- The Washington Times - Wednesday, August 13, 2008

A government order that temporarily banned a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae and Freddie Mac and 17 large investment banks expired Tuesday.

The companies’ shares have stabilized since the ban took effect July 21. The Securities and Exchange Commission says its order helped prevent stock manipulation, and that regulators will be able to analyze data to gauge its effectiveness. But some experts say that may be difficult to determine.

The SEC instituted the emergency ban last month after a precipitous slide in the shares of Fannie and Freddie, the government-sponsored companies that together hold or guarantee more than $5 trillion in home mortgages — nearly half the U.S. total. The SEC on July 29 extended the ban until 11:59 p.m. Tuesday, saying it would not be extended further.

The agency plans to consider new rules meant to provide additional protections against abusive “naked” short-selling in the broader market of public companies, while allowing legitimate short-selling.

That prospect has raised concern among advocates for hedge funds and private investment companies, which protested against the SEC’s extension of its order.

“What is … more significant is what long-term rules the SEC plans to propose,” Gary Distell, a partner in the financial services practice at law firm Katten Muchin Rosenman in New York, said in an e-mail message.

An expansion of the order into a marketwide rule “would force firms to spend money to automate their systems and would add costs to both brokers and customers in the form of increased borrowers’ fees,” said Mr. Distell, formerly a lawyer at the now-defunct investment firm Bear Stearns & Co. “In this time of economic uncertainty, that would not be a popular outcome for Wall Street.”

Short-sellers bet that a stock’s price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale. The SEC’s temporary order required short-sellers to actually borrow shares before selling them.

SEC Chairman Christopher Cox has said the order helped prevent potential “distort and short” manipulation of stocks, which occurs when rumors and misinformation are used to drive down the price of a stock that has been sold short.

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