- US federal and state officials are reportedly analyzing whether a possible "market manipulation" was behind the recent volatility in regional banking shares, as the White House vowed to monitor "short-selling pressures on healthy banks."1
- This comes as the American Bankers Association urged the Securities and Exchange Commission (SEC) to take action against the alleged "abusive" trading practices against otherwise healthy banks.2
- Short sellers reportedly made nearly $379M in paper profits on a single day alone from betting against certain regional banks despite allegations of strong fundamentals in the sector and sufficient capital levels.3
- Though short selling — in which investors sell borrowed securities aiming at buying them back at a lower price to rake in the difference — is legal, artificially affecting or controlling stock prices to deceive or defraud investors is not.4
- Shares of multiple regional banks came under selling pressure on Thursday, with PacWest Bank dropping almost 50% after the company admitted to exploring a sale and Western Alliance dropped 39% following reports it was also considering strategic options, which the bank denied.5
- Questions about the future of regional lenders persist following the collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank in recent months.6
- Pro-establishment narrative, as provided by Wall Street Journal. It is certain that bearish short sellers have been betting against regional bankers despite the Fed reaffirming that the US banking system is sound and resilient, but this does not tell the entire story. Some investors are fearing the contagion of regional-banking problems and its possible spillover to the broader economy, while others may be seeking to force the Fed to ease its campaign to cool inflation down. The finance marketplace is adjusting to broader complexities.
- Establishment-critical narrative, as provided by Semafor. Short sellers do play a crucial role in rational, well-functioning markets. However, because these investors have pocketed billions of dollars in two months by betting against regional banks that added deposits in April, it should be clear by now that this is no longer a well-functioning financial market. A temporary ban on short selling, similar to the one adopted in 2008, should be put in place to reduce panic selling.