Finally, the SEC Takes Action

Wednesday, 17 Sep 2008 | 2:23 PM ET

Too little too late?

Maybe not, but the Securities and Exchange Commission sure did wait a while to step in and stop short sellers from hammering down stocks with impunity.

SEC Rule Changes
Analyzing the new SEC short-selling rules, with Paul Kedrosky, TheStreet.com columnist, Ten Asset Management and Mad Money's Jim Cramer.

The stock market’s federal regulator announced Wednesday that it would implement new short-selling rules to stop abuses by traders. What took the SEC so long, Cramer’s not sure, but he offered proof that such rules are necessary in this environment to prevent the complete collapse of major financial institutions.

The KBW Bank Index, a major index for the financials that Cramer follows, bottomed on July 15, which was the same day the SEC announced that it was start enforcing short-selling regulations it had left behind, namely naked short selling and the uptick rule. (The former requires a trader to borrow stock before he sells it short, while the other requires that a stock tick up in price before being sold short.) So when the feds get involved, at least in this respect, key parts of the market begin to stabilize.

The SEC eventually walked away from enforcement, though. And when the government stopped watching, the shorts stepped right back in. Smart were the institutions that used that brief respite to raise capital and find their footing, such as Merrill Lynch. That company might never have been in position to be bought out by Bank of America had the SEC not intervened mid-summer.

“I think that Merrill Lynch might not have existed if it weren’t for these short-selling rules because it could have been taken down.”

AIG, which the government gave $85 billion to in return for an 80% stake, was also a solvent company at one point, Cramer said. The shorts did their damage here, too, “very viciously” raiding the stock. The Mad Money host wondered why the government isn’t eager to at least try reinstating these short-selling rules, especially if they’re being forced to bailout Fannie Mae, Freddie Mac and AIG.

“If it’s possible that we face the Western world destruction of finance,” Cramer said, “I think it’s also possible to do a little trial of the uptick rule. It worked for a long time.”

Questions for Cramer? madmoney@cnbc.com

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