JPMorgan Chase chief executive Jamie Dimon has called on US regulators to look into the behavior of investors betting against bank stocks as part of official efforts to “end” the banking turmoil.
Four lenders went bust while some hedge fund short sellers they made big profits from bets against such shares in the past two months. Regulatory action to deal with bank failures has failed to arrest the fall in the shares of some lenders.
“The SEC has the enforcement ability to scrutinize what people are doing by name in options, derivatives, short selling,” Dimon said Thursday in an interview with Bloomberg Television, echoing a recent call from a group of US banking lobby.
“If someone is doing something wrong, people are colluding, or people go overboard and then tweet about a bank, they should follow suit and forcefully,” he added.
Earlier this month the American Bankers Association asked for the Securities and Exchange Commission take measures against alleged “market manipulation”.
In a letter to the regulator, the group noted “significant short selling” of several bank stocks “that do not appear to reflect the financial condition of issuers or general industry conditions”, and urged the SEC to reduce “the avenues for trade abusive”.
Short sellers borrow shares and then sell them on the market, making bets that they will be able to buy them back cheaper before giving them back. The Financial Times reported last month that funds had made billions of dollars betting against bank stocks during the early stages of the banking turmoil.
The SEC and other regulators introduced controversial temporary short selling bans following the collapse of Lehman Brothers in 2008. Academic studies since then have tended to conclude that such bans have little positive impact and may be counterproductive by reducing liquidity and hampering market efficiency, but the idea persisted.
Hedge funds rejected any proposed ban on short selling.
“Banning short selling will only increase market volatility, hurt price discovery and delay a regional bank price recovery,” the US trade group Managed Funds Association on Monday wrote to the SEC. “[A ban would be] unjustified and would cause greater harm to investors, markets and issuers themselves subject to such restrictions”.
Responding to a question from the FT before Dimon spoke, the London-based Alternative Investment Management Association said it was “strongly opposed” to any potential ban on short selling.
“There is a lot of solid evidence out there that shows that it is not short selling that is behind a particular equity underperformance,” said Jiří Król, deputy general manager of Aima. “The bans severely inhibit the ability to discover prices at a time when it’s needed most.”
SEC Chairman Gensler said last week that “in times of heightened volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that could threaten investors, capital formation or the markets in general”.
Regional bank stocks have been hit hard following the recent lenders meltdowns, which began with the unexpectedly rapid disintegration of Silicon Valley Bank in March. First Republic, a California-based lender, replaced it this month as the second-largest banking collapse in US history, with $93.5 billion of assets sold to JPMorgan.
Banks including PacWest, Western Alliance and Zions Bancorp are down at least 50% this year.
Just over 19% of PacWest’s shares are currently being shorted borrowed, according to data from specialist consultancy firm S3, compared to just 4.2% borrowed before the SVB collapse. Short interest in Western Alliance came in at 10.5%, up from 2.8%.
The three most profitable positions for short sellers in the first quarter were those betting on downsides for SVB, Signature Bank – which collapsed just days after SVB – and First Republic, according to S3.
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