In an effort to boost investor confidence in the face of a market crisis, federal securities regulators took the dramatic step Friday of temporarily banning short selling in nearly 800 financial stocks
The Securities and Exchange Commission (SEC) announced the ban of short-selling, which has been blamed for widening the scope of the recent financial crisis and contributing to the collapse of values of investment and commercial bank stocks in particular, according to the Associated Press.
The move, SEC chairman Christopher Cox said, would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the Federal Reserve, the Treasury and Congress. The SEC said its action calls a timeout to aggressive “unbridled” short selling of financial stocks, and the agency said it would consider measures to address short-selling in other publicly traded companies.
The SEC said in its announcement that it was acting in concert with the U.K. Financial Services Authority in taking emergency action that announced a similar ban on Thursday. The move, the SEC said, will hopefully help protect the securities markets from future disruptions and increase shareholder confidence.
“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” Cox said in a statement. “The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets.”
According to the Associated Press, a recent wave of short-selling has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big financial companies.
Some British politicians also claim that short-selling attacks were partly responsible for HBOS PLC’s abrupt takeover by banking rival Lloyds TSB PLC on Thursday amid a sharply falling share price.
The California Public Employees’ Retirement System (see CalPERS, Maryland Sec Lending Programs Respond to Markets), the nation’s largest public pension fund, joined a pension fund group no longer lending out shares of certain financial institutions (see Pension Funds Drop in Short-Selling Curbs in SecLending).
But some critics assailed those new measures as inadequate to stem the tide of short-selling, and asked for a prohibition on all naked short-selling similar to the SEC’s 30-day emergency ban earlier this summer, covering the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks.
Merrill Lynch & Co.—being bought by Bank of America Corp. in a $50 billion shotgun deal—and giant insurer AIG— rescued with an $85 billion cash injection from the Federal Reserve—were said to be among the likely short-selling targets.
More information about the SEC action is available here.