Thursday, September 18, 2008

McCain and Short Selling

Sen. McCain says he'd fire SEC chief Christopher Cox for having "betrayed the public's trust" (WSJ).

Fair enough. In hindsight there seem to be plenty of steps that could have been taken to eliminate risk in the sub-prime and derivatives markets. But that's not what's got McCain angry:
Sen. McCain said the SEC allowed abusive short-selling, or bearish bets on a company's stock, to turn "our markets into a casino."

Sen. McCain also criticized Mr. Cox for eliminating a trading rule that acted as a speed bump to prevent short-seller from pounding a stock. The rule, known as the uptick, said traders could only place short-sales following a higher bid in a stock price. The SEC eliminated the rule in July 2007, and market participants have been urging the SEC to reinstate the rule ever since. Mr. Cox has said the rule is ineffective today since markets have changed since it went into effect around the Great Depression.

Short selling didn't cause the current crisis. Yes it's hurt, and it's probably a good idea to reign it in, but we already have rules on the books for dealing with it. Chairman Cox is right, reinstating the uptick rule won't materially affect the credit markets, which is what's causing the failures at Bear, Lehmann, Merrill, and Morgan. But as always short-selling is a convenient target when times are bad, and Sen. McCain apparently believes he can get a political bounce from aggressively attacking both Chairman Cox and the bears.

McCain also supports creation of a Resolution Trust Corp-like entity to isolate the bad paper currently clogging financial markets. First suggested by Brady, Ludwig, and Volcker yesterday, it sounds like a plausible solution. What's not clear is whether he agrees this entity should be temporary, lasting long enough to resolve the current crisis and then disbanding, or whether he favors a new permanent agency with broad regulatory power.

Once again, he sounds like a johnny-come-lately. Never mind that Sen. Obama has been every bit as much blind-sided by this week's events, I kind of expected Team McCain to keep more of a level head. Talking tough about short selling and (possibly) proposing huge new federal bureaucracy right in the middle of a crisis doesn't recommend his economic expertise.