Tuesday’s D-Day for SEC – and Banks

The Securities and Exchange Commission will decide Tuesday whether or not it will continue its “emergency rule” against naked short-selling a list of 19 banks.

The irony, of course, as Cramer points out, is that naked short-selling any stock is illegal and not just the banks. So there was no need for this special action by Chairman Cox and his cohort.

But here we are, and the SEC’s decision is looming and it’s of tremendous importance. The hedge funds that relentlessly hammered down the banks before Cox stepped in have been put in check only by the attention brought on them by enforcement of this rule. If the SEC decides to let go of its focus on naked short selling, the bear raids would return and everyday investors – and the market – would be in a house of pain.

There’s no doubt the rule was effective, even though at least one of the SEC commissioners doubts its efficacy. But a quick glance at the banks in question shows the never-ending spiral they were in came to a halt once the rule was (re)implemented, and they even went higher. Sure, the bank stocks dropped 4% Monday, most of them, including Lehman Brothers , Citigroup, Bank of America and Wachovia, are still trading up where they were before the SEC got involved. As for the banks that were left of that list of 19 names – Washington Mutual, American International Group and National City, for instance – they all took a hit.

The bottom line is that no stock should be the target of naked shorting. The SEC needs to do the right thing and make sure that rule continues to be enforced.

“As bad as these prices for the banks were today,” Cramer said, “believe me we will see much lower ones for the financials Wednesday if the SEC does the wrong thing [Tuesday].”

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