From Deseret News archives:
SEC temporarily bans short-selling
Move infuriates many exchanges, traders, economists
Not the mortgage companies that buried Americans in debt. Not the investment banks that touted the debt as a solid investment. Certainly not the politicians whose policies helped birth the housing bubble.
The current villain is the "short seller," an investor who wagers that stock prices will fall. And with market turbulence hurting Morgan Stanley, Goldman Sachs and others, short sellers are natural targets.
Both New York Attorney General Andrew Cuomo and the Securities and Exchange Commission plan investigations of rumor-mongering and market manipulation by short sellers.
The SEC also banned the shorting of 799 financial stocks through Oct. 2, a move that infuriated many exchanges, traders and economists who warn it could throw a disastrous kink into the markets.
"This is the financial equivalent of war," said David Oser, chief economist, ShoreBank.
Even vultures have their virtues. Short sellers can keep the markets working smoothly, ensuring that prices are based on supply and demand. They have also exposed corrupt businesses such as Enron.
What investors such as Chanos do is sell borrowed shares, which they then buy back at a later date. Should the stock drop in value, the short sellers profit. Another way to short involves buying stock options.
"Short sellers are not evil," said University of Chicago economics professor Richard Thaler. "If you don't have short-selling, then market prices are set by the most optimistic investors."
The SEC staff has recommended that traders responsible for providing liquid markets be excluded from the ban, although the commission has yet to officially modify its decision. The U.K. financial regulator has the exception in its short-selling ban.
Without an exemption, Wayne Luthringshausen, chairman and chief executive of the Options Clearing Corp., warned of "dire consequences" for the markets.
Chicago Board Options Exchange Chairman and CEO William Brodsky said there could be "the sudden and severe removal of liquidity from the marketplace at the same time that the government is taking unprecedented steps to preserve it."
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