October 7, 2008
I am a trader for a hedge fund. We are not materially long financial stocks, so I have no direct benefit from writing this, except that I do not want a financial collapse.
I want to write to say that I think you should keep the short ban on most financial stocks. There are a few that do little lending and trade near their 52-week highs, and these, people should be allowed to short. But the others should remain restricted.
I also think you should force people (over a period of 2 or 3 months) to cover unhedged short positions in financial stocks down more than 50% from the beginning of the year.
Short-selling is very useful in ferreting out financial problems and limiting overvaluation of stocks. However, the whole world now worries about financial stability — there is no lack of worry there.
And few lending institutions now trade at high multiples of past earnings or book value.
What short-selling does now is complicate capital-raising for banks. Since each dollar of capital for a bank supports on the order of ten dollars of loans, this can be very harmful.
It is true that every share sold short eventually must be covered, but eventually we are all dead and we must deal with what is needed now.
Thank you for your attention.