The government stepped up its crackdown on what it sees as possible stock-market manipulation, issuing new rules that make it harder to short financial stocks or bet on their decline. The move comes days after the Securities and Exchange Commission said it would step up investigations of false rumors.
The Wall Street Journal and Financial Times put the news on their front pages, while The New York Times puts it on its Business Day cover. The Journal calls it an “unprecedented action” and a “dramatic emergency order” that the SEC may institute for all stocks, not just the financials. The SEC protected nineteen companies, including Fannie Mae and Freddie Mac and Wall Street firms like Lehman Brothers.
To short stocks, investors borrow shares and sell them. If the stock price falls, they replace the shares at a cheaper price and make money. The SEC’s move doesn’t prevent short selling, which is totally legal, just a type of it called “naked shorting” where investors short stocks without actually borrowing the shares.
Shorts blasted the move. The Journal:
New York hedge-fund manager Whitney Tilson called the proposals a “desperation move” that could end up silencing investors who are among the first to point out problems at troubled companies.
“What do I think is really going on here?” he asked. “I think that regulators are very, very concerned about the collapse of the stocks of major U.S. financial institutions and are grasping at straws as to what to do about it.” Mr. Tilson’s hedge fund has had short positions on banks and brokerage firms, including Lehman, Washington Mutual Inc. and Wachovia Corp., as well as big bond insurers.
The Journal has a nice mini-history of short selling, noting that authorities have tried to limit it since at least 1733, after the South Sea Bubble.
The SEC’s move didn’t help the government-backed mortgage biggies much. Fannie plunged another 27 percent, while Freddie dropped 26 percent.
Were you talking !&%# about my stock?
The Journal also reports on C1 more details about the SEC’s examination of Bear Stearns documents to see if its crisis was in part manufactured by Goldman Sachs and two big hedge funds. It leads with dramatic corner-office calls from the CEOs of Lehman Brothers and Bear Stearns questioning Goldman’s CEO on whether his firm manipulated their beaten-down stocks.
The paper says Alan Schwartz, the former Bear Stearns CEO, has “pointedly asked” Goldman’s Lloyd Blankfein if Goldman trading manipulation helped kill Bear, quoting a person familiar with the conversation (almost certainly Schwartz himself, as Blankfein said he didn’t remember the conversation). Lehman CEO Richard Fuld has also confronted Blankfein concerning rumors about his company.
The Journal says Bear documents show Goldman and two hedge funds, Citadel Investment Group and Paulson & Company, exited certain complex trades in the weeks before Bear’s collapse, as Vanity Fair has reported. It’s unclear why exiting trades related to a faltering company like Bear Stearns would raise suspicions, though.
Ben’s Grim
Federal Reserve Chairman Ben Bernanke issued a grim report on the economy in testimony before the Senate, the NYT and FT say on page one and the Journal on A3.
The Times story talks about this and that before finally getting to Bernanke in its eighth paragraph.
Mr. Bernanke offered no timetable for improved economic performance, declaring that while the risks to the overall economy were still “skewed to the downside,” inflation “seems likely to move temporarily higher in the near term.” The Fed, he said, needed to guard against higher prices’ spreading through the economy…
The main reasons for Mr. Bernanke’s sober assessment, he told senators, were rising commodity prices, especially energy, and continued weakness in the housing sector. He suggested that housing prices might turn around next year, but that high energy prices were likely to persist because demand was outstripping supply.
And here’s why…
The economic news was bad yesterday. Producer prices soared by 1.8 percent in June from the month earlier and were a huge 9.2 percent higher than a year ago. The Journal says in its Bernanke story that it was the biggest increase in twenty-seven years.
Retail sales were basically flat at a 0.1 percent increase over May. Take out gasoline, and sales dropped 0.5 percent—and that’s in a month that was supposed to be flush with tax-stimulus checks.
Not so fast, on Fannie & Freddie
Bush’s Fannie and Freddie bailout plan hit headwinds in Congress yesterday, the Times says on C1 and the Journal on A2.
Congress delayed approval of a housing bill in order to deal with the government’s request for open-ended support of the two mortgage giants.
“If you’ve got a squirt gun in your pocket you may have to take it out,” [Treasury Secretary Henry Paulson] said. “If you’ve got a bazooka, and people know you have it, then you may not have to take it out. By making it unspecified, it will greatly expand the likelihood it will not have to be used.”
Separately, a key regulator moved to shore up cash access for the banking industry.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.