Following the signing of the Emergency Economic Stabilization Act of 2008 on Friday, the SEC issued a statement that the ban on short selling financial institution stock will expire late on Wednesday night. Some fear the lifting of the ban will cause financial institution stock to decline even more. As evidence they point to the bankruptcy of Lehman Brothers following the lifting of a similar short-selling ban earlier this year.
If the ban is working to shore up prices, then presumably lifting the ban, absent other factors, will cause prices to drop. One big factor to consider is the effect of the bailout. The SEC has said all along that it would keep the ban in place until a bailout was in place, but the bailout has not garnered as much investor confidence as was expected (as evident by how the markets performed today).
The SEC may have to extend the ban until investors no longer fear a run on bank stock, whenever that may be. Another factor that points toward extending the ban is that investors with cash are waiting to see if the lifting of the ban causes stocks to fall even more before they buy in. Conversely, if the ban is not lifted, these same investors continue to wait.
