Texas Pension Funds Asked Not to Loan Shares for Short Sales

Date: Friday, September 19, 2008
Author: Andrew Harris, Bloomberg

The two biggest public pension funds in Texas, which hold $100 billion in investments, were asked by state Attorney General Greg Abbott not lend shares of some companies to would-be short sellers.

``We're very concerned in Texas about the loss and potential loss of millions of dollars in our pension system as a result of recent declines in the market,'' Abbott said yesterday in a phone interview.

In a pair of letters sent to directors of the Employees' Retirement System of Texas and to the Teachers Retirement System of Texas, Abbott asked the funds to ``temporarily suspend the practice'' of lending shares of ``certain troubled companies'' in an effort to improve the overall liquidity of U.S. financial markets.

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares that they then sell. If the price drops, the sellers pocket the difference when they buy back the stock at the lower price and return it.

Short sellers have come under scrutiny from regulators and executives as shares of some of the biggest investment firms have plummeted during the deepening credit crunch and the collapse of several Wall Street institutions.

New York State Attorney General Andrew Cuomo yesterday said he is investigating short sellers of shares of Lehman Brothers Holdings Inc., American International Group Inc. and other financial companies to see if investors spread false information to drive down stock prices.

`Wide-Ranging' Probe

That ``wide-ranging'' probe also will examine trades of New York-based securities firms Morgan Stanley and Goldman Sachs Group Inc., which have been targets of short sales this week, according to Cuomo.

The California Public Employees' Retirement System, known as Calpers, and the New York State Common Retirement Fund already have decided to stop lending shares for short sales, following a similar move by the California State Teachers' Retirement System.

Abbott of Texas said his office was taking ``basically calling for the same actions that have been undertaken by Calpers.''

The attorney general declined to say if his office was investigating any specific instances of improper short selling. He said his office was ``analyzing'' its options with respect to the issue of naked short selling.

In naked-short scenarios, speculators issue sell orders without first borrowing shares to sell or deliver to a buyer, creating phantom shares that dilute the value of authentic shares.

Abbott declined to say if such trading was ``actually happening at this time,'' in his state.

``I hesitate to call it an investigation,'' he said. ``It's an analysis. We're looking into it.''

Teachers Retirement System Director Ronnie Jung and spokesman Howard Goldman didn't return messages seeking comment after business hours yesterday. Employees' Retirement System spokeswoman Mary Jane Wardlow also didn't return a message seeking comment.

To contact the reporter on this story: Andrew Harris at the federal court in Chicago at aharris16@bloomberg.net.