New York state's pension funds on Thursday joined other public pensions that temporarily stopped lending bank and brokerage stocks to short sellers, the state comptroller said, saying he wanted to starve "this speculative fire."
New York state's list of 19 stocks that will not be loaned includes two of the latest targets of short sellers, Goldman Sachs and Morgan Stanley, Comptroller Thomas DiNapoli said.
New York's bid to stabilize financial markets follows a similar move in mid-July by state pension funds in New Jersey, which instructed its lending custodian to stop lending securities to short sellers.
"We were well out in front of this," said Tom Vincz, spokesman for the New Jersey Division of Investment.
New York City's pension funds followed suit on Thursday afternoon. William Thompson, the Democratic city comptroller, said the city's pension funds were suspending securities lending for 19 stocks that were on the U.S. Securities and Exchange Commission's "naked" short-selling list.
These actions are significant because pensions earn money by loaning stocks.
DiNapoli, New York state's Democratic comptroller and the sole trustee for the state's $154 billion in pension funds, said in a statement that this speculative selling was pressuring the stock market and threatening the health of the national economy.
"By removing some of the fuel that is feeding this speculative fire, my action is intended to bring stability and rationality back to our equity markets," DiNapoli said.
CalPERS, the largest U.S. public pension fund that serves about 1.5 million California public employees, took a more limited approach. It only stopped lending the stocks of just four banks -- Goldman, Morgan Stanley, State Street
Corp and Wachovia Corp
While New Jersey said it had no plans for its $76 billion pension funds to resume loaning stocks, CalPERS said it expects to lift its restrictions "once the market volatility abates."
Maryland's $37 billion pension fund also enacted curbs -- and gave short sellers just 24 hours to return the $1.4 billion of stock out on loan as of Wednesday's close, according to Dean Kenderdine, executive director of the state retirement and pension agency.
The stocks of Goldman Sachs and Morgan Stanley have tumbled as the credit crunch gets worse. New York's Democratic attorney general, Andrew Cuomo, on Thursday said he was probing possible illegal short selling of the stocks of Wall Street companies.
Cuomo's list includes Goldman Sachs and Morgan Stanley and two other firms at the heart of the Wall Street crisis, Lehman Brothers and American
International Group
Short sellers arrange to borrow shares in companies they consider overvalued and sell them in hopes of making money if the stock prices fall. It is a legitimate form of trading that can prevent a stock from becoming priced too richly, but the strategy is often blamed when a company's stock falls.
A "naked" short sale occurs when the seller does not borrow or arrange to borrow the stock in time to make delivery to the buyer within the standard three-day settlement period, according to the SEC.
BANNED ON BOTH SIDES OF THE POND
In another development on Thursday, the SEC put into effect tighter rules on traders who profit when stocks they have shorted decline in price.
And in London, the UK Financial Services Authority imposed a temporary ban on short-selling financial stocks on Thursday, saying the measure was needed to prevent further instability.
New York City Mayor Michael Bloomberg, who wants the city to keep its cachet as a global money center but who has castigated speculative short selling, noted on Thursday the hurdles facing regulators who set the toughest rules.
"The ability of any one country to impose regulations is almost impossible because companies can shift their business or because their competitors are being judged and regulated by a different set of standards elsewhere in the world," the mayor, an independent, told reporters in Washington, D.C.
Administrators of Florida's $120 billion pension fund for state government workers are discussing possible actions on short selling to help stabilize the U.S. stock market, but spokesman Dennis MacKee said no decision had been made.
Other state and city pension officials were not available for comment, including those in Colorado, Delaware, Massachusetts, Oklahoma, Ohio and Wisconsin.
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