EVERETT — A new crackdown on Wall Street’s short-sellers helped result in a $275 million gain Thursday for Snohomish County’s largest bank.
Shares of Frontier Bank’s holding company, Frontier Financial, rose by more than 50 percent after a yearlong slump. The stock started at $11.64 on Thursday and closed at $17.50, up $5.86 for the day.
Frontier Financial’s market value rose from $547 million to more than $822 million.
The volume of trading for the stock was more than four times higher than an average day.
The sudden jump also led the Abarim Snohomish County Stock Index, created by Edmonds businessman Tim Raetzloff, to its biggest one-day rise in the 14-year history of the index.
“I think we saw a short squeeze today,” said John Dickson, Frontier’s president and chief executive, meaning short-sellers were pushed out of his stock.
Everett-based Frontier wasn’t the only bank to have a breakout day, as the battered banking industry got a reprieve. Shares of Washington Mutual rose 49 percent and Wachovia Corp. shares gained 59 percent, with both companies mentioned in different merger rumors. Banner Bank was up 40 percent.
Among local banks, however, news of curbs on short-selling — and especially “naked” short-selling — had the biggest impact on Frontier’s shares, as that stock has been a favorite among such traders. Locally based Cascade Financial and City Bank also were up, but not dramatically.
“Frontier has been one of the most shorted community bank stocks, at least in our neck of the woods,” explained Sara Hasan, banking analyst with McAdams Wright Ragen in Seattle. Dickson said that more than 20 percent of the company’s shares were being shorted at times.
Short-sellers bet a stock’s price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.
So-called naked short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale.
With more than $2.8 billion in deposits statewide, Frontier ranks as the third largest bank or thrift based in Washington, according to the Federal Deposit Insurance Corp. As with most banks, Frontier has dealt recently with a rise in bad loans, mostly to construction and development firms caught by the housing slowdown, and other adverse market conditions.
In the past year, Frontier’s shares have slid from $25.57 to a low of $8.31 in mid-July, a 68 percent drop. Before Thursday, the banking company’s shares had been on a slow rise again.
Dickson said one of the frustrating aspects of the trend is that short-sellers haven’t been subject to the same sort of disclosure as long-term stockholders, meaning they can try to manipulate the price without having to identity themselves.
This week, however, the tide has moved strongly against short-selling practices. On Thursday, New York state’s attorney general launched an investigation into whether some traders used illegal tactics to drive down the stock price of several Wall Street firms.
While short-selling is not illegal, New York state Attorney General Andrew Cuomo said he will focus on whether short-sellers engaged in conspiracy or spread rumors and bad information to influence the stock prices of financial firms and banks that have been hammered in the ongoing financial crisis.
“I want the short-sellers to know today that I am watching. If it’s proper and legal, they have nothing to worry about,” Cuomo said. “It is illegal, however, when such shorting is combined with the spread of false information in order to bring a company down.”
The Associated Press contributed to this story.
Reporter Eric Fetters: 425-339-3453 or fetters@heraldnet.com.
Short-selling curtailed
Government regulators have installed new controls on short-selling, a move in which traders bet that a stock’s price will fall so that they can profit from it. They borrow shares of the stock, usually from their brokers, and sell them after they drop, buying the cheaper shares to cover the borrowed ones. Then they pocket the difference.
The sell-offs can prompt a company’s price to plummet. Sometimes traders spread rumors about a company to make its price fall faster or farther.
So-called naked short-selling occurs when sellers don’t even borrow the shares before selling them and then look to cover their positions after the sale.
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