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The financial regulation that is due to be signed by President Obama has not gone unnoticed in the markets. The markets roiled with the S&P down by 9% compared to the begin of May. Greece is indeed part to blame, but the Greek worries are not new, we know about the Greek tragedy for a while now. Germany's new rule to ban short sellers on Sovereign bonds, well yeah, I'd say it is a mistake, but what the heck does it have to do with the S&P? It is well known that naked shorts create distortions in the market, and betting on the demise of states can only aggravate things. Naked short selling introduces perverse incentives as explained in this blog post, but confusing short selling and naked short selling shows that the regulators do not seem to understand their job. It definitely did not help the markets, but I believe there is a much more important factor out there: the new banking regulations.
Banks told members of Congress that proposals like the one on spinning off swaps desks [from the banks] contributed to this week’s market turmoil. What the heck did they just say? Did the markets [read investors] not appreciate the new rules, or did the banks themselves rock the boat?
They have guts to say something like this in Congress, they just held Congress for ransom.
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