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

September 18, 2008 | 12:07 pm

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.

Cuomony_2 "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

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