Friday, September 19, 2008

Bad Banks, Short Selling and Financial Terrorism

We said yesterday that now was the time to be trading, but we never had an inkling of the news that hit the markets last night. A possy of US financial glitterati announced last night the US government is to stage a monumental bail-out of the hundreds of billions of dollars of 'toxic' mortgages.

This move is aimed at being the silver bullet that finally brings the credit crisis to an end.

The idea appears to be the creation of what is being called a 'bad bank' which would act as a massive fund designed to suck bad debt out of the system with the US government holding this debt until maturity.

News of the plan, was greeted with cheers on the floor of the New York Stock Exchange. The Dow Jones index traded in a 617-point range, eventually closing up 410.03 points, or 3.86pc, at 11019.7, its best one-day percentage gain in six years.

Markets across Europe are being called up vastly with the FTSE, CAC 40, and the DAX all expected to make 200 point + gains. This bail-out and with the news that the FSA has banned short selling on financial stocks for 120 days is sure to make today's session an interesting one.

The FSA made the short selling move on fears that other banks could follow HBOS in being targeted by short-sellers.

Outgoing FSA chairman Sir Callum McCarthy said: "There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures."

The ban covers all new short-selling of financial stocks. Also, by next Tuesday, investors must disclose short positions of more than 0.25pc of a company's total value.

Traders though are none to impress, one said "This is an utter joke. There is now even less liquidity in a poor liquid market. How are the institutions going to sell?"

Short sellers are being viewed with suspicion all over the world. Jim Cramer, CNBC commentator and ex-hedgie was discussing the short selling measures in the US and even made reference to 911 and the belief in some quarters that airlines were being shorted by Bin Laden and other terrorist groups and the same could be happening with financials.

Cramer’s been talking to the short sellers he knows, and that’s the theory they’ve been putting forward. His sources said that it’s doubtful that the market’s traditional short sellers are behind the negative action we’ve seen lately.

Cramer, who was merely relaying what he heard, did say that, given the fact that the U.S. is in a “financial nationally emergency,” the “financial terrorism thing, to me, has to be put on the table just because the regular short sellers are not doing this.”

Calls to investigate who is behind short selling are coming, not just from Cramer, but from others in the financial markets. One trader who we spoke to said "Banning short selling is just madness, long term. If the FSA suspect that there is something going on other than legitimate shorting, then we will wear it until the deadline but if this becomes a permanent thing, forget it, the days of the free market are over".

The FSA have said that they believe short selling to be a legitimate tool so we believe it's unlikely that this ban will be extended indefinitely, but as we have said many, many times before, prepare for a massive tidal wave of regulation in 2009/2010.

Source: HF Markets - Online Trading

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