Posted on 07/21/2008 1:03:20 PM PDT by 300magnum
NEW YORK (Reuters) - Emergency action by regulators to rein in abusive short-selling in some large financial firms should be expanded to include the stocks of all public companies, a former top markets watchdog said on Monday.
Former Securities and Exchange Chairman Harvey Pitt said the SEC's emergency order that went into effect on Monday would help in "restoring legitimacy" to short-selling activity but should go even further.
"It's something that is very good of the SEC to have done," he told Reuters in an interview. "They can't do it across the board without going through formal rule making, but I do believe that they need to expedite that."
The SEC last week announced an emergency measure applying to stocks of 17 Wall Street firms, as well as U.S. housing finance companies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) as a way to curb manipulative short selling. The emergency action can last up to 30 days.
The commission's move has drawn complaints, including from the banking industry, which wants the protections extended to all banking companies. The SEC has said it will consider rules to address short-selling issues across the entire stock market.
"Any cut less than the whole is going to be perceived ultimately as arbitrary," said Pitt, now head of financial consultant Kalorama Partners in Washington. "My own view is they couldn't do all of the public companies in one fell swoop. They made what appears to me to be a reasonable cut, and hopefully they will expand it across the board just as quickly as they are able to do it."
Short sellers borrow shares they think are poised to drop in price and then sell them, hoping the stock will fall and can be repurchased at a profit. A "naked" short occurs when an investor sells
(Excerpt) Read more at news.yahoo.com ...
“Naked”, “broad”, “firm”, “shorts” - I can’t stand to read economic articles these days...
Anyone who has studied the markets knows that the best way to ensure a crash is to eliminate short selling. This is because shorts, while they’re there, eventually have to purchase the shares. This cushions any down move and frequently results in a “short covering” rally at the end.
The issue is not short-selling per se, but rather illegal "naked" short selling. This occurs when the short seller does not borrow the shares he shorts -- in essence, counterfeiting the shares he sells. Normal legal short selling is essential to an orderly market but not naked short selling.
bkmark
I am fully aware of the definition of naked short selling. It doesn’t change the issue whatsoever. Short sellers have to cover eventually whether or not they have borrowed or allocated the specific shares beforehand.
Neither do I feel that the practice of naked short selling is acceptable. But it is no different in its ultimately bullish effect on the shares.
Those who own stock that is subjected to naked short selling are taking it in the shorts.
The problem is that some short-sellers are not covering their shorts -- ever. And if allowed to short without borrowing the stock, they can short enough to drive a stock into bankruptcy. Some stocks have had many more short outstanding than total shares. NFI and OSTK are two examples. These companies have filed lawsuits because of manipulation of their shares by naked short selling.
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