Tuesday, July 15, 2008

Chris Cox Earns His Pay as SEC Chairman

A schematic model of the new rule

Chris Cox today earned his pay as SEC chairman -- proving that he is exceeded only by his predecessor from the 1990s, Arthur Levitt, at making grand gestures that actually mean little.

Today he told the Senate Banking Committee that he is instituting a "pre-borrow" requirement for short-selling Fannie Mae and Freddie Mac. The Wall Street Journal says this afternoon that this "will likely limit short-selling for the two mortgage entities." (A later version of the article backed off from that assertion.) I beg to differ.

No, what it will do is limit naked short selling of the securities -- and, as Bob Pisani points out today, there's no evidence that this great phantom menace is actually taking place in the mortgage stocks.

The SEC is imposing a "pre-borrow" requirement. What that does, as described (in a different context) in a famously indifferent SEC rulemaking called Regulation SHO, is bar short sales "without borrowing, or entering into a bona-fide arrangement to borrow [the shares]. . ."

Since shorts already have to borrow or arrange to borrow shares before shorting, this doesn't do much of anything.

The market greeted Cox's bright idea by pushing down the prices of Fannie and Freddie stocks 27%.

CNBC today asked me to appear today on the air to discuss this totally useless bit of rulemaking. I declined. My feeling is, why contribute to what is plainly a publicity stunt?

UPDATE: The SEC issued at day's end an "emergency order" and made it effective June 21 (must be one heck of an"emergency"). The order extends to all "substantial financial firms." I guess insubstantial financial firms, or substantial non-financial firms, are not worthy of inclusion in this meaningless gesture.

As Joe Nocera puts it, "this is about chasing bogeymen, not getting to the root of any real problem."

I forgot to mention Floyd Norris's discussion of a similar SEC publicity stunt a few days ago -- a Sunday press release on its jihad against "rumors":

In other words, they haven’t yet found anybody who used “rumor-mongering and abusive short-selling” to drive down the prices of financial stocks. So now they will try to find some unfortunate firm that does not have adequate controls to prevent violations, even though they can’t seem to find any actual violations.
They still haven't found any evidence -- there is no effort to do so in the bare-bones SEC release issued late in the day.

I'm not been one of the SEC's biggest fans, but I must say that I have rarely seen such intellectual dishonesty -- bordering on outright fraud, in my view -- from our supposed securities watchdogs. Unfortunately, no one in Congress seems to grasp the issues either.

© 2008 Gary Weiss. All rights reserved.

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