What’s Next? Is The SEC Going To Ban Market Declines Altogether?

It appears that the short-selling ban is likely to be extended to include non-financial companies, as more and more companies apply for “short-selling protection” and both General Electric (GE) and General Motors (GM) were added to the list of stocks that are “protected” from short-selling.

From the Financial Times:

More companies in the UK and the US have been appealing to regulators for protection from short selling after the practice was banned or restricted for banks and other financial stocks in many countries last week.

The Securities and Exchange Commission on Monday gave exchanges control of the list of US stocks protected from short sellers, which was extended to an extra 96 companies. New restricted stocks include carmaker General Motors, industrial group General Electric and GLG Partners, the hedge fund.

Calls for protection have come particularly from property groups, where trade bodies fear their shares could come under assault from short sellers. Short sellers aim to profit from falling prices by borrowing shares and selling them in the hope of buying them back for less.

General Electric said it had requested that the SEC should place it on the list, while GM said it had not asked to be included. Under the new SEC rules, companies can opt out of the list, although the New York Stock Exchange said that none had so far.

I’m starting to become of the opinion that belief in the “short-selling” menace should serve as some sort of “market IQ test”, if you actually believe that the stocks of malaise ridden companies are going down the tubes due to short-sellers and not to leaking money like a sieve, being deep in debt, insolvent, etc, then, well……

E.g. if you think that the decline in GM’s share price is primarily due to short-sellers and not their actual business problems, I have a bridge to sell you.

What’s next, are they going to ban market declines altogether? Are they going to start arresting investors who make perfectly rational decisions like, well, selling garbage stocks, because it puts downwards pressure on prices?

Last week I felt like we were living in historic and extremely interesting times, now I’m starting to think that the times are becoming absurd.

You can read more on the subject here.

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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Comment by crazytimes

2008-09-24 08:20:34

The SEC is messing things up, the bureaucrats should be fired. I hope they won’t be banning market declines because that will be absolutely INSANE

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Comment by Michael F. Perlis

2008-09-24 18:17:04

Quick or “Short”-Fixes Won’t Avert Financial Crisis. We Must Look at the Financial System as a Whole.

As the former Assistant Director of Enforcement at the SEC, I have seen first hand how rampant short-selling can affect the market; although, I do not agree with the notion of regulating short-sells by stopping them altogether. This idea is short-sighted and does not address the underlying issues of how we encourage short selling not as a tool for greedy traders but as a way to rekindle interest in a very cautious market. The SEC’s move to ban short-selling, something that goes against market principles, does indicate that an earnest reevaluation of the entire financial system is in order. For this we need a team of regulators, and economic experts from a broad cross-section of institutions, willing to come to the table to find answers to the problems therein. We have heard from Secretary Paulson and Fed Chairman Bernanke, but the other players like SEC Chairman Chris Cox, the International Monetary Fund, the World Bank and other global institutions that are important to managing this crisis remain on the sidelines.

Questions need to be raised as the Congress and Bush administration debate this bailout plan such as what is the true size of potential losses on sub-prime mortgages and other loans. Some estimates put the total at over $1.5 trillion. The failure of Bear Stearns, Lehman Brothers has raised the question of whether US regulators now consider the remaining banks and bank holding companies at risk. Who could be next and are there checks and balances in place to address those failures? These large institutions play a much larger role than ever before in our financial system by issuing securities, packaging mortgage and credit-card loans, and other financial packages. The preparation for this can only come through a comprehensive economic strike force that can offer the leadership that is currently lacking within our federal institutions.

Michael F. Perlis
Partner
Stroock & Stroock & Lavan, LLP

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