CalPERS today stopped making Morgan Stanley, Goldman Sachs Co., State Street Corp. and Wachovia Corp. stock available for lending to mitigate short selling in the companies and damage to their market value.
CalSTRS stopped lending its shares in Morgan Stanley and Goldman Sachs.
Christopher J. Ailman, CIO of the $155 billion California State Teachers Retirement System, Sacramento, on Wednesday e-mailed the CIOs of 60 public pension funds asking them to ban lending of the shares of the two companies, said Sherry Reser, CalSTRS spokeswoman.
By this morning, Mr. Ailman heard back from seven. For the most part, he received a positive response, although I wouldnt say they said they are definitely doing it, Ms. Reser said. They might be considering it they might have to go through their boards.
CalSTRS on Wednesday banned the lending under an order issued by Mr. Ailman, including pulling back shares already lent, Ms. Reser said.
The idea is short selling is detrimental, Ms. Reser said. It destroys the capital in these holdings.
CalSTRS has 5.1 million shares of Morgan Stanley and 1.5 million shares of Goldman Sachs, run externally and internally. Ms. Reser didnt know how many of the shares were lent.
CalSTRS is proceeding with its securities lending program, except for the ban, Ms. Reser said. CalSTRS doesnt have investment programs that short stocks, she added.
At the $223 billion California Public Employees Retirement System, Sacramento, spokesman Clark McKinley said: We dont want to inadvertently contribute to short selling that could have an adverse impact on these companies.
Its not going to stop short selling (in the four stocks), but it will slow it, Mr. McKinley said.
Except for the ban on the four stocks, CalPERS is proceeding with its securities lending program, which has $29 billion out on loan in equity and fixed-income securities, Mr. McKinley said.
CalPERS has 4.8 million shares of Morgan Stanley, 1.6 million shares of Goldman Sachs, 8.3 million shares of Wachovia and 2.2 million shares of State Street, all available for lending and run both internally and by external managers. He could not say how many shares were lent or if CalPERS called back shares on loan or imposed the ban only going forward. All this was done independently; it wasnt triggered by anything CalSTRS did, Mr. McKinley said.
Illinois State Board of Investment, Chicago, isnt ordering any ban, concerned about what the consequences would be for its securities lending program and for market liquidity, said William R. Atwood, executive director of the $11.2 billion fund. Im not sure what the consequences to our securities lending program would be if we said we wont lend out these stocks, said Mr. Atwood.
The Illinois board has $1.8 billion on loan in a program run by State Street Bank; most of those securities are Treasuries. The percentage that would be in any company would be very small, said Mr. Atwood, who said he hasnt heard anything from CalSTRS.
Im highly sympathetic to the position (about a ban), Mr. Atwood said. We own these securities. These companies have enough problems without bizarre predatory trading practices affecting them.
One of the problems in the market now is a decline in liquidity, Mr. Atwood said. If we start restricting various forms of liquidity and securities lending is one form you create unforeseen problems. The fundamental purpose of securities lending is to create liquidity for market-makers, not necessarily to help short sellers. There is a liquidity function of borrowing securities, which facilitates the function of the global markets.
Virginia Retirement System, Richmond, has the matter under consideration, though no decision has been made, said Jeanne Chenault, spokeswoman for the $55 billion fund. Ms. Chenault didnt know if VRS officials had heard from CalSTRS.
John Heine, SEC spokesman, declined to say if SEC officials have discussed recently short-selling bans with CalSTRS or other pension fund officials.
John J. Mack, Morgan Stanley chairman and CEO, said in a memo to employees Wednesday that short sellers are driving our stock down. You should know that the management committee and I are taking every step possible to stop this irresponsible action in the market. We also are communicating aggressively with our long-term shareholders.
Erica Platt, Morgan Stanley spokeswoman, said company officials declined to comment about the pension funds bans.
Goldman Sachs spokesman Ed Canaday couldnt be reached for comment.