When Regulators Panic

The range of regulatory responses to the current chaos in financial markets is instructive. The SEC bans naked short selling, the Russians just close down their markets altogether before announcing plans to spend $20 billion on stocks, and the FSA, in the UK, has banned all shorting of financial stocks for at least 30 days.

Meanwhile, the broad US stock market — the closest thing we have to a gauge of overall market sentiment — is in the midst of yet another nasty lurch downards. The S&P 500 is now at a four-year low, and has lost more than a quarter of its value since May. Oh, and any institutional investors thinking maybe a money-market fund might be a good idea right now are going to want to choose someone other than Putnam, which is liquidating its $12.3 billion fund.

The regulatory responses aren’t going to be particularly effective: anybody who really wants to short financials will still be able to do so, by using options or ETFs or some other workaround. But maybe this is just the financial equivalent of x-raying shoes at the airport: it makes it look as though Something Is Being Done in the face of all the carnage. After all, regulators are just as adept at CYA moves as anybody else.

Update: This just in, from the WSJ: New York Attorney General Andrew Cuomo has started a "wide-ranging investigation into short selling in the financial market". Thanks, Andrew.

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