How thoughtful of the SEC to come to the aid of the primary dealers, the Wall Street banks, after virtually ignoring the naked short selling problem in the markets for the past eight years.
SEC to fight short selling of financials
By Joanna Chung in New York
July 15 2008 21:31
Financial Times
US regulators will take emergency action to stop abusive short-selling of stock in financial institutions such as mortgage financiers Fannie Mae and Freddie Mac and investment bank Lehman Brothers.
Christopher Cox, Securities and Exchange Commission chairman, told legislators on Tuesday that the agency would issue an emergency rule to stop so-called “naked” short-selling of shares in significant financial entities. The SEC will also consider new rules to extend those trading limits to the rest of the market.
Short sellers aim to profit from share declines – usually by borrowing a stock, selling it and buying it back in the market. But in a “naked” short the shares are sold without being borrowed first. The emergency rule, which would be in effect for up to 30 days, would require anyone making a short sale to borrow the security first.
It would apply to Fannie and Freddie – the government-sponsored entities that own or guarantee almost half of US mortgages – and all primary securities dealers including Lehman, whose shares have been battered by rumours the bank says are false.
The action comes amid intensifying efforts by authorities to crack down on rumour-mongering intended to manipulate securities prices. The SEC has been investigating whether false rumours and abusive short selling contributed to the collapse of Bear Stearns in March and the declines in Lehman’s shares.
It is now working with the Financial Industry Regulatory Authority and New York Stock Exchange Regulation to conduct industry-wide “sweep examinations” of market participants, including hedge fund advisors
“If we are successful in bringing future cases . . . I believe the penalties should be commensurate with the enormous amount of shareholder value that is destroyed by this kind of wantonness toward other people’s money,” Mr Cox said. The agency has used emergency rule-making powers in the past, for instance after the September 11 terrorist attacks, but this would be the first time it has issued an emergency rule on short selling.
Fannie Mae and Freddie Mac closed down 27.3 per cent and 26 per cent respectively.
