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...

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.
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."

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?
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.
France is also savvy to other devious, speculative moves as well:
6 - Are trades in index derivatives allowed where the basket of securities includes one or more of the securities concerned?
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.
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:
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.


Reader Comments (rss)

(Flattened / Threaded)

  1.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 10:58am

    Poor, poor pitiful fool!

    Investors are going to say to them "You will not control my money!".

    Freedom of capital when hindered bites back in a very harsh way.

     

    reply to this | link to this | view in thread ]

  2.  
    identicon
    Yogi, Aug 17th, 2011 @ 11:04am

    The difference

    The difference between Europe pulling this crap and the US is that the United States is supposedly a democracy and the Leader of the Free World ( a designation that is rapidly losing its meaning)which includes things like Free Speech.

    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.

     

    reply to this | link to this | view in thread ]

  3.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 11:08am

    Re: The difference

    Very true. Europe has long believed that the Government is the reason their country is as great as it is.

     

    reply to this | link to this | view in thread ]

  4.  
    icon
    Andy (profile), Aug 17th, 2011 @ 11:14am

    Re: The difference

    Ah yes that country called Europe...which, despite the aspirations of the worst federalists in many European countries, still does not exist.

     

    reply to this | link to this | view in thread ]

  5.  
    icon
    Ninja (profile), Aug 17th, 2011 @ 11:18am

    Reminds me of the classic solution the betrayed husband finds for the fact his wife is banging his friend in the living room sofa: sell the sofa.

    If your financial system is going boom and is getting criticized the solution is simple: silence the critics. There, financial problem solved =D

    /derp

     

    reply to this | link to this | view in thread ]

  6.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 11:22am

    Re: Re: The difference

    Andy, yes that is correct. It is only a country in the way they act. I misspoke. I meant that the countries in Europe believe...

     

    reply to this | link to this | view in thread ]

  7.  
    identicon
    out_of_the_blue, Aug 17th, 2011 @ 11:26am

    "Short selling" is on FUTURES, not on already owned stock.

    So your statement "In much simpler words: investors are not allowed to profit when stock prices dip." just doesn't apply to what's actually been banned.

    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.

     

    reply to this | link to this | view in thread ]

  8.  
    icon
    Chris Rhodes (profile), Aug 17th, 2011 @ 11:30am

    The Root of the Issue

    A quote that pops into my head more and more these days:

    "You can ignore reality, but you cannot ignore the consequences of ignoring reality." - Ayn Rand

     

    reply to this | link to this | view in thread ]

  9.  
    icon
    :Lobo Santo (profile), Aug 17th, 2011 @ 11:32am

    Re: The Root of the Issue

    That quote is foolish. The consequences of ignoring reality is just more reality.

    FAIL.

     

    reply to this | link to this | view in thread ]

  10.  
    icon
    Atkray (profile), Aug 17th, 2011 @ 11:39am

    Tball

    The people that run the T-ball leagues for kids are taking over the world.

    No score keeping and everyone gets a trophy.

    It isn't going to work for adults any better than it works for kids.

     

    reply to this | link to this | view in thread ]

  11.  
    identicon
    anonymous disenfranchised Dutch coward, Aug 17th, 2011 @ 11:40am

    bankcrisis

    these rules could also have something to do with that other crisis a while back. you know, the almost world wide collapse one. for some reason people blame the financial institutions for that.

     

    reply to this | link to this | view in thread ]

  12.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 11:42am

    Re: "Short selling" is on FUTURES, not on already owned stock.

    What? Short selling is not nor has it ever been only in futures. Futures do not deal in individual stocks. Futures only deal in stock indices.

    Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a security that isn't owned by the seller, but that is promised to be delivered.

    Read more: http://www.investopedia.com/university/shortselling/shortselling1.asp#ixzz1VJRWFv1O


    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.

     

    reply to this | link to this | view in thread ]

  13.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 11:47am

    Re: "Short selling" is on FUTURES, not on already owned stock.

    By the way Futures values are based on actual value of the underlying commodities. Stock values are based on the "Greater fool theory" in which you hope that a greater fool than you will value the stock more than you. There is not a stock that is actually valued at the empirical value of "assets-liabilities= value."

     

    reply to this | link to this | view in thread ]

  14.  
    icon
    Gwiz (profile), Aug 17th, 2011 @ 11:48am

    Re: The difference

    Mr. Berra is that you?

     

    reply to this | link to this | view in thread ]

  15.  
    identicon
    dev, Aug 17th, 2011 @ 11:54am

    new economy

    in the new economy people can only buy stock, never sell.

     

    reply to this | link to this | view in thread ]

  16.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 11:59am

    Re: The Root of the Issue

    I choose to believe that what you state as a statement of reality is in itself a distortion of what we will believe is the actual reality of our consequences of not seeing reality as it is.

     

    reply to this | link to this | view in thread ]

  17.  
    icon
    Chris Rhodes (profile), Aug 17th, 2011 @ 11:59am

    Re: Tball

    This is the most apt analogy I've seen in a while. I like it.

     

    reply to this | link to this | view in thread ]

  18.  
    icon
    Skeptical Cynic (profile), Aug 17th, 2011 @ 12:01pm

    Re: new economy

    That would not be buying but giving money away since you could never actually make money which only happens when you sell after it has risen in price.

     

    reply to this | link to this | view in thread ]

  19.  
    identicon
    Anonymous Coward, Aug 17th, 2011 @ 12:43pm

    Re: Re: The Root of the Issue

    > Head explodes...

     

    reply to this | link to this | view in thread ]

  20.  
    identicon
    Anonymous Coward, Aug 17th, 2011 @ 2:37pm

    Re: Re: new economy

    Dividends?

     

    reply to this | link to this | view in thread ]

  21.  
    icon
    btr1701 (profile), Aug 17th, 2011 @ 9:33pm

    Re: "Short selling" is on FUTURES, not on already owned stock.

    > Selling short is sheer speculation, GAMBLING.

    How is selling long not gambling as well?

     

    reply to this | link to this | view in thread ]

  22.  
    identicon
    Lawrence D'Oliveiro, Aug 18th, 2011 @ 12:00am

    Markets Are Irrational

    Who says stock trading was based on any kind of logic or rationality? This blog itself pointed out as much in its earlier report on the reaction to the S&P downgrading of the US credit rating. Prices go up because they go up, and go down because they go down, and thereís usually little else to it.

    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 wonít manage themselves, perhaps they need some adult supervision. Isnít that all there is to it?

     

    reply to this | link to this | view in thread ]

  23.  
    identicon
    Anonymous Coward, Aug 18th, 2011 @ 12:39pm

    Re: Re: "Short selling" is on FUTURES, not on already owned stock.

    "There is not a stock that is actually valued at the empirical value of "assets-liabilities= value.""

    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.

     

    reply to this | link to this | view in thread ]

  24.  
    identicon
    Anonymous Coward, Aug 18th, 2011 @ 12:47pm

    Re: "Short selling" is on FUTURES, not on already owned stock.

    Speculation is defined as any activity that does not guarantee the safety of the investment i.e. anything you can do with a stick is sheer speculation, GAMBLING.

     

    reply to this | link to this | view in thread ]


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