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Terror Attack on US Financials? Details of SEC Short Ban

Last night, we discussed the absurdity of banning all short sales. The details of the SEC action have been released (see below). The specifics are a "temporary halt in short selling in 799 financial institutions" until October 2nd. 

I have been trying to contextualize this, and I keep coming back to what seemed like a wild theory yesterday that seems a whole lot less wild today. During the day, I had an interesting phone conversation with Joe Besecker of Emerald Asset Management. (We used to do schtick together on Power Lunch, and made for an amusing financial comedy team). 

But Joe is a good money manager, a great stock picker, and a thoughtful guy. He raised an intriguing issue: None of the many hedgies he knew were pressing their bets recently. The bear raids on the banks and brokers were NOT a case of piling on by US based hedge funds. And from what he was seeing and hearing about in terms of order flow, the vast majority of the financial short selling the past week or so were being done overseas. It appears that the lion's share of shorting was coming out of overseas bourses such as London and Dubai.It may not be a coincidence that the financial short selling ban is both here and in London.

Then there is another coincidence: The huge increase in shorting of the financials occurred on the anniversary of 9/11. And on top of that, the same institutions attacked on 9/11/01 were the ones suffering in recent days.

Joe asked the question: Is anyone investigating whether this is a case of financial terrorism? He wanted to know if someone was at least looking into this question (Joe is buds with Jim Cramer, and mentioned it to him, who then omitted to cite in his column that this was Joe's theory, not his own). 

Anyway, its an interesting theory, one that seemed kinda out there -- until last night's emergency action. Nothing else really explains the insanity of banning short sales -- except for Joe Besecker's questions. I can think of only 3 other possibilities that explain this insane action:

1) Extreme idiocy and incompetence -- not unthinkable ftom the gang that couldn't shoot  straight in DC these days;

2) Following the impetuous Fannie/Freddie rescue, the timing of this certainly has political overtones. We will see if it gets extended a month from October 2nd to November 5th. 

3) Some other factor, possibly financial terrorism.

I can think of no other explanations for the dismantling of the free operations of trading markets.

~~~

The grand irony of all this is that Naked Shorting has been very profitable for the big broker dealers, like Morgan And Goldman and Merrill and Lehman. They have looked the other way for years, and the SEC has been AWOL on this issue.

Short sales require a locate (shares to borrow) and then a subsequent delivery. It should take less than 3 days to deliver the borrowed shares, but instead, delivery is often delayed indefinitely. Failure to deliver leads to a margin charge, which can be as high as 9-15%.

If you want to know who to blame for the past 5 years of naked shorting, you only have two places to look: The Financial brokers themselves, and the nonfeasance of a feckless SEC.

Previously:
SEC: Ban All Short Selling  (September 18, 2008)
http://bigpicture.typepad.com/comments/2008/09/sec-ban-all-sho.html

Sources:
SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets
SEC Chairman Christopher Cox
FOR IMMEDIATE RELEASE 2008-211
http://www.sec.gov/news/press/2008/2008-211.htm

SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets

FOR IMMEDIATE RELEASE 2008-211

Commission Also Takes Steps to Increase Market Transparency and Liquidity

Washington, D.C., Sept. 19, 2008 — The Securities and Exchange Commission, acting in concert with the U.K. Financial Services Authority, today took temporary emergency action to prohibit short selling in financial companies to protect the integrity and quality of the securities market and strengthen investor confidence.  The U.K. FSA took similar action yesterday.

The Commission’s action will apply to the securities of 799 financial companies.   The action is immediately effective.

SEC Chairman Christopher Cox said, “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets.  The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets.  This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.”

Today’s decisive SEC action calls a time-out to aggressive short selling in financial institution stocks, because of the essential link between their stock price and confidence in the institution.  The Commission will continue to consider measures to address short selling concerns in other publicly traded companies. 

Under normal market conditions, short selling contributes to price efficiency and adds liquidity to the markets.  At present, it appears that unbridled short selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation.  Financial institutions are particularly vulnerable to this crisis of confidence and panic selling because they depend on the confidence of their trading counterparties in the conduct of their core business. 

Given the importance of confidence in financial markets, today’s action halts short selling in 799 financial institutions.  The SEC’s emergency order, pursuant to its authority in Section 12(k)(2) of the Securities Exchange Act of 1934, will be immediately effective and will terminate at 11:59 p.m. ET on October 2, 2008.  The Commission may extend the order beyond 10 days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total duration.

The Commission notes today’s similar announcement by the U.K. FSA.  The SEC and FSA are consulting on an ongoing basis with regard to short selling matters and will continue to cooperate in carrying out regulatory actions.

The Commission also has taken the following steps to address the recent market conditions:

• Temporarily requiring that institutional money managers report their new short sales of certain publicly traded securities.  These money managers are already required to report their long positions in these securities.
  
• Temporarily easing restrictions on the ability of securities issuers to re-purchase their securities.  This change will give issuers more flexibility to buy back their securities, and help restore liquidity during this period of unusual and extraordinary market volatility.

 

http://www.sec.gov/news/press/2008/2008-211.htm

Friday, September 19, 2008 | 05:54 AM | Permalink | Comments (113) | TrackBack (0)
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Comments

The 'financial terrorism' theory most likely is nothing more than an invention of the powers that be (Wall Street and their servants: the USA government) to justify the robbery of the century, that is, forcing the taxpayer to pay for the sins of the financial elites thru a RTC kind of 'solution'. Never thought the USA could fall so low.

Posted by: LooksLikeItIsTooLateToWakeUpAmerica | Sep 19, 2008 6:34:04 AM

The most insane and idiotic thing that the SEC has EVER done. This will come back and its going to come back with a vengeance and fury that we have never witnessed. Take your gains and get the hell out of this market.

Posted by: Hangtime79 | Sep 19, 2008 6:46:41 AM

Terrorism? That is just an excuse to change rules when they government feels like and take away rights from citizens.
People will leave Banana Capitalism and take their money elsewhere. I vote for possibility one. .-)

Posted by: Katie | Sep 19, 2008 6:54:36 AM

The SEC action may be maddening but the suspicion of terrorist activity is not the least bit crazy. Wall Street has been the primary target of bin Laden from the start. The garage bombing at the WTC didn't work so the bastards tried another method that succeeded.

Remember too that bin Laden comes from money. He may live in a cave (or pretend to) but he can easily move among the elite because he grew up in that world. There's limitless wealth in the Middle East and their ability to manipulate financial markets cannot be discounted.

"No one ever imagined" has been proven wrong again and again.

Posted by: The Original DC | Sep 19, 2008 6:58:47 AM

Good morning fellow Pakistanis...

I think I will go out and beat my rented mule this morning....

Posted by: Bruce in Tennessee | Sep 19, 2008 7:02:03 AM

provocative idea, though, if 'officialdom' is going to run with it, I'd think we'd be best served by having the SEC port, the data from, the trading runs directly to the web for multi-"3rd-party-verification".
(as if they really had such a handle, on things, as they claim)

though, I tend with the "convenient" postulate..

http://www.thefreedictionary.com/convenient

Posted by: Mark E Hoffer | Sep 19, 2008 7:04:41 AM

Funny, I had lunch with my financial adviser today. We live in Tokyo and all of his clients are non-Japanese (mainly Americans and Brits). He was telling me about the hectic couple weeks he's had--mainly about how his usually aloof and docile clients were acting like raving lunatics telling him to either buy Lehman or short it because they had "inside information."

Financial terrorism??? Please, BR, you can't be serious!?!? Stop hanging with "friends of Cramer's," that's bound to bring some unwanted, unneeded stress and downright ickyness....

Posted by: Brian | Sep 19, 2008 7:09:56 AM

Hi Barry,

this "financial terrorist theory" is just nonsense. I thought you had more common sense than that.Its always nice to blame "external forces" when someone is losing money,that way no-one can prove or dissprove it. Just look at the other markets like Brazil,Russia, China, India, Hong Kong,these markets are way down but we don't hear anybody over there complaining about "financial terrorism"!Pls..this "financial terrorism" excuse is so lame.

~~~

BR: 1) Its not my theory, I am passing it aloing.

2) I posited 2 of my own possible theories

3) What is your explanation? I am at a loss . . .

On a related note, "insights" such as this about my credibility, when musing on current issues, from 1st time posters aren't even worth a bucket of warm spit . . .

Posted by: jimmy linte | Sep 19, 2008 7:12:24 AM

The Government is going to nationalize all the bad debt.Problem solved!

Posted by: Automated Robot | Sep 19, 2008 7:18:33 AM

Totally plausible, yet it's amazing that those brilliant, sophisticated terrorists would not want the alleged Muslim elected President of the US!

Posted by: CNBC Sucks | Sep 19, 2008 7:18:57 AM

ho ho ho. This is a master stroke, and its funny to see some people actually falling for this theory. maybe we can even get some people to buy stocks. 'buy stocks coz' its patriotic' :)

Posted by: Danka | Sep 19, 2008 7:19:52 AM

I think it's totally plausible and probable and I have been short selling since last fall. I was trading through LTC, Asian Contaigon, after 9-11, dotcom crash, bear market of 2000-2003 and I have never seen anything like what has gone on in the past week. Nothing even close. Northern Trust down 27% instraday? Goldman practically liquidated in front of our eyes? Come on! That does nothing but damage to US traders and the market.

And someone please figure this one out for me. Why is the ultrashort financial (SKF) under the 200 dma despite this carnage in financial stocks? Why at a time when the S&P made a signficantly lower low than in July did SKF make a 58 point lower high?

Posted by: txchick57 | Sep 19, 2008 7:26:14 AM

WOW, I though we here in Dubai was bad. Socializing losses, nationalizing bad companies, banning short seliing/ phorbidding capitalism&free markets...... wait til the inflation consequences hit..... the FED is printing money like no tomorrow to bail out the financial institutions...this is very inflationary....

The Republicans have the GALL to claim Obama is a socialist.... the GREATEST Socialist is BUSH 43..... What would Jesus Do?

$$$ Sheik

Posted by: John Doe | Sep 19, 2008 7:26:39 AM

Barry, Barry are you going as nuts as Cramer. It's no wonder your buddy hangs out with that weasel. I've no doubt this bit of insanity will be all over talk radio during the next 24 hours, they go for this sort of nonsense you shouldn't. The ban is a measure of desperation of course but since it's done wonders for some of my long positions in Euro banks I'm not going to look a gift horse in the mouth. We're clearly going to see another big rally but it's going to fizzle over the next week but a combo of the ban and the pending huge bailout which is going to cost hundreds of billions have effectively ended the danger of a complete market implosion which I never thought was going to happen because it was obvious the govt was going to do whatever it needed to do to prevent it. That said it doesn't change the essentials of deleveraging by financial institutions and Joe Sixpack and this is going to keep the economy in the doldrums for the next 18 months. I'm going to interested to see what Roubini has to say about all this.

Posted by: John(2) | Sep 19, 2008 7:31:07 AM

Just wondering. Do Kudlow and the other Republican oddballs still want to privatize social security? Are they working for the terrorists, or are they just easy to use as dupes?

Posted by: blimp | Sep 19, 2008 7:31:23 AM

After the first attack on 9-11 we were all suposed to go shopping. Now we must go long!

Posted by: John | Sep 19, 2008 7:33:52 AM

What a load of crap. So did Obama,..a I mean did Osama master mind the flipping houses pyramid scheme,...then packaging all this toxic crap into CDO's, then....leveraging to the hilt on the garbage??? Too funny!

No doubt these financial geniuses have brought thi country too it's knees and it' not the Middle East I worry about.

Posted by: Ken H. | Sep 19, 2008 7:36:33 AM

The other day you called idiot someone for blaming short sellers of what was happening.

There goes your headline for today

Clueless Fund Manager of the Day: Blaming Middle East Financial Terrorist

Posted by: Jav | Sep 19, 2008 7:37:15 AM

I'd be more worried why Congress seems to have no say in economic matters anymore. You may laugh but they are supposed to be the representatives of the people and not just the bankers. Of couse, Congress has it's share of incompetents and buffoons. And Congress is a tool of lobbyists. However, have the bankers representatives proven to be any less buffoonish and incompetent? And note that the lobbying that the members of Congress undergo is nothing compared to that of Paulson and the Fed. Plus, the members of Congress do have to get elected so there's a more direct responsiveness to the general public in congress then in the Banker's Club.

What we have are economic decisions made for the bankers and by the bankers. Economic decisions made completely out of the public eye. The decisions are made not by wise philosopher-kings with the interests of the people of the nation in mind but by greedy swindlers. The same greedy swindlers that have proven time and time again they are not to be trusted with too much economic power.

Posted by: ponziq | Sep 19, 2008 7:43:29 AM

Hey, John if you want to go shopping, SKF is currently in the bargain bin at $93 ask.

Last time it was that low, the S&P was over 1400. I said a few weeks ago I wouldn't be surprised to see 1400 again before the election and I still think that. Didn't expect a trip to 1140 first but it is what it is.

Buy the SKF if you think this is bogus. It's on sale!

Posted by: txchick57 | Sep 19, 2008 7:44:10 AM

Yeah, that's it. 'it was those non christians that did it'. Jeez what a croc. But to move on: I hear that the USSA will be buying mortgages. Do they mean MBS's? and how will they be priced, now that uncle sugar is in the deal?

Posted by: uncool | Sep 19, 2008 7:45:10 AM

I know Joe Besecker and he is one of the biggest idiots Ive ever met and Emerald is one of the worst money managers i know of. Barry...you have got to be kidding.....

Posted by: ARJB | Sep 19, 2008 7:48:21 AM

The financial terrorists are Greenspan, Moodys, S&P, Ambac, Morgan Stanley, etc. Round them up and send them to GitMo.

Posted by: Eddie | Sep 19, 2008 7:54:55 AM

Operation Wall Street Freedom has begun.

Posted by: Winston Munn | Sep 19, 2008 7:57:13 AM

Things are all right...I go to the US Economic High School, and things don't seem to have changed much. Did notice this morning that they sent the short bus, and we had a bunch of new kids and a new driver.

I liked him though. Driver's name is Mr. Cox, and he says just call him Midas. All his friends do.

Sat by a kinds goofy looking kid in the back, little Paulie. Kept playing with a big plastic gun of some kind. Nice guy though. Taught me a new song, "I love you, you love me, we're just one big family..." at least I think that is the way it went.

Did feel sorry for one of the kids though. Ben. Kids teased him unmercifully. Seems his big brother Al used to ride the short bus, and this kid used to give out free candy to everyone on the bus. Ben gave out candy for awhile, they tell me, but now he only gets to bring one or two pieces each day, and the kids who don't get any get really mad. They seem to be the dumbest ones, and they make the loudest racket.

Gotta go, we have arrived at school...maybe I will tell you how my day went tonight.

Posted by: Bruce in Tennessee | Sep 19, 2008 8:00:03 AM

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