Friday 19 September 2008

SEC weighs broad move on short-selling

Amid the spiralling market crisis and mounting pressure from lawmakers, the Securities and Exchange Commission is considering taking the dramatic step of temporarily banning the routine practice of betting against company stocks.
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Guanyu said...

Source: SEC weighs broad move on short-selling

The Associated Press
19 September 2008

WASHINGTON: Amid the spiralling market crisis and mounting pressure from lawmakers, the Securities and Exchange Commission is considering taking the dramatic step of temporarily banning the routine practice of betting against company stocks.

The move, if taken by the SEC, may well be unprecedented and a reflection of regulators’ concern about the widening scope of the financial crisis as entreaties come 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.

SEC Chairman Christopher Cox, Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting Thursday night with members of Congress. Cox told the lawmakers the SEC may put in a temporary emergency ban on all short-selling — not just the aggressive forms it already has targeted, according to a person familiar with the matter.

The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies.

The person spoke on condition of anonymity because the possible action by the SEC hasn’t been publicly announced. Cox and the other four SEC commissioners were meeting Thursday night to consider the plan and it wasn’t immediately clear if and when it might be approved.

After the meeting at the Capitol, Cox told reporters “a great deal of regulatory change is in the works to address these problems.” He declined to discuss specific possible steps on short-selling.

“We are likely to take additional steps in the days ahead that are more particularly addressed to this urgent situation,” Cox said.

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 restrict, but do not ban, short-selling by for example, reducing the required time for short sellers to deliver the stocks underlying the sale transactions.

Some critics assailed the new measures as inadequate to stem the tide of short-selling. They asked for a prohibition on all naked short-selling similar to the SEC’s 30-day emergency ban this summer covering the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks.

New York Attorney General Andrew Cuomo called the measures a positive step but said more must be done, calling on the SEC on Thursday to “immediately freeze short-selling of financial sector stocks on a temporary basis.”

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.