Profiting from fear

There has been far too much "passing the buck" between our tripartite system over the past year.

Reforms to undo all the damage Brown did as chancellor in 1997 need to be brought in immediately so that one organisation has the power to control our financial system again!

Preferrably the BOE, but at this point, any would do!!!

Ps... Did you see RP on Newsnight yesterday? He looked very "young" in comparison to Jeremy Paxman?!

"Short selling.....is not evil" Really? That seems rather a blanket statement for what is, after all, selling something that you do not actually own. In many fields of commerce, selling something that you do not own would be considered improper.

My view is that we need to get back to sound financial principles. Not selling things that you do not own might be a part of that process - along with not borrowing money that you cannot afford to repay.

It is important to remember that it isn't the owners of the Shares expressing disapproval by selling, it is gamblers being lent other peoples Shares to sell.

The Fund Managers profit by lending these Shares, but the Share Owners (pension funds and Private Investors) do not profit by it, and if their investment suffers, they lose out.

Fund Managers should not be allowed to lend their Clients Shares at profit in this way.

If a Fund Manager owns its own stake and wishes to lend that, then that is a different matter.

It seems to me that we need to slow down share transactions - make it take 24 hours to buy/sell. Of course this might be an anathema to the current 'city' but I'm sure many companies would prefer to be listed on a market with a built in slow response for long term investers as opposed to the casino culture prevalent at the moment. The stock market after all is first intended as a vehicle to raise capital for companies - not to be usurped as a gambling den.

Also, while I've been no advocate of RP (the Northern Crocker) in the past, I have to commend the amount of work he seems to be putting in over the last few days.

Obviously, it's his job and raises his profile and these are extraordinary times, but he was reporting through Sunday night and Monday morning and still on tv at 10.30 last night.

I can't agree with the recent posts which criticise his attempts at playing down the likelihood of Lehmans going bust either. I don't think he was wrong, I think he was just being careful, after NR. It's about time, but good for him anyway!

It seems a bit late for the Government to start talking of more rules and regulations. They should have been acting against the likes of Northern Rock, flouting every aspect of prudent and fair lending.
Perhaps they would also have been more dilligent regarding the betting on share prices ( with borrowed shares) that is not what company shares should be about. I do wonder if spread betting debts are enforcable considering they are nothing less than outright gambling ?

Reckless lending and unfettered greed has caused this situation and those in charge of large institutions who have misled the market should be brought to book. Starting with those executives at N R who created syndicated borrowings against dubious loans.
Perhaps you could give your view Robert as to why no one at NR or other failed companies have not had thier collars felt.

Controls should be introduced on Stock Lending. A regulation should prevent its use in shorting on Equities. In its current form it just encourages speculators rather than investors.

The hedge funds at the heart of the NR debacle took the chances you describe and when it all went South and their risks were realised and investment wiped out, they went bleating to the government about how "unfair" it all was. They are now attempting to take the chancellor to court, I understand, because they backed the wrong horse?

I have no sympathy for them, and none for anyone whose profession is effectively devaluing companies for their own gain!

i believe in HBOS, i bought £8,000 of their shares, although they are worth considerably less now.

Traders all too easily sell on the whim of the latest news story and forget that HBOS posted a half year profit after tax of £950 million just 1 month ago.

The best thing that HBOS can do is to use its modest profits now to buy back its own shares from people that do not really want to own them in the first place.

A bank's basic business model is to borrow cheap and lend dear. Banks currently cannot borrow cheap, and the lendings they've made are being defaulted on. Is it any surprise that the market estimate of the value of such a company is volatile? Criticise short-selling by all means because you don't understand it or it seems strange, but it isn't happening to companies with solid business models, it's happening to companies whose value it's nearly impossible to assess. Just because they're household names, doesn't mean they're immune from financial strife!

Perhaps the introduction of some sort of capital cover would reduce the levels of leveraged speculation and hedging (not sure what the rules are today) - this also needs to be looked at for other speculators e:g Commodities.

Given the mess that leveraged speculation has got us into I would have thought that some sort of fast responce to dampen it and preventing these guys benefiting from the mess they have created would be a good thing.

I agree with the futility of the UK acting alone, but I would have thought that if the largest financial centres acted together - and had some draconian measurs in place for those who go around the rules.

In these times I would have thought that some fast action would be a good thing - recognising longer term changes may be required.

A common quotation on these shores is from
Daniel Drew, a 19th century speculator:

"He who sells what isn't his'n must buy it back
or go to pris'n."

But, it may actually be true that short sellers
in some sense stabilize the market. After all,
no one begrudges someone who takes a speculative
risk and buys what he/she perceives to be an
undervalued stock!

Robert and Friendlycard #2

I thought that selling something you didn't own is illegal! (aka fraud!!!)

Btw ...Robert you looked pretty tired on Newsnight lastnight (looked like you were running on adrenalin alone!).... and then you were up early again this morning! You'll burn yourself out.

If all the excess bonuses paid in London and New York were added up I think thay just about equal the capital needed to shore up the institutions who paid them out!

Comment 7 : BrockleyHound

"Controls should be introduced on Stock Lending. A regulation should prevent its use in shorting on Equities. In its current form it just encourages speculators rather than investors."

Mmmm. What needs to be addressed as far as stock lending is concerned is the separation of risk and reward.

If the beneficial owner of shares wishes to earn a fee for lending shares to a hedge fund, he knows that he is also providing fuel for a possible diminution in the value of his shares. He may, or may not, decide that this is what he wants to do.

The stock-lending problem arises, however, when the borrowing fee from the hedge fund does not get paid to the owner of the shares, but to the fund manager, or nominee account administrator, in whose care the shares have been left. It's for this reason that so much short-selling is possible, and, if the problem is seriously to be addressed, the first thing that needs to happen is for the regulators to make it impossible to divide risk and reward in this way.

Here we go again. The government waits till something very predicatable happens and then and only then says something should be done about, but guess what, not by the government, no by somebodyelse. When will this government actually get on and act on anything important.

Andywr #11 ......you make some good points.

Legislation can be implemented quickly to dampen down speculation....as exemplified below re the recent oil commodity bubble earlier this year.....this was proposed to close down the 'London loophole' in the US.

https://dpc.senate.gov/dpc-new.cfm?doc_name=lb-110-2-117

At about (well almost exactly) the time this legislation was tabled the price of oil began to fall dramatically. This just demonstrates the hyper sensitivity of the markets. The traders think they have to stay one step ahead of the game but in fact just react with herd mentality.

The Yanks seem to be the only ones able to legislate quickly.....maybe they could take the lead regarding highly leveraged short selling.....this might be our only hope!

Our legislators and regulators here in the UK need to get their act together ....and fast.

I am going to buy shed loads of HBOS shares because they are no cheap as chips

'Profiting from Fear'...er, sorry Robert, but isn't that one of the big plus sides for the corporate world of the free market economy. The US and UK Governments profit through fear all the time, as do the media in general.
I would have thought that anything is fair game for the market makers - same old story, when we practice this overseas (Asia and Russia over recent years to name but two) it's the global financial markets doing their job we are told...but when it happens to us we don't like it.
Sorry Robert, but the time to call for tighter regulation over the financial markets was in 86 when Thatcher de-regulated them. Or any time in the last 10 years when many economists warned of the dangers we were storing up. But of course, when your property portfolio keeps increasing in value, and you're climbing the corporate ladder, and we have reams of politicians telling us that we're on a neverending gravy train...it's hard to see the blindingly obvious when it doesn't directly affect you.

The solution to this is simple. Instead of a welter of new regulation controlling short selling make the whole process public.

Require both the owner who makes the shares available and the Hedge Fund to make public the fact that shares are being sold by a third party, not the owner. That information should be publicly available from the date the shares are transferred to the hedge fund.

It shouldn't be difficult for the government to set up an internet register of shares transferred to Hedge Funds for all to see.

It's very clear today that speculators and that is all the polite term for them are tagetting HBOS. It's a solid institution run by solid people - the speculators are trying their best to undermine it, simply in the interests of making some money out of others hardships - just greed, pure and simple!

Disagree with Preston.
Short selling is an evil.
Short sellers do not perform a service by puncturing bubbles; they sell once the bubble is punctured and so accelerate the downside, with detriment to us all.
Lets say I think your house is going to fall in value or is falling in value. I short your road or district, and your house falls further in price.
How do you feel about that?
Well like pension funds, and long term investors you are locked into your house, and cant get out in the week can you?
Think again.
Shorting is evil.

DavidGraham1984 #9

You certainly are a brave person for buying that many HBOS shares.....do you really think that the GBP 950M profit recently posted by HBOS is real? These numbers mean nothing in the current banking climate. The banks still have some way to go before they fully disclose their true losses.

I guess you can be described as a real investor but I fear you may be overtaken by the professional speculators......good luck!

Robert it is nonsense to say that short selling should not be outlawed in the same way that insider trading or dealing has been outlawed.

If you don't actually own and have not paid for the shares then you shouldn't be allowed to sell them. That is simple and unambiguous and easy for the regulators to regualte and punish any investor who tries to flaunt the rule.

If those working in the stock and financial markets are as clever and astute as they would have us believe then they should be capable of drawing attention to companies and businesses that are over-valuing or over-inflating their assets and bring them into line with acceptable practices. accordingly.

If investors do decide to move offshore in order to continue with the practice of short selling then it should be quite easy to set up a blacklist and set up a system to freeze their transactions or accounts to prevent them doing it or recieving their ill-gotten gains. As I said earlier the secret is to make sure they do own and have paid for their shares beforehand. If the governments and regulatory bodies don't do this sooner rather than later then the problem will simply grow until the markets become as confused and unsettled as they were before the credit crunch

#6 GrumpyBob

I don't believe the majority of NR executives were corrupt or should face prison, as you suggest.

The problem NR faced was worse - The senior management just werent up to the job, in terms of experience or business intelligence. The company has always prided itself on promoting from within, which unfortunately leads to a weak gene pool. Many of its highest directors are NR lifers who started in the post room. While this is fine for the odd person, to have all of them come from this position is very bizarre and indeed, very insular.

Its telling that the first thing Ron Sandler did was bring in heavy hitters from outside with plenty of experience of working somewhere other than NR! As I understand it, all of the exec are gone, with the next level of Management Board Directors now reporting into someone new, just in case.

That isn't to say that the weaknesses of the board may not have exploited by the Marketing Division, but I think they were just greedy, inexperienced and stupid, not criminal.

Short-selling like this is illegal in the US for precisely the reasons why HBOS is suffering right now. It should be banned here too, but it will take a far more competent chancellor and government than this bunch of no-hopers to do it!

Stock Markets these days are more like Casinos and that has to stop.Speculators aren't only gambling with their money they're gambling with other people's jobs and livelihoods,people who's lives can be turned upside down by the greed of someone they've never met,someone possibly several thousand miles away.
And what chance of any kind of meaningful regulation from a Government that still allowed Northern Rock to offer 125% mortgages a week after they were effectively nationalised?

This has been talked about for a while - but is not that different to the upsides that companies might see when their stock is going up: it may be based on solid performance or it may be a gamble that someone's taking. "Fear [of the unknown]" or "risk", in other words, is EXACTLY what the financial markets trade; why would one want to stop that??

We have yet to see all the consequences of the financial chaos fully played out - who knows what we are in for as nobody has the full picture.

The government should conduct a fast track enquiry and move to legislation (best with EU and USA [who hopefully have been softened up]). Some of the activities of senior execs are clearly criminal in motivation and consequences.

The concept that a 21st century economy can be managed by a small group of financial 'anoraks' fiddling with interest rates can now be seen as laughable.

Some years ago I was in Hong Kong when the Far Eastern financial crisis took hold and some big players decided to try and break the linking of the Hong Kong dollar to the US dollar.

Besides committing their huge currency reserves the Hong Kong financial regulators enforced local rules against short selling.

The speculators lost heavily and a few who had broken the short selling rules were prosecuted. Even today I cannot but admire how the local regulators seemed right on top of the situation in a way their anglo saxon counterparts are clearly not.

Why is it that the UK financial regulators cannot control the market in a similar way. If they do not understand how to do so they ought to have had rules in place years ago to ensure that they could.

#11, BankR, if you emulate us in anything, you
will only be disappointed. I'm sure that if you
watch carefully, you will find that anything that
we do is fatally flawed and suffers from the
law of unintended consequences.

Short sellers can only be deterred from pushing a stock too far down if they fear a bigger player might take the opposite view.

There's quite a good case now for HM government to buy up say a 25 per cent stake in all of our major banks. They are cheap, if they are safe, which they would be if HMG owned a big chunk of them. I don't speak as a shareholder, by the way.

That would sort out the short sellers of major UK banks, and deter them for the future from endangering these companies who, love or hate them, are actually quite important.

Here we go again.. why is selling borrowed stock any more wrong than buying with borrowed money? You have borrowed the money, you have to pay it back, but in the mean time you are free to do with it what you like (including losing it). No different from borrowed shares.

What about the billions of borrowed pounds being poured into property and equity markets that excessively *inflate* the price? Oh but wait.. prices that are too high are a "good thing" because they make us all feel richer. Speculation is ok when it overvalues your house and pension assets, but not when it undervalues them.

What about the pension funds themselves, shouldn't we go one step further and bar them from selling their shares too, not just lending them? That way we will never discover how overvalued they are, and we can all sleep tight.

And of course we wouldn't want naive creditors to get the wrong idea about their borrowers ability to pay back - the poor simple souls are prone to panics, so best to keep market prices artificially high for them too.

What nonsense.

The most important thing a market needs to find the correct price is liquidity. When large institutions stock pile shares in a listed company as a long term investment, these are taken out of circulation and liquidity suffers. By lending the shares they allow trading to continue, and the correct price is found. Short sellers and leveraged buyers simply cause natural volatility.

This is simply another "stamp duty" effort from Darling, showing outward sympathy for the sofa investor but knowing full well that he cannot (and should not) be interfering.

So let me get this straight...the Chancellor is uncomfortable with a practise that is legitimate.

He swiftly passes the buck to the FSA, not wanting to sully his hands with a potentially awkward decision.

The FSA, which has already proved itself to have been 'asleep at the wheel' in the weeks before the run on Northern Rock, is now expected to make a swift decision? Dream on.

When will these clowns learn. We're either a free market economy or we're not.

If the Chancellor, the FSA and the CEO of HBOS (and the other banks for that matter) don't like what's happening to their share price that's just tough.

The shares are worth what someone is prepared to sell and buy them for. End of story.

I think a few commentators on this blog, including Ambrose, are missing the point.

We are seeing the restructuring of the investment banking and consumer finance industry after a long period of soft finance, There has been excessive optimism about low inflation and the end of boom and bust.

Capitalism has always had booms and busts. Good regulation and moderately good government (that would be optimistic), and a good deal of luck, can moderate those busts.

In the mid-1980s the broker, deal and merchant banking industry restructured over an 18 month period in the run up to Big Bang. Now we have a new Big Bang which is taking place real time, and will continue to run over the next two to three months, and will echo for several years.

John Thain at Merrill Lynch got the message. Hank Paulson and the NY Fed told it to him pretty clearly last Friday. Move first before your equity valuation is too impaired.

The mistakes have already been made. Bad bets have been taken on commercial and residential property. Risk management groups have failed to understand the correlation of different asset classes. Senior management have taken on leverage, without prudential capital structures.

What matters for the moment if you are running an insurance company, a commercial bank or an I-bank, is there here and now, and where do you go from here?

If I were running Goldmans or Morgan Stanley I would be thinking about my sustainability. Do I want a banking partner, and if so, US, European or Asian? I would move quickly.

If I were a commercial banker I would be enormously careful of short term liquidity risk with my counter parties.

If I were an insurer I would be talking to my regulator

If I were a naked short player I would be looking for profit.

Is there any point in banning shorting?

I don't really think so, even if you could. Water flows down a slope. Dumb decisions have been made, and risk miscalculated. That is why there are shorting opportunities.

There is very little that government or regulators can do now other than facilitate the dynamics of this restructuring play out.

There is clearly a need for a completely different regulatory environment, but now is not the time to introduce it piece meal. Investment banking may not be the attractive place it has been for the last twenty years.

Should we be where we are now? No.

Are a lot of people, ordinary people as well as well heeled bankers going to go through a lot of pain and financial loss. Yes.

What should we be doing now? I'm not religious, so I guess hope will have to replace prayer.

One thing I do hope (pray) for is that we don't have another Russian debt crisis to add to western woes. It is not looking too good.

When would I call the bottom of the market? The moment that Warren Buffett buys into an ailing insurance company.

For me the problem with 'shorting' is not so much that vast profits can be made but that those doing the shorting are probably making these profits because of their 'insider knowledge' of the market. In other words how much of a risk are these 'shorters' really taking?

Preston your article implies, and correctly so, that sentiment plays a huge role in financial and equity markets, in fact any kind of market. The activity of short selling brings perhaps unwarranted fear that the item being sold short, in this case a company, is in a worse position than it actually is. The same can be said of certain areas of the media. Do we need to apply more regulation/censorship in this area as well to prevent unwarranted propaganda and scaremongering having a detrimental affect on markets?

I'm a depositor with HBOS in Ireland and am not inclined to withdraw.

But a major consideration I hadn't counternanced before ilast year is that this is a British bank and that the bank run on Northern Rock illustrated an incredible degree of mindblowingly incompetence on the part of the UK authorities.

#2: it is not selling something you don't own; it is a deal under which somebody gives you something (which you can sell or not sell), but which you contract to give back in the future. Title in the stock passes to the seller, otherwise s/he couldn't sell it.

#3: I think you misunderstand the way in which Fund Managers operate.

#4: admirable words, until you need to liquidate your position in a hurry... or your pension fund needs to do the same to protect your pension - or are you happy to forego that protection?

#6: who are you to say what shares "should" be about any more than anybody else? They are an asset, like any other. Should we ban pawn broking for the same reason, or stop you taking out HP (using a pledged asset - the car)?

#9: profit is meaningless; it is a purely paper construct, seldom backed by actual cash, and speaks little to current worth or viability. LB posted a $19bn profit last year!!

In the wider debate: the market in its current form creates opportunities for investment. But nobody forced banks to be quoted companies - they could just as easily have been private companies and have issued bonds. Equally nobody forced them to leverage so heavily.

#9: you own shares in HBOS, so you were clearly happy with their business strategy, and happy to profit from it - why be askance when others don't share your sentiment?

I am convinced that, once the dust of the current crisis has settled, there will be an overwhelming public and governmental insistence on the reintroduction of sound financial principles.

One of these principles will be a restriction on selling assets that you do not own.

There will be a public backlash against speculation. Scope for speculation has a role at the margins of capital markets, but the speculative tail has been wagging the fundamental dog for far too long.

There will need to be restrictions - either voluntary or mandated - on lending ratios. For example, no mortgages should be allowed at greater than 90 percent LTV or more than 4x earnings.

Also, regulators will need to incorporate bubble management into their inflationary mandate. This could mean raising interest rates if house prices and/or capital markets over-inflate, even if consumer inflation is low.

Functional separation between the businesses currently bundled within banks needs to be reintroduced.

Above all, regulators need to be able to say to bankers that "we are not going to allow you to imperil the broader economy through your inventiveness".

I think that we will see a more regulated, but also a more rational, financial basis in the future. If this is so, there will have been a positive outcome from the pain.

This is exactly what is wrong with this Govenment - passing the buck to the FSA will not solve the problem.

Those that are speculating must act with some restraint. Although it may be an opportunity for short term profits - it cannot be in their long term interest. They should think carefully about pushing this too far!

It would not take much to trigger a Northern Rock style problem. So Mr Darling had better be doing more behind the scenes.

Conspiracy? Is it worth taking the chance that I'm wrong?

Did anyone reallly think they could rip off eastern potentates for 10s and 100s of billions USD and walk away. These busness' come from blood fued and tribal/gangster societies.

Note, Credit Crisis means the banks don't have any money because the cash rich abroad won't put their money with those banks.

Short selling to kill firms like Lehmans is dangerous and potentially very expensive. Who has the cash to do this?

If you don't know which UK banks created, packaged and sold on UK liar loans as AAA then find out.

surely the short selling problem can be solved by ensuring you can only buy and sell shares you actually own not ones you have "borrowed". that way is you want to take a punt then fine, but you have to put your money where your mouth is!

I listened to that interview with the Chancellor this morning and it didn’t appear to me that he knew what he was talking about. He waffled on about the FSA looking at this. They did, back in the summer and knee jerked disclosure of short positions, with two weeks notice – but only in companies where there was a rights issue going on. And a right horlicks it turned out to be. Apart from the fact that it revealed supposedly very large positions and might just have become a self fulfilling prophecy, there was some doubt as to whether the positions had been accurately disclosed.

ExcellenceFirst (#15) I think gets part of it right. A short position that extends past the normal delivery into settlement (roughly a day and a half, possibly two I think) will require the shorter to borrow stock to initiate the sale (or, if doing it by CFD, the writer of the CFD to do the same as a hedge, unless they’re really brazen and bet that their client is wrong). So traditional long investors really should make sure that they or their custodian’s have very strict conditions on when they lend, else they are just helping to diminish the value of their holding. But even if every holder in HBOS stopped lending, it won’t stop shorting. An intra-day trader could sell in the morning and buy back in the afternoon, thereby securing the stock to deliver into settlement the next day – a naked short. And I think looking at the way the HBOS share price behaved towards the end of yesterday, there was some of that going on. It’s pretty brazen and not illegal. If the initiating sale is big enough, it will have the effect of dropping the share price (normal) so it gets the ball rolling for the shorter. The big risk is not being able to buy shares back, not just at a price that is lower and therefore giving the profit, but at all.

If the holders of the stock don’t want to see their investments tanked and believe the company is undervalued anyway, a) don’t lend and b) a bit simplistic this, but the principle is there - start to buy shed loads when it looks as though the price is going south, hopefully to get the price heading upwards, start a bear squeeze, accelerating that price rise and the shorters (particularly naked ones) would take a hammering, and possibly risk failing to deliver. And at that point the FSA would start to get interested..

Come off it Robert!! If someone borrowed your car and then sold it, you would not be so understanding.

Daily Kos, Tuesday 16 Sep 2008 at 02:42, has noted that the Federal Reserve has - in violation of section 23A of the Federal Reserve Act - said that until 30 January 2009 commercial banks will be permitted to extend liquid funds to their brokerage affiliates. The "liquid funds" mean customer deposits.

In other words, the Federal Reserve is to suspend a rule that prohibits deposit-taking banks from reallocating ordinary deposits to help shore up perhaps trillions of losses made by their investment banking subsidiaries. This suspension will last until 10 days after the new US President comes into office. Talk about a "poisoned chalice".

I would link to the Daily Kos report but I am not sure that I am permitted to do so. Anyway, it would appear that, although in this country people's savings are protected up to £35,000 per licensed institution (not per account), if the Federal Reserve does this it might make the Treasury unable to meet that undertaking to ordinary people about their savings.

Direct short selling is a necessary evil and unless no trader is allowed to run a net short position thsi whokle suggestion is dumb.

Is he seeking to stop the right to buy the put on any share as well.

It is singularly impossible to have a one way of operation in a market i.e only buyers or only matching a buy order with a sell order, and not be seen to be a mickey mouse market.

Ideas like this get floated because they are showing how ignorant and powerless they are as a government to events, and have clearly learned nothing.

It should be noted that even if tsi vumb idea came about it woud not stop people dealing in a grey market which would clearly have a knock on effect in the cash market.

For a Chancellor who is mwant to be in control such comments are clearly based on a desperately limited knowledge of what really goes on.

For heavens sake sort our the banks and stop listening to their sob stories. No one rustrs them any more and if you want to stop a run on them read them the riot act as they do in America.

We are in no less a mess here in the UK but we are pussy footing around because no one at the Treasury appears to have any experience or a clue what to do.

The FSA is a total joke suffering the same handicaps and the Bank of England is limited by constraints under the Tripartite agreement.

Its difficult enough having a dithering Prime Minister surely we don't have the same handicap afflicting the Chancellor!

Anyone who believes RP is wrong over Short Selling is deluded. No one can "Buck" the market. The price of anything is soley governed by what people are prepared to pay for it. There are examples of the market being deluded and foolish, for example, with Tulips or Contemporary Art, (as witnessed at Sotheby's yesterday), but the market actually sets the price. So, if you are in the market place, and you find a willing seller and a willing buyer for a product AND you can make profit as a result of that transaction - it matters not a jot wether you make it on the way up or the way down. Short selling is a market tool. It's impossible to ban - because the willing buyer and willing seller will disguise the transaction with a mask. Here's the painful truth - we Westerners have become useless at trading. The Eastern block and Asian nations are much more savvy at trading - they are used to haggling in the market. We're lazy and slothful (I include myself). When things go wrong, we need to blame someone else for our misfortune. We want the government to always "bail us out", thus allowing us to act in any way we want, regardless of the consequences. This includes speculation in anything financial. Greed had driven the property bubble that has now well and truly burst. The people who want ban Short Selling would be only to happy to use this tool to protect their own investments if they were at risk - so their two faced double standards are not worthy of further consideration. However, I would like to see all the Real Estate Agents who organised NINJA mortgages put in prison for a while - or sent to the Falkland Islands for a long stay. They should be accompanied by the bank exec's who kept lowering the quality standard of bundled mortgages to include ever increasing junk loans. They should bear the consequences of their actions. It was their greed over the last decade that should be punished.

Headless chickens, the lot of them.

When will they act to stop speculation by powerful entities who misuse their financial muscle to cause widespread chaos while profiting at Joe Publics expense. Answer - never.

It is the small saver and investor who always suffer as they are unable to move quickly or are locked into pension funds and schemes which themselves cannot move vast sums at will for fear of rocking the boat.

There should be a reasonable period fixed before shares can be sold on. There should be a tax on short term gains made by speculators. It wont happen - we will be told it will destroy the City as a world leading financial centre.

Any bets on when HBOS will fold?

Short selling is a dichotomy. I fully accept that it provides a public service by 'puncturing over inflated prices' but it also creates the initial prediction required for the self-fulfilling prophrecy and benefits only those weathy enough to play the game. The idea of the rich riding profitable escalators in both directions is repugnant. I think the immorality of it outweighs any benefit by a mile and if I ruled the world.......

Short selling is not illegal, but naked short selling is, at least in the USA and has been for a while - see Regulation SHO in January 2005.

The UK adopted some regulations in March this year.

This is dangerous and misguided. People may not like 'short-selling', but if people tried to 'short-sell' a company that was UNDER-valued, they would risk making theoretically limitless losses if the price shot up.

Short-selling does allow stocks and shares to be priced more accurately - although of course the threat of fallacious rumours being spread and causing panic does need controlling. As does 'insider trading' and other manipulation of market prices.

But the 'wisdom of crowds' tries to get the price right - if bets could only be made about shares going up, it would just put off the evil day when someone suddenly realises that the 'emperor has no clothes' - and the price would collapse far, far too quickly for the companies to be able to do a thing about it...

At least HBOS took the hint from the last round of 'short-selling' to shore up its capital base - if the 'market' thinks that was too little, or too late, then whose fault is that ?

If the owners of the shares think that short selling will depress the price of their asset, why are they daft enough to lend them to the short sellers?

Shorting is entirely legitimate, and can't be stopped. We can only hope that in this case, because it's a bank that holds the mortgage paper for a huge swathe of the country, and because it's an important British company, that the shorters receive a sharp haircut, hopefully all the way to their necks, when the market turns.

Our regulation are in a complete mess. They have to pass emergency regulations to stop short selling.

This is why I believe that top government jobs should pay a higher salary to attract the best minds, now the country is being run by not so bright people who are messing it up, looking at the cabinet you can see it clearly.

Either give Bank of England power to target growth as well, or the the power off setting interest rate as these all go hand in hand.

Lets not forget that it is our pension funds, managed portfolios, ISAs etc where these shares are being "borrowed" from.

Surely this is not in the interests of us humble investors (who have no say in where out pension contributions are invested).

How can we act to prevent our investments being erroded in this way?

I'm guessing that it is one side of their business (the hedge fund) borrowing the shares from another side of their business (prension fund).

Is it down to our pension providers to act to prevent this from being allowed?

I think the important words here are ...
'perceived as vulnerable'
There is not much room for sentiment in the markets and if they think that there is money to be made from selling HBOS short then they will. No, don't tell me - you thought it was a world of gentlemen in the city ?

40 Friendlycard

I fear that once the stock market begins to rise, and house prices also start to rise again, the public indignation and backlash will once again be washed away in a rush of 'me too' loan applications......

#43 - short sellers ARE putting their money where their mouth is, since their losses are (potentially) unlimited, unlike those selling shares that they own (whose losses are capped by the original price of the shares). This is another reason why banning short selling is an odd idea: it's not like these people aren't using their own money to make bets on the market...

Its not the buying and selling of the shares thats the problem (as many on here suggest).

Its the pension funds that "lend" these shares to hedge funds etc.

They know exactly what the hedge funds are planning to do and that is to lower the value of the investments.

Surely this is a contradiction to their objectives, its simple stop doing it!!!

Selling shares that you have not bought. Buying or selling comodities that you have no intention of using or comsuming (no Mr Darling this is not like Airliners that buy fuel they intend to consume).

In simple terms this is gambling pure and simple - exactly the same as placing money on a horse. Of course the financial sector will defend it as being totally different but it isn't. Its pure gambling and it undermines the true financial situations and it certainly kicks the small share investor in the teeth.

It not exactly rocket science to predict that these practices were bound to eventually cause precisely the choas we have now. The sad thing is that successive governments have done absolutely nothing about it - there the blame lies.

Hmm, I think what we're seeing here is the difference between short selling based on fundamentals and speculative short selling. This is no different to the speculative buying and selling of actual shares, except that it's done with derivatives.

We saw the worst excesses of speculative share buying during the dotcom boom: after flotation Netscape was trading at ridiculous price/earnings ratios. Yet people were still piling in, not because they thought Netscape would deliver the returns, but simply because they thought the price would keep going up. We saw the carnage when people suddenly started looking at fundamentals again.

With HBOS we are seeing the inverse, only this time it is speculative trading in derivatives. Essentially the short sellers are basing their trading decisions on sentiment about direction rather than analysis of fundamentals: "If the price is going down I need a piece of the action". Investment banks have huge number crunching computer grids which ensure they *are* part of the action, and so the downward pressure is amplified, as is the upward pressure in other times.

The commentators who are after the banning of derivatives are missing the point: it's not because they are derivatives, it's because they are traded on anticipated price movement rather than actual fundamentals. This is, and always has been, the nature of speculation - from the South Sea Bubble to Wall St in 1929. Yes, it all happens faster now, but it is the same effect.

Speculators are not welcome. If we can't draw a definitive line separating speculators from decent traders doesn't mean we have to endure their abuse.

Yes, the stock market has become a casino. And the computer and digital networks cannot be mixed with 200 years old laws.

Keep in mind why the stock market was created in the first place. The investor buys shares in a company because he believes in that company and wants to become part of success. But he has to give the company time to make good use of his investment otherwise it makes no sense.

Restricting re-selling the shares for 24 hours is not enough. Investors should stick to their decision for weeks, if not months. This would put an end to speculation.

I am not sure that the issue is just short selling, isn't the problem caused by things like leverage, market herd mentality, poor 'banking' decisons and market instabilities - all created by the greed of the investment banking community?

The values of shares are too volatile, because the 'market likes volatility' - so the markets are designed to help short term traders make money and not to make capital available where it is required.

The greedy actions of the bankers are causing broader problems for everybody -and they have milked off huge amounts of money, which they should not be entitled to.

We need to curbe the excesses of the industry - proper legislation is the only way, followed up by much more severe penalties for people who break the rules. These people need to be treated like criminals, they have acted like them.

Shareholders should be pushing for firms to stop paying too much money to people doing their job, with shareholders money, and trying to get some of the bonus's repaid - by the members of the comapnies board if necessary.

A huge review of the financial markets MUST take place to stop this sort of activity in the future.

Is somebody trying to tell me something about HBOS?

Nice and simple, if you are afraid short sellers are going to ruin your investment you have two options: Stick it in the bank or diversify.

Gambling is about chance, financial speculation is about seeking assymetrical returns and then managing the risk.

Short sellers do NOT perform a public service. They typically short sell shares that are falling, not those that are over-valued, and their activities make the falls sharper. In other words, they destabilise stock markets. I agree it would be hard to stop the practice - but it absolutely SHOULD be stopped if possible. They are actually parasites who prevent the proper functioning of stock markets.

Re: Post 33

If a person genuinely believes there is some profit to be made from selling shares that he doesn't actually own, why on earth would he not want to actually buy the stock before selling it on, unless he was trying to rig the market.

If someone borrows the money in order to buy the shares beforehand that is all well and good and there is proof of ownership. That makes it easier for the authorities to check out people who might be guilty of insider dealing.

some of the later comments get closer to the issue. Why do pension funds and insurance companies lend their stock to allow the value of their investments to be driven down? The usual answer is because they get a few basis points in return. ( and the remuneration goes to the fund not the fund manager unless trustees are asleep at the wheel).

I think there begins to be an argument in favour of banning shorting of regulated entities when you see the knock-on effects through covenants and the inter-bank markets. All the problems seem to be funding not solvency per se ( look at LIBOR today), I guess lehmans and northern rock will turn out to have been solvent in the course of time.

I find it odd that many on this board are in favour of 'short selling' - ie borrowing shares that you don't own in order to sell them at a high price and buy them back cheaper.

Yet these same people seem to berrate banks for poor lending decisions on mortgages?

Standards?

Surely if you want to move away from lax banking or trading standards it would be better to say only sell what you own?

Very informative blogs today. As a potential small investor in the stock market I will definately not go any where near it now. These big sharks are just waiting to swallow up the money of the little fish like myself.
The stock market used to be steady and reliable and in the long term equities could always be seen as a sound investment for the man in the street.
Not any more.
I'll just leave them to swallow up each other and in the end hopefully they will all disappear into a big black hole.

Isn't the only real issue the scale of the short sellling on a given share?

If (relatively) small proportions of the total market cap are shorted then this is just a bet and won't be a large enough position to materially affect the share price. If I was to borrow £1000 worth of HBOS shares from a friend, sell them and then buy them back tomorrow for example it's no going to make any difference whatsoever.

If a large amount of the total shares are shorted (and I have no idea at what level this is likely to happen) then the selling can have a material effect on the price - and presumably can also cause a tipping point as 'genuine' investors see the price falling and decide to get out.

Presumably then we need to continue to allow shorting to help markets set realistic prices but declare shorts and limit the amount of stock in any one company that can be shorted. I seem to remember something similar being proposed a couple of months ago.

Short selling is a form of market distortion carried out by speculators only interested in short term gains - any benefits in identifying weaknesses in companies are well outweighed by the bear raids of the hedge funds which are prompted by reckless greed and which are in danger of undermining sound companies like HBOS - this type of destabilising activity has to be stopped by firm action by the FSA, which we haven't seen thus far. Most investors are long term and their interests are prejudiced by large institutions lending shares to hedge funds to mount bear raids. Sloppy regulation has led to a situtation where at present "the convicts are running the jail".

One more thing you forget Robert is that any kind of regulation against short-selling would be defined as 'market abuse' or 'market manipulation' in which case the FSA would have to take itself to court.

I also did not see the Chancellor on any of the captains in business running to prevent extremely long buying of their stock done on 'hope.'

Sorry, if HBOS has large exposure to the US alt A market it is their fault and they should expect no sympathy or funding from the taxpayer. It is time for capitalism (at it's best or worst - take your pick) to weed out the weak and the incompents.

As a disclaimer and to dispell any potential conflitcs of interest: I have both my mortgage and offset savings at HBOS.

Comment 40 Friendlycard

"... but the speculative tail has been wagging the fundamental dog for far too long."

Yes, I agree, but I think the major players in the short-selling game are not really speculating so much as laying an aniseed trail that they are extremely confident that the pack will follow. Yes, there's some risk involved, but at the same time the pack is really not interested in fundamentals, only with holding the right position to benefit from whichever bandwagon happens to be rolling at any given time. The financial muscle of the big players is such that they are able to create the initial price movements that set the bandwagon in motion.

Comment 52 : lordBeddGelert

"... But the 'wisdom of crowds' tries to get the price right ..."

Were crowds wise to cause a tripling of the price of houses over the 10 years to August 2007?

When lastminute.com had a turnover smaller than that of a large pub, were they wise to value it at nearly a billion pounds?

Were the sentiments that lavished praise on Northern Rock, with its rationally indefensible business plan, wise ones?

Maybe the measurement of crowd wisdom would be more accurately assessed by use of the average displayed by the individuals who comprise it, not the total of those individuals?

58: gimmetruth

A good point, and I fear you may be right, but I hope that what's going on at the moment will be sufficiently cathartic to bring about a long-term change in public and government attitudes.

Based on past experience, we need to be cautious about spill-over from the financial to the 'real' economy. But I do think that, in this case, the public will have been sufficiently shocked to demand a restoration of sound financial principles, including leverage and asset ratio hurdles. We also need to set interest rate policy with reference to asset as well as consumer inflation.

I also think that, when bankers complain about any new restrictions which might be introduced, the wider credibility of bankers will have been so impaired that the public, and governments, might well ignore their complaints this time.

Imagine what the world would be like if the thousands of city vultures actually went out and got real jobs, that produced real things, like the majority of the population.

Instead of gambling for a living, instead of creaming off the profits in silly bonuses and 'creating' magic money out thin air they could become real productive human beings.

"First, short-selling (as I've said many times) is not evil, in and of itself. In fact, short-sellers perform a public service when they take a risk to puncture the over-valuation of assets, as they routinely do."

That's just not true, though,is it?

Shortsellers drive the price down, hoping to persuade other investors to get out, and putting the stock into a vicious spiral.

Public service? Come now, you should be ashamed of yourself!

A lot of people seem to be convinced that the investment banks and hedge funds that are in serious trouble right now are in that position because of poor trading decisions or as some have put it, "bad bets."

That might actually be somewhat misleading; while there's no doubt that the somewhat dubious futures and derivatives packages that have evolved over the last few years really do take the system beyond a level at which it can function, there is an argument to suggest that the initial positions weren't bad ones, as follows:

When the original positions were taken, the institutions in question would not have known that, contrary to previously, they would not have the same kind of access to finance that they did before the banking system snarled up. Short- to medium-term losses that would have been absorbed by long-term gains, in normal circumstances, instead force these groups into a situation where they cannot cover their debts.

In my opinion, the blame for this still rests significantly on poor lending decisions to consumers, particularly within sub-prime mortgage markets. Of course, those taking those loans are also to blame.

#73 "sound companies like HBOS "...
How do you know? If they are as sound as you say, the market will adjust accordingly.

Capitalism is ruthless - so called 'long term investors' are still speculating whether they like it or not and if they can't take the risk then they should put their money in a deposit account (maybe not with HBOS!).

Share go down as well as up you know...

Well done, Mr Chancellor.

It's always good to see that somebody is ready to shut the stable door just after the horses have bolted!!

I cannot believe the drivel I have read here complaining about short selling. Presumably none of these simpering people have a problem with borrowing money to buy shares? Short selling is an expression of the seller's valuation of the commodity he is selling. he clearly believs that its true value is less than where the current market value is. By the same token, those people buying when a seller (short or otherwise) sells have a valuation of the commodity which is higher than current market value. It does not matter whether the price is rising or falling at the time of the transaction. All that is required is that difference of opinion. Without it we would all be buyers at the same time or sellers at the same time and the market would not function at all. The secondary market in shares (where all short selling takes place) has very little to do with the raising of capital ( a primary market function). It is merely an indication of the cost of new capital for an existing business. I don't suppose anyone would argue that banks would find it easy to raise new capital at this time, hence the market appears to be functioning rather well with all this 'evil' short selling that is taking place.

76 Friendlycard

We can but hope.

Unfortunately the financial services industry has been elevated to such a position of importance by successive governments. Our balance of payments deficit is bad enough, but look what it is without profits from financial services.

By the time normality returns we will probably be in the early days of a Cameron government, which will push the free market agenda further, with no doubt, attractive tax breaks for the bonus boys brigade.

83 Gimmetruth

Good point again. Something which I think needs to be borne in mind in this context is an ongoing, rapid worsening in UK trade in energy - we'll be importing 50% of our gas consumption within two years from now. Together with a deterioration in earnings from financial services, the trade outlook is grim indeed.

However, I hope that Cameron may realise that the continued health of the financial services sector will, in the future, be seen to rest on sound finance and not, as hitherto, on ultra free market liberalisation.

So the emphasis might be on resilience and reliability rather than flexibility and innovation. The City's disproportionately large role in global finance rests on a British history of sound finance and reliability.

If we fail to restore sound finance principles, we will suffer from a lack of confidence; but, if we can gain a reputation for ultra-sound finance, we could actually benefit by gaining market share.

Principles of sound finance will be the new agenda in the US, which has a history of periodic outbreaks of puritanism. I hope something similar happens here too.

82 Hawkeye56

The issue is not the morality or otherwise of short selling. The issue is the impact of short selling on the overall market. If short sellers by their actions cause a price to fall, which fall they then profit from, that is harmful to the market. It actually causes the market to undervalue shares, and it destroys the wealth of other investors who have bought shares for their real value, which consists in their dividend stream.

Similarly, too much use of borrowed money to buy shares can be harmful if it causes share prices to rise without any regard for fundamentals. We've seen lots of that in the past as well.

The action of shorting lowers the perceived value of the share being shorted, in the same way that going long increases perceived value. Both actions are indicators of value, and as such will be used by others to make decisions. Minor shorting by one or two will produce a minor change in perceived value.

Hedge fund managers should not be allowed to devalue the stocks they hold long by lending them out for shorting. It may not be perceivable on a single transaction, but that is what they are doing. The drop in value of the investment as a result of shorting comes off the bottom line of the investor.

I agree mostly with the likes of #62 #64 #47 #48 there is nothing wrong with short selling; fund managers, traders, those carrying out the shorts bear the risks of prices falling and rising respectively (this is abundantly clear given the stress that many funds and banks are now under) and act as valuable indicators in the market to hopefully correct mis-pricing of assets.

The practice of short selling and the failure of institutions are logically related but not strictly dependent. They suffer from over-reaction and uncertainty in the markets which only more transparency and better understanding of market mechanisms and rating agencies can alleviate.

We are seeing large scale corrections in a time of great uncertainty because risk was badly rated, and too much confidence was put in the ability of regulators and rating agencies

I do agree that there should be better disclosure of the duration and nature of share sales to aid everyone in assessing the motives of traders, are they genuine long term lay offs of shares or are they short term speculations fuelling market unease.

Clearly remuneration is part of the problem, but I see this as a logical extension of problems caused by the corporate veil (a slight digression i know) and corporate accountability.

A very negative side effect of all of this is the public bail-out of these institutions, as the currency is diluted by injections of funds and weakened by public ownership of shoddy assets we are effectively taxed for bad corporate governance.

The solution for HBOS is to encourage supportive rather than negative sentiment about their share price.

This can be done in a number of ways.

I am suprised their management has not tried them. This might, like the short-selling, be an issue of competence.

With regard to the way the City seems to be imploding, as I have mentioned before, the dogs are out eating the other dogs.

In the old days the short-sellers would be invited to take sherry with the Governor of the Bank and told in no uncertain terms by his deputy that they are selling the City itself short.

It would seem that Uncle Lenin was right: the capitalist will sell you the rope with which you hang him.

the shares the fund manager has are not owned by him but by the investors, people like you and me. So perhaps if they had to ask my permission to lend someone MY shares it would stop the excesses of short selling!

Can someone in this blog please explain something to me in as simple terms as possible about share price crashes. Presumably its not in anyones interest for a share price to fall heavily? Why for instance does a bank crashing in the US make a small manufacturer in the UK worth less? Why when calamity occurs do people just agree not to sell and therefore the price wont crash

I wonder if the underlying problem may actually be the huge growth of tracker funds in recent years? As these are passively managed, the fund manager effectively doesn't care what happens to the share price and is willing to lend the shares to a short-seller for a fee even if this might cause the price to fall.

Passively managed funds were great when they first appeared (didn't Warren Buffet endorse them strongly?), but they've grown in number to such at extent that they own a large part of the share market, and as their behaviour is completely predictable, is this now making it easier for speculators to control the market and effecively "milk" those funds?

90: FoxGell

Firstly, some clarification - a bank crashing in the US might well have no effect on a small manufacturer in the UK; the headline indexes like the FTSE 100, though, wouldn't feature firms like that, just the largest.

With regards people agreeing not to sell - the problem there is that there's a wide range of different circumstances in which shares are sold;

- Individuals selling shares to avoid losing too much money, some of whom might have considerable amounts invested in shares and may not be able to absorb enough of a loss in asset value if they did fall.

- Hedge funds whose survival rests on a high rate of return; for which they need to get out of unprofitable positions fast.

- Companies themselves through rights issues can create shares, which tends to drive down prices as supply increases relative to demand.

There are a load of others, but those are just some - it's hard to stop all of the different groups from wanting to sell. Also, sometimes, share prices *should* fall, where companies are over-valued. In such cases there can be benefits to share prices falling (mainly for potential investors as the information they'll have is now more accurate).

#90 if people think that the bits of paper they have may be worth less in the future they try and get rid of them as quickly as possible. This is sensible.

Holding on to them does not make them retain their value, it is the price someone is willing to pay for them that determines what they are worth, and the price someone is willing to pay is a judgement-call based on a combination of what is going on at the moment [with the institution to which the shares relate] and what may happen in the future.

It's all a big gamble.

90:

Good question, to which I think there are several answers.

First, the crash of a US bank may feed through into the broader economy, depressing demand for the small manufacturer's products.

Second, market ratings - if falling share price affect comparative yields and multiples, the value of the UK manufacturer as a stream of future value may diminish even if its earnings and dividends do not weaken.

Third, a scarcity of capital may have adverse implications for the manufacturer.

Lastly, there's the "babies and bathwater" syndrome - perfectly good companies' share prices get marked down in across-the-board movements (and this can create good buying opportunities for long-term investors).

I'm sorry but this is getting silly!
1) Security owners DO profit from short selling, not just fund managers. Funnily enough, that's why they do it - to earn income to service their, in the case of pension funds, vast portfolios.
2) It's not "selling something you do not own". Check the regulations: Absolute title to the stock has to pass from the owner to the buyer, via the borrower.
The borrower is contracted to return the equivalent security i.e same ISIN, to the "lender" at some point in the future. this is why he may face unlimited losses if the price moves against him i.e up!
3) Speculation is not evil, it is neccessary to provide liquidity without which no market could exist. All you guys who make huge profits in bull markets, buying securities that you couldn't even begin to value, didn't complain then. Who do you think is going to buy them next time you panic cos the footsie has lost two points on the day but speculators? i.e people who take a different position from "rational" people like you!

Our banks have an even bigger crisis looming than the mess they are already in....nobody trusts them any more.
Pension fund schemes, endowments, life insurance saving schemes... its going to be hard to keep a straight face when you're trying to sell any of these in the future either.
We dont trust them to be wise with our money, and we dont trust them to keep our money.
Democracy's sometimes ugly sister...capitalism.

Dear Foxgell
If you "invest" 20 odd quid in the book "The intelligent investor" by Benjamin Graham, I think it will answer your question.
The author is credited with being the "father of modern security analysis and value investing"
Warren Buffet was a, somewhat, distinguished student of his and attributes much of his success to Graham’s teachings.
cheers

Guys from comments 91 plus. Firstly many thanks for beginning to open my eyes to something that I think I wish I had looked so much closely at. I had saved 100 quid a month since 1998 till 2006 into a Unit trust that 1 year ago was worth 16 grand. I actually asked the fund manager if it was worth cashing as it seemed high and he said why on earth would you? So put in my place I have watched it come down till I suggest tomorrow it will be worth circa 11 grand. Had I just put in a building society it would be worth 14 grand. These arent figures that will destroy an economy but can make or break an individual who works hard and tries to save for nice things. It make me realise how you shouldnt tread anywhere unless you are prepared to do it properly and informed. Im sat scared to sell so will hopefully sit for 2-3 more years hoping beyond hope they go back up again. I do not understand all these people writing vitriolic statements in other blogs about banks getting their deserts etc. surely via pension funds and things this is a crisis for everyone. Anyhow I have a few grand put away in HBOS also!!! They will probably go to the wall tomorrow. but thank you for some interesting insight. appreciate you writing

There are certain trade sectors, such as Banking, where short selling should be outlawed.
John C.

Mr. Peston is correct--the short sellers in any market are bit like the grim reaper: terribly unwelcome, but needed to remind everyone of stark realities.

Are some of the short-sellers harvesting wads of cash? Absolutely, because they invested their money in stocks at that price where their actual values are, not what the rest of the market wishes them to be.

Let the short sellers do their job, and let the hot air out of the balloon. If they overstep, they will lose money to their counterparts buying long.

This will be a painful, and hopefully instructive, episode for everyone, from the local consumer to the central bank governor. Best get it over with, and push ahead.

We just might see a semblance of sanity return.