Biglaw

One Of America's Most Prestigious Biglaw Firms Calls On SEC To Rescue Banks From Short Sellers

Banks are 'under attack' -- but will the SEC do anything about it?

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decline fall collapse stock market recession chart graphBanks are failing, and in response, because some people just want to watch the world burn and make a quick buck in the process, other banks’ stocks are being short sold left and right.

Wachtell Lipton, one of the most prestigious Biglaw firms in America, isn’t just going to stand by and watch as more banks fold under the pressure. The firm wants the Securities and Exchange Commission to do something about it — and fast.

Late last week, the firm sent out a client memo entitled, “Abusive Short Selling: Once Again, It’s Time to Act.” Written by Edward Herlihy, co-chairman of Wachtell’s executive committee, and Matthew Guest, a partner at the firm, the memo calls on the SEC do something it hasn’t done since the 2008 financial crisis: place a temporary ban on short sales of banking institutions.

Will the Biglaw firm’s banking gambit work? We’ll have to wait and see.

In the meantime, read Wachtell’s full memo below.

The country needs a prompt, tailored response by the SEC to coordinated short attacks that are putting our economy at great risk. In recent trading sessions, the short strategy consisting of “pile-on and wait” has targeted safe and sound regional and community banks and shaken the market’s confidence. Skyrocketing short interest levels have created a relentless downward pressure on the banks’ equities that bears little or no relationship to fundamental performance. The targeted banks are the engine of American economic activity, with their local presence and knowledge allowing for responsible underwriting of the agricultural, small business and middle-market lending that sustains production and employment.

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The distress faced by the banks that failed was undoubtedly the result of some mix of poor risk management and challenges from the extraordinarily rapid change in interest rate conditions created by the Federal Reserve. But, despite this, potentially viable private sector, open bank resolution attempts were stymied by short-seller driven market death spirals that overwhelmed rationality.

Unnecessarily shaken by the curious and seemingly pre-ordained outcome of the First Republic auction, confidence in America’s mid-size and smaller banks remains under attack. Just as we wrote during the Financial Crisis, decisive, focused action from the Commission is necessary to appropriately regulate coordinated short attacks that profit trading firms at the expense of small retail investors, employees and retirees. Similar to their action in 2008, we urge the Commission today to impose a 15-trading day prohibition on short sales of regulated financial institutions to allow time for the banking regulators to work on steps to restore confidence, and for the market to absorb fundamental information and work as it should. Other longer-term solutions may include reinstitution of the traditional up-tick rule, and aggressive enforcement combating abusive short sales, market manipulation and groups acting in concert. Absent prompt action, strong banks, employees, communities and the American consumer may continue to bear the high costs of unnecessary and unjustified distress.

A new sign of panic in the US banking industry: Law firm Wachtell Lipton calls on SEC to crack down on short selling of bank stocks. [Insider]

Staci ZaretskyStaci Zaretsky is a senior editor at Above the Law, where she’s worked since 2011. She’d love to hear from you, so please feel free to email her with any tips, questions, comments, or critiques. You can follow her on Twitter or connect with her on LinkedIn.

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