Effects Of SEC Short Sale Ban - Washington Mutual Rallies To 2X Price No One Would Pay To Buy The Company In The First Place

I believe banning short sales has the potential to be reversed relatively quickly because of its negative impact on true price discovery - a process that is now impossible. Just like all of those other illiquid assets on bank's books that escape true price discovery for similar reasons. That's what happens when liquidity is removed from markets or when instruments are being offered up in an illiquid market as we have with bank assets. We don't have open, transparent and liquid markets just because it is fun to play the casino. Secretaries Paulson and Cox, being free marketeers, seem unable or unwilling to acknowledge this truth either as it relates to stocks or bank assets or anything else. Or, as it relates to their solutions to problems arising that will truly and severely distort price discovery.

The market had already determined there were no takers for Washington Mutual's stock when it was trading at $2 and the company had itself up for sale. With the euphoria surrounding Paulson's bailout plan, the gamblers have bid up Washingtom Mutual to more than doubled its pre-SEC short selling ban price. So, now we have its stock trading at 100% premium to a price already determined to be too high by an open and functioning market. Thank your friendly SEC chairman for this scheme that will end up causing more problems than it solves.

Update: I realized I left out the punchline right after posting this. Doh! If true price discovery cannot be achieved, there is a reasonable probability many market participants will not bid the market. Do you want to buy an asset that is not determined by a working, open and transparent market? We could see prices fall because of a lack of bids due to a vote of no-confidence. Just like the no-confidence outcomes we are seeing in other markets.