Short Selling Ban Proves Short-Lived

The Securities and Exchange Commission implemented the restriction on September 19 to restore equilibrium to markets. But the ban, which expired last night, clearly didn't work as most of Wall Street felt it only added to market confusion.

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MADELEINE BRAND, host:

From NPR News, this is Day to Day. The federal government has been trying to stabilize the markets and restore investor confidence for weeks now. One of the measures they used to do that, though, has just gone away. The Securities and Exchange Commission has instituted, or had instituted, a ban on short selling of financial stocks, and that ban expired today. Marketplace's Mitchell Hartman is here now. And, Mitchell, this was short lived. What was this ban designed to do?

MITCHELL HARTMAN: Well, back on September 19th, the SEC imposed this rule, and it was to try to curb speculation in financial stocks. It was a ban on short selling. Short selling is when an investor borrows a stock from a third party and immediately sells it on the stock market. The investor's betting that the stock will go down. Later, he or she buys it back, hopefully at a lower price, returns it to the original owner, and the short seller makes a nice profit. Basically, it's the difference between the higher price he sold it for initially and the lower price he bought it back for.

Now, in mid-September, with so many speculators betting that these financial stocks would go down and selling them short, thinking at the SEC went that these companies themselves could be seriously undermined, so the ban was imposed for 14 days. It covered about a thousand stocks, and it expired today.

BRAND: Well, some people say that there should - it should have continued, that short selling - banning short selling was something that maybe should remain, at least until all this financial mess gets sorted out.

HARTMAN: Well, the problem is really when short selling gets out of hand. It's when too many speculators pile on, all betting against stock or even a whole sector like banks. There's actually pretty wide agreement among economists and regulators that short selling can be a good thing, at least in moderation.

Think of it like an outlet for bad news. If a company's got problems, short sellers can force that news out in the open, and the markets function best when everyone knows which companies are having trouble. But there's pretty much wide agreement that things probably were getting seriously out of hand back in September. That's what Charles Elson told me. He runs the Weinberg Center for Corporate Governance at the University of Delaware.

Dr. CHARLES ELSON (Director, Weinberg Center for Corporate Governance, University of Delaware): Short selling has been highly problematic for the financial stocks, as those engaging in it are speculating that the price will go down and through this short selling, it's been argued, have, in fact, forced the price farther below where the price, in fact, should be.

HARTMAN: The problem is, there are people who are making enormous bets on bad news. They leak bad news. The bad news becomes self fulfilling.

BRAND: So, it's a chicken and egg thing. What's the verdict, Mitchell? Did the ban work?

HARTMAN: Well, you know, looking at the numbers, it's hard to argue that it worked out well. The Dow's down 19 percent since the ban started. One fund that tracks financial stocks is down more than 25 percent. You know, some economists basically think that it did some good in the beginning. You know, it probably kept these companies from falling hard and fast, but in the end, they still slid. They slid pretty far down the slope, only they did it a little slower.

BRAND: Thanks, Mitchell. That's Mitchell Hartman of public radio's daily business show, Marketplace.

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