Thursday, Jan 22, 2009
The FSA has faith in Darling.......NOT!!!!!
The Guardian: Darling kept in dark as FSA lifted ban on short-selling
"A rift has opened up between the government and the financial authorities after a furious Alistair Darling was kept in the dark over the lifting of the ban on short-selling, which may have contributed to this week's tumultuous crash in the value of banking shares."................Cant the man take a hint?
Posted by titaniccaptain @ 11:25 AM (1139 views) Add Comment
32 Comments
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1. japanese uncle said...
Of course this information was leaked to the necrophagous cold-blooded-monsters in the City who yet again made world's easiest billions.
2. mountain goat said...
The lifting of the ban has been in the newspapers for weeks!
3. titaniccaptain said...
Spot on Ju.........and they say there is no conspiricy........hmmmm
4. Crunchy said...
All this money goes somewhere it does not all vanish.
The money magnet keeps pulling it in and is doing very well.
Work out where the money is going and you solve the money crisis.
5. troy said...
TC
On the whole, it is the poor and the middle classes that rely on wages and salaries – while the rich derive their incomes from wealth. However, while the rich have been getting richer, they have not become indebted. Nor are they using these assets to spend and boost the economy. Instead, on the whole, they are standing by while their assets rise in value. The poor, by contrast, have watched as their wages and salaries declined as a share of GDP, and have had to borrow to compensate for these losses. By doing so, they are providing a service to the rest of the economy, and helping asset prices stay high.
Ann Pettifor 2003
and
Winston Churchill, in his book about that period, The Gathering Storm, described it well:
“The year 1929 reached almost the end of its third quarter under the promise and appearance of increasing prosperity, particularly in the United States. Extraordinary optimism sustained an orgy of speculation. Books were written to prove that economic crisis was a phase, which expanding business organisation and science had at last mastered. “We are apparently finished and done with economic cycles as we have known them” said the President of the New York Stock Exchange in September. But in October a sudden and violent tempest swept over Wall Street…
The whole wealth so swiftly gathered in the paper values of previous years vanished. The prosperity of millions of American homes had grown up a gigantic structure of inflated credit, now suddenly proved phantom. Apart from the nation-wide speculation in shares which even the most famous banks had encouraged by easy loans, a vast system of purchase by instalment of houses, furniture, cars and numberless kinds of household conveniences and indulgences had grown up. All now fell together.
6. letthemfall said...
troy - you're giving me deja vu
Again this is about regulation. In this situation, allowing speculators the opportunity to bust the banks doesn't make any sense.
7. Me Me Me said...
What a pack of lies, everybody on the entire planet, even some neighbouring stellar nurseries have been waiting for revenge for being heavily stopped out last September which WAS illegal and cost me 40% of my account.
8. still renting said...
@JU and TC
You two see conspiracies everywhere, but just for once trying using your brains, or at least paying attention to the facts. Try reading this BBC article from when the ban was introduced: FSA introduces short-selling ban
This sentence is, I think, relevant: "The rule came into force at midnight and is due to last until 16 January."
You would have to be as stupid as Alistair Darling to be caught out when the ban expired on the day it was always intended to expire.
As for the Guardian's "may have contributed to this week's tumultuous crash in the value of banking shares", a glance at the short interest in bank stocks show that there was only a small increase in shorting last week. The main reason their share prices fell again, was continual bad news about the state they're in causing large investors to sell. Anyone a little less blinkered (or deliberately sensationalist) would have noticed that bank stocks fell dramatically while the short selling ban was in place as well.
9. troy said...
RE 5. letthemfall said...troy - you're giving me deja vu
Again this is about regulation. In this situation, allowing speculators the opportunity to bust the banks doesn't make any sense.
Thursday, January 22, 2009 11:52AM
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
letthemfall ~~~ ah ha you've been on shippy's thread!
I think I'll have to declare this Ann Pettifor day lol ~~~ I came across the article from 2003 looking for something else and was taken by the detail and clarity of her predictions, quite amazing. It must be one of the 'nuggets' that helped form my opinions.
re busting banks ~~~ it's all about destruction ~~~ s2r1 has a valid point ~~~ just take a look at what Ann and Winston (Churchill not Smith) have to say about 1920s/30s. The pattern is very similar and very simple.
Much of what has been learned and written about over the years has been buried or ignored intentionally in order to achieve contemporary goals. But the info is still there for those who don't want to be spoon fed.
10. japanese uncle said...
stillthinking
I must admit that I had no knowledge of such terms of the ban. But then this whole article itself is shee non-sense and waste of space, isn't it? Yes, after having so many conspiracies going unchecked, one tends to see yet another conspiracy that is non-existent.
11. titaniccaptain said...
@Stillrenting
From your quoted article
""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," said FSA chief executive Hector Sants. ".....does that sound like an orgaisation that is about to lift the ban on short selling.........
Or maybe this does.....
"Callum McCarthy, chairman of the Financial Services Authority, expressed concerns over recent volatility.
"There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short-selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues"
Yes the ban was only temp but up for review and with the quotations I have given above from your article I dont think it would be too presumptuous to think that the FSA were going to keep the ban in place given the signals they were giving off and the economic enviroment we are in.
As for your rude comment on using our brains try posting an article which doesnt contradict the point you are trying to make........
And as for seeing conspiricy being everywhere....no I dont see it everywhere but I do see it somewhere....and when it comes the financial Dog eat Dog markets where large amounts of money are exchanged it would be a fool who believed that the markets are run fair and square..they are not.......
12. letthemfall said...
troy
They're interesting quotes. I doubt that many people think about these things. Politicians are mainly interested in hanging on to power, or acquiring it. They do one or two good things, but the electorate constrains what they could do if they wanted to. People either don't understand what's happening, or don't want to so long as they are okay, or in a few cases are only interested in money and power regardless of the consequences.
13. titaniccaptain said...
As for the article the reason I posted it is because of the stated clear lack of comunication between the FSA and the Government which I believe is a very important statement on the level of efficiency that our country which is being run..........
14. japanese uncle said...
tc:
I take your point.
15. shipbuilder said...
4. troy said...
"On the whole, it is the poor and the middle classes that rely on wages and salaries – while the rich derive their incomes from wealth. However, while the rich have been getting richer, they have not become indebted. Nor are they using these assets to spend and boost the economy. Instead, on the whole, they are standing by while their assets rise in value. The poor, by contrast, have watched as their wages and salaries declined as a share of GDP, and have had to borrow to compensate for these losses. By doing so, they are providing a service to the rest of the economy, and helping asset prices stay high."
That's a great quote. clear and simple.
16. still renting said...
@JU
Yes. I have to admit I'm not a fan of the Guardian anyway, but that article was was poor even for them.
@TC
As I mentioned, the article I quoted was from last September, when the ban was introduced. It clearly doesn't contradict my main point that the ban was due to expire on 16th Jan. The comments from Hector Sants and and Callum McCarthy are (obviously) about what was happening at the time, and justifying putting the ban in place.
17. still renting said...
If it's of any interest, this article, A shortage of shorts from FT Alphaville yesterday, gives some more up-to-date info on the short selling of bank stocks (or lack of it). Some of the comments following the article are also worth reading.
18. titaniccaptain said...
@still renting
Actually I disagree, the comments from Hector Sants and Callum McCarthy both point out that short selling is dangerous in a pricarious economic state. With the banks being so fragile the reintroduction of short selling would be (By the comments they made) a dangerous move. Back in september the enviroment was more stable than it is today (Not much) so I would say that the move to reintoduce short selling without giving prior warning contradicts the comments made by Hector Sants and Callum McCarthy and would bring into question their credibility. With regards to conspiricy this does make you wonder JU if your original statement was actually "Spot on"
19. titaniccaptain said...
@Still Renting
Actually thanks for the debate its been good to lock horns with someone
20. stillthinking said...
http://www.opendemocracy.net/globalization-americanpower/article_1463.jsp
I found the 2003 Anne Pettifor article here. If she thought all that in 2003, she must have had a pretty hard time breathing for the next 5 years.
21. still renting said...
@TC
At the risk of sounding rather repetitive, Sants and McCarthy's comments were justifying the ban at the time it was introduced. Clearly they thought it was needed at that time, but they also thought it would only be needed for a few months, hence creating it with an expiry date of Jan 16th.
As for not giving prior warning, if the initially published expiry date wasn't enough for you and Darling, they actually confirmed it on January 5th. From the BBC (on the 5th): UK short-selling ban to be lifted - "The FSA said the ban would expire as planned on 16 January, despite calls from MPs to keep it in place."
But am I correct in suspecting that you will ignore all the evidence and persist in stating that they "reintoduce[d] short selling without giving prior warning"?
22. still renting said...
@TC
It's all good fun. :o)
23. troy said...
stillthinking sorry I didn't realise I'd missed the link ~~~ the opendemocracy link is good.
I actually found it in 2003 here http://www.jubileeresearch.org/worldnews/europe/opendemocracy010903.htm and it's still there.
Her blog is here http://debtonation.org/in-the-news/
and an Amazon link with some interesting reviews of the book here
http://www.amazon.co.uk/Coming-First-World-Debt-Crisis/dp/0230007848
thanks shippy ~~~ AP has been to Dublin of all places recently ~~~
The crisis in Ireland
11th January, 2009.
Dashed across to Dublin this week-end, to address the Irish Green Party Conference, and met up with Richard Douthwaite of FEASTA - the excellent Irish think tank. I was shocked by what is happening to our neighbours. One newspaper headline declared yesterday that in this country of just 5 million people, 5,000 are being laid off every week. According to the Economist Intelligence Unit, “in October there were 260,300 claimants on a seasonally adjusted basis, up by a mammoth 57.1% on a year earlier, and by 6 .5% on the previous month (the largest ever monthly jump in claimant numbers.)”
http://debtonation.org/2009/01/the-crisis-in-ireland/
24. titaniccaptain said...
@Still Renting
Yet again I disagree lol
It does contradict the statements because the danger that McCarthy mentioned has not gone away.
From your last article
"When the ban was introduced, FSA chief executive Hector Sants said that while short-selling was a legitimate investment technique in normal market conditions, the "current extreme circumstances" had given rise to "disorderly markets"............The Current extreme circumstances have not gone away infact they are worse and I fail to see what has changed.......
The point I am making here is that after Daling "Strongly advised" the FSA not to lift the ban they went against his recomendation......yes the FSA is independent to the government as is the BOE there should be better comunication withing the system to coordinate a recovery.....forgeting the BBC new headlines and press releases from the FSA about lifting the ban the comunication was not brought forward to Darling in a way that could be debated so that the government could act. The One hour that is mentioned in the Guardian was probably a procedural matter that would give debate on the matter between the FSA and the government before finalising the procedure...... there is a clear division between the "current extreme circumstances" mentioned by McCathy and the actions of the FSA when (Now Im repeating myself) things have got alot worse.......
25. stillthinking said...
Isn't the argument against short selling that there are insufficient funds to call the short seller's bluff. As in, should somebody sell below the price you believe to be correct you could start buying, because you believe the correct price to be higher. But in this case irrespective of what you believe the true value to be you can't buy because no funds available. Like no limit poker, I have 4 aces but have been raised above the amount I can bet.
Also, short selling falsely increases the amount of stock in circulation so is in and of itself market distortion, this distortion would only become apparent should the short sellers bluff be called, which would require purchasing -additional- shares above and beyond what actually exists.
Consider, 100 shares at 1 pound each. Their true fundamental value (as there is one). Short sellers enter the market, now there are 200 shares floating about valued at 90p. Even though I believe the true value is really 1 pound I cannot intervene, and thereby make money from the short sellers, because that would require -additional- funds to the extent in this case of 90 pounds.
So despite the fact the short sellers are creating a self-fulfilling price spiral downwards (because dealing with banks), due to present market conditions they cannot be stopped.
That notwithstanding, personally I think the banks all end up being nationalised and their shares worth nothing, but IMO I see the reasons behind the ban. My key point is that the liquidity required to prevent short sellers crashing banks doesn't exist, so the ban is basically required as a consequence of gross funding problems.
26. titaniccaptain said...
My problem agains short selling is that there is moral hazard treating shares like a casino....you give an excellent analogy of the system of short selling Still thinking
27. mountain goat said...
Short selling is extremely risky because one can lose far more than one invested in the first place, as the VW-Porsche story shows. As someone who invests in the stock market I am quite happy for people to lose their money in this way. Sharp falls and panic selling clear out the weak hands and speculators, trading with borrowed money or in the game for quick profits. If you follow the standard advice of only trading with money you don't need immediately there is no danger. Your shares drop in price and then go up again some time later. Sharp price falls are often followed by big rallies I have benefited from. Short covering also gives surprise lifts to share prices as the shorts buy back. To present short sellers as parasites forgets the fact that these people are the real expert traders who study carefully the valuation of stocks. Without these valuations bubbles would be more common; to be successful short sellers need to sell when prices are high and buy back when prices are low. I can't understand the moral hazard unless there is insider information etc, but this applies to normal share trading too.
28. still renting said...
@StillThinking
I can't follow the "insufficient funds" part of your argument. Yes, short selling does increase the apparent amount of stock in circulation. But why should that have any effect on whether you can afford to invest? Also, the increase in stock available due to short selling is relatively small. You can only sell short what you can borrow, and usually only a few percent of an issue are available to borrow.
A few other comments on short-selling. It is neither without cost, nor without risk.
Costs: - Borrow fees - the more a stock is shorted, the more likely you are to have to pay to borrow it.
- Dividends - if the issuer pays a dividend, the short seller also has to pay that dividend (on the stock he has effectively created)
Risks: - Limited upside, unlimited downside. If the stock falls to zero, I get the value of my position as profit. But if the stock triples in price I lose twice the value of my position.
- Stock markets go up - In the long term that is. The odds are, if you buy stocks and hold them for a few years you will make money. Conversely, if you sell short for a few years, you are likely to lose.
The benefits of shorting:
- Market makers couldn't do their job effectively without it. They are required to buy and sell the shares available in the market, so if they don't have some method of shorting they could lose money on positions that they only hold as a function of making the market. Without market makers, you will not have liquid markets. There would also be no put options, spread betting, cfds, etc., because no-one will originate such trades without the ability to hedge them.
- Price discovery - Shorting allows investors to send the signal that a stock price is too high.
- Long / short strategies - Lets say I want to invest in a company because I think it's a great company, but I think the sector it's in may suffer in the recession. I could buy the company's stock, but short a basket of other companies in the same sector. That way, I only make money from my company outperforming the others, but I don't suffer the consequences of the entire sector shrinking
Lastly, it's worth noting that many of the funds that are shorting banks are tending to hold those short positions for several months, or even over a year. These are not short term, speculative "attacks" on a share price, but a long-term considered view that those share prices are too high.
Gosh, that was a long post. Sorry.
29. Bernard Berger said...
IMHO (and it could be wrong) the "insufficient funds" argument falls down in two places:
- Firstly from a theoretical point of view - if there are not enough funds to purchase an asset at a value at which is perceived to be priced below the fair value, then that perceived fair value is clearly too high, and is not the fair value - otherwise market participants would sell other fairly valued assets to purchase the undervalued one. The only circumstance when this would not happen is if all assets held by all market participants were also being priced in the market at below fair value, to a greater degree than the asset being shorted. In this case participants would not sell their assets to snap up the bargain, as they would loose out to a greater extent on the assets they sold. However, in this case, then it is also clear that the asset in question is not really under-priced, but is in fact overpriced compared to all other assets.
Secondly from a practical point of view - The idea that there aren't enough funds to buy overly shorted stocks is not empirically accurate. The total amount of cash and other liquid assets held by market participants far exceeds the value of shorted stock, let alone that portion of shorted stock which is trading below fair value (somewhere between 0 and 100%).
Finally, shorting (as oppose to naked shorting) does not artificially boost the number of shares floating about. In order for a short to occur an investor who originally holds the stock needs to lend it out to another, who can then sell it, to repurchase it later. Once this loan of say 100 shares is made, there are not 200 shares floating about, but 100 shares (held by the prospective short seller), and a loan equal to the value of the shares when shorted (held by the original investor, and owed by the prospective short seller). Once the short seller has gone ahead and sold the borrowed shares, there are still just 100 shares now held by the new purchaser. The short seller has the cash from the sale, and a loan obligation to the original investor, and the original investor holds a loan asset at the value of the shares they originally lent.
Naked short selling on the other hand does artificially increase the volume of stock in circulation, and can be used to distort prices. This is when the seller shorts without first borrowing the stock, and will usually be facilitated by the sellers broker. It is illegal in the US. The problems of naked short selling are not viable arguments against standard short selling, the just imply that enforcement of regulation needs to improve.
30. stillthinking said...
I don't believe that borrowing can be carried out while the shares are still in the portfolio of the original holder. For me, selling short is selling shares you don't own. Apart from that, because in fact, I think short selling without borrowing is OK, the problem is, for me, IMO, etc
Suppose I short shares in Apple, and the share price starts to decline, that doesn't impact on the number of iPhones, iPods that they sell.
Essentially, shorting Apple shares does not impact on demand.
Further, suppose I short shares in a healthy bank, they know what their profits are and with sufficient capital they can simply purchase their shares back to the loss of the shorter. With sufficient capital.
However, the case of Apple and a bank is different because shorting their shares actually does affect demand for deposit accounts. If you think the bank shares,which represent capital really, are losing value, then you would demand a higher interest rate or more likely in today's environment just move your money elsewhere. Demand for banks is not just for loans, I think there is a demand for deposits, as in should Lloyds offer 10% interest there would be a great deal of demand.
However, unlike shorting Apple shares which does not affect demand for Apple, shorting bank shares affects the demand to deposit with them. So shorting bank shares is a self-fulfilling bet which is different from a company that has a real product.
Also, as mentioned, there are too many gaps to accept (in my totally ignorant opinion, it must be said, however I don't believe it already) that there is enough knowledge about how many shares are real or borrowed. If I borrow my friend's car, can I sell it to buy back later? In what sense is that borrowing? What if he borrowed money to buy that car? etc etc
31. stillthinking said...
I hope somebody read that because it occurred to me that this is about to drop off the bottom of the list and is therefore stale bread (I wish the list was a bit longer).
32. stillthinking said...
Put it another way still renting, and don't worry I will track you down on another post...
First, and most basically, if short selling was as tightly controlled as you suggest then it wouldn't be short
selling, it would just be selling. Anyway,
There are two fish stalls, one run by Peter and one run by Tom, both are offering 100 fish for 5 pounds. The clear
implication being that there are 200 fish available for 10 pounds. The reality however, is Peter owns 100 fish, and
that he has told Tom that he can sell them as well, this deal is written down and signed (there are only 100 fish).
Accordingly, I might make the decision that 200 fish are worth 10 pounds. But really fish are scarcer than that, I
cannot buy 200 fish for 10 pounds in reality. If I were to attempt to buy 200 fish for ten pounds, thinking that
that represents good value, then I can't and in that case I would win assuming Tom and Peter had to honour their
prices and get fish from somewhere else.
However, if my belief about the real value of fish has been called, lets say I value them personally at 6.50, then I
won't buy any fish at all. In which case there is no fish market and I would be better off selling any fish I own
immediately.
That is how I see it. I don't see how the market can tell which shares are borrowed and which aren't irrespective of
agreements between borrower and lender. In particular I find it hard to believe that somebody who has "shares" for a
particular period of time would not consider them an active part of their portfolio.
To repeat, if short selling was as tight as a drum as you suggest, then it would just be ordinary selling.