Behind the ban on short selling

In “Goldman, Morgan Rewrite Playbooks” Aaron Lucchetti and Kate Kelly of The Wall Street Journal report that the chief executive officers of Goldman Sachs and Morgan Stanley “pushed for rules that are an anathema to many free-market champions:”

During phone conversations [with regulators], both CEOs said they needed new, emergency rules to prevent abuses in the market by investors betting on drops in Morgan Stanley and Goldman shares. The Securities and Exchange Commission had passed other rules to limit the bets, known as short sales, but hadn’t taken the more radical step of temporarily banning short sales on financial stocks.

It was an ironic plea. Both Goldman and Morgan service scores of hedge funds, which depend heavily on the ability to short stocks. The two also lend out shares used by others to short. The firms knew that they would face some angry clients by calling for restrictions against a popular investment strategy, but they felt they needed to restrict abuses and protect themselves. The SEC on Friday, Sept. 19 enacted the temporary ban.

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