New short-selling rules helping who?

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

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