hmmmmm coincidence? LOL

 

 

I think not.

Thu, 08/11/2011 - 10:38 | Link to Comment Spitzer
Spitzer's picture

what happens to the short ETFs then?

Thu, 08/11/2011 - 10:51 | Link to Comment dhengineer
dhengineer's picture

I made a ton of cash in 2008 using SKF and SDS, which don't hold the actual stocks.  They are derivatives based on the bank index and the S&P, and are supposed to be double-weighted the inverse of the underlying indexes.  They aren't perfect, making maybe 175 percent rather than 200 percent, but they work pretty well for the short run.  I was using them in a self-directed IRA, so I could buy and sell without worrying about short-term cap gains taxes.

Thu, 08/11/2011 - 10:58 | Link to Comment oddjob
oddjob's picture

Buy puts on the long etfs.

Thu, 08/11/2011 - 11:00 | Link to Comment sunnydays
sunnydays's picture

It is only the stocks that could get hurt not the ones the banks are doing themselves for the government.  shorts on metals will always be allowed, that could never get stopped.  They wouldn't do that to themselves it is too important.

Thu, 08/11/2011 - 10:39 | Link to Comment 101 years and c...
101 years and counting's picture

as a holder of spxu, faz and dto, i applaud this stupidity.  they are making it too easy to make money in this centrally planned ponzi.

Thu, 08/11/2011 - 10:39 | Link to Comment dbach
dbach's picture

I reject your reality and substitute my own

http://www.youtube.com/watch?v=W8qcccZy03s

Thu, 08/11/2011 - 10:41 | Link to Comment firstdivision
firstdivision's picture

Well we know that Euro markets will get a quick bump up in the short covering, but then plunge as traders sell positions to balance risk. This is going to be awesome as it fails to float the markets. Looks like Sarkozy and Merkle will be meeting twice a day soon.

Thu, 08/11/2011 - 10:39 | Link to Comment SheepDog-One
SheepDog-One's picture

WOW so we got a market rise based upon banning short selling thus destroying the markets and certain plunge to come. Just fantastic work again FED world bankster boys! Standing ovation!!

Thu, 08/11/2011 - 10:53 | Link to Comment dbach
dbach's picture

I wonder if this will be bullish for gold as a safe haven or if, combined with the hiked margins, incite margin calls and push people to liquidate

Thu, 08/11/2011 - 11:52 | Link to Comment Absinthe Minded
Absinthe Minded's picture

Yes.

Thu, 08/11/2011 - 10:55 | Link to Comment slaughterer
slaughterer's picture

Markets always rise at first on a short ban.  Then they start to implode.  

Thu, 08/11/2011 - 10:58 | Link to Comment RobD
RobD's picture

Is that why the FTSE has a hardon right now, up 3.17%(+465)?

Thu, 08/11/2011 - 11:17 | Link to Comment firstdivision
firstdivision's picture

Yeppers! Look for it to open down tomorrow though.

Thu, 08/11/2011 - 11:16 | Link to Comment chunkylover42
chunkylover42's picture

Sure, you get a quick covering of the shorts for a nice ~10% pop.  then the longs look at that as a chance to get out at a slightly better price than a few hours ago and start selling because it's a still a shitty situation.  With no shorts left to cover at any point in the future, panic selling starts and it cascades down into the toilet.

Banning shorts is equivalent to shooting the messenger.

Thu, 08/11/2011 - 10:42 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

Human sacrifice, dogs and cats living together. Mass hysteria.

http://www.youtube.com/watch?v=O3ZOKDmorj0

Thu, 08/11/2011 - 10:39 | Link to Comment Waffen
Waffen's picture

oh contraire

 

It worked.. it extended and pretended for another few weeks.

Thu, 08/11/2011 - 10:46 | Link to Comment SheepDog-One
SheepDog-One's picture

Actually 'it worked' for 2 days.

Thu, 08/11/2011 - 10:40 | Link to Comment No One
No One's picture

Are you ready for some football?!?!?!?!?

Thu, 08/11/2011 - 10:40 | Link to Comment Seasmoke
Seasmoke's picture

i said back then it would not work as they had hoped and i am 100% positive this desperate, disgusting move will blow up in their faces as well.....you NEED both sides to have a market ......WHAT IS SO HARD TO UNDERSTAND !!

Thu, 08/11/2011 - 11:02 | Link to Comment snowball777
snowball777's picture

We're sorry...we can't hear you over the sound of the jets warming up. Can you help us move these boxes into the cargo hold?

Thu, 08/11/2011 - 21:34 | Link to Comment StychoKiller
StychoKiller's picture

Turn on that painted-rock radio, then call the tower...

Thu, 08/11/2011 - 10:41 | Link to Comment Johnny Yuma
Johnny Yuma's picture

This will create a nice air pocket beneath the market. Once the last buyer comes in, price will drop like an elevator with it's cable snapped.

Thu, 08/11/2011 - 10:42 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

...the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued...

Correlation does not equal causation.

Thu, 08/11/2011 - 10:48 | Link to Comment swissaustrian
swissaustrian's picture

Exactly.

Reducing the cause of the plunge in 2008 to the short selling ban is way too simplistic.

Thu, 08/11/2011 - 10:52 | Link to Comment SheepDog-One
SheepDog-One's picture

If it looks like a duck, quacks like a duck, walks like a duck, its a duck.

Thu, 08/11/2011 - 10:51 | Link to Comment DCFusor
DCFusor's picture

Right, correlation ain't causation, and there was an unintended and unhealthy consequence.  Since you couldn't short banks, we had everyone and his brother becoming a bank to get in on that from the corporate side, and also to grab more federal money as a "bank".  Few have reverted to what they really are.  Just another way for some to game the system.

Thu, 08/11/2011 - 10:42 | Link to Comment Debugas
Debugas's picture

NAKED short-selling is equivalent to counterfeighting and SHOULD BE BANNED

but covered short-selling is ok

Thu, 08/11/2011 - 11:39 | Link to Comment Doubleguns
Doubleguns's picture

Naked long buying should be banned too.

Thu, 08/11/2011 - 11:49 | Link to Comment JohnG
JohnG's picture

Nonsense.  If I'm short of something, just why the hell would I want to own it??  That's the point of a short.

Thu, 08/11/2011 - 10:42 | Link to Comment Sudden Debt
Sudden Debt's picture

Tyler, You seem to forget that this time will be different!

Never look back, keep your eyes on the horizon!

while you're 100 yard from the cliff....

 

Thu, 08/11/2011 - 10:44 | Link to Comment Sudden Debt
Sudden Debt's picture

They had to ban it! It didn't fit into their Inside Trading Strategy!

 

Thu, 08/11/2011 - 10:45 | Link to Comment MichaelG
MichaelG's picture

Such price declines can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, especially when there is a fundamental underlying basis.

Fixed that for them.

Thu, 08/11/2011 - 10:45 | Link to Comment treemagnet
treemagnet's picture

You must choose the red pill or the blue pill. 

Still cannot believe we're gonna do this again x2. 

Thu, 08/11/2011 - 10:52 | Link to Comment Sudden Debt
Sudden Debt's picture

TAKE THE BLUE PILL WITH 2 SHOTS OF VODKA!!!!

YOU'LL BE DRILLING FOR OIL ALL NIGHT!

Thu, 08/11/2011 - 14:20 | Link to Comment Putty
Putty's picture

Bullshit. I'm taking both.

Thu, 08/11/2011 - 10:46 | Link to Comment Spastica Rex
Spastica Rex's picture

Annette Bening: "What do you sell, anyway?"

John Cusack: "I sell confidence."

Who's conning who?

http://www.youtube.com/watch?v=yGlkaHGj0Ug

Thu, 08/11/2011 - 10:47 | Link to Comment apberusdisvet
apberusdisvet's picture

If it comes here, watch the bullion banksters get an exemption; national security, dontcha know.

Thu, 08/11/2011 - 10:48 | Link to Comment lizzy36
lizzy36's picture

I don't get how 3 years later, we are still doing the same shit that doesn't work. And it is being done over and over again.

The status quo really is fucking nuts.

As long as we continue to concentrate on yesterday, we will be doomed tomorrow.

Thu, 08/11/2011 - 10:55 | Link to Comment John McCloy
John McCloy's picture

When the fundamentals fail at first blame and ignore them and insert hopium. Then resort to manipulation and finally everything becomes reliant on perception which has been failing us for about 3 years now so all they have left is more attempts to create opinion and alter perception.

Thu, 08/11/2011 - 11:26 | Link to Comment Mediocritas
Mediocritas's picture

This isn't about doing what actually works, this is political.

Political "correctness" means doing that which gains you the most political power. Often that means doing the polar opposite of what is truly correct.

Fact is, to the little people on the street, watching their nest egg going up in smoke, us short sellers are satan in the flesh. Average Joe is freaking out as his retirement savings vanish before his eyes and there's me, loving it because I'm applying a little price discovery on Joe's behalf seeing as he wasn't interested enough to bother to research the true value of his stocks.

Clearly, therefore, the market going down is all the fault of us bears and popular anger rises, something that power hungry politicians are NEVER slow to capitalize on. In true political correctness, they promise to give the people what they want and ban the bears. Half the time, these same politicians probably know damn well that this will only make Average Joe lose even more, but they don't care because Joe has no idea.

Same shit as always, different day.

Thu, 08/11/2011 - 10:49 | Link to Comment OpenEyes
OpenEyes's picture

a friend of mine just posted this on facebook, thought it was pretty good:

If you had purchased $1000.00 of shares in Delta Airlines a year ago, you would have $49.00 today! If you purchased $1000.00 in AIG shares, you would have $33.00. If you purchased $1000.00 in shares in Lehman Brothers, you would have $0 today! But if you purchase $1000.worth of beer, drank all the beer, turned in the aluminum you would have $214.00. Therefore the best investment plan is to drink heavily and recycle. It's called the 401 keg plan!

Thu, 08/11/2011 - 10:55 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

Winning the future!

Thu, 08/11/2011 - 11:19 | Link to Comment pazmaker
pazmaker's picture

scrap aluminum going for about .55 per pound here.

Thu, 08/11/2011 - 11:08 | Link to Comment dussasr
dussasr's picture

$214 in beer cans from $1,000 worth of beer?  Not likely, unless you are drinking really cheap swill and live in a state with $.10 deposit on the cans. 

Thu, 08/11/2011 - 11:16 | Link to Comment snowball777
snowball777's picture

Or you could have bought $500 worth of gold, $500 worth of beer, recycled $107 for a total of $857 dollars...all while being drunk and both financially and ecologically sound.

Diversification!

Fri, 08/12/2011 - 03:38 | Link to Comment ZeroPower
ZeroPower's picture

Your friend doesnt know math.

Delta would leave you with $500, AIG with ~$550 today. As for the scrap beer cans - extremely unlikely.Your friend is a troll.

Thu, 08/11/2011 - 10:51 | Link to Comment Everybodys All ...
Everybodys All American's picture

At the end of the day if you hold the bank stock ... you are still going to sell it. Just not today!

Thu, 08/11/2011 - 10:54 | Link to Comment TTaco
TTaco's picture

Somebody ever heard about a synthethic Short? (Short Call, Long Put, Same Strike)
This is Ridick-less!
LOL - Smile Face

Thu, 08/11/2011 - 10:55 | Link to Comment Everybodys All ...
Everybodys All American's picture

little guy hasn't ... and that's the point.

Thu, 08/11/2011 - 11:10 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

The point is to shift the blame to the, "evil speculators." 

Banning short-selling is merely prepping the PR battle field.

It's just like yelling, "Don't kill me!" after you shoot somebody.  All the witnesses remember is that the dead guy was trying to kill you. 

Thu, 08/11/2011 - 11:24 | Link to Comment TTaco
TTaco's picture

They would like to live in a world where you can only Buy and never Sell. You can buy on margin and have a credit morgage but you can't try to correct this madness. "The bubble is the problem,not the crisis". Basically, its right to mount a ponzi scheme and its wrong to point out its a scam. They wouldn't like us to look at the structure of the Ponzi-Social Security

Thu, 08/11/2011 - 10:55 | Link to Comment Eagle Keeper
Eagle Keeper's picture

Blatant manipulation... Unless of course you write the rules to allow...

Thu, 08/11/2011 - 10:56 | Link to Comment dwdollar
dwdollar's picture

No worries.  The DOW is back above 11,000.  Party on and don't think about tomorrow!

Thu, 08/11/2011 - 11:06 | Link to Comment Rainman
Rainman's picture

Does this mean I shouldn't have dry cleaned my old tattered DOW 10,000 hat ???!!!

Thu, 08/11/2011 - 11:00 | Link to Comment Arch Duke Ferdinand
Arch Duke Ferdinand's picture

Must View!

*****Pacific Northwest and Alaska Volcanic Eruptions Update

Two confirmed Volcanic eruptions...more coming friends....

http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/08/pacific-north...

*****The Creek...short video.

Parallel to knocking your head in the Stock Market...

http://www.youtube.com/watch?v=BLRAqfN48zo&feature=feedbul

Thu, 08/11/2011 - 11:04 | Link to Comment the not so migh...
the not so mighty maximiza's picture

not untill the west coast sinks into the pacific do I have my edgar cayce moment.

Thu, 08/11/2011 - 11:20 | Link to Comment snowball777
snowball777's picture

Also, the earth rotated giving the appearance of the sun rising in the east...and the tides continued to ebb and flow. Stay tuned!

Thu, 08/11/2011 - 12:04 | Link to Comment Absinthe Minded
Absinthe Minded's picture

Are you calling that website a traveshamockery?

Thu, 08/11/2011 - 12:24 | Link to Comment snowball777
snowball777's picture

I'm saying that about every post from the ArchDufus.

Thu, 08/11/2011 - 11:01 | Link to Comment notadouche
notadouche's picture

Hmmm, it would seem to me that if the institutions are in good shape, facts will always protect your organization shorterm stockprice notwithstanding.  However if you are trying to hide the ugly truth then you have to resort to bans and jawbonning and chicanery.  In the end it the financial truth wins the day.   Any one that doesn't believe this just remember this list and what their respective CEO's were saying just days before the truth prevailed:

Bear Stearns, Country Wide, Enron, Wachovia, Worldcom, Leahman Bros, Washington Mutual, Merrill Lynch, Citigroup, AIG, Bank of America, Goldman, Barney Frank, Chris Dodd, Geithner, Greenspan, Long Term Capital, GM, GE...the list is actually exhaustive but I think I made my point.   In no instance did a healthy company crater because of lies and damned lies, in fact the only way these and other corporations prosper or held on longer than what they should have been is because of lies and chicanery.   

Funny isn't it that it's lies that gave them prosperity and truth that leaves them in the dust yet on the way down the liars claim other liars are damaging their entities.  Kind of ironic I suppose.

 

Thu, 08/11/2011 - 11:12 | Link to Comment Dain Bramage
Dain Bramage's picture

Why doesn't the SEC et al talk of a ban on buying on margin when the market is in overbought mode? 

Thu, 08/11/2011 - 11:24 | Link to Comment snowball777
snowball777's picture

Because the people working at the SEC are captured former industry.

Thu, 08/11/2011 - 11:20 | Link to Comment RemiG2010
RemiG2010's picture

Some people never learn anything! Totally clueless!

Thu, 08/11/2011 - 11:26 | Link to Comment RiskAverseAlertBlog
RiskAverseAlertBlog's picture

Nice. Timely reminder. Thanks!

Thu, 08/11/2011 - 11:38 | Link to Comment Bob Paulson
Bob Paulson's picture

Bye bye short covering rallies...

Thu, 08/11/2011 - 12:11 | Link to Comment DarkStarDog
DarkStarDog's picture

"market"  ?  LOL  nuttin but BS bail outs day after day.  See you at the pawn shop.

Thu, 08/11/2011 - 12:32 | Link to Comment Cortez
Cortez's picture

Only the most retarded of lawyers are brilliant enough to believe that banning something will cure the problem.  I'm surprised no one has banned sandbags since they show up everytime there is a danger of flooding.

Thu, 08/11/2011 - 22:21 | Link to Comment fraud-fed
fraud-fed's picture

Also, when they tip over all hell breaks lose and 24h news coverage ensues.

Thu, 08/11/2011 - 12:43 | Link to Comment Muwabi
Muwabi's picture

Question: During the short-selling ban, I can still sell my puts on EWI when they go through the roof right?

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yang46's picture


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