Barry Ritholtz on the short-selling ban

From Mr. Ritholtz's 'The Big Picture' blog:

Terror Attack on US Financials? Details of SEC Short Ban

Posted by Barry Ritholtz on Friday, September 19, 2008 05:54 AM

Last night, we discussed the absurdity of banning all short sales. The details of the SEC action have been released (see below). The specifics are a "temporary halt in short selling in 799 financial institutions" until October 2nd.

I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management. (We used to do schtick together on Power Lunch, and made for an amusing financial comedy team).

But Joe is a good money manager, a great stock picker, and a thoughtful guy. He raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion's share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Joe asked the question: Is anyone investigating whether this is a case of financial terrorism? He wanted to know if someone was at least looking into this question (Joe is buds with Jim Cramer, and mentioned it to him, who then omitted to cite in his column that this was Joe's theory, not his own).

Anyway, its an interesting theory, one that seemed kinda out there -- until last night's emergency action. Nothing else really explains the insanity of banning short sales -- except for Joe Besecker's questions. I can think of only 3 other possibilities that explain this insane action:

1) Extreme idiocy and incompetence -- not unthinkable ftom the gang that couldn't shoot straight in DC these days;

2) Following the impetuous Fannie/Freddie rescue, the timing of this certainly has political overtones. We will see if it gets extended a month from October 2nd to November 5th.

3) Some other factor, possibly financial terrorism.

I can think of no other explanations for the dismantling of the free operations of trading markets.