SEC to limit 'short selling' of Fannie Mae, Freddie Mac shares

It's bear-hunting season on Wall Street.

The Securities and Exchange Commission is invoking emergency powers to limit "short selling" in Fannie Mae and Freddie Mac shares, as well as in stocks of major brokerages, Chairman Christopher Cox told Congress today. And the SEC will consider extending the order to the rest of the market as well.

Short sellers borrow stock and sell it, betting the price will drop. If their bet is correct, they can buy new shares later at a lower price, repay the borrowed stock, and pocket the difference between the sale price and the repurchase price.

The SEC will require traders to "pre-borrow" shares of Fannie, Freddie and major brokerages before selling them short, Cox said. That then would lock up those shares, preventing them from being borrowed by other short sellers. In effect the SEC is trying to limit so-called naked shorting, which is selling stock without actually having the shares in hand or located. Naked shorting already can be illegal, depending on the circumstances, but the rules against it haven't been widely enforced.

Cox told the Senate Banking Committee that an emergency order would be released today. UPDATE: Read the SEC's order here.

As the stock market has plunged this year, short sellers have ramped up their bearish bets, increasing the downward pressure on share prices -- and particularly battered financial issues.

“In addition to this emergency order, we will undertake a rulemaking to address the same issues across the entire market,” Cox said.

But so far, Cox's plan doesn't seem to be doing much to lift shares of Fannie or Freddie. Fannie was down $1.61 to $8.12 at 10:45 a.m. PDT; Freddie was down $1.22 to $5.89.

Photo: Christopher Cox. Brendan Smialowski/Bloomberg News

Comments

[Maggie Knowles]

Have you read http://www.deepcapture.com/ ? or watched the presentation on Wall Street corruption at http://www.businessjive.com/ ? This loophole should have been closed a long time ago. Is it true that this practice is responsible for reducing the middle-class retirement funds by 50%? Maybe what these guys say is true, the system is corrupt from top to bottom. Years of housecleaning ahead (I hope.)

[PGB SD]

So, if people continue to believe that the fundamentals to the companies leave something to be desired, how will limiting short selling prevent the stock from going down further? Considering the two companies have $5 trillion in liabilities and a relatively small cushion of cash, their fundamentals seem to be problematic...

This just seems like they're going after a symptom of the problem, not the problem itself. Or perhaps the SEC is just trying to protect the government's new investment in preferred shares of the companies...

[jeff krup]

PGB SD
The SEC is NOT preventing short selling!
They are preventing NAKED short selling, which is absolutely illegal and for good reason, it is tantamount to counterfeiting!
Short selling is lovely and wonderful and healthy and legal and not being impeded in any way.
You are right to be suspicious of the application of this new rule to these institutions (often the perpetrators and beneficiaries of illegal naked short selling).
Learn the difference between short selling and naked short selling before you continue to fuel the confusion (or perhaps that is your intent)
For a complete explication of this issue go view
http://deepcapturethemovie.com

[martscan]

I know the difference between 'short selling' and 'naked short selling', truth be known, the effective difference at the time of sale is nil. Having the stock with which to cover the sale 'located', or even in hand, for settling the trade within the proscribed time limit is no more efficacious in preventing a 'raid' than not having the stock located at the time of sale, PROVIDED IT IS LOCATED PRIOR TO THE SETTLE. In fact, at the time of settlement there is no way of knowing, or caring, when the covering stock was located or procured. And, if the trade must be "busted" for failure to deliver the stock, an offsetting buy must be made...effectively negating an inordinate bear influence on the stock price. The whole of the SEC announcement is, IMO, nothing but 'show time' designed to psychologically buoy public sentiment for those financial companies that, ironically, should suffer the greatest, justifiable, damage wrought by short sellers, legal or not.