SEC rule temporarily limits short-selling

July 16, 2008|By Bloomberg News

The Securities and Exchange Commission is adopting a temporary rule that will limit the ability of traders to bet on a drop in the shares of brokerage firms, Freddie Mac and Fannie Mae, the agency's chairman, Christopher Cox, told the Senate Banking Committee yesterday.

The SEC will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale. The emergency order, to be in effect for 30 days, will bar a practice called naked short-selling, in which traders avoid the financial cost of borrowing shares - the way short-selling ordinarily is done - when betting that the share prices will fall.

Cox said the SEC will draft rules "to address these same issues across the entire market."

Hedge-fund manager William Ackman, who oversees $6 billion at Pershing Square Capital Management, is among those betting that shares of Fannie Mae and Freddie Mac will fall. There is no indication that he is engaging in naked short- selling, in which traders never borrow shares from their broker or deliver the stock to buyers.

The SEC is reluctant to curb short sales "because it would require a major retooling of the plumbing of Wall Street," said James Angel, a finance professor at Georgetown University who is studying short sales. "It's only when the big Wall Street firms are threatened that the SEC does something about it."

The SEC is investigating whether trading abuses contributed to the collapse of Bear Stearns Cos. in March and the 80 percent drop in the market value of larger rival Lehman Brothers Holdings Inc. this year.

Fannie Mae and Freddie Mac have each lost about 80 percent of their value amid speculation that the mortgage-market crisis might push them into insolvency.

Short-sellers, who borrow shares betting that they will decline, are spreading rumors about Lehman in an organized attempt to depress the stock, said Richard Bove, bank analyst at Ladenburg Thalmann & Co. in Lutz, Fla.

"As with Bear Stearns, Lehman has been targeted by the fear trade," David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said in a report. Lehman should go private to avoid the attacks by short-sellers, he said.

Freddie Mac stock was down as much as 34 percent yesterday before Cox's comments and finished the day off $1.85, or 26 percent, at $5.26 in New York Stock Exchange composite trading.

Fannie Mae's stock tumbled 27 percent.

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