Federal regulators debunk rumors of short-selling ban

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, March 9, 2010; 5:44 PM

Federal regulators shot down rumors in the financial markets Tuesday afternoon that they were planning to ban short-selling of stocks in which the government has a stake.

"There is no truth to the rumor that we are considering restricting the short-selling of stocks in which the government has a stake," said John Nester, a spokesman for the Securities and Exchange Commission.

Financial markets were abuzz Tuesday with reports that the government was planning to ban short sales in the stock of some companies that have public investments. The government gained these shares in exchange for bailing out the firms as part of efforts to rescue of the financial system.

Freddie Mac and Fannie Mae soared as much as 18.5 percent and 15 percent, respectively, before closing 7.6 percent and 5.9 percent higher. American International Group spiked 12.6 percent, and Citigroup jumped 7.6 percent.

In a short sale, a trader borrows stock and sells it, betting it will fall in value. If the trader is correct, he can reap a profit by buying back the stock at a lower price before returning it to the owner. Critics of short-selling say it can force down the price of a company's stock.

The SEC has put curbs on short-selling before -- most notably during the height of the financial crisis in 2008, when the agency banned short-selling in financial stocks to ease the downward pressure on their prices.

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