9:27 am - SEC banned short selling certain financial US stocks

What is short-selling and 'naked' shorting? WASHINGTON (AP) - As part of a wide-ranging effort to contain Wall Street'sworst financial crisis since the Great Depression, the Securities and ExchangeCommission took the unprecedented step Friday of banning short sales of stock in799 financial companies. What follows are questions and answers about the government's decision: Q. What is short-selling? A. The activities of short-selling might sound lewd at times -- there's"naked shorting" and "covering your shorts" -- but the practice of selling stockshort is pretty straightforward. Investors "sell short" if they think the shares of a particular company aregoing to decline and they want to profit from the drop. To do this, an investor borrows shares of Company X, usually from theirbroker, and then immediately sells them at their market price, say $100 pershare. If the share price falls, let's say to $80, the investor buys back theshares and returns them to the broker. The investor pockets the difference -- inthis case, $20 per share. The practice can be risky. If the shares increase in value, the investor hasto buy them back at a higher price, losing money in the process. Q. Why did the SEC temporarily ban the practice? A. The government and some money managers blame widespread short-selling byhedge funds for contributing to the collapse of Lehman Brothers Holdings Inc.,American International Group Inc. and other troubled companies by driving downtheir share prices. Shares of the two surviving investment banks, Goldman Sachs Group Inc. andMorgan Stanley, saw sharp price drops this week. On Wednesday, Morgan Stanleyshares fell 24.2 percent while Goldman's dropped 13.9 percent. Such sharp drops erode the market's confidence, which makes it harder forthe companies to raise capital and could scare away clients, further weakeningthe companies. The SEC's ban gives financial companies time to stabilize "without the dailydrumbeat of hedge funds shorting them on a coordinated basis," said PhilOrlando, chief equity market strategist for Federated Investors Inc., whichmanages $330 billion in assets. New York Attorney General Andrew Cuomo said Friday his office willinvestigate whether some short sellers spread rumors and negative information todrive down the share prices of Lehman, AIG, Goldman and other firms. Q. What's naked shorting? A. Naked shorting involves selling shares without actually borrowing them, apractice that critics say is particularly prone to abuse, because it potentiallyenables more shares to be sold into the market than actually exist. The SEC temporarily banned naked shorting of 19 financial companies in July.On Wednesday, it restricted the practice but did not ban it outright. Some moneymanagers have called for the SEC to prohibit naked shorting. Q. How much are short sellers really to blame for the mess we're in? A. That's a hotly disputed question. The SEC said that in normal times"shorts" can make markets more efficient and bring in more capital, but addedthat a "time out" is needed. Richard Baker, president of the Managed Funds Association, a trade group forhedge funds, said shorting is "an essential risk management tool." Q. Will the SEC's move work? A. On Friday, it certainly helped reverse the slide in financial companies'sshares, as Goldman and Morgan Stanley each jumped about 20 percent. The hope is that by the time the ban is lifted, the rest of the government'srescue plan, which includes acquiring some of the toxic mortgage-related assetsfrom large banks, will kick in and the market will stabilize on its own. But Baker at the MFA argued that by the time this summer's temporary ban onnaked shorting was lifted, the shares of the 19 covered companies had droppedanyway. Copyright 2008 Associated Press. All rights reserved. This material may not be

9:24 am - Stocks soar as investors bet on gov't rescue plan

Stocks soar as investors bet on gov't rescue plan NEW YORK (AP) - AP Video 0919b--wall--street Wall Street had another extraordinary rally Friday as investors stormed backinto the market, relieved that the government plans to restore calm to thefinancial system by rescuing banks from billions of dollars in bad debt. The DowJones industrials soared about 370 points, giving them a gain of about 780 overtwo days, and Treasurys fell as money flowed into equities. The government's proposal, while still a work in progress, has placatedinvestors who worried that a continuum of bad bets on mortgages would hobblemore financial companies and cause further damage to the strained banking systemand the overall economy. "If a solid plan is put in place, it's definitely going to be a positive ineasing the pain," said Stephen Carl, principal and head of equity trading at TheWilliams Capital Group. He added, though, that the set-up of any plan willdetermine its success. A new government ban on short selling, or placing bets that a stock willfall, likely added to the market's gains as traders adjusted their positions. "Abig chunk of this is scaring all the shorts to cover their bets," said JoeBattipaglia, market strategist at Stifel, Nicolaus & Co., referring to shortsellers. Treasury Secretary Henry Paulson, speaking about the rescue plan, said abold approach is needed to remove troubled assets from the books of financialfirms. He offered few details, but said he would working through the weekendwith congressional leaders to assemble a remedy. The plan could help neutralize a yearlong credit crisis that intensifiedthis week. Wall Street suffered massive losses Monday and Wednesday, and creditmarkets essentially seized up following this week's bankruptcy of LehmanBrothers Holdings Inc. and the bailout of teetering insurer AmericanInternational Group Inc. Analysts said it was the first government response decisive enough torestore confidence in the markets; in the past, it has relied largely on stepslike injecting cash into the banking system that, at least until now, had alimited impact. "Everything they had done had been a Band-Aid approach, at the margins,"said Jay Mueller, economist at Strong Capital Management. "Now we're dealingwith the root problem." The government took other steps Friday to restore stability to the financialsystem. The Federal Reserve said it will expand its emergency lending and letcommercial banks finance purchases of asset-backed paper from money marketfunds. The Fed injected more money into the U.S. financial system, as it haddone earlier in the week. The central bank also said it will buy short-term debtobligations issued by mortgage giants Fannie Mae, Freddie Mac and the FederalHome Loan Banks. To further ease investors' anxieties and bolster tattered investorconfidence, the Treasury Department has decided to use a Depression-era fund toprovide guarantees for U.S. money market mutual funds. Money market mutual fundsare typically considered safe, but some investors have been fleeing them,fearing that the funds' holdings included souring corporate debt. And to help limit the freefall in financial stocks, the Securities andExchange Commission on Friday enacted a ban until next month on theshort-selling of nearly 800 financial stocks. Short-selling is the commonpractice of betting against a stock by borrowing shares and then selling them inthe open market. A short-seller's hope is the stock will fall; if it does, thestock can be bought back at the lower price. Those cheaper shares can bereturned to the lender, allowing the investor to pocket the profits. Traders canlose, however, if the stock rises. Wall Street observers have disagreed over the extent to which pressure fromall those bets that a stock will fall shaped investor sentiment and strangledsome financial stocks, like those of Lehman Brothers last week. Some say thefundamental problems with overleveraged financial companies warranted thepessimism while others say the short selling was a death knell for somefinancial names. "The federal government has been petitioned by Wall Street to take evasiveaction in the money markets, the stock and bond markets, to avoid a completemeltdown of the credit system," said Battipaglia. "Once the credit system meltsdown, the economy falls. We can hand-wring about if this is the proper thing forthe government to do, or if Wall Street pulled the panic button too soon, butthat's something for the historians to sort out." It's difficult to quantify how much of the market's gains reflected shortsellers who are forced to step in and cover their bets by buying now risingstocks that had predicted would fall. While that appeared to play some role inthe advances Thursday and Friday, the Nasdaq composite index -- dominated by bigtechnology stocks, not financials -- showed big gains along with the Dow and theStandard & Poor's 500 index. The Dow rose 368.75, or 3.35 percent, to 11,388.44 after having been up asmuch as 463.36. Friday was a quarterly "quadruple witching" day, which marks thesimultaneous expiration of options contracts, an event that often adds tovolatility and heavy volume. Still, much of the market's moves were due to thegovernment's actions Friday. Broader stock indicators also surged. The S&P 500 index rose 48.57, or 4.03percent, to 1,255.08, and the Nasdaq composite index rose 74.80, or 3.40percent, to 2,273.90. Even with Friday's big gains, stocks didn't end the week with much changeafter the whipsaw sessions. The Dow slipped 0.29 percent, the S&P 500 rose 0.27percent and the Nasdaq added 0.56 percent. Treasury prices dropped as investors poured money back into stocks. Theyield on the 3-month Treasury bill -- a safe investment to which investors haverushed this week -- rose to 0.95 percent from 0.07 percent late Thursday. Yieldsmove opposite from price. The yield on the benchmark 10-year Treasury note shotup to 3.81 percent from 3.53 percent late Thursday. The stock market's enormous swings during the week reveal how anxiousinvestors have been about the tightness in the credit markets the possibilitythat other financial companies might succumb to the difficulties in the markets. The only lasting move in a week of intense volatility came late inThursday's session when reports emerged that the government was considering aplan that would shift soured debt off financials' books. A wobbly marketrocketed higher, giving the Dow a 410-point gain for the session, buying thatcontinued through Friday. The dollar rose against most other major currencies in Friday trading, whilegold prices jumped. Light, sweet crude rose $6.67 to settle at $104.55 a barrelon the New York Mercantile Exchange. Advancing issues outnumbered decliners by about 7 to 1 on the New York StockExchange, where consolidated volume came to a heavy 9.1 billion shares comparedwith 10.3 billion shares traded Thursday. The Russell 2000 index of smaller companies rose 30.06, or 4.15 percent, to753.74. Overseas stock markets soared. Japan's Nikkei stock average jumped 3.8percent, and Hong Kong's Hang Seng index surged 9.61 percent. In Europe,Britain's FTSE 100 jumped 8.84 percent, Germany's DAX index advanced 5.56percent, and France's CAC-40 rose 9.27 percent. The Dow Jones industrial average ended the week down 33.55, or 0.29 percent,at 11,388.44. The Standard & Poor's 500 index finished up 3.38, or 0.27 percent,at 1,255.08. The Nasdaq composite index ended the week up 12.63, or 0.56percent, at 2,273.90. The Russell 2000 index finished the week up 33.48, or 0.27 percent, at753.74. The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted indexthat measures 5,000 U.S. based companies -- ended at 12,882.14, up 117.26points, or 0.92 percent, for the week. A year ago, the index was at 15,371.29. Copyright 2008 Associated Press. All rights reserved. This material ma