Terror Attack on US Financials? Details of SEC Short Ban

From The Big Picture :

Last night, we discussed the absurdity of banning all short sales. The details of the SEC action have been released (see below). The specifics are a "temporary halt in short selling in 799 financial institutions" until October 2nd.

I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management. (We used to do schtick together on Power Lunch, and made for an amusing financial comedy team).

But Joe is a good money manager, a great stock picker, and a thoughtful guy. He raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion's share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Joe asked the question: Is anyone investigating whether this is a case of financial terrorism? He wanted to know if someone was at least looking into this question (Joe is buds with Jim Cramer, and mentioned it to him, who then omitted to cite in his column that this was Joe's theory, not his own).

Anyway, its an interesting theory, one that seemed kinda out there -- until last night's emergency action. Nothing else really explains the insanity of banning short sales -- except for Joe Besecker's questions. I can think of only 3 other possibilities that explain this insane action:

1) Extreme idiocy and incompetence -- not unthinkable ftom the gang that couldn't shoot straight in DC these days;


2) Following the impetuous Fannie/Freddie rescue, the timing of this certainly has political overtones. We will see if it gets extended a month from October 2nd to November 5th.


3) Some other factor, possibly financial terrorism.

I can think of no other explanations for the dismantling of the free operations of trading markets.

The grand irony of all this is that Naked Shorting has been very profitable for the big broker dealers, like Morgan And Goldman and Merrill and Lehman. They have looked the other way for years, and the SEC has been AWOL on this issue.
Short sales require a locate (shares to borrow) and then a subsequent delivery. It should take less than 3 days to deliver the borrowed shares, but instead, delivery is often delayed indefinitely. Failure to deliver leads to a margin charge, which can be as high as 9-15%.
If you want to know who to blame for the past 5 years of naked shorting, you only have two places to look: The Financial brokers themselves, and the nonfeasance of a feckless SEC.

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Ban the shorts? A BIG mistake!

By temporarily banning short-selling on banks, the SEC is setting a dangerous precedent and is failing to address the real problems plaguing Wall Street.

By Paul R. La Monica, CNNMoney.com editor at large
Last Updated: September 19, 2008: 12:53 PM EDT

NEW YORK (CNNMoney.com) -- Randy Newman once famously sang that short people got no reason to live. Apparently, SEC chairman Christopher Cox feels the same way about short sellers.

The Securities and Exchange Commission's plan to temporarily ban short selling in shares of 799 financial services companies is a bold - but highly flawed - move to try and restore confidence in Wall Street and the entire banking system.

I understand why the SEC is taking this step, but I think it sets a dangerous precedent, could create more problems than it solves and doesn't address the fundamental problem facing bank stocks.

First off, this bet on declining stock prices is a healthy part of the financial markets. Short sellers borrow shares they don't own and sell them, hoping to later buy them back at a lower price so they can pocket the difference.

The practice ensures an orderly functioning of the stock market - "longs" bet on the upside, "shorts" bet on the downside, and the markets move along.

Talkback: Is the ban on short-selling bank stocks a good idea?

Banning the practice could cause disruptions. "This is borderline insanity - if the SEC had set out specifically to make the liquidity problems worse, they couldn't have done a better job," said William Fleckenstein, president of Fleckenstein Capital, a Seattle-based firm that specializes in short selling. "Guys that are short are like guys that are long. We're just looking to make money."

Second, in the past few years, shorts have often identified fraudulent companies such as Enron, Tyco and WorldCom before many others saw the problems. You can argue that shorts were once again early in identifying banks that were in financial danger.

It is true that short selling may have exacerbated the problems plaguing banks. Rapidly plunging stock prices led to a crisis of confidence that fed on itself and sent prices even lower. And as I pointed out in a column last week, short sellers have been increasingly making bearish bets on banks that are not facing big credit-related problems.

But it's not the fault of short sellers that Lehman Brothers (LEH), AIG (AIG), Washington Mutual (WM), Wachovia (WB), Merrill Lynch (MER) and Citigroup (C) - to name a few - have been bleeding red ink for the past few quarters.

The real problem

The issue at hand is not that short selling is evil. It is that some short sellers engaged in illegal practices, manipulating the market by spreading rumors to push stocks lower.

It is such manipulation, not the practice of short selling itself, that the SEC should crack down on. The SEC's statement about the ban lacked any mention of how the commission planned to fight fraud.

Instead, the SEC seemed to compare short sellers to kindergartners in need of a nap. The statement Friday morning said that the temporary ban amounted to a "time-out."

What the SEC is doing is equivalent to a police department investigating a series of suspicious fires deciding that, rather than catching the crook, they'll temporarily ban the sale of all matches in the hopes that after the ban is over, the arsonist will have decided to stop being a pyromaniac.

"What is the SEC gong to do next? Outlaw all selling?" asks Fleckenstein, who is also the author of the book "Greenspan's Bubbles."

SEC just prolonging a future selloff

The SEC's ban creates a potential new problem. Between now and the end of the ban on Oct. 2, the value of many banks that deserve to be trading lower may become artificially inflated.

John Derrick, director of research at U.S. Global Investors, a money management firm based in San Antonio with about $5.4 billion in assets, said that while the SEC's ban is a "prudent" idea for the short-term given how volatile the markets have been, he worries that there could be some very large unintended consequences.

After all, when the SEC first banned so-called "naked" short selling on a smaller group of financial stocks in July, that temporarily led to a big boost in bank stocks. That obviously didn't last.

"Are we going to have a replay of July where we get a bounce for a few days and then you're fighting the same battles a few months from now?" Derrick wondered.

For all the talk of capitalism now being dead given the government's plan to likely assume much of the banking industry's mortgage-related illiquid assets as well as the takeovers of Fannie Mae, Freddie Mac and AIG, the SEC's action is far more ominous for those who believe in free markets.

There is ample historical precedent for the government stepping in to bailout companies deemed crucial to the nation's economy: Penn Central Railroad, Chrysler and the Resolution Trust Corporation set up to help solve the savings and loan crisis all come to mind.

But what the SEC announced Friday is just a monumentally bad idea. Loyal readers of this column know that I am fairly optimistic about the chances for an economic and market rebound - and they often berate me for it.

However, one thing I am not is a market cheerleader or fan of excessive regulation. And at the end of the day, the SEC's actions are highly hypocritical.

The SEC is attempting to curtail market manipulation. But it is doing so by manipulating the market.

First Published: September 19, 2008: 12:32 PM EDT

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Terror Attack on US Financials? Details of SEC Short Ban

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Oil Up $6 to $104

By Bespoke Investment Group, An SA Author.


Somewhat lost in the mix today is oil's rise of $6, back above $100. As shown in the chart below, however, the commodity is still in a solid downtrend. For oil to break its downtrend, it needs to move and close above the $108-$109 level.

Click to Enlarge

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Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

The Size Of The Commercial Paper Collapsed

The charts below were provided by The Casey Research in the John Mauldin's Weekly Letter entitled, "Betting on Financial Armageddon" :

Click to Enlarge

It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number.

For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.

As Barry Ritholtz wrote: "So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis." (Don't get me started on blaming the short sellers. Let's not blame the people who leveraged up their companies 40 to 1 with bad investments.)

Related Posts :

1. Ban the shorts? A BIG mistake!
2. Terror Attack on US Financials? Details of SEC Short Ban

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.