Morgan Stanley shares affected by naked short selling

Sep 18, 2008 | Comments 1

Morgan Stanley and Goldman Sachs are the only U.S. stand alone investment banks left after the

Merrill Lynch buyout and Lehman Brothers collapse, but they are feeling the catastrophe of the financial crisis that’s hit Wall Street with both firms shares falling, Morgan Stanley shares dropped 24 percent whilst Goldman Sachs shares fell 14 percent.

Both banks have a reputation of being conservatively run, and ones that fundamentally avoided the bad mortgage-related assets that have caused havoc with the financial system worldwide.
As AIG got bailed out by the federal government it’s clear that the shares are taking punishment, with all the rumours and press regarding the crisis we are living in a market controlled by fear, and the inevitable short selling, it in turn driving the stock price down.

The SEC announced a ban on naked short selling by introducing Regulation SHO. Short selling is the name given to aggressive practice of betting on a stock’s fall without first borrowing shares. But bringing in regulation SHO to combat naked short selling did nothing to control widespread rumours as to who would be the next bank to go, bringing financial institutions share price down with it.

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  • Phil

    This SEC “action” is full of loopholes. See the comments below:

    Overstock CEO Comments on SEC’s New Rules Against Naked Short Selling

    ‘No penalties for financial rapists’ declares Byrne

    SALT LAKE CITY, Sept. 17 /PRNewswire-FirstCall/ — Overstock.com, Inc. (Nasdaq: OSTK) chairman and CEO Patrick M. Byrne comments on the SEC’s September 17, 2008 press release that purports to protect investors against naked short selling.

    Dr. Byrne commented, ‘At the core of the SEC announcement is a decision that if a hedge fund naked shorts a stock, its broker isn’t supposed to let them naked short again. But guess what: they were not supposed to naked short in the first place. Instead of giving the buyer who receives the fail the right to put it back to the naked short selling participant, the SEC once again opts for no penalties for financial rapists.

    ‘If the SEC were anything but a hedge fund bootlick,’ continued Byrne, ‘it would not have taken the half-measure of a pre-borrow requirement applied only as a penalty for those failing to deliver within T+3, but would have instituted a market-wide pre-borrow requirement (as it did in its July 15, 2008 Emergency Order protecting Upper Caste financial firms), and mandatory buy-ins at T+3.

    ‘Some questions for the SEC:

    1. How will the SEC determine whether an institution is in compliance with this rule? The only way to determine compliance is through an SEC audit, something that could only occur months after the fact. In the case of a bear raid, that will be too late.

    2. Where is the ‘buy-in’ requirement? Under the new SEC rules a crooked hedge fund can still naked short sell without settlement and keep that short open indefinitely. It appears that only future naked short sales will require a pre-borrow and that there is still no closeout requirement for failed trades.

    3. What of manipulative day trading? Chairman Cox has admitted that the financial stocks did not have a significant level of naked shorts, but rather collapsed under day trading activities. The new rule fails to address this, the very activity that generated the need for the July 15, 2008 emergency order. The manipulative day trading short seller never has a position open for three days. However, under the new rules, he can still use a single locate multiple times to create the best leverage possible to drive natural investors out of the market.

    4. Where are the penalties? Without meaningful penalties, these rules have no bite. The SEC needs to make sure that the rules are strictly and aggressively enforced — both for failures to deliver that occur within the CNS system and outside the CNS system in ex-clearing trades, where, I suspect, there is naked shorting that makes the object of current SEC concerns look like small potatoes.

    ‘Rule 10b-21, the short selling anti-fraud rule, is a carefully contrived joke. It moves from a low-penalty too-vague-to-enforce rule, to a high-penalty too-vague-to-enforce rule. Without strict and aggressive SEC enforcement (for which the SEC has zero demonstrated record) it will be just more lines of meaningless pabulum in the Federal Register.

    ‘On the bright side, the SEC has eliminated a major loophole in Regulation SHO, the options market maker exception. There was never a good reason why options market makers should have been allowed to naked short and fail to deliver in perpetuity. For taking this long overdue action, I applaud the SEC.

    ‘What is needed is a Congressional investigation into the abortion that is our nation’s stock settlement system, focusing especially on the DTCC. A healthy next step would be to unplug the SEC and move its functions into the DOJ.’