Will all hell breaks loose when the short sell ban is lifted? P.S. Of course they'll extend the ban for another month just in time for the election.
I've been wondering about this. I"m gonna put on my little conspiracy theory hat for fun and put this out. Seems that the Oct 2nd date was chosen because the bush administration knew they could twist the arm of congress to get some sort of bailout done by then. In the meantime you aren't allowed to short financials so they stay a float..... Then before the Oct 2nd deadline the bailout passes and the gov tells the banks either you bend over to all our provisions, (executive pay, government offer price for the junk, etc) or on Oct 2nd we're gonna release the shorties on your stock which essentially means this "voluntary" program is really not that voluntary. I mean shorting financials at the current price makes sense if they are still holding bad loans, but if the bad loans are gone does it really make sense to short financials from this point on? Seems like there is better risk reward to short another sector like discretionary spending or something than a bank with a beat down stock price that no longer holds bad loans...... So Oct 2nd only choice for a bank is to "volunteer" to sell their assets to the gov on the gov conditions or go bankrupt when the shorts concentrate on that bank since I'm sure most banks will go along with the bailout..... Just my little fun conspiracy theory!
I find that very logical; sort of like the "if you want highway funding, then voluntarily lower the drinking age to 21..." Keep in mind the value of mortgages is $14 Trillion and the paper on those mortgages is $165 Trillion. The numbers just don't work. The $700 Billion is moot; it does nothing.
I"m not sure at this point since the bill has been delayed. If the gov't decides that some sort of bailout is going to happen within the next week or two they may lift the ban. Essentially they'll be trying to trap some short sellers by lifting the ban and then releasing a bill that should create a short squeeze........I'm not a stock guy but from what I see there's better opportunites to short else where than financials. I think that trade is just about done. But I don't really see any harm in lifting the short sell ban.
Equating the the 165 trillion to the 14 Trillion underlying is a little too simplistic. A lot of the derivative "paper" are credit default swaps and there is little probability that all of the underlying mortgages will fail (unless the sun burns out, of course) There is a lot of residual value in what you refer to as "paper". Problem is, nobody has a very accurate idea at this juncture what the residual value will, a few years down the road, be. It is certainly considerable. So what the 700 billion does is buy time. The eventual losses will be far smaller than 700 Billion. (I'm not trying to make light of this very serious situation, but let's try and keep it in perspective.)
What will happen to bank stocks next week? SEC Ban on Short-Selling of Financial Stocks to Expire Oct. 8 http://www.bloomberg.com/apps/news?pid=20601087&sid=ak27vmONuUpg&refer=home