Led by the California State Teachers' Retirement System, a group of at least five major pension funds committed on Thursday to try to hobble the short- sellers blamed in part for the recent crashes of several financial stocks.

Chris Ailman, the chief investment officer of CalSTRS, said he hopes the move will help to stabilize stock prices – and thereby protect CalSTRS' own investments – as well as calm fears of a broader financial collapse.

Short-sellers profit when a stock's value falls. By making heavy bets against key bank stocks, Ailman said, they have worsened an already precarious situation.

"It creates an artificial crisis of confidence," he said.

The push against short- selling got additional support Thursday night with the Associated Press reporting that the Securities and Exchange Commission is considering temporarily banning the practice for all stocks.

In a closed-door meeting on the financial crisis with congressional leaders, SEC Chairman Christopher Cox told lawmakers his agency may put in a temporary emergency ban on all short-selling.

New York Attorney General Andrew Cuomo, meanwhile, launched an investigation to determine whether short-sellers have conspired illegally to drive down the price of financial stocks.

Ailman's plan aims to curtail short sales of shares in four financial firms: Goldman Sachs Group Inc., Morgan Stanley, Wachovia Corp. and State Street Corp. Share prices of all four have fluctuated wildly this week.

Stock market experts said if enough large funds follow CalSTRS' lead, short-selling the stocks could become more difficult.

"If they all start to get on the same bandwagon, I think you've got a significant effect," said Dwight Jaffee, a professor of finance at the University of California, Berkeley, Haas School of Business.

Here's how the strategy works:

To execute a short sale, an investor first borrows shares from a stockholder for a small fee and then sells them. If the stock drops in value, the short-seller buys new shares, returns them to the lender to cover the debt and keeps the difference in price.

To make such deals happen, though, a short-seller needs to find a stockholder willing to lend shares.

Under Ailman's plan, CalSTRS and other big funds, which ordinarily are major lenders to short-sellers, would commit to not lend shares of certain stocks for at least 30 days.

On Thursday, the $220 billion California Public Employees' Retirement System announced it would join CalSTRS, as did funds in Illinois, Pennsylvania and Indiana. Ailman has contacted managers of 56 other funds, a CalSTRS spokeswoman said.

Because many factors influence stock prices, it will likely be impossible to measure the impact of the move. Even if many other funds join CalSTRS, a short-seller would probably still be able to find a willing lender.

"We are not eliminating their ability to borrow stock – we're just making it … harder," Ailman said.

In its $155 billion portfolio, CalSTRS holds roughly 0.4 percent of the shares of Morgan Stanley and Goldman Sachs. In the past week, the value of those investments has declined by $156 million.

While Ailman's plan fits in with the raft of market-calming strategies now circulating, some experts said it borders on market manipulation.

"A well-functioning market lets investors 'vote with their feet' and should let people vote negatively if they think that a stock is overvalued," said Joseph Chen, a professor of finance at the University of California, Davis.

Ailman countered that CalSTRS is taking appropriate short-term action in response to a crisis.

"We are focusing in on stocks that are clearly under aggressive short-selling attack," he said.

Call The Bee's Jim Downing, (916) 321-1065.