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Paulson interview: The SEC's restrictions on selling were beyond a joke

As Hank Paulson seeks to resubmit his action plan to save the US financial system, Euromoney considers whether he was ever the right man for the job, asks the questions that he desperately needs to answer, and analyses the mistakes he has made which mean, whether his bill is eventually passed or not, he has failed as Treasury secretary.

Q: Surely as a former investment banker, let alone Treasury secretary, you could have told SEC chairman Cox how ridiculous his short-selling restrictions were?


On Friday, September 19, the SEC banned the short selling of 799 financial services company stocks. SEC chairman Christopher Cox grandly pronounced: “The Commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets.” And while it is of course a shame that he never directed this arsenal against the bundling of toxic ninja and liar loans into widely distributed securities, he now confidently promised that: “The emergency order temporarily banning short selling of financial stocks will restore equilibrium to markets.”


One week later, Washington Mutual – one of the banks on the list of protected stocks – had filed for bankruptcy, its share price having fallen 99% in the week following the banning order.


Confidence in these banks was not evaporating because of their volatile and declining share prices: their share prices were declining because confidence in the banks was evaporating.


The only impact the short-selling ban seemed to have had was that trading volume in these stocks was much lower in the week when prices collapsed than it had been in the week before the ban, when their stock prices were rising.


While the political battle raged over passing of the Paulson bail-out plan, here was government intervention in markets in microcosm: ill thought out, ineffective, ever expanding.


Each night of the week following the initial ban, the New York Stock Exchange helpfully produced a new updated list of stocks on the banned short-selling list. As early as Monday, September 22, America’s iconic industrial corporation, GE, which of course derives a large share of revenues from financial services, and car-maker GM were added. So too, for some unfathomable reason, was discredited ratings provider Moody’s Investors Service.


Ford was added on the Tuesday, IBM on the Wednesday. A host of real estate investment trust companies were added throughout the week, with one of the last additions on the Friday following the initial ban being AIV Apartment and Investment Management Company. It was joined on the protected list by car retailer AutoNation, Wright Express Corporation (which provides payment-processing and information-management services to the commercial and government vehicle fleet industry in the US) and, perhaps most bizarrely of all, fine jewellery retailer Zale Corporation.


Zale runs, among other retail brands, a chain of kiosks where young women and men can have their ears pierced for free if they also buy earrings there – the Piercing Pagoda. Apparently, Piercing Pagoda offers customers an extensive selection of popularly priced 10-carat and 14-carat gold chains, charms, bracelets, rings, earrings and body jewellery, as well as a variety of silver and stainless steel jewellery. It claims to have pierced 20 million pairs of American ears.


No doubt it is a leader in its field, but why is it on the prohibited short-sale list? Perhaps to prop up the gold or stainless steel markets, or because its higher-end stores provide consumer finance? This is a company that claims piercing is safe even for children and infants. It is not clear whether the knowledge that chairman Cox is now protecting its shares against those nasty short-sellers will leave US mothers sleeping any more easily in their beds.


At the time of going to press, no stocks had been removed from the restricted list. 


Why Hank Paulson has failed as Treasury secretary


Q: If you know so much, why didn’t you see the crisis coming?


Q: Every time you’ve spent money, you’ve said it would solve the problem. What’s different this time?

Q: If you’re going to cook up a plan, why not make sure it isn’t half-baked?

Q: Surely as a former investment banker, let alone Treasury secretary, you could have told SEC chairman Cox how ridiculous his short-selling restrictions were?

Q: Why was the bail out plan as originally presented so desperately short on detail?

Q: Did you forget that the negotiations were about politics as much as they were about saving the banking system?

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