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Short-selling banks

Robert Peston | 10:15 UK time, Tuesday, 3 June 2008

Short-selling of shares is one of those City activities that generates a vast amount of emotion.

Canary Wharf towerQuite a lot of people, including senior people in business, regard the practice of selling shares, securities and commodities you don't own as immoral, as a form of heinous speculation.

I don't take that view.

On the whole, I regard short-sellers as making a helpful contribution to the process of setting fair prices for tradable securities and commodities.

When shares, for example, are priced at euphorically high levels, that is just as likely to lead to a serious misallocation of capital resources as when shares are priced below fair value.

So when a hedge fund such as the short-selling specialist Kynikos identified the fraudulently managed US energy giant, Enron, as grotesquely over-valued, and then sold the shares short, that was a public service (albeit one for which Kynikos's founder, Jim Chanos, was handsomely rewarded).

And although some gag at the billions trousered by the US hedge-fund superstar John Paulson from short-selling securities linked to US subprime, is it reasonable to criticise him for profiting from banks' and other hedge funds' stupidity at overvaluing these securities in the first place?

But short-selling isn't always a blameless and harmless activity.

At times like these, when uncertainty about the robustness of the financial system verges on hysteria, short-selling can cause damage to the health of real businesses - with serious ramifications for their respective employees and customers.

Take the case of a bank that needs to raise capital. And there are quite a few of those around the place right now.

When the share price of that bank falls, it becomes much harder and more expensive for that bank to raise the capital it needs.

And that in turn reinforces the downward momentum to the share price, because the prospects for that bank worsen as the cost of capital rises.

What's worse for the bank, the fall in its share price can also spook providers of credit and depositors - which, again, can do serious damage to the bank's profitability and even (in a worst case) its viability.

So short-selling a bank perceived to be vulnerable looks like a one-way bet for hedge funds, a sure thing.

I am not going to hold up Bradford & Bingley as an example of the excesses of short-selling hedge funds, because the worrying rise in arrears on buy-to-let and self-cert mortgages indicates that the short-sellers were probably right to identify it as over-valued.

But it's less clear that the astonishing falls in the prices of HBOS and Royal Bank of Scotland - which are trying to raise humungous sums in rights issues of new shares - are merited rather than the self-fuelling consequences of a dangerous short-selling feedback loop.

So should short-selling be restricted or banned?

That's quite difficult to do in a financial world where shares, securities and commodities can be traded across borders.

But even without the intervention of government or regulators, the owners of these banks - the big institutional investors who manage the long-term savings of millions of us - could more-or-less put a stop to short-selling.

And it's rather astonishing that they haven't put a stop to it.

Most giant pension funds and insurers have to own a bit of HBOS or Royal Bank, for example, because at least part of their funds will track the UK market - and that means owning a slice of our banks.

And if the real business prospects of HBOS or Royal Bank were damaged by the impact on creditors' confidence of a falling share price, well that would do serious damage to the health and wealth of the pension funds and insurers that own their shares.

Here's the important point.

Short-sellers have to borrow shares in order to sell them - and they borrow them from pension funds and insurers.

In a hypothetical case, a hedge fund would borrow a million shares in Megabank for a fee (in effect an interest rate).

It would then sell those million shares at the prevailing market price of £8 a share, raising £8m in total.

What the hedge fund hopes is that Megabank's share price would then slide.

Let's say it does - to £4 a share. The hedge fund then buys a million shares for £4m and hands the million shares back to the lender.

Which means that the clever-clogs hedge fund has banked a real cash profit of £4m. Nice work.

But note that the hedge fund would be up the creak without a paddle if it was unable to borrow the shares in the first place.

Isn't it slightly odd that insurers and pension funds actually facilitate short-selling by hedge funds?

Surely it would be rational for them to stop lending stock to hedge funds, since in the very act of lending to them they may be undermining the value of the shares they own.

It does seem the height of madness that institutional investors, which are obliged to own shares in the likes of RBS and HBOS for years and years, may be encouraging falls in the share prices of RBS and HBOS and possibly even damaging the long-term prospects of those banks.

Naturally we rang our leading insurers and pension funds to ask whether they were lending out shares in RBS, HBOS and Bradford & Bingley, but mostly the response was a sheepish "no comment".

But I haven't heard back yet from Insight, the fund management arm of HBOS itself.

Can HBOS itself really be encouraging short-selling of the sort that mullered its stock?

I'll let you know, when I know.

UPDATE: Here's the answer from HBOS: it doesn't engage in much stock lending, by virtue of the structure of its fund management business, rather than as a matter of policy.


Comments

  • Comment number 1.

    I seem to remember from the Maxwell case that fund managers can lend shares they manage but do not own and pocket the fee - that makes a lot of sense.
    However, what would happen if the hedge fund that borrowed the shares went bust (say because the share price went up significantly instead of down) and the managed fund had the problem of having allowed the hedge fund to borrow something it did not own? Do the managed funds insure against that risk when they lend or are the amounts so relatively small they carry the risk themselves? If the fund managers do not insure is there a risk for the pension fund or whoever actually owned the shares that were borrowed?

  • Comment number 2.

    Doesn't falling share price make it easier rather than harder to raise equity capital? The buyer has a much greater incentive, since they get a much bigger slice of the company for same money.

    Perhaps the problem is that people who have the money to buy in, realise that the true value of some banks is close to or below zero.

  • Comment number 3.

    Are the people that are playing this game the actual people that own the shares or are they all agents that benefit from the trading volume that they create?
    Do they care whether the companies are helped or dragged down by the process?
    Shorting is just betting, one party believes the shares will really go down while the lender believes that he is better off taking the fee and getting the shares back at their future value.
    Is the ability of firms to raise money in rights issues affected by the current severe shortage of money?

  • Comment number 4.

    A story about short selling AND Pension funds. Supercalmdown will be pleased.

  • Comment number 5.

    So what if it undermines the value of the Banks/Pensions.......as long as someone is making a bonus.....surely that's what's important!!

    It's the individual that counts......isn't it??

  • Comment number 6.

    There is a distinct possibility that the right hand does not know what the left hand is doing.

    Each part of a financial institution has its targets which presumably the relevant manager has to meet or he loses his job. This could easily lead to conflicts of interest within the organisation.

    Remember, this is how we acquired the sub-prime fiasco in the first place.

    For as long employees in the financial sector consider themselves to be risk-takers rather than servants of institutions devoted to economic stability and the common well-being we will continue to have this sort of difficulty.

  • Comment number 7.

    Short selling is a necessary product of trading. Take it from someone who was a permanent bear for years.
    Robert is right in that ther is a certain irony in long term buy funds lending out their stock which could exacerbate a fall.
    But where the funds must hold the stock as a core investment, the bottom line is that its better to get the extra revenues in for lending than not.
    It should be remembered that should a stock suddenly be bid for, then the lenders stock is withdrawn albeit momentarily.
    Going short is a gamble but to say it handicaps the ability of a banks to raise money is a nonsense!
    Banks have only now started to pay a risk cost to raise capital because they have not been honest with their shareholders in regards to their off balance sheet liabilities and still appear to be maintaining that position.
    If we are looking at the causes why banks have got into this mess we need to look to Downing Street and the poor regulatory environment that ensued from there.
    The Banks will always cry wolf but lets not forget the UK banks alone have made well over £200 billion profit over the last 10 years, a not insignificant figure.
    The killer is that they have not learned the party is over and their earnings will not be the same again but their business plans don't allow for stagnant performance.
    Whilst you mention stock lending to short sellers lets also not forget that many investment banks are owned by the self same clearing banks who are now begging for money!
    The UK has knocked the US regulatory system time and again, but when it comes to tranparency the US are leaps and bounds ahead of us.

  • Comment number 8.

    This has all the makings of a story 'placed' by the PR bosses at RBS and HBOS to try and bolster their sliding share prices.

    The simple fact is that both banks, but particularly HBOS, face significant problems in the markets in which they operate which aren't going to resolve themselves overnight.

    Wholesale and Retail funding is still expensive...mortgage arrears levels are rising...mortgage demand has fallen off a cliff and unlikely to recover in the short-term...profits warning are in the air from other providers in the sector. End result - lower profits and lower earnings for shareholders.

    It really shouldn't be a surprise to anyone that the share price of these two banks has reduced so much. Short-selling by Hedge Funds happens, but the CEOs at RBS and HBOS should look elsewhere for their scapegoats.

  • Comment number 9.

    you write "Short-sellers have to borrow shares in order to sell them - and they borrow them from pension funds and insurers."

    is that really the case in the uk? no naked shorts? how quaint.

  • Comment number 10.

    The reason portfolio managers continue to lend stock is that the income from stock lending is significant and they want to make as much money for their clients as possible!

    There's nothing wrong with short-selling, of course, but one of the real problems at the moment seems to be naked short-selling - i.e. selling stock without having first borrowed it. It is suspected that many hedge funds engage in this practice, selling unborrowed stock and then simply failing to deliver it. This adds to the supply of stock and of course drives the prices down.

    Lots of details on this at http://www.deepcapture.com/

  • Comment number 11.

    Ordinary investors look at Companies trading accounts, dividend policy and long term growth prospects.
    All are of little importance due to manipulation of the prices by hedge funds in my opinion. That is how great Companies were built in the UK with long-term shareholders who wanted to see a company successful and receive a fair return.

    I do think it should be illegal to trade borrowed shares and if the city wants to gamble then there are sufficient casinos and web betting to satisfy there ego's without destroying the fundamental point of shareholder values and the reasons for holding shares.

    R Chamberlain

  • Comment number 12.

    There are some very educated and well articulated responses here as usual, but speaking for Joe Ordinary-Public, all I see is another round of the 'huge gain, little risk' game that got us into the mess in the first place, but this time in the reverse direction - fortunes being siphoned out of the system by the few, for little effort, at the expense of the many.
    Makes me sadly ashamed to be a capitalist!

  • Comment number 13.

    Call me niaive but until today I'd never heard of naked short-selling and it sounds like a really dubious practice to me. Since when have such fancy money-making schemes been legitimate? No wonder we're in such trouble.

    I've worked in financial services; obviously not at the cutting edge! I still had trouble sleeping at night. As pointed out previously in#6, targets lead to a complete distortion of the business with different departments forging ahead on their own and never speaking to each other. Do the board ever look at the business as a whole or do they collectively turn a blind eye while money is being made and until there's a problem they can no longer ignore? By then it's too late. Or is it the case that no-one at director level really knows what's going on?

  • Comment number 14.

    Dear Mr P,

    While you are waiting for HBOS to respond to your query, I am wondering if you could ask them whether they lend stock held by SIPP account holders too? I would be most interested to learn whether they are making money from my holdings, while harming the value of my SIPP!

  • Comment number 15.

    Robert, I have to more or less agree with your position.

    The only real danger I can see is where short selling can become self-fulfilling.

    For example, if you drive the share price to a level in which the rights issue might fail.

    But given the short timeframe for rights issues and the heavy discount involved, even this is tough unless market sentiment is very much against you anyway.

    I think the main problem is that people tend to see a low share price as, of itself, a disaster per se.

    It might be if it correctly predicts the future but, if not, its nothing more than a great buying opportunity.

  • Comment number 16.

    First, what is your evidence for the alleged downward short selling-induced spiral in bank shares? In what sense is selling bank shares short a one-way bet given the potential for good news as well as bad news? Short sellers are an easy scapegoat. Second, only a small part of securities borrowing is to finance directional short sales. The majority is to cover short positions taken to hedge long positions in other instruments, such as indices or derivatives; or by dealers to hedge trading positions, for example where they are providing liquidity to clients by buying shares; or for other purposes, such as to avoid settlement fails. If pension funds ceased to lend securities, I doubt it would have any effect on the underlying share price. But it would deprive pensioners of the lending income. Furthermore it would certainly reduce market liquidity, which is the last thing that any investor should want at present.

    For more information, please read an ISLA paper on short selling at:

    http://www.isla.co.uk/docs/Securities%20Lending%20and%20Short%20Selling.pdf

    David Rule
    Chief Executive
    International Securities Lending Association

  • Comment number 17.

    In the same whay that the dotcom boom allowed the price of stocks to get pumped up to over inflated levels, and the recovery from 2003 arguably did the same for other stocks (e.g. banks in hindsight) it seems something of a case of sour grapes to object to short selling.

    And of course, if you think that the effects are over exaggerated, you get an opportunity to buy at a bargain price.

    Short selling has also been available to private investors for many years through CFDs or spread betting.

  • Comment number 18.

    The answer to this came up at our recent market abuse training. If your normal business practice is to lend securites and you are mandated by your client to do so then if you deliberately withold the securities from the market you are apparently guilty of market abuse and cann therefore be fined by the fsa and presumably sacked even though you are suffering from the fall in the share price. Go figure the logic.

  • Comment number 19.

    Hmm, somebody listened to what I said about shortselling.

    Unfortunately, for the small investor, short selling does seem to be being used to destroy Shareholder value and make PLC's cheaper to buy by Private Equity.

    Large scale Stock lending makes no sense if it destroys the value of the company whose Shares are being lent.

    B and B for example has lost almost 90% of its Share Price since 2006 (500p to 65p approx)

    The returns on Stock lending cannot possibly make up for that.

    So why on Earth would the Pension Funds etc engage in such a practice?

    Obviously, it's their Pensioners who will suffer in the long run, but then how often is a Pension Fund held to account by its Pensioners ?

    Pension Funds should act to protect their investments not play it fast and loose.

    Of course, the number of ordinary Shareholders will fall as trust in the system is undermined and the City of Londons reputation has been greatly tarnished by all of these events.

    Bearing in mind Britain is supposed to be relying on Financial Services to make up for its lack of manufacturing I think we are all going to be in trouble.

    With loss of Confidence will come loss of International investors, damage to Sterling's exchange rate, balance of payments, and of course, higher Inflation.

    Short Term gains by some leads to Long Term loss for us all.

  • Comment number 20.

    In reply to post 4

    No, I am not pleased to have to post about Pension Funds and Shortselling.

    The City should have sufficiently developed Moral fibre to know this is wrong already, without requiring someone like myself, to point it out to them.

  • Comment number 21.

    It's interesting how people view Pension Funds investments.

    For example:

    No one would mug an old lady on the street.

    But people don't seem to be concerned that a future Old Lady's Pension Fund may be robbed by foolish (or deliberate) actions on the part of financiers.

    But then Financial Crime has always been Too Difficult, even when the trail of Swag is pretty obvious to anyone who bothered looking.

    Thats enough posts from me for one day!

  • Comment number 22.

    You raise an interesting point about index-component stocks. Yes, many funds have to hold RBS and HBOS because they are index components. The higher the market cap of the stock, the greater the weighting they need to hold. This means when the share proce is rising, the weighting is rising and the automatic price support from such holders continues. On the way down however (a more familiar scenario at the moment) the same gearing effect works in reverse. Stp drops in wrighting (or drops out of the index) and it is automatically sold by these holders. There is therefore a dangerous tendency to increase volatility as a result of the very existence of tracker and quasi-tracker funds.

  • Comment number 23.

    A reply to Grumpybob (not a relative by the way) posting 11 - "that is how great companies were built in the UK" - er, actually, no. Speculation has ALWAYS been part of the mix. What about the South Seas company? what about 19th century boom and bust in railway shares? Whose speculative profits built the corn exchanges that you find in towns all over the country? Brokers and profiteers have always driven markets - it's just that they can only get so far out of touch with the fundamentals before the tide goes out and they are wrecked on the rocks. Same will happen to short-selling hedge funds, in time, if it gets too out of hand. Trust the market: it may not know 100% what it is doing - but it knows more than you.

  • Comment number 24.

    As contributors will have realised I know nothing of how high finance works so I am gratified that my naïve questions have been taken seriously and insightful comments made. The idea of going short naked strikes me as a similar sort of nightmare horror as waking up to find I was streaking though Waitrose - not a pretty prospect nor a wise thing to do.

    The suggestion that my questions sounded like a public relations ploy put me out a little. As a piece of personal disclosure I admit that I teach public relations but such an underhand approach is not something I would ever recommend and I am sure my students would never consider doing anything so unethical.

    Public relations professionals are too easily a whipping boy or scapegoat for the misdeeds of others in what is sadly so often a corrupt society and with perhaps the odd very few exceptions public relations professionals are honourable men and women. Like Caesar’s wife and journalists, they professionally need to be above suspicion.

  • Comment number 25.

    To #24 Leonard26

    For the avoidance of doubt, my comments in #8 about the story relates to Robert's blog, not your original question.



  • Comment number 26.

    I don't see the problem with short selling the banks provided it's not of the naked kind. Naked short selling misleads the market just as much AAA bonds made up of subprime mortgages.

    It's all based on sentiment rather than economic facts. The hedge funds think there's more downside to banks share price, whereas if it is pensions funds lending out the shares they still make money from loaning.

    It's speculation (arguably adding liquidity to the markets). The gamble is if banks maintain their dividends which the hedge funds have to those they've borrowed from.

    As a long term private investor, it means I can buy banks shares at a level which I think is below their long term value.

  • Comment number 27.

    As always I read your comment with some interest and although I don't necessarily agree with some of what you have to say.

    Firstly let me say that I for one cannot condone the practice whereby people can sell something they don't own. It is not acceptable elsewher so why should it be right in the city. If the people managing the Hedge Funds wish to sell short then they should be obiliged to buy the goods beforehand otherwise, if not the system can be too easily abused.

    Secondly I do not accept your comment (RP) that people who short sell make a useful contribution to the process of setting fair prices for tradable securities and commodities. As we know the people working in the city are either riding on the crest of the wave or down in the trough, for them there appears to be no in between. That makes them an easy prey to unscrupulous hedge fund managers and such like who know how to play both ends against the middle in order to get what they want. Particularly when the hedge fund managers know they can do this almost risk free.

    To say (RP) the short term selling specialist Kynikos managed to identify that the company Enron was grotesquely over valued only higlights the fact that the auditor's (who are sometimes also grotesquely over payed and over valued) were less than competent in identifying what was going on at Enron.

    What we need from the people who are running our banks and businesses is a greater level of competence, less spin and more honesty and integrity. Likewise we need to ensure that auditors are far more diligent and show a greater apitite for honesty and integrity when it comes to reporting the way in which many companies value their businesses and services.

    Finally keep your reports coming they seem to stimulate a good deal of interest and plenty of banter.

    GRB













  • Comment number 28.

    I do find it difficult to justify short selling. My problem is that there are other methods by which a fund can protect itself. For example is it not possible to buy put or call options. Or Write put or call options. It is the options market which is there to enable funds to protect themselves.
    As for underwriters there is a problem insomuch that they may expect the shares to be fully taken up and as a result they underwrite more shares than they can afford. This leads to a problem because they may well have to sell assets to raise the money to pay the calls. From my experience this actually happened back in the late eighties with BP when the Kuwaities had to bale out the government by taking up a majority of the shares. Does my memory let me down or is there somebody still alive who remembers those heady days.

  • Comment number 29.

    I have learnt a lot today about short selling. However, the conversation has left me perplexed.

    Distinguishing between a concert party and a fan club leaves me confused and I have a similar problem with short selling.

    Is it always possible to distinguish a naked short from a bear raider?

    Could short selling lead to a rash of takeovers that will surface in the real economy as longer dole queues and consequent defaults on mortgage payments?

    Is there a collective noun - as in a “nest of vipers” - for bear raiders?

  • Comment number 30.

    I work in engineering and our typical product cycle time, cradle to grave, is over 15 years. In our industry we are plagued with short termism and constantly have to suffer the consequences of decisions made by senior managers who have long since moved on.
    It seems to me that all this short selling, especially if pension funds are cutting their own throats by lending shares to be shorted, is sacrificing long term stability for short term gain. Those making the short term gain are not those who will suffer in the long term and it seems that someone will have to control them.
    The whole system seems to stink - the "light touch" regulation which has been encouraged of successive governments is a joke.

  • Comment number 31.

    It is claimed that free markets are the panacea to economic success. What about those who are disadvantaged by the effects of these markets, as more and more people are, and what about those who are able to manipulate the markets.
    Someone above mentioned the South Sea bubble, whilever there is ignorance, greed and dishonesty all markets will be rigged against those with little knowledge.
    The real tradgedy of the Bradford and Bingley situation is that the management got paid huge bonusses and the consultants huge fees to set up a sitation where some whiz kids can make massive profits out of taking our money from us.

    by the way, there seems to be a lot less optimism in the blogs nowadays

  • Comment number 32.

  • Comment number 33.

    Thank you to Grouchmonkey ( post 23 ) for attempting to explain his take on our history. The people who did build the Corn exchanges, railways, companies such as ICI, Glaxo, and Lever Brothers and those in the even more distant past where true entrepreneurs. Yes, finance was raised by shares, and provided by brokers but people lost their shirts on the success or failure of the venture. Not by gamblers who have no concern whatsoever about the success or failure of the business they gamble on.
    Although I would agree with grouchmonkey that once the gamblers have wrecked the British Business culture, things will sort themselves out ! the city bankers will need to find someone to make the goods they will want to spend their dubious profits on ! and there will not be any decent companies left.

  • Comment number 34.

    Indeed, Robert, you could put an effective end to short-selling by stopping stock lending. But if you did that market liquidity would dry up and shares would head down for far longer and far further than if the status quo were left unchanged. Remember that shorts have to repurchase the shares they've sold short. They can and often do get it wrong - and are forced to cover at much higher prices, at a loss.

    There is an interesting study in the US, by Professor Owen Lamont, which shows that the companies complaining most vociferously about short sellers are typically those that have most to hide. It's called shooting the messenger. The negative views of shorts are a vital antidote to the chronically bullish and often misleading spin published by companies' directors, their legions of PR agents, and government ministers, all of whom have a vested interest in painting things in a rosier light than is deserved.

    Those with a few minutes to spare might care to look up on Google the public statements from the managers of Enron and Worldcom in 2001 - or of Northern Rock and Bradford and Bingley in the months before their problems surfaced.

  • Comment number 35.

    I'm sure that if I tried to sell something I didn't own I would be committing an illegal act - so why can these people get away with doing this sort of thing?.

  • Comment number 36.

    The big problem is one of Trust.

    Equity (ie Shares) rely on People trusting the Company to make best use of their Money
    AND
    on the Stock Exchange to let them trade fairly.

    When Trust is abused and breached both by Companies and Market Makers (shortsellers), the result is a loss of trust.

    Without Trust the Equity market will eventually fail, and the Credit markets will remain a joke.

    People won't Invest in Shares.

    People won't buy into Pension Schemes.

    People will tell their Children they cannot trust Institutions.

    The Children will grow up with less respect for Property of others (because the Financiers have set a clear example of how it is okay to STEAL)

    And as has been seen already, some of those Children will have no respect for Human Life either.

    Everything in this World is interconnected, from the Big Banks and Companies, the Pensioners and the Unemployed, and the kids on the street corner who see no future for themselves in this country.

    So to restore some Trust and some confidence the Stock Exchange Members should under take to cease any Sharp Practice's.

    Such as selling/lending Shares they do not own (for example those held on Nominee Accounts)

    And they should cease any practices such as spreadbetting, which encourage People to see the Stock Exchange as a Casino.

    That practice belittle's and undermines the image of Share investment, and image is everything these days.

    If the London Stock Exchange members do not take action, they will just be seen as running the LAS VEGAS of Northern Europe rather than a world leading financial centre.

    And who except Gamblers Anonymous will take them seriously then ?



  • Comment number 37.

    Dear Robert,
    This is a REQUEST, can you please ask your Defence Correspondant to open a blog just like this please.
    THANK YOU.

  • Comment number 38.

    creak versus creek?

    come on peston - what happened to that public school educated spelling ability?


    But note that the hedge fund would be up the creak without a paddle if it was unable to borrow the shares in the first place.

  • Comment number 39.

    Nice try, but you are - as others have said - shooting the messenger. Lending shares for fixed income is a normal tool in the fund managers tool box - it helps them optimise the risk profile of their portfolio.

    What you are suggesting - that fund managers stop doing this to prevent price falls - is effectively the same as saying "they" should hoard shares in an attempt to control the price. This is unrealistic, as it would require wide-spread collusion amongst fund managers - and we all know how cartels end up - someone breaks out and sells the shares for the inflated price.

    Also don't forget that - provided you believe the markets expectation of future return, and for all its faults that is the best estimate there is - the fund manager has managed to lock in lower risk future returns in form of fixed income when the expectations were higher, by lending shares when they were more expensive. If they simply sat on the shares, they would not only suffer the price falls, but also a lower expected return for the period that the shares would have been lent for.

    As for the morals of short selling, what is the difference between selling shares you don't own (as long as you can deliver them), or buying shares for money that you don't own (aka. leverage)? Short selling keeps the market more liquid than it would otherwise be.

  • Comment number 40.

    Even if this trade were stopped, would it not be circumvented by people trading in 'contracts for difference' ?

  • Comment number 41.

    I'm sorry Robert, but this sort of nonsense is the very reason why I have resolved to give no more than I have to to my company's pension scheme. This is dealers playing with the savings of Joe Public, who do not have money to spare for them to mess about with. It is the unpleasant and unacceptable face of capitalism, it is not clever, and does not deserve praise from the likes of you - however balanced your blog report may be.

    I am now looking after my money, myself, through ISAs and other cash saving devices. They may not provide the potential returns that share portfolios, property and the like could - but at least I am assured of a return.

    The sooner the City is reigned in, and the ridiculous "I'm alright Jack" bonus culture is eliminated the better. At that stage it might start working in someone else's interest, other than their own.

  • Comment number 42.

    Robert asks "So should short-selling be restricted or banned?" The real question is, can it be banned? I suspect not - someone will always find a clever workaround for any barrier put in place when there is serious money to be made. In fact, the financial sector seems to habitually find ways to circumvent safeguards (the way in which the credit crunch came about is a great case in point), even if what they actually do is simply rename the problem to avoid the application of certain legislation (write downs rather than write offs? Is there any material difference? Nationalisation vs "temporary public ownership" is another example.).

    Sure, short-selling should be banned but the financial sector is so very big, so very powerful and so utterly driven by greedy short sightedness that, even if it were, banning short-selling would result in it being replaced with something even more profitable for the few and damaging for the rest of us.

  • Comment number 43.

    #36 supercalmdown, nice to see you have moved from your pension rant.

    Firstly, the post by Robert was deceptive. Informed comments on this blog have flattened the idea that short selling should or even could be limited. Buying and selling are two sides of the same coin, as are buying on margin or short selling. Cry-babies who cry foul will have to leave the casino if they run out of money. Some bankers, as is to be expected, given their limited knowledge and decision making expertise, are doing so already.

    I agree that Trust is the major business issue. But I do not think it is a question of morals, but of consistent and reliable behaviour.

    May I comment on what I think are factual errors in your post.

    It is ingenuous to believe that a company makes best use of the equity of their shareholders or even tries to, or that a stock exchange lets them trade fairly.

    The equity market will not fail as long as you continue to give them your hard-earned money to play with.

    People will continue to put their money in shares and pension schemes as long as they continue to believe that they are investing their money, instead of realising that they are speculating.

    Saving happens when you place money in a fixed interest account with a bank up to the 35k guarantee, and above that in government bonds.

    Speculation is when you buy property without the intention of living in it, or if you buy shares, or any other thing that could conceivably be described as an asset, in the hope it will increase in price or provide a return.

    Irrational irresponsibility is when you let someone else speculate with your money, such as a pension fund or mutual fund.

    Investing is when you use money to finance productive activity of your own, something where you will add value, whether through business entrepreneurship (business) or technical innovation (research).

    Rational irresponsibility is when you let someone else either invest your money or use it to finance their own productive activity as described above. Perhaps you could earmark a small percentage of your funds to this type of speculation.

    People will only tell their children that they cannot trust institutions once they actually realise this truth for themselves. Children forget this advice after a decade or so. Every now and then some people who control some institutions can be relied upon to breach trust in such a spectacular way that it results in an economic depression. Then many people realise this truth, and it can take decades before it is once again forgotten, as those who experienced it at first hand die off.

    The financiers you talk about do not generally steal anything but if they do then they go to jail (under American law), or are rebuked or subjected to negative remarks for a short time (if they live in this country).

    Yes things are interconnected but I do not think this adds anything to the debate.

    You speak of sharp practice of stock exchange members as if you have never watched a football match. Scallywags will be scallywags, and are simply being themselves. As long as the referee knows and enforces the rules, and keeps their eyes open, the match usually does not degenerate.

    Unfortunately, the regulators and policy-makers are responsible for things coming unstuck, but this is to be expected. The scallywags are cleverer than the regulators, and it is more difficult to predict and control the global financial economy than the weather system on Pluto. At least the Anglo-Saxon contingent is aware of the need to maintain a relatively free market, even though it sometimes behaves like a free-for-all market.

    You should not have the right to deprive people of their right to gamble, or speculate. If they want to borrow to buy or borrow to sell, what is it to you? And if foolish people want to give the scallywags their money to gamble with, well, what can I say? Once again, the regulators are at fault here. At least half of the population in this country is of below average intelligence, no matter that the socialists who run this country try to convince you otherwise. The job of the regulators, policy-makers and politicians is to educate these people about the above truths and not promise them that they can borrow their way to living-the-dream.

    Anyway, share markets are more like racecourses without a central tote than they are like a casino. A casino has a house, someone in control. Since the nineties the tipsters have managed to gain the upper hand (hedge-funds) and the bookies seem to no longer bother to cover their bets (bankers), but this, again, is the fault of the regulators.

    Many of the bookies and most of the tipsters will be out of business sooner than you think. If people who complain about sweatshops actually invested in them, would you care if they got their comeuppance and went bust? No! So what about people who became shareholders in banks? Same principle. Perhaps you are actually your own enemy, because it is the money you gave to pension funds which was in turn used to buy bank shares, which has propped up all these scallywags in the first place!

    This image of share investment, as you call it, is a myth to make so-called investors seem important to themselves, so they will part with their money. They are actually irrational irresponsible people without the benefit of a financial education. Rather do real work than speculate, if you feel so strongly.

    It is you, with respect, who is taking the stock market too seriously. If you and a hundred million like you stopped taking the share markets seriously, stopped throwing your money away in order to feel important, then bubbles would not be so harmful. If you have spare money, and are not willing or able to occupy yourself in entrepreneurial or innovative activity, then save it for goodness sake!

  • Comment number 44.

    Perhaps Mr Peston could ask the friendly fund managers who pockets the fees for stock lending. I recall a conversation with a group who told me they made more money from stock lending than they did from the management fees on thier funds, which may hint at why most managers aren't too concerned at the practice.

  • Comment number 45.

    I am not sure why my original comment (17) has been referred to a moderator. But let's try again. I am Chief Executive of the International Securities Lending Association, which represents participants in the securities lending market: beneficial owners, their agents and borrowers. I agree with Robert Peston that short sellers make a helpful contribution to setting fair prices in an open and efficient market. I dont understand why he takes the view that the market for HBoS and RBS shares is different. If short selling caused the price of their shares to fall below fair value, other investors would quickly take the opportunity to buy. I fail to see how a 'dangerous short selling feedback loop' can be created or how short selling can be a one-way bet. Rather it sounds like short sellers are being made scapegoats again.

    It is also important to understand that only a small percentage of lent securities are used to cover directional short sales. Securities are also borrowed for many other reasons: for example, to avoid settlement fails, by market makers in order to provide liquidity to buyers, and to enable arbitrage-related activity: for example, to go short individual shares versus an index-based basket.

    Pension funds and other investors lend shares in order to earn additional returns at low risk. If they decide not to lend they miss out on that return, to the detriment of their investors. It is not clear that the underlying share price would be affected one way or the other. But one certain consequence of reduced securities lending would be to lower market liquidity. Particularly at present, that is the last thing that any investors should want.

  • Comment number 46.

    The only reason for the current financial fiasco, is not irresponsible borrowing, but hugely irresponsible lending, driven by lender's greed.

    If lenders had been as cautious and responsible in the past as they are being now, then the mess wouldn't have happened in the first place.

    How about this for a revolutionary idea that might just ensure that there is never a repeat of the present debacle we are all suffering from at the moment.

    If the only place Banks and lenders could borrow money from here was the Bank of England, then there would be no need for LIBOR (the main reason for the problem) . Banks would then have to justify why and for what reason, they wanted the money in the first place and would need to satisfy the BOE they they were worthy of the loan (just like we have to) and would only get it if the BOE was satisfied and secure.

    The BOE would then be able to properly monitor the behaviour of these lenders and could ensure that they never over extended themselves, or borrowed beyond their means, the same conditions they expect from us.

    Wonder if it could catch on???????????

    blueessell

  • Comment number 47.

    Re comment 45

    I read with some interest what you had to say about all the advantages of participating in the securities market (in particular short selling) without disclosing any of the disadvantages.

    That I suspect is because you, as an insider, will have the information to know when to sell and trouser the money and get out before the muck hits the fan.

    For someone like me the big problem with short selling is the fact that some poor unfortunate (sucker) who is not on the inside, will end up picking up the tab after all the big porkers have had their share. That person will invariably end up worse off

  • Comment number 48.

    Hahahahahahaha... oil @£139pb! End of Days... no one... but no one will be short of fuel tomorrow ...or the day after... or next week or next year.... it is soooooooooooo much Bull!

    £139 pb ...keep on buying ...go on Barclays, HBOS, LLoyds ... and when the price crashes with the realisation that the emporer is wearing new clothes don't you dare come cap in hand to the tax payer begging for help. This time the banks will have to be allowed to sink.

    Moral hazard... it's where this game started... it is where it will end.

  • Comment number 49.

    There is nothing wrong about trading on margin until it becomes massive speculastion. Examples are Hunt's attempt to corner the silver market, current oil price speculation, current bank speculation and the UK pound speculation in the early 1990s. You can't fight the weight of geared up funds - unless you change the gearing rules. Hunt was stopped by merely requiring an increase in margin payments. He didn't have the cash, had to close his positions and the silver price dropped to normal levels.

    Why don't our regulators act? Well when various countries need to act together is the problem. Hence you have self created finacial problems, burma, zimbawe etc. ....

  • Comment number 50.

    I hope you dont feel I am wandering too far off the subject, but I have a serious problem with the rights issue of RBS.I cannot understand how the directors, and in particular the auditors could say that the 2007 accounts fairly reflected the true situation at RBS on the 28 Feb. and then shortly after admit that there were very significant (5.9 billion ) differences in the value of certain assets. These assets were not acquired after the end of 2007, nor can their value have changed so abruptly and by such a large amount in such a short time. Any selling off of RBS was therefore completely justified on the grounds that neither the directors nor the auditors had signed off accounts which had any relationship to the real state of the Company. Any short selling is therefore not the important issue in relationship to the price collapse, but the fact that the Directors AND the auditors had not given the shareholders the true facts.

 

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