财经观察 1262 --- More shorting, please!

More shorting, please!

By Jame DiBiasio  |  22 September 2008  

Financiers have long extolled the virtues of short selling. Just because they are now receiving a taste of their own medicine is no reason for regulators to ban the practice.

You short sellers are a naughty lot. First you knocked sterling out of the embryonic eurozone in 1992, costing Mohammad Mahathir a bundle. Then you nearly K-Oed the Hong Kong dollar in 1998, forcing Donald Tsang as then-financial secretary to buy up the stock market. Now you are being blamed for the demise of Northern Rock, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, HBOS and AIG, and you seem hell-bent on driving Goldman Sachs and Morgan Stanley under. You glory in kicking a man when he’s down. You are the ruin of capitalism. I bet you hate puppies and kittens. It is only just, therefore, that the United Kingdom’s Financial Supervisory Authority has banned short selling of financial stocks, a move quickly followed by the United States Securities and Exchange Commission as well as other governments. Or is it? Through the miasma of panic and doubt that now grips our headlines, I seem to recall that shorting was actually a healthy thing. Providing liquidity. Ensuring discipline. A dispassionate, level-headed judgment against faulty business models and the dubious claims of overpaid CEOs. I seem to further recall that prop desks at the likes of Lehman, Goldman and Morgan Stanley, not to mention the hedge funds run or financed by AIG, would have all been practitioners – nay, champions – of this harsh medicine. And you were right. There are plenty of reasons for the credit crisis: Alan Greenspan’s refusal as governor of the Federal Reserve to tighten margin requirements even as an equity bubble ballooned, or his refusal to act on warnings about OTC derivatives. Or ridiculous accounting rules that have driven investors to mark long-term positions to market. Regulations that encouraged people with unreliable cash flows to buy homes they could never afford. Credit-rating agencies. Short selling is not a cause of the crisis. It is a symptom, and has played a part in dealing the final blow to several institutions. But those blows were dealt because plenty of Masters of the Universe had already put their necks on the chopping block. Unlike the spider’s web of credit default swaps against dodgy CDOs now spilling out of AIG’s cupboard, which clearly necessitates the US government to act as lender of last resort, there remain today market-based solutions to mitigate the effects of short selling. First, and most obviously, business models must adapt. So Morgan Stanley is, as of this writing, asking the China Investment Corporation to take a 49% stake. If that doesn’t work out, Wachovia is prepared to step in. Secondly, there is only so much short selling that the market will bear. Not because of sympathy, but simply because so many prime brokers are now out of business. Now the stock lenders are coming under fire, because their securities-lending operations no longer look so lucrative to their investors – hence State Street’s stock losing 49% of its value in a single trading day last week. Finally, a number of leading institutional investors have ordered a ban on banks lending their stocks. APG and Calpers need Goldman and Morgan Stanley. They can’t be the buy-side if the sell-side screws the pooch. So these violent spasms of short selling are going to fade, regardless of what panicking regulators in Washington and London do. The danger of enacting bans on short selling, as the FSA and SEC have done, is that such rules become institutionalised. What appears now as an emergency measure may well be difficult to remove later on. It also looks like another case of closing the stable door after the horse has bolted. The US Federal Reserve and Treasury have acted well under pressure, trying to limit moral hazards while saving the system. Lots of new regulations are to come, some of them badly needed. There will be, as always, plenty of duff ideas that will also be considered. Banning short selling, or making it incredibly difficult, will surely be among them. It is a siren song that should be ignored.

Please find below links to the official announcements from the US (SEC), UK (FSA) and Australian (ASIC) regulatory authorities. 

1. US - Securities and Exchange Commission (SEC)
   Press release – ‘SEC Halts Short Selling of Financial Stocks to Protect Investors and Markets – 2008-211’ dated 19 September 2008 (including links to the actual SEC orders)http://www.sec.gov/news/press/2008/2008-211.htm
   
   2.      UK - Financial Services Authority (FSA) Short selling (No 2) Instrument 2008
   http://www.fsa.gov.uk/pubs/handbook/instrument2_2008_50.pdf
   Short Selling (No 2) Instrument 2008 – FAQs 19 September 2008
   http://www.fsa.gov.uk/pubs/other/short_selling_faqs.pdf