[jyl]

The SEC and other govt regulators are trying to run the shorts.

Recall a few months ago, the SEC prohibited naked shorting in 19 financial stocks. While the stocks rallied briefly, the shorts got back on and drove a number of them, incl FNM FRE etc, to effectively zero. The prohibition on naked shorting is pretty easy to work with, or work around.

Now the govt is apparently urging large funds to stop loaning stocks to the shorts. CalPERS announced today it will no longer loan MS or GS stock, the NY pension fund said it will not loan any financial stocks. I suspect that other large funds are cutting back on their lending as well, quietly.

The SEC has also proposed requiring daily public disclosure of short holdings. Hedge funds hate having their positions exposed, as it makes them a target for other hedge funds or long funds trying to force covering. Hedge funds will also likely lose their access to managements who know they are being shorted by that fund.

NY has announced an investigation into alleged abusive shorting, and will be subpeonaing records from hedge funds. The targeted funds could have their trading records, emails, IMs, etc all subpeonaed.

The SEC has also proposed an outright ban on shorting, for some undetermined period. This would completely disrupt the investment strategies of many hedge funds, who stay market-neutral with balanced short and long positions.

The UK's equivalent of the SEC has already banned shorting of any financial stocks.

I was told today that prime brokers are telling their hedge fund clients that the cost of borrowing stocks will go up 3-5X. That is a huge increase.

I have to think about the wisdom of these measures. But clearly they are extraordinarily aggressive steps.

The market rally today was almost entirely from short-covering. You saw the most-shorted stocks soar, +10-15% in some cases, while the less-shorted stocks were typically -5% to +5%. A lot of hedge funds lost money today, and most long-only funds underperformed the indicies. It was a crazy day.