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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yipcarl's picture

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


LOL.  it's all 911 logic these days..

Buckaroo Banzai's picture

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

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.

Spitzer's picture

what happens to the short ETFs then?

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.

oddjob's picture

Buy puts on the long etfs.

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.

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.

dbach's picture

I reject your reality and substitute my own

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.

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!!

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

slaughterer's picture

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

RobD's picture

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

firstdivision's picture

Yeppers! Look for it to open down tomorrow though.

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.

Cognitive Dissonance's picture

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

Waffen's picture

oh contraire


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

SheepDog-One's picture

Actually 'it worked' for 2 days.

No One's picture

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

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 NEED both sides to have a market ......WHAT IS SO HARD TO UNDERSTAND !!

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?

StychoKiller's picture

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

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.

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.

swissaustrian's picture


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

SheepDog-One's picture

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

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.

Debugas's picture

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

but covered short-selling is ok

Doubleguns's picture

Naked long buying should be banned too.

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.

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....


Sudden Debt's picture

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


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.

treemagnet's picture

You must choose the red pill or the blue pill. 

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

Sudden Debt's picture



Putty's picture

Bullshit. I'm taking both.

Spastica Rex's picture

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

John Cusack: "I sell confidence."

Who's conning who?

apberusdisvet's picture

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

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.

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.

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.

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!

pazmaker's picture

scrap aluminum going for about .55 per pound here.

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. 

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.


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.

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!