Shorts say stock woes prove crisis not their fault

CHICAGO (Reuters) - A temporary U.S. ban on short selling has failed to stop the relentless sell-off of financial stocks, proving that the trading strategy is not to blame for the crisis shaking Wall Street, two veteran short sellers said on Tuesday.

James Chanos and William Ackman also said it wasn't clear that when the ban expires at 11:59 p.m. Eastern time on Wednesday, how many institutional investors would lend their shares out to short sellers.

The strategy, which involves selling borrowed shares in hopes of buying them back at a lower price, has been blamed in some quarters for the collapse of several once-mighty Wall Street firms and turmoil in credit markets.

In the run up to ban by the U.S. Securities and Exchange Commission, several leading pension funds, including CalPERS, stopped lending certain financial stocks to short sellers.

"The contention was that short-selling was driving down stock prices, driving down the stock prices of financial institutions," Ackman said on the sidelines of the fall meeting of the Council of Institutional Investors.

But he said the emergency ban on short-selling financial stocks, which went into effect September 19, had forced bearish speculators onto the sidelines -- and yet the stocks they had allegedly targeted had continued to suffer.

"What better evidence do you have that it's not short sellers driving down the prices?" he said. "It was fundamentals. The companies were taking on too much credit risk ... using too much financial leverage and bad accounting."

At the same conference, Chanos, the founder of the $5 billion hedge fund Kynikos Associates, said: "The hue and cry is, 'The shorts did us in.' ... But the narrative doesn't fit the facts."

He said a number of probes had been launched into alleged improper short-selling -- where investors, in addition to betting against a stock, also spread false rumors about the company.

So far, he said, there's been no smoking gun indicating illegal acts by short sellers.

"In an age of e-mails, instant messages and voicemails and the paper trail they leave behind, if there is a group of people spreading rumors that they know to be false, Inspector Clouseau could pull this one in," Chanos said, referring to the fictional detective in the "Pink Panther" movies.

Their comments came as U.S. stocks tumbled for a fifth straight day, led by steep declines in financial stocks.

Bank of America Corp (BAC.N) plunged 26 percent after the bank reported a steeper-than-expected decline in quarterly profit, slashed its dividend and said it was selling $10 billion in new stock.

JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) slumped 10.6 percent and 13 percent, respectively, amid worries that other banks may also need to raise cash as they struggle with the weak economy and the worst financial crisis since the Great Depression.

(Editing by Richard Chang)