Short Selling of Banks Stopped

Jonbvn

Just watching Sky News, who are reporting that the FSA is stopping the shorting of banks stocks from tonight.

I wonder how this will affect absolute funds?

Generali

Jonbvn wrote: »

Just watching Sky News, who are reporting that the FSA is stopping the shorting of banks stocks from tonight.

I wonder how this will affect absolute funds?

The biggest problem for absolute funds is that it will make hedging much more expensive.

Say you are the Portfolio Manager for Jonbvn's Big Financials Hedge Fund (JBFHF) running a long/short portfolio in financial companies.

You are looking for the best way to invest your clients' money and you reckon that Generali Bank (run by a talented, young and attractive tyro) has been undervalued by the market so you want to buy some shares.

'Hold on', you think to yourself, 'Generali Bank is clearly a screaming Buy but what happens if the market as a whole for banking shares goes down. Generali Bank won't drop by as much but it will still drop and that goes against my promise to my clients to maintain the value of their investment as my primary objective'.

In this case, you go to a big investment bank and they will short sell for you a basket of shares that is designed to approximate 'financial institutions' or 'banks run by young tyros' or some such thing (Goldmans is very good at this sort of thing). That way, if you are right and Generali Bank outperforms the market as a whole you'll make money on the outperformance of Generali Bank.

Goldmans need to short the stocks making up the basket of shares so they aren't exposed to any share price fluctuations.

Of course the other thing absolute return funds will do is find a complete piece of rubbish like NRK and short the fck out of it thus making a packet. Both seem like reasonable things to do to me.

ad44downey

It just means share prices will fall more slowly but fall they still will

mewbie_2

Absolutely great. The markets are allowed to do what they like on the way up, regardless of how many gullible people they swindle, as long as the bonuses, and backhanders to their mates in government keep getting paid - cash for peerages anyone? Doesn't matter about a nation of poor people hooked into crippling debt. But on the way down all of a sudden the legislators leap into action, got to protect those mates of ours in the City don'cha know. It's sick, and criminal - but of course the old boy network runs all the way through the system.

Free market anyone? Er, not just now, old Bertie's in a bit of a pickle, I b*ggered him at Rugby and now I owe him a favour.

Yours, peed off,
MSE.

Generali

mewbie wrote: »

Absolutely great. The markets are allowed to do what they like on the way up, regardless of how many gullible people they swindle, as long as the bonuses, and backhanders to their mates in government keep getting paid - cash for peerages anyone? Doesn't matter about a nation of poor people hooked into crippling debt. But on the way down all of a sudden the legislators leap into action, got to protect those mates of ours in the City don'cha know. It's sick, and criminal - but of course the old boy network runs all the way through the system.

Free market anyone? Er, not just now, old Bertie's in a bit of a pickle, I b*ggered him at Rugby and now I owe him a favour.

Yours, peed off,
MSE.

The argument is that the Evil Short Seller (ESS) shorts a stock, its price collapses and so it gets downgraded by the ratings agency so the ESS gets stuck in even more and so on until the poor, traumatised board of the bank is forced to seek the protection of Nationalisation and a big payoff to make the nasty men go away.

Of course if you try to short a stock in a decent company then you lose a packet and this argument is rubbish quite frankly.

Arcaine

Pretty sure this will be a temporary measure, and anyway for everyone that takes a short position someone takes the corresponding long, or am I wrong on that?

mewbie_2

Arcaine wrote: »

Pretty sure this will be a temporary measure, and anyway for everyone that takes a short position someone takes the corresponding long, or am I wrong on that?

Well that's what the Kama Sutra recommends.

mr_magoo_5

ad44downey wrote: »

It just means share prices will fall more slowly but fall they still will

That’s right, not a big deal in the overall scheme of things, just going to prolong the pain.
Unless that is,the green shoots of recovery, miraculously appear.

Halleluiah, praise the lord. :j

LisbonLaura

& stage two is give everyone & everything a AAA rating & stop all this trading nonsense.
In the Brave New World stability is the watchword.

Wealth creation indeed...........what a silly idea it was

StevieJ

mewbie wrote: »

Absolutely great. The markets are allowed to do what they like on the way up, regardless of how many gullible people they swindle, as long as the bonuses, and backhanders to their mates in government keep getting paid - cash for peerages anyone? Doesn't matter about a nation of poor people hooked into crippling debt. But on the way down all of a sudden the legislators leap into action, got to protect those mates of ours in the City don'cha know. It's sick, and criminal - but of course the old boy network runs all the way through the system.

Free market anyone? Er, not just now, old Bertie's in a bit of a pickle, I b*ggered him at Rugby and now I owe him a favour.

Yours, peed off,
MSE.

I take it you are not invested in the stock market.

mewbie_2

StevieJ wrote: »

I take it you are not invested in the stock market.

Up to my neck dear boy. Pension and a few bits and bobs. But - the point of a market is lost if one element is taken away. The financiers have tinkered with the rules over the last years, and we are suffering the consequences. I don't trust them to do further tinkering.

They shouldn't say 'market forces' for ten years as if there is nothing they can do, and suddenly try to change the rules when it no longer suits.

Quick savage crash, return to normal methodologies, people start earning a living again instead of sponging off the backs of ordinary people - and we might stand a chance of a recovery. Introducing a half baked protectionism to protect the guilty parties does not strike me as a good way to run a railroad.