Magazine article The Spectator

A Ripsote to the Archbishop

Magazine article The Spectator

A Ripsote to the Archbishop

Article excerpt

When Rowan Williams and John Sentamu took up their crosiers against shortsellers, they chose strange company: Ken Lay, the disgraced chief executive of Enron, Dennis Kozlowski, the jailed boss of Tyco (who took out full-page ads against short-sellers, before his company sank under the burden of accounting fraud) and the former prime minister of Malaysia Dr Mahathir Mohamad are probably the most renowned critics of shortsellers. In recent weeks they have been joined by assorted Labour frontbenchers, including Yvette Cooper and Hazel Blears.

They are a motley crew. The common thread, linking business executives and politicians, is blame shifting -- or to use a more biblical term, 'scapegoating'.

The best short-sellers, on the other hand -- the likes of Jim Chanos of Kynikos, or David Einhorn -- see themselves as defenders of truth, lone rangers who take on the might of corporations such as Enron, Tyco, Freddie Mac, Fannie Mae and Lehman Brothers and shine a light on flawed business strategies and bad practice. So who is right?

Regulators around the world appear to have endorsed the criticisms of short-sellers in recent weeks by imposing a variety of restrictions, ranging from greater disclosure (Spain) to an uptick rule (Taiwan) to bans on naked shorts (Belgium, Germany, Netherlands, Portugal) to outright bans (the UK, US, Ireland, Australia, Switzerland). Our own FSA has led the charge with the longest outright ban -- three months -- of any market in the world.

But there is a pattern in the severity of the measures and it is not in relation to malpractice. The scale of restrictions in each country is more or less in direct proportion to the weakness of the banking system. So the paradox is that it is the developed markets and not the developing ones which are imposing restrictions on short-selling. Indeed, one market is going in quite the opposite direction. Two weeks ago, China announced that short-selling would be permitted for the first time.

The moves against short-selling in Western markets were a sort of circuit-breaker, an attempt to provide stability to the market by removing one source of selling pressure.

It is understandable, given what is as stake, that regulators will use all the tools in their armoury to stabilise the banking system. Banks are dependent on 'confidence' and there is a reflexive interplay between the three barometers of confidence: share price, the 'credit default swaps' (CDS) market, and deposit flows. Aggressive selling of bank shares can be self-fulfilling, especially when combined with the widening of CDS spreads (indicating higher perceived levels of risk in relation to particular banks) and can in theory produce a 'death spiral' if it feeds into depositor withdrawals.

For these reasons a temporary restriction on short-selling can be justified as being in the public interest.

But it is a trump card which can only be used once. Given that short-selling interests represent just under 5 per cent of UK equity market capitalisation, the fundamentals will reassert themselves rapidly. If people want to sell, with or without shorts, that is what they will do. No one (fortunately) can blame shortsellers for the collapse of Bradford & Bingley, Washington Mutual and Wachovia in the US, Fortis, Dexia and Hypo Real Estate in Europe, or Glitnir Bank in Iceland.

Beyond the context of the banking crisis, it is difficult to see any basis for restrictions on shortselling. It is now deeply embedded in all aspects of financial markets. BP uses short-selling to hedge its commodity exposure; the Church of England uses short-selling to hedge its currency exposure; hedge funds use short-selling to hedge their equity and credit exposures and so limit the volatility of their returns to investors. …

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