SEC Restricts Short Selling of Fannie (FNM), Freddie (FRE), and Brokers
As key mortgage financiers Fannie Mae and Freddie Mac face financial crisis combined with continued problems in the brokerage sector, the SEC has restricted short selling in these distressed areas. The plan will last 7 days, starting Monday July 21, with the option to potentially extend the order 30 days. The order has been extended additional days.
In his testimony before the Senate Banking Committee on Tuesday, the regulator’s chairman, Christopher Cox, said that the S.E.C. will issue an emergency order adding a “preborrower requirement” on the shorting of Fannie, Freddie and Wall Street firms.
The move is meant to curb the practice of naked short selling, a sometimes controversial practice in which the investors don’t borrow the shares before the sale, unlike in normal short sales. - New York Times Deal Book
In my opinion this new restriction will do little to prevent potential downfalls of Fannie, Freddie, and brokers. The restriction seems to mostly have a small psychological impact and fails to address the core underlying issues that plague these companies.
First, almost all securities that are shorted are not naked shorts. Currently, short sellers must locate securities to borrow, normally through prime brokers. However, the short seller does not have to enter into an official contract with the firm the shares are being borrowed from. The SEC order forces short sellers to enter an actual agreement to borrow the shares. This would reduce the amount of borrow in the market, reducing the number of shares that could be short.
This SEC restriction really just seems to slightly complicate the shorting and securities lending process, and should not have a dramatic impact. Although short interest has continued to rise in these securities and the general financial sector, there will still be a large number of shares for short sellers to borrow in this sector.
This SEC restriction mainly seems like an easy way for the government to demonstrate action and attempt to punish short sellers that are perceived by many to be acting against the best interests of the marketplace. However, in my opinion short selling generally creates a more efficient market. Also, shorting is an important part of hedging strategies that reduce portfolio risk. Last, even if short selling was completely eliminated investors could still profit from the failure of financials by buying other instruments, such as credit default swaps.
SEC Links:
SEC Emergency Order FAQ
Official SEC Emergency Order
19 Securities Listed in Emergency Order:
BNP Paribas Securities Corp. (BNPQF or BNPNY)
Bank of America Corporation (BAC)
Barclays PLC (BCS)
Citigroup Inc. (C)
Credit Suisse Group (CS)
Daiwa Securities Group Inc. (DSECY)
Deutsche Bank Group AG (DB)
Allianz SE (AZ)
Goldman, Sachs Group Inc (GS)
Royal Bank ADS (RBS)
HSBC Holdings PLC ADS (HBC and HSI)
J. P. Morgan Chase & Co. (JPM)
Lehman Brothers Holdings Inc. (LEH)
Merrill Lynch & Co., Inc. (MER)
Mizuho Financial Group, Inc. (MFG)
Morgan Stanley (MS)
UBS AG (UBS)
Freddie Mac (FRE)
Fannie Mae (FNM)
Related Sites:
Is It Time to Pull the Rug Out From Short-Sellers?
First, Let’s Kill All the Short Sellers
Thanks for the link. Sounds like interesting read
Leave your response!