The U.S. Is So Scared of a Market Meltdown, They’re Siccing The DOJ On Shorts

We know what happened in the banking meltdown over the last few months. Silvergate Bank, Silicon Valley Bank, and Signature Bank all failed within a matter of days from March 9 through March 12, 2023.

Credit Suisse failed just a week later on March 19, and was forced into a hastily arranged shotgun wedding with UBS. First Republic Bank was hanging by a thread the entire time and finally was put into receivership by the FDIC on May 1.

Stock markets fell sharply during this period, although they recovered most of those losses in early May. Most analysts believe this mini-banking crisis is over and the Fed and FDIC have done enough to reassure depositors and to prevent further runs on the bank. This crisis is far from over. It’s just taking a breather.

The hit list of mid-sized regional banks that are vulnerable to bank runs and sitting in the crosshairs is well-vetted on Wall Street. When the banking crisis reignites, stocks will go down again. The selling pressure will increase for reasons in addition to the banking panic, including an emerging recession and global liquidity crisis.

When that happens, Washington will have to pull out their stock market panic playbook last used in 2008. This will include a ban on short-selling. In fact, the Department of Justice has already started a new war on short selling, as reported in this article.

The article describes a wave of criminal charges likely to be filed aimed at short-selling on inside information or short-selling as market manipulation. To be clear, insider trading and market manipulation can be crimes, and criminal activity should be thoroughly investigated. Still, it’s no coincidence that a wave of short-selling cases is coming at exactly the same time that markets are expecting a crash and the SEC may have to re-institute new short-selling bans in a panic situation.

Short sellers have always been the designated bad guys in market crash situations going back to the 1929 crash and even further. The truth is that short sellers do the market a service by helping the process of price discovery and providing market information about the direction of markets. Yet, anyone making money in a market crash is bound to invite abuse and even retribution.

Some short sellers may go to jail as a result of these investigations. Others may simply find their hands tied as markets dissolve in front of their eyes. If you can’t protect yourself by shorting stocks, it may be a good time to lighten up on stock exposure before the panic gets real.

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