McCain Calls for Cox's Ouster

As the federal government works to create a new entity that would take financial services companies' bad assets off their balance sheets — talk of which helped drive the Dow Jones Industrial Average up to its biggest percentage gain in nearly six years yesterday — the chairman of the Securities and Exchange Commission, Christopher Cox, is enduring a stunning reversal of fortune.

Once the darling of the Republican Party, even touted as a possible vice presidential candidate, the 55-year-old former congressman was accused yesterday of betraying the public trust by the Republican presidential nominee, Senator McCain, who declared, "If I were president today, I would fire him."

The criticism of Mr. Cox comes on the heels of a political firestorm over short selling, a strategy where traders sell borrowed stock in the hopes it can be repurchased later at a lower price and they can pocket the difference. In response to clamoring from key Democrats, including Senators Schumer and Clinton, as well as pressure from Wall Street executives such as Morgan Stanley chief executive John Mack, the SEC was on the verge last night of taking the dramatic step of banning the strategy. Yesterday, the British financial regulator, the Financial Services Authority, announced it would block short selling of financial stocks through January 2009.

News reverberated around Wall Street yesterday of a potential ban on short sales and the creation of a federal mechanism that would remove the soured debt plaguing banking stocks, possibly by buying the assets at a deep discount, to be sold once the market improved. The speculation helped drive the Dow up more than 410 points, or 3.9%, and reclaim about 90% of its Wednesday losses.

In a speech in Cedar Rapids, Iowa, Mr. McCain heaped blame for the current Wall Street crisis on the SEC, telling the crowd that the agency "kept in place trading rules that let speculators and hedge funds turn our markets into a casino." He blasted naked short selling, where the traders don't make an effort to borrow a stock before selling it short, and the elimination of the uptick rule, which once prevented traders from shorting any stocks that hadn't first posted a price increase.

"Speculators pounded the shares of even good companies into the ground," Mr. McCain said yesterday.

"While I have great respect for Senator McCain, we have sometimes disagreed, and this is one such occasion," Mr. Cox said in a statement yesterday afternoon. "The SEC has made plain that we have zero tolerance for naked short selling."

Conservatives were caught off guard by Mr. McCain's statements, with several Republican politicians reached by The New York Sun declining to comment. The president of Americans for Tax Reform, Grover Norquist, said Mr. McCain's speech "was a bit harsh," and that Mr. Cox is a "proven free-market conservative."

The 55-year-old Mr. Cox, who was unanimously confirmed by the Senate to his SEC appointment in 2005, was offered up as a possible running mate for Mr. McCain in a Wall Street Journal article in March. Calling him "youthful and confidence-inspiring," the article praised him as "a serious and sober minded politician" who had "ample experience to serve as understudy to a well-traveled 72-year-old." A California Republican, he served in the House of Representatives for nine terms, "amassing a strong record as a fiscal conservative and tax cutter," the article, by Brendan Miniter, said.

Mr. Cox's move to ban short selling may stanch some of the criticism. Still, while some welcomed news of the ban, hoping it would alleviate the whipsawing of the markets in recent days, others predicted it would only wreak more havoc.

"If you eliminate short selling, you are saying that the only way you can make money is if a stock goes up," the chief executive of Lightspeed Professional Trading, Stephen Ehrlich, said. "As a result, companies' incentives to drive extra profitability might not be there."

Short selling, which is legal, is a useful way to hedge bets and it plays a critical role in allowing the derivatives market to function, Mr. Ehrlich added. It also ensures that stock prices are efficient and accurate, and without it, many stocks would have artificially inflated prices. Enron is often cited as a case where short-sellers detected fraud.

The ban would follow other rules the SEC rushed to announce earlier in the week, including making it a fraud for sellers to deceive their brokers about borrowing shares to short, and eliminating some exemption for options traders. A ban would not be a complete break with previous policies, however. Earlier this summer, the SEC instituted a temporary "emergency" order that banned short selling for 17 financial securities firms, including Lehman Brothers, Fannie Mae, and Freddie Mac. The stock prices did rise somewhat during the ban, only to fall back to previous lows once the ban was rescinded.