Short-sellers caused bank panics

CNBC's Jim Cramer argues that the recent panics in financial stocks was caused by short-sellers:

You have to remember that banking is a business built entirely on trust. When shareholders and customers see these stocks plummeting virtually without a bottom, then they pull their money, further exacerbating the problem. And you can see that play out in these financials right up to the Friday before the Citigroup bailout.

On four days in November – the 6th, 10th, 12th and 19th – the shorts accounted for at least 50% of Citi’s trading volume. On one day it was as high as 71%. In that time, the stock cut in half to $6.40. By then panic had set it, and regular investors started selling Citi en masse. In just one day – Nov. 20 to Nov. 21 – the amount of shares sold jumped 1.5 million and the stock finished its near month-long decline at $3.77.

See the pattern? Lack of proper regulation allows short-sellers to hammer down a stock, causing fear among regular investors and customers. These regular investors then continue the selling, further damaging the stock and making the short-sellers a lot of money. Citigroup wasn’t alone, either. This same game played out with JPMorgan, Bank of America and almost all the other big banks. Imagine what would have happened if the government didn’t step in on Monday, Nov. 24.

Cramer didn’t hesitate to point fingers at SEC Chairman Christopher Cox. It was Cox who repealed the uptick rule, which is exactly what’s allowed bear raiders to annihilate stocks. Until there’s a return to regulation on Wall Street, this kind of thing will continue to happen.

With ordinary companies, a plunging stock price wouldn't matter in the long run. With financial companies, on the other hand, a plunging stock price can scare customers into withdrawing their money, thus causing a classic bank run. Apparently, that is what caused Wachovia to go collapse.