As is now well known, this week the SEC announced that it plans to tightened short-selling rules on Monday for 19 financial companies, essentially limiting naked short selling by now requiring short-sellers to actually borrow the shares they plan to sell before shorting. The new restrictions were loosen a little on Friday when the SEC said market makers wouldn't have to pre-borrow the stock, but would still need to deliver them within three days. Market makers had complained that the new rules would prevent them from providing the necessary liquidity for making an efficient market.

Upon first hearing of the rule change (or enforcement), in particular the listing of the gang of 19, I wondered in a post whether some companies on the list would prefer to not be included, given the attached stigma of needing Government intervention to prop up their shares. After all, the rule is effectively an SEC induced short-squeeze. Of course, that was 3 days and +20% ago. Now other companies are wondering why they were not included. After all, they like +20% moves as well.

As mentioned in a recent WSJ article, the Financial Services Roundtable, who represents 100 of the largest U.S. financial companies, wants the SEC to extend the order to include companies they represent as well. Companies like Wachovia, reporting next week, are not currently included. Apparently they are either not big enough to fail, or are not yet in poor enough shape to fail. Given the recent investigation of Wachovia, and speculation about poor numbers next week, that may soon change.

If history is any indication, and it usually is - it is rarely different this time - then companies may want to be careful what they wish for. Research by Professor Charles Jones at Columbia Business School has found that similar moves by the SEC have some unhappy precedents. As mentioned in the WSJ article: "In 1932, the New York Stock Exchange announced that, effective April 1, brokers would need written authorization before lending an investor's shares. "This wreaked havoc on the securities lending market, but the effect was completely temporary," he [Jones] said, because the move only added extra hoops, and didn't prevent people from taking bearish positions if they wanted."

More regulation, and temporary results. Not necessarily what we need long-term, but what we will probably get regardless. Maybe with less next quarter, short-term, results-generated management, by both investors and the government, we would not need additional layers of regulation.

As discussed in a recent Bloomberg article, the spread between the 3-month Libor and the overnight index swap (OIS) rate, traded forward 3 months, is greater than similar expiring spreads. This recent movement in the spread is signaling that traders are concerned that banks will have difficulties obtaining cash to fund existing assets, as well as putting into question their ability to shore-up their balance sheets. In general, an increasing spread signals that funds are becoming less available. The recent activity appears to be driven more by traders leaving the short-term, closer to expire positions early over worries about Libor and its reliability.

The spread has averaged about 11 basis points over the last 10 years, but has ranged between 24 bps to 90 bps this year, and has gotten as high as 106 bps last December. The activity in the swaps market is worrisome, indicating that derivative traders do not feel that the sell-off of financial companies in March was the low, and that the worst is not behind us. Recent problems/concerns with Lehman Brothers, Wachovia, and UBS, as well as the recent sell-offs in Goldman Sachs, Merrill Lynch, JP Morgan, and Citigroup are also highlighting concerns with the financial companies. As usual, this is not good news for the economy and the market as a whole as it needs a strong financial system to keep greasing the gears of expansion. It may be a long summer until the credit markets start showing a little more confidence.

On Fast Money (CNBC, Monday), it was mentioned that Wachovia was setting up for a good trade. Reasons for the trade included the current write-downs (assuming that all the bad news is out?), and the mention of the stock approaching recent lows (the 3 month chart does show $25 providing some short-term support, but the longer-term trend looks less bullish). As a caveat, it was mention that any buy here should have tight stops, very tight stops. In general, it is probably more prudent to wait until one sees a break from the longer-term downtrend, currently at around $28, before stepping in the waters. Granted, you lose that 10% move, which I am sure the $25.50 trade with tight stops is hoping to capture, but the risk in financials in general is a little too steep. There are also new concerns with dilution, the reduced dividend, and the extra cash that is not needed for current write-downs ($7 billion in new stock offerings and saving $2 billion in reduced dividends to cover $4.1 billion in write-downs and credit loss provisions). Where is the other money going? If future write-downs are expected, and anticipated, then the stock may trade lower. On the other hand, if the extra cash is to sure up the balance sheet, and give Wall Street confidence that the bank can weather any new, smaller hiccups, then we may see higher prices. Either way, the recommended tight stops are certainly in order, and prudent, not just for WB, but all financials. If one really wants to consider any potential bottom move for financials, the Financial Select Sector SPDR (XLF) ETF may be a safer trade. It will help reduce your firm-specific risk, which still seems to frequently pop-up in this sector.

Ticker: WB, XLF

Wachovia took $2 billion in write-downs and another $2.1 billion in new provisions against credit losses, causing it to raise $7 billion in new capital through the sale of common and preferred stock. Of interest is that 2 + 2.1 does not equal 7. Given that the company also expects to save $2 billion by cutting its dividend by 41%, I wonder what the other funds are being used for? Recent problems apparently resulted from the acquisition of Golden West, a California bank and mortgage lender. Right now, "mortgage" and "California" are not two terms you want showing up in your quarterly and annual reports. Not that all acquisitions for Wachovia have been bad, given that the A.G. Edwards acquisition may help them overcome some of their recent problems, or at least provide some steady capital. Of course, I am sure the good folks at A.G. Edwards are not happy, given that their previous stronger shares were converted to Wachovia shares after the acquisition, and are now being further diluted, including a reduced dividend.

Ticker: WB