Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

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
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.


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