During party conference, Vince Cable set out his proposals for tackling some of the causes of the current financial crisis:
Short-selling in UK bank stocks should be banned by the City watchdog to stop “aggressive” speculators “betting against the taxpayer”, Vince Cable, Liberal Democrat deputy leader, said …
“The hedge funds are betting against the taxpayer, since they know that if a leading British bank were to collapse, the government would have no alternative but to intervene,” said Mr Cable.
The party’s Treasury team believes a ban on the short trade would halt a cycle of “fear feeding on fear”.
You can read the full story here.
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8 Comments
Run that one by me again. I have worked in the City for 25 years so I think I get the hang of this short selling.
Vince Cable says the hedge funds are short selling bank shares. Selling short means selling shares that you haven’t got at a price agreed now for delivery at some future time in the hope that at the time you have to deliver the shares you will be able to buy them more cheaply. OK, so far this is plausible and all part of a freely trading market.
But then Mr Cable says they are doing this because they know the government will step in to prop up the banks. Which goes against his original statement. Government support will push up the share price and reduce the short sellers likelihood of profit.
Unlike LibDem MP’s, hedge fund traders are rational people, because they know irrational traders get wiped out. The only reason they will be short selling is because they think the bank shares are overvalued and will fall notwithstanding any government support.
So much for Mr Cable’s much vaunted prowess in financial matters. There is obviously a world of difference between being working in the Kenyan Treasury, being a Spad at the DTI or forecasting oil demand and understanding financial markets.
Mark, as a former trader, we all know there is a thin line between adopting trading positions which are designed to protect and positions which are speculative. Both can fit and have a role in a free market.
However, Vince is also right to point out that positions are being taken that would not be taken if deep down there was not a believe in the market that governments will bail out banks.
Governments need to ‘control’ market expectations, or at least dampen them. A failure to do so will lead to a mood change which might, once again, make nationalisation publically acceptable – surely something we all wish to avoid?
The HBOS debacle shows that the market clearly is not rational, and unfortunately it looks like MPs aren’t either if they allow the creation of this new superbank.
It’s a shame that the Board of HBOS have failed in their primary role as maintaining the value of the shares — If HBOS as people are saying is “too big to fail” why on earth aren’t they looking at smarter and braver options like re-mutualisation, partial nationalisation, etc.
A firesale of the largest high street lender to the 2nd largest just means a huge number of lost branches, lost jobs and less choice while the hedge funds pocket a big profit for manipulating the market.
The FSA should have been investigating the very very dubious shorting speculation against the bank, as it did previously, but turned a blind eye.
There has nothing rational about banking and the finanical markets for about 5 years, it’s all been quick buck speculation – no more rational than gambling on horses, and every bit as unregulated as a dodgy bare knuckle boxing match in a car park.
Mark Williams, you misunderstand the situation. Just because the Govt will step in at the end to prevent bankruptcy does not mean that the share-price will be held up – after all the shareholders still may get nothing (hopefully) depending on the deal arranged by the govt.
after all the shareholders still may get nothing (hopefully) I don’t own any shares in HBOS – but loads of ordinary people do (who got them when they demutualised) or have their pensions partly invested in them. This sort of gloating comment is deeply distasteful.
Prentiz,
I’m not sure that Mark was gloating. The shareholders – in theory – get the rewards of share ownership, namely dividends and the prospect of capital growth. I don’t know how Halifax shares have performed since demutualisation in 1997 but they may well have been, for a large time, a better investment than a bank account. The fact that the market can go belly up does not mean that the shareholders should be compensated for it. This is the downside of risk.
Whether the markets were manipulated or not in this instance is a moot point. I didn’t get the impression that Mark was happy that pension funds have been hit, but that this is what is supposed to happen when a stock plummets in perceived value.
Prentiz, it’s not gloating, it’s an understanding that it’s lack of “Moral hazard” (http://en.wikipedia.org/wiki/Moral_hazard) that got us into this mess.
As Vince himself said in his main speech, it is utterly unacceptable that shareholders should attempt to secure “the privatisation of profit and the socialisation of losses” – as they did for example at Bear Sterns.
Shareholders will not start demanding that their directing boards behave responsibly unless they fear the loss of everything.
Mark Wright
“Mark Williams, you misunderstand the situation. Just because the Govt will step in at the end to prevent bankruptcy does not mean that the share-price will be held up”
Then you clearly fail to understand that what Vince Cable said about “betting against the taxpayer” was completely erroneous. The short seller is betting that the shares are worth less than the current market price. What the government does at a later date is erroneous.
No speculator is going to short a stock unless he is confident the share is overpriced, because for every speculator trying to push the price down there will be others willing to but into an underpriced stock. In a sense the speculator is doing a public service by acting on his view of a stock and risking his own capital to do so. It is better to have an efficient market where the views positive and negative) ar fully reflected in market prices than it is to have a market where negative views are not fully reflected in the market prices because of restrictions on selling stocks.
You also misunderstand that a share price of zero or a low price will not bankrupt a company. It doesn’t have any direct effect on the company’s ability to operate, merely on its ability to raise further capital from the stock market or its likelihood of being taken over. But if the stock is oversold or underpriced then the market will quicklt see that its price is out of line with fundamentals and the market will buy the stock.