Shorts blamed for bank stock plunge

Shares of most big banks nosedived as controversial ban on short selling ended. But bank stocks didn't do well during the ban either.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Steve Hargreaves,

NEW YORK ( -- Bank stocks sank across the board Thursday, leading the broader market in a frenzied selloff. Some market watchers blamed the drop on the expiration of the short selling ban on financial stocks.

The S&P Banking Index plunged more than 13.5% and several leading bank stocks posted double-digit percentage drops, including Goldman Sachs (GS, Fortune 500), Wells Fargo (WFC, Fortune 500), Citigroup (C, Fortune 500), and Bank of America (BAC, Fortune 500).

Wachovia (WB, Fortune 500) and Morgan Stanley (MS, Fortune 500) were particularly hard hit, each falling over 25%. Even JP Morgan (JPM, Fortune 500), heralded as one of the few to successfully navigate the credit crisis so far, fell 7%.

Wachovia has taken a hit as its future remains uncertain. The beleaguered bank, which has seen its shares fall 72% in the past three weeks, is in limbo right now. Citigroup and Wells Fargo have both made offers to buy parts of or all of Wachovia and the two are still feuding over how the assets might be split.

Morgan tumbled 26% as the investment bank continued to be plagued by rumors that Japan's Mitsubishi UFJ (MTU) agreement to buy a 20% stake in Morgan was in jeopardy.

A Morgan spokesman dismissed such rumors, saying the deal will close this coming Tuesday under the same terms announced earlier this week.

Mitsubishi also said in a statement Wednesday morning that the rumors are not true and that it expects the deal to close next Tuesday.

A source familiar with the Morgan-Mitsubishi deal blamed the slide in Morgan Stanley's stock Thursday on the expiration of the short selling ban.

Frank Barkocy, director of research with Mendon Capital Advisors, an investment firm that specializes in bank stocks, also blamed the decline across the financial sector on short selling.

"The resumption of short selling is putting pressure on these stocks," said Barkocy. "The group overall is very weak."

The Securities and Exchange Commission barred stock traders from shorting most financial stocks on Sept. 19 as the credit crisis unfolded. The SEC extended the ban last week and said that if a bank bailout bill was signed into law, the ban would end three business days after that.

Short sellers borrow stock at one price and sell it with the hopes of buying the stock later at a lower price so they can pocket the difference. Some have blamed short sellers for spreading false rumors about banks in order to send the stocks drastically lower.

But the ban was controversial, with some arguing that short sellers do a service to the market by identifying overvalued stocks and that prohibiting short selling was nothing more than an artificial manipulation of the market.

Still, even with the short selling ban in place, bank stocks took a beating. The S&P Banking Index has plunged over 30% since the ban took effect.

Short selling may not be the only thing weighing on bank shares Thursday. The U.S. government is also thinking about buying bank stocks, the White House said.

The move would be an attempt to directly inject capital into banks - which have been starved of cash as homeowners default on mortgages and inter-bank lending dries up.

But banks would issue new shares for the government to purchase, diluting the value of existing shares for current stock holders.

Also, analysts said the government would likely buy shares of the banks facing the most financial trouble, which isn't exactly a vote of confidence for the industry.

"If you own a bank stock, and you think the government might take it over, what do you do?" asked Harry Clark, chief executive of Clark Capital Management. "You sell it." To top of page

They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.