If you spend years feeding the bears you can’t complain when they bite you. Now that Aviva (LON:AV) has been the victim of short-selling the insurance giant is belatedly thinking it should not be lending them the stock to sell short.

Short-selling is when investors sell shares they do not own in the belief the market price will fall, allowing them to buy the shares at a lower price to settle their obligations. It needs someone to lend them the shares for the period they are short however, and institutions like Aviva have happily done that for a fee.

In the search for someone to blame for the collapse in the stock market and the banking system, short-sellers have provided a suitable villain. The Financial Services Authority had two goes at banning shorting in 2008 – first during rights issues (because the banks were trying to raise money) and secondly for financial stocks at any time (because bank shares were falling all the time).

That non-banks never got protection shows the FSA was more interested in looking after its regulated businesses than safeguarding the market. With all banks rescued, the ban was lifted in January 2009.

But when Aviva announced its results in March its shares were savaged, falling 40 per cent in two days. Rather than blame the £11bn loss it reported, the board blamed short-sellers and suddenly saw the light.

This blog has said before that if the institutions did not lend stock, the short-sellers could not deal. When it was receiving its fee to allow bears to bomb the banks Aviva saw no problem; when the short-sellers turned on Aviva they squealed and tried to organise a pan-European ban on shorting.

As a major investments and pensions group with more than £350bn of funds under management Aviva has far more to lose from seeing stockmarkets spooked by shorters than it can gain in fees from lending. Aviva has eventually realized that.

If one clear lesson is to lead by example and stop lending, the other is not to shock the market with bad results. And Aviva shouldn’t have boasted it was paying a maintained annual dividend when actually the final payment was cut, wiping out the increase in the interim. Canny investors could see the trend was down.

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