British LibDem party wants to stop hedge-funds from shorting banks
The head of the British Liberal Democratic Party has called for regulators to step and and force hedge-fund managers to stop short-selling failing banks, making billions as the banks stumble and are rescued with tax-money.
Speculation is a normal part of trading in shares, but on this occasion the hedge funds are betting against the taxpayer, since they know that if a leading British bank were to collapse, the Government would have no alternative but to intervene.It's hard to know who to root against here, the hedgies who invented exotic, incomprehensible over-the-counter instruments or the banks who bought them with their customers' deposits. FSA must stop ‘short selling’ of bank shares – Cable
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Yeah - but at the same conference, they've announced that they'd cut taxes by £20bn without being able to explain how they'd do it; that they'd make all the UK's power supply green; and, presumably, give out free cakes and party hats to everyone in the country. They know they're not in a position to win the next election, so making grandiloquent promises they won't have to fulfil is all part of the fun of the conference season.
"Instruments". I've been hearing this word constantly in the context of how fucked-up our economies have become. I'd never heard anyone talking about "financial instruments" until the whole real estate thing began to crumble in upon itself, and then every single article on how these things actually worked referred to these weird workarounds as "instruments".
I guess the financial industry wanted something that sounded better than "scams".
First off, lightly regulated hedge funds have weathered the crisis pretty well, whereas heavily regulated banks have done comparatively poorly, because (a) a lot of the regulations pressed the banks into doing stupid things - like loaning to borrowers with really poor risk profiles and credit records, so as to avoid charges of "redlining"; (b) banks and bank-like entities, including Fanny Mae and Freddy Mac, spent a lot of money buying off senators and representatives to keep at bay the kind of regulation that would actually hold them accountable (Obama is the number two recipient of Fanny Mae / Freddie Mac payola, by the way).
Second, short selling is a GOOD thing - (a) it allows people with good information to publicize that information; (b) it makes them put their money where their mouths are, separating ignorant babble from informed opinions; (c) it allows everyone else to benefit from that information.
E.g. if a bank is poorly capitalized and is likely to crash, we would prefer to precipitate that crash now, instead of leaving the stock price irrationally high, implying that it's got low risk, and tempting widows and orphans to invest their funds in it.
Information creation and dissemination is not free - we have to incent people to dig into things and post that info in the public sphere, and thus the profit motive is harnessed in short selling.
The vast majority of the time when folks dislike short selling, their are either (a) ignorant of how the market works; (b) well informed of how the market works, but have a desire to censor financial information that is damaging to them.
The next time you hear someone say that short selling should be banned, or that derivatives should be banned, realize that both of these are the transfer of information, mentally edit the sentence to "accurate information about stocks should be banned", and ponder whether that's really a great idea.
Blaming short sellers for bank prices going down is like how US congress blamed speculators for high oil prices, even though congress had done nothing to create a viable alternative.
Short sellers are small in comparison to the market. They are a symptom of the problem, not the problem.
Of course no one is blaming the people who unreasonably inflated bank stock prices by buying them.
@2 :
> "Instruments". I've been hearing this word constantly in the context of how fucked-up our economies have become. I'd never heard anyone talking about "financial instruments" until the whole real estate thing began to crumble
That just means that you were ignorant.
However, ignorance is usually rational, so that's not a bad thing.
> in upon itself, and then every single article on how these things actually worked referred to these weird workarounds as "instruments". I guess the financial industry wanted something that sounded better than "scams".
I guess that you don't really understand what a derivative is, and how it can be used to minimize risk. There are a bunch of good books, but you can start with the Wikipedia articles on Alpha, Beta, Modern Portfolion Theory, and Futures.
Lib Dems are an academic political party. They're OK at a local level but they have never once held power at a national level.
Simplest option is to strictly enforce a limit on the ratio of debt to assets any bank can operate with. It wouldn't prevent banks going tits up, but it would limit the damage by triggering any problem to reach a head when it was still at a much smaller scale.
The assets of anyone who worked at Lehman brothers / Meryll Lynch / Bear Sterns, etc. and who got paid their 30 pieces of bonus silver (say $500k or more) should be seized and returned to the government to offset the enormous bail-outs being made. They should be disbarred from ever working in finance again.
There need to be deep consequences for the people who've made a quick buck while the going was good, we can't afford this kind of squander.
I'm in favour of genuine innovators who manage to invent and run a business in profit eg, people like Gates and Jobs being able to keep their rewards, but when it turns out that we've a class of bankers and traders who are essentially leeches on the main arteries of the economy, getting rich by siphoning off a small fraction of a large stream of money, then it's time to tear them out and cauterize the wounds before the country bleeds to death.
@TJIC #3:
Obama is the number two recipient of Fanny Mae / Freddie Mac payola, by the way
Could we possibly get a source for that factoid, please? Thanks in advance.
Cory,
That is a quote from Vince Cable, the shadow chancellor, not the head of the British Liberal Democratic Party Nick Clegg.
The banks had an equal, if not greater, hand in creating the exotic products too - that is where the cash is, after all, since all vanilla products have their margin squeezed.
Any bank too lazy or inefficient to compete in the commoditized products will race to create the newest exotic payoff, which leads to more and more esoteric products being created and foisted on less savvy investors. The hedgies just have money to swing around fast, in the search for their 20%+ "alpha" performance.
Vince Cable isn't the leader of the Lib Dems - that unenviable job falls to Nick Clegg. Vince was briefly the acting-leader for a bit.
As other posters have noted, the Lib Dems don't have a great likelihood of ever forming a Government (unless in coalition with a bigger party). They can poll up to 20% of the vote, but are losing out to the Conservatives at the moment with the latest MORI poll putting them on just 12%, despite the meltdown by the currently governing Labour party...
Anyone who wants to stop short selling is just ignorant of how the market works. Short sellling *helps* the market by putting a floor under it. It's one of the simplest ways to cushion any potential crash.
When someone opens a short position, eventually they *have* to buy back the stock they have shorted. This creates an automatic reserve of buy orders. Why on earth would anyone want to eliminate that?
"Hedgies" didn't invent these financial instruments. You are confusing them with investment banks.
#9
The ability to short sell is clearly necessary in a financial market. However, I'm not sure that the recent change in the timing of short selling was a good idea. In the past, short selling could only occur on an uptick--i.e., when the underlying share price increased. Once that rule was removed, volatility increased dramatically, and massive swings started occurring that would've been impossible beforehand.
kinda makes a shoebox under the bed more attractive no?
Out of curiosity: Hands up everyone who has an economics degree with years of relevent experience, and therefore understands both the financial instruments being discussed and the consequences of changing them. Anyone?
I lived with an investment banker for two years and learned just enough to understand that the systems of short selling, futures, derivatives and god knows what else are hellishly complicated. They're the result of decades of very intelligent, motivated people spending every waking moment trying to screw an extra penny out of each other. More fun comes from attempts at govt regulation and from the fact that most trades in some markets are made by computers because humans can't react fast enough. This doesn't mean they're any good for a country or economy, but it DOES mean that there are no obvious or intuitive consequences when something is changed.
I'm not saying that we shouldn't have a voice in the debate. We should. I'm just saying that we need a bit of humility when demanding that changes are made to a system that none of us understand.
Ah yes...do not blame the flies for the existence of sh*t.
The perception is that practices like short selling are engineered to maximise profit without the tedious requirement of delivering any useful, tangible output.
It's not just the Lib Dems - Scotland's First Minister and all of the political parties represented in the Scottish Parliament apparently made the same call today: Scottish National Party, Labour, Conservatives, Green, Liberal Democrat. BBC report.
only if you fill the shoe-box with gold bullion.
Hedge Fund
@#15
That's my perception about most things done in the City.
@5:
> Simplest option is to strictly enforce a limit on the ratio of debt to assets any bank can operate with. It wouldn't prevent banks going tits up, but it would limit the damage by triggering any problem to reach a head when it was still at a much smaller scale.
EVERY nation does this. It's called The Reserve Requirement. See also Fractional Reserve Banking.
No reserve requirement can prevent bank failures, and the higher the reserve the requirement, the tighter the access to capital, leading to slower growth in the economy.
> The assets of anyone who worked at Lehman brothers / Meryll Lynch / Bear Sterns, etc. and who got paid their 30 pieces of bonus silver (say $500k or more) should be seized and returned to the government to offset the enormous bail-outs being made. They should be disbarred from ever working in finance again.
So the manager who opened a new China branch and did a great job has his entire income retroactively confiscated? How about the quants who came up with new ways to arbitrate prices between North American and Europe, thus making oil trades slightly more efficient?
What about the US Constitution, Article I, section 9, that says that no ex post facto laws may be passed?
@6:
>> @TJIC #3:
>> Obama is the number two recipient of Fanny Mae / Freddie Mac payola, by the way
> Could we possibly get a source for that factoid, please? Thanks in advance.
http://www.opensecrets.org/news/2008/07/top-senate-recipients-of-fanni.html
Primary sources:
Federal Election Commission data from June 30, 2008.
Tekna2007,
The claim that Obama was the number 2 recipient of Fannie Mae-Freddie Mac case in the Senate appears to have originated with John Gibson of Fox News, but he cites the people responsible for Opensecrets.org as a source.
I looked at the organizations that donated the most to Obama, and I didn't see Fannie Mae or Freddie Mac there..though I did see J.P. Morgan, Goldman Sachs, Morgan Stanley, and Lehman Brothers.
Then I did some more googling, and found this, which has this bit.
It looks like that claim is true.
I'm still not sure what this dispute has to do with whether or not it's a good idea to stop hedge funds from shorting banks.
OK, now the Financial Services Authority has banned short selling of financial shares: - Here's the BBC story.
The FSA, the UK financial regulator has just restricted short selling from midnight tonight:
http://news.bbc.co.uk/1/hi/business/7624012.stm
@21: Thanks TJIC
financial instrument: debt divided by profit times revenue plus unicorns equals hedge funds
If http://globaleconomicanalysis.blogspot.com/2008/09/britain-bans-short-selling-citing.html is to be believed, they've already banned short-selling altogether.
Lib Dem has held power in the national government for as long as I can remember. They usually take between 10% and 20% of the seats. On divisive issues (where the major parties don't agree, and some of the people within those parties don't agree), this makes them the swing vote.
All of the bad stuff that's happened in the UK legislature is the result of the two major parties agreeing, usually against Lib Dem opposition.
Like all politicians, they do sometimes say silly things.
(FD: my MP is Lib Dem, and I have never once bothered to vote for him. Wouldn't make any difference anyway)
I'm looking forward to hearing back from all the earlier posters about how this couldn't possibly happen, to explain how we're not really here and life is an illusion, because /actually/ simulations running in a highly advanced civilisation's sim which they use to amuse their kids.
To be fair, I have to admit I'm pretty dumfounded by this news myself. Incidentally, please note that it's not the Government that's banned short trades on banks, insurance and other finance companies, it's the independent regulatory authority. Oops, missed the scare quotes there, that should read "independent", of course.
TJIC @3, your impassioned defense of short-selling as a vital part of a healthy free stock market would have been much improved by some recognition of the particular ways -- mentioned in the post to which your were ostensibly replying -- that the market is unfree in this particular case. Specifically, that the government stands ready to bail the banks out as they fail.
Instead you just cut-and-pasted a standard diatribe about regulation, taking a brief moment of your time to customize it with an Obama factoid for the current political environment.
@28:
> TJIC @3, your impassioned defense of short-selling as a vital part of a healthy free stock market would have been much improved by some recognition of the particular ways -- mentioned in the post to which your were ostensibly replying -- that the market is unfree in this particular case. Specifically, that the government stands ready to bail the banks out as they fail.
They're two entirely separate topics - government bailouts are orthogonal, applying as they do to banks, insurance companies, car manufacturers, unions, etc.
However, if you want me to swear an oath, sure: I stand ENTIRELY against government bailouts. Not that I expect you'd know, but I've been ranting against the bailouts on my personal blog.
> Instead you just cut-and-pasted a standard diatribe about regulation, taking a brief moment of your time to customize it with an Obama factoid for the current political environment.
Sigh. I'm so wishing that when I saw you in the Burlington Apple store the other day I'd said hi.
#29 AVRAM
I've read your complaint about TJIC's post four times now, and I still don't understand it. Shorting has no direct causal relationship to bail-outs. One is a market function, the other political.
TJIC
How do you feel about reinstating the uptick rule?
@3 ... short selling is a GOOD thing - (a)... (b)... (c)...
I want you to explain that to someone who suddenly can't get a student loan.
Seriously. That is about the most selfish "we financial wizards are more important that the rest of you" explanation I have ever read.
Your markets were gamed. We're now saving your asses.
Got Shame?
#33: MDH, you'll first have to explain how short sellers are keeping students from getting loans. Do short sellers cause bank managers to make bad decisions?
I'm just saying that we need a bit of humility when demanding that changes are made to a system that none of us understand.
Thousands of economists theorize and a handful are proven correct. You could do better with a Ouija board.
My economics is a bit hazy as it's been ages since I did my degree. Surely the last thing you want if you have sold short is for the Government to prop up the bank, increasing the share price, before you repurchase the stock. Perhaps someone can clarify.
Asuffield @29,
Don't know how old you are if the Liberal Democrats have held power for most of your life. The Liberal Democrats have never won more than 10% of the seats in the UK Parliament since they were set up in the late 1980s. The old Liberal Party had not won 10% of the seats since 1923.
For most of that time, there was one party with a large enough majority to govern without needing the support of any other parties and so the Liberals / Liberal Democrats have "held the balance of power" for about 4 of the last 90 years.
Well, I hate to be the one to say this. But you are ALL wrong.
Who are the true villains in this financial crisis? Investment bankers? Mortgage lenders? Short sellers? Hedge fund managers? Liberal politicians? Conservative politicians? No, these are all just so many vultures on the carcass.
So who are the criminal masterminds behind this debacle? Who is the twisted figure skulking in the shadows? Who holds the smoking gun? Who's bloodstained fingerprints are all over the crime scene?
You want to know who? I'll tell you who!
Real Estate agents.
That's right, after all, who else would tell someone with $40,000 in credit card debt that "now is a great time to buy a house". Who would try to convince some poor slob that a 900 sf. condo next to a wrecking yard is "a great deal at $350k" Who would be the first to tell you that "real estate is always a great investment"?
Real Estate agents, that's who.
And you know what, they are getting away from this financial train wreck without so much as a scratch. They've got their commission, so its "so long suckers" to the rest of us.
They are devious by nature. Look at the bright-eyed, cherub-faced picture on their business card. How does that compare to the 20-years-older, leathery-faced mug leering at you under that tawdry hairdo? And where do they come from? Was there ever a clever, optimistic child who said "I want to be a Real Estate agent when I grow up". Hah! Not likely. More likely is that some cretin who just got fired from their job was sitting in front of the TV, scratching their belly, when they suddenly figured "Hey! Why don't I go out and get a Real Estate license then I can make a living just by driving around leaving notepads on people's doorsteps!"
And the worst of that depraved lot? Anyone who ran a "Buy Real Estate With No Money Down" seminar.
See now the Source of Contagion...
http://www.trumpinstitute.com/seminar.php
Look at the bright-eyed, cherub-faced picture on their business card. How does that compare to the 20-years-older, leathery-faced mug leering at you under that tawdry hairdo?
That's funny. Because it's not an exaggeration. There's a 80-something agent here who has a black and white photo from the 1940s on her card. I don't think that she sells much, but she never misses free food.
"It’s a whole complicated insurance thing. They just bury the whole thing. Pretend it never happened. The insurance business is completely screwy now. You know they’ve reintroduced the death penalty for insurance company directors?"
"Really?" said Arthur. "No, I didn’t. For what offense?"
Trillian frowned, "What do you mean, ‘offense’?’ "
"I see." replied Arthur
TJIC @32, no oath needed. There is no doubt in my mind that you oppose gov't bailouts.
I also need to apologize, since I think I judged you a bit harshly there.
My point above was that LibDem head Vince Cable thinks there is a causal link between the availability of government bailouts and the eagerness to sell short. Maybe he's right, and there is a subtle incentive there. Maybe he's wrong, and the two are unrelated. The more of his speeches I read, the more I get the impression that he just has a knee-jerk opposition to the idea of short-selling.
Thing is, you jumped right over that alleged link, missed it entirely, and posted as if the claim had never been made. That annoyed me, because it looked like you were posting a canned rant instead of engaging with the actual topic. I'm sorry I did that.
In retrospect, I think what may have happened is that the idea of a link between those two things is so foreign to you that you just didn't see the claim being made.
As for the Burlington Apple store, is that a joke? Last time I was in Massachusetts was Labor Day weekend, and I don't remember going into any Apple store while I was there.
#33: MDH, you'll first have to explain how short sellers are keeping students from getting loans.
First re-read my comment and note the paragraph break. Related, but unlinked thoughts are there. So very sorry if you read that as a single paragraph.
My state just had to find a bunch of money to lend to students, because of all this.
Profiting on the misery of others is disgusting.
Do short sellers cause bank managers to make bad decisions?
Bank presidents, yes, I believe so. Bank managers only get to work with the pool of money they have, bank presidents are the ones who find it. Short selling, therefore, limits the options, and causes bankers to prefer higher gain loans over lower gain loans.
I may be wrong, but my statement about it being a damned selfish way of looking at the world, coming from someone whose (I assume he's a financier of some sort) job is skimming off the top of the rest of us.
There is no reason most bankers should make 6 figures - the job just isn't that hard.
Financial instruments are not scams. A better analog would be 'bet': Financial instruments are bets on which way the value of a certain asset (stock, currency, resource) will go.
"Shorting a stock" is, effectively, the same as placing a bet that the stock will go down in a given amount of time.
"Going long" is the opposite of shorting: You own the stock which equals a bet that it will, over time, go up.
These things are very fundamental, and it is hard to outlaw them without outlawing huge parts of the free market. The fact that they are even trying shows how desperate they are.
Well he gets my Vote.
If it stops people from profiteering at the tax payers expense sure.
Also The Lib Dems as far as I know are going to make the tax cuts by cancelling the trident replacement.
As was pointed out last night on the BBC's excellent Mock The Week, the electoral system gives them virtually no chance of ever being elected so they might as well promise a robot butler for every home!
Mmmmmmmmm, robot butlers...
MDH, anyone who calls short selling "profiting on the misery of others", has no clue what they are talking about.
http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=11591349
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4783638.ece