Students in Free Enterprise business column
Raymond McDonough
Issue date: 9/30/08 Section: News
For anyone following the recent trends in the stock market over the past couple of weeks, you have been taken for a rollercoaster ride.
The economy seems to be in shambles, and many people are struggling to meet day to day expenses due to the credit crunch and mortgage back securities. However, there is another underlying cause as to why various sectors of many markets are declining. Short selling of securities has driven down the price of many stocks and has caused the end of the era of investment banks.
Short-selling, which involves investors selling stock in anticipation that the price will fall, has rattled the stock market after restrictions, which have been in place since 1939, were removed in 2007.
This measure was implemented to prevent a bubble, or push in price that margin trading or trading on credit creates. In recent months, short-selling has driven stock prices to the floor and contributed in the default of companies like Bear Stearns and Lehman Brothers.
These investment banks invested in mortgages, in which there was no unification throughout the investment vehicles bunched into the sub-prime mortgages.
The result was the companies' assets and stock price became over-valued, giving investors a good reason to begin shorting stocks. After Lehman Brothers defaulted, the two investment banks left standing were Morgan Stanley and Goldman Sachs Group.
In response to the affects of short selling, the Securities and Exchange Commission (SEC) has temporarily banned short selling on about 800 financial stocks to boost investor confidence. This ban is to be in place until October 2, 2008 and may be extended ten more days after if the SEC deems necessary. The ban includes commercial banks and the two investment banks that announced a transformation in their business model last week, Morgan Stanley and Goldman Sachs.
The announcement that Goldman Sachs and Morgan Stanley are becoming commercial bank-holding companies came as a shock on Wall Street. The era of investment banks has come to an end. The change marks a shift in the financial landscape dating back to the Great Depression.
The economy seems to be in shambles, and many people are struggling to meet day to day expenses due to the credit crunch and mortgage back securities. However, there is another underlying cause as to why various sectors of many markets are declining. Short selling of securities has driven down the price of many stocks and has caused the end of the era of investment banks.
Short-selling, which involves investors selling stock in anticipation that the price will fall, has rattled the stock market after restrictions, which have been in place since 1939, were removed in 2007.
This measure was implemented to prevent a bubble, or push in price that margin trading or trading on credit creates. In recent months, short-selling has driven stock prices to the floor and contributed in the default of companies like Bear Stearns and Lehman Brothers.
These investment banks invested in mortgages, in which there was no unification throughout the investment vehicles bunched into the sub-prime mortgages.
The result was the companies' assets and stock price became over-valued, giving investors a good reason to begin shorting stocks. After Lehman Brothers defaulted, the two investment banks left standing were Morgan Stanley and Goldman Sachs Group.
In response to the affects of short selling, the Securities and Exchange Commission (SEC) has temporarily banned short selling on about 800 financial stocks to boost investor confidence. This ban is to be in place until October 2, 2008 and may be extended ten more days after if the SEC deems necessary. The ban includes commercial banks and the two investment banks that announced a transformation in their business model last week, Morgan Stanley and Goldman Sachs.
The announcement that Goldman Sachs and Morgan Stanley are becoming commercial bank-holding companies came as a shock on Wall Street. The era of investment banks has come to an end. The change marks a shift in the financial landscape dating back to the Great Depression.
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