The establishment no longer wants to remain silent about the American banking crisis. A leading banking organization has called on regulators to put a stop to short sellers. In a letter to the Securities and Exchange Commission (SEC), the American Bankers Association urged state regulators to ban harmful short selling on regional banks. Speculation is decoupled from the financial reality of financial institutions.

Winand von Petersdorff-Campen

Economic correspondent in Washington.

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However, this is demonstrably an incomplete representation of the role of short sellers. The short seller Raging Capital of investor Bill Martin was the first to warn of the fundamental problems of the Silicon Valley bank on Twitter in January and to encourage the first customers and investors to migrate. According to recently published admissions, the state supervisors had recognized the problems, but had not enforced a change of course.

In one respect, the banking lobby is right: in fact, after the collapse of the Silicon Valley bank, short sellers had begun borrowing and selling shares from less robust regional banks on a large scale, buying them back at a significantly lower price and returning them to the stock's lender. After the failure of First Republic Bank, additional short sellers stepped in.

In Thursday's trading session, shares of financial institutions Pacwest, Western Alliance and First Horizon were the main target of short sellers. At times, they lost 40 percent of their value on the trading day. The development gave ammunition to the lobby. Short sellers destroy the values of fundamentally healthy banks and end up hurting the retail investor, according to the American Bankers Association.

When the short sellers are silenced

The push against the short sellers is met with angry reactions. On Twitter, the influential hedge fund manager and founder of AQR Capital, Cliff Asness, spoke out with extraordinarily harsh formulations: The banking aristocracy is trying to use the naked power of the government to help itself and support its own comfortable jobs. The initiative of the banking lobby lacks any facts. These bankers are neither businessmen nor real bankers. They are fraudsters who call on the state for help as soon as their bad business model is challenged.

Asness, who received his doctorate from the University of Chicago and was supervised by the legendary economist and Nobel laureate Eugene Fama, also referred on Twitter to a scientific paper, the quintessence of which is underlined by his accusations: Companies that succeed in hindering and stopping short sellers show low stock returns for years to come. The explanation of the study by Harvard economist Owen Lamont: The successful obstruction of short sellers leads to the overvaluation of the stock.

Another recent study by Stanford economist Amit Seru points to blatant mismanagement by bankers. According to the report, the American banking system had held assets whose market value was $2.2 trillion lower than what was reported on the balance sheets. The astonishing side result: The bank managers had not provided any hedges against the devaluation, which corresponded to an average of ten percent of American bank assets. There was virtually no hoarding against the interest rate risk.

Deposits de facto guaranteed by the Fed

With further interest rate hikes, banks' assets continue to lose value. This applies not only to government bonds, but also to loans issued by banks. Loans for real estate projects in particular are in danger of becoming lazy because projects can no longer be presented profitably in the new interest rate landscape.

In order to prevent the banking crisis from spreading, the Federal Reserve had issued a de facto deposit guarantee. State-regulated deposit insurance only covers balances up to $250,000. However, Silicon Valley Bank and Signature Bank had been declared systemically important, which went hand in hand with the complete guarantee of deposits. In fact, the guarantee had an effect. Very few banks registered waves of emigration. Pacific Western, which has been hit particularly hard by short sellers, reported on Thursday that the credit volume of customers had even increased.

Unmet risks

Shortly before the weekend, the bank managers of the attacked banks were allowed to breathe a sigh of relief. Pacific Western nearly doubled its market value on Friday, while Western Alliance Bancorp gained 59 percent. Considerations in the government to slow down the short sellers or make a complete deposit guarantee official may have triggered the brief rally. Several investors had called on the government to announce the complete guarantee.

Some short sellers may have been caught on the wrong foot. However, a call for state aid from their ranks has not yet been heard. Meanwhile, economist Hanno Lustig points out that a deposit guarantee would de facto subsidize the financing of banks by the state and thus the taking of uncovered risks.