Market Up; SEC to Halt Short Selling
The Financial Service Authority in the UK banned the short selling of securities until January, when the policy is to be reviewed.
The Dow ended up 410 points after falling as low as 150 down during the day’s trading.
The upside momentum came as rumors began swirling after Senator Charles Schumer of New York proposed forming a new agency to deal with ailing financials. The murky details can be found at the Wall Street Journal.
It would appear that regulators are attempting to set up a holding cell for distressed securities, though they would likely place limits on who or what entities would be eligible for this black hole. It is also not clear how this toxic debt would be handled without negatively affecting either taxpayers or the currency, or, likely, both.
Looking at the actions of regulators over the past months, it is clear that they won’t bail everyone out: Lehman was proof of that. Conversely, the losses of the Reserve Primary Fund (and the subsequent $90 billion in redemptions that followed) caused by the Lehman bankruptcy may lead the to try to bail out everyone. But they will most likely play favorites based on how strong the financials are of the entities involved. JP Morgan Chase, for example, was clearly favored by the Fed during the Bear Stearns intervention. Bank of America, on the other hand, is currently digesting the assets of both Countrywide and Merrill Lynch, so may be at higher risk.
What is clear is that equity is not out of the woods yet, and the jump experienced today was premature. In every bailout scenario (Bear Stearns; Freddie Mac; Fannie Mae; Lehman Brothers and AIG) common shareholders were basically wiped out. Lehman stands as the exception in that it was allowed to file for bankruptcy, thus wiping out both equity and bond investors.
The other thing that’s clear is that the bilout will be at the expense of taxpayers and homeowners, not to benefit them.