SEC Tries to Eliminate Free Market, Promises to Find Patsy

The SEC said “As a result (of short selling), the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process,” the SEC said. “If significant financial institutions are involved, this chain of events can threaten disruption of our markets.” Well perfect….more rules they will not enforce to protect people from themselves.

The agency’s rule change would prevent investors from making “naked” short sales of the biggest financial stocks (an investor sells stock that has not yet been borrowed). These companies would include Merrill (MER), Citi (C), Lehman (LEH), Morgan (MS), Fannie (FNM), Freddie (FRE), Wachovia (WB). Bank of America (BAC) and almost any other financial of any significance. Naked shorting is not always done intentionally as many times broker-dealers will accidentally fail to deliver stocks to investors who have arranged to borrow a stock. If it is done intentionally, it is illegal. If not intentional, it is a mulligan? Why is the investor being held up to scrutiny here? Why isn’t the SEC coming down on broker-dealers for doing it?

I cannot short shares without going through my broker, if they allow me to do it without having shares available to borrow, why is it my fault? They are the ones with the information, not me.

“Today’s commission action aims to stop unlawful manipulation through naked short selling that threatens the stability of financial institutions,” SEC Chairman Christopher Cox said in a statement.

The “new /old” rule would require a short seller to borrow the securities before executing the sale. It would also require the investor to deliver the securities on the settlement date. Hasn’t naked shorting been a no-no for a long time? Is this like Cox doing a Dean Wermer and now putting the investor community on “double secret probation”?

Now, As of June 30, shorts held about 14% of Fannie’s outstanding stock, almost 12% of Freddie’s, and 10% of Lehman’s stock. Does it matter that all three are sitting on billions in losses and actually may go under? If their performance did not suck, the shorts would ignore them. This is the genesis for Cox finally coming in off the golf course.

Bill Fleckstien said, “While no one in Washington did their job, now they are trying to blame short sellers,” he continued, “Short sellers don’t make stocks go down. If a short seller was trying to push a stock to a price where it didn’t belong, it would come back right away.”

All this while the SEC subpoenaed Deutsche Bank (DB), Goldman Sachs (GS) and Merrill Lynch (MER) in a probe of suspected manipulation of Lehman Brothers (LEH) and Bear Stearns shares. The SEC requested trading records and e-mails.

They also sent subpoenas to more than 50 hedge-fund advisers, seeking trading and communications data related to short-selling and options trading in Bear Stearns or Lehman.

Here is what will happen. Cox and Crew are going to find their “patsy”. Some poor slob buried deep in a trading floor is going down and his boss will resign. They will find an email from the guy who said to someone “hey did you here the latest on Lehman?”. The rumor will have turned out to be false but no matter the intent, this lackey is going down. Then the SEC will hold a press conference, thump its chest and claim to be looking out for the “little guy” and protecting them from “rumor mongering price manipulators”.

The executives that caused the billions in losses are going to just walk away with their multi-million dollar paydays and Johnny, the one year out of business school derivatives trader gets 3-5 and a million dollar fine. Go Chris!!!!!

This is so predictable….

Disclosure (“none” means no position):Long GS,WB,C, none

↑ Grab this Headline Animator

Visit the ValuePlays Bookstore for Great Investing Books