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Short Selling and the 'Plus Tick' Rule of Yore

September 19, 2008 1:07 PM

ABC News’ Alice Gomstyn and Zunaira Zaki report: The news of a potential trillion-dollar federal government solution to the credit crisis is the dominant news story of the day, but let’s not sell the other news short.

Pun intended.

The Securities and Exchange Commission announced today that it is temporarily banning the short selling of 799 financial stocks to “to protect the integrity and quality of the securities market and strengthen investor confidence.”

As of now, the ban is scheduled to hold until the end of the day  Thursday, Oct. 2.

Short sellers, who take bets that a share price is going to fail, have come under extra scrutiny lately, with some arguing that they’ve played  a  large part in the breathtaking plunges this year of once-valuable stocks, with now-bankrupt Lehman Brothers being held up as the most recent, prominent example.

SEC chairman Christopher Cox alluded to those concerns in his statement today about the new ban.

“The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” Cox said.

The SEC’s move follows a similar move by regulators in the U.K. and the announcement by New York State Attorney General Andrew Cuomo that he’s launching an investigation of short selling. (For more on the SEC’s earlier actions on short selling, check out this blog post from Thursday.)

Meanwhile, some are defending the practice of short selling.

“There's nothing wrong with short selling,” said Ted Weisberg, the president of the brokerage firm Seaport Securities.“In free markets, you should be able to sell short.”

Weisberg said that the real problem lies in the fact that the SEC eliminated a rule known as the “plus tick” rule last year. That rule prevented traders from ganging up on a stock that was already falling in price and instead, limited potential short sales to stocks that were on an upswing.

Weisberg said that reintroducing the rule is a better long-term solution than simply banning short-selling.

The SEC hasn’t immediately responded to calls for comment on Weisberg’s suggestion. We’ll let you know if that changes.

UPDATE: The SEC responded to an ABC News request for comment by directing us to a statement issued just before the “plus tick” rule change was set in motion. According to the statement, the change was “designed to modernize and simplify short sale regulation and, at the same time, provide greater regulatory consistency by removing restrictions where they no longer appear effective or necessary.”

September 19, 2008 | Permalink | User Comments (20) | TrackBack (0)

A Tough (Short) Sell

September 18, 2008 4:40 PM

ABC News’ Alice Gomstyn reports: If you haven’t been paying attention to short sellers lately, there are two important things you should know:

1. Some are blaming short sellers for driving down the share prices of vulnerable companies, including the now-bankrupt brokerage firm Lehman Brothers.
2. They’re under some serious pressure from the federal government, the British government and now, a state attorney general.

But let’s backtrack for a minute and take a look at what short selling is: Through short selling, investors can profit off bets that a company’s stock is going to fall by borrowing the stock and then selling it. Assuming the stock’s price falls as expected, short sellers then cover their positions by actually buying the stock at the cheaper price. They then pocket the difference between what they sold it for (the higher price) and what they bought it for.

Because short sellers essentially wager that a company is going down the tubes, they’re not exactly the most popular people on Wall Street or Main Street.

Over the summer, spurred by concerns that short sellers were encouraging the decline of mortgage giants Fannie Mae and Freddie Mac and other firms, the Securities and Exchange Commission adopted a ban on “naked” short selling  --  the act of selling a stock that you don't own and haven't borrowed yet    --  on 17 companies. On Wednesday, the SEC announced it was bringing certain limits on short-selling to the wider market.

Today, across the pond, the U.K.’s Financial Services Authority put a temporary ban on short-selling for financial companies.

Now, just this afternoon, New York State Attorney General Andrew Cuomo said he would be investigating whether traders illegally used false information to push down stock prices (and push up their own profits) for companies like Lehman and insurance giant AIG.

Cuomo told reporters: "Short-sellers should know today that I am watching.”

So are we.

--With reports from ABC News’ Lauren Pearl.

September 18, 2008 | Permalink | User Comments (15) | TrackBack (0)

Why Friday May Be a Volatile Day

September 18, 2008 9:41 AM

ABC News’ Bianna Golodryga reports: The headline this morning reads: "Federal Reserve and other central banks announce further measures to address elevated pressures."

A globally coordinated injection of money from central banks from around the world was announced this morning. Most argue that this may not be enough, and that a globally coordinated interest rate cut is needed now.

What's the downside of a global rate cut? A declining U.S. dollar. This worry is offset, however, by the expectation that global currencies would decline in tandem.

As it turns out, no economy is immune from the ripple effect of the credit crisis. And the only way we can get out of it is with a globally coordinated reaction. As the United States goes, so goes the world economy. If an American consumer sneezes, a Chinese factory worker catches a cold.

This all comes at a particularly bad time.

Not only is September historically the worst month of the year for the stock market. But the third Friday of the month -- tomorrow -- is historically the most volatile.

That's because it marks a quadruple witching day. That's when investors unwind their positions in futures and options contracts before the contracts expire.

Confusing to say the least, but what's important to keep in mind is that quadruple witching days are very volatile, with wide stock swings and heavy trading volume. Not something to look forward to, on the heels of recent events.

And despite the Fed's decision to keep interest rates unchanged on Tuesday, some traders think that, given yesterday's selloff and Friday’s expirations, the Fed could be considering that globally coordinated rate cut with other central banks.

September 18, 2008 | Permalink | User Comments (10) | TrackBack (0)

Want to Buy Lehman? Head to eBay

September 17, 2008 9:00 AM

ABC News' Alice Gomstyn reports: Just because Lehman Brothers has filed for bankruptcy, that doesn’t mean that you can’t still own a little piece of the fading brokerage firm -- and I’m not talking about stocks. Everything from hats to softball jerseys to tote bags to cigar humidors, all emblazoned with the Lehman Brothers name, are now up for auction on -- where else? -- eBay.

So far, a Lehman Brothers logo tie and one of the humidors have fetched some of the highest bids: $102.50 and $203.50, respectively.

A source inside Lehman tells me that he and his co-workers -- none of  whom would cop to posting the items online -- have had a good chuckle about the auctions.

But not everyone is laughing. One of the eBay sellers is peddling a Lehman Brothers “Operating Principles Cube," a block that lists company tenets such as “Demonstrating smart risk management.”

In the product’s description, the seller wrote, “I wish management listened to the same things on this cube! Then my good friends  ...  talented people wouldn't be out of a job.”

September 17, 2008 | Permalink | User Comments (4) | TrackBack (0)

Congress Examines Lehman’s 'Excesses'

September 16, 2008 5:12 PM

ABC News' Scott Mayerowitz reports: Just one day after Lehman Brothers filed for bankruptcy, Congress decided to look into its collapse.

The House Committee on Oversight and Government Reform and its chairman Henry A. Waxman, D-Calif., called Lehman CEO Richard Fuld to testify Sept. 25.

The hearing will “examine the regulatory mistakes and financial excesses that led to the bankruptcy filing. The committee will also explore the impacts of the bankruptcy on financial markets and the United States economy.

Waxman has been active this year looking at Wall Street and excesses. Back in March, his committee looked at how much CEOs of three companies behind the subprime mortgage market make millions of dollars while thousands of Americans lost their homes and investors lost billions of dollars.

September 16, 2008 | Permalink | User Comments (44) | TrackBack (0)

New Wall Street Powerhouses Emerge

September 15, 2008 11:40 AM

ABC News’s Bianna Golodryga reports: With Bear, Lehman and an independent Merrill out of the picture, Morgan Stanley and Goldman Sachs remain the last brokers standing.

Shocking at how quickly this all happened. But not shocking that it actually happened. Over the last decade, brokers have been acting like banks -- and thus became take over targets for larger banks. Bank of America expressed an interest in Merrill this time last year (when Merrill was at $90 a share). I spoke with Bank of America CEO Ken Lewis six or so years ago when he first took over at the bank. Even then, he was stressing a more compact financial services sector.

No doubt this is a big blow to New York and New Jersey economies due to widespread layoffs. But going forward, the banking industry -- while consolidated and much smaller, will most likely be more powerful.

I can't help but notice the similarities to the dot com bubble. There were tens if not hundreds of Internet companies before the bubble burst, leaving only a handful. But the three to five left have a larger market capitalization now than all of the dot com companies at the height of the bubble.

Ken Lewis and Jamie Dimon, of JP Morgan, once viewed as Wall Street’s biggest outsiders, are now the new kings of the street.

The AIG story is much bigger and potentially damaging. This is one that should be watched closely. It will be more difficult for an outside buyer to step in and save the world's largest insurer. And so, while the Government and Fed wouldn't help Lehman out, don't be surprised if they do step in somehow for AIG.

To think: on any other day the big story would be oil which is down dramatically below $100. Inflation is down as well. At least there is some good news for consumers.

September 15, 2008 | Permalink | User Comments (28) | TrackBack (0)

Economic Woes: Will It Ever End?

September 12, 2008 11:46 AM

ABC News Charles Herman reports: With word on the street that Lehman Brothers could be sold off as early as this weekend and with other institutions like Washington Mutual and Merrill Lynch seeing their stock price under assault, it leaves you wondering.

Who is next? When will it end?

While no one can foresee the answer to the first question -- if they could, they’d make a mint in today’s volatile market -- the answer to the second one always comes back to one answer.

The turmoil will start ending after the housing market stabilizes.

But that light at the end of this financial tunnel is still not yet visible.

First off, home prices have to stop dropping so dramatically. As of June, home prices are down 15.4 percent, according to the Case-Shiller Index from Standard & Poor’s.

Next, the number of homes for sale has to decrease. Currently, there are 11.2 months of existing homes for sale or 4.7 million homes with for sale signs in the front yard. That’s just too much. Economists look to six months worth of inventory to promote home price increases.

Then again, even if there are buyers, mortgages have become harder to obtain as banks worry about providing any loan that has the word “mortgage” in it.

Finally, we can’t forget foreclosures. On Friday, we learned that foreclosures shot up 27 percent in August compared with a year ago. There are more than 303,800 homes in some stage of foreclosure, according to RealtyTrac, the largest number of homes in some stage of foreclosure since the group started tracking foreclosures in January 2005.

Taken together, these are all preventing a recovery in the housing market. Economists and other housing analysts now believe we could see the bottom sometime in 2009. Unfortunately, there won’t be a press release announcing it, so all of us will have to read the housing tea leaves to uncover when this will all end.

Until then, expect more bad news from Wall Street and, increasingly, Main Street.

September 12, 2008 | Permalink | User Comments (55) | TrackBack (0)

WaMu's Fighting Words

September 12, 2008 10:14 AM

ABC News' Alice Gomstyn reports: The time has come: WaMu is fighting back.

When I was working on a story Wednesday about analysts questioning whether the housing crisis would sink Washington Mutual, the bank stayed mum. But by Thursday evening, it had issued not one but two statements defending its financial health.

The first was a forecast for the bank’s third-quarter performance. The bank said that it expects to write off less in bad loans this quarter than in the quarter before -- $4.5 billion vs. $5.9 billion.

That might be cold comfort to some,  but the bank also said that, despite the expected write-offs, it “continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability.”

WaMu’s second statement, issued about two hours later, disputed the decision by the credit rating agency Moody’s to lower the bank’s investment grading.

The bank called Moody’s move “inconsistent with the company’s current financial condition.”

“The action by Moody’s appears to reflect the current uncertainty in the markets, rather than a thorough evaluation of Washington Mutual’s business, the strength of its national franchise and the steps it is taking to return to profitability,” the bank said.

WaMu, no doubt, is attempting to quell the perception that it's yet another financial firm headed for a meltdown, but it’s unclear how effective its efforts will be. Fred Cannon, an analyst with Keefe, Bruyette & Woods Inc., suggested to The Wall Street Journal that the efforts could backfire.

"By needing to make the statement,” he said, “it underscores a lot of the concerns.”

Stay tuned.

September 12, 2008 | Permalink | User Comments (57) | TrackBack (0)

Mortgage Rates Fall, Saving Homebuyers Thousands

September 11, 2008 11:02 AM

ABC News' Scott Mayerowitz reports: While shareholders might have lost out in the federal government’s bailout plan for Freddie Mac and Fannie Mae, people looking for a new mortgage might have won big.

The rate for a 30-year fixed mortgage this week fell to an average of 5.93 percent, according to Freddie Mac. That’s down from 6.35 percent just last week.

A family with a $200,000 mortgage taken out last week at 6.35 percent would have monthly payments of $1,244.47. At this week’s rates, those monthly payments drop $53.35 to $1,190.12

That $50 might not seem like much, but the interest savings over 30 years is actually pretty substantial: $19,568.30.

Also, keep in mind that last year at this time, the average 30-year mortgage was 6.31 percent. Since that time the Federal Reserve has cut interest rates several times but mortgage rates never followed because banks shaken by bad loans were hesitant when making new ones.

Frank Nothaft, Freddie Mac’s vice president and chief economist, said these new, lower rates “will help to spur home purchases and loan refinancing in coming weeks.”

Given falling home prices and continued foreclosures this might just be the shot in the arm that the housing market needed.

September 11, 2008 | Permalink | User Comments (13) | TrackBack (0)

For Sale to Foreigners: Las Vegas, Houston?

September 11, 2008 10:30 AM

ABC News' Alice Gomstyn reports: Real estate developers in cities outside of New York have a message for foreign investors: Wish you were here!

During an international real estate conference held (ironically) in New York City, a handful of developers lead a session called “Beyond New York City: A Look at Other Top Cities for U.S. Real Estate Investment.”

With the credit crisis leaving so many in the United States tight-fisted, developers – much like U.S. banks – are looking abroad for more investment.

On Wednesday, their basic message was this: Times may be tough but there are still good buys in the United States and they’re not just limited to the Big Apple, long a favorite of foreign investors who in the last year have snapped up the city’s historic Chrysler and Flatiron buildings.

At the session, developers extolled the benefits of cities like Las Vegas and Houston, among others.

Sin City has seen a sharp drop in its recent gaming revenue lately, but the city’s population is still increasing, said Paul Murad, the president of Metroplex Group. Murad also touted the city’s growing furniture and alternative energy industries.

David Goswick, the principal of Houston-based Historic Real Estate, said his city was tops in job creation and has been ranked as one of the best places to live by several publications.

I checked in with Goswick after the session to see whether he really thought Houston had a chance to rival New York in the real estate investment world. Not surprisingly, he stayed upbeat and on message.

“It’s not in the hip status of New York City,” he replied, “but it’s certainly emerging.”

September 11, 2008 | Permalink | User Comments (16) | TrackBack (0)