LOL: It keeps getting better. Fed "clarifies" short selling restrictions. You can't, but pros can....

User Forum Topic
Submitted by flu on September 19, 2008 - 8:45pm

LOL.

Cliff notes version:

Short Sell ban on 799 financial institutions is in place for everyone, except institutional(professional) traders.

Translation:
We've decided to shaft most of you taxpayers that want to time the markets by betting against the market, but those traders that need to make money to prop up the earnings for the banks they work for are excluded....

I just find this so interesting.

Previous threads on this topic.
http://piggington.com/letter_from_broker...
http://piggington.com/holy_snickers_you_...

Quote:

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.

http://biz.yahoo.com/ap/080919/sec_short...

Govt trading ban could have unintended results
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.

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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.

"Without offering a flip-side to the price-discovery mechanism, I think there's a pressure built up in stock prices that only gets relieved in a great cataclysm," he said.

Short selling involves borrowing a company's shares, selling them, and then buying them to return them to the lender later, when the stock falls. The short-seller pockets the difference in price.

Although the practice can make markets more efficient and bring in more capital, the government argues that it has widened the scope of the recent financial crisis and contributed to the collapsing values of investment and commercial bank stocks in particular.

Government officials on both sides of the Atlantic have been denouncing hedge funds and other short sellers they say have swarmed over the limp bodies of venerable investment banks and other big companies. New York Attorney General Andrew Cuomo likened them to "looters after a hurricane," and his office is investigating a possible conspiracy among short-sellers to spread negative rumors to pound down companies' stock prices.

The turmoil in recent weeks has swallowed some of the most storied names on Wall Street. Three of its five major investment banks -- Bear Stearns, Lehman Brothers and Merrill Lynch -- have either gone out of business or been driven into the arms of another bank. Many contend that short-selling played a key role in forcing the collapse of these institutions.

SEC Chairman Christopher Cox, who with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke had met with lawmakers at the Capitol Thursday night, acknowledged that such extraordinary measures would not be necessary in a well-functioning market and said they are only temporary.

Cox said Friday his agency "is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets." He said the temporary ban "will restore equilibrium to markets."

The SEC also imposed a new requirement, also temporary, for investment managers to publicly report their new short sales of stocks. And the agency eased restrictions on the ability of companies to buy back their own shares, also through Oct. 2, another move aimed at helping restore liquidity to the distressed and volatile market.

Over the summer, the SEC imposed a 30-day emergency ban on "naked" short selling -- where sellers don't actually borrow the shares they sell -- in the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks. But Friday's ban expanded to all short selling, not just the more aggressive naked variety, and to a much wider universe of companies.

The 799 companies covered by the SEC ban are an A-to-Z of the nation's financial institutions, including the powerhouse investment banks such as Goldman Sachs Group Inc. and Morgan Stanley and commercial banks running the gamut from Bank of America Corp. to Cape Fear Bank Corp. SLM Corp., which is known as Sallie Mae and is the biggest U.S. student lender is on the list, as are Charles Schwab Corp., Berkshire Hathaway Inc. and Principal Financial Group Inc.

Washington Mutual Inc., the nation's largest thrift, which has lost billions from subprime mortgage exposure and seen its shares plunge in recent weeks, also is on the SEC list. So is the NYSE Euronext, the biggest stock exchange, and foreign financial companies whose stock is traded on U.S. exchanges, such as Lloyds TSB Group PLC of Britain and China Life Insurance Co. Ltd.

However, investors still have ways to place bearish bets: by trading in options that turn profitable when a stock drops.

Jim Chanos, a prominent short seller and president of a $7 billion hedge fund, Kynikos Associates, called short-selling a "vital investment strategy" and said banning the practice "will not enhance long-term market integrity."

He argued that investment banks' bad bets on risky assets -- not predatory short-sellers -- were the true cause of the steep declines in the stock price of financial firms.

"Far from being the cause of the crisis, many short sellers were warning months and years ago about problems in this area," Chanos said in a statement.

The new SEC ban also touched smaller investors. Two popular funds that specialize in short selling and are traded on stock exchanges -- ProShares' Short Financials and UltraShort Financials -- were temporarily halted Friday due to the ban. Trading resumed later in the day, but ProShares said it has suspended creating new shares in the funds until further notice.

ProShares Chairman Michael Sapir called the ban "extraordinary" and said it remains to be seen whether it has the intended effect of calming the markets.

"I don't think anyone sees the action today as a long-term solution," Sapir said. "It's a way to calm things down, but it isn't consistent with a free and open market."

The SEC's ban came in concert with Britain's Financial Services Authority, which announced a similar ban there Thursday. Some British politicians had claimed that short-selling was partly responsible for HBOS PLC's abrupt takeover by banking rival Lloyds TSB PLC on Thursday. The ban there was met with a similar reaction as the SEC move -- a mix of relief and skepticism.

"Banning short selling is just a part of a solution," said Nic Clarke, banking analyst at Charles Stanley Stockbrokers. "We view this as a side issue. It doesn't stop the underlying reason for the credit crunch and it doesn't get to the heart of the problem."

AP Business Writer Emily Flynn Vencat in London contributed to this report. Stevenson Jacobs reported from New York.

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FLU, that's a good thing. If
Submitted by Mayer on September 21, 2008 - 2:50pm.

FLU, that's a good thing. If those market makers can't hedge the puts they write with short stock positions, the options market goes haywire. Check out WM and other financials and look at the ridiculous spreads there.

If you can't short, buy puts! If the MMs aren't allowed to short, the spreads will make sure that it isn't worthwhile to be long puts.

Allowing the MMs to short also gives retail investors a chance to profit from negative sentiments in the financials since we can't short directly or get into any of the ProShares ETF at the moment.

Short your bank by taking
Submitted by steveno on September 21, 2008 - 9:27pm.

Short your bank by taking away their funding.

If we take all our extra money out of the banks, they will fail just as fast as if they aren't bailed out. I have already moved my savings to scott trade from suntrust ($80K). So I basically have taken 800K of loans off their books. That's the beauthy of fractional reserve banking. Leverage up 10X and feels great until the market turns, then 10% down wipes you out. Just think if we remove a few more billion in cash from these institutions, it means a run on the banks. They were building up cash in advance/expectation of bank runs. This is one way we can control them by taking away their funding.

I have also converted 3% of my savings to gold/silver in the last few weeks, already have turned 10% profit! I am trying to convert more but there is a shortage of silver and gold coins and limits are being placed on purchases.

Take your money and run. Convert some of it to precious metals, put the rest of it away, only keep the minimum for transactions at the bank....they are not safe and they are all insolvent.

Steveno

Pretty soon they'll pass a
Submitted by peterb on September 21, 2008 - 9:30pm.

Pretty soon they'll pass a law that you cannot sell equities. Only buy them. That way the market will always go up. Problem solved.

Seems like this plan didn't
Submitted by joestool on September 21, 2008 - 11:23pm.

Seems like this plan didn't get thought all the way through: A moratorium on short selling underlying stocks would cause increased demand for put options and tend to raise their premium. If sellers of put options ca'nt short stock to hedge their put selling, this too will tend to increase put option premium. If buying put options as insurance to hedge against a long equity position therefore becomes too expensive, this will tend to decrease demand for buying the equity -- and tend to lower its price.
Then there's option exercise: how do equity options settle if you can't be assigned on in-the-money short calls or long puts if it would result in taking a short position?

The funny thing is that I'm
Submitted by flu on September 22, 2008 - 6:14am.

The funny thing is that I'm already reading about how the ultra short financial ETFs ( SKF ) is already having a premium. Apparently, though inverse ETF's use swap agreements, they can't find counterparties that are available to make this happen.

http://biz.yahoo.com/ms/080919/253823.ht...

There's a palpable sense of fear and uncertainty in the markets today. This helped lead to a number of unprecedented government actions this week including a wide sweeping ban on short sales of 799 financial stocks, tapping into a $50 billion fund to guarantee money market assets, and discussions of creating a Resolution Trust-like vehicle to help shore up the balance sheets of struggling financial institutions. Following the announcement of the ban on short sales, two ProShares inverse funds (including the widely held UltraShort Financials ProShares (NasdaqGS:SKF - News)) ceased trading for a couple hours this morning in order to give the issuer a chance to sort through the implications of these government actions. In this article, we will attempt to shed some light on the situation by addressing the major questions about what happened this morning and how the Securities and Exchange Commission's restriction on short selling financial stocks will affect exchange-traded funds in the future.

If these funds use swaps agreements to replicate inverse returns on their stated benchmarks, then why are short-selling restrictions on individual financial stocks affecting and Short Financials ProShares (AMEX:SEF - News)?

It's true that these ETFs don't actually engage in short selling to produce inverse returns on their stated benchmarks--they typically use swaps and futures, which are contracts to pay a fixed amount of interest in return for a counterparty paying the return on an agreed-upon index (in this case, the Dow Jones U.S. Financials). However, issuers like ProShares cannot find willing counterparties to the swaps they would need to write, as the counterparty would need to hedge the position by shorting financials. With the short-selling restriction in place, there aren't any counterparties willing to assume this huge risk. Keep in mind that most often the counterparties we are referring to are investment banks, such as Goldman Sachs (NYSE:GS - News), Morgan Stanley (NYSE:MS - News), and Merrill Lynch (NYSE:MER - News)--each of which are dealing with their own issues amid the credit crises.

Ostensibly there's an exemption for the ETF/ETN market makers that create and redeem shares to short shares as part of an ETF portfolio hedge, but ProShares does not short equities in any of its portfolios nor does its prospectus explicitly reserve the right to short equities. The language of the emergency order also makes it difficult to tell if a broker-dealer would be allowed to short financial stocks in order to hedge an ETF's swap position. At this stage in the game, with the capital constraints and confidence issues that these firms are currently facing, banks taking the other side of ProShares' swaps may just not want to risk incurring the SEC's wrath.

The bottom line is this: The lack of counterparties means that new swap agreements are extremely difficult to obtain, so no new assets can be invested and no more shares created (see ProShares' press release).

Why did SKF and SEF stop trading?

As previously discussed, due to the short-selling ban on financial stocks, there are no counterparties willing to buy/write the issuers' swap agreements, as the wide sweeping ban on shorting financial stocks means that the counterparty would be unable to hedge away its exposure. The shares of these ProShares ETFs did resume trading in the financial markets today, but they seem to be trading at prices that are not in line with their intraday indicative values. This is to be expected, however, based on the simple laws of supply and demand. Viewed as one of the remaining avenues to gain short exposure to the financial sector, the demand for the SKF and SEF were expected to explode. Essentially, all who were covering their existing short positions in response to the ban were expected to attempt to gain short exposure via these inverse financial sector ETFs.

Thus, ProShares contacted the American Stock Exchange this morning to note that it was not planning to create new shares in light of the SEC's unprecedented ban on shorting 799 financial stocks. The AMEX responded by halting trading on the securities to prevent huge diversions between the indicative benchmark value and market price.

What are the likely effects of this until the end of the short-selling ban on Oct. 2?

As long as investment banks are concerned about capital reserves and the amount of risk on their books, they are unlikely to write swaps that short financials. Thus, existing shares of these inverse financial ETFs should continue trading, but new shares will not be created.

According to its prospectus, ProShares invests in only derivatives (including options, swaps, and forwards), so it does not actually short the stocks itself. An emergency amendment to the prospectus that would allow the issuers to engage in short selling is a possibility, but unlikely in our view.

So long as ProShares is unable to find counterparties to short the index, it will continue to allow only redemptions and not creation of new shares. This will prevent the ETFs from trading at a discount, but it will allow them to trade at a substantial premium (as no authorized participants can arbitrage the premium away by creating new shares and selling them until the premium disappears). We've already noticed the SKF trade at a 5%-6% premium over net asset value.

Even if investment banks stabilize and become willing to take risk onto their balance sheets before Oct. 2, the expenses on these funds will increase substantially as counterparties demand much higher interest payments to take on the unhedgeable risk. This cost would be expressed in the fund's expense ratio.

In our opinion, the only hope of clearing this up before Oct. 2 is either an SEC clarification that broker/dealers can short stocks to hedge derivatives bought by ETF market makers, or a change to the ETF prospectuses that allows the funds themselves to short stocks directly.

What else can I do in the meantime?

Although investors cannot currently short sell individual financial stocks, there is no ban on shorting ETFs that court exposure to the sector, such as the Financial Select Sector SPDR (AMEX:XLF - News) (long financials) or the Ultra Financials ProShares (AMEX:UYG - News) (double-long financials). Individuals could short UYG instead of buying SKF, although we'd note that this leaves open the potential for bigger losses over multiday periods due to the compounding of leveraged daily returns. The Rydex Inverse 2x S&P Select Sector Financial (AMEX:RFN - News) is still trading and creating new shares, although it is also likely to have trouble finding willing counterparties if it faces a wave of new assets flooding in to short financials.

Investors who already own SKF or SEF can sell the funds at any time because trading has recommenced, and since redemptions are still allowed, there is little risk of selling at a discount. In fact, there may be a good chance of selling at a significant premium sometime before this situation resolves itself.

Will any other short ETFs be affected?

There is a chance that other short ETFs such as UltraShort S&P 500 ProShares (AMEX:SDS - News) may have similar trouble if they face a sudden influx of assets necessitating a large number of new swap agreements. However, these funds are not as large as UltraShort Financials (in terms of assets under management), and their underlying indexes have only a 15%-20% stake in the financial shares that cannot be shorted. Thus the risk to a counterparty from entering into those swaps with ProShares is much smaller than on the financial indexes, so broker/dealers are much more likely to continue entering swap agreements on the broad market indexes. The market for these broad index swaps is also much more liquid, so ProShares would be able to find more potential counterparties than with the financial sector index swaps, where the firm represents a much larger portion of the market.

ETF Analyst Bradley Kay contributed to this article.

I am not, nor never have been
Submitted by DWCAP on September 22, 2008 - 1:52pm.

I am not, nor never have been a short seller. I have no idea who this guy is, nor do I really care. I just thought this rant:

http://dailybriefing.blogs.fortune.cnn.c...

was kinda funny and that his disclaimer is a classic. (Furthermore, if you read one guy's opinion on a blog and do anything based solely on that, you are an idiot.)

http://graphics8.nytimes.com/packages/pd...

DWCAP wrote:I am not, nor
Submitted by flu on September 23, 2008 - 7:33am.

DWCAP wrote:
I am not, nor never have been a short seller. I have no idea who this guy is, nor do I really care. I just thought this rant:

http://dailybriefing.blogs.fortune.cnn.c...

was kinda funny and that his disclaimer is a classic. (Furthermore, if you read one guy's opinion on a blog and do anything based solely on that, you are an idiot.)

http://graphics8.nytimes.com/packages/pdf/business/22nocera-blog.pdf

Lol... Someone is pissed... Here's the actual commentary article.

http://executivesuite.blogs.nytimes.com/...

My favorite line from your first article:

"But it forced funds to cover short positions (Wall Street speak for scrambling to buy shares of companies they hate and had therefore shorted). And quantitative funds that use computer models, like Asness’ AQR, undoubtedly did not have a “what if the government bans shorting” contingency built into their algorithms."

Lol...Government 2, Hedge Fund 0