It appears as though some market participants have a vested interest in beating up the GSEs. It appears as though no rescue plan, no amount of capital, no reassurances from various government officials are enough to stop the slide of GSE common equity and preferreds. Small investors are all to eager to believe the doomsayers. What they do not realize that, by joining in with market participants talking down the GSEs, they are sewing the seeds of their own demise.
You see, the market participants talking down the GSEs are, by and large, short. By panicking investors are creating a self-fulfilling prophecy which could end badly. The government and the GSEs themselves do not want to explore the nationalization option.
We must remember that asset bubbles work in both directions. Irrational exuberance can cause asset prices to rise without being justified by fundamentals. Uncontrollable fear can cause asset prices to fall without being justified by fundamentals. However, fear and short driven selloffs can lead to corporate failures.
This is why the Treasury and the Fed have proposed a plan to lend liquidity to the GSEs. Market participants who deliberately undermine the rescue plans by voicing their opinions in the media to help ensure the success of their trading strategies are detrimental to the markets. For this reason, the SEC is going to restrict shorting shares of the GSEs and certain finanicials. Those wishing to short their stocks would need to borrow shares and the lender would then take the shares out of the market making those shares unavailable for delivery or further borrowing. Needless to say, the shorts are up in arms. All this is, is a return to days gone by. This order is temporary and will be reviewed in 30 days. That could be long enough to stabilize the market.
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