Saturday 20 September 2008

The first unintended consequence of banning shorts

Yes, it's already started:

the likes of John Mack have implicitly conceded that there's simply no way they'll be able to issue any kind of convertible bond for the foreseeable future.

How's that? Investors in convertible bonds are perfectly happy to put up new money, but they invariably short the underlying stock at the same time. It's called convertible arbitrage, and it's popular enough that there's almost no room in the convertible-bond market for anybody else. Any bank trying to issue a convertible bond into a market where short-selling is banned would be doomed to fail.


There is pain, and there is pain. You can slow the pain down or push it out to a different point, but sooner or later it's going to bite and the further you push it out, the more it's going to hurt. Some day, not too far from now, we're going to see the real consequences of banning shorts.

And it won't be pretty.

Update: NEXT!

3 comments:

Sackerson said...

If shorts are banned, how about hot pants? I only ask because we're going 70s.

Obnoxio The Clown said...

@sackerson: I'm fairly sure you don't want to see me in hot pants.

Mark Wadsworth said...

One can argue the merits or demerits of selling shares short (and personally I see no harm in it whatsoever, provided it is not accompanied by spreading malicious rumours about the company AKA insider trading).

That is not the point.

The point is that the legislation is totally and utterly unenforceable as there are so many different ways of doing it (contracts for difference, selling a future, spread betting, selling a call option, buying a put option etc).

You can apply the same logic to banning certain drugs. Even if it were accepted that the world would be a better place without crack cocaine (and it probably would be), the law banning it is in practice unenforceable and the Unintended Consequences cause ten times as much damage that the drug itself.