Tuesday, October 7, 2008

Short Sales Ban Ends Tomorrow

The ban on short sales ends tomorrow. Will stocks collapse? Probably not, perhaps the reason why stocks tanked Tuesday was in anticipation of the lifting of the ban. After all, if prices are expected to fall tomorrow nobody will hold them today.

Another interesting date to watch is October 10 (in an earlier post I got the date wrong, October 23 is the date that WAMU bondholders will have their auction. Lehman's auction is in a couple of days, but this just strengthens the point I am making). That is the day that the auction will take place to settle the credit default swaps relating to the Lehman bankruptcy. The amount that is owed in this case could be $400 billion. Fear over how this will play out is just another factor in the general uncertainty over the economy.

Finally, the Fed's announcement that it will purchase commercial paper must reveal that policymakers understand that the credit crisis is really bad. Otherwise they would not have taken this important step. This must have been another shock that hurt markets, but it is good that the Central Bank will take action in this case.

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