Cuomo, McCain, U.K. join war on stock 'short sellers'

It’s a free-for-all in the attack on "short sellers" today.

New York Atty. Gen. Andrew Cuomo said he was launching a probe of short sellers’ activities in shares of Lehman Bros. Holdings Inc., American International Group and other battered financial stocks.

"I want the short sellers to know today that I’m watching," Cuomo said at a news conference. If the shorts are "spreading rumors" about stocks to drive them down, he said, "that may very well be illegal." He reminded Wall Street of the enforcement powers he has under New York’s tough securities laws.

In Britain, securities regulators took the bold step of banning short selling in any financial stock for the rest of the year. See the story here.

Meanwhile, one day after the Securities and Exchange Commission announced new steps to crack down on the shorts -- traders who borrow stock and sell it, betting on lower prices -- Republican presidential candidate John McCain in effect called for SEC Chairman Christoper Cox’s resignation for not stepping up earlier on the issue.

From McCain, speaking in Cedar Rapids, Iowa:

The primary regulator of Wall Street, the Securities and Exchange Commission, kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground. The chairman of the SEC serves at the appointment of the president and has betrayed the public's trust. If I were president today, I would fire him.

Early on Wednesday Cox said the SEC was changing certain trading rules to rein in naked shorting. Later in the day he dropped a much bigger bomb on the shorts by proposing that large money managers publicly disclose their short positions daily.

Because short selling is perfectly legal as long as traders follow well-known rules, it isn't clear what disclosure would achieve -- other than maybe shaming even legitimate shorts into scaling back on their bets for fear of attracting public wrath.

Jim Chanos, a well-known short seller who is head of Kynikos Associates in New York and also the chairman of the Coalition of Private Investment Companies, attacked the proposal, saying it was "akin to the government suddenly requiring Coca-Cola to disclose their secret formula for free to all their competitors."

Chanos said the "consequences of a hasty or ill-considered rule in this environment could be extremely harmful to the capital markets."

An SEC spokesman said the commission could vote on the disclosure proposal today.

Cuomo couldn’t resist his own dig at the SEC. "I believe the federal government has been ineffective when it comes to regulating these markets," he said, referring to the meltdown of financial stocks.

"We want to stabilize the market. The market needs stability now."

Photo: New York Att. Gen. Andrew Cuomo. Credit: Mike Groll / Associated Press

Comments

[Blutarski]

This is insane. The only good guys in this whole sorry episode are the short sellers. They were the first to notice that these companies were seriously over-leveraged and the only ones to act on that knowledge. If regulators had listened to what the shorts were saying, the American taxpayers would be $100 billion better off today.

[Jason]

Although I disagree with Mr. Cox's proposition in making short positions public on a daily basis, I also feel that naked shorting must be reigned in. It's creating imbalances in the order books which causes devastating results for firms that need sound stock prices on a day to day basis to operate. By that I mean financial firms who's trading and counter party integrity would be compromised by a Moody's or S&P downgrade. Downgrades often precipitated by a collapsing stock. It then becomes a self-fulfilling prophesy.

The methodical shift from LEH to AIG and now MS is tangible evidence of shorts concentrating on individual firms susceptible to collapse by flooding the sell side with shares. Shares of which many, if not a preponderance, were shorted nakedly.

[rudy - thousand oaks]

No - my mind was made up a long time ago. A decade or two of these people being in positions of powere is all the information I need. The dog and pony show of the last several months are only a distraction.

As the saying has been going, put lisptick and a republcan and you still have a bigot, ignorant, and antisocial.

[David]

I thought selling what you do not own was fraud

[James Monachino]

Kill the messenger

Short selling is the other side of buying the stock. It isn't a risk free event. Do stockholder complain when the stock goes to high - - way beyond the fundamental price value of the stock.

Solve the problem not the symptoms. Short sellers don't create poor corporate management they just act on the results of the faltering leadership.

Finally, I find it interesting that the champions of deregulation are now moving at the speed of light to selectively socialize our country with all these government buy outs and bail outs. I would be happy with some accountability and regulations that contained some bite.

James Monachino

[martscan]

John McCain should just shut up when it comes to things financial and the economy. He can't even mumble correctly as he recites, in his 6th grader's sing-song fashion, his index cards, written by the Neanderthal economist Phil Gramm. The hypocrisy, distortions, innuendos, lies and disingenuousness of Dr. Strangelove, he recently converted to the Rovian school of legerdemain, is downright shameful. The well thought out use of negative trigger words: speculators, casino, naked, 'sell stock without ever owning it', betrayal...all serve the propaganda purpose of fermenting the Republican mold in oat meal brains. A masterful con job, a 'sting', on the public. That anyone can say 'free market' and 'no short selling' in the same breath should be shot. A month ago the boogie man was the oil speculator...but we now never hear a word of the speculators who are short oil up their noses. Short sellers, not crooks, do not target prosperous, well managed companies. They focus on ill-managed, money losing companies that deserve to be punished for their performance...the essence of the Darwinian force of capitalism. The boogie man du jour is the short seller. Why do we not hear a word of the 'pump and dumpers'? Can anyone even imagine the extent of money involved in legitimate short hedges? Can anyone imagine the thought of limiting the upside on equities?

Dr. Strangelove mentions 70 years of 'protection' garnered from the uptick rule...a joke. If a criminal conspiratorial group designs an illegal raid on an undeserving company, it is no mean trick to fashion upticks. Everyone in the markets knows that the underlying cause of this debacle can be laid at the feet of Phil Gramm and his ilk of 'free marketers'..a hick country 'professor' that is now a multi-millionaire due to his service as a tool for the real manipulators that repealed Glass-Steagle...that 'protected' us for decades and, once gone, opened the floodgates for every idiotic, esoteric, unregulated derivative and 'swap' a Frankenstein could create, sold to ostensibly alleviate risk but, in fact, exacerbated risk. But the fees were terrific. John McCain is a walking fraud, and anyone that votes for him, and gets Gramm in the bargain, is a jerk.

[jim]

Short sellers can go directly to jail. Do not collect $100.00.
Those bastards nearly capsized our system via a flood of innuendo and lies.

Listening, Einhorn? Jail, I say.