Subscribe in a readerSEC Takes Drastic Action: Bans Short SellingPosted by ahc99 on September 19th, 2008
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Now you know things are serious. The Securities and Exchange Commission (SEC) is planning to place a temporary ban on short selling. Currently the ban is only on the short selling of 799 financial stocks and until October 2, 2008, but with the way the financial stocks are doing, the ban is likely to be extended until future notice. I don’t recall the SEC ever doing this before; the consequences of this ban will be epic.
Just to give some background, short selling is when an investor sells a stock expecting it to fall in the near future, after which the investor will then buy the stock again at the lowered price and turn a profit. A more extended explanation of short selling can be found at Investopedia.
But why has the SEC suddenly decided to ban short selling and why now? It’s because a lot of the public has been blaming the short sellers for the current instability of the financial sector. They believe that the short sellers have maliciously targeted many of the distressed banks (such as Lehman Brothers and Morgan Stanley) and drove their stock prices into the ground, causing them to be worthless just so they could buy in again and turn a profit later on when their prices go up. Incidentally, speculators can go both ways, as seen by the rise and fall of oil.
Personally, I believe that these short sellers have definitely contributed to the credit crisis we are seeing right now. Of course they are not the only reason, selling subprime mortgages to unfit owners also comes to mind, but their effects cannot be discounted. Why you say? Because many of the troubled banks right now need short-term market funding, such as Morgan Stanley, but they have not been able to get any with all these speculators anticipating them to collapse, causing their stock prices to plummet and their credit ratings to be downgraded. Take away these short-sellers and poof! part of the problem is gone.
This might seem very simple and you might be wondering if part of the problem could have been this easily solved, why hasn’t the SEC done this sooner? Well it is probably because they realize this will be followed by a ginormous backlash with all sorts of market players and hedge fund managers and owners hopping mad. Yes, they will definitely try to fight it and we’ll see whether the SEC can hold its ground and not budge. I doubt anyone will argue in the short sellers favor though, with the way the stock market has been acting recently. And this will undoubtedly provide at least some type of short term relief to the banks, which need all they can get right now.
Sure is an interesting time on Wall Street eh? I wonder what catastrophe will hit tomorrow. If stock prices continue to fall then that means I can buy more into my 401(k) at a discount.