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Wednesday, July 16, 2008

The SEC gets into the market manipulation game

An alarming amount of short-seller backlash has emerged in the last several days in response to the decline in the financial stocks. In response, the SEC has issued an "emergency rule" declaring that all short sales in major financial stocks must be preceded by a stock loan borrow.

Couldn't the stocks be headed lower because the Secretary of the Treasury declared Fannie and Freddie worthless equities and not because of pesky short sellers? Could the fact that every central bank in the world seemed to have woken up a couple of days ago and realized they owned a ton of risky mortgage paper have led to the decline in the stocks?

The Treasury has made clear their option to buy equity in stocks when they see fit. Will they start buying? Is the government trying to engineer a short squeeze?

I myself do not believe in short conspiracies. My experience is market dynamics prevent that from occurring -- when a stock finds a level that draws out buyers the sellers wind up making bad sales. The problem here is that these stocks haven't been able to find a level. Their credit quality is deteriorating exponentially due to the oversupply of credit derivatives in the market. The FDIC takes over the #3 mortgage issuer in the nation (Indymac) and immediately halts foreclosures -- so people that can't afford their mortgages, that agreed to speculative terms they couldn't in fact maintain, get a break. None of that paper goes away. It just lingers out there.

If anyone is trying to manipulate the market, its the federal government and their minions... not the short sellers. I see your invisible hand, fellas.

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