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British banks shorted

Robert Peston | 08:44 UK time, Wednesday, 24 September 2008

Prime ministers probably shouldn't use phrases they don't understand.

Gordon BrownGordon Brown, seconds ago, attacked "naked short-selling" on the Today programme, and then went on to describe short-selling covered by borrowed stock (viz short-selling that's not naked).

For next time, prime minister, what you're criticising is all short-selling, not the racier clotheless variety.

Perhaps I'm being pedantic, but these sorts of semantic errors are becoming slightly pathological (go back to the Marr interview on Sunday for more Brown malapropisms on the market).

While we're on the subject of shorting, the scariest disclosure of the past 24 hours was that John Paulson has made bets of around £1bn that the share prices of our biggest banks are on their way down.

He's the hedge-fund megastar, the founder of New York's Paulson & Co, who made several billions last year short-selling collateralised debt obligations.

If he thinks our banks are almost as structurally flawed as investments created out of subprime rubbish, well that's not altogether reassuring.

As for the widespread suggestion that Warren Buffett has just announced a great vote of confidence in the US investment banking system by injecting $5bn into Goldman Sachs, don't make me laugh.

He's demanded, and is receiving, a lovely 10% dividend, which means he views Goldman as a high-risk investment.

This is very expensive money for Goldman, not least because if it wants to buy Buffett out, it has to pay a 10% premium.

And on top of that he gets a warrant to purchase $5bn of common stock which can be exercised at any time in the next five years.

In other words, the world's biggest and most fearsome investment bank has just had its pocket picked by a 78-year-old (albeit the canniest 78-year-old on the planet).

Strange times.

Comments

  • Comment number 1.

    Would we expect anything else from Brown. He should look at his own Government failings and the fact that he has short sold the entire assets if Great Britain Plc for the past 11 years.

    His "performance" yesterday tells the story, a Z List actor writing his own review. Worse was the unfettered adulation from his equally useless cabinet sidekicks who have been part of his naked short selling of the rights and the future of the decent hard working people of this country.

    It is a sad time when those hard working men and women cannot afford to heat their homes but the non working can obtain computers and broadband for free ! He is the short selling master of all time.

    His gimmicks have bankrupted us and he simply promises more and costlier gimmicks.
    The British people know what Brown really stands for but sadly they have not had the opportunity yet to do the whole country a favour and oust him at the polls. That time cannot come soon enough.

  • Comment number 2.

    Am I right in noticing that the growth in the practice of short selling about which Gordon Brown is now so critical can be dated from the time of the abolition of tax relief on dividends for pension funds in 1999? Pension funds desperately needed to boost their income following this decision and securities lending was one way to achieve this, thereby enabling short selling to flourish. And, oh yes, it was Gordon Brown himself who abolished the tax relief and so has played a large part in the growth of a practice which he now so despises.

  • Comment number 3.

    I think Gordon knew very well what he was saying, although I didn't hear the context. I am not a fan of his but there is an important distinction between 'naked' shorting and covered shorts. With covered shorts you take shares out of the market and so it has a balancing effect. If anyone wants to buy the shares then he will have to pay a higher price because some of those shares are now not available. Naked shorting effectively creates a limitless amount of shares to sell, an infinite amount of stock which can send the share price only one way.
    Covered shorting provides a very useful function, it sorts the bad wood out from the good which is essential for a healthy economy.
    Come on Robert, are you sure you understand?

  • Comment number 4.

    Don't expect anything much above the level of "goo goo, gah gah, look at the lovely bow-wows" from El Gordo, or any other of his happy band of inmates for that matter, when dealing with anything at all. I am just waing for an interviewer, with a real grasp of a range of topics, to really push for a proper response to issues. An interviewer who actually listens to, and understands the evasiveness of, the waffle and piffle that comes from EG and his ilk, and who actually nails the ambiguities and falsehoods. Come on Robert, get to it, take the new ball and lets see a few short pitched deliveries fizzing past the throat.

  • Comment number 5.

    Strange Times.. I wonder if Gordon Brown is hoping for more financial collapses as it would seem to strengthen his new role as 'steady hand on the tiller through troubled water..'. Just what we need a dour Scot to hold the naughty economy in line.. Shame that he has allowed them to run free, with unlimited pocket money, for the last 11 years.. where were you then stern father-figure?




  • Comment number 6.

    Quite surprised at this to be honest.

    I'm sure Gordon knows full well the difference between naked and covered shorting, I do and I'm not remotely involved in the Finance industry - he's ran the economy for over a decade.

    Obviously just a slip up but one you wouldn't really expect someone in that position to make.

    As for Paulson - I thought short selling had just been outlawed so presumably this isn't 'new news' as those bets can't have just been made.

    And Buffet - he's just a man with an eye for a bargain. Another way of looking at it would be that if he thinks that now is the time he can get the best deal, maybe he also thinks now is the bottom???

  • Comment number 7.

    Omaha 1 Goldman Sachs 0

    Out of carnage, comes opportunity.

    Lloyds TSB (subject to shareholder approval) getting HBOS for £12.2bn, having missed out on (alledgedly) N Rock for £30bn a year ago because the BoE said it was anti-competitive and not in the best interests of the market/economy.

    No more US investment banks and the godfather of them all, Goldman's selling itself cheap to a famed investor backing cash generative investments - even high risk ones like Goldman. He is backing the people. Wise sage indeed.

    Asian and M Eastern investors now queuing to buy financial service company assets at lowball prices elsewhere.

    Trouble is, we all pay thanks to the collective and systemic failure of the system and regulators alike.

  • Comment number 8.

    The shameless trotting out of his wife should tell you all you need to know!

  • Comment number 9.

    Robert - you are wrong about Mr Brown's comments. I say this even though I am no supporter of his.
    Naked short selling is about someone selling stock in the market that they are NOT a Holder of. They are obliged to deliver stock to the market and in order to do this then borrow. The term Naked short selling is relevant to them not holding the stock, not the ability or not of borrowing to deliver. If they borrow to deliver, they are still Naked short sellers as eventually they will have to buy back and cover the short of shares they never held in the first place.

  • Comment number 10.

    If he thinks our banks are almost as structurally flawed as investments created out of subprime rubbish, well that's not altogether reassuring.

    You may want to rethink that...

    Paulson beleives the price will drop -- there is no indication of WHY it will drop.

    If people like your good-self beleive that he is right, then it is a self-fufilling prophesy... It drops because a hedge-fund manager says it will - regardless of the actuality.

    Not bad pay for being a shepherd of the easily led sheep... The sheep only have themselves to blame.

  • Comment number 11.

    I think the ill judged comments of the PM are beside the point (apart from the obvious issue that he's a 10 year chancellor who doesn't seem to understand the economy). If he's genuinelly the man who will be leading us through this, then we'll just have to live with it.

    Even the disgusting use of public funds to buy worthless "assets" at gold prices in the US is beside the point, really. It's Paulson giving a golden handshake to his friends on Wall Street, but is still not my main concern.

    What I want to know is what is the UK government actually going to do? It's time for a plan, conference grandstanding aside.

  • Comment number 12.

    No one has been more irresponsible than Gordon Brown when it comes to fiscal matters. He's set up for life whilst the rest of us, who have been forced to invest our money in pensions, in the hands of these so called irresponsible bankers and that are reducing in value day by day and we cannot do a thing about it thanks to Gordon Brown. He hasn't got a clue.

  • Comment number 13.

    Oh, Mr Peston, I am surprised that you have not also picked up on Gordon Brown being discombobulated by James Naughtie at the mention of the phrase 'light touch regulation'..

    It was like one of those moments in 'QI' where a panellist mentions a phrase repeating a common 'urban myth' and the lights and alarms are triggered..

    The PM wanted to use a panoply of words and phrases to avoid that nasty, nasty 3-word trigger...
    "Not soft touch regulation.."
    "Risk-based regulation.."

    When Slim Jim mentioned 'not just light touch, but limited touch' - well, Gordon could be forgiven for getting a little flustered..

  • Comment number 14.

    can someone explain to me why naked shorting is any better or worse than covered shorting? in both cases the trader sells an asset he does not have beneficial interest in, temporarily depressing its price.

    in both cases he must sooner or later go into the market and buy an asset to which he does not have legal title or risk failure of delivery (either delivery into the naked short sale or return of the asset to the lender). in any case, i don't think lack of sellers is a problem in this market.

    the only thing i can see that makes covered shorts "better" is that they provide short-term cash to the stock lender.

    am i missing something?

  • Comment number 15.

    "the scariest disclosure of the past 24 hours was that John Paulson has made bets of around £1bn that the share prices of our biggest banks are on their way down."

    I'm sure that with Gordon Brown at the helm our banks are safe.

    Brown v Paulson

    "This is no time for a novice"

  • Comment number 16.

    Comment 6 : Cheese_Me_Too

    "I'm sure Gordon knows full well the difference between naked and covered shorting, I do and I'm not remotely involved in the Finance industry - he's ran the economy for over a decade.

    Obviously just a slip up but one you wouldn't really expect someone in that position to make."

    Not a slip up at all, I'd suggest. Just the standard politico-tabloid exaggeration for effect that adorns 21st Century communication technique.

    Absolutely what you'ld expect from someone like Brown - someone completely incapable of phrasing reality in a way that persuades, so takes the soft and deceitful option of overstatement to stir up the sentiment of the herd.

    I wish someone would tell me what benefit it is to society to be in a situation where every uttering of every authority must be deconstructed, and stripped of false meaning and disingenuity, before being given active consideration. Isn't this an extremely inefficient way of managing our affairs?

  • Comment number 17.

    Buffett and GS have done business together for years they both know exactly what they are doing. Having an investment by Buffett is a massive mark of credibility and makes an unequivocal statement that GS will survive. Well worth the cost - it will probably added that much to the market cap in a single week

  • Comment number 18.

    This comment has been referred for further consideration. Explain.

  • Comment number 19.

    1. The Buffet deal is structured in the way many are saying Paulson should be using for his mother of all bailouts. Using preferred stock and equity (warrants in Goldman's case).

    2. Crisis in Washington, PM travels to New York. Par for the course. No talk of a UK bailout which should be done simultaneously.

  • Comment number 20.

    Explanation.

    Naked short selling.
    To sell shares you do not own, this is illegal in America.

    Short selling.
    To sell shares you have borrowed and intend to buy back at a lower price.

    Short covering.
    Having to buy the shares you shorted.

  • Comment number 21.

    America is a superpower because of its consumers which drives the economy and payes the American Government huge taxes in excess of $150billion a day.

    Now if the financial system crashes with most American invested in Wall Street then America loses the funds to drive its military operations and very soon ceases to be a superpower.

    The US Government therfore have to fix the Wall Street mess or very soon be forced to print money to retain or try to etain its superpower status.

    This whole mess is more about retaining Americas world power dominance and that alone.

  • Comment number 22.

    miskers59 @ 3

    obviously should have read your post first. but i do not get the logic of your claim:

    "With covered shorts you take shares out of the market and so it has a balancing effect. If anyone wants to buy the shares then he will have to pay a higher price because some of those shares are now not available."

    who is the stock lender? is it not someone who intends to hold that stock in the longer term? by lending the stock, he retains economic ownership and expects to receive back legal title.

    yet by borrowing and selling stock, the covered short seller has taken a "locked up" share from a buy-and-hold investor and dumped it on a market maker who is probably keen to get his book flat risk. the stock lender has no reason to go out and buy replacement stock, so there is no offsetting demand created by the transaction.

    and what do you think the market maker does with the stock dumped on his book? sell it to another market maker? or maybe just accept the position and make the most of it by lending the stock out again.

    i can see that naked short selling is much easier to do in large quantity in a short space of time, so it could cause more volatility in the market. but they both will have the effect of cra pping on the market price.

  • Comment number 23.

    Thanks Robert for distilling down key facts that normally we would have to wade through a lot of commentary to get.

    That said, I'm not sure I would be too concerned about a "hedge fund megastar"...we can all be right one day, wrong the next.

    Just cos he made money by shorting CDOs gives him little additional insight into UK banks.

    Times will get a lot tougher, bad debts will rise but a lot is already built into current valuations.

    I just think market value of RBS or others will be way higher in a few years time so the case for shorting is a little too based on weak near term sentiment.

  • Comment number 24.

    Why don't they just set the price they would like people to pay for things. Go the whole hog...

    This is gettint truly hairy.

  • Comment number 25.

    Amazingly you criticise the Buffett investment and claim that it is not a vote of confidence in GS.
    Even with a 10% return buffett isn't going to put in $5bn if it will not be safe. In anybodies book a guaranteed 10% return is worthless if the underlying investment is lost.

    I suppose that story doesn't make good press....

  • Comment number 26.

    There has been no boom and bust because our Glorious Leader says so. Radio 4 Today, this am.

    What we have witnessed over the last ten years is a period of unprecedented benign growth, with historically low intrest rates, thanks to this (Labour) government, that has now stopped due to various outside forces beyond the government's control... again our Glorious Leader, Radio 4 this am.

    While this country's future and well-being is in the hands of a man unable to recognise historical truths... however unpalatable from a personal point of view...we are, collectively and individually ...doomed!

  • Comment number 27.

    Robert if you're "being pedantic" you should get you're own facts right:

    You say Paulson "made several billions last year short-selling collateralised debt obligations". he didn't he made several billions last year short-selling the ABX index: a synthetic index of US asset-backed securities.

    Perhaps non-expert journalists shouldn't use phrases they don't understand?

  • Comment number 28.

    #21 If America starts printing paper money, the US$ will go down the tubes and the American economy will be so deep in the doo-doo that they can't see the sky !! Combined with its mountain of debts, it will achieve instant Third World or Banana Republic status !!

    #6 From his track record, Buffet only bets on "sure things". Therefore I do not think he will accept "toxic" assets even if they were offered to him for free !! Carrying this further, as was said in #17, Buffet saw something in GS that was worth his investing in them. Since there are (literally) hordes of "Buffet followers/watchers", what's the betting that GS shares will start jumping like fleas on a hot griddle ??

  • Comment number 29.

    Anyone that supports short selling/derivative selling or hedge funds must have their snouts in the trough.

    The rights to own shares already exists when you buy them through the stock market. Any other sort or transaction based on any other form of ownership is a recipe for disaster, as recent events have proved. Close all the short sellers and hedge funds down.

  • Comment number 30.

    Am I missing something here?

    Wouldn't it be much better for the US government just to take over paying sub-prime mortgages (or at least the balance that the home-owners couldn't afford - surely they can't all be bad?) and take a proportionate stake in the property, rather that paying off the banks? A sort of national 'shared ownership' plan.

    This way, US tax payers would gain a large asset base with some value, home owners could stay in their homes, the economy would keep moving and there would not be large numbers of newly-homeless for the taxpayer to support. Additionally, the banks would then be earning the interest they were expecting to get when they made the loans in the first place.

    If I were a US taxpayer I would be livid at my government giving $800bn to bail out the banks' balance sheets rather than keeping people in their homes.

    Anyway, it's beginning to look to me as if the banks have moved beyond this, and are now trying to extort the 9/10 fractional 'fictional' money that they created on their balance sheets back from taxpayers - not just the 1/10 'real' money. $100 trillion anybody?


  • Comment number 31.

    I read lots of comments knocking Broon but nothing about his potential replacement. The Tory leader has gone quiet, and well, has been quiet for a while. The Tory conference is next week, if anyone has noticed, and I haven't heard of any serious ideas coming out about the current crisis.

    I think the truth is that the Tories would have opposed any regulation on the markets. If they criticise Broon now then why didn't they criticise him before the proverbial horse bolted. I suppose they were too busy counting their money!

  • Comment number 32.

    I'm sure Gordon understands the machinations of the market as well as most. After all he is currently premier in a capitalist market economy.

    A market needs traders to take positions within it in order to function smoothly. Without traders we could only buy and sell by matched deals between interested parties. This would be clumsy and costly. Imagine having to buy a weeks groceries without going to a shop or market.

    Short sellers are part of the market. If you sell short you must still buy at some stage. Without short sellers the market becomes less fluid - there are less buyers of down priced stock.

    Gordon desparately needs a scapegoat, today that's short sellers.

    The ultimate problem of overlending and underpriced credit default insurance will work it's way out by action of the market if left to it's own devices. Hence Buffett buying a distressed prices.No doubt there are many Middle East and Asian fund managers watching too.

    The political problem lies in the hardship caused to the greater population by bank collapse, unemployment and inflation or tax rises.

    The public gets to vote on the decisions made by the powerful. They however get the politicians they deserve!



  • Comment number 33.

    #28
    You have it wrong about Buffet only betting on sure things.

    He is $20 billion yes $20 billion down on his investment in Pepsi in 1987.

    Buffet makes money because he can buy in times of financial crisis when prices are low and have the ability to hold although he has been holding a loss in Pepsi since 1987.

    Buy on the sound of gunfire.

  • Comment number 34.

    "Naked short selling" is a technical term, it is a particular form of shorting when you don't own the stock first. Only certain institutions, such as some hedge funds, have the right to naked short sell. So GB was correct...

  • Comment number 35.

    Comment 31 : dceilar

    I suppose that you also disagree with the conventional wisdom that holds Europe's Ryder Cup defeat as being down to those who were playing, rather than to those who weren't?

  • Comment number 36.

    With the intent of paulson to balloon his own GS investment with a mother of all bailouts, buffets got another incentive to move now. Whether or not the dems agree and sign the bankers 700B$ draft is a bigger Q.
    still if GS go down the toxic cdo gurgler, buffets 5b perpetual premium investment will mean they are all his(sorry hank!)
    Buffets also got one hell of a put wriitten on the dow?? If that isnt saved he'll be the next one needing to be bailed out.

  • Comment number 37.

    The fact that Warren Buffett has made a move and a big one is the best news I have heard in along time. It is a positive dynamic. If the Old Boy wins out it helps post toxic, changes the landscape.

  • Comment number 38.

    34#
    You are incorrect, naked short selling is selling a stock you do not own " or have borrowed ".

    If you borrow the stock its just short selling.

    Selling naked short stock in America is illegal and carries a long prison sentence.

  • Comment number 39.

    Forgive me if I'm wrong, but HBoS was not a victim of shortselling was it?

    I recall that in the week before it's takeover that it's shares on loan rose from 4% to 5.5%.

    Lehman's on the other hand had 24% of it's shares on loan the week before it collapsed.

    So can someone tell me please which UK bank has been the victim of short sellling?

  • Comment number 40.

    The problems right now are being caused by people who ae using the stock market as would gambles.

    I spoke to someone last week who
    " invested " in HBOS and the rights issue for his sons future.

    Along come a few spivs and speculate on HBOS by short selling one making £28 million profit whilst others los their shirts.
    THIS IS NOT INVESING ITS GAMBLING USING THE STOCKMARKET.

  • Comment number 41.

    No you weren'e being pedantic. You were being a smug git.

  • Comment number 42.

    #21 ..

    America is also a superpower because it designs, develops and manufacturers lots of interesting, high tech, high value added stuff upon which we now all depend..

    The UK on the other hand ....errrrr.... oh yes... sells off it's nuclear plant designer/builder to the Japanese, its nuclear power plant operator to the French and then the Govt tells us we need more nuclear power... Brilliant strategic move..

  • Comment number 43.

    There were several cases in America over the llast few months that there were more shares shorted than the company actually had.

    As an example a company has 1 billion shares yet 2 billion were being shorted at the same time.

  • Comment number 44.

    Hi Robert,

    To take a phrase out out Dubya seniors book, 'Gordon Brown knows as much about economics as my dog Milly.'

    He clearly had no understanding of how the financial markets run when he was Chancellor and this now confirms it.

  • Comment number 45.

    The short sellers manipulate the market. Most of the shares in a company are not traded they are held long term. A short seller who has 1-2% of the shareholding,has about 100% of the daily trade in a company, this and a few well placed rumours/downgrades/newspaper articles, leads to large drops in price and big profits. Due to this many good companies are trading much below true value. As Mr Buffett has spotted.

  • Comment number 46.

    42 Wee-Scamp:

    Very well put. The sale of Westinghouse, in particular, was shockingly short-sighted.

    The most depressing admission is that, whilst we urgently need new nukes, we have neither the technology nor the money to do it for ourselves. Feeble.

    Two thoughts re. energy taxation:

    - As part of this deal, I wonder whether any assurances were given about future taxation? Neither EDF nor any other company would commit to an investment like this if they thought future windfall taxes were likely.

    - The government will receive a GBP 3 billion windfall from this, which is far more than could have been raised by a one-off energy tax: WILL THIS GOVERNMENT ENERGY WINDFALL BE USED TO HELP STRUGGLING ENERGY CONSUMERS?

  • Comment number 47.

    Bankinvestor dont expect GS to come up with too much cdo business (hot profits) into the future. They'll probably find they are a bit on the nose globally too (even though they're touted as a good "franchise"), then when he looks over the GS books how much is he going to have to clean up??

  • Comment number 48.

    Buffet was the largest investor in Freddie mac so he is not that clever an investor.

  • Comment number 49.

    #39 - Red Lenin

    Northern Rock fell victim to short selling in the weeks before its shares were suspended.

    Obviously the price had been falling steadily for 6 months before that as investors began to voice concerns about it's reliance on wholesale funding (and headlines and bank runs didn't help), but short selling was alleged to be rife in the days before trading ceased.

    What I don't understand is that even before the run, the share price had halved from its peak, so why are so many "small shareholders" looking to the government for compensation? They had ample opportunity to get out before the shares were 0GBP!

    I held a small number of NR options myself and sold at around 10GBP. By the time it was down to 6GBP I was counting my blessings. Those investors who held on until nationalisation need to think about their own motivations for holding on to plummeting stock, rather than complain the government "stole" their company from them.

    As has been mentioned frequently, recently, the value of investments can go down as well as up.

  • Comment number 50.

    RE:#49

    Further to my post, this article from TimesOnline November 17 2007 states that shorting and naked shorting was rife in NR share dealings.

    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2866204.ece

    If this was the case TEN MONTHS ago, why is it suddenly an issue now?

  • Comment number 51.

    Or this warning from even earlier - SEPTEMBER 2007:

    "Hedge funds reaped £1 billion in profits from Northern Rock’s collapsing share price over the past seven months, according to one of London’s most prominent hedge fund managers.

    Philip Richards, co-founder of RAB Capital and the biggest shareholder in Northern Rock, launched a ferocious attack on some rival hedge funds for fomenting panic, and accused regulators of failing to properly regulate trading in Rock shares.

    He told The Times: “When you have a group of funds shorting and shorting and shorting, you start to create an atmosphere of panic.”

    Mr Richards, who bought more than £50 million of Rock shares earlier this week for his RAB Special Situations Fund, gave warning that activist hedge funds would target other banks if they succeeded in bringing down Northern Rock."

    The last paragraph is chilling, in the sense that a year later that is whats happening and the government have just decided to take action!

    The full article is at: http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2508081.ece

  • Comment number 52.

    Interesting comment about shorting - although the continued falls in bank shares since shorting was banned tend to suggest that it's selling, not shorting, causing the falls.

    However - what we all really want to know is: who leaked the news about the Lloyds takeover of HOBS to you ?

    And is it BBC policy for its economics editor to act as a substitute Regulatory News Service for share price sensitive information ?

  • Comment number 53.

    Short selling can be corrupt. A middleman[for short seller] meets pension/trust fund manager for dinner. They agree that short seller can borrow certain number of shares. At a price. The pension fund manager gets some money on the SIDE, some goes to the fund. The fund holders lose. This is one reason why all short positons should be transparent both to the market and shorted company shareholders. Also the pension / trust fund managers should be accountable ,as lending to shorts is not in best intrest of fundholders. A lot of short positions should be investigated by Stock Exchange for possible corruption. Think a short who has never had a position/ shareholding in a company, suddenly has a short position. Why and how?.

  • Comment number 54.

    49 - I wasn't going as far back as Northern Wreck, I was meaning recently being as it's only recently that Grinch Brown has become obsessed with short-sellers.

    Thanks anyway

  • Comment number 55.

    W Buffett only buys underpriced stock. Thats the point isnt it, you are a bit daft if you by stock that you expect to go down. W Buffett still holds a lot of Pespi - you can't expect every buy to come good however big, it is what happens in the portfolio overall. A big player coming to the market is a good sign, it is the return of normal service and the buying of GS when everybody has been twittering about it being a casualty is significant, even if all it does is provoke more into the marketplace that is what is needed. The market is not active enough. More risk takers need to apply.

    It doesnt matter what Brown says, it is what he does. He has a Crash Dummy image at the moment and the Brown Ring around him don't help. Brown has made it clear he has lashed himself to the wheel and isnt going to go if he can help it. There is not a Lefty, and it has to be a Lefty, coming forward that appeals to the public so there is no challenge yet and until there is then this is the scene. He will march everybody up to the top of the hill and march then down again and everybody will just switch off more and more. Browns main reaction so far has been to extend domestic policies like lagging and PCs for the financially challenged, nothing big. He did act as an introductory agency with HBOS but that was initiated by Lloyds. Nothing else. The short selling bit is irrelevant, markets can be suspended whenever, and it is just trying to make something out of nothing. Browns policy is intertwined with the UK Bank situation and something will have give. The question is what action re the UK banks is looming either driven by the markets or by US demands on the UK which are surely there. Brown is not exactly going to rush to tell the UK voters that he is being told what to do by the US.

  • Comment number 56.

    Elsewhere on the BBC website it is reported that 20 financial institutions in the US (including Fanne, Freddie, Lehmans and AIG) are being investigated for fraud by the FBI and:

    "ABC News, citing unidentified sources, said the probes were assessing whether company officials systematically misled investors about the financial strength of their institutions."

    Full article is here:

    http://news.bbc.co.uk/1/hi/business/7632790.stm

    Isnt that what everyones been saying for months? Looks like they werent stupid, but criminal... Or criminally stupid!

  • Comment number 57.

    #54 - Red Lenin

    No problm.

    Thats the point thought, isn't it? If short selling was being blamed for NR a year ago, why hasnt GB and his government done anything in 12 months?

    Inactivity quite often equals inability!

  • Comment number 58.

    Gordon Brown is the man who claims his years of "prudence" (funny there was not a mention of the word in his speech the other day) has prepared Britain well fro the financial trouble of late. I heard him on the radio this morning ,5live, claiming credit for getting Britain through the economic crises in the Asian market of 1998! Presumably this was down to his ten months of prudence!

    The man's unbelievable. Takes all the credit for years of low inflation and economic growth....when "global factors" such as food produce and oil among other things were cheap... yet takes no blame for what's happening now and instead cites what's happening to global factors...such as food prices and oil. The very same factors which were never (and never are) mentioned by him to have had anything to do with low inflation and continous growth we now find to be soloely to blame for today's inflation and stagnant growth.

    Here's an idea for Gordon, who is obviously desperate for them. Remember just a few years ago we were all concerned about drought and where our water supplies would be coming from? Well now our reservoirs have plentiful supplies and no one talks of water shortages any more. So gordon, why not take credit for this? Blame the previous drought on the worldwide situation and claim the recovery in supplies is all down to the actions taken by you in government.

    It would sound ridiculous i know. But more believeable than some of your pronouncements on the economy!

  • Comment number 59.

    Oh God. This one is more one-eyed than usual. I really do wish the BBC would employ a reporter who will present a balanced view and not just trot out his own personal prejudices.

    Anyone who knows anything about Buffet will know that he only invests in businesses and business models he understands and likes. Yes he is asking for a good return. An equity return - remember that?

    It is certainly not without risk, just ask the shareholders and unsecured creditors of Bear Stearns and Lehman.

    Robert just cannot bear to believe that one of his heroes thinks Goldman is a great business.

  • Comment number 60.

    The historical MCOL (market cap on loan) figures for the affected institutions are available. As far as I am aware shorting has not been a dominant factor in recent months. It certainly wasn't in the case of HBOS because shorts accounted for was less than 10% of trade. (Something like 5% at the end).

    But this can be answered somewhat by plotting MCOL against shareprice for banks that have requested tax payer bail-outs. I strongly suspect (on the figures I have seen) that the data does not fit what Gordon Brown is saying. In the worst cases (Northen Rock) something like 1/5 of market cap was on loan, so, obviously, the other 4/5 was people selling. Which proportionally would anyone pick as the dominant factor in the drop?

    A few MCOL-price graphs please Robert!

    An attack on short-sellers is an attack on hedge funds. Hedge funds are the least risk taking entities in the financial world.
    Scapegoating them at the expense of people that repackaged debt and lied about its value, is typical Labour. Attack whatever is easiest and plays to the tabloids.

    Please, please, someone post some graphs!!

  • Comment number 61.

    I don't like the words Gordon Brown and naked in the same report.

    But seriously, this is getting really hairy.

  • Comment number 62.

    Sorry to be pedantic too, Mr Peston, but I can't find any "malapropism" as such in the Marr interview with Gordon Brown. If we want our politicians to say what they mean, then so should the journalists who comment.

  • Comment number 63.

    I certainly wouldn't trust Brown. His "masterful" handling of the economy was basically down to a massive increase in public sector employment costs (a huge injection of cash to the economy), and imposed (too) low interest rates (and don't pretend the Bank is independent on this). The latter led to the asset bubble which provided the other engine to the economy - equity withdrawal. Take out the these 2 effects, and there would probably have been zero growth. So already the UK economy is looking up the proverbial creek. Now factor in the fact the the financial services sector, providing 20% of GDP is stuffed, and you could be looking at a drop of 10% in the size of the sector.

    Oh, and one last thing. Back at the end of the 90s in the middle of the dotcom bubble, this shortsighted fool sold most of the countries gold reserves as a price about a quarter of what they are now, and dumped it into equities. Which then collapsed a couple of years later. So we lost twice on that. Utterly useless. He got lucky with low interest rates and his luck has just run out. Big time.

  • Comment number 64.

    I think I have gone too far to be rescued now as paranoia completely sets in.

    With all the mates-rates setting going on over Bank takeovers, and a "turning point" a day maybe the US have just wheeled out just about the last credible icon who can be portrayed as reassuring.

    The heads of the Banks can't be wheeled out anymore..and even the Fed are making it up as they go along...so the straw chewing, stolid, old fashioned Sage of Omaha steps up and has a punt.

    I also have to say on Sunday night when watching a portly Belgium detective I was struck how the ad breaks seemed to be full of Halifax;s singing staff and an ethereal Bradford and Bingley ad---- more to convince us by their apperance, I felt, that it is all safe, solid business as usual out their in Money land; as for any chance of getting anyone to actually put any money in the accounts.

    As long as I don't start hearing the band strike up Abide with Me inside my head everything might still be alright!

  • Comment number 65.

    Short sellers appear to be public enemy number1. Let's have a little Economics 101 shall we? We have all observed that prices in a bull market go too high before falling back while in a bear market they go too low before rebounding. Short selling reduces the extremes at both ends of the cycle. In a bull market short sellers increase supply thus preventing prices from soaring ever higher while in a bear market their desire to lock in their profits creates extra demand preventing prices from falling as far as they might. By taking positions against both the extreme bulls and the extreme bears they reduce volatility in the market - they actually make it more ordered.

    Now can I have a PhD?

  • Comment number 66.

    ''short-selling'',''naked short-selling'' is all we seem to hear/read about in the media, but shares are falling because of a lack of buyers, and if you like, naked long positions which overvalued companies.
    Funny how the recent 33% fall in the oil price, and other commodities, was not denounced as an outrage.

    Perhaps short-sellers are the New Jews.

  • Comment number 67.

    It's quite clear that a bounce is near and property prices will not go below Q1 2004 levels, even if the banks do suffer a bit along the way.

    Contrary to what others thing, this really isn't that hairy.

  • Comment number 68.

    What happened to the huge profits the banks posted over the last ten years? For example, wasn't Barclays being criticised for making 7bn GBP in each of 2006 and 2007 while still charging fees to customers (those fees will be back soon, by the way, along with a whole lot more)? Didn't the other banks save anything for a rainy day out of a total profit of 38bn GBP in 2007?

    Or is it the case that the huge profits never existed and were just based on notional values of "assets" which were hopelessly overvalued?

    If that's the case have they really "lost" anything? Except the faith of investors and through paying cold, hard cash in bonuses? You can't lose what you never had -

    If these companies were overvalued until 2008, then isn't it right to have this correction? If they've over extended themselves based on fictional balance sheets, then thats bad decisions made by bad management and they should all go to the wall.

    Aggressive market share increases have led to this juncture, with banks lending money they don't really have to people who couldnt afford to pay it back.

    In this sense, perhaps the HBOS / Lloyds merger isnt a bad thing, as clearly competitiveness DOESNT work in the banking sector? If one introduces a 100pc mortgage, the next will bring out a 110pc, then NR will bring out a 125pc! If one offers 2x income, the next will introduce 3x, then 4, etc. We may need to see much LESS competition and a much more stable market, so why shouldnt each smaller bank be taken over by a successively larger bank until weve only got a handful left (aside from the redundancies this would cause)?

    If savings are guaranteed and mortgage debt is still a relatively reliable source of continued income and can be cherry picked from the rubble by the bank buying these mortgage books, I'm all for it. The consumer wont lose out, their payments will just go to a Spanish or Hong Kong / Shang Hai bank instead (more than likely).

    Please don't let the government just throw cash at the issue, as in the US! Unless Gordon has a lot of banker friends he wants to ensure are personally liquid, rather than the institutions or markets they represent, it wont help, longer term.

    America is over (for now) and we should concentrate on building relationships with our European neighbours!

    Moral hazard... Moral bankruptcy more like (not just economic bankruptcy). I wonder if you can file for that..?

  • Comment number 69.

    60.

    Interesting point and I too would like to see the graphs.

    However, I don't think it is necessarily the case that a small MCOL figure means that short sellers can't have a significant impact, particularly if acting in concert. If there are very few buyers and most investors are sitting on their hands, it doesn't necessarily take very much sales volume to move the price significantly, particularly if done in an aggressive and co-ordinated way.

    The argument on shorting is finely balanced, but I do think it was correct to ban the shorting of banks. In most cases no amount of shorting will damage the underlying business of the shorted company, but in the case of a bank it can and did. In HBoS it resulted in a complete loss of a damaged confidence, people started withdrawing deposits and that threatened its existence. Yes it was flawed, but this was more about exploiting share price weakness and the ability to drive it down than getting to its "true value". At its worst it was the deliberate and wilful destruction of value at the expense of its very large base of depositors.

  • Comment number 70.

    Pure and simple - Brown is out of his depth.

    His knowledge of the economy stretches as far as having credit on tap and a huge country in the East supplying you with goods for pennies.

    It's a bit like playing Sim City with an infinite money cheat.

    This is getting hairier than a ZZ Top convention!

  • Comment number 71.

    69. I agree on short term bans or limits on shorting - what I disagree with is the magnitude of the criticism they've facing versus the underlying problems that prompted shorting and broader sell-offs of equities. In these circumstances I agree with limits or even bans on shorting.

    The MCOL as a proportion of market capital does not, in my opinion (I accept I could be wrong), suggest that it was the principle thing destroying market confidence in banks. I think repeated statements suggesting everything was hunky-dory followed by compounded bad-news from the US played a far larger part. The most conservative banks (I'm looking at you Lloyds) don't have any of these problems.

    This is opinion though. I think the data will probably tell a story that may show it's more complicated than I think. I still don't think politicians are right to single out shorting or 'greedy' practices when the bulk of the problems leading up to it took place when they were in charge of regulators. I don't think Gordon Brown should be held accountable for things that happened in the US though.

    I think there may of been co-ordinated shorting going on but I suspect the bulk of it took place on the other side of the Atlantic, where MCOL as a proportion of market cap was far higher.

    Unfortunately I'm at home. Without the figures in front of me I accept I could be wrong, so this isn't intended as hard argument, rather opinion.

  • Comment number 72.

    I believe this is very cheap money for Goldman Sachs, considering the timeline of the investment.
    Buffet will be concerned about the difference between his interest rate (10%), and today's US inflation rate (~5.3%), equal to about 4.7%, today.
    Assuming the '$700Bn' rescue package is approved, the US economy will be burdened with a high level of debt. To provide investment to encourage long term economic growth, the US Treasury will have to print dollars, which, by definition, will increase inflation, thereby reducing the percentage return on Buffet's investment.

  • Comment number 73.

    Does this mean that the likes of Paulson have to buy a heck of a lot of stock at some time. When does that have to be done by or can they hang on indefinitely?

  • Comment number 74.

    I guess GS isn't as stupid as Mr Preston thinks:

    Their market cap just went up 1.25bn so that's the first 3 and a bit years dividend already paid.... This is also callable debt so when the markets calm down that preferred is history. Another way to look at it is that GS just got free money if it calls in the next 18 months.

    Also you think LEH was smart when they refused to sell stakes at better terms than this?

  • Comment number 75.

    Oh but The Emperor has no clothes. Well spotted Robert, some time after the rest of us, but better late than never.

    I'd watch your back tho', in the ZNL infested Beeb waters. Never mind the Big Boss Man, who knows not only how to bear a grudge, but also to exact reparation.

    More, please! Let the masses know that we have been conned. I'd expect more honour if the Cosa Nostra were running the country than we will ever see from these thugs.

  • Comment number 76.

    Get him told Robert!

  • Comment number 77.

    Hi Rob,

    When oil prices were going throuh the roof from say £35 --> £70 --> £135 this same government didn't intervine when speculators were doing long , why it didn't choke the economy? and the common man?

    now why the same government talking steps towards short and trying to kick start the economy?

  • Comment number 78.

    Robert

    You rightly criticise GB for his short-selling rather confused explanations.

    However, what of your colleague standing in for you in the Business slot on BBC Breakfast a couple of days ago, who, helpfully gave the viewers a clear explanation of what short sellng was all about....

    His "borrow from Mr A ("say someone not using the shares, such as a pension fund") and then sell to Mr B for £10, buy back later for £5, and return the shares to Mr A with a small fee for his assistance"...was followed up with the classic "so, everyone's happy"....

    "Perhaps I'm being pedantic, but these sorts of semantic errors are becoming slightly pathological".

    Now that's what I like about democratic Capitalism (or is it Utopia) - all winners and, apparently, no losers....

    Give that man a lend of the 'scoop of the year' trophy.

  • Comment number 79.

    When are we all going too learn, that we put so much faith in these financial strongholds only to watch them destroy themselves.

    For many years these financial corporates have grown bigger and bigger by legally stealing from normal people.

    Yet our own goverment are going too fund a rescue bid, again we pay for this rescue bid - not those who have got fat from other peoples money

  • Comment number 80.

    While it is undeniably a fact that short sellers make money by driving down share prices, I am struggling to understand why holders of shares lend shares to the short sellers knowing that the value of the shares returned to them will be worth less following such a loan.

    Can anyone explain why anyone would lend out shares knowing that the value will be driven down?

 

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