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The emergency order, which effects the securities of 799 financial companies, and was done in parallel with similar action taken by the UK's Financial Services Authority, is effective immediately and will end on Oct. 2nd. However it could be extended for up to 30 calendar days, according to the SEC release.
Some of the investment banks " including the now defunct Bear Stearns and Lehman Brothers, have blamed short sellers for driving down the price of their stocks, which then threatened the independence of Morgan Stanley and Goldman Sachs, the two largest U.S. investment banks, even though they reported higher earnings this week.
A crisis of confidence in brokerage companies has led Morgan Stanley to consider a merger with Wachovia, the Charlotte-based retail banking company. In addition, there are reports that Morgan Stanley is negotiating with China Investment Corporation, a state owned fund to raise its current stake up to 49 percent. Morgan Stanley has already raised money from CIC whose current stake is 9.9 percent of the bank.
"Short selling has ganged up on stocks of Morgan Stanley, Goldman Sachs, and State Street," said Rob Hegarty, managing director of TowerGroup's Securities, Investments & Insurance Practicesin a live Webcast today. Hegarty went on to blame the regulators for a lack of oversight and action this week. "In Tower Group's view, we've actually seen the regulators fall asleep at the switch here," said the firm's practice leader. "The SEC has done very little to intervene to abate the short selling," said Hegarty. The repeal of the uptick rule was a contributor to the volatility this week," said Hegarty. The uptick rule, established in 1938, and was repealed in July of 2007, required traders to wait for a stock to make an upward move before it could be sold short.
