Naked-Shorts Ban Gets Chilly Reception

Still, Coffelt believes companies are faltering due to weak fundamentals -- even if stock declines appear rapid. He is "personally skeptical" that there is much naked short selling occurring.

"You look at AIG, and if there was real value there, rather than see the federal government buy it, you would have seen Warren Buffet buy it," says Coffelt. "He was offered it and he didn't buy it."

There is little debate over whether firms like Bear Stearns, Freddie, Fannie, Lehman, AIG or Merrill have faced serious problems amid the housing and credit crises. But there is a strong debate over whether short sellers exaggerated those issues, and whether the companies might have been able to ultimately survive without bailouts, bankruptcies or fire-sale acquisitions.

Bharath notes that the temporary restrictions put in place by the SEC in July and August did not significantly reduce short positions in the 19 financial stocks it affected. In fact, the broader market fared worse while those regulations were in place -- suggesting that the restrictions may have unnaturally stymied genuine opinions. Since the restrictions have been lifted, four of the firms in question have essentially gone under.

Bharath says the new SEC rules are "probably useless" in the long term, but might prove effective as a short-term tactic to calm irrational selling.

"It is very important to send the psychological message that manipulation will not be tolerated to calm down the markets," says Bharath. "Whether it has a real effect is not clear."

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To see lists of stocks that could be aided by the naked short-selling ban, please see our story on "threshold securities," compiled Tuesday by the New York Stock Exchange and the Nasdaq.