SEC Bans Naked Shorts of Fannie, Freddie

Securities and Exchange Commission Christopher Cox on Tuesday said the regulator planned to crack down on naked short-selling of Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote), helping to lift financial stocks in afternoon trading.

Cox said in testimony to the Senate Banking Committee on Tuesday that the agency will require short-sellers to borrow shares of the two government-sponsored mortgage giants and broker dealers including Lehman Brothers(LEH Quote), Goldman Sachs(GS Quote), Merrill Lynch(MER Quote) and Morgan Stanley(MS Quote) before selling them. The new restrictions are called for under a temporary emergency order that expires in 30 days.

Short sellers borrow shares and sell them in the hopes the stock's price will fall, allowing them to pay back the lower price. "Naked" short sellers do not borrow the shares first, allowing them to drive down the stock's price without regard for natural supply and demand. ...