Everybody wants protection from the short sellers
The government protected 19 financial firms from naked short selling the other day, and the stocks rallied big time, as the chart above shows. As we predicted, the rest of the market wants the same protections from the naked short sellers. WSJ:
The emergency order says traders need to lock up, or pre-borrow, stock for future delivery before they execute a short sale, or bet the stock will drop. The SEC says that will “eliminate any possibility” that the markets will be disrupted by naked short selling, which occurs when the trader never borrows the stock and then “fails to deliver” it to the buyer within three trading days.
On Friday, the SEC said market makers wouldn’t have to pre-borrow the stock, but they would still need to deliver it within three days. These “fails to deliver” can occur from clerical errors, and the SEC says they are often resolved within a few business days. But they can create downward pressure on a stock price, and when not covered over extended periods, could be a sign of abusive short selling.
In 2004, the SEC created a “threshold list” for stocks that fall into this category. A stock is included if such “failures to deliver” meet three criteria: They occur over five consecutive trading days; equal 10,000 shares or more; and at least 0.5% of the company’s shares outstanding…
companies that also have been under selling pressure didn’t make the cut, including Wachovia Corp. and Washington Mutual Inc. Washington Mutual submitted a letter to the SEC asking that the rule include other financial companies, according to a person briefed on the matter. Wachovia declined to comment.
National City Corp., a regional bank that scrambled to raise capital earlier this year and isn’t protected in the SEC order, has been on the threshold list nine of the first 12 trading days this month. “The current universe of names is too narrow” and should include the largest U.S banks, said Kristen Baird Adams, a spokeswoman for Cleveland-based National City.
One irony of the financial firms lining up to get protection from the shorts is that it was the brokerages themselves who enabled the naked shorting in the first place, and only seemed to notice a problem when they themselves became the victims of the practice.
July 21st, 2008 at 3:25 pm
I stand by my comment on Jack’s previous short-selling post.
Yahoo has some links to commentary.
Joe Nocera slammed the SEC on July 16 and twice on July 15. (On the few occasions I’ve looked at the New York Times recently, its readability has seemed to be improving. Of course, it might be my attitude that’s changing.)
The Times notes the avoidance of creative destruction in the government’s latest response to the crisis, and wonders if we’re risking Japanese-style stagnation. As I write the S&P 500 is about 5% below its value–denominated in debased dollars–when Bush took office, so we may be well into such stagnation already.
July 22nd, 2008 at 4:47 pm
The WSJ’s ‘An Energy Sarbox’ describes an intrusion into the market that is grosser than the SEC’s favoritism to some institutional short sellers.
“…Congress has begun to believe its own demagoguery.”
July 24th, 2008 at 7:24 am
Megan McCardle has more on the energy-trading legislation, which passed its first Senate hurdle 94-0. Some quality invective can be found in her comments section.
I’m not a doctrinaire opponent of financial regulation, including stringent emergency constraints. However, such constraints make sense to me only if they buy time to address the underlying conditions that precipitated market turmoil. Unfortunately, I worry that whatever steps the government, especially Congress, is taking will have the effect of pushing the problems off into the future–and make them worse, perhaps catastrophically worse, when they return.
July 26th, 2008 at 1:40 am
For the time being, Senate Republicans have blocked the energy-trading bill by insisting on pro-drilling amendments[1].
Megan McArdle has another sensible post on the issue. A commenter adds that, by restricting hedge funds’ capability to short, commodity-trading restrictions might serve to prop up oil prices.
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[1] Maybe even the dullest elephant stirs at the threat of annihilation. Now, what would it take to get the GOP to advocate limited government again…?