Stocks rally as US takes action

NEW YORK // US market regulators issued an emergency curb on short-selling today, igniting big rallies in financial stocks that have been targeted by sellers as the credit crisis gathered pace. The US ban came a day after the UK Financial Services Authority imposed its own temporary four-month ban on short-selling of financial stocks. National market watchdogs in France, Portugal, and Ireland took similar steps. The US Securities and Exchange Commission ban came after the SEC Chairman Christopher Cox was widely criticised for not acting to control the practice that had led to sharp declines in US and European financial stocks since the onset of the credit crunch. The French regulator AMF said it was also talking to other Eurozone regulators about market dealings, leading to expectations that the ban would snowball. The SEC order followed a formal SEC meeting yesterday night and a separate extraordinary meeting that Mr Cox and other senior officials attended in the Capitol building the same evening. Senior administration officials asked Congressional leaders for additional authority to soothe turbulent capital markets. The US Treasury Secretary Henry Paulson and the Federal Reserve Chairman Ben Bernanke are seeking legislation to give the US government the power to buy up illiquid assets that are plaguing financial companies. "The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets," Mr Cox said in a statement. "This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress." Short-selling involves an investor selling stock in anticipation the price will fall ? in which case the investor can buy the stock back at a lower price. Such a strategy is usually coupled with borrowing the stock that's being sold from an institutional investor such as a pension fund. The US short-selling ban includes commercial banks, insurers and the two remaining big investment banks Goldman Sachs Group Inc and Morgan Stanley. Morgan Stanley shares soared 29 per cent to US$29.11 in early trading, while Goldman jumped 27 per cent to $137.55. The S&P financial index shot up 12.5 per cent. A widely followed exchange-traded fund that tracks the S&P 500 financial sector, the Financial Select Sector SPDR, rose 17 per cent. The UK Financial Services Authority imposed a four-month ban on short-selling of financial stocks yesterday, driving financial stocks there up by as much as 40 per cent. Ireland also announced a ban on short sales. "It's absolutely the right thing to do. These are extraordinary times, extraordinary markets, and they require exceptional measures, and I am particularly pleased it has been put in place," said Keith Skeoch, Chief Executive of Standard Life Investments, speaking about the UK action. "I'm also particularly pleased that it's temporary, and I think that the market should be allowed to settle down and short selling is part of the market and quite pleased that at some point the ban will be lifted." National market watchdogs in France, Portugal, and Ireland took similar steps, but there was no co-ordinated announcement in spite of exchange mergers and new pan-European trading platforms making EU-wide share trading common. The Committee of European Securities Regulators, made up of national watchdogs from all 27 EU states, may make a statement on short selling later today, regulatory sources said. Other countries tightened up rules against "naked" short-selling, which is when investors sell the stock without owning or borrowing it, and buying it back before the trade has settled. In Switzerland the bourse and regulators reminded investors that naked short-selling was not allowed on the Zurich-based SWX exchange. Australia slapped a ban on naked short sales, effective on Monday. The global rally in finance shares was helped by the radical US plan to mop up toxic mortgage debt as authorities continued to take drastic action to halt panic spreading across the industry. "The big armoury is really aimed at it (the financial crisis). There's been massive liquidity injections and now restrictions on the free market economy," said Simon Maughan, an analyst at MG Global. Financial companies had pushed the SEC to end abusive short selling after Lehman Brothers Holding Inc was forced into bankruptcy protection earlier this week, and Merrill Lynch & Co Inc agreed to be bought by Bank of America Corp. Morgan Stanley's chief executive John Mack lashed out at short sellers on Wednesday after watching company shares plunge as much as 42 per cent and seeing prices for its debt-default insurance soar into distressed territory. "What's happening out there? It's very clear to me ? we're in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down," Mr Mack said in a memo. On Wednesday, the SEC issued rules requiring short sellers and their broker-dealers to deliver securities by the close of the business on the settlement date, three days after the sale. Today's SEC emergency action could go even further. "The Commission will continue to consider measures to address short selling concerns in other publicly traded companies," it said. The SEC order will end at 11.59pm eastern standard time on Oct 2, and could be extended for 10 days. The SEC measure can only last a total of 30 calendar days. Under the emergency order, institutional money managers will be required to report their new short sales of certain publicly traded securities. Investors are already required to report significant long positions. The SEC also temporarily eased restrictions to give companies more flexibility to repurchase their stock. *Reuters

Stocks rally as US takes action

US market regulators issued an emergency curb on short-selling, igniting big rallies in financial stocks.