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Short Sellers Leave Banks Feeling Anxious Following Unprecedented Weekend On Wall Street

According to the New York Times, the heads of several major financial institutions held an emergency meeting over the weekend to urge the SEC to reinstate a temporary rule limiting short selling, the risky but often lucrative practice of betting on a firm’s falling share price.  In July, the SEC briefly halted naked short selling after speculators placed large bets that shares of Fannie Mae and Freddie Mac, the troubled mortgage giants, would decline

The practice of short selling has flourished in the past year.  For example, hedge funds as a whole are down more than 4 percent this year, but hedge funds focused on short selling are actually up 9.76 percent.  Short sellers’ success, along with the decision of investment banking giant Lehman Brothers to file bankruptcy over the weekend, has again thrust the practice of short selling to the forefront of the financial world.  Short sellers bet hard against Lehman Brothers over the past year raising the obvious question: what role did short sellers play in Lehman Brothers’ collapse?  Short sellers argue they do nothing wrong, and merely uncover problems at financial institutions such as Lehman Brothers ahead of others in the market.  On the other hand, critics argue that short sellers have contributed to the speed of the decline of any number of financial shares and are wary of short sellers, who often publicly campaign against entities while standing to profit when the market accepts their negative message.  Although short sellers’ role in the collapse of Lehman Brothers is open for debate, there is no dispute that other financial institutions are now more anxious than ever over the practice.

Full post as published by OverRegd - Securities Regulation and Litigation Blog on September 15, 2008 (boomark / email).