SEC Tries To Intimidate Short Sellers

What do I think is really going on here?  I think that regulators are very, very concerned about the collapse of the stocks of major US financial institutions and are grasping at straws as to what to do about it.

– Whitney Tilson (subscription required), Founder, The Tilson Funds

Yesterday in testimony before Congress, SEC Chairman Christopher Cox announced beefed up enforcement against “naked short selling” to prevent manipulation and rumors from driving down the stock prices of major US financial institutions.  Fannie Mae, Freddie Mac and 17 large US financial institutions were singled out for protection.

For those of you who trade in your pajamas, don’t worry, you’re okay.  “Naked short selling” refers to selling shares short that you don’t have an exclusive agreement to borrow.  Apparently, the same shares are frequently sold short many times over.  This rule attempts to prevent that, allowing shares to only be sold short one time, effectively reducing the supply of shares that can be sold short.

But, as Whitney Tilson points out, what this is really about is that the financial stocks are getting crushed, taking down the stock market with them and creating a crisis of confidence, and the government wants to put an end to that.  So they are resorting to bullying and intimidation and basically saying to big short sellers of the financials: “Watch your back son.”