A couple of weeks ago following the passage of the Energy Markets Emergency Act we wrote a tongue in cheek blog regarding the legislation and commented that the fact that it was basically an empty gesture was its greatest attribute given that it did not include some of the draconian measures being contemplated by some Senators.
While purporting to fight market manipulation, some Senators have suggested basically creating rules—such as using margin—to manipulate the market. Creating uneven rules on margin as was suggested during one of these hearings to try and affect market activity is a manipulation regardless of its intent. We ended the blog half jokingly by suggesting that with the equity markets under such pressure that it would be ironic if Congress tried to manipulate activity in one market one way and in another—equities—in a different manner. We quipped, “It could happen.”
Well today Securities and Exchange Commission (SEC) Chairman Christopher Cox announced before a Congressional hearing that the SEC would issue an emergency order that will provide that all short sales in the securities of primary dealers, Fannie Mae and Freddie Mac be subject to a pre-borrow requirement.
The announcement highlights the depth of the problems in the banking industry, coming a day after the government needed to prop up mortgage lenders Freddie Mac and Fannie Mae and has a smell of desperation to it.
While it is not exactly what we suggested might happen, it is close enough to give us a chill, especially given that our attempt included a measure of sarcasm and cynicism.