From the FT:
The ban on short-selling bank stocks marks another political victory for Vince Cable, the Liberal Democrat Treasury spokesman, who has proved a prescient forecaster of financial doom.
Mr Cable’s lacerating attacks this week on hedge funds “hunting in packs” to drive down bank shares appeared in tune with a populist backlash against the “short-selling spivs” deemed responsible for forcing HBOS into a takeover…
Before the ban was announced George Osborne, the shadow chancellor, defended short-selling as a “symptom” not a cause of the problems. The Tories last night said they welcomed “any short-term action that will bring stability to the markets and allow a period for calm reflection”.
The development has left the [Conservative] opposition party on the backfoot … [their] defence of market forces appeared out of tune with public sentiment, as well as regulatory thinking.
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16 Comments
Err, if HBOS wasn’t in trouble the stock wouldn’t go down.
You can’t change the temperature by banning thermometers.
Isn’t this a bit illiberal? Banning things?
In the current climate, Short selling has become a tool for speculators to make money by destroying banks. When ordinary tools of marginal use to the world become weapons it is reasonable to consider banning them, especially if only temporarily.
Eh, people short selling causes the problem, make a killing and then the very people who have done the short selling benefit again as the shares are bailed out by the taxpayer.
Not surprising this is popular with Tories like Guido who recognise the defence on unjustified privilidge is the very essence of conservatism.
No, banning things isn’t inherently illiberal.
(A) I’m not a Tory
(B) Shorts lose money when a stock is bailed-out. Long’s make the money from the taxpayer. Why is the spiv on the other side of the trade more deserving of a taxpayer bail-out?
I think if you look in the dictionary you will find that banning things is definitively illiberal.
Have to agree with Guido here.
It may be a political victory, but its not a victory for sound economics or liberalism.
This just all smacks of ‘do somethingness’ and finding a scapegoat to blame (other than the state which grants the privilege Mouse complains about – and by banning and regulating we grant more privilege).
Guido is not a Tory, City Slickers are not spivs and Putin is not a Russian.
People make money from buying shares if they think they will go up. It’s called going long.
People make money from borrowing and selling shares they think are going to go down (they buy them back later at the lower price). It’s called shorting.
Get either call wrong, and you lose money.
The taxpayer bailing out a company you have gone short on does not help you – it loses you money.
There is nothing wrong with either activity on its own – in fact they are essential for market liquidity.
However, if you engage in activity designed to artificially ramp up the price of a share you are long on (such as false take over rumours), that is illegal and wrong. (pump and dump)
Conversley, if you engage in activity designed to ramp down the price of a share you are short on, that is illegal and wrong. (trash and cash).
This move is simply a populist ‘something must be done’ reaction.
Guido – dictionaries don’t define words, they give common usage. Liberals have bannned plenty of things – because they understand there is a conflict between individual freedom and it’s impact on others.
>People make money from borrowing and selling shares they think are going to go down (they buy them back later at the lower price). It’s called shorting
I can think of a better description for this utterly useless activity 🙂
Having brought them back later at a lower price, they can then wait for a govt bailout to increase the price of shares.
>Get either call wrong, and you lose money.
Or more likely, you lose someone elses money
I think that One of the Passing tories has indulged in some thinking and blown a fuse.
There is a basic distinction between ‘simple’ shorting and ‘naked’ shorting – the first implies technical possession of the shares in question whereas the latter does away with this requirement.
In the latter case it becomes possible to sell more shares than actually exist in the company, which distorts any value judging mechanism and perverts the market to the benefit of those who acting against the wider interest.
Unregulated and unrestrained naked shorting is damaging when done on any great scale and this should be actively discouraged.
Oranjepan, if you are trying to explain economics to Tories, you really MUST do so in ways that the average Dave, George, Boris and Oliver can understand. Try, “If one gives one’s fag £2 to go down to one’s Turf Accountant…”
Those defending short selling seem to forget that the purpose of buying and selling shares is to transfer economic ownership of a company (or part there of). Shares do not exist in isolation from the economic assets they represent. Selling shares you don’t own is an economic nonsense.
It is ironic that when dealers at the likes of Lehmans short companies in the productive economy making and providing useful goods and services, and causing people to loose their jobs – then it is ‘legitimate capitalism’
But all of a sudden it is the city spivs whose jobs are at risk – and all of a sudden it is the enemy of capitalism.
It turns out the only 2.75% of the HBOS stock had been borrowed for short selling and it is unclearb how much of that is accounted for by stock lenders whgo borrowed stock to sell after lending their own stock, but less than 3% is low by normal standards and it now appears the Mr Sants of the FSA admits that he had ants in his pants.
For those who don’t like short selling consider this. If a stock is owned by 10% of the market then if short selling is banned it can only be sold by that 10% up to the amount they own. On the other hand the stock can be bought by anybody and in any amount (up to the issued share capital of the company). IUt doesn’t take a great financial to see that the stock will rise faster when under valued than it will fall when it is overvalued if short selling is banned. Banning short selling appeals to interfering busybodies, who typically do not understand why short selling is usually permitted. Easy to see why that should appeal to LibDems and the SNP.
It’s probably a mistake to engage with Mark Williams on this subject because I am neither an economist nor a City trader, but like many other people I have been struggling to understand what all this means and I am none the wiser after reading his contribution. Surely the reason that short selling is a bad idea is because it contributes to the instability of the financial system. I have no idea what a short seller has to pay in order to borrow shares he does not own, but for a fraction of the cost of ownership he is enabled to create a market which would not otherwise have existed. I have yet to hear a convincing explanation of how that is beneficial to anyone except the person making the profit from the transaction.
“short selling is a bad idea … because it contributes to the instability of the financial system”.
Myth. Short selling no more adds to instability than buying shares with 100% borrowed money. Taking a negative view on a stock or any other commodity is a perfectly reasonable thing to do. If a investor or speculator is well capitalised then short selling adds no instability at all.
If you take the view that at least some market traders are not parasites and outcasts and perform a useful social role by providing an efficiently traded market for shares, commodities and financial instruments, then short selling is no more unstable than long buying. In fact it is likely to give more efficient pricing because pricing pressure from bulls and bears can be reflected more rapidly in the price. Banning short selling may give rise to inflated prices which may lead to greater instability.
OK Mark – I’m genuinely interested in trying to understand this rather than to score political points. My understanding from what I have read in the newspapers is that the short sellers do not need to be ‘well capitalised’ because they rent the shares they do not own for a fraction of their value. That sort of leverage must make for a potentially more unstable market because it is allowing people without adequate assets to participate in the market, just as the American housing crash has been caused, in part at least, by the entry of people into a market they couldn’t afford to be part of.
RBS shares down 30% in one day. Must be due to all those short sellers. Oh no, can’t be that, they have been banned. Well in that case it must be due to deregulation, Thatcher and Conservative policies in the 1980’s.