The Wonk Room

SEC Bans Naked Short Selling…Again

Our guest blogger is Ed Paisley, Vice President for Editorial at the Center for American Progress Action Fund.

The Bush administration’s dysfunctional Securities and Exchange Commission today will attempt to implement, for a second time, a ban on naked short selling – a stock lending practice that is illegal in the United States if the person doing the selling doesn’t in fact have a line on the stock he’s trying to sell. Short sellers are hammering Wall Street stocks, courtesy of the SEC’s inability to stop what is already illegal, and what it tried to stop back in March, to no avail.

Such ineffectiveness only compounds the greater problem haunting U.S. stock markets due to short selling – the ability of speculators to relentlessly sell a stock short (betting its price will fall and then working to make that happen) after the SEC in July last year decided to end the so called “uptick rule.” This rule, in place since 1938, prevents speculators from selling a stock short if the price of the stock is falling. Only when the price is rising can speculators bet against that price.

The uptick rule made it hard for speculators to push the price of a stock down after betting it would fall. The demise of the uptick rule took effect in July 2007, just as the U.S. housing crisis began to grip global financial markets. The SEC thought less supervision of short selling would help U.S. financial markets. Since then, legions of short sellers have progressively hammered Wall Street, contributing greatly to the current stock market crisis.

Why did the SEC end the uptick rule? And why can’t it ban what it already considers illegal? Well, under the Bush Administration the SEC has been pushed to implement a governing conservative philosophy that argues fervently for less supervision of our financial system. We can see today how well that’s turned out.

Conservatives running our financial regulatory institutions have so effectively peddled this shockingly imprudent deregulatory fervor that the SEC is a revolving door. Three largely ineffective SEC chairman and a total of 13 different commissioners have graced the agency during the Bush years. Not since FDR – a four-term president – have there been more than ten commissioners and three chairmen appointed to the SEC. Experienced staff have also been fleeing the agency. Why stay when your supervisory mandate is to do less?