After the collapse of Enron Corp. in 2001, Wall Street "short sellers" were hailed as heroes for helping to expose the company's massive accounting fraud.
Seven years later, the "shorts" -- traders who borrow stock and sell it, expecting to profit from falling prices -- are the reviled black hats of global markets. They have been damned by regulators and politicians who say they're largely responsible for the meltdown in bank and brokerage stocks that brought the financial system to its knees this week.
On Friday, the Securities and Exchange Commission took the unprecedented step of ringing a fence around 799 financial stocks -- from tiny Beverly Hills Bancorp to giant Bank of America Corp. -- and forbidding traders from shorting them for at least 30 days.
The SEC said it had become concerned that short selling of financial shares "may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets."
Note the "may be causing." The SEC is conceding that it doesn't know for sure what effect short selling has had on financial stocks. But with the Dow Jones industrial average at nearly a three-year low Wednesday and fear of a credit-market collapse rampant, the SEC faced overwhelming pressure to do something.
So now the agency, led by Chairman Christopher Cox, is blatantly trying to stop financial-stock prices from going down.
On Friday, the order had the desired effect, and then some: The average financial stock in the Standard & Poor's 500 index soared 11.1%, on top of the 11.7% surge Thursday, when rumors first began to circulate that the U.S. was planning bold steps to deal with the financial crisis.
Investors who have shorted financial stocks this year didn't try to disguise their anger.
"The irony is that the SEC is doing exactly what it claims to be against -- manipulating the markets," said Eric Newman, who manages the West Chester, Pa.-based TFS Market Neutral mutual fund, which shorts some stocks while going "long" (buying and holding) others.
Many academics were no less critical of the SEC. Jonathan Macey, a securities law professor at Yale University, said the ban on short selling was "an abomination."
The SEC wasn't operating in a vacuum. Securities regulators in London made the first move against short sellers Thursday, when they banned shorting of British financial stocks through year-end.
