SEC bans short selling for financials – Sep. 19, 2008

Agency puts temporary halt to trading practice that ‘threatens investors and capital markets’ for 799 financial companies.

NEW YORK (CNNMoney.com) — The U.S. Securities and Exchange Commission took what it called “emergency action” Friday and temporarily banned investors from short-selling 799 financial companies.

The temporary ban, aimed at helping restore falling stock prices that have shattered confidence in the financial markets, takes effect immediately.

“This will absolutely make a difference,” said Peter Cardillo, chief market economists at Avalon Partners. “Short sellers are going to have to cover their positions very heavily.”

Short sellers borrow stock with the aim of selling it, then buy it back at a lower price, hoping to pocket the difference. The commission said short sellers add liquidity to the markets during normal conditions, but recent unbridled short-selling has contributed to the recent tailspin in the stock market.

Thank you, thank you, thank you.

Normally, I’d be wary of this steps like this, but in this case, I really do believe that short-sellers and rumor-mongerers have been more responsible for the condition of the market than the actual underlying exposure.

Rather than allowing many financial institutions to unwind some of their more toxic positions in an orderly manner, the rumors are forcing companies into a situation where a bailout is necessary; when it might not have been otherwise.