WASHINGTON – The Securities and Exchange Commission took the dramatic step early Friday of temporarily banning the routine practice of betting against company stocks.
The move, announced on the agency's Web site, may well be unprecedented and a reflection of regulators' concern about the widening scope of the financial crisis as entreaties come from all quarters to stem a swarm of short-selling.
In the announcement, the commission said it was acting in concert with the U.K. Financial Services Authority in taking emergency action to "prohibit short selling in financial companies" to protect the integrity of the securities market and boost investor confidence.
"The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets," SEC chairman Christopher Cox said in a statement. "The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets."
The move, he said, would not be necessary in a well-functioning market and is only a temporary step that is part of the actions being taken by the Federal Reserve, the Treasury and Congress.
A recent wave of the market maneuvers — where traders seek to profit by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big companies.
Cox, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke held a closed-door meeting Thursday night with members of Congress.
The SEC said its action calls a time-out to aggressive short-selling in financial stocks and said it would consider measures to address short-selling in other publicly traded companies.
Short-selling, in a normal market, contributes to efficiency while adding liquidity to the markets. But now, the SEC said, it appears that "unbridled" short-selling was contributing to the sudden price declines in the securities of financial institutions.
On Wednesday, New York Sens. Charles Schumer and Hillary Clinton, both Democrats, appealed to the SEC for such a temporary ban, saying the watchdog agency "has the power to take a temporary but important step to help restore a measure of stability to our financial markets."
The California Public Employees' Retirement System, the nation's largest pension fund, said that starting Thursday it is no longer lending out shares of Goldman Sachs Group Inc. and Morgan Stanley, joining a growing number of public pension funds that are attempting to curb short-selling of two investment banks' stocks.