So the SEC is going on a tirade against short selling after public pressure forced them to do something. However, exactly how and why were the 799 financial firms selected for the temporary short selling prohibition chosen? Granted, most of the companies on the list are bank holding companies, which make sense. However, there were a few oddball choices, such as Apollo Investment Corp. (NASDAQ:AINV), which is a business development company, and FBR Capital Markets (FBCM). None of the mortgage-focused real estate investment trusts, which play an important role in loan origination for the primary market and which purchase numerous mortgages and MBS in the secondary market, made the list.
Aren't these financial firms as well with "frozen" assets on the balance sheet? As Paulson said:
The federal government must implement a program to remove the illiquid assets that are weighing down our financial institutions and threatening our economy.
Tell that to struggling REITs like Redwood Trust (NYSE:RWT), Chimera Investment Corp. (NYSE:CIM), or worst of all, Thornburg Mortgage (TMA). These mortgage REITs all hold high-quality yet illiquid assets on their balance sheets.
Short sellers have encircled these firms, knowing that mortgage REITs, by their very nature, depend on access to the capital markets to support their portfolio of mortgages and MBS, yet they aren't worthy of being included on the SEC's no-short selling ban list? If we're going to prop up everyone's stock price, let's try to be fair about it. Mortgage trusts play a very important role in adding liquidity to the market for non-GSE conforming debt. They also provide a source of valuable income to individual investors like you and me.
If we're going to make a bread line, let's promote the mortgage REITs closer to the front. These companies purchase so-called "illiquid" assets, distribute income to shareholders, and establish a market for people who don't fit in the Freddie/Fannie box. Mr. Cox and the SEC staff, please throw us a bucket. We'll help bail.
Disclosure: No positions.