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FINANCIAL SYSTEM IN CRISIS : FROM OUR BLOGS

SEC may put temporary ban on short selling

September 19, 2008|Tom Petruno | Times Staff Writer

Federal regulators today may take their boldest steps yet to curb stock "short sellers" amid rising criticism over the practice of betting on lower stock prices.

The Securities and Exchange Commission is expected to announce some kind of temporary ban on short selling, a person familiar with the matter said. The agency late Thursday was said to be considering a number of options, including a ban on shorting all stocks or limiting the ban to financial stocks.

A marketwide ban would be an extremely bold step and would almost certainly spark outcries that the SEC was undermining the integrity of the free market.

Securities regulators in London on Thursday may have set the scene for the SEC with a surprise announcement banning short selling in major British financial shares for the rest of the year.

In a short sale, a trader borrows stock and sells it, expecting the market price to decline. If the bet is correct, the trader can repurchase shares later at a lower price, repay the loan and pocket the difference between the sale price and the repurchase price.

Although short selling is legal as long as traders follow well-known rules, the strategy in recent months has come under withering attack by regulators and politicians who believe that some short sellers have acted illicitly to crush shares of many financial firms.

On Thursday, New York Atty. Gen. Andrew Cuomo said he was launching a probe of short sellers' activities in shares of Lehman Bros. Holdings Inc., American International Group Inc. and other battered financial stocks.

If the shorts are "spreading rumors" about stocks to drive them down, he said, "that may very well be illegal."

Short sellers also came under attack by Republican presidential candidate John McCain.

Speaking in Cedar Rapids, Iowa, McCain accused the SEC of fostering "trading rules that let speculators and hedge funds turn our markets into a casino." He said that SEC Chairman Christopher Cox had "betrayed the public's trust" and that he would fire Cox "if I were president today."

Cox later released a statement saying that "now is not the time for those of us in the trenches to be distracted by the ebb and flow of the current election campaign."

Cox on Wednesday had announced new rules to curb "naked" short selling -- selling shares without actually borrowing them -- and proposed requiring big investors to publicly disclose their short positions in stocks.

Jim Chanos, a well-known short seller who is head of Kynikos Associates in New York, attacked the disclosure proposal, saying it was "akin to the government suddenly requiring Coca-Cola to disclose their secret formula for free to all their competitors."

Putnam money fund to liquidate

More trouble for the $3.5-trillion money market mutual fund industry: The Putnam Funds firm in Boston said Thursday that it had closed its institutional Putnam Prime Money Market fund and would liquidate the portfolio, after big investors rushed to get their cash out.

Putnam said the $12.3-billion-asset fund didn't have "credit-quality" issues but was hit by "significant" redemptions.

Nervous investors have been pulling cash from some money funds after the Reserve Primary fund, a large money fund in New York, said Tuesday that it had "broken the buck" -- fallen below the standard $1 a share -- because of losses on IOUs from failed brokerage Lehman Bros.

A Putnam spokeswoman said it was premature for the firm to say whether investors would get all of their money back or whether the fund would experience losses in liquidating.

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tom.petruno@latimes.com

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Money & Co.

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