Monday, July 7, 2008

Knee-jerk solution hits the buffers

Confusion over UK rules on shorting

When you mishandle the economy you go into fire-fighting mode - and start another series of problems. The new FSA rules to reduce shorting can lead to the identification of successful shorters, causing others to pile in and achieving the opposite of the intended effect. Now other problems with the application of the rules are emerging - but don't worry the FSA is keeping things under review and their (in)famous 'light touch' is being applied to the enforcement of these rules.

Posted by icarus @ 05:36 PM (762 views)
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9 thoughts on “Knee-jerk solution hits the buffers

  • Aahh, exactly what some of us pointed out two weeks ago would happen.

    This move has been brought in by the FSA under pressure from the government as a panic measure to try to stop speculating on house builders’ dire solvency problems.

    The problem is that the smaller players have far more to gain from watching (and copying) what the bigger players do in an open poker game. But the FSA didn’t think of that and brought this rule in anyway. Dozing at the wheel again.

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  • If the financial industry need to raise $1 tn+ and it has raised $300 bn (a) there’s a long way to go and (b) investors will be reluctant to fill the hole. So when rights issues by banks run into difficulties, as they will, er, let’s clamp down on the shorters.

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  • And it’s having completely the opposite effect! The smaller players are taking the calls from the bigger players (under the new found rules about openness on shorting) and placing their bets the same way!

    What a disaster on legs. The FSA should either move quick to withdraw the requirement or run for cover.

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  • paul – sorry about the link, but if you got to the article (googling the FT article title will also get you there) it identifies other problems too: firstly the shorters don’t have to indicate when they’ve closed out their position and secondly some shorters are merely hedging long bets (which don’t have to be disclosed). So the disclosures of short positions exaggerate the amount of shorting.

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  • Yes, I think it can be found here:

    http://www.ft.com/cms/s/0/a2b62ca2-4b94-11dd-a490-000077b07658.html

    That exaggeration feeds back into the market, further exaggerating the scale of how much it is being shorted which creates a losers bargain. I really wouldn’t want to be running a bank making a rights issue at the moment.

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  • Help is at hand. Badger has appointed a chief executive of the International Centre for Financial Regulation. It’s Barbara Ridpath, ‘head of rating services Europe’ at bogStandard & pissPoor, one of the ratings agencies which gave healthy ratings to terminally ill CDOs and fuelled the financial crisis.

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  • “When in doubt make some laws, treat the symptoms not the cause”

    OK sooooooo how will this help the underlying issues in the UK? We don’t have manufacturing as our core activities, and foreign companies are more adept at providing “service industry” (shudder) products in their own markets.

    Well done FSA. Here’s another one for you, try and prosecute me – Bradford & Bingley have more money owing to them than they have deposits, and the best thing depositors can do is protect their money by removing it from the financial mismanagement that has occured.

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