Among the policy recommendations that Wachtell made clear in no uncertain terms that it (and its numerous clients) would demand implemented were:
the SEC should immediately re-impose, under its emergency powers, the “Uptick Rule.” In addition, the SEC must now consider other very strong measures such as using its emergency powers to place limitations on short sales for a period of time to restore a fair and orderly market. Also, it is essential for the SEC to scrutinize short sellers and their related transactions, including options and credit default swaps to determine whether these strategies are contributing to the severe dislocations taking place in the marketplace.
the SEC should promptly make public the results of their examinations of the short selling activities and take immediate enforcement action against those who are engaging in this abusive manipulative conduct.
the SEC should use its emergency powers to halt short selling in the securities of financial services firms and banks for a 90-day period.and the ominous:
[the SEC] should require hedge funds and other institutional investors to publicly report their daily short positions if those positions exceed ¼ of 1% of the outstanding shares of a public company and should also disclose publicly whether the short sellers have any oral or written contract, arrangement, understanding or relationship (legal or otherwise) with respect to those securities.
short sellers also should be required to report to the SEC on a next-day basis if they fail to deliver securities by settlement date
a critical next step is for the Federal Reserve Board, the Treasury Department, the SEC and the CFTC to undertake on an urgent basis a 30-day comprehensive review of the credit default swap market
the [SEC's] actions are too little too lateWell, at least Wachtell isn't shy of telling us how it, or, technically, its clients, feel...
the SEC must act now
What is most notable, is a blurb about major pension funds ending their stock lending programs, in a sense creating the type of forced short covering rally that we have discussed in the past.
It has been publicly reported that California Public Employees’ Retirement System (CalPERS), the asset management division of Bank of America, and the New York and New Jersey state pension funds have stopped lending shares of certain financial companies to short sellers. We urge the SEC to encourage a voluntary initiative among lenders of securities pursuant to which the lenders would agree for 90 days not to lend securities of any financial services firms or banks.Just how much of this proposal did the SEC adopt? Judging by their favorable response to virtually all initiatives, it would seem feasible that the SEC also likely adopted a stock lending ban covertly. Now keep in mind, all these recommendations occurred only after the Lehman collapse: one can only imagine what happened in the days of early March when the market was set to go to 0. A massive securities lending ban would explain not only the phenomenal outperformance of high beta (most shorted) stocks, but also the rumors about the Fed's involvement with State Street, the biggest securities lender in the US, if not the world.
- The SEC’s Investment Management Division should also examine whether there is a potential conflict of interest for a mutual fund or a pension fund to lend securities to a short seller when the results of the short seller’s trading may adversely affect the NAV of the mutual fund or the value of the pension fund’s portfolio.
Maybe this has all the makings of another one of those proactive FOIA-type queries: which is sad, because if the regulators were truly transparent with their intentions and actions they would have informed the investing public if it really was the case that borrow on a plethora of stocks is impossible to find, instead of having to find this out the hard way through your personal broker/dealer.
So going back to the original question: just who is Wachtell Lipton representing, and more specifically, just who are the undersigned Ed Herlihy and Theodore Levine.
It is no surprise to Wall Street regulars that Mr. Herlihy, in the pantheon of M&A lawyers, has represented numerous companies, but notable are some of the most allegedly conflicted transactions over the past year, including: representing BofA in its acquisition of Merrill (odd that he has not been summoned to Congress yet), Wells Fargo's acquisition of Wachovia, JPM's acquisition of Bear Stearns, GS/AIG/Carlyle/Riverstone in acquiring Kinder Morgan, and Apollo/TPG in acquiring Harrah's. One can see how Mr. Herlihy would be incentivized (monetarily or reputationally) to maintain the financial system status quo and scapegoat that traditional evil doer, the short seller/CDS trader.
As for Ted Levine, the lobby interests become all too apparent as well: after working at the SEC for 13 years, he became a General Counsel at UBS, which over the past year, in the opinion of Zero Hedge, has been constantly on the cusp of operational viability.
It would be safe to say that between their extensive Wall Street interests, the two lawyers might appear to represent anything but a fair and unbiased perspective on the real troubles that ail Wall Street. As for the latter, which just 3 months ago was in cardiac arrest, why not have an old SEC lackey convey the big firms' displeasure to the SEC and other "regulators" via their most trusted and best compensated conduit, while in the meantime making shorting impossible. And after all, who really reads boring legal memos these days... aside from other special interest groups at the SEC of course.
hat tip Richard Sphere: Related Content Print this post