Australia's corporate regulator, Tony D'Aloisio, has outdone himself this time.
After eight months of doing absolutely nothing about the problems of short selling, on Sunday the Australian Securities and Investments Commission chief decided to ban the practice outright for a month.
As expected, we saw the results yesterday: an artificially inflated market.
Why stop at short selling? Big Tony should have just banned selling altogether, and with the new mood in Washington, perhaps have issued an edict that, until say the end of December, traders would be restricted to buying - and only at specified prices. That way, the beleaguered Macquarie Group and Babcock & Brown could return to their once vaulted positions at the top of the corporate tree.
The level of irony of the past week has been outdone only by the degree of hypocrisy. We've seen Macquarie Group railing against the activities of short sellers and the commission threatening action against those who engage in spreading "false rumours". Presumably, true rumours are OK.
It is reasonable to assume one of the true rumours is that some Macquarie executives had taken loans over their shares and that as the stock price tumbled to $26 last week they were asked to stump up extra cash as security or lose their stock.
On Wall Street, meanwhile, Goldman Sachs and Morgan Stanley - the only two investment banks left standing at this point - have cried foul over the activities of "speculators".
Perhaps your columnist has been mistaken. But for decades, I've always thought the sole focus of investment banks was to engage in speculative trading, whether it be in stocks, bonds, derivatives, or in Macquarie's case, infrastructure.
Every investment bank in the world, including Macquarie, has employed legions of traders who have been paid enormous bonuses to short sell all manner of things. Now the shoe is on the other foot, they've suddenly cried foul and regulators around the globe have stupidly jumped to their defence.
There is an enormous amount of misinformation about short selling. There is no doubt it can lead to market manipulation if it is not properly regulated. And that is the key - proper and vigilant regulation.
Since February, when it was obvious the rules regarding short selling were being ignored, the commission and the Australian Securities Exchange have been urged to enforce their own rules.
Those rules clearly state that short selling can take place only in the biggest 200 companies and that no more than 10 per cent of shares in those companies can be short sold.
Most importantly, all short sales must be reported so market participants can identify the amount of short selling in any one stock.
But some clever traders found a loophole in the rules.
If they sold short and then borrowed stock from an owner to deliver on to the market, they argued that technically it wasn't a short trade and therefore it didn't need to be disclosed. As a result, short trades were taking place outside the top 200 companies and for well in excess of 10 per cent of the issued capital.
Our regulators teamed up to inquire into the issue. But precious little happened until Sunday, when ASIC went overboard and banned short selling instead of simply tightening and enforcing existing regulations.
Short selling is not to blame for the malaise afflicting global markets.
As Thomas Henker from the Australian School of Business argues, properly regulated short selling merely speeds up the pricing process. Banning it will not stop the rot. It will simply slow the pricing process and detract from the efficiency of our markets.
Macquarie and Babcock & Brown are under pressure because they are carrying enormous debts and the business model they employ is under a cloud.
Remember early this year when Eddy Groves had his shares sold from under him by his bankers after short-sellers targeted ABC Learning? Late last year the child-care operator's shares peaked at $6.91. It last traded at 54c.
It may have been short-sellers that drove the price down with savage intensity. But it has never recovered. That's because the short-sellers got it right.
If they'd got it wrong, ABC would have rebounded and those with short positions would have lost a fortune.
After yesterday our reputation as a nation with sophisticated capital markets has been the biggest loser.
