New SEC Governance: Mixed Blessing

The SEC has decided that short selling has gotten out of hand. The practice in which shares are borrowed and sold, hoping to be bought again at a lower price and returned in order to generate profits when a stock is falling, is a common practice among investors who feel a stock is overpriced. Financial stocks have been shorted heavily in the past year, Bear Sterns Cos (BSC) being case in point. When it was rumored to be in trouble, millions of shares were shorted, aiding the downfall of the company.
Today the SEC moved to curb excessive short selling by eliminating 'naked shorting' in which shares aren't actually borrowed. The idea is that as long as the institution could obtain shares it can allow shorting, it doesn't actually have to go through with the process of finding them. Starting Monday the practice will no longer be considered legitimate. Financial stocks which have bear ed the brunt of the short sellers rose hugely today, as investors bet the prices will start to rise once naked shorting is ended. Examples include Lehman Bros (LEH) which has risen over 50% since Tuesday, and Citigroup (C) which rose over 18%. Also seeing some day light are government backed Fannie Mae (FNM) and Freddie Mac (FRE) which are up 12.33% and 17.16% respectively.
This ruling is in a way a double edged sword for financial stocks. In the short term, it provides much needed relief from the battering their stocks were taking from short sellers. Also, it gives confidence to investors that the government will not stand for speculation to get in the way of the macro economy functioning. This can be seen from the recent price jumps. However, in the longer term, it may end up keeping profits down in the future. Many of these companies profit from not only arranging naked shorting, but do it themselves. The elimination of the practice, and continuing regulation by the government could cut into the incomes of these financial stocks in the future.
I am overjoyed that the market actually had a couple successful days among the weeks of crap we have seen, but I do find it interesting that this may come back to haunt the same institutions that are reaping the benefit currently. I'm hoping that the bulls can find their legs again, at least among deserving companies. I think that they may have gotten a little closer these past couple days.