TO BE NOTED: From the NY Times:
"Some Revile Plan to Limit Short-Selling WASHINGTON — Responding to the depressed financial markets, regulators for the second time in less than a week are preparing to take steps that could have the effect of temporarily shoring up stock prices. But in the process, some critics say, the measures could undermine the integrity of the markets.
On Wednesday, the Securities and Exchange Commission plans to announce several proposals to permanently restrict traders from making bets that stock prices will decline when those prices are already dropping.
The proposed restrictions on these so-called short sales follow a lobbying campaign by financial institutions and other companies, which have experienced sharp declines in their stock prices, and their allies in Congress.
Short-selling is the practice of borrowing stock and selling it in the hope that its price declines. If it does drop, then the seller profits by buying it back at the lower price and returning the borrowed shares.
Some companies and Wall Street executives have blamed short-selling for needlessly accelerating declines in stock prices and contributing to the demise of companies like Bear Stearns and Lehman Brothers.
Other market players disagree. They say short-sellers are the market’s whistle-blowers, and their stock trades and skeptical analyses of corporate balance sheets are essential to the efficient functioning of the markets. Many large investors also use short-selling techniques as a hedge to protect them against losses in declining markets.
Officials were working through the weekend to draft several possible rule changes, including a tougher variation of a former rule that prohibited short sales while a stock price was declining. That rule, known as the uptick rule, was put in place in 1938 in response to the market turbulence of the Great Depression. It was repealed two years ago. The uptick rule was more restrictive for short-sellers trading stocks listed on the New York Stock Exchange than those trading on Nasdaq. But one of the new proposals could change that and make it more onerous for short-sellers on all exchanges.
The S.E.C. also plans to announce that it is considering a proposal by the major exchanges that would impose restrictions on short-selling only after a stock suffers a daily drop by a specified percentage.
Last year the commission imposed a series of temporary and hastily drafted restraints on short-sales after heavy pressure from Wall Street and the Treasury secretary at the time, Henry M. Paulson Jr.
The move this week follows the decision last Thursday by the Financial Accounting Standards Board to give banks greater discretion in putting a value on their sharply declining mortgage securities.
The standards board initially resisted making changes to the so-called mark-to-market rules, but quickly relented after its chairman, Robert H. Herz, came under withering attack by lawmakers.
The slumping financial markets have been rebounding steadily in the last month for many reasons, including the regulatory and legislative decisions in Washington. The Dow Jones industrial average closed on Friday above 8,000, a major gain from the 6,500 level of four weeks ago.
Examining short-selling practices has been a high priority for the S.E.C.’s new chairwoman, Mary L. Schapiro. She said in a recent interview that even before she arrived at the commission, she had heard from thousands of investors and others that the elimination of earlier restrictions had led to greater market volatility.
“This is a tough issue and that’s why we’re going to be very deliberative,“ she said last Friday. “You won’t see emergency orders or midnight proclamations. We want to go through the regular rule-making process and understand whether there is a nexus between removing” the earlier restrictions and undermining investor confidence.
There has also been growing political pressure for the commission to act.
A bipartisan group of six senators, led by Senator Edward E. Kaufman, Democrat of Delaware, has demanded tighter restrictions over short-sellers. Mr. Kaufman, who took the seat of Vice President Joseph R. Biden Jr., made short-selling restrictions the first piece of legislation he introduced.
But supporters of unfettered short-sale trading have said that the practice is a convenient scapegoat and that new restrictions are simply punishing traders who have legitimate reasons for believing that some companies have had overvalued stock prices.
They have also said that the changes in the accounting rules and the proposals to restrict short-sellers threaten to undermine the independence of the regulators and show their willingness to buckle under heavy political pressure.
“It’s unsettling that Washington continues to focus its efforts on issues that have nothing to do with causing the crisis such as short-selling or stricter and more transparent accounting measures,” said James Chanos, president and founder of Kynikos Associates, a hedge fund company that specializes in short-selling. “If anything, both practices should be encouraged.”
Officials said that one of the proposals to be announced on Wednesday would be based on the best bid price of a share of stock and the other on the last price. The different approaches reflect the differences between the Nasdaq trading rules, a dealer’s market where stocks are traded electronically at ranges set by hundreds of market makers, and the New York Stock Exchange, a modified auction market, where the price is set centrally.
The purpose of the old rule was to prevent short-sellers from accelerating a declining market. Under that rule, short-sellers had to execute their initial trade at or above the last trade, as long as that trade was higher than the previous transaction, for companies listed on the New York Exchange.
But for Nasdaq companies, short-sellers could sell at any price so long as the trade was executed after the “best bid” price of the share had been raised from the previous best bid. As a result, the uptick rule had a far more limited effect for short-sellers interested in trading the stock of Nasdaq-listed companies.
In recent days, the commission has received comments about the plans to curtail short-selling. In an about-face, the operator of the New York Stock Exchange, NYSE Euronext, joined by several other large and small exchange operators, asked the commission to reinstate a version of the old uptick rule. The exchange said it was necessary to curtail abusive short-selling that had harmed investors and listed companies.
But in proposing to repeal the old rules two years ago, the New York exchange wrote that “short-sale price restrictions have become not only unnecessary, but also their continued maintenance will serve only to interfere with the mechanisms of an efficient market.”
Larry Leibowitz, an executive vice president at the N.Y.S.E., said the exchange’s new view was the result of its experience over the last year.
“We have seen conditions that we never saw before,” Mr. Leibowitz said. But opponents of the restrictions said that the temporary rules from last year might have briefly halted some stock declines, but that they were counterproductive.
“When you have these sorts of restrictions you may have a little spark in the market,” said Eric W. Hess, general counsel of Direct Edge, which claims to be the third-largest stock market in the United States. “But that perception quickly evaporates.”
Mary Schapiro just started speaking to the Society of American Business Editors and Writers convention in Denver. I’ll be posting highlights here:
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“In explaining the decision, the S.E.C. accountant, Conrad Hewitt, said such securities were “hybrid” securities with equity and debt-like characteristics that presented a particular challenge to banks.”
That’s why I don’t like TARP, it’s a hybrid plan. Expect it to present a particular challenge to taxpayers. By the way, the banks are doing a fair job of lobbying considering their supposed positions.
— Posted by Don the libertarian Democrat