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[JoeSmith]

NEW NSS RULES BEING DRAFTED[/B]

SEC to Limit Short Sales of Fannie, Freddie, Brokers (Update2)

By Jesse Westbrook and David Scheer
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July 15 (Bloomberg) -- The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, Freddie Mac and Fannie Mae as part of a crackdown on stock manipulation, the agency's chairman said.

Christopher Cox told the Senate Banking Committee that the agency will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale. The emergency order, to be in effect for 30 days, will bar the practice called naked short selling, in which traders avoid the financial cost of borrowing shares when betting they'll fall.

Cox said the SEC will draft rules ``to address the same issues across the entire market.'

Hedge-fund manager William Ackman, who oversees $6 billion at Pershing Square Capital Management, is among those betting that shares of Fannie Mae and Freddie Mac will fall. There's no indication he is engaging in naked short selling, in which traders never borrow shares from their broker or deliver the stock to buyers.

The SEC has been reluctant to curb short selling ``because it would require a major retooling of the plumbing of Wall Street,' said James Angel, a finance professor at Georgetown University studying short sales. ``It's only when the big Wall Street firms are threatened that the SEC does something about it.'

Trading Abuses

The SEC is investigating whether trading abuses contributed to the collapse of Bear Stearns Cos. in March and the 78 percent drop in the market value of larger rival Lehman Brothers Holdings Inc. this year. Fannie Mae and Freddie Mac have each lost about 80 percent of their value amid speculation the mortgage-market crisis may push the firms into insolvency.

Short-sellers, who borrow shares betting that they'll decline, are spreading rumors about Lehman in an organized attempt to depress the stock, according to Richard Bove, bank analyst at Ladenburg Thalmann & Co. in Lutz, Florida.

``As with Bear Stearns, Lehman has been targeted by the fear-trade,' said Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone in a report yesterday. Lehman should go private so it can avoid the attacks by short-sellers, he said.

Freddie Mac, down as much as 34 percent today before Cox's comments, erased some of the decline and fell $1.49, or 21 percent, to $5.62 at 2:34 p.m. in New York Stock Exchange composite trading. Fannie Mae shares rebounded from a 30 percent drop and were down 18 percent.

Opposition

``I don't think the government should ban short-selling in anything as long as it's fully disclosed, as long as there's no manipulation,' MFS Investment Management Chairman Robert Pozen said in an interview with Bloomberg News yesterday. ``Don't we want the market to work here?'

John Nester, an SEC spokesman, said the emergency order will ``require any person effecting a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on settlement date.'

In traditional short selling, traders borrow stock through a broker and hope to profit by selling shares high and later buying them back at lower prices to repay the loan.

Naked short selling isn't necessarily illegal, unless authorities can prove fraud, such as a scheme to manipulate stock prices.

To contact the reporters on this story: Jesse Westbrook in Washington at [e-mail]; David Scheer in New York at [e-mail].
Last Updated: July 15, 2008 15:01 EDT

http://www.bloomberg.com/apps/news?pid=20601087&sid=aPE.Apdv7m2E&refer=worldwide


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