US securities regulators yesterday took the dramatic step of temporarily banning the trading practice of betting against financial stocks in an effort to boost investor confidence in the face of a market crisis.
The move, announced on the Securities and Exchange Commission’s (SEC) Web site, temporarily bans short selling of 799 financial stocks.
Short selling is a legitimate method of trading, but has been blamed for widening the scope of the recent financial crisis and contributing to the collapse of values of investment and commercial bank stocks in particular.
PHOTO: AFP
The turmoil has swallowed some of the most storied names on Wall Street. Three of its five major investment banks — Bear Stearns, Lehman Brothers and Merrill Lynch — have either gone out of business or been driven into the arms of another bank.
Short selling involves betting against company stocks by borrowing their shares, selling them and pocketing the difference when they fall.
In its announcement, the commission said it was acting in concert with the UK Financial Services Authority in taking emergency action which announced a similar ban there on Thursday.
The SEC said it hoped its move would protect the integrity of the securities market and boost investor confidence.
“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” SEC Chairman Christopher Cox said in a statement.
“The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets,” he said.
The move would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the US Federal Reserve, the Treasury and Congress, he said.
Short selling can contribute to efficiency while adding liquidity to the markets. But a recent wave of the maneuvers — profiting 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 financial companies.
Some British politicians also claim that short selling attacks were partly responsible for HBOS PLC’s abrupt takeover by banking rival Lloyds TSB PLC on Thursday amid a sharply falling share price.
Market regulators in Britain, citing “current extreme circumstances,” announced a temporary ban on short selling on Thursday.
Cox held a closed-door meeting with members of Congress on Thursday night, US Treasury Secretary Paulson and US Federal Reserve Chairman Ben Bernanke. The SEC said its action calls a time-out to aggressive “unbridled” short selling in financial stocks and said it would consider measures to address short selling in other publicly traded companies.
The California Public Employees’ Retirement System, the nation’s largest pension fund, 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 the two investment banks’ stocks.
On Wednesday, New York senators Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for a temporary short-selling 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 SEC on Wednesday had 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. Those new rules took effect on Thursday, restricting but not banning short selling by, for example, shortening the required time for short sellers to deliver the stocks underlying the sale transactions.
But some critics assailed those new measures as inadequate to stem the tide of short selling and 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 said his office was 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.
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