European Nations Wish To Ban Negative Thoughts Or Investments On Their Financial Position
from the towards-a-more-patriotic-hedge-fund dept
It seems that no country is immune to the sting of financial opinions. As we saw recently, S&P's decision to strip an "A" off their rating for the U.S. debt resulted in President Obama's dismissal of the rating ("We're still AAA."), Michael Moore's call for something a bit more drastic ("show some guts and arrest the CEO of Standards and Poors") and, finally, the Senate Banking Committee's decision to explore its options, including a possible hearing involving S&P ("We won't arrest them. We'll just take them downtown to answer a few questions.")Being unable to graciously accept financial criticism isn't just an American problem, however. As several European nations continue their slide into bankruptcy, their respective governments have stepped up to do the only thing that makes sense: ban short sales on government-backed bank shares (following on a similar plan to ban negative ratings). It's yet another case of governments attempting to suppress expression it doesn't like (i.e., "We think failure is the most likely option.") through legislation. And as Matt Levine of Dealbreaker explains, there's a whole lot of unintended consequences to banning "sad thoughts about banks:"
This is hard to believe because all European banks are obviously well capitalized and any suggestion to the contrary is just rumor and speculation. But! Sometimes things go wrong. Sometimes banks need to raise money. When equity investors are staying away from them, sometimes they do this by selling convertible bonds...Oddly enough, the protectionist legislation meant to protect the banks from "evil" speculation will also work against their ability to raise funds in the future, which extends the damage from "just right now" to "an indefinitely longer period."
The short sale bans are mostly for just 15 days, but repeatedly changing the rules in the financial markets will have effects well beyond the brief share-price gains. If you're a convertible arbitrage investor, it's now pretty clear that you should never buy convertibles issued by a European bank, because you may not be able to hedge when you need to. Which can't be good for the banks' future capital raising needs.
Then there's this bit of extremely broad terminology coming from Spain's entry into the "the only correct position is a positive position" ban-happy sweepstakes:
This preventive ban affects any trade on equities or indices, including cash equities transactions, derivatives in regulated markets or OTC derivatives, that has an effect of creating a net short position or increase a previous one, even if on an intraday basis. A net short position means any position resulting in a positive economic exposure to falls in the price of the stock.In much simpler words: investors are not allowed to profit when stock prices dip. This also means that investors can't mix in a few shorts with the rest of their investments to insulate themselves against price drops. Or rather, that they can do that, but only if the end result of the investments is that they lose money when stock prices fall. Spain, it would seem, is only going to allow bullish investments despite the realities of the market, and it will be watching this on a day-to-day basis, if the language above is to be believed. Adios, bear market day traders!
France ties things down even further in its extensive AMF document:
3 - Is an investor allowed to create a net short position in one of the securities concerned by using derivatives?France is also savvy to other devious, speculative moves as well:
No, investors are not allowed to use derivatives to create a net short position; they may only use derivatives to hedge, create or extend a net long position.
6 - Are trades in index derivatives allowed where the basket of securities includes one or more of the securities concerned?Again, this overly broad ban against speculators who have the audacity to express their lack of confidence in a financial system via their market activity will also steamroll "legitimate" investors who are just looking to "not lose money," as Levine points out:
a) Investors exposed to the equity market are allowed to hedge their general market risk by trading in index derivatives. In this context, the AMF accepts the marginal net short positions in the securities concerned that may result from that trading in index derivatives.
b) Trading in index derivatives for any other purpose than hedging general market risk is not allowed unless the resulting net short positions in the securities concerned are offset by long positions.
We wonder how you would test whether a net short position in an index derivative is for the purposes of "hedging general market risk" or for the purposes of "profiting on spreading false rumors" (or other non-legitimate purposes, like hedging specific market risk). Presumably anyone shorting European indexes does so because they don't want to lose money when the market goes down. Even speculators.Oh, and one more thing: these bans are still in effect if you're a citizen of these short-sale-banning countries, no matter which country you actually reside and/or do business in:
The Decision applies to any natural or legal person, French or foreign, regardless of whether trading takes place in France or in another country, or on a regulated market or not.All of this ridiculous legislation is due to various governments suddenly developing very thin skin when investors insult them tangentially with their financial decisions and opinions. There's nothing to be gained by banning short sales and plenty of unintended consequences to unleash into an already-disrupted marketplace. Levine sums up their attitude this way:
You take shorting of bank shares as a personal affront, and your goal is not to have functioning markets but just to prove that you’re tough.While I'm sure most governments would love all of their citizens to believe that their respective nations will overcome all odds and rise to greatness once again, in the meantime, investors are still going to bet on what is likely, rather than just wrapping themselves in the flag and throwing their money into whatever the legislative body deems to be proper, patriotic investments.
Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.
Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.
While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.
–The Techdirt Team
Filed Under: debt, economics, europe, markets, opinion, short selling, sovereign
Reader Comments
Subscribe: RSS
View by: Time | Thread
Poor, poor pitiful fool!
Freedom of capital when hindered bites back in a very harsh way.
[ link to this | view in chronology ]
The difference
Europe never had any such pretensions - they just want to live the good life without having to deal with meanies like Hitler and without having to starve or work too hard.If they need to censor their citizens to achieve that - they will, and in fact do so regularly.
[ link to this | view in chronology ]
Re: The difference
[ link to this | view in chronology ]
Re: The difference
[ link to this | view in chronology ]
Re: Re: The difference
[ link to this | view in chronology ]
Re: The difference
[ link to this | view in chronology ]
If your financial system is going boom and is getting criticized the solution is simple: silence the critics. There, financial problem solved =D
/derp
[ link to this | view in chronology ]
"Short selling" is on FUTURES, not on already owned stock.
Selling short is sheer speculation, GAMBLING. Should be always banned. -- Has been after causes a collapse.
Way to avoid most shenanigans in stock market is to simply require minimum time to hold a stock -- I favor a one year period. Puts an end to uncertainties that give rise to speculators gambling with money that they don't have.
[ link to this | view in chronology ]
Re: "Short selling" is on FUTURES, not on already owned stock.
And short selling in no more "GAMBLING" than actually buying the stock. In one you hope the stock will go up, in the other you hope the stock will go down.
The only difference is that with short selling you don't own the stock.
As for instituting a policy requiring a minimum time to hold you just show that you really don't have a clue. Why should I as an investor put any money in anything in which I can't get out of it when I think it is best?
Please talk from a place where you have actual knowledge and not from the fallacies you live with.
[ link to this | view in chronology ]
Re: "Short selling" is on FUTURES, not on already owned stock.
[ link to this | view in chronology ]
Re: Re: "Short selling" is on FUTURES, not on already owned stock.
Nor should there be such a stock because that would not make any sense. It assumes assets and liabilities have fixed values that don't vary depending on who you ask and it ignores the remaining ingredient in a stock's price, namely the future potential value of the company.
[ link to this | view in chronology ]
Re: "Short selling" is on FUTURES, not on already owned stock.
How is selling long not gambling as well?
[ link to this | view in chronology ]
Re: "Short selling" is on FUTURES, not on already owned stock.
[ link to this | view in chronology ]
The Root of the Issue
"You can ignore reality, but you cannot ignore the consequences of ignoring reality." - Ayn Rand
[ link to this | view in chronology ]
Re: The Root of the Issue
FAIL.
[ link to this | view in chronology ]
Re: The Root of the Issue
[ link to this | view in chronology ]
Re: Re: The Root of the Issue
[ link to this | view in chronology ]
Tball
No score keeping and everyone gets a trophy.
It isn't going to work for adults any better than it works for kids.
[ link to this | view in chronology ]
Re: Tball
[ link to this | view in chronology ]
bankcrisis
[ link to this | view in chronology ]
new economy
[ link to this | view in chronology ]
Re: new economy
[ link to this | view in chronology ]
Re: Re: new economy
[ link to this | view in chronology ]
Markets Are Irrational
So if markets are emotional and irrational, it makes sense to try to manage that emotion and irrationality, rather than let it spin out of control. If the kids won’t manage themselves, perhaps they need some adult supervision. Isn’t that all there is to it?
[ link to this | view in chronology ]