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Britain has banned short-selling -- when investors borrow company stock to sell it -- in financial shares and warned it could extend the ban to other sectors in order to steady the markets.
Across the Atlantic, New York Attorney General Andrew Cuomo said Thursday he's launching a "wide-ranging" investigation into short-selling on Wall Street, particularly in financial stocks.
The move comes after the Federal Reserve and five other central banks -- including the Bank of England -- carried out a co-ordinated intervention pouring billions of dollars into the money markets to try and get them working
again.
The coordinated makes clear that blame for the current global financial crisis does not just lie at the door of irresponsible lending by banks, notably fuelling housing bubbles like those in the United States and Britain which have now gone into reverse.
Some experts say "naked short" sales in which the investor has not borrowed the sale but intends to do so, contributed to driving Lehman Brothers into bankruptcy, and may have played a role in the failure of Bear Stearns and near collapse of AIG, Fannie Mae and Freddie Mac.
In New York, Attorney General Cuomo stressed that short selling remains legal, but said he intends to use New York's Martin Act to prosecute short sellers who spread false rumors and engage in other improper conduct.
The attorney general said he's looking into short-selling in a number of financial firms, including Lehman Brothers, American International Group (AIG), Goldman Sachs and Morgan Stanley.
Cuomo also called upon the U.S. Securities and Exchange Commission to temporarily suspend all short-selling on financial stocks, preferably for 30 days. This is allow markets to stabilise and hopefully root out short sellers who spread false information.
In a similar move, Britian decided to ban short-selling and told all investors holding short positions totalling more than 0.25 percent of a financial company's total shares to disclose details of those positions from Tuesday.
The new rules will be reviewed in 30 days but will remain in place until January 16, 2009, after a comprehensive review of rules regulating short-selling.
"While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets," FSA chief executive Hector Sants said in a statement.
"As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector."
"The FSA stands ready to extend this approach to other sectors if it judges it to be necessary," it added.
The FSA announcement came just hours after British bank Lloyds TSB agreed to buy rival HBOS for 12.2 billion pounds (US$21.8b)in a rescue takeover.
HBOS, or Halifax Bank of Scotland, is the latest global bank to fall foul of the ongoing credit crunch following the collapse of US group Lehman Brothers, the sale of Merrill Lynch and the rescue of insurer AIG earlier this week.
Short sales are designed to profit from a declining share price by an investor or broker arranging a sale of a share he does not own but has been "borrowed" on an agreement to return the share at a future date.
In effect, the investor or broker is betting that the share price will fall and that they will make a profit.
Short selling as result can put enormous pressure on markets if sentiment turns negative -- as it has done over past months in the credit crunch -- and has been blamed in part of the dramatic fall in share prices seen in once mighty investment banks and other financial groups.
The Securities and Exchange Commission said the new rules "strengthen investor protections" against this type of sale.
Analysts say the new rules curbing speculative sales that aim to profit from falling share prices may help curb the volatility that has been roiling the market.
"Implementation of the new rules, effective today, should stem the massive bear raids that dramatically accelerated the huge drop in share price of several financial institutions," said Fred Dickson, chief market strategist at DA Davidson & Co.
Short sales are designed to profit from a declining share price by an
investor or broker arranging a sale of a share he does not own but has been
"borrowed" on an agreement to return the share at a future date.
Most short sales are not illegal but some naked short sales can allow traders to manipulate the market to force down prices, according to the SEC.
The latest US rules impose penalties on traders who fail to deliver promised securities on the agreed settlement date, the SEC said. A broker can also be banned from further short sales if the rule is violated.
The new regulations also impose penalties for any fraudulent representations by those using short sales. - CNA/sf
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