The opening paragraph of the Securities and Exchange Commission’s (SEC) emergency order restricting naked short selling of Freddie Mac, Fannie Mae and primary dealers issued on July 15 read:
“False rumors can lead to a loss of confidence in our markets. Such loss of confidence can lead to panic selling, which may be further exacerbated by “naked” short selling. As a result, the prices of securities may artificially and unnecessarily decline well below the price level that would have resulted from the normal price discovery process. If significant financial institutions are involved, this chain of events can threaten disruption of our markets.”
This preceded the SEC using Bear Stearns (BSC) as an example of what can happen when rumors get out of control, which begs the question as to why the government allowed—and supplemented through guarantees— JP Morgan’s purchase of BSC at such a discount. Shouldn’t shareholders get compensated?
