Earlier this week Vince Cable called for action on aggressive short-selling of bank shares … and now Guido has spotted the news that the Financial Services Authority (FSA) is indeed banning short-selling in financial companies. Plaudits for Vince, but this drastic action is also a sobering reminder of just how deep the current financial crisis runs.
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4 Comments
Is this not a classic example of an opposition party behaving like an opposition party? First, putting together legally strong restrictions on short selling is complex and doesn’t just happen on a whim. It must have been in preparation for some time.
Secondly, the decision is not one for the Chancellor to take but for the Financial Services Authority.
It’s a bit much to claim the credit for this for Vince Cable.
This is almost impossible to legislate for rigourously and will require the co-operation of market participants to have a meaningful effect. First of all the current FSA laws regulations do not cover terms like “net short positions” in the depth that one would normally see such terms defined in tax law or company law. Soon after any law is drafted swaps dealers will generally see very quickly how to circumvent it.
A simple example, assuming the regulations apply to stocks but not options, then short sellers will use put options to create a simlar position.
More complex assuming “net short positions” include option positions as is currently the case during rights issues, then a traders position might include a stock borrowing of 100 (shares sold in the market to create a short position) and a way out of the money call option for the same number of shares exerciseable on the date the stock loan is repayable. Is that a “net short position”? In nominal terms perhapsit is, but in economic terms it is a short position because the call is unlikely to be exercised.
Moreover the FSA cannot regulate all market participants. If anybody outside the UK wants to make a market in UK shares or options over UK shares there is little that the FSA can do to stop them. For example the FSA can do little to stop American investors taking short positions in ADRs issued by UK comapnies. That is the jod of the SEC.
And its a bad policy.What percentage of HBOS shares were out for loan when the evil short sellers were supposedly dragging it down? 3%. Come on, this policy is shutting the wrong stable door after the horse has bolted.
ok but where’s the big liberal idea for the mortgage crisis? Noises about helping home-owners rather than bungs for banks need plans. If central government is to intervene let it be through local authorities taking over mortgages. LAs could offer banks mortgage amount minus fall in house prices rather than let houses be sold off as repossessions and take 10-20% equity. Owners could take up lower mortgages or become tenants of LA housing. Imprudent banks take a hit; imprudent buyers take a hit; liquidity restored. Administration could be centralised with simpler mortgages: fixed rate or Bank rate + %. LA income will reduce central subsidy and if they sell into market when it recovers % goes back to central government. Housing will recover in time due to demand and supply. Could even impose ban on repossession for period. Even announcement of scheme would stabilise market.
Only lib dems could propose this. Conservatives’ friends in city would love a bail-out. Gordo is too fixated on American system to think out of box and other Labour ideas are centralised or control-freaked. All their shared equity schemes I’ve heard of consist of refurbising an entire area and selling them at prices that depress the local market.