Feds Issue Timeout On Short Selling The Securities and Exchange Commission has issued a temporary ban on short selling of 799 financial industry stocks. Investors short a stock when they think it's more likely to go down than up. The move is a bid to calm jittery financial markets.
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Feds Issue Timeout On Short Selling

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Feds Issue Timeout On Short Selling

Feds Issue Timeout On Short Selling

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From NPR News, this is All Things Considered. I'm Michele Norris. Treasury Secretary Henry Paulson and other Bush administration officials will be sitting down this weekend with congressional leaders. Their job, to stabilize the financial markets in a way that both sides of the aisle can agree on. In the meantime, the Securities and Exchange Commission temporarily banned the short selling of financial stocks. Critics say short selling has been a big reason why bank stocks have taken such a pounding lately. For more on that, NPR's Jim Zarroli reports.

JIM ZARROLI: You buy a stock when you think it's going to increase in value. But what do you do when you think a stock is going to fall? One thing you can do is sell the stock short. You borrow someone's shares, sell them, and pocket the proceeds. Then weeks or months later, if your hunch proves correct and the stock is down, you buy new shares and repay the original owner. Only now you can buy the shares for less than they first cost you, so you've made a profit. Critics say that short sellers are opportunistic. They look for weak stocks and pile on, and that hurts companies by driving down their share price. New York Attorney General Andrew Cuomo this week said he's investigating abuses by short sellers.

Mr. ANDREW CUOMO (Attorney General, New York): We are watching. We are watching very closely. This is a crisis for the country's economic situation, and we're not going to allow it to be exacerbated by illegal short selling.

ZARROLI: And this morning, the Securities and Exchange Commission said it had barred short selling of nearly 800 insurance and financial stocks until October 2nd. Critics say manipulation by short sellers has hurt financial stocks like Morgan Stanley. Doug Roberts of channelcapitalresearch.com says a lot of these companies desperately need capital, but if they're being targeted by short sellers and their stock price is falling, investors are afraid to go near them. Robert says if no one invests in them, their price falls even further until they're forced into bankruptcy.

Mr. DOUG ROBERTS (Founder and Chief Investment Strategist, channelcapitalresearch.com): It's kind of referred to on Wall Street as the death spiral, where kind of like the company is worth more dead than alive.

ZARROLI: So when the SEC announced its temporary ban this morning, it had an immediate impact on stock prices.

Mr. MANUEL ASENSIO (Longtime Short Seller): We can see it. If we just punch up to chart of one of the companies that is on the list.

ZARROLI: Manuel Asensio is a longtime short seller. Hours after the ban was announced, Asensio went on to his computer in his midtown Manhattan office to show me how it was affecting financial stocks.

Mr. ASENSIO: This is Western Alliance Bancorp. And here you see it traded as low as 13.75 dollars this week. And today...

ZARROLI: Well...

Mr. ASENSIO: It had an opening of 27.66 dollars.

ZARROLI: Asensio is critical of the SEC ban. He says short sellers can't really hurt stocks that have real value, not for long, anyway. Good stocks always come back. What short sellers can do is seek out stocks that have some underlying problem the public hasn't fully grasped yet. Asensio says stocks like Morgan Stanley and Lehman Brothers fell because the companies were loaded down with bad mortgage debt that had been concealed from shareholders.

Mr. ASENSIO: If these companies had been more transparent about what they owned and if what they owned was fairly valued, we wouldn't have this problem to begin with. For government to be creating an obstacle to the price-discovery process is not good.

ZARROLI: The SEC ban was praised by Morgan Stanley and other financial companies, who say it will address extreme and unprecedented movements in the market. Doug Roberts of channelcapitalresearch.com is less optimistic.

Mr. ROBERTS: It's just really a temporary measure. I think really what they're trying to do is kind of get some stabilization. The same way that you try - you know, you get somebody who was in an auto accident, you try to stabilize the patient until you get to the hospital.

ZARROLI: Roberts says the ban could work in the short run, but that eventually people who are out to manipulate the markets will find another way to do it. Jim Zarroli, NPR News New York.

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