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Banning Short-Selling 'Is a Mistake': Barry Ritholz

Thursday, 20 May 2010 | 3:26 PM ET

"Outlawing short-selling is a mistake," said Barry Ritholz, chief executive and director of equity research at Fusion IQ and author of "Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy."

"If you go back over the last few decades, every major fraud [Enron and WorldCom] has been uncovered by short-sellers," he said.

Ritholz thinks the U.S. looks at European markets' problems "as an excuse for something that was due to happen anyway." He believes the key is to look at various sign posts to gauge where the market is going.

He expects "the lows of May 6 to be a magnet" with the telling factor being: "Does volume attentuate as we approach those levels, or do we see supply really dominate demand and selling really pick up?"

Hedge Fund Titans Meet
Hedge fund industry titans are meeting in Las Vegas to talk about investing in these wild global markets. CNBC's David Faber talks to Barry Ritholtz, CEO of Fusion IQ, at the conference.

And with financial reforms "gaining teeth" this week, Ritholz thinks the market will be easier to gauge after some form of "derivative regulation is passed."

"Right now derivatives are treated completely separately from every other financial instrument. That has to stop," he said. Derivatives have to be brought under "normal financial instruments."

But what Ritholz most wants to see are:

1. issues "on the rating agencies, who are the prime culprit in this;" and

2. reasonable limitations on leverage, because "back in the days before the 2004 waiver, leverage was limited to 12 to 1. Once that was waved for the 5 biggest banks, they were 30,35,40 to 1."

"At 40 to 1 there is zero room for error and we saw what happened," he summed up.

Read an Opposing View:

More from Ritholz:

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Thursday's Biggest Dow Losers by %
(as of this writing)

General Electric*

Alcoa

Boeing

Bank of America

Kraft Foods

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Disclosures:

Disclosure information was not immediately avaulable for Ritholz or his company.

* General Electric is the parent of CNBC.

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