Federal regulators on Wednesday extended an unprecedented ban against all short-selling in the shares of more than 800 financial companies, keeping it in place at least until after Congress enacts a massive financial bailout plan.
The Securities and Exchange Commission announced the extension of the ban, which was put in on Sept. 18 in a bid to shore up investor confidence in the face of the spiraling market crisis.
The ban, which was to expire Thursday, now will last until the third business day after enactment of the $700 billion financial bailout plan now before Congress. It will end no later than Oct. 17.
Late Wednesday, the Senate passed the bailout plan, which appeared to be gaining ground in the House, where Republicans' opposition softened.
The idea is that the extension will give enough time for financial markets to calm, with bailout program's plan to buy up Wall Street's toxic mortgage debt possibly starting to have a positive effect. By law, the SEC's emergency ban could not be extended beyond Oct. 17.
In the days since the ban took effect, the stock market has been on a rollercoaster ride. On Monday, the day the bailout plan was rejected in the House, the market shot downward and sent the Dow Jones industrials on a record 778-point plunge. Some relative calm returned to the markets Wednesday, with Wall Street falling only moderately and the credit markets still showing signs of strain. The Dow Jones average closed down about 20 points.
Short-sellers bet against a stock. The practice, which is legal and widely used on Wall Street, involves borrowing a company's shares, selling them, and then buying them when the stock falls and returning them to the lender. The short-seller pockets the difference in price.
Although short selling can make markets more efficient and bring in more capital, regulators have maintained that it has widened the scope of the financial crisis and contributed to the collapsing values of investment- and commercial-bank stocks in particular -- and the demise of Lehman Brothers.
The SEC "has taken steps during recent weeks to address concerns regarding short sales in light of the ongoing credit crisis," the agency said in a statement issued Wednesday night. "The steps (the SEC) has taken are designed to ensure the continued smooth operation of orderly markets. Our actions have been taken in consultation with regulators of the major developed securities markets around the world, with whom we have coordinated in monitoring market reactions."
But on Wall Street, professional short-sellers have said they were being unfairly targeted by the SEC's prohibition. And some analysts have warned of possible negative consequences, maintaining that banning short-selling could actually distort -- not stabilize -- edgy markets.
The Coalition of Private Investment Companies said Wednesday it welcomed the SEC's decision to end the short-selling ban this month. It was "a recognition of the adverse impact that this ban has been having on investors as volatility spiked, transaction costs rose and liquidity became scarce," the group said in a statement.
The SEC also extended, in this case through Oct. 17, its easing of restrictions on the ability of companies to buy back their own shares -- another move aimed at helping restore liquidity to the distressed and volatile market.
And the SEC extended its new requirement for investment managers to report to the agency their new short sales of stocks. The new mandate will continue beyond Oct. 17 as an interim rule, the SEC said, promising to seek public comment on it.
The SEC, however, made a modification, allowing managers to report their short positions to the agency confidentially, rather than requiring public disclosure.
The private investment group said it was "deeply concerned about the disparate treatment" of reporting requirements for short stock positions compared with normal ones.
The companies covered by the short-selling 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., Berkshire Hathaway Inc. and Principal Financial Group Inc.
There were 799 companies named in the SEC's Sept. 18 order. Another 71 were later added, including General Electric Co., General Motors Corp. and American Express Co.
Global Markets Sink After Wall Street Shakeup
SEC to Extend Short-Selling Restrictions
