Friday September 19, 5:07 pm ET
By Marcy Gordon and Stevenson Jacobs, AP Business Writers
Big SEC step to ban short-selling of financial stocks could have unintended consequences
WASHINGTON (AP) — The government’s unprecedented move Friday to ban people from betting against financial stocks might be a salve for the market’s turmoil but could also carry serious unintended consequences.
In a bid to shore up investor confidence in the face of the spiraling market crisis, the Securities and Exchange Commission temporarily banned all short-selling in the shares of 799 financial companies. Short selling is a time-honored method for profiting when a stock drops.
The ban took effect immediately Friday and extends through Oct. 2. The SEC said it might extend the ban — so that it would last for as many as 30 calendar days in total — if it deems that necessary.
That window could be enough time to calm the roiling financial markets, with the Bush administration’s massive new programs to buy up Wall Street’s toxic debt possibly starting to have a salutary effect by then.
The short-selling ban is “kind of a time-out,” said John Coffee, a professor of securities law at Columbia University. “In a time of crisis, the dangers of doing too little are far greater than the dangers of doing too much.”
But on Wall Street, professional short-sellers said they were being unfairly targeted by the SEC’s prohibition. And some analysts warned of possible negative consequences, maintaining that banning short-selling could actually distort — not stabilize — edgy markets.
Indeed, hours after the new ban was announced, some of its details appeared to be a work in progress. The SEC said its staff was recommending exemptions from the ban for trades market professionals make to hedge their investments in stock options or futures.
“I don’t think it’s going to accomplish what they’re after,” said Jeff Tjornehoj, senior analyst at fund research firm Lipper Inc. Without short sellers, he said, investors will have a harder time gauging the true value of a stock.
“Most people want to be in a stock for the long run and want to see prices go up. Short sellers are useful for throwing water in their face and saying, `Oh yeah? Think about this,'” Tjornehoj said. As a result, restricting the practice could inflate the value of some stocks, opening the door for a big downward correction later.