Via NASDAQ Regulatory Alert #2008-022:

NASDAQ issuer Diamond Hill Investment Group, Inc. (DHIL) has voluntarily opted-out of NASDAQ’s list of Covered Securities under the SEC’s Emergency Order, effective today, September 22, 2008. Diamond Hill Investment Group, Inc. will not be subject to the restrictions of the Emergency Order.

DHIL either has nothing to be afraid of from short sellers, or they are happy to pick up their own shares at a cheaper price. Nevertheless, shares of DHIL were up $0.75 (or 0.81%) as of the time of this post. How were their competitors faring? All I see is red (market caps and volume notwithstanding) …

(h/t CR)

UPDATE: The NYSE not so bold: GM, GE added to list. By the time the short selling ban’s first expiration date hits, every company traded will have a new financial services subsidiary that makes them eligible.

Short selling is being banned around the world.

Market regulators are scared that some folks think stocks aren’t nearly as valuable as they appear, and those same regulators will be damned if someone makes a profit from being right.

The road to hell is paved with good intentions, as is the road paved with baleful ones.

Bloomberg sayeth:

The U.S. Securities and Exchange Commission stiffened rules against manipulative short-selling after a market rout pushed American International Group Inc. to the brink of collapse and triggered Lehman Brothers Holdings Inc.’s bankruptcy.

The SEC adopted two regulations today forcing traders and brokers to close out short sales on all stocks, amid concern investors are driving down prices by flooding markets with sell orders. A third rule makes it a securities fraud when sellers deceive brokers about delivering borrowed shares to buyers.

“These several actions today make it crystal clear that the SEC has zero tolerance for abusive” short-selling, SEC Chairman Christopher Cox said in a statement on the rules that take effect tomorrow.

Short-selling now caused Lehman’s and AIG’s collapses? Shame on Bloomberg. Mr. Cox might also have noted that the shares of other firms were often used as bonuses, and they just couldn’t have bankers’ comp under water (as said bankers noted at last week’s meeting).

UPDATE: CEOs of investment banks talking their book (emphasis mine)…

Seeking to avoid the kind fate that led Lehman and Bear Stearns to collapse, John J. Mack, Morgan Stanley’s chief executive, made an unsuccessful effort on Tuesday evening to persuade Citigroup’s chief executive, Vikram S. Pandit, to enter into a combination, according to people briefed on the talks.

“We need a merger partner or we’re not going to make it,” Mr. Mack told Mr. Pandit, according to two people briefed on the talks. Mr. Pandit, a former senior investment banker at Morgan Stanley, said Citigroup was not interested.

When you’re making statements like that, short sellers or no short sellers, your stock is headed for the tank.

UPDATE 2: Hmm…

Editors’ Note [NYT]

An earlier version of this article cited two sources who were said to have been briefed on a conversation in which John J. Mack, chief executive of Morgan Stanley, had told Vikrim S. Pandit, Citigroup’s chief executive, that “we need a merger partner or we’re not going to make it.” On Thursday, Morgan Stanley vigorously denied that Mr. Mack had made the comment, as did Citigroup, which had declined to comment on Wednesday.

The Times’s two sources have since clarified their comments, saying that because they were not present during the discussions, they could not confirm that Mr. Mack had in fact made the statement. The Times should have asked Morgan Stanley for comment and should not have used the quotation without doing more to verify the sources’ version of events.

Maybe the SEC should be regulating the media as well as the market.

If you’ve already planned your weekend, keep reading. Otherwise, you have more important things to do.

• Why the rumors about the Mormon Church buying Facebook made sense - it’s about genealogy business. Personally, I think the Mormon Church is run by very smart folks, and very smart folks don’t buy businesses that don’t justify their valuations via profits.
• In defense of short selling. It only needs defending because the powers that be want to ensure folks the “buy and hold” strategy they were “sold” doesn’t come back to bite.
• A state record channel catfish was caught on a Barbie Rod! I wonder when Mattel will start dumping last year’s model on eBay.
• The CFTC found that a select few speculators were dominating the oil trading market, but they also noted that those few didn’t really manipulate prices. I’ll bet that if oil was trading a $200 a barrel right now, some of their “findings” might have been a little different.
• Banks are still lining up at the pig trough discount window, and their wealthy clients are feeling the pain as private-equity capital calls come in. Didn’t those clients know the banks lent out all that money they were supposed to be safeguarding?

That in turn brings up the question…

• How safe is your brokerage account (yes, brokerages use securities as collateral on loans too)? Guess that depends on your brokerage…

Source: Weiss Research, Inc.

Adieu.

The Wall Street Journal found it depends on who you talk to:

Floyd Norris, in his Marketplace column, noted that the 12 pure U.S. stocks rose 23% after July 15; the S&P 500’s financials rose 22% in the same period.

Still, S3 Matching Technologies, an Austin, Texas, data firm, points out that Fannie Mae’s stock fell 40% and Freddie Mac 41%. Those two stocks, you will remember, provided much of the catalyst for the emergency order.

But academic and corporate research indicate the experiment failed. Perhaps the strongest antiban argument comes from Arturo Bris, a professor at Swiss business school IMD who is affiliated with the Yale International Center for Finance. He tracked the 19 stocks protected by the SEC’s Emergency Order and examined short-selling data provided by the NYSE…

Bris’s most damning finding was that the emergency order impeded market efficiency–in effect, it distorted the “price discovery” process that it was hoping to fix. “The G19 stocks have suffered a significant reduction in intra-day return volatility and an increase in spreads, which suggests a deterioration of market quality,” Bris wrote.

In addition, some unprotected financial stocks–including Washington Mutual–were hit really hard. Bris told Deal Journal of the ban: “I think it targeted the wrong stocks.”

And for those with short-term (no pun intended) memory loss, the purportedly right stocks.

This choice excerpt brought to you by Deal Journal:

Oliver: When the stock collapsed from the high to the low, the public started to blame “the shorts” for that. Is that not a fact?

Whitney: I think from a hindside point of view, they blamed “the shorts.”

Oliver: They blamed the “shorts,” whereas, as a matter of fact, if the prices were inflated, they should have blamed the “longs” for having inflated them?

Whitney: And themselves.

Oliver: But instead of being logical about it, and blaming those who inflated prices, they blamed those who might have deflated them had they the power at that time–that is, the “shorts”?

Whitney: Yes.

Sound familiar?

Forget waiting for “fail to deliver” notices on the short selling of financial issues - some firms are refusing the shorts altogether. It’s a classic case of “you pat my back and I’ll pat yours.”

It’s high time the SEC implements the “No-Loss Sale Rule” instead…

(h/t Big Picture)

Save a trader from a coronary today!

Motivated by the clampdown on short selling of financial stocks, the Wall Street Journal says…

That is one takeaway from Washington’s recent response to market turmoil. By singling out “speculators” who want to push bank stocks down and oil prices up, lawmakers and policy makers reinforce a message that the free market is a wonderful thing as long as it isn’t going against you.

From the list, you could also surmise the SEC is trying to keep last year’s stock bonuses above water, for its buddies of course.

UPDATE: Yet the WSJ contradicts itself a little while later, lobbying for return of the uptick rule. The argument cries out “Save my retirement account from those evil short-sellers.”

Nobody was whining when the financials were reporting billions upon billions in fresh new earnings during the mortgage boom. Now that those financials are writing off the same billions and their stocks are reflecting that fact, deflecting blame is the obvious reaction.

Via Forbes:

What could be the beginning of a broad crackdown on short-sale abuses came Tuesday, when Securities and Exchange Commission Chairman Christopher Cox told a Senate committee the agency was moving swiftly to prevent mischief in the trading of shares of Fannie Mae (FNM) and Freddie Mac (FRE), the battered mortgage finance companies.

The SEC will also be providing cover for brokerages including Lehman Brothers, Goldman Sachs, Merrill Lynch, and Morgan Stanley. I suspect other financial companies, including regional banks (and possibly insurers with heavy exposure to mortgage-backed securities) are not far behind.

For those just joining, the SEC is targeting naked-short selling, a process which by traders short the stock without borrowing the shares as required. It’s usually a quick process - short and cover before settlement date, although sometimes it is just done for efficiency sake. If the stock is widely held, some firms allow shorting from the list - they make sure the stock is borrowed on the trader’s behalf after execution, and they generally have pre-arranged dealers for this purpose. Now, short-sellers will be required to secure the stock before they short, at least for this handful of issues.

I am sure the SEC means well here - they are trying to slow down the “rumor trade.” But they are favoring obvious short targets, using rules that are already technically in place (since 1934), and making the markets somewhat less equitable in the process (i.e. little guys may see more “cancelled” notices on their trading screens while the big guys with direct lines to stock loan departments will continue business as usual).

I wonder how many “fail to deliver” notices were handed back over Fannie, Freddie, and Lehman shorts to push them in this direction.

UPDATE: Barry Ritholtz says it’s akin to “idiots fiddling while Rome burns.” There certainly is a deer-in-the-headlights aspect to all this.

UPDATE 2: Here’s a list of the affected issues…

- Allianz SE
- Bank of America Corp.
- Barclays PLC
- BNP Paribas Securities Corp.
- Citigroup Inc
- Credit Suisse Group
- Daiwa Securities Group Inc
- Deutsche Bank Group AG
- Fannie Mae
- Freddie Mac
- Goldman Sachs Group Inc
- HSBC Holdings Plc ADS
- JPMorgan Chase & Co
- Lehman Brothers Holdings Inc
- Merrill Lynch & Co Inc
- Mizuho Financial Group Inc
- Morgan Stanley
- Royal Bank ADS
- UBS AG