Short sellers brought to heel by the FSA
Dominic O'Connell
AS the City digested Lehman’s stunning demise and Lloyds TSB’s shock swoop on HBOS, the directors of the Financial Services Authority (FSA) gathered in London to give the green light to their own market bombshell.
After months of watching wave after wave of short selling smash the share prices of the big banks, the financial watchdog had had enough.
Its top executives drew up a plan for the most drastic piece of stock-market intervention ever seen in Britain — the suspension of an entire class of trading in one of the biggest sectors of the market. The full FSA board was assembled on Thursday to approve the scheme.
An announcement was made shortly after the London stock market closed the same day. It was brief and to the point. Short-selling, a widespread market practice in which traders try to make money by betting that a share price will fall, was banned in the shares of financial-services companies.
In all, 32 groups — including the big British banks — were put on the list of protected companies. The prohibition would last until January 16, and the FSA reserved the right to extend it to other sectors if it saw fit.
America’s Securities and Exchange Commission, which had earlier tightened the rules on short-selling, followed Britain’s lead on Friday and announced a ban of similar scope.
The move took the market by surprise, and provoked howls of protest from hedge funds, many of which are expected to face serious losses in coming months as a result. (AtW's comment: why am I not suprised that it is the hedge funds that are moaning about it? Maybe they should actually lookup definition of word "hedge". If they were really hedging they'd be buying "options" not shorting.)
“These measures have the potential to create several unfortunate consequences, including an increase in the cost of capital for banks at a time when it is most needed,” said the Alternative Investment Management Association, a hedge-fund trade group. (AtW's comment: you can clearly see that his heart is bleeding for banks being unable to get cheap capital on the market... oh wait if he gets their shares down then the price of capital to the banks increases!)
In March, the FSA made much of an investigation into a collapse in the share price of HBOS, only to have to admit that while it had found evidence of rumour-mongering to drive down the bank’s shares, it had been unable to pin the blame on anyone.
This time, the FSA action was not triggered by fears of deliberate rumour-mongering or other illegal market manipulation. Instead it believed the stock market had stopped working properly simply because investors had lost confidence. Any bet against a bank’s share price had become a self-fulfilling prophecy.
“We are not suggesting that the recent share-price moves were a result of outright market abuse,” said Hector Sants, chief executive of the FSA. “It was rather that the market had become inefficient, in the febrile, overexcited, nervous environment we are in. (AtW's comment: yes Hector you are right, this was not outright abuse - this was "business as usual", not!)
Traders were reasoning that any short-bet against a bank was a winner, because the government would inevitably provide a back-stop against a complete collapse.
The FSA was hamstrung in taking its normal action in the case of unusual trading — suspending the shares of the company in question — because that would probably have caused a run on the bank.
“People forget that in this respect, banks are a special case. If you suspend the shares, you will have scenes like we had with Northern Rock, with queues in the streets,” said one FSA source.
HBOS was the latest British bank to find itself in the eye of the storm. Its shares plummeted last week and early this week until it became clear that Lloyds TSB was going to step in with a takeover.
Even after the minor rally sparked by the confirmation of the Lloyds TSB plan, the shares closed on Friday at 222Åp, down 74% over the past 12 months.
Sants denied that he had come under political pressure. “I had no pressure at all. I have had no calls from any member of the government or any civil servants in any way enquiring about our short-selling policy,” he said.
He is now leading a deeper policy review that is likely to lead to reform of short-selling rules by the end of the year. (AtW's comment: the new rules should be saying something like this - 50 years in Her Majesty's Belmarsh on bread and water.)
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What annoys me most is that word "hedge" is totally abused in "hedge funds" - they are not hedging anything: their objective is to make carpload of profit in short time that is only possible when you significantly affect market in unpredictable for others but predictable for you ways - if they were really hedging they'd be using derivatives like options designed to avoid losses, where as they are trying to create profits from air.
Dominic O'Connell
AS the City digested Lehman’s stunning demise and Lloyds TSB’s shock swoop on HBOS, the directors of the Financial Services Authority (FSA) gathered in London to give the green light to their own market bombshell.
After months of watching wave after wave of short selling smash the share prices of the big banks, the financial watchdog had had enough.
Its top executives drew up a plan for the most drastic piece of stock-market intervention ever seen in Britain — the suspension of an entire class of trading in one of the biggest sectors of the market. The full FSA board was assembled on Thursday to approve the scheme.
An announcement was made shortly after the London stock market closed the same day. It was brief and to the point. Short-selling, a widespread market practice in which traders try to make money by betting that a share price will fall, was banned in the shares of financial-services companies.
In all, 32 groups — including the big British banks — were put on the list of protected companies. The prohibition would last until January 16, and the FSA reserved the right to extend it to other sectors if it saw fit.
America’s Securities and Exchange Commission, which had earlier tightened the rules on short-selling, followed Britain’s lead on Friday and announced a ban of similar scope.
The move took the market by surprise, and provoked howls of protest from hedge funds, many of which are expected to face serious losses in coming months as a result. (AtW's comment: why am I not suprised that it is the hedge funds that are moaning about it? Maybe they should actually lookup definition of word "hedge". If they were really hedging they'd be buying "options" not shorting.)
“These measures have the potential to create several unfortunate consequences, including an increase in the cost of capital for banks at a time when it is most needed,” said the Alternative Investment Management Association, a hedge-fund trade group. (AtW's comment: you can clearly see that his heart is bleeding for banks being unable to get cheap capital on the market... oh wait if he gets their shares down then the price of capital to the banks increases!)
In March, the FSA made much of an investigation into a collapse in the share price of HBOS, only to have to admit that while it had found evidence of rumour-mongering to drive down the bank’s shares, it had been unable to pin the blame on anyone.
This time, the FSA action was not triggered by fears of deliberate rumour-mongering or other illegal market manipulation. Instead it believed the stock market had stopped working properly simply because investors had lost confidence. Any bet against a bank’s share price had become a self-fulfilling prophecy.
“We are not suggesting that the recent share-price moves were a result of outright market abuse,” said Hector Sants, chief executive of the FSA. “It was rather that the market had become inefficient, in the febrile, overexcited, nervous environment we are in. (AtW's comment: yes Hector you are right, this was not outright abuse - this was "business as usual", not!)
Traders were reasoning that any short-bet against a bank was a winner, because the government would inevitably provide a back-stop against a complete collapse.
The FSA was hamstrung in taking its normal action in the case of unusual trading — suspending the shares of the company in question — because that would probably have caused a run on the bank.
“People forget that in this respect, banks are a special case. If you suspend the shares, you will have scenes like we had with Northern Rock, with queues in the streets,” said one FSA source.
HBOS was the latest British bank to find itself in the eye of the storm. Its shares plummeted last week and early this week until it became clear that Lloyds TSB was going to step in with a takeover.
Even after the minor rally sparked by the confirmation of the Lloyds TSB plan, the shares closed on Friday at 222Åp, down 74% over the past 12 months.
Sants denied that he had come under political pressure. “I had no pressure at all. I have had no calls from any member of the government or any civil servants in any way enquiring about our short-selling policy,” he said.
He is now leading a deeper policy review that is likely to lead to reform of short-selling rules by the end of the year. (AtW's comment: the new rules should be saying something like this - 50 years in Her Majesty's Belmarsh on bread and water.)
---
What annoys me most is that word "hedge" is totally abused in "hedge funds" - they are not hedging anything: their objective is to make carpload of profit in short time that is only possible when you significantly affect market in unpredictable for others but predictable for you ways - if they were really hedging they'd be using derivatives like options designed to avoid losses, where as they are trying to create profits from air.
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