New SEC rule is a short-selling speed bump

I stridently opposed restrictions on short-selling last April, but added this caveat:

I agree some regulation [ … kills me to write that] in the financial and public sector needs to come to pass, but this accomplishes nothing aside from cheap public relations. If the markets are so weak selling short is capable of breaking them, maybe they should be broken.

Not too sure this move by the SEC is the answer, but it does seem measured and could well fall under the “some financial regulation is necessary” rubric I created in the previous blog post. I don’t like the idea the SEC is stifling the open market, but given the amount of pure jacking around the market has endured over the last two years, curbing “spiraling sales sprees” is probably not that bad an idea. It’s tough to remain a market purist in the face of market failure and the reality of ongoing market tinkering.

From the second link:

Federal regulators on Wednesday imposed new curbs on the practice of short-selling, hoping to prevent spiraling sales sprees in a stock that can stoke market turmoil.

The Securities and Exchange Commission, divided along party lines, voted 3-2 at a public meeting to adopt new rules.

The rules put in a so-called “circuit breaker” for stock prices, restricting for the rest of a trading session and the next one any short-selling of a stock that has dropped 10 percent or more.

Short-sellers bet against a stock, in a practice that is legal and widely used on Wall Street. They borrow a company’s shares, sell them and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

The SEC move followed months of wrestling with the controversial issue. The SEC asked for public comment last April on several alternative approaches to restraining short-selling, and a bipartisan group of senators have been pushing the agency to act or face legislation.

The agency got more than 4,300 comments on the issue.

Short-selling regulation

I see the SEC is looking into placing new restrictions on short-selling. A terrible idea and one that sends the entirely wrong idea to the market. Do we have a capitalist economy, or not?

I agree some regulation [ … kills me to write that] in the financial and public sector needs to come to pass, but this accomplishes nothing aside from cheap public relations. If the markets are so weak selling short is capable of breaking them, maybe they should be broken.

From the link:

The Securities and Exchange Commission is carefully weighing options for reining in rushes of short-selling that can sink stock prices and will work seriously on a plan to give shareholders access to annual corporate ballots for directors, the agency’s chief said Monday.

SEC Chairman Mary Schapiro and the other four SEC commissioners are scheduled to vote Wednesday on new short-selling rules _ a change being pushed by investors and lawmakers _ and are expected to put forward several separate proposals for public comment.

“We will be very deliberative in our effort to determine what is in the best interest of investors,” Schapiro said in an address to a conference of the Council of Institutional Investors, a group representing public, corporate and union pension funds that together have an estimated $3 trillion in assets.

The SEC will open for comment a proposal to reinstate the so-called uptick rule or take other measures designed to stem market dislocation caused by excesses of short selling, which involves betting against a stock.

UK ends stock shorting ban

The U.K. Financial Services Authority came to its senses and ended the idiotic ban on shorting financial stocks. This move punished a group without a hint of blame in the ongoing financial crisis and likely did some real harm to all markets.

From the link:

The short ban might already have caused longer-lasting harm by injecting doubt over the very rules of the game. To have maintained it in today’s less febrile environment would have made no sense, leading to less effective price discovery and wider spreads. After all, recent losses in financial stocks are the result of management and bulls getting carried away during the boom, not shorts profiting on the way down.

Bailout news, jobless rate, short selling and rate cuts — oh, my

I’ve done a lot of blogging on the bailout and derided this ongoing process — including banning shorting some stocks (see more below on this) — as “corporate socialism.” I still don’t like the bailout, but now that the Senate passed its revised version I’m guessing the House will go along tomorrow unless the GOP stalwarts feel particularly feisty.

From the second link:

House members are getting another chance to vote on a financial bailout bill that has infuriated millions of voters after the Senate added tax cuts and other sweeteners and passed it handily.

Senators advanced the much-criticized measure in a 74-25 vote late Wednesday, sending it to the other side of the Capitol for a showdown vote expected Friday. The move was calculated to win over enough dissenting House members to get the bill through and reverse Monday’s stunning defeat in the House, party leaders there planned to press rank-and-file members Thursday for the dozen converts they believe they need.

But bailout news isn’t the only story with this ongoing financial crisis. Go below the fold for more on the jobless rate, the latest on shorting and possible additional rate cuts.

The no-short list grows

I’ve already put my thoughts on the anti-capitalist move by the SEC to ban the short selling of certain stocks out there. Predictably everyone wants a little protection from the free and open market leading to more companies being added to the no-short list.

Here’s a NYT article via AccountantsWorld covering the very subject.

From the second link:

The list of companies that regulators are protecting from short-sellers keeps growing, as do the questions surrounding it.

By Monday evening, the number of companies on the list rose to nearly 900, from 799 on Friday, when the Securities and Exchange Commission sought to restrict bearish bets against financial companies to help stabilize the markets.

 

Nearly every major bank is now included, along with large insurance companies and others. Trading in bank stocks withered on Monday amid uncertainty over the rules and the sweeping bailout that the Bush administration has proposed for financial companies.

But many questions remain. Some analysts — and a few firms initially left off the list — complained that the initial S.E.C. roster was incomplete.

Want to see just how ridiculous this whole process becomes once the stinky can has been opened? Here’s a bit from later in the article:

By Monday evening, the Ford Motor Company, which also owns a bank, was added to the list.

Cracking down on shorting financial stocks

This move by the SEC and the U.K.’s Financial Services Authority is boneheaded and ridiculous. Free markets are free markets. Bans and increased regulation on legitimate transactions are an unacceptable level of governing in our system.

Right now the United States is not truly a capitalist nation, and the GOP (if you want to count GOP-appointed commissioners) has failed our land in every way possible.

Change can’t happen soon enough.

From the link:

Panic is ugly.

And nowhere is it uglier than in emergency moves by regulators to restrict short-selling, trading that lets investors profit from a stock’s decline.

Indeed, by targeting short selling, the U.K.’s Financial Services Authority and the U.S. Securities and Exchange Commission could even prolong the agony for financial stocks.

The FSA has banned short-sales of financial-company shares until January. The SEC is considering disclosures for short-sellers more onerous than for investors owning shares.

Regulators are scared by recent market events. They are going down this road because they want to arrest the rapid decline in certain bank shares. The assumption is that short-sellers have mounted bear-raids on companies that live or die by confidence, stoking market-wide fear.

But targeting an integral stock market activity, such as short-selling, carries risks. For example, short-selling is an important risk-management tool, allowing investors to hedge their long positions.