The good news is that the market is working . . .” Being told this by Richard Lambert, the CBI’s director-general and former FT editor, on Wednesday afternoon was in some ways reassuring. It was just that, at the time, it seemed difficult to believe.
HBOS shares were continuing the wild fluctuations that took them from 200p to 88p and back again in a matter of hours; the FSA was telling anyone who would listen that HBOS “continues to fund its business in a satisfactory way”; the FTSE 100 index was falling through the psychological 5000 barrier; and the Treasury was taking credit for rescuing HBOS’s 20m customers through a takeover by Lloyds TSB, apparently organised at a cocktail party a night or so before.
Not what you’d call an average “working” day.
To be fair to Lambert, he was talking about oil, commodity and labour markets – which are showing signs of working, and regulating themselves. In these markets, in both the US and UK, higher costs are impacting on demand, bringing prices and inflation down, leading to further interest rate cuts and currency weakness, potentially boosting exports, reducing imports and allowing trade to have a beneficial impact on the domestic economies.
In US and UK equity markets, however, Lambert admitted the events of this week represented the “most serious upheaval in financial services for 80 years”, in which “no one can be sure if there will be more aftershocks, or where they would take place”.
And when markets like these appear to stop working, or regulating themselves, the immediate reaction is to intervene to get them working again.
So it has come to pass that a small group of short- sellers and hedge fund managers have succeeded where legions of north-eastern pensioners failed last year: bringing about government intervention to wave through a bank takeover, and bringing in new trading regulations.
But for market intervention to have a chance of working, the timing, consistency and degree must be right. On these measures, the UK’s tripartite authorities have arguably been less effective than they are making out.
In claiming a central role in the HBOS-Lloyds deal, the prime minister looks like a cross between Lady Bracknell and a bad football referee. Clearly of the opinion that to lose one bank may be regarded as a misfortune, but to nationalise two looks like carelessness, his new-found willingness do “everything possible” to enable a takeover smacked of the referee who, having failed to award a stone-certain penalty in the first half, desperately tries to make up for it before the end of the match.
As shareholders won’t need reminding, Lloyds TSB was in talks to take over Northern Rock last year, until the deal was blocked by the Bank of England or the Treasury (depending on whether you believe Alistair Darling or Mervyn King).
In announcing a temporary ban on the short- selling of financial shares late on Thursday, the FSA’s intervention then looked as clumsy and late as Jack Worthing’s attempts to impress Lady Bracknell, or a centre half’s tackle in the penalty area. It will prevent a future bear raid on a vulnerable bank, but it is surely a case of shutting the stable door hard after the Black Horse has bolted.
Short-selling has always divided opinions. It is either integral to the efficient working of markets, as vested and “hedged” interests – such as the Alternative Investment Management Association – have argued this week. Or it is morally reprehensible and detrimental to fair pricing in markets. But you can’t have it both ways, as FSA chief executive Hector Sants tried to do by saying: “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.”
Given the capital protection afforded to private investors by long-short equity funds such as BlackRock Absolute Alpha, and retail funds of hedge funds, surely a more consistent approach would be to ban permanently the excesses of short-sellers but permit a more equitable short-selling regime.
“Naked shorts” – the short positions taken by speculators who sell shares without first having borrowed them – have clearly distorted markets severely, and are now banned by US regulators.
However, short-selling under the “uptick rule” – whereby borrowed shares can only be sold at a price above the preceding trade – at least ensures that short- sellers can’t create their own downward price momentum.
Why didn’t the uptick rule help this week? Because it only operated in the US and the Securities & Exchange Commission scrapped it in July 2007. So now we know how it feels to be sold short by unfettered speculators – and by regulators.
matthew.vincent@ft.com
