In the past two months, four major banks have failed because they have lost the trust of their customers. The customers then invested their deposits elsewhere. Many banks thought interest rates would be zero forever. They made long-dated loans to at least get low returns. Now they are unable to pay a market interest rate on their deposits, meaning they cannot fund their assets profitably.
Now that they’ve lost their customers’ money, the previously optimistic bankers want to ban short sellers. (Editor’s note: short sellers sell stocks they previously borrowed, taking advantage of falling prices. Such short selling can further depress troubled stocks.) Skeptical voices that have dared to publicly express their concerns about this business model of the banks want to persecute them and silence them.
Wild speculation, hollow business models
Until recently we were in a bull market of wild speculation with empty business models fueled by the free money tide. Now that money has gotten expensive, it’s suddenly unfair that stock prices can go down as well as up. It’s a lot easier to blame the short sellers who bet on falling prices than it is to own up to your own stupidity.
About the guest author
Barry Norris is the founder of Argonaut Capital and the fund manager of the Argonaut Absolute Return Fund, a leading long/short equity fund based in London. In the blog “Argonautica” he writes about financial market topics.
Every company on the stock exchange has decided to submit to public scrutiny. This public also includes investors shorting stocks. To hedge your market risk and differentiate your returns from most funds which only perform based on where the market is going. The assets controlled by short sellers are tiny compared to those of traditional investors. Stocks of failed banks weren’t even particularly popular targets for short sellers. The suggestion that their share prices would collapse under the weight of short selling is just a convenient myth.
Many more banks will fail
Companies don’t fail when their stock price goes down, they fail when they run out of money. No government will forbid savers to receive a market interest rate on their deposits. Many more banks designed only for a world of zero interest rates will fail in the coming months, regardless of the actions of investors who foresaw the future.
The few professional short sellers are uniquely motivated to see some stocks fail, but equally the much more numerous traditional investors are only interested in rising stock prices. The comical marketing by banks and analysts, which is often disguised as research and lures stupid capital into business model castles in the air, is not criticized. The only research that comes close to professional due diligence these days often comes from short sellers. A market price only reflects the average opinion about a stock.
The truth, however, almost always prevails, even if it is only represented by a minority. Whoever forbids short selling forbids the truth.
Also read, how investors deal wisely with seasonality in the stock market
