September 18, 2008

The SEC Acts: Short-Selling and Rumor-Mongering

Yesterday, facing a cry to adopt a market-wide rule on naked short sales and rumor-mongering (see this Wachtell Lipton memo entitled “Today the SEC Must Step Up” from Tuesday), the SEC took several coordinated actions against “naked” short selling. This came in the form of an emergency order, thereby avoiding the typical notice and comment period of government rulemakings. The SEC’s new actions became effective at midnight. Here is a statement from Chairman Cox and Enforcement Director Thomsen.

These actions apply to the securities of all public companies; compared to the SEC’s temporary Emergency Order (that lapsed a month ago) which only applied to companies in the financial sector. Wachtell’s new memo? “Too Little, Too Late.”

In his “Race to the Bottom” blog, Professor Jay Brown provides some nice analysis of whether the SEC’s emergency order violates the Administrative Procedures Act…

AIG to Be Renamed “NOSLAUP II, LLC”? Hint: “Paulson” Spelled Backwards

Some members wonder why the Federal Reserve only purchased 79.9% of AIG – was there any magic to it not going over 80%? As noted in this DealBook blog by Prof. Davidoff, the government can’t purchase more than 80% of a company “because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency.” Thanks to Tom Conaghan of McDermott Will for tracking this down.

A nice off-balance sheet play by the Feds. I guess they are trying to be like Enron. Maybe they should rename Fannie Mae “Raptor 6” and AIG “NOSLAUP II, LLC” (ie. “Paulson” spelled backwards).

Anyways, I can’t wait to see the Fed file their Schedule 13D and all of their Section 16 reports.

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