The SEC's 'Sacred Cow' List: Where Are WaMu and Wachovia?

When I heard that the SEC was going to shake its proverbial finger at short sellers and threaten to do its job, I didn’t exactly rush to see who was on the “Sacred Cow” list.  No brainer, right?  Big regional and money center banks, the shakiest of the investment banks.  I really would have thought that I could have guessed about 15 of the 19 names off the top of my head.

Then, I saw the list. 

Company	Ticker Symbol(s)	YTD % change
BNP Paribas Securities Corp.	BNPQF or BNPQY	-15.8
Bank of America Corporation	BAC	-33.4
Barclays PLC	BCS	-36.8
Citigroup Inc.	C	-34.3
Credit Suisse Group	CS	-26.1
Daiwa Securities Group Inc.	DSECY	-2.0
Deutsche Bank Group AG	DB	-31.1
Allianz SE	AZ	-16.7
Goldman, Sachs Group Inc	GS	-15.0
Royal Bank ADS	RBS	-54.6
HSBC Holdings PLC ADS	HBC and HSI	-5.7
J. P. Morgan Chase & Co.	JPM	-8.3
Lehman Brothers Holdings Inc.	LEH	-70.8
Merrill Lynch & Co., Inc.	MER	-42.4
Mizuho Financial Group, Inc.	MFG	10.7
Morgan Stanley	MS	-27.4
UBS AG	UBS	-47.5
Freddie Mac	FRE	-73.1
Fannie Mae	FNM	-66.5

Humph, I’ll take “foreign investment banks I don’t give a crap about” for $600, Alex.

Suddenly, I don’t feel so dialed-in anymore.  No Wachovia (WB)?  No Washington Mutual (WM)?  Apparently, I don’t run in the right rumor-mongering circles.  Obviously, some of our naked, short-selling sleaze-balls are trying to destroy financial institutions not even domiciled in the US (and no one invited me). 

I mean, dog piling on Fannie and Freddie is one thing; they never made sense (GSE?) and they’ve got silly names, but they’re as American as government subsidized corn to make inferior fuel programs.  It’s our right to trash them.  But, these companies are “guests” on our exchanges, and we should be extra nice to them.  This must be a public relations nightmare for Christopher Cox.  How much damage have these maniacs done? 

Company	Short Interest %	Outstanding	Shares Short
BNP Paribas Securities Corp.	0.03%	895,300,000	275,300
Bank of America Corporation	2.28%	4,452,783,993	101,494,900
Barclays PLC	0.26%	1,633,674,505	4,207,800
Citigroup Inc.	2.90%	5,249,833,103	152,024,700
Credit Suisse Group	0.13%	1,013,515,969	1,349,600
Daiwa Securities Group Inc.	0.01%	140,470,000	20,900
Deutsche Bank Group AG	0.48%	500,400,000	2,383,300
Allianz SE	0.06%	4,523,500,000	2,522,700
Goldman, Sachs Group Inc	3.47%	416,380,000	14,461,000
Royal Bank ADS	0.06%	9,489,300,000	5,279,800
HSBC Holdings PLC ADS	0.25%	2,365,810,463	5,970,500
J. P. Morgan Chase & Co.	1.62%	3,426,631,526	55,601,200
Lehman Brothers Holdings Inc.	10.13%	694,401,926	70,312,700
Merrill Lynch & Co., Inc.	5.89%	982,799,330	57,896,700
Mizuho Financial Group, Inc.	0.03%	5,695,846,500	1,854,700
Morgan Stanley	3.28%	1,109,013,816	36,342,600
UBS AG	0.71%	2,012,018,718	14,385,100
Freddie Mac	11.69%	661,550,000	77,349,000
Fannie Mae	14.29%	982,319,990	140,374,000
Total (ex-Fannie & Freddie)	1.18%	44,601,679,849	526,383,500

Not so much, actually.

Fannie and Freddie are excused from this discussion.  Let’s focus on the other 17.  On July 11, 2008, Bespoke Investment Group reported that the short interest of the S&P 500 was 6.0% (percentage of float), yet the Sacred Cows have a cumulative short interest of just 1.18% (percentage of outstanding – I’m not making another table).  Is that really cause for concern?  Maybe Barry Ritholtz is right and there are alternate universes at work here.  In my universe, 1.18% short interest is no great shakes.

I can understand giving Lehman and Merrill some shelter, even if it’s just enforcing the laws that should be enforced.  But Goldman?  Why are the “smartest guys on the street” hiding under mom’s apron?  They should just buy puts on themselves, make billions and squeeze these cretins until their eyeballs pop; they’ve pulled similar stunts, right?

Do they all belong to a Secret Club or something?

Don’t be silly.  Their club’s not a secret and two of the sacred 17 aren’t members (as far as I know).  15 of the 17 (88%), however, are members of the London Bullion Market Association. Only Japan’s Daiwa Securities Group and Mizuho Financial Group are not listed LBMA members.  It’s a pretty exclusive club of  120 members (if I counted right).  So, 12.5% of the membership just showed up on the SEC’s enhanced investor protection list.  Sure, it seems a little weird, but it’s important that the SEC take action to prevent things like what just happened to Indymac. I feel a lot more confident about Wachovia (12% short interest) already, don’t you?

Fun Facts: Most of the gold traded in the world takes place in the over-the-counter [OTC] markets and the London Bullion Market is by far the biggest OTC market in the world.

Let’s review, the SEC has decided to shield a bunch of mostly non-American financial institutions from short sellers (who have shown little interest in shorting them) in order to stabilize our troubled banks, by remembering that it has laws it should be enforcing, because if the institutions that are already safe are assured safety, then the ones in peril should be OK too (trickle down).   And there’s nothing weird about that.

Additional sources: Shortsqueeze.com, Google finance.

Comments

[orca]

This is interesting information. I saw the list, didn't understand why some were and some weren't on it, especially the foreign ones, and although I'm not sure yet LBMA is the trigger to the compiled list it is not farfetched. Questions remain: why GS, why not WM/WB/etc, why not all 120 LBMA members (insofar that they have a US listing), but this truly is eye-opening. Good work Mark.

[gosailing]

SEC Chairman Cox specifically referenced " Primary Dealers", Fannie Mae, Freddie Mac in his "naked" shorting decision. Primary Dealers and requirements for being Primary Dealers are listed at the NY Federal Reserve website:www.newyorkfed.org/mar...

[Greybeard]

Good point, Gosailing.
The Fed's Primary Dealers list has all on the 'sacred cow' SEC list except for Allianz SE and Royal Bank and Fannie Mae/Freddie Mac. The SEC's seemingly arbitrary list may have much more with keeping open the Fed's ability to trade volumes US securities. Thereby securing the Fed's ability to execute their monetary policy (right or wrong).
www.newyorkfed.org/abo...

[Shabba]

I think your data is wrong. It doesn't make any sense for the finanicals to have a lower short interest than the S&P 500. In fact it makes absolutely no sense whatsoever, and I gotta say that your data must be wrong. These stocks have been decimated. I wonder if this includes "naked shorts". How are they measuring this, is it the average short interest at the end of the day, or what? I've seen a lot of these companies exchange 20+% of their total shares in one day. This has to be massive short selling.

[Tim in SATX]

Mark and all, the real protective target of the SEC list is just Fannie, Freddie and Lehman. The whole primary dealer thing is just thrown in there to add some hint of legitimate rationalization. The SEC is perverting their mission to protect investors. They have turned a blind eye to the whole bubble promotion issue, and now that we have the next bubble bust- in real estate finance, they are looking for scapegoats.
Shorts play an essential role in mopping up bursting bubbles as they are the only bid while taking profits in a crash. This, after their offerside supply at the top protected the last fools from theirown bidding extremes.
The SEC is misreading the rumor mongoring shorty boogieman here. The source of the rumors on Bear Stearns for example was merely the sharing of counterparty risk concerns as a part of legitimate business transactions. If you needed to hedge your BSC credit or counterparty risk in a meltdown, why not short the stock?
The SEC is inadvertantly playing Whack-a-Mole with dynamic credit exposure hedging. Financial equities are intangible options on a leveraged balance sheet. Did anyone notice that during the short squeeze on the GSEs their MBS spreads blew out? Do you think their equities were getting kicked around like credit hedge option footballs? Did anyone notice how MBS spreads improved when the GSEs reversed today?
Is the SEC now trying to promote GSE equity in a desperate attempt at a last ditch private market recapitalization? Are they misreading the shorting of Lehman as a bear raid when it is credit and counterparty risk exposure hedging?
And as far as Hanky Panky Paulson goes- I say stop it with the shotgun socialism!

[mark mchugh]

thanks all. BIG THANKS to gosailing and Greybeard. I completely missed the meaning of "primary dealers" in the statement (I never even think about government securities), but that is the 'sacred cow' list. Allianz is Dresdner Kleinwort, and Royal Bank is Greenwich Capital. Cantor Fitzgerald is private, and Bear Stearns will be absorbed into Lehman. I must concede the LBMA connection becomes a secondary footnote.

I still think the question, "what does this mean?", is valid. I detest the selective enforcement of rules and was puzzled, to say the least, by the list. Maybe we should be expecting turmoil in the US goverment securities market.

Shabba - I collected my short interest data from shortsqueeze.com and used google finance for some of the shares outstanding data (if it was missing at shortsqueeze). Many financials have very large short interest (NCC- 21%, for example). The point I was trying to make was the companies on that list don't have large short interest (excepting FRE, FNM & LEH). I couldn't tell you how accurate the information provided is, or how short interest from other exchanges is reflected on ours, if at all. But, from the info I can get, it certainly doesn't seem like the companies are under siege on our exchanges and that's all the SEC controls. So, why are they concerned?

In both investing and life, I believe that those "weird little things" often turn out to be significant in hindsight, and if you can decipher them sooner rather than later, you'll be way better off. This may be one of those things. Plus, I can't resist a good conspiracy theory.

Thanks again all, for sharing your insight.

[Chris C]

Excellent post. Short selling is real and destructive and done by some of the same banks on the protected list. But it seems like they don't like to be on the receiving end of the same treatment.

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[User 138602]

foreign banks? is it because they have their head office in another country? all those institutions have money invested everywhere including USA. But I agree with the fact they should all be protected
no privileges should be attached to only a handful in the same sector.
thanks for the list and all that goes with it,really interesting and valuable tools.