Short-Sale Ban Fails to Save Ambac, Farmer Mac From 50% Plunge

By Nick Baker and Eric Martin

Sept. 25 (Bloomberg) -- Ambac Financial Group Inc. and Federal Agricultural Mortgage Corp. tumbled more than 50 percent in the past four days. And you can't blame short sellers.

Their stocks are among 942 that the Securities and Exchange Commission prohibited investors from betting against because of concern speculators were unfairly punishing the shares. Of the total, 44 percent underperformed the Standard & Poor's 500 Index since the SEC unveiled the list of banned stocks Sept. 18, according to data compiled by Bloomberg.

``Taking the short sellers out of the market doesn't change the fundamentals,'' said Dean Gulis, part of a group that manages about $3 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan. ``It's wrong to say that short selling of shares was the biggest contributor to the financial crisis.''

The SEC banned short sales, where traders sell borrowed shares with the hope of buying them back later at a lower price, on concern investors took advantage of the subprime mortgage market's collapse to drive stock prices lower. Morgan Stanley Chief Executive Officer John Mack blamed short sellers for ``driving our stock down,'' according to a memo to employees sent Sept. 17. Lehman Brothers Holdings Inc. CEO Richard Fuld told Wall Street executives he believed short sellers ``actively colluded'' to topple Bear Stearns Cos., CNBC reported April 1.

JPMorgan Chase & Co.'s purchase of Bear in March saved it from bankruptcy, while Lehman, once the fourth-largest investment bank, filed the biggest bankruptcy in history last week.

Trailing S&P 500

Altogether, 418 stocks on the SEC's no-short-selling list fell more than the S&P 500's 1.7 percent decline since Sept. 18. Bloomberg's index of all U.S. shares covered by the ban climbed 3 percent, helped by 23 percent increases in Goldman Sachs Group Inc. and American International Group Inc. and a 9.9 percent gain in Morgan Stanley. They are among the 40 heaviest-weighted stocks in the index.

Ambac, the second-largest bond insurer, declined 55 percent to $3.02 in New York Stock Exchange composite trading since Sept. 18, extending its year-to-date retreat to 88 percent. The New York-based company said at the end of last week that it may delay the start of a new municipal bond insurer after Moody's Investors Service said it's considering cutting the firm's financial- strength rating by several grades.

Almost one-third of Ambac's shares available for trading were sold short on Sept. 15, according to New York Stock Exchange data compiled by Bloomberg. Although existing wagers against Ambac and other companies on the no-short list were allowed to remain in place after the SEC ban, new bets are prohibited through Oct. 2.

`Everyone Wants a Villain'

Farmer Mac, as government-sponsored enterprise Federal Agricultural Mortgage is known, plunged 65 percent to $5.25 since Sept. 18. The Washington-based company said Sept. 22 that its reserves may fall short of federal requirements. Farmer Mac hired a financial adviser to assist in selling assets and common and preferred stock.

``Everyone wants a villain,'' said Brad Alford, the Atlanta- based head of Alpha Capital Management LLC who invests in hedge funds. ``It's obviously not the short sellers.''

Financial institutions plunged during the past 19 months as banks globally racked up more than $500 billion in mortgage- related losses and writedowns following the first nationwide decline in U.S. home prices since the 1930s. Banks and brokerages led financial companies in the S&P 500 to a 54 percent retreat between Feb. 20, 2007, and July 15, 2008. That's the steepest slump since at least 1962, according to data compiled by Birinyi Associates Inc., a Westport, Connecticut-based research and money-management firm.

Morgan, Goldman Rebound

New York-based Morgan Stanley retreated 50 percent to an almost 10-year low of $21.75 in the seven days ended Sept. 17. It rebounded 14 percent, helped by the Bush administration's proposal to spend $700 billion on troubled bank assets. Goldman, which lost 36 percent to $108 over eight days ending Sept. 18, has since rallied 23 percent, helped by a $5 billion investment from Warren Buffett's Berkshire Hathaway Inc.

Conseco Inc., a Carmel, Indiana-based insurer that's also on the no-short list, retreated 40 percent to $4.78 since Sept. 18. Western Alliance Bancorp, a Las Vegas-based lender, plunged 43 percent to $14.68, while Ames National Corp., a bank based in Ames, Iowa, sank 37 percent to $26.71.

``It's a negative to have your name on the list because you're being branded as vulnerable,'' said Dan Genter, the Los Angeles-based president of RNC Genter Capital Management, which oversees $2.9 billion. ``If I were an investor, I'd want to be out of them.''

To contact the reporters on this story: Nick Baker in New York at nbaker7@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.