The United States government took action Friday to prevent the credit crisis from worsening by temporarily banning the short selling of financial companies and creating a temporary guaranty program for the U.S. money market mutual fund industry.
The Securities and Exchange Commission (SEC), acting in concert with the U.K. Financial Services Authority (FSA), will prohibit short selling in 799 financial companies for 10 business days, effective immediately. The U.K. FSA took similar action on Thursday.
The SEC may extend the order beyond 10 days if it deems an extension necessary in the public interest and for the protection of investors, but will not extend the order for more than 30 calendar days in total.
“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets. The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets,” says SEC chairman Christopher Cox. “This action, which would not be necessary in a well-functioning market, is temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury, and the Congress.”
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The SEC says the action calls a time-out to aggressive short selling in financial institution stocks, because of the essential link between their stock price and confidence in the institution.
Meanwhile, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund—both institutional and retail—that pays a fee to participate in the program.
President George W. Bush approved the use of existing authorities by Treasury secretary Henry Paulson to make available as necessary the assets of the Exchange Stabilization Fund for up to US$50 billion to guarantee the payment.
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