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An 'abomination'? Critics attack SEC's short-selling ban

September 19, 2008 |  1:07 pm

Some negative reaction today to the Securities and Exchange Commission’s surprise decision to temporarily ban short selling in 799 financial stocks:

--- Eric Newman, who manages the TFS Market Neutral Fund, which has both long and short positions in stocks: "The SEC has done a fantastic job blaming short sellers for nearly every problem in the financial markets today. It’s a brilliant PR campaign that links legitimate short sellers to ‘naked’ short sellers, that assumes any stock going down is only going down because of those pesky hedge funds and their short selling.

"The irony is that SEC is doing exactly what it claims to be against -- manipulating the markets and propping up ailing financial companies that are now politically important because they are essentially backed by taxpayers" via government loans.

--- Larry Harris, a professor of finance at USC and a former SEC chief economist, as quoted by Bloomberg News: "Proposals to ban short-selling are a highly politically motivated attempts to stop reality. To ban short selling is to in effect say that the government is going to try to determine what stock prices should be."

--- Richard H. Baker, president, Managed Funds Assn., which represents hedge funds: "MFA is deeply concerned by the crisis in the global financial markets, but equally troubled by the SEC’s unprecedented actions in response to the crisis. We stand firm in opposing restrictions to short selling and maintain that short selling is an essential risk-management tool and a critical component of ensuring market stability, not a contributor to market volatility. Further, restricting short selling has not been shown to provide an ultimate benefit to the stocks it is meant to protect."

--- Jonathan Macey, securities law professor, Yale University: Banning short sales is "an abomination. Short selling is a legitimate, critical market strategy that has incredibly important functions, including ferreting out information that could not be ferreted out any other way."

--- Jim Chanos, head of well-known short-selling firm Kynikos Associates and chairman of the Coalition of Private Investment Companies: "We are very concerned that these emergency orders will not enhance long-term market integrity nor will they address the fundamental economic issues that have been afflicting our financial sector. We also believe that markets cannot withstand for long constantly changing rules in which each new regulation is announced in the middle of the night without any public comment or participation.

"Far from being the cause of the crisis, many short sellers were warning months and years ago about problems in this area. Simply put: short selling is a vital investment strategy that responds to market fundamentals and contributes to the integrity of stock prices. Investors are best served when they can hear both the reasons to buy and the reasons to sell any given security."