Wow... Crazy Day... SEC Limits Naked Shorting on Fannie, Freddie, Lehman, Morgan, and Goldman

Wildest day--and I'm not even a day trader :) In what seems like an unprecedented move, SEC is limitting naked shorting of Fannie Mae, Freddie Mac, and the primary dealers (Goldman Sachs, Merrill Lynch, Morgan Stanley and Lehman Brothers):

Christopher Cox, chairman of the Securities and Exchange Commission, said on Tuesday that the regulator will try to limit so-called naked shorting of shares in Fannie Mae, Freddie Mac and primary dealers including Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs. The SEC will issue an emergency order stating that all short sales of shares in these companies will be subject to a "pre-borrow" requirement, Cox explained. This will last for 30 days, he added. The SEC is also planning more rule-making focused on the broader market, Cox said.


I'm not sure what this means for shorts who took positions in the last few weeks, such as William Ackman and others, if they can't deliver the shares. I suspect it probably applies to new positions and it only applies to naked shorting. Naked shorting, for those not familiar, is when you sell short a stock without actually borrowing a physical share. Naked shorting is generally not illegal and some, such as Patrick Byrne of Overstock.com, have argued that it hurts businesses.

The problem faced by financials is that a lot of people (generally the efficent market crowd) perceive market prices as being reality when in fact it may or may not be. In other words, financials depend on trust which comes from the share price. This is one reason some are suggesting that Lehman Brothers should go private. Even though the fundamentals won't change if Lehman were private, it won't be subject to rumours like it is facing now.

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