After the transatlantic furore surrounding nasty short-sellers and rumour-mongering crooks supposedly intent on bringing down perfectly solvent and robust banks, Paul Amery steps up for the defence.
Writing in the FT, he considers the somewhat heavy-handed official reaction to the latest bout of gossip that certain institutions might be in trouble. Short-selling, he points out, has never been top in the popularity stakes, banned at various times in England, France and Japan. But they get a particularly bad press as soon as equity markets turn down.
Those willing and ready to short, he adds, face well-armed opposing forces – from directors and their legions of PR people, to government ministers and central bankers who have repeatedly acted to forestall and reverse equity market falls over the past 20 years.
At times — take Federal Reserve chairman Ben Bernanke’s surprise interest rate cut last August, which took place before the market opening on an options expiration day, thereby causing the market’s rally to be even more explosive — these actions seem to have been implemented to maximise the shorts’ losses.
It is worth reiterating that shorts have performed a public service in the past by drawing attention to companies that are indeed in trouble, are involved in fraudulent activity or have flawed business models.
In the case of Tyco and Enron, shorts were vilified but proved to be wholly right, while most Wall Street analysts kept buy ratings on the stocks until the very moment of bankruptcy.
He concludes:
In the case of the UK banking sector, it is understandable that officials may be jittery about the prospect of any repeat of the Northern Rock saga. But threatening shorts is not the way to do it and is likely to have little effect. If more banks run into problems as a result of the recession, it will be because they have over-extended themselves in the credit boom. They will have plenty of company in the debt-dependent Anglo-Saxon economies. Shooting the messengers who point this out will do more harm than good.
Related links
What next, internment? – FT Alphaville
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