The SEC passed a temporary emergency order on July 15 that barred the short sale of publicly traded securities of 19 substantial financial services firms in response to what the Commission described as “unusual and extraordinary circumstances” in which markets have been illegally manipulated through “the dissemination of false rumours”.
The emergency measure, which was set to expire on July 29 but has now been extended to August 12, is in response to the ongoing rumours of liquidity difficulties and of a crisis of confidence among counterparties that brought down Bear Stearns and have more recently dogged other firms.
Among the 19 entities protected under the order are some of the institutions that have seen their equity prices slide most precipitously in recent weeks and months, including government-sponsored enterprises Fannie Mae and Freddie Mac, and securities dealer Lehman Brothers.
According to figures from Texas-based market data provider S3 Matching Technologies, the order has been largely effective, with the shorting of the 19 stocks falling by 70% in the past fortnight. It seems likely SEC chairman Christopher Cox will push for the extension of the order in addition to expanding the remit of the directive to cover more, or perhaps all, SEC-regulated firms.
This is despite claims from some trade associations that the logistics of essentially barring short-selling in the US simply drive internationally active institutions to conduct the business from overseas and beyond the SEC’s jurisdiction. Others argue that short-selling plays a vital role in the healthy functioning of capital markets, acting as a moderating influence in market booms.
Meanwhile, media reports in the US have claimed the SEC has served subpoenas to around 50 hedge funds and investment banks requesting phone transcripts and all email messages that mention Barclays, California-based bond fund Pimco, Chicago-based hedge fund SAC Capital Advisors or the Federal Reserve’s lending facility, as part of its investigation into the source of rumours dogging Lehman Brothers.
Both SAC and Pimco were rumoured to be pulling out of conducting further business with Lehman, while the dealer was alleged to be in such a tight funding position that word spread across Wall Street it was borrowing funds directly from the Fed. Barclays was also speculated to be planning to purchase Lehman for substantially less than its market valuation, another whisper that has proven unfounded.
The SEC hopes to track down the source of the speculation by comparing transcripts to uncover a common thread. Should that thread lead back to a single institution with significant current or former short positions against Lehman Brothers or Bear Stearns’ equity, it is likely to face some awkward questions.See also: SEC bans naked short selling of financial stocks
Lehman removes president and CFO as share plunge continues
BSAM managers indicted for fraud
The week on Risk.net, July 7-13, 2018Receive this by email