The federal government, trying to boost investor confidence in the face of a market crisis, took the unprecedented step Friday of temporarily banning a practice of betting against financial stocks.
The move by the Securities and Exchange Commission will temporarily ban what is called short selling of 799 financial stocks. The rule took effect immediately Friday and extends through 11:59 p.m. EDT on Oct. 2.
Short selling involves borrowing a company's shares, selling them, and pocketing the difference when the stock falls. It is a legitimate method of trading -- it can make markets more efficient and bring in more capital -- but the government argues that it has widened the scope of the recent financial crisis and contributed to the collapsing values of investment and commercial bank stocks in particular.
The SEC also eased restrictions on the ability of companies to buy back their own shares, also through Oct. 2, a move aimed at helping restore liquidity to the distressed and volatile market.
The turmoil has swallowed some of the most storied names on Wall Street. Three of its five major investment banks -- Bear Stearns, Lehman Brothers and Merrill Lynch -- have either gone out of business or been driven into the arms of another bank.
In its announcement, the SEC said it was acting in concert with the U.K. Financial Services Authority, which announced a similar ban there Thursday. Some British politicians claim short-selling was partly responsible for HBOS PLC's abrupt takeover by banking rival Lloyds TSB PLC on Thursday.
The SEC said it hoped its move would protect the integrity of the securities markets and boost investor confidence. The agency said it wanted a time out on aggressive, "unbridled" short-selling in financial stocks, and said it would consider measures to address short-selling in other publicly traded companies.
"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC Chairman Christopher Cox said in a statement. "The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets."
The SEC also imposed a new requirement, also temporary, for investment managers to publicly report their new short sales of stocks.
Cox said the moves would not be necessary in a well-functioning market and are only temporary steps. He had met Thursday night with members of Congress, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
The 799 companies covered by the ban are an A-to-Z of the nation's financial institutions, including the powerhouse investment banks such as Goldman Sachs Group Inc. and Morgan Stanley and commercial banks running the gamut from Bank of America Corp. to Cape Fear Bank Corp. SLM Corp., which is known as Sallie Mae and is the biggest U.S. student lender is on the list, as are Charles Schwab Corp.
Washington Mutual Inc., the nation's largest thrift, which has lost billions from subprime mortgage exposure and seen its shares plunge in recent weeks, also is on the SEC list.
The stock of the NYSE Euronext, the biggest stock exchange, is subject to the short-selling ban. Also covered are a number of foreign financial companies whose stock is traded on U.S. exchanges, such as Lloyds TSB Group PLC of Britain and China Life Insurance Co. Ltd.
Other entities have taken their own steps against short sellers. The California Public Employees' Retirement System, the nation's largest pension fund, is no longer lending out shares of Goldman Sachs and Morgan Stanley to short sellers.
Not all short-selling is alike. On Wednesday, the SEC adopted rules it said would provide permanent protections against abusive instances of "naked" short-selling, in which sellers don't even borrow the shares before selling them, and then look to cover positions immediately after the sale. Those new rules took effect Thursday, shortening the required time for short sellers to deliver the stocks underlying their transactions.
But some critics assailed those new measures as inadequate, and asked for a prohibition on all naked short-selling, similar to the SEC's 30-day emergency ban this summer covering the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks.
New York Attorney General Andrew Cuomo said his office will investigate whether some short sellers spread rumors and negative information to drive down the share prices of Lehman, American International Group Inc. (AIG), Goldman Sachs (GS), Morgan Stanley (MS) and other firms.
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