Securities and Exchange Commission

At the peak of the real estate boom, there was one group of individuals who said the bubble was about to pop. They pointed to overvalued land and bad underwriting of loans. And they bet their own money on their beliefs. Who are these unsung prophets of the subprime bust: the much-maligned short-sellers, whom both Britain, as Iain Murray reported yesterday, and now the U.S. Securities and Exchange Commission temporarily want to ban in an effort to keep the share price of financials from going further down.

On Thursday, John McCain foolishly called for the ouster of SEC Chairman Chris Cox because Cox hadn’t cracked down on so-called “naked” short sellers and supposedly “kept in place trading rules that let speculators and hedge funds turn our markets into a casino.”

McCain would have been on better ground asking for Cox’s ouster based on his refusal to push for reform of the growth-killing and counterproductive Sarbanes-Oxley accounting mandates and for opposing CEI’s lawsuit against the law’s unconstitutional Public Company Accounting Oversight Board. The “naked” short-selling McCain was referring to — which doesn’t mean that someone is shorting a stock disrobed at their computer, but refers to when someone trades with shares that aren’t there — is already illegal. (Although the SEC steps recently taken to prevent it could have costly effects on broker-dealers who would have to redesign their computer systems. More on that in another blog post.)

But later that evening, Cox would apparently prove the even bigger fool by reportedly telling Congress that the SEC was going to temporarily ban all short selling! According to the Associated Press, “Cox told the lawmakers the SEC may put in a temporary emergency ban on all short-selling — not just the aggressive forms it already has targeted, according to a person familiar with the matter. The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies.”

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