From Bloomberg:

Sept. 17 (Bloomberg) — The U.S. Securities and Exchange Commission, responding to a market rout this week, may require hedge funds to disclose their short-sale positions and plans to subpoena the funds for their communication records.

Hedge funds and investors managing more than $100 million in securities would be “required to promptly begin public reporting of their daily short positions,” Chairman Christopher Cox said in a statement today. The enforcement division will obtain “disclosure from significant hedge funds” regarding “past trading positions in specific securities,” Cox said.

Lawmakers including U.S. Senate Banking Committee Chairman Christopher Dodd and regulators say short sellers may have contributed to a market crisis by spreading false information and using abusive tactics to attack companies. Hedge funds and other investors argue that poor business strategies are to blame, not short sellers.

“A lot of hedge funds don’t like being forced to disclose their long portfolios, so they’re really not going to like this,” said Sean O’Malley, a former SEC lawyer and now a partner at Goodwin Procter LLP in New York. “There is going to be some push back from hedge funds, but they may not get any sympathy in the current market environment.”

When people lose money they need a scapegoat, and short sellers always top the list. And when there’s a crisis, bureaucrats and politicians can’t help but make more rules, even though it was government meddling that caused the whole problem by granting bankers a blank check to blow bubbles.

The five SEC commissioners must approve the rule, which would be adopted on an emergency basis, for it to become binding. Hedge funds, which are private pools of capital whose managers participate substantially from any profits on invested money, prefer to keep their positions secret to prevent other traders from stealing their strategies.

There are all kinds of legitimate reasons for secrecy, not just to prevent copycating.

The agency’s plan to subpoena communication records will mark the second time the regulator has sent information requests to hedge funds in three months. In July, the SEC subpoenaed hedge-fund managers and Wall Street’s biggest firms seeking evidence they were manipulating shares of financial companies.

These financial companies are insolvent. No manipulation is necessary. The proof is that when Lehman sought a buyer last weekend, with the market closed, nobody offered a dime.

Morgan Stanley, the second largest U.S. securities firm, tumbled the most ever today after a government rescue of American International Group Inc. failed to ease the credit crisis. In a memo to employees, Chief Executive Officer John Mack said the management committee is “taking every step possible to stop this irresponsible action in the market.”

Morgan Stanley

“There is no rational basis for the movements in our stock,” wrote Mack, who added that he was in contact with Cox and Treasury Secretary Henry Paulson. “We’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down.”

Does Mack think he is fooling anyone?

Democratic New York Senators Hillary Clinton and Charles Schumer urged the SEC today to impose a temporary ban on short- selling of all financial stocks, saying it would “help restore a measure of stability to our financial markets.”

You can always count on these two to pick up a hammer for the coffin of America.