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Wall Street clampdown on the rogue traders
Simon English, City Correspondent18 Sep 2008
Wall Street watchdogs are clamping down on the rogue traders accused of destabilising the global banking system.
In response to desperate claims for action from big American banks, the Securities & Exchange Commission is to enforce tough new rules against short-sellers - the investors who bet that shares are going to fall.
Short-selling is a legal tactic which is seen as perfectly legitimate in normal times, but it is increasingly becoming a cause of concern.
Critics say the short-sellers actively try to force share prices down, sometimes by spreading false rumours about the health of large companies.
At the moment this is seen as a serious risk given the extent of the credit crunch and the panic that surrounds even the biggest banks. Commission chairman Christopher Cox said hedge funds and other investors must now disclose their short positions every day.
The agency is also stepping up its investigations into alleged market manipulation, sending subpoenas to 50 hedge funds it suspects may have been conspiring to force down share prices.
Short selling occurs when a trader sells shares borrowed from other investors. They then hope to buy them back later at a reduced price - the difference between the two prices being profit. Edward Yingling, president of the American Bankers Association, welcomed the new rules which come into force immediately. "This needed to be done yesterday frankly," he said. "We're in a very dangerous situation."
Short-sellers such David Einhorn are implicated in the demise of Lehman Brothers and the near collapse of American mortgage giants Fannie Mae and Freddie Mac.
New York senator Hillary Clinton also backed the moves, saying the rules would protect thousands of jobs in the city and save it as the world's leading centre of finance. By forcing the shortsellers to disclose their positions so often, the commission hopes the effect of rumour mongering will be much reduced. In Britain, HBOS and others have claimed to be victims of market manipulation, with traders spreading gossip about its finances.
Rebel with a cause
TO SOME, short seller David Einhorn is a ruthless spiv who targets leading companies and tries to force down their share price. To others, he is a rebel hero, picking holes in the strategies of overpaid chief executives. His Greenlight Capital fund has soared in value since he began in 1996, making a fortune for investors and for himself.
His biggest battles have been with Allied Capital and Lehman Brothers. The new Wall Street rules may go some way to stifling his activities.
Reader views (3)
So George are you saying that Goldman Sachs is a bad company? On what grounds?. It is profitable, not overexposed to the subprime market and has the back up of depositers. Yet it is being targeted by short sellers. Why? Because there is concern that banks are not lending each other money and this makes GS vulnerable to raising money? Does that make GS "bad" and so worthy of attack or simply a victim of a loss of market confidence due to external factors?
- Mrs Ben, London, 18/09/2008 18:48
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Short sellers only hasten the falls of bad companies, they don't turn good companies into bad companies. If short selling was banned, it would suddenly result in instantaneous collapses once a bad company was outed as all of the regular shareholders rushed for the door at the same time.
Regulating against them would be akin to regulating against the symptom rather than the disease.
The logical extension of regulating against short selling in order to prop up share prices, would be to ban all forms of selling and only allow buying of shares. Which is of course, impossible.
- George, London, 18/09/2008 13:16
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It's incredibly immoral that as a society we've allowed to flourish a system that rewards the destruction of companies and lives. capitalism will eat itself.
- Iain, Covent Garden, 18/09/2008 13:08
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