The list of 19 financial firms that the Securities and Exchange Commission (SEC) protected from certain short-selling practices included a host of foreign banks and excluded some notable American banks. Of the 19, over half are based overseas, including three British banks, two Swiss banks, two in Germany and Japan, and one more in France. Two other firms on the list aren’t really banks at all (Fannie Mae and Freddie Mac).
Meanwhile, some notable US national and large regional banks didn’t make the cut, including Charlotte-based Wachovia and BB&T.
Furthermore, according to this weekend’s Wall Street Journal, nine of the 19 firms on the list have less than 1% of their outstanding stock shorted. Hardly a crisis of short-selling for those firms.
So what’s all this about?
Here are some guesses:
1. This is yet another attempt by Uncle Sam to buoy the ailing stock markets.
If this is the case, it worked, at least, it worked for a few days. There is plenty of evidence that the 3.77% gain we saw from the S&P 500 since Wednesday is a so-called “bear-market rally,” meaning that, come Monday (or shortly thereafter), the bears will be back out on the prowl, wiping out these gains.
2. This is an attempt by the SEC – and by extension, the US Government – to kick short sellers in the nuts.
Aside from the curbs placed on short-selling, which is bad enough, the real damage to traders with short positions lies in the rally the SEC inspired. For example, if you placed a short bet on, say, Bank of America on Tuesday, by market close on Friday you would be deep in the red and fending off margin calls from your bankers. Bank of America stock increased over 48% since Tuesday.
3. This is an attempt to rescue the insider and institutional shareholders of these 19 firms.
I should say clearly and up front that I have not done the math or legwork and cannot say who, precisely, the biggest beneficiaries have been from this recent SEC order, but it doesn’t take Sherlock Holmes to figure out that major investing institutions are going to be prominent on that list. These would include State Street Global Advisors, Barclays Global Investors, Vanguard Group, Fidelity Management, among others…the usual suspects. These large institutional asset managers serve as the conduit through which fund managers and rich individuals funnel money into the market. Their good fortune is not a bad thing, necessarily, since their health impacts pensioners and a large number of folks who invest in mutual funds and the like.
Of course, the 19 protected firms also have a large number of insider holders, and these are often the same people who fouled up the works in the first place by exercising slack oversight and ignoring their risk-management people. The SEC’s decision has basically handed these folks a midsummer boon, assuming that financial stocks maintain this rally’s gains. Let’s not forget, too, that these are the same folks, by and large, who the SEC is supposed to be policing.
And then, remember as well the sovereign wealth funds of the Gulf States, which plunked down billions over the past year into first-world financial stocks, only to see a good deal of their investment evaporate as the financial crisis deepened. The SEC’s attempt at regulation also restored billions to their collective balance sheets.
Unfortunately for American stockholders, saving yourself also means saving the incompetents responsible for this mess, as well as Arab sheiks and Swiss bankers, but we’re all just one big, happy family here in the global economy.
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