On September 18, when the financial crisis after the fall of Lehman Brothers was at its most critical moment, the United States candidate to the presidency, John McCain, told the electorate what he would do if he became President. “I would fire Cox”, he affirmed, according to information from the international press. The target of his speech was Christopher Cox, president of the Securities and Exchange Commission (SEC), the American capital market’s regulatory body. According to the candidate, Cox should be punished for betraying the people’s trust and allowing hedge funds and speculators to transform the market into what he defined as a “casino”. “The regulator snoozed, my friends”, complemented McCain.

Under the threat of becoming the villain, Cox did something about it. In less than 24 hours, he gave the market its scapegoat for the crisis. Starting that Friday – and for 10 days extendable by another 30 – short selling of shares from 799 companies, mostly financial institutions, was forbidden. His intentions were clear. He was trying to nip the crisis in the bud.

Short selling operations, known in Brazil as stock lending, favor a bear market. This is because the investor can easily take advantage of a strong bearish movement. They need only rent the stock, wait for the price to take a dive and, later on, buy anew at a much cheaper price in order to give it back to the person who made them the loan. When a crisis of gargantuan proportions is at hand, the existence of such an instrument can be considered giving a rope to a suicide.

American lawyer Gregory Harrington, of Arnold & Porter, defends the ban at this time. “It’s an appropriate decision for an extraordinary situation.” But the market has shown that they would rather have the right to keep their rope and use it as they see fit. The SEC president’s decision raised more than a few hackles. According to short selling defenders, the liquidity that this instrument injects into the market is commendable, for it avoids large oscillations and makes pricing more efficient. Furthermore, Cox’s initiative was badly taken for its “manipulative” effects. People who were “short” in operations of this type had three trading sessions, at most – the liquidation period for a loan – to “cover” themselves. This obligation pushed a bullish pressure down the market’s throat, creating great discomfort.

“Excepting cases of fraud, it is not SEC’s place to act on an asset’s price”, explains Professor Robert Howell of the Tuck School of Business. Howell understands that the operation, done legally, should not be forbidden because it is essential to the financial market. Furthermore, argue investors, suspension of short selling did not eliminate the possibilities of bearish betting outside the spot market. Futures and options markets also serve this purpose.

In Brazil, according to a statement by the CVM (the country’s securities and exchange commission), some controls – such as liquidation and centralized compensation – make initiatives such as Cox’s indispensable. The autarchy highlighted the benefic character of short selling and is not considering further regulatory measures.