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Event 1—In July 2007, the SEC removed the uptick rule that required any short sale of a stock be done following an uptick in the price of that stock. The S&P financials essentially traded sideways prior to the removal of the uptick requirement, but they fell more than 12 percent in the first month after the rule change and at the same time the VIX nearly doubled.
Event 2—Volatility leaped in mid-November 2007, at the same time that FAS 157 was implemented. The S&P financials continued trending down. Citigroup CEO Charles Prince retired under pressure and Merrill Lynch CEO Stanley O’Neal was ousted around this time.
Event 3—In mid-March 2008, Bear Stearns collapsed under the weight of its exposure to mortgage-related derivatives, creating another volatility spike.
Event 4—In mid-July, the SEC restricted short sales of the 19 largest financial companies. This included shares of Fannie Mae and Freddie Mac, both of which had huge exposure to mortgage securities. The beleaguered S&P financials bounced up on the news, while volatility declined.
Event 5—In mid-September, just a few days after the collapse of Lehman Brothers, the SEC temporarily banned short selling of about 1,000 financial stocks. Many of these companies had reported many billions of dollars in FAS 157-related write-offs. Initially, the S&P financials popped up but the longer-term downward trend quickly resumed. Volatility shot up to record levels.
