Short Selling Ban, Part V: Is Mr Ed A Bank(er)?

We have been very vocal in expressing our concern with the SEC’s ban on short selling financial stocks. Not only because the ban itself threatens basic free market principles, but the list itself is very arbitrary and includes many non-bank institutions. This morning the SEC updated the list and added 7 names, which included Sears Holdings (“SHLD”) and AutoNation (“AN”).

Is SHLD a bank? Our review of the FDIC website this morning shows that SHLD is not registered as a bank and according to SHLD’s 2007 10-K:

“We compete with a wide variety of retailers, including other department stores, discounters, home improvement stores, consumer electronics dealers and auto service providers, specialty retailers, wholesale clubs and many other competitors operating on a national, regional or local level along with Internet and catalog businesses, which handle similar lines of merchandise.”

In addition, SHLD’s actually breaks out revenue into merchandise sales and credit and financial products. In 2007, SHLD reported $50.7BN in merchandise sales and $0 in credit and financial services revenue. That is not a typo.

SHLD is not a financial company! It begs the question who is adding these companies to the list and why SHLD has been added. SHLD has been out of the credit business for more than three years, the stock is down only 8% on the year, and the borrow fee for shorting are in the mid 20% range (i.e. almost impossible to borrow and thus short). Not a likely target for protection from “evil doers” in our estimation.
Perhaps it was added because SHLD’s largest shareholder is ESL Investments, the hedge fund of former Goldman Sachs luminary Ed Lampert?

In adding both SHLD and AN, which comprise ~64% of the value of ESL Investments collectively, the SEC is doing nothing more than protecting the assets of a hedge fund manager.

We hear Ed is a good guy. We have nothing against him personally, or hedge fund managers altogether. They are the great equalizers of daily trading, provided that they are not selectively banned from the game.

Additionally, Lampert is a Yale guy… so he deserves our partisan Yale Blue bias up here in New Haven. It’s hockey season, and we all stand together in the stands! That said, Keith and I were Yale hedge fund managers too, and no one is giving us this club deal.

Daryl Jones
Managing Director

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