Short selling exposes fraud and bad business models...
ITALY'S BANKS have exposure to Greek debt. They also have exposure to Italian government debt. They are over exposed...and on Friday, Italy's main stock index fell by 3.5%, writes Dan Denning in his Daily Reckoning Australia.
Investors punished the banks and priced in the coming collateral damage.
But the regulators struck back against prices! Consob, the Italian share market regulator, has ordered that short-sellers "must reveal their positions when they reach 0.2%or more of a company's capital and then make additional filings for each additional 0.1%. The measure takes effect today and lasts until September 9", according to Bloomberg.
Rising government bond yields (and falling prices) are the perfectly natural reaction to finances that have become transparently absurd. If you're a government and you're trying to prevent pricing information from betraying how bankrupt you are, what do you do? You interfere with the ability of prices to communicate information. You fix the market.
Bloomberg reports, "On July 5, European lawmakers voted in favor of a ban on short selling of government bonds in the EU unless traders have at least 'located and reserved' in advance the securities they intend to sell. The European Union Parliament in Strasbourg, France, also called for restrictions on traders' use of credit- default swaps to profit from defaults on sovereign debt they don't own."
There are plenty of people who object to short-selling on principle. When you short sell, you're selling something you don't own to someone who doesn't know you've borrowed it. You give back what you've sold only after you've bought back. If you sold it for more than it was worth when you bought it back, you make a profit.
Short sellers serve the very useful function of exposing bad business models and fraud in the market. Attacking them is a great way of ensuring that fraud continues and is not revealed in prices. If you're perpetuating a fraud, you'd want to get rid of short sellers.
In any event, Europe's bankers are busy giving themselves more time to exit the market before allowing it to fail. This will allow them to buy up assets at post-crash levels. The public will be left with huge debts and bailouts to pay for.
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