by Alistair Barr
The Securities and Exchange Commission said Tuesday that it will try to limit so-called "naked" short selling of shares in Fannie Mae, Freddie Mac and big brokerage firms.
The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a "pre-borrow" requirement, said Christopher Cox, chairman of the SEC. This will last for 30 days, he said. The SEC is also planning more rule-making focused on short selling in the broader market, Cox said.
In a typical short sale, traders sell borrowed shares, hoping to buy them back at a lower price and return them to the lender. The difference is kept as profit. In naked shorting, a trader shorts a stock without first making necessary arrangements to borrow shares. That sometimes means the seller fails to deliver the stock to the buyer and the trade can't be settled, running afoul of securities laws.
Imposing a "pre-borrow" requirement on short sales of some shares will force traders to make sure they have located securities before putting on negative bets. That may limit the pressure on the stocks included in the emergency order.
Fannie and Freddie shares have slumped roughly 70% in the past month as investors worried they may need to raise more capital to cover losses from their huge mortgage exposures. The government stepped in over the weekend, proposing a bigger line of credit for the companies and possible equity investments.
Lehman has also been hit hard by the mortgage-fueled credit crisis. Shares of the brokerage firm have slumped more than 45% in the past month.
Lehman shares rebounded 6.6% to close at $13.22 on Tuesday. However, Fannie and Freddie stock continued to plunge, losing 27% and 26%, respectively, despite the SEC's plans to limit naked shorting. The Dow Jones Industrial Average closed below 11,000 points for the first time in two years.
source: http://www.marketwatch.com/news/story/sec-limit-shorting-fannie-freddie/story.aspx?guid=%7B2B08DEE5-8D5F-47D6-A2D4-7DD5ECEE0D5B%7D&dist=msr_40
Thursday, July 17, 2008
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