Short-selling

The global financial crisis has its roots in various different causes, which, collectively, have resulted in what The Economist has termed a ruinous "death spiral". One of the factors contributing to the current state of the global finance environment was the widespread practice of short-selling securities, such as shares and derivatives, of major financial institutions. The term short-selling in itself refers to the selling and buying back of borrowed securities, based on the speculation of falling prices for the securities in question. This allows the short-seller to make a profit with the sole risk of potentially rising prices. Already last year, economists observed an increase in such activity, notably among financial institutions such as Bear Sterns and Lehman Brothers. Governments were relatively slow to react, because in the past, short-selling had, at times been a useful regulatory mechanism - to prevent the overvaluing of stocks, for example - as studies from the 1970s have shown. The practice of short-selling has however, especially over the last several months, contributed more to the downward spiraling of the financial sectors worldwide, than any government had predicted, now demanding the introduction of drastic control measures all over the developed world. The United States, for example, have banned short-selling in over 900 financial institutions until the October 2 and the Swiss Federal Banking Commission has threatened short-sellers with severe punitive measures, should they violate the newly introduced prohibition on short-selling. This goes to show the extent to which short-selling is perceived by governments to have influenced the global financial crisis to date.