Short-selling wasn’t the cause of banks’ problems
Ending the ban on short-selling financial stocks is not only good in principle, it is also encouraging for investors. When other arms of government are tightening controls, the Financial Services Authority has signalled that there is light at the end of the credit crunch tunnel.
The shorting ban imposed in September 2008 was arbitrary and unnecessary. It was a panic response to panic selling. And it did not work: bank shares continued to plunge even when hedge funds were banned from selling shares they hadn’t yet bought.
It was banks’ management that caused bank shares to fall, not short-sellers. The hedge funds were merely reading the market correctly – just as a long-holder in a pension fund would sell a share it expected to fall.
Nor, directly, does a fall in bank shares affect the bank’s balance sheet. It might erode confidence in the bank and it would affect the massive capital raising that we now know the sector needed, but the bank’s own finances are unaffected. Artificially inflating shares in banks or insurance companies is the sort of market abuse that should really worry the FSA regulators.
But why simply protect the 34 financial stocks chosen by the FSA. Why not protect oil companies from speculators – or housebuilders or retailers that have fared as badly as banks? Was the FSA protecting the stockmarket – which includes all those other sectors – or simply the businesses that it directly regulates?
Now that three of the largest banks the regulator was protecting are effectively government-owned, it is even more important that the state is not seen to be giving special treatment to its own investments.
Lifting the ban is certainly not a sop to hedge funds, stricken or otherwise. They will still have to disclose their positions and risk losses if they call the market wrongly. But it is just possible that by allowing them to gamble their money again, a more liquid market will mean more stable share prices.
Lifting the short-selling ban is not quite sounding the all-clear on the credit crunch, but when government is having to pile tax-cuts on to past cuts and follow bank bail-outs with new rescues, a sign from the FSA that restrictions can be eased is extremely welcome.
But if financial companies are really worried about investors selling shares they do not own, the remedy is in their own hands. If they do not lend stock to the hedge funds, the funds cannot sell short.
