East West Bancorp stock gets boost from SEC’s ban on short selling

East West Bancorp Chief Executive Dominic Ng will tell you that his Pasadena bank is in about the same financial condition as two months ago: some loan problems, but a high net worth and a solid base of deposits.

East West’s stock price is another matter, though -- trading at less than $8 a share in mid-July, it closed at $17.65 on Friday. Ng believes the recovery is due almost entirely to the Securities and Exchange Commission’s moves against short sellers.

Betting that a stock’s price will decline, the shorts borrow shares and sell them. That enables them to profit if the stock falls by buying it back at the lower price -- all perfectly legal and, many would say, healthy for the stock market.

Financial stocks in general have fallen sharply since the credit crisis took hold last year. As those declines accelerated in recent months, short sellers targeted a host of institutions, from huge Wall Street firms like Morgan Stanley to the smaller institutions with branches dotting Southern California.

Ng has no doubt that the short selling of East West and other stocks hasn’t been on the up and up.

“Everyone involved with the financial stock market knows that there was rampant illegal short selling going on since the beginning of the year,” Ng said Friday. “Many regional and community banks and thrifts had taken a major beating in their stock price in the spring and summer due mainly to illegal short-sells.

“Unfortunately, the government didn’t intervene sooner -- which resulted in the chaos in the past several days.”

East West shares recovered somewhat after the SEC unveiled a crackdown on “naked” short selling, in which the speculators skip the borrowing part and sell shares they don’t own, which can be illegal.

As the SEC broadened its campaign to temporarily ban all short selling in financial issues late this week, East West soared along with the rest of the sector. Although the stocks may have rallied partly in response to the government’s plan to buy up mortgage-related debt, some short sellers almost certainly were closing out their positions by buying stock, boosting demand.

East West, which was on a list issued by the SEC on Friday of stocks off-limits to short sellers, shot up 28% in the last two days.

Among others on the list, Southern California’s battered adjustable-rate mortgage lenders did the best of all: Downey Financial Corp. of Newport Beach rocketed up 94% over two days, while FirstFed Financial Corp. of Los Angeles rebounded 68%.

(Also on the list: Vineyard National Bancorp, a Corona-based lender to home builders, and a passel of L.A. banks that, like East West, do a lot of real estate lending and have Asian Americans as their core clientele: Cathay Bancorp, Center Financial Corp., Hanmi Financial Corp., Nara Bancorp, Preferred Bank and Wilshire State Bank. Los Angeles’ largest bank, City National Corp., isn’t on the list but a spokesman said the SEC ban covered all commercial banks, listed or not.)

Echoing a common complaint, FirstFed Chief Executive Babette Heimbuch said short sellers had used the Internet as a megaphone to spread falsehoods.

“If you bet a stock goes up, there is not much you can do to help it go up except maybe spread a rumor that it is going to be bought out at a higher price,” she said. “But most investors wouldn’t trade on such a rumor.

“But if you sell short it appears to be much easier to spread rumors parading as fact about something negative, especially in a volatile market where everyone is already worried. So the stock goes down on fake news.”

The SEC’s ban on short selling of financial shares lasts until Oct. 2, and can be extended for a full month.

Branding the effort a “bandage approach,” Ng called for a comprehensive crackdown on illegal short sales and limits on regular short selling of all stocks, not just a handful of large, “too big to fail” financial institutions. “Fairness is critical,” he said.

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scott.reckard@latimes.com

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