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SEC Bans Shorting Financials

by: Paul Kedrosky September 19, 2008 | about stocks: GS / JPM / MS / XLF    
Paul Kedrosky

Paul Kedrosky

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I've been scanning the SEC's just-released rule banning shorting of financial stocks. According to the SEC, a staggering 779 stocks are covered by the order, which goes into effect immediately.

The SIC codes covered are 6000, 6011, 6020-22, 6025, 6030, 6035-36, 6111, 6140, 6144, 6200, 6210-11, 6231, 6282, 6305, 6310-11, 6320-21, 6324, 6330-31, 6350-51, 6360-61, 6712, and 6719. I'm sorting through the list of companies now.

At the same time, the SEC is instituting a new institutional disclosure form for weekly short sale activity in non-financial stocks. Starting now, the form must be completed on a weekly basis (!) in any week when a fund manager initiates, adds to, reduces, or closes out a short position. The rule comes into effect on September 28, 2008, and expires on October 2nd, unless extended by the SEC (which I'm assuming it will be).

What a mess. More here.

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[Update] A few quick nuggets from perusing the list:

  • Some SEC dyslexic likely meant MPB, which is Mid Penn Bancorp, and they blocked shorting of MBP instead, which is Metabolic Pharmaceuticals.
  • Lehman is on the list, which is hugely reassuring given its current bankruptcy status.
  • The SEC is blocking shorting of NAHC, which is Nigerian Aviation Holding Company. Damn Nigerians. It's not enough they have all the best scams; they get shorts blocked too.
  • Silver State Bancorp is on the list. Recall, it's a failed bank already seized by the FDIC.

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This article has 25 comments:

  •  
    Sep 19 03:55 AM
    Finally -- something very real and tangible has been done by the gov't instead of just throwing money away at underwater financials.

    I can't even imagine what the rally is going to be like as a result of this.

    This is basically what EVERYONE was secretly hoping for - a super-duper overnight smackdown on shorts of an absolutely gigantic magnitude.
    Reply
  •  
    Sep 19 04:06 AM
    It's the 1930's all over again. History repeats itself, but always with new variations.
    Reply
  •  
    Sep 19 04:31 AM
    Buy the Rumor sell the fact. Anybody that thinks this is the end all to this credit fiasco I have a bridge to sell you. Maybe a temporary reprieve but we haven't even touched the tip of this financial debacle iceburg. Things must run there natural course good bad or indifferent. Not we are letting the very people who got us into this mess off the hook. Why not throw everyones credit card debt into this pot or even better forgive everyones mortgage completely. More money into the economy PROBELM SOLVED ha ha ha.
    Reply
  •  
    Sep 19 04:34 AM
    too funny !!! maybe there is a nigerian conspiracy angle?

    :)


    this government is such a scam !!!

    i love the blatantly open nature of paulson funding his buddies with our money via bailouts, banning short selling (which his buddies made a killing on until their own firms were sold short) and now the buyout of the illiquid assets that his buddies created.

    we're gonna pay them our money for their junk, i love it.

    one question, how do i get in on this scam?
    Reply
  •  
    Sep 19 06:51 AM
    Man, this is fun, in a pop-popcorn-it's-the-e... kind of way. Between this and the revive-the-RTC-zombie plan that everybody thinks is going to magically detoxify the banks, how far do you think they can kick the can down the road?
    Reply
  •  
    Sep 19 06:52 AM
    (The whacked part above said "end of the world". Weird.)
    Reply
  •  
    Sep 19 06:53 AM
    Do the short selling rules apply to the individual investor? I know they will apply to the ETF's and program traders?
    Reply
  •  
    Sep 19 07:00 AM
    Why not ban bad news? I think the Soviets did that........ This is a financial Maginot line, does nothing but show hysteria, weakness and the complete lack of thoughtfulness that is the hallmark of the gov't's leadership.
    This will increase the panic and decrease the liquidity of the market, the exact opposite of what they want
    Reply
  •  
    Sep 19 07:01 AM
    I really wish I could think of something truly funny in a black humor sort of way...like many of the fine posts here and other places on Seeking Alpha. But, all I can see is the Bush administration going out in a blaze of insanity here. Paulson and Bernake seem to have taken over the government as the Congress and the people sit there with our eyes and mouths open (drooling) not quite forming a word...(whaaaaat!)
    Reply
  •  
    Sep 19 07:20 AM
    So what actually happens if youre in a ETF like SKF? Is your money frozen?
    Reply
  •  
    Sep 19 07:35 AM
    Not sure why it takes a sledgehammer to crack and egg. If there's naked shorting, stop it! This is baby out with the bathwater. Also not sure why big institutional investors haven't elected to not offer their shares for lending. That would put a crimp in a shorting strategy, and for someone who can only be long, a form of risk protection.
    Reply
  •  
    Sep 19 08:07 AM
    Picture the US economy as a hot air balloon. Over the last 8 years it has been shot full of holes (accidentally, wink wink) by Dick Cheney. And now the propane tank is empty and the balloon is falling fast. The government solution? Hand all the passengers a can of beans and tell them to start eating.

    This is a difficult concept to grasp... but short selling actually boosts equities. It allows you to have people both long and short (hedged). (Say 60 long / 40 short for example.) Without shorting, instead of being long and short, You'd have to be "long and cash", or just cash. Since being long and cash is too risky, investment is discouraged. How many times have we read in the history books how the government has discouraged investment? This one will make the history books. But anyway, the banks will get what they need - cash - but the market will tank. It has to, because shorting boosts equities. This will cause the bank losses to multiply. It is a guaranteed thing. The banks will lose more. By its actions, the government has just admitted that we're in a fullblown depression. Before we've had an accompanying market crash. They have just tore a hole in the side of the balloon. Only their hot air is holding it up.

    This is how this criminal cabal will steal all your 401k, pension, everything. After they are done there will be a fire sale of public assets, and 299 million americans will be completely broke with no purchasing power of any kind. All engineered, all predicted, all warned about by "kooks" for years. Should have listened to Ron Paul!
    Reply
  •  
    Sep 19 08:11 AM
    Capital One (COF) seems to be missing from the list.
    Reply
  •  
    Sep 19 08:28 AM
    American Express (AXP) isn't there either. But Blackstone (BX) and Och Ziff (OZM) are there. Protecting the Hedge Funds but not the Credit Card Companies?
    Reply
  •  
    Sep 19 08:50 AM
    Maybe they should ban the selling of long positions too. Coming soon: If you own a financial stock long, you are no longer allowed to sell it! sorry but this ain't your papa's capitalism any more.
    Reply
  •  
    Sep 19 08:53 AM
    A mess is right! Tbill, not a depression - yet. The earthquake just happened, tsunami wave will take some more time to reach shore, about two or three years total.

    If you see my comments by clicking on my name, I have said this for a year about a negative 20% GDP and the start of the next bull would be 2013 (pending decent government).

    Now, am I self-efifying?!? YES! I am doing this because of one reason: I want all of you to get off of your asses and start scheduling meetings with your Congress people with financial solutions and if you don't have solid ones, then this DO NOTHING CONGRESS needs at least a real picture of what is taking place.

    You can also get a hold of the Peterson Foundation and talk to David Walker as this group is interested in changing our government and also has started building a formidable team.

    This effort will take time to educate politicians and citizens alike on how they can help repair this.

    Historically America has about four years of deep fiscal pain before they have voter revolutions and boot out the corrupt from the House of Representatives.

    Let's start now on this project, shall we gentlemen? And I will run myself for Congress in my district in Maine in 2012. It doesn't matter if I win, I will educate bluntly along the way.

    I don't want to go and yell at and babysit mental dwarfs in Washington if I did win, but so what, my country is worth is, all of you are worth it as is your families! That is how we must think now. First, protect your immediate family and neighbors, then begin to fix it. No way to fix it without serving to fix Washington and that will be an ugly but necessary fight indeed. Best of success. We do not have to take this all in the rear. It is our nation and we are the educated leadership with resources. Stop bitching now and get to work.
    Reply
  •  
    Sep 19 08:55 AM
    iThingbig are you running for something? you sound like you have much more experience than Obama and Palin.
    Reply
  •  
    Sep 19 08:58 AM
    This was another well-timed sucker move by the insiders to cause another big move from which they could profit. No brainer. Short rule, short rule expires, shorts pile on, new short rule, shorts' money vacuumed up. Sucker move. Thanks for the free money, fellas.
    Reply
  •  
    Sep 19 09:13 AM
    People that think short sellers are the cause of this are idiots. Greespan pulled a move like this several years ago...also right before options expiration. I guess the Greenspan Put isn't quite dead yet.
    Reply
  •  
    Sep 19 09:28 AM
    Today ,we are witnessing an implentation of a cohesive plan which will abort (perhaps inadvertantly) an attempt to derail U.S economy and the global financial institutions.Coinciden... record open short interest (stock market) was accompanied by rumors and distortions which would have created an Armageddon.We have seen several institutions virtually liquidated.The sequential problems had allowed some reporters on a "financial news" station to question FED's stability .
    There is no economic value to a "naked" short as it is a tool for a market disruption and potential source of economic instability.You don't like the company?liquidate your position .Alternatively ,do not buy the stock.
    There is no doubt in my mind that the "Mega" shorts were responsible for the events of the past few days.These events were a threat to the U.S and the Western economies.
    It appears that SEC and other agencies had found an effective approach against the Armageddon like instability.
    We need more cooperation amongst the Central Banks and global regulatory bodies to unify their effort against the forces of disruption.
    In the meantime ,AIG problems are being resolved.The regulatory agencies are addressing other peripheral issues .
    The global equity markets are poised for a major rally.
    The U.S is poised for a major economic rebound.
    Reply
  •  
    Sep 19 03:38 PM
    Not running at this point. I am a businessman and tech guy, specifically with in Internet mass media. Heck almost anybody is going to do better then Obama or Palin that come here and articulate on Seeking Alpha. Congress and serving one term is all I will wish to serve. Washington and politicians are a snake-pit. Although a foreign diplomat job is something that would perhaps be appealing. I just started a website called RagingDebate.com. It's in beta mode and I have no begun mass marketing it. My objective in the short term is a connector of several groups and facilitation of contacting and e-profiling citizens that wish to help into categories for mobilization. I have done some work for fund-raising for three Governors, a President and a couple runner-ups online. My political connections want no part of what I am doing, so I will use my own funds.


    On Sep 19 08:55 AM John Angstrom wrote:

    > iThingbig are you running for something? you sound like you have
    > much more experience than Obama and Palin.
    Reply
  •  
    Sep 19 07:39 PM
    It is doubtful that all the contradictions in the SEC's temporary ban on short sales will be worked out before the ban is lifted.

    However, the existing rules against naked short selling will be enforced and they're not going away.

    So, if you want to make money as a naked short seller, you may have to go elsewhere.

    Speaking of which, I hear that Brazil is now promoting a few secluded beaches where naked short sellers will be allowed to congregate. However, I don't think they'll be allowed to buy or sell anything. :-)
    Reply
  •  
    Sep 19 10:32 PM
    This is absolute fascism. The Communist oligarch Paulson only stepped in once the shorts started to pile on Goldman and he was losing his net worth. Everyone knows it.

    But I guess it's all my fault that Bear, Lehman, and AIG failed. Its all my fault, I am so sorry I short stocks. Pff. These Communists masquerading as Republicans should be tried for treason and executed.
    Reply
  •  
    Sep 19 10:46 PM
    I guess Paulson and Bush are jealous of the authoritarian powers in Pakistan and chose to immitate the Taliban by banning short-selling.

    Here is a chart of the pakistan stock market before and after imposition of short selling ban: https://admin.minyanvi...

    By the way, today was the biggest emerging markets rally in 20 years. Guess which country didn't participate? The only one that banned short-selling, namely Pakistan.
    Reply
  •  
    Sep 19 10:47 PM
    https://admin.minyanvi...
    Reply
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