Banks Ask to Join SEC Protection Racket

Um, could someone explain to these folks that the monster rally in bank stocks was due to short covering? No. the bankers would rather live in the illusion that the dim outlook for their industry is due solely to the machinations of evil short sellers, not their mismanagement.

Objectively speaking, the downside of a low stock price is greater risk of takeover (these banks should be so lucky) and higher cost in capital raising. The latter is the only remotely defensible reason for this move (assuming it would work, which is highly dubious) since most banks badly need to rebuild their balance sheets.

If their request is granted, bank executives will have fewer people to blame for their (in their mind) depressed share prices. And as many cynics noted, being one of the 19 singled out for protection against naked shorts was an indication that those institutions were in precarious shape. So now the ABA wants the whole industry tarred with the same brush?

From Reuters (hat tip reader Megan):

An emergency move by U.S. securities regulators this week aimed at curbing manipulative short-selling in some major financial firms should be expanded to all publicly traded banks, or it could erode confidence in the banking industry, a top trade group said.

A letter from the American Bankers Association to the Securities and Exchange Commission this week stressed that banks could be vulnerable as they are suffering from the financial turmoil stemming from the downturn in the U.S housing market…

On Friday the SEC, the U.S. markets watchdog, amended its action from earlier in the week but limited the protection to 19 firms including U.S. housing finance giants Fannie Mae and Freddie Mac whose shares plunged on concerns they were undercapitalized.

The rule also applies to the stocks of 17 Wall Street firms, primary dealers that have access to the Federal Reserve’s discount window, such as Citigroup Inc…

The ABA said the majority of the 8,500 banks in the United States are well-capitalized and capital levels are not affected by their stock prices. However, it said people with bank accounts might equate stock drops with the safety of their deposits.

That is the lamest excuse I ever heard. No one every voiced that worry during the S&L crisis, when banks were falling over on a regular basis.

Print Friendly, PDF & Email


  1. Anonymous

    If you look at the list of 19 singled out banks, it looks as though this is the list of the entities that are “too big to fail”. In other words, the government can’t let them fail and therefore wants to prevent having to pay for bailing them out like it did for Bear Stearns. I don’t think it really implies that all of them are in a precarious position, although it is likely that many of them may be. All of the other banks can fail and the Federal Reserve will let them be taken care of by the FDIC.

  2. Anonymous

    This country club of IBs, Deposit Banks, regulators and the political elite s is rotten to the core. It’s like an incestuous grand family now showing their true colors. Exempt PDs from rules of naked short selling. Financial fascism at its purest. All of them be damned to hell! Bernanke’s testimony gave it away when he commented that a higher share price would be beneficial for Fannie and Freddie to raise more share capital. Voila, enter Cox and this Mussolini bill…presto, Anti-trust violations all over the god damn map. We need new police to police the current police.

  3. Steve

    Ah, government price controls. First the Fed steps in to “correct” pricing in the credit markets by pretending the holders’ inflated marks are good. Now SEC will teach the stock market how to price wounded or insolvent financial firms.

    The Fed hasn’t indicated how long it intends to continue its charade. SEC had best be prepared to extend its ban indefinitely, because when it lapses there’s going to be carnage in equities.

  4. Anonymous

    I beleive that the rise in equity prices resulted from the fall in oil prices which itself resulted almost totally from the hope/belief that the Saturday Geneva meeting with Iran, Solana et al and Condi’s man would produce a uranium enrichment pause or other major positive development.

    But what actually happened was something of a disaster, wherein the Iranian rep pretty much said, “FU Bush.”

  5. Yves Smith

    Anon of 12:54 PM,

    Financials rose far more than the market as a whole, and the posts by professional traders I have seen attribute it to short covering.

  6. Tom Lindmark

    The rule change is somewhat a non-event. The circumstances and obvious intent to manipulate markets is not. It represents a dangerous trend in terms of the reaction of the government and the regulators to this whole series of events. These were my thoughts earlier today.

  7. Anonymous

    Re: “bankers would rather live in the illusion that the dim outlook for their industry is due solely to the machinations of evil short sellers, not their mismanagement.”

    We live in a world of illusion spun by The Bush Coup!

    Re: One wonders how, in the absence of any oil laws, the Iraqi oil ministry could even consider awarding any contracts, much less contracts without bids. Even more strange is the fact that a Texas oil baron, Ray L. Hunt, owner and CEO of Hunt Oil Company, a close political ally of President George W. Bush, was able to sign a contract with the Kurdistan Regional Government (KRG) last September, a contract that bypassed the Iraqi central government.
    The Iraqi Oil Minister, Hussain al-Shahristani, has condemned the KRG deal with Hunt Oil in no uncertain terms as an indication of the growing tension between the KRG and Iraq’s central government. Apparently the deal ran counter to American policy as well, something which is being questioned by congressional leaders in Washington. If so, one may well ask why the State Department did not do anything to discourage Hunt Oil from dealing with a regional government in Iraq without clearance from its own officials?

  8. Anonymous

    The list of the companies looks very odd. Allianz SE for instance is mainly an Insurance company based in Germany.

    They guys there didn’t ask for it and didn’t know why they were included. The trading volume in the US for Alilanz shares is minimal.

    In my opinion, this list is a smoke screen for the few companies which really need this kind of “help”.

  9. Anonymous

    My understanding is that the new rules are designed to prevent naked shorting by forcing the short seller to have control of the shares he is selling already locked in, at the time of execution of the short sale, rather than just being able to sell shares before gaining control of the shares. The new rule is actually a good thing.
    The problem is that the refs again are showing selective bias by only protecting the special 19. By their actions, the refs are implying there is a critical market operating deficiency with regard short sales. What should be done is that these new rules should be applied not just to these 19, nor limited to the banking industry as a whole. Rather, the new rules should be applied and strongly enforced across entire markets. Naked shorting is an unfair technique that allows a select few to artificially manipulate the market. This practice should be strongly punished.
    The reason you won’t see anything close to this taking place is because the Security Industry will fight this tooth and nail. They will tell you with a straight face that this practice provides market liquidity. Yeah right. Phony market liquidity is what it’s really all about.
    Look at Check Clearing for the 21st Century Act (or Check 21 Act) as an analogy. One of the reasons that the banking industry pushed for this was that it increased the speed with which checks can clear. Banks could then more quickly and act upon bad checks to reduce losses. So if I repeatedly write checks on my account before the cash is there (even if my intention was to have the cash in place by the time it cleared), and the checks continually bounce, I go to jail. But wait aren’t I just increasing market liquidity?
    How is naked shorting any different than when you write checks before you control the cash and why should it be treated any differently?

  10. Francois

    “How is naked shorting any different than when you write checks before you control the cash and why should it be treated any differently?”

    Because we are ONLY individuals and any contribution one may make to the political establishment does not matter. (unless really loaded)

    But banks…IBs,…broker-dealers…man! They can wine, dine and give mucho dimes to anyone that matters in DC.

  11. Anonymous

    Hello. Basically anyone can still short stock. Its just the naked shorting that is against the law. Nothing wrong with shorting, naked shorting on the other hand is complete horseshit.

  12. Too Short

    The short-selling prohibition should have no effect on options trading, or shorting synthetically. Don’t see how this really anything but a nuisance.

  13. Huff Puff

    Blatant hypocrisy. Many of these protected banks are the worst short sellers, naked or otherwise. Then instead of equality before the law, we give privileges to the offenders? This rule is like giving criminals the exclusive right to bear arms.

  14. Steve

    > The short-selling prohibition should have no effect on options trading, or shorting synthetically.

    It will impact some prop desk strategies and program trades.

    While the SEC's goal is to avoid piling on, I suspect that short interest in these names will actually rise — anticipating that longs will start unloading their positions prior to the expiration of the new rule.

  15. Anonymous

    Follow up to anon @ 9:37am- “How is naked shorting any different than when you write checks before you control the cash and why should it be treated any differently?

    Oh… I got it now. It’s wrong when we try to get a free ride with the institution’s money(writing and issuing checks before we have the cash) -but- but it’s a shrewd investment strategy when the bank does the same thing with the public’s funds (let’s pretend the broker has the shares, so they can sell them, sit on the cash for free).

    Is this how to make a market or Ponzi scheme?

  16. Reino Ruusu

    I don’t get it. Doesn’t a low stock price make getting new equity easier, because it means more dilution for existing shareholders and thus more value, ie. a greater portion of any future profits, for the new equity?

Comments are closed.