- The Washington Times - Wednesday, July 30, 2008

Federal regulators are expected to extend through mid-August a temporary order banning a certain kind of short-selling of the stocks of mortgage finance companies Fannie Mae, Freddie Mac and 17 large investment banks.

Advocates for smaller banks and investment firms also have been urging the Securities and Exchange Commission to expand the order - scheduled to expire Tuesday - to cover additional financial companies. They contend that smaller companies continue to be targeted by aggressive short-selling. But such action will require a formal proposed rule to be voted on by the SEC commissioners.

SEC Chairman Christopher Cox told Congress last week that a proposal expanding the order to cover all public companies will be introduced soon. An agency spokesman declined to comment Monday.

The SEC announced the emergency order on July 15 after a perilous slide in 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 move followed a 13 percent drop in the price of Fannie shares and a 22 percent plunge in Freddie’s on July 10, when a news report said the government had begun contingency planning in the event the companies failed. The next day, Freddie shares plummeted 33 percent at one point and Fannie stock lost 29 percent of its value.

The SEC has said the order could be extended for as many as 30 calendar days if the agency determines that is necessary for the public interest and to protect investors. Industry and government insiders expect that to occur, which would make the order effective through Aug. 14.

Analysts and government regulators blamed aggressive short-selling for exacerbating the recent plunge in Fannie Mae and Freddie Mac’s stock, as well as that of big investment house Lehman Brothers Holdings Inc.

The SEC order prohibits so-called “naked” short-selling of shares of Fannie, Freddie and the 17 large investment banks. The companies’ shares generally have gained since the agency’s announcement.

But shares of regional banks and investment firms nationwide have continued to be targeted, according to the American Bankers Association and other industry advocates.

Short-sellers make a 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 order requires short-sellers to actually borrow shares before selling them.

Fannie Mae shares dropped $1.24, or 11 percent, to $10.31 Monday, while Freddie Mac fell 55 cents, or 6.6 percent, to $7.72.

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