Short Interest in Financials Sharply Down From 1 Year Ago

One year ago, at the epicenter of the credit crisis, Lehman Brothers went dark, marking the biggest bankruptcy in U.S. history. On the same day, Bank of America announced that it would acquire one of the most prominent wealth management houses in the world, 98-year old firm Merrill Lynch. Both events highlight the start of an unprecedented year full of remarkable events in the financial industry.

Although much debate revolves around the fall of Lehman Brothers, there is no doubt about the ripple effects related to the collapse of the 158-year old firm on the financial market, and the world economy. And while many of the financial firms left standing could emerge stronger than before, the overall industry has changed forever.

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Since The Month That Shook the World, the S&P Financial sector, which tracks the performance of 79 financial companies, is down nearly 32%. Despite the precipitous fall of the equity markets since September 2008, financial companies have been among the best performers, up about 130% since the stock market reversed its downward trend on March 9, 2009.

Indeed the market's rally since March paired with hopes of an economic recovery seems to have changed some investors' sentiment towards the financial group. As measured by short interest, the total number of shares of a security that have been sold short by investors expressed as a percent of total outstanding shares, the number of investors bearish on some of the most prominent financial firms has returned to levels well below last year's crisis.

The charts below depict a sample of financial companies and how their short interest has changed since the day that Lehman Brothers went bust. Of course, as the government required many of these companies to raise capital, their shares outstanding rose, thereby lowering their percent short interest. Of the group, Fannie Mae and Freddie Mac, continue to have amongst the highest levels of short interest.