Short sellers pare bets on financials

Times Staff Writer

Short sellers pulled back on their bearish bets in major financial stocks late last month, new data show.

Whether that had anything to do with the Securities and Exchange Commission’s attempt to quash the most aggressive form of shorting in 19 big financial issues, we’ll never know. It could just be a coincidence.

And in the case of at least one of the 19 stocks -- mortgage titan Freddie Mac -- the shorts were confident enough to keep raising their bets.

After six weeks of plummeting bank and brokerage share prices, the SEC on July 15 announced an unprecedented rule aimed at preventing “naked” shorting of 19 major financial stocks, including Freddie Mac, Fannie Mae, Citigroup Inc. and Merrill Lynch & Co.


SEC Chairman Christopher Cox has said the agency has no problem with legitimate short sellers -- bearish traders who borrow stock and sell it, betting the price will drop.

But the SEC, Cox said, wanted to prevent so-called naked shorting, which is selling stock without having the borrowed shares lined up.

Naked shorting can lead to a “bear raid” on a stock, pummeling it mercilessly.

The temporary rule that took effect July 21 required that anyone shorting the 19 stocks “arrange beforehand to borrow the securities and deliver them at settlement.”

Many on Wall Street saw the rule as an attempt to jawbone even legitimate short sellers into backing off.

Whatever the SEC’s intention, from July 15 to July 31 the number of shorted shares declined in nearly all of the 19 issues, according to New York Stock Exchange data reported late Monday.

But the stock market overall was rallying in that period, and rallies often cause some short sellers to close out their bets.

The number of shares shorted on the NYSE overall (covering all listed stocks) fell 1.5% in the last two weeks of July, to 18.3 billion, the first drop since late March.


Specifics on a few of the stocks on the SEC’s list:

* The number of shorted shares of Fannie Mae dropped 5.2% from July 15 to July 31, to 146.4 million. But that wasn’t much of a decline given that the short position has soared from 86 million shares at the end of April.

* There were 54.9 million shares short in Merrill Lynch at the end of last month, a decline of 13.5% from the record high of 63.5 million in mid-July but still up sharply from 42 million at the end of April.

* Lehman Bros. remained a popular short target: The total short position fell less than 4%.


* As for ailing Freddie Mac, the shorts boosted their bearish bets by nearly 13%. The company’s shares have slumped from $8.73 on July 31 to $5.37 on Tuesday.

The SEC’s temporary rule expired Tuesday. Cox has said the agency will soon propose a similar rule to restrict naked short selling across the entire market.





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