SEC Can't Solve Problems, Curbs Short Selling Instead

It's been at least a few weeks since I've had the pleasure of ranting against the SEC for its inanity. Fortunately (or unfortunately depending on how you look at it), the SEC voted 3-2 on Wednesday to adopt new, mind-numbingly complicated restrictions on short selling that are certain to prevent another financial crisis. The new rules kick in when a stock drops 10% and stipulate that a stock can only be sold short at a price that is above the national best bid. The curb remains in place for two days - the day the stock drops and the following day. The SEC did not exempt option and equity market makers who only short stocks to hedge and facilitate liquidity to other investors. Still confused? MarketBeat has a handy Q&A that helps explain the news rules.

If we take a step back in the time machine and review what happened to the markets, you will recall that financial stocks were taking it on the chin when investors were panicking about massive losses at financial institutions. Bank CEOs complained and the SEC banned short selling to "fix the problem" of falling stocks. Then stocks fell off of a cliff. Meanwhile, Fannie and Freddie were put under conservatorship, Lehman failed, AIG was nationalized, WaMu and Wachovia were seized by the FDIC and auctioned off. The government was forced to inject capital into the nation's largest banks (some more than once) to keep them from collapsing as they absorbed catastrophic losses from their excesses during the financial bubble years. Any rational person reviewing history would look at the evidence and conclude that short selling had nothing to do with what happened in the fall of 2008. It had nothing to do with ANYTHING. Stocks fell off a cliff DURING the short sale ban as investors finally realized that things were bad and about to get worse. A rational person wouldn't even need to scratch their chin to come to this conclusion. Instead the SEC has instituted new bans that will likely do nothing other than screw up the markets and allow more sophisticated players to game the system. The short selling restrictions will not:

• Help the SEC find the next ponzi scheme before it turns into a $65 billion debacle.
• Keeps investment banks from spinning IPOs or putting out conflicted research
• Keep investment banks from creating another technology, housing, private equity, or commercial real estate bubble
• Keep investment banks from helping sovereigns or insurance companies from hiding assets off balance sheet
• Keep investment banks from hiding their own assets off balance sheet
• Keep investment banks from mismarking level III assets and hiding them from investors
• Insert more examples of things the SEC should've been focusing on instead of this moronic regulation.

Aren't you glad we raised the SEC's budget so it could waste its time on ineffective regulation? For a better, more heated rant on the subject, travel back in the Mock the Market time machine and read what I said when the short sale ban was introduced. It was some of my finest work.