Trading in troubled Fannie Mae, Freddie Mac faces new rules
The panel that regulates US stock trading is expected to issue new limits on trading in shares of the troubled Freddie Mac and Fannie Mae mortgage firms and other investment firms, the chairman of the Securities and Exchange Commission told Congress on Tuesday, dpa reported.
SEC Chairman Christopher Cox told the Senate banking committee that the panel would issue an order later Tuesday that would limit the ability of traders to bet on a decline in the shares of the two firms and of brokerages.
The practice is called short-selling, in which investors sell "borrowed" shares they never own for a higher price, then buy them back at a lower price, pocketing the difference as profit. Critics charge that the practice allows speculators in a declining market to massively push share values down even further.
Shares in financial companies and banks have plummeted over the past year as the full extent of the US mortgage market crisis has emerged, with tens of thousands of homeowners walking away from loans as their home values depreciate.
The crisis has eroded overall US economic growth, subdued consumer spending and caused the near-collapse of the financial company Bear Stearns until the US central bank rushed to its rescue earlier this year.
Over the weekend, the crisis was threatening Freddie Mac and Fannie Mae, the two government-chartered firms which hold about half of all US mortgages and whose value fell 50 per cent last week. Shares fell another 34 per cent Tuesday in early trading.
After weekend crisis consultations with Congress and the White House, the US Department of the Treasury and the central bank took another unusual step on Sunday to guarantee their debt.
On Tuesday, US President George W Bush called a press conference to reassure the American public about financial security while the captains of finance - Cox, Treasury Secretary Henry Paulson and Federal Reserve head Ben Bernanke - went to the US Senate to explain what was going on.
In that context, Cox announced the proposed rules that would limit a variation of short selling called "naked short selling." Under the old rules, several investors could own the same share at the same time, but the new rule would in effect prohibit that.
"In addition to this emergency order, we will undertake a rule making to address the same issues across the entire market," Cox told the committee.
The SEC has been probing whether similar trading abuses contributed to the near collapse of Bear Stearns in March and the 78- per-cent drop in the market value of Lehman Brothers Holdings Inc, Bloomberg financial news service reported.