‘Short sellers’ boosted bets on Lehman, AIG, WaMu

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Bearish ‘short sales’ of shares of Lehman Bros. Holdings Inc. and insurance giant American International Group jumped in the first two weeks of September, leading up to the latest credit crisis that drove Lehman to file for bankruptcy protection and forced a federal rescue of AIG.

Washington Mutual Inc. also remained a big target of short sellers.

The data, in the regular biweekly short-interest report from the New York Stock Exchange released Wednesday, will give more ammo to people who believe short sellers have been trying to orchestrate the demise of major financial firms.

Of course, the numbers don’t prove that. All we know for sure from the data is that either 1) more speculators expected the stocks to go lower or 2) more investors were trying to hedge their portfolios by using short positions in Lehman, AIG and other financial issues.

But if some short sellers were in fact engaged in a ‘bear raid’ on the stocks to drive them lower by spreading rumors that the companies might fail, regulators now have more data they can mine to try and prove that.

The Securities and Exchange Commission last week said it had launched a probe of trading in financial stocks, and would require hedge funds and other money managers to discuss their activities under oath.

The Wall Street Journal reported late Wednesday that the SEC had subpoenaed more than two dozen hedge funds about their recent trading in Lehman, AIG and other financial issues.

In a short sale, a trader borrows stock (usually from a brokerage’s inventory) and sells it, either betting on the price to fall or to provide a portfolio hedge in case that happens. If the stock does decline the trader can later buy new shares to replace the loaned ones and pocket the difference between the sale price and the repurchase price.

Short selling is legal as long as investors follow well-known rules. But as Wall Street’s bear market has worsened this year, short sellers have been vilified as market manipulators.

Legally or illegally, the shorts had it right on Lehman, whose shares now trade for 22.5 cents -- down from $16 at the end of August.

NYSE data show the number of shorted shares of Lehman Bros. soared to 108 million as of Sept. 15, or 15.7% of outstanding shares, from 76.8 million on Aug. 29.

AIG’s shorted shares rose to 96.6 millon, or 3.6% of outstanding shares, from 85.8 million in the same period.

But some financial issues were much more heavily shorted than Lehman and AIG. WaMu’s shorted shares, for example, jumped to 429.2 million as of Sept. 15, or 25% of outstanding shares, from 382 million two weeks earlier.

WaMu’s shares fell to a multiyear low of $2 on Sept. 15 after Lehman filed for bankruptcy. The stock bounced back to $4.25 by Friday, in part thanks to the SEC’s decision to temporarily suspend shorting of 800 financial stocks.

This week, even though WaMu can’t be shorted by most investors, the stock has resumed its slide on fears about the thrift’s stressed finances. On Wednesday, WaMu shares plunged 94 cents, or 29%, to $2.26.