Britain bans short selling of Financials

[aerius]

Financial Times link

FSA to ban short-selling of financial stocks
By Peter Thal Larsen, Banking Editor

Published: September 18 2008 17:44 | Last updated: September 18 2008 18:09

Short-selling of financial stocks is to be banned in the United Kingdom from midnight on Thursday night under rules drawn up by the Financial Services Authority.

The ban, which has been approved by the watchdog’s board of directors, will prevent investors from creating or adding to short positions in all publicly quoted financial companies. The ban will remain in force until January 19, 2009, when the FSA plans to publish a comprehensive review of short-selling rules.

The ban comes after a week in which the shares of leading financial institutions have come under intense pressure as a result of turmoil in the financial markets. Short-sellers have been blamed for driving down the share price of HBOS, the banking group that on Thursday unveiled it was being rescued through a takeover by Lloyds, its UK rival.

Hector Sants, chief executive of the FSA, said: “While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector.”

In addition, the FSA is also tightening up its disclosure rules, forcing investors to disclose all net short positions in excess of 0.25 per cent of a company’s share capital.

Though the ban currently applies only to an unspecified list of financial stocks, the FSA said it “stands ready to extend this approach to other sectors if it judges it to be necessary.”

The change in the rules is the FSA’s second attempt to curb short-selling. The regulator has already prevented short-selling of shares in companies that are in the midst of raising cash from investors through a rights issue.

News of the ban comes amid growing political backlash against short-selling, which has been blamed for exacerbating the woes of the country’s banks, and for contributing to the crisis of confidence in some of the country’s largest financial institutions.

Because it was such a clear success in China where short selling is illegal; their markets are down something like 60% in the past year. This is not going to end well. Watch what happens when all the bids disappear and everyone goes into panic sell-off mode.

[Sidewinder]

The British government's reaction may be heavy-handed, but considering the havoc ruthless have wreaked upon the economies of entire nations, it's understandable (see George Soros, who's blamed for the Black Wednesday crisis that forced the UK Treasury to spend 27 BILLION in reserves prop up the currency, and the 1997 Asian Financial Crisis that... well, there's a reason the Chinese military considers him a legitimate target in the event of war).

[Admiral Valdemar]

The US and Australia are doing likewise.

[Fingolfin_Noldor]

Is Short selling the type of selling where you bet that a share will fall lower in price?

[Admiral Valdemar]

Is Short selling the type of selling where you bet that a share will fall lower in price?

Yes. And this move, even temporary, is going to royally fuck things up.

[Fingolfin_Noldor]

Is Short selling the type of selling where you bet that a share will fall lower in price?

Yes. And this move, even temporary, is going to royally fuck things up.

Well considering there were allegations that some companies tried to "short sell" Bear Stearns, there's good reason to stop it from happening.

What exactly are the pros and cons of this?

[Admiral Valdemar]

The cons are that this solves nothing of the underlying issues we're trying to deal with. It also will make stocks rally beyond their actual worth and, more than likely, affect energy too. Even though the FSA have limited this to naked short selling, and the SEC to financials temporarily, the message has already been sent that shorting anything is riskier than ever.

They may as well just manipulate the stock market themselves and be done with it. Hey, the Dow went up a thousand points today! We're all rich, no boom to this bust!

[aerius]

Well considering there were allegations that some companies tried to "short sell" Bear Stearns, there's good reason to stop it from happening.

What exactly are the pros and cons of this?

All the insiders and institutional investors sell their shares into the pump and get a massive profit out of it. The people buying the shares in the pump, that means various pension plans and average everyday investors like your co-workers or parents get royally ass-raped when the stocks top out and all the bids disappear. When there are no bids, the price crashes down hard & fast, and it happens so fast that people won't be able to get through to their brokerages to put through a sell order. The price almost always over-corrects, that is to say, it drops further than it went up.

Then the cycle repeats itself a few more times until we get the final capitulation sell off, and each time the "insiders" get richer while you, the public, gets raped. In effect, the largest wealth transfer in history.

There are no pros unless the temporary ban includes a full asset disclosure for all the companies on the list. Put all their books on the table so we can see where the shit sandwiches are, then we all know which firms are good, and the rest can be taken out back and shot.

I said it before in the other thread, this is basically a massive industry & government sanctioned pump & dump scheme. The industry gets rich, while you get pumped of all your assets and dumped in the street.

[Ekiqa]

Short selling should always be banned.

It's what causes people to gamble so much, as they are selling what they do not own.

[Edi]

Short selling should always be banned.

It's what causes people to gamble so much, as they are selling what they do not own.

That was naked short selling, which is different from certain other types of short selling as far as I understood something I read from one of the recent articles on the economy. Whether linked from one of the threads here or from the HG forums I don't remember.

[aerius]

Short selling should always be banned.

It's what causes people to gamble so much, as they are selling what they do not own.

If you're going to ban short selling then you also need to ban fractional reserve banking, because that's borrowing, lending, and buying using money which the institutions don't own. A bit of a problem since every civilized country uses this system.

The Cole's Notes version. Short selling is when you borrow the shares from your brokerage and sell them, and at some point you buy them back and return them, hopefully making a profit. Nothing wrong with that.

Naked short selling is when your brokerage doesn't have any shares available, but they let you "borrow" the shares anyway since they know that some shares will become available in a few hours or days. This has always been illegal, if the brokerage can't find those shares before your trade clears, you've basically pulled a bunch of "phantom shares" out of thin air. Here's the thing, you and I can't do naked short sales unless we've managed to bribe our broker, BUT, the guys at Goldman-Sachs, JP Morgan-Chase and so forth do it all the time since they're their own brokerage, and since they're so powerful the SEC and other regulators let them get away with it as long as they don't create too many "phantom shares".

Here's the thing, short sellers have a place in the market, their job is to take out weak or dishonest companies before their crap gets too out of hand and screws up the system. If a company's bleeding money or doing something fishy with their accounting, the shorters will put it out of its misery or make them honest, hopefully before it can merge or get bailed out. Related to the above, short sellers could never hope to take out or damage a good healthy company such as Exxon-Mobil. They could try, but other investors would go "hey, look! A bargain!" and they'd all pile in and buy up all the shares pushing the price back up to where it was before, they pocket a profit while the shorters get burned.

The reason the shorters have been so successful at driving down the share prices of financial companies is because the financials are bleeding money and fucking with their books. Enron could've taken lessons from the crap that banks are pulling off these days with their creative accounting. The banks are insolvent and bleeding money, yet they've fudged their books to make them look like they're merely a bit short of on hand cash. They lie about their losses and refuse to put fair a market value on their assets. The shorters know this so they're trying to kill them, but the government won't let it happen. And so the system doesn't get cleared out and the shit keeps piling up until it overflows the toilet and makes a big fucking mess of the whole house.

[Ekiqa]

Short selling should always be banned.

It's what causes people to gamble so much, as they are selling what they do not own.

The Cole's Notes version. Short selling is when you borrow the shares from your brokerage and sell them, and at some point you buy them back and return them, hopefully making a profit. Nothing wrong with that.

Sorry, its just my grandfather was a bond dealer, and he hated stockbrokers. With bonds, you HAVE to put up your own money. Unlike this, where you dont need to put up any money at all. Just keep borrowing. To the broker, its like Monopoly money. Not real money.