19 September 2008

SEC Issues Emergency Order - Bans Short Selling of Financial Stocks

These bailouts miss the point.

An entire economy was created to irrationally slingshot the US economy to this tipping point. The economy is based on the activity of gearing up to create, finance, market and exploit malinvestment.

That doesn't mean that malinvestment can continue, and it doesn't mean that this malinvestment is going to become valuable. Losses will have to be realized - nothing is going to magically give this house of cards real world economic value.

From the trenches.

Hank Paulson is saying "get this toxic debt off the banks' books."

Well, what is going to prevent them from putting new toxic debt back on as soon as they have the opportunity? Did they suddenly grow wisdom? Learn from experience? Become chaste and humble?

And when this latest plan fails, because they are still only treating symptoms, and enriching the bankers, and manipulating markets, what will they do next?

Forced buying of Treasuries? Currency controls on the dollar? Production quotas for industries? Government lists of patriotically favored stocks and commodities from homeland security?

When the banks and the government become trading partners we are beyond simple moral hazard.

SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets

Commission Also Takes Steps to Increase Market Transparency and Liquidity

Washington, D.C., Sept. 19, 2008 — The Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence. The U.K. FSA took similar action yesterday.

The Commission’s action will apply to the securities of 799 financial companies. The action is immediately effective.

SEC Chairman Christopher Cox said, “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets. The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets. This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.”

Today’s decisive SEC action calls a time-out to aggressive short selling in financial institution stocks, because of the essential link between their stock price and confidence in the institution. The Commission will continue to consider measures to address short selling concerns in other publicly traded companies.

Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets. At present, it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation. Financial institutions are particularly vulnerable to this crisis of confidence and panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business. (Some animals are more equal than others - Jesse)

Given the importance of confidence in financial markets, today’s action halts short selling in 799 financial institutions. The SEC’s emergency order, pursuant to its authority in Section 12(k)(2) of the Securities Exchange Act of 1934, will be immediately effective and will terminate at 11:59 p.m. ET on October 2, 2008. The Commission may extend the order beyond 10 days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.

The Commission notes today’s similar announcement by the U.K. FSA. The SEC and FSA are consulting on an ongoing basis with regard to short selling matters and will continue to cooperate in carrying out regulatory actions.

The Commission also has taken the following steps to address the recent market conditions:

Temporarily requiring that institutional money managers report their new short sales of certain publicly traded securities. These money managers are already required to report their long positions in these securities.

Temporarily easing restrictions on the ability of securities issuers to re-purchase their securities. This change will give issuers more flexibility to buy back their securities, and help restore liquidity during this period of unusual and extraordinary market volatility.