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 Lawmakers on Capitol Hill are joining regulators in the U.K. and U.S. and three large public pension funds to target short sellers blamed for driving down the stock price of key financial institutions including Lehman Brothers Holdings Inc. and American International Group Inc.
On Thursday, House Financial Services Committee Chairman Barney Frank, D-Mass., joined a chorus of Democrats and Republicans on Capitol Hill in calling on Securities and Exchange Commission Chairman Christopher Cox to strengthen a series of measures the agency adopted recently to combat the type of manipulative short selling that many argue has contributed to the current woes of financial firms. "This is an emergency and those rules should have been tougher," Frank said in an interview with The Deal. "I would have liked to see the SEC go further." The SEC on Wednesday adopted regulations that took effect Thursday requiring short sellers and their broker-dealers to deliver securities within three days of a trade. Failure to meet the requirements would lead to the parties being prohibited from making future short sales in the same security. The SEC on Wednesday night also announced that it will consider an emergency rule that will require hedge funds and other investors with $100 million invested in securities to disclose publicly their short positions on a daily basis. The new rules are aimed at limiting "naked" shorting, the practice of selling shares without arranging to borrow the securities up-front. In addition to lawmakers in Congress, GOP presidential candidate Sen. John McCain made a separate call for Cox to step down. Meanwhile, two of the largest U.S. public pension funds, California Public Employees' Retirement System and the New York State Common Retirement Fund, said they will stop lending Morgan Stanley and Goldman Sachs Group Inc. stock to short sellers after the shares plunged as part of the economic crisis. Their action follows a similar move Wednesday by the California State Teachers' Retirement System, which called on 60 other investment managers to do the same. Seperately, the Financial Service Authority, the U.K.'s financial regulator, banned short selling of financial shares until Jan. 16 after HBOS plc's share price dropped significantly over the past three days. The FSA is also requiring daily disclosures of certain existing short positions in financial companies. In the U.S., Frank and other lawmakers including Sen. Hillary Clinton, D-N.Y., called on Cox to reinstate some variation of a so-called uptick rule, a regulation removed last year that allowed short sales only if a preceding trade boosted a company's stock price. "I would have liked the reinstatement of the uptick rule or some variation of that," Frank said. Other Democrat and GOP lawmakers also raised concerns about naked short selling and the SEC's recent actions. House Financial Services Committee Ranking Member Spencer Bauchus, R-Ala., argued that temporary emergency action the agency employed in July that sought to limit naked short selling of Lehman, Fannie Mae, Freddie Mac and 16 other financial stocks for a limited period of time did not go far enough. "What we've seen in the last year, abuse of naked short selling weakened a lot of our institutions that probably would have survived had it not been for those abuse practices," Baucus said. "As short sellers often acting in concert with each other systematically singled out one institution and drove down their stock, undermined the confidence of the public and customers of those institutions., it impaired their ability to raise capital and finance their debt. In many cases these institutions failed, because of short sellers, even if it was not the root cause of their difficulty." Baucus added that the emergency order, which expired in August, had the effect of driving naked short sellers to midsize and smaller banks. "I think a blanket order was needed then," he said. Rep. Carolyn Maloney, D-N.Y., also lashed out at short sellers. "Many of my constituents have come to me and said their company would be there, their jobs would be there if this deceptive practice were stopped earlier," she said. Other lawmakers, including Rep. Randy Neugebauer, R-Texas, raised concerns about the commission's decision in 2007 to remove the uptick rule. "One of the reasons the uptick rule was put in place in the 1930s was to bring stability to the markets," Neugebauer said. "Is this the time to bring back the uptick rule in this environment were in now?" - Ron Orol Categories Deal Video
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