A rift has opened up between the government and the financial authorities after a furious Alistair Darling was kept in the dark over the lifting of the ban on short-selling, which may have contributed to this week’s tumultuous crash in the value of banking shares.
(May have, but in fact, didn’t)
The Guardian’s odd take on shorting doesn’t stop this being a fascinating story though. As the above par says, it seems Chancellor Darling wasn’t told about the FSA’s plans to lift the ban. Well, not until an hour beforehand anyway:
The chancellor is thought to have been given just one hour’s notice by the Financial Services Authority that hedge funds would once again be able to place bets that bank shares would fall. Darling believes the ban will have to be reintroduced, given the fragility of the financial system.
Shares in high street banks have crashed since the ban was removed at the end of last week. Barclays lost a quarter of its stockmarket value on Friday and fell a further 10% yesterday to close at 66.1p. This values Barclays at just £5.3bn, the same as the profits it intends to report for 2008. There are rumours that it hopes to bring forward its results to end concerns about its financial health.
The Guardian says the matter reflects the “ideological differences” between the different authorities involved. We’d say it was nothing so high-falutin’ at all: just a turf war made nasty by the political exigencies of an easily baited government.
Darling would like to keep the short selling ban in place for two reasons:
Firstly, because by and large the national media does not understand short selling and prefers to label it as some kind of destructive speculation: banning it is a policy move taken straight from the tabloid songbook.
Secondly, because even if falls in bank share prices do not necessarily make the banks any more likely to collapse, they do get people talking about them as if they are (just look at all the fevered talk about nationalisation that has preoccupied the commentariat this week). This in turn puts pressure on the government – who naturally want the banks’ shareprices to be a bit more stable so it looks like they’re handling the situation well and so Simon Jenkins writes nicer things about them. This is thus a policy move taken in response to the broadsheet songbook.
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The FSA is of course right to have lifted the ban. Hopefully that’s now the end of the matter. If one thing will add hugely to volatility of share prices, it will be more shilly-shallying around; banning and then unbanning depending on the mood of the month.
And anyway, shorters like volatility even less than politicians do. Which is really why it’s so ridiculous to characterise it as a highly speculative practice. It’s certainly risky, but that’s why most hedge funds (or at least, the best ones), who are supposed to be risk averse, use outright shorting as a longer term strategic practice: betting on an ineluctable trend over a matter of weeks, rather than jumping on some violent spivwagon.