The Securities and Exchange Commission took unprecedented action against short sellers on Tuesday, acting on a widespread concern that negative bets against bank and brokerage stocks might be exacerbating the financial sector’s woes.
In a dramatic emergency order, the SEC said it would immediately move to curb improper short selling in the stocks of struggling mortgage giants Fannie Mae and Freddie Mac, as well as those of 17 financial firms, including Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and Merrill Lynch & Co.
The plan, which is expected to go into effect on Monday, will expire in 30 days. But the SEC will also begin considering whether to extend the new requirements to all stocks traded in the US. The actions represent one of the most extensive attempts by a government agency in recent years to control short selling.
It’s far from clear whether the move, which sparked a barrage of criticism, will curb the activity of short sellers. While its aim is to curb abuses, it also would add an additional layer of bureaucracy to legitimate transactions.
Some critics say the move is simply an attempt by the SEC to show that it is taking action when it is under pressure for not doing enough to police markets. SEC Chairman Christopher Cox, in particular, has come under fire for not being a more visible figure at a volatile time.
Short selling is a legitimate trading strategy in which traders aim to profit from falling stock prices. Shorting can act as a corrective force at times of rampant bullishness in markets, its defenders say. But it has long been controversial because it pits investors, notably hedge funds, against companies that are eager to see their share prices high.
The full story is available at the Wall Street Journal web-site.