You saw it in 2008 with short-sellers trying to gangbang stock prices low enough to trigger bond indenture codicils forcing companies to redeem those bonds. Before Governments insured bank deposits, earlier generations experienced it when depositors made runs on banks, clamoring to get their money out, and right this dang minute, Sonny. You’ve suspected it in recent years, as somebody’s cash flow somewhere has been decimated by those toxic sub-prime mortgage loans that brought down the civilized world and Iceland in the Financial Apocalypse.
In these kinds of cases, financial institutions have to liquidate assets unexpectedly. A wise old man once told us that banks are always technically insolvent, meaning they wouldn’t be able to cover their liabilities if everyone asked them to, but in the normal course of business that doesn’t happen.
When it does, of course, actual insolvency results. From there they pretty much all go under.
The real problem lies in how banks get driven to that point. For every financial institution in the world, there's at least one moneysucking broker who knows exactly what securities the institution will have to sell, and when, and will jump all over those prices with his moneysucking broker buddies, trashing market quotes with short-selling, making themselves a bundle by crippling the financial institution‘s ability to raise cash liquidating that specific paper. These instruments have to be sold at any price, and as soon as the problem institution is done getting rid of them, market prices return to where they were before the moneysuckers swindled this particular customer of theirs.
Generally, what Wall Street racketeers have to do first is short-sell the institution’s own common stock down low enough to get the ball rolling.
According to the NY Times, beginning Friday France banned new short-selling and adding to existing short positions in 15 financial stocks for 15 days, Italy and Spain took similar 15 day actions, and Belgium did so for an indefinite period. Greece and Turkey already have such bans.
Bloomberg reported that the Securities and Excuses Commission here would do no such thing.
We don’t know what’s up, but European regulators are obviously worried enough about something to implement radical controls. If the real story ever comes out, and we’re hoping that never happens, it’s our guess the details will fit neatly into the opening paragraphs of this piece, maybe adding a whole new example of criminal activity by short-sellers that world investors have not endured before, probably some demonic manifestation bubbling out of an undead laboratory run by the derivatives crowd.
Major U.S. financial institutions were temporarily nationalized after the Big One in 2008. We dream of the day when somebody in Europe will step up and make that measure permanent, addressing there the explicit reason cited for most of the stock market crashes the world has experienced since Gamed-Market Capitalism began - the latest impending scary money center bank failure.
And then we'd hope it would catch on. Whatever, banning short-selling for 15 days is no way to deal with a systemic problem.
People here keep arguing that we have too much Government. Others say we don't have enough. From our perspective at The MacDougal Post, it sometimes looks like we don't have any at all.
