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'Short sellers' trimmed bearish bets on many financial issues

August 12, 2008 | 10:28 am

"Short sellers" pulled back on their bearish bets in major financial stocks between July 15 and July 31, new data show.

Whether that had much or anything to do with the Securities and Exchange Commission’s attempt to quash the most aggressive form of shorting in 19 big financial issues, we’ll never know. It could just be a coincidence.

And the data don’t suggest the shorts were running all that scared. In the case of at least one of the 19 stocks -- mortgage titan Freddie Mac -- the shorts were confident enough to keep raising their bets.

After six weeks of plummeting bank and brokerage share prices, the SEC on July 15 announced an unprecedented rule aimed at preventing "naked" shorting of 19 major financial stocks, including Freddie Mac, Fannie Mae, Citigroup and Merrill Lynch & Co.

SEC ChairmChriscoxjuly08an Christopher Cox has said the agency had no problem with legitimate short sellers -- bearish traders who borrow stock and sell it, betting the price will drop.

But the SEC, Cox said, wanted to prevent so-called naked shorting, which is selling stock without having the borrowed shares lined up. Naked shorting can lead to a "bear raid" on a stock, pummeling it mercilessly.

The temporary rule that took effect on July 21 required that anyone shorting the 19 stocks "arrange beforehand to borrow the securities and deliver them at settlement."

Many on Wall Street saw the rule as an attempt to jawbone even legitimate short sellers into backing off.

Whatever the SEC's intention, between July 15 and July 31 the number of shorted shares declined in nearly all of the 19 issues, according to New York Stock Exchange data reported late Monday. But the stock market overall was rallying in that period, and rallies often cause some short sellers to close out their bets.

The number of shares shorted on the NYSE overall (covering all listed stocks) fell 1.5% in the last two weeks of July, to 18.3 billion, the first drop since late March.

Specifics on a few of the stocks on the SEC’s list:

---The number of shorted shares of Fannie Mae dropped 5.2% betweeen July 15 and July 31, to 146.4 million. But that wasn’t much of a decline given that the short position has soared from 86 million shares at the end of April.

---There were 54.9 million shares short in Merrill Lynch at the end of last month, a decline of 13.5% from the record high of 63.5 million in mid-July but still up sharply from 42 million at the end of April.

---Lehman Bros. remained a popular short target: The total short position dipped less than 4% in the last two weeks of July, to 82.1 milllion.

---As for ailing Freddie Mac, the shorts boosted their bearish bets by nearly 13% in the period, from 105.9 million shares to a record 119.4 million. The company’s shares have slumped from $8.17 on July 31 to about $5.60 today.

The SEC’s temporary rule expires today. Cox has said the agency won’t extend it but will soon propose a similar rule to restrict naked short selling across the entire market.

Photo: SEC Chairman Christopher Cox. Credit: Chip Somodevilla /Getty Images

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