Naked Short Selling

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Subject: FW: Naked short-selling blamed in Wall St crisis
Date: Mon, 15 Sep 2008 20:00:01 -0600
From: PByrne@xxxxxxxxxxxxxx to flytiger

Gosh. Who knew?

Naked short-selling blamed in Wall St crisis
11:00AM Tuesday Sep 16, 2008
WASHINGTON - With Wall Street engulfed in crisis, the Securities and Exchange Commission is planning measures to rein in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some fear could be turned against other vulnerable companies.

During emergency meetings between federal officials and investment bank executives over the weekend, SEC Chairman Christopher Cox indicated to the bankers that the agency plans in a few days to impose new permanent protections against abusive "naked" short-selling, a person familiar with the matter said Monday.

Unlike the SEC's temporary emergency ban this summer covering naked short-selling in 19 stocks, the new measures would apply to trading in the broader market. The person spoke on condition of anonymity because the SEC actions haven't yet been officially announced.

A critic of the agency said the action comes too late to stem a tide of short-selling attacks that have been felling huge companies.

The SEC measures likely would include removing an exception for market makers in options on stocks from rules restricting naked short-selling, and a tightening of anti-fraud rules related to that activity, according to the person familiar with the matter.


Those two measures could be put in place administratively by quick approval of the SEC commissioners. Another change, reducing from 13 to five the number of days that short-sellers would have to deliver stocks after an initial failure to do so, would require a public meeting and formal vote to propose it as a new rule.

Short sellers bet that a stock's price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

Naked short-selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale.

Jim Hardesty, president and market strategist at Hardesty Capital Management in Baltimore, called the possible reduction of delivery time "a tepid little measure." He endorsed a ban on all naked short-selling similar to the one that the SEC instituted this summer on an emergency basis covering stocks of 19 major financial companies.

"We need to restore confidence in this system," Hardesty said. Hedge funds and other aggressive short sellers "are ganging up on one company after another. A company the scale of Merrill Lynch got into the clutches of those people."

Investors like Hardesty contend that naked short-selling, if left unchecked, would have given hedge funds and other aggressive short sellers an unfair advantage to attack other victims after Lehman Brothers , Merrill Lynch - being bought by Bank of America Corp. in a $50 billion shotgun deal - or giant insurer American International Group, which reportedly appealed to the Federal Reserve for emergency funding, were said to be among the likely targets.

Travis Larson, a spokesman for the Securities Industry and Financial Markets Association, Wall Street's biggest lobbying organization, declined to comment Monday. Spokesmen for the Managed Funds Association, a group representing hedge funds, didn't immediately return a call seeking comment.

But Steve Thel, a business law professor at Fordham University who was an attorney at the SEC, said the agency's actions are a way to limit abuses in short-selling in an orderly way without "making it hard for people to express negative opinion" about companies.

The purpose of market regulations is "not to protect incumbent management from the market's understanding of bad news," Thel said.

Investors have clamored for the SEC to institute another emergency order similar to its ban from mid-July to mid-August against naked short-selling of the stocks of mortgage finance companies Fannie Mae and Freddie Mac, and 17 large investment banks - including Lehman and Merrill.

The SEC's temporary order required short sellers to actually borrow shares before selling them. By law, it could not be extended beyond Aug. 12.

Cox has said the order helped prevent potential "distort and short" manipulation of stocks, which occurs when rumours and misinformation are used to drive down the price of a stock that has been sold short.


- AP

 

I 'm having guys call me from top firms in tears.

I've waited for this for how many years. I'm making money, and I'm still physically sick to my stomach over what they've done to us.

Good luck all.

 

It appears those assholes in Washington are moving. I noticed this morning everything financial hard to borrow, and with RBS pfd yielding 19% overnite fund 15% in Europe, I thought maybe the paid off SEC finally moved.

My word is, Cox was told to move, or they will have his head. There are some corrupt sob's still on the other side, but watch the financials, OSTK, TASR, DNDN over the next day or so.

We still are on a precipice. So obviously, it's your call.

You can thank me later

 

DJ Bank Group Seeks Tougher SEC Action Vs Short-Sale Abuses



WASHINGTON (Dow Jones)--The American Bankers Association has asked bank regulators to press for greater protections against market manipulation and short-sale abuses.

In a letter Monday, the bank industry trade group said it is concerned that coming changes to Securities and Exchange Commission short-sale rules "will not go far enough to protect banks and bank holding companies from these abusive and manipulative practices."

The bankers group urged the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision to press SEC Chairman Christopher Cox to address so-called naked short-sale practices targeted to banks.

Short sellers aim to profit from declining stock prices by borrowing shares for sale and replacing the borrowed shares at a lower price.

Naked short sellers don't borrow shares before selling them short, a practice that can put strong downward pressure on a stock's price. The SEC adopted a temporary emergency order this summer, which has since expired, to curb short-sale abuses for 19 financial stocks. The SEC is considering other changes to its short-sale rules, but the bank trade group said such changes might fall short of what is needed to protect banks against short-selling abuses.



-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com

 

September 16, 2008, 3:59 pm

Dodd Says Crisis ‘Deepening,’ Blasts Short-Selling



From this afternoon’s press conference with Senate Banking Committee Chairman Christopher Dodd (D., Conn.).



Dodd

# On the economy: “The economic crisis we are in the midst of is deepening.”

# On the crisis: “I hold my breath every Friday afternoon around 4:30” in anticipation of a phone call from Treasury Secretary Henry Paulson. Paulson is scheduled to testify Thursday morning before Dodd’s committee.

# On Paulson: “He’s the right guy in that job at this point.”

# On Securities and Exchange Commission Chairman Christopher Cox: “I’ve been disappointed.” He said he wished Cox would do more to stop naked short selling. “Where’s the chairman of the Securities and Exchange Commission?”

# On the administration’s response to the crisis: “It’s important to note that these events that we talked about are not natural disasters. They happened, in my view, because of mismanagement and deregulation that occurred on basically an eight-year-old coffee break by the administration.”



–Damian Paletta

Permalink | Trackback URL: http://blogs.wsj.com/economics/2008/09/16/dodd-says-crisis-deepening-blasts-short-selling/trackback/

 

Longs = good! Shorts = bad bad bad! Complete crap as usual.

Naked shorting is illegal. Shorting is not and is integral to the markets. Anyone who says otherwise is an idiot.

 

.....and who's in charge?

 

I saw a piece re aig and naked short selling.

IF, "naked Short selling" becomes a household word, which I am sure the ostk crowd is aiming for, this will divert attention away from the real issues.

Naked shorting will become the Conference call phrase of the day replacing "pps was down this quarter because of the weather".

 

Statement of the Shadow Financial Regulatory Committee on Regulation of Short Selling

Edward J. Kane, Kenneth E. Scott and Chester Spatt | Sep 16, 2008
During the recent turmoil, short selling has been widely blamed by managers, the media and the Securities and Exchange Commission (SEC) for causing unwarranted declines in the value of financial institutions. The SEC has expressed its fear that false “rumors” might artificially reduce the stock price of financial services firms in particular. This triggered a renewed interest in regulating short sales, resulting in an “emergency order” limiting short sales in nineteen financial firms.[1]

The Committee sees no good reason for intensifying the regulation of short selling. Short sales play an important role in our stock markets, allowing investors to express legitimate concerns about accounting irregularities and other reasons for the overvaluation of individual firms. In line with the SEC’s investor protection mission, short selling informs and protects investors against artificially inflated stock prices. Empirical evidence about the stock price of companies who blame short sellers for artificially driving down their stock prices indicates that, far from regaining value, on average over a period of many months these companies actually underperform a benchmark sample of comparable firms by approximately 2% per month.

Short sale restrictions cannot suppress the information content of rumors. Rumors can be true or false, but often precede the revelation of adverse information. The propagation of malicious and fraudulent rumors is already punishable under the securities laws.

The SEC’s preexisting rules required short sellers to locate securities available for borrowing before the execution of their order. However, traders may be unable to borrow or deliver the stock within the three-day settlement period. Brokers currently control damages that delivery difficulties might cause by imposing suitability and margin requirements. The SEC’s emergency order (now expired) required short sellers in the nineteen stocks to enter a delivery agreement in order to trade. This action did not target positions or trades based on rumors, nor was there any evidence that these stocks experienced substantial delivery problems. Only one of the nineteen was on the SEC’s “threshold list” for elevated delivery failures. Less than 1% of all equity transactions encounter delivery problems. In contrast, delivery has been a genuine problem in the market for credit default swaps. Where policymakers could improve the handling of short sales is to focus on increasing the transparency of securities lending. Making prices paid on securities loans more transparent would potentially increase the supply of loanable securities, ease lending and delivery concerns and make investors more aware of profits that can be made by making their securities available.

One of the worst things that authorities might do would be to reintroduce some version of the tick rule. The tick rule was a Depression-inspired notion. The rule, which was repealed last year, allowed a stock to be sold short only after a trade that had increased the stock’s price. The basis for repeal was an SEC-designed experiment in which the tick restrictions on when investors could sell stock short were removed for a pilot sample of stocks and retained for a matched control sample.[2] The experiment showed that tick restrictions increased trading costs and generated no trading benefits. In a decimalized market the old tick rule could not have much bite. Imposing a new x-cent tick test (requiring an up-tick of at least x cents in the stock price) would be tantamount to an outright ban on short sales for securities trading with spreads less than x.

Notes [1] See Emergency Order Pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 Taking Temporary Action to Respond to Market Developments, July 15, 2008, www.sec.gov/rules/other/2008/34-58166.pdf

[2] Two of these were presented at the SEC’s Roundtable on the tick test and short selling. See “It’s SHO Time! Short-Sale Price-Tests and Market Quality by Karl Diether, Kuan Hui Lee, and Ingrid M. Werner (forthcoming, Journal of Finance), www.afajof.org/afa/forthcoming/4131.pdf and “How do Price Tests Affect Short Selling? by Gordon J. Alexander and Mark A. Peterson http://www.siu.edu/~map1/papers/UptickRule.pdf, in addition to the SEC’s staff analysis in “Economic Analysis of the Short Sale Price Restrictions Under the Regulation SHO Pilot” http://www.sec.gov/news/studies/2007/regshopilot020607.pdf

 

http://biz.yahoo.com/bw/081219/20081219005187.html?.v=1

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