US too turns against the shorts

The headline on FT Alphaville says “America suspends capitalism” while the Wall Street Journal’s Deal Journal suggests that the regulators would simply have put a bounty on a short seller’s head if only they knew that it could be done. They are both referring to the emergency order of the US SEC against naked short selling in 19 financial stocks including Lehman Brothers, Fannie Mae and Freddie Mac. These orders were issued under Section 12(k)(2) of the Securities Exchange Act which provides that the SEC “in an emergency, may by order summarily take such action ... as the Commission determines is necessary in the public interest and for the protection of investors ... to maintain or restore fair and orderly securities markets.”

I can well see that a ban shorting Fannie Mae and Freddie Mac might help the central banks of China, Russia and other countries which together hold close to a trillion dollars of these Agency bonds, but I fail to see how it protects the US investors whom the SEC was set up to protect.

It was only last month that I commended US regulators for not being as harsh on short sellers as the UK had been. My praise was clearly premature. In addition to the ban on naked shorting, the SEC was also talking loudly about “enforcement investigations into alleged intentional manipulation of securities prices through rumor-mongering and abusive short selling.”

Incidentally, Aleablog tells us that there is an ETF that allows one to short the US Financials Index without being naked short at all. That post also tells us June was the best month for short sellers since the dot com bust seven years ago.

Posted at 6:39 pm IST on Wed, 16 Jul 2008         permanent link

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