Wall Street not big on short-selling rule

Alisa Roth Jul 16, 2008

Wall Street not big on short-selling rule

Alisa Roth Jul 16, 2008


KAI RYSSDAL: The stock stories of the day trade under the symbols FRE and FNM. Both Fannie Mae and Freddie Mac shot higher today, about 30 percent apiece. It seems it took the markets a couple of days but everybody’s accepted the notion that the government-backed mortgage companies aren’t going to fail, now that they’re even more government-backed. The Treasury Department and the Fed are standing by with cash.

And the Securities and Exchange Commission has decided to tighten up some rules on short-selling. That is, betting a stock is going to go down. I told you at the end of the broadcast yesterday the SEC’s cracking down on an especially risky variety of short-selling — naked shorting, it’s called. Which has, in turn, prompted a big debate on Wall Street about how much shorting, naked or otherwise, ought to be allowed.

From New York, Marketplace’s Alisa Roth reports.

ALISA ROTH: There’s nothing illegal about short-selling. The worry is too much could force a stock to lose value faster than it would otherwise.

Ted Weisberg’s been trading on Wall Street for decades. He says the SEC should bring back the short-sale rule, also known as the plus-tick rule. It says selling short is fine. But you can’t do it at the absolute rock bottom price.

TED WEISBERG: That rule basically prevented the short-sellers from just pounding the stock down by just hitting every bit in sight.

The rule was only rescinded a year ago. And it doesn’t look like the SEC’s going to go back on that decision. For now, it’s only restricting one kind of short-selling. And on a small number of companies for a limited time.

Bill Fleckenstein is a hedge fund manager. He thinks even that’s too much.

Bill Fleckenstein: Is the SEC going to be able to come up with some rules that’s going to make the price of these financial institutions go up? No. Is the Treasury going to be able to? No? Is the Fed going to be able to? No.

He says that means no amount of regulation will turn the market around. And the government should stop picking on the short-sellers.

Fleckenstein: The short-selling’s not the problem that caused these stock prices to be where they are, so that’s not going to change anything.

Fleckenstein says only more serious issues can push stock prices down and keep them there. Things like poor management. But trader Weisberg isn’t buying it.

WEISBERG: Wall Street is driven by so much of psychology that if the psychology is negative enough and you scare people enough, you can cause a lot of downward momentum.

Executives at Bear Stearns and Lehman Brothers would argue that kind of momentum is something no amount of good management can make up for.

In New York, I’m Alisa Roth for Marketplace.

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