Temporary stop to routine practice in wake of Lehman Brothers’ demise
19 September 2008
WASHINGTON - Amid the spiraling market crisis and mounting pressure from lawmakers, the Securities and Exchange Commission on Friday took the dramatic step of temporarily banning the routine practice of betting against financial companies’ stocks.
The move is a reflection of regulators’ concern about the widening scope of the financial crisis and follows entreaties from all quarters to stem a swarm of short-selling.
A recent wave of the market maneuvers — where traders seek to profit by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big companies.
The action applies to the securities of 799 financial companies.
It was announced after SEC Chairman Christopher Cox, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting Thursday night with members of Congress.
‘Restore equilibrium’ “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” Cox said in a statement. “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.”
The emergency order will end at 11:59 p.m. on October 2. The SEC said it may extend the order beyond 10 days if it deems an extension is in the public interest, but will not extend the order for more than 30 calendar days in total duration.
Short-selling, which has been practiced on Wall Street for decades, is not illegal per se.
On Wednesday, New York Sens. Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for such a temporary ban, saying the watchdog agency “has the power to take a temporary but important step to help restore a measure of stability to our financial markets.”
The California Public Employees’ Retirement System, the nation’s largest pension fund, said that starting Thursday it is no longer lending out shares of Goldman Sachs Group Inc. and Morgan Stanley, joining a growing number of public pension funds that are attempting to curb short-selling of two investment banks’ stocks.
The SEC on Wednesday adopted rules it said would provide permanent protections against abusive instances of “naked” short-selling, where sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale. The new rules took effect Thursday. They restricted, but did not ban, short-selling by for example, reducing the required time for short sellers to deliver the stocks underlying the sale transactions.
Speaking before Friday’s announcement, New York Attorney General Andrew Cuomo called those measures a positive step but said more must be done, calling on the SEC to “immediately freeze short-selling of financial sector stocks on a temporary basis.”
Conspiracy? Market regulators in Britain did just that, citing “current extreme circumstances” in announcing a temporary ban on Thursday.
Cuomo also said his office is launching an investigation into whether some short sellers engaged in conspiracy or spread rumors and negative information to drive down the share prices of Lehman, American International Group Inc., Goldman Sachs, Morgan Stanley and other firms.
Some investors contend that naked short-selling, if left unchecked, would have given hedge funds and other aggressive short sellers an unfair advantage to attack other victims after Lehman Brothers Holdings Inc., which made the biggest bankruptcy filing in U.S. history on Monday.
Merrill Lynch & Co. — being bought by Bank of America Corp. in a $50 billion shotgun deal — or giant insurer AIG, rescued with an $85 billion cash injection from the Federal Reserve, were said to be among the likely targets.
Shares of regional banks and investment firms nationwide continued to be targeted by aggressive short sellers after the SEC’s emergency ban took effect in mid-July, according to banking industry representatives.
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SEC halts short-selling of financial stocks
Temporary stop to routine practice in wake of Lehman Brothers’ demise
19 September 2008
WASHINGTON - Amid the spiraling market crisis and mounting pressure from lawmakers, the Securities and Exchange Commission on Friday took the dramatic step of temporarily banning the routine practice of betting against financial companies’ stocks.
The move is a reflection of regulators’ concern about the widening scope of the financial crisis and follows entreaties from all quarters to stem a swarm of short-selling.
A recent wave of the market maneuvers — where traders seek to profit by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big companies.
The action applies to the securities of 799 financial companies.
It was announced after SEC Chairman Christopher Cox, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting Thursday night with members of Congress.
‘Restore equilibrium’
“The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” Cox said in a statement. “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.”
The emergency order will end at 11:59 p.m. on October 2. The SEC said it may extend the order beyond 10 days if it deems an extension is in the public interest, but will not extend the order for more than 30 calendar days in total duration.
Short-selling, which has been practiced on Wall Street for decades, is not illegal per se.
On Wednesday, New York Sens. Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for such a temporary ban, saying the watchdog agency “has the power to take a temporary but important step to help restore a measure of stability to our financial markets.”
The California Public Employees’ Retirement System, the nation’s largest pension fund, said that starting Thursday it is no longer lending out shares of Goldman Sachs Group Inc. and Morgan Stanley, joining a growing number of public pension funds that are attempting to curb short-selling of two investment banks’ stocks.
The SEC on Wednesday adopted rules it said would provide permanent protections against abusive instances of “naked” short-selling, where sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale. The new rules took effect Thursday. They restricted, but did not ban, short-selling by for example, reducing the required time for short sellers to deliver the stocks underlying the sale transactions.
Speaking before Friday’s announcement, New York Attorney General Andrew Cuomo called those measures a positive step but said more must be done, calling on the SEC to “immediately freeze short-selling of financial sector stocks on a temporary basis.”
Conspiracy?
Market regulators in Britain did just that, citing “current extreme circumstances” in announcing a temporary ban on Thursday.
Cuomo also said his office is launching an investigation into whether some short sellers engaged in conspiracy or spread rumors and negative information to drive down the share prices of Lehman, American International Group Inc., Goldman Sachs, Morgan Stanley and other firms.
Some investors contend that naked short-selling, if left unchecked, would have given hedge funds and other aggressive short sellers an unfair advantage to attack other victims after Lehman Brothers Holdings Inc., which made the biggest bankruptcy filing in U.S. history on Monday.
Merrill Lynch & Co. — being bought by Bank of America Corp. in a $50 billion shotgun deal — or giant insurer AIG, rescued with an $85 billion cash injection from the Federal Reserve, were said to be among the likely targets.
Shares of regional banks and investment firms nationwide continued to be targeted by aggressive short sellers after the SEC’s emergency ban took effect in mid-July, according to banking industry representatives.
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