Short Selling of Banks Stopped

moanymoany

Generali wrote: »

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.

Generali, I understand a little bit - talented, young and attractive - but it sounds really true - so I will take five!

Jonbvn

Generali wrote: »

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.

LOL,

Wasn't that what they called the young Turk who used to run HBOS?;)

Generali

Jonbvn wrote: »

LOL,

Wasn't that what they called the young Turk who used to run HBOS?;)

Quite possibly. I understand the branch staff in towns where there's also a Lloyds branch have a different 4 letter name for him now.

baby_boomer

mr_magoo wrote: »

just going to prolong the pain.

But it might give the authorities / directors more time to come up with solutions.

A rushed afternoon's meeting is not the best way to avoid a botched job on a company with £55bn of assets and 10,000s of jobs.

fimonkey

Ok, I've NEVER understood 'short selling' despite the attempts to read about it.. so please, in the simplest terms, and using the simplest analogies, could someone please explain all this to me please?

Many thanks

GracieP

fimonkey wrote: »

Ok, I've NEVER understood 'short selling' despite the attempts to read about it.. so please, in the simplest terms, and using the simplest analogies, could someone please explain all this to me please?

Many thanks

Ok, say someone has a motorbike but they can't use it because they don't have a license. They lend the bike to a short-seller for a fee, with an agreement that they will get an identical bike back. The short-seller sells the bike for £1000. 3 months later the bike has gone down in value to £500. The short-seller buys an identical bike for £500 then returns it to it's owner. The short-seller can keep the other £500 minus the fee to the owner.

Generali

fimonkey wrote: »

Ok, I've NEVER understood 'short selling' despite the attempts to read about it.. so please, in the simplest terms, and using the simplest analogies, could someone please explain all this to me please?

Many thanks

No analogies, just an explanation. This is a simplification but pretty close to how things work in the real world (as far as banking can be described as the real world):

In normal circumstances you buy some shares ('go long'). You hope it goes up in value and if it does you make a profit.

For example, you buy 100 shares tomorrow morning in HSBC for 796p (UK shares are quoted in pence) because you think they're a good company. They go up to 846p so you sell. Your profit is (846-796)*100 = 5,000p = £50. The maths is (selling price - buying price)*number of shares.

If you sell short you reverse the order in which you do things. At first you sell shares you do not own to someone (a broker usually). You hope they'll go down in price so you can buy them back for less and that way make a profit. As you don't actually own the shares you sold in the first place there is an extra step involved where you borrow the shares from someone that owns them and you pay them for the loan (typically 0.5% of the value of the stock per year).

For example, you short sell 100 shares tomorrow morning in Vodaphone because you think they're a piece of rubbish. You short sell at a price of 120p and borrow the shares from Generali Bank so you can actually give the person you sold the shares to his shares! In a week it turns out that you were right and Vodaphone are rubbish and the share price falls to 20p. In this example you make (120-20)*100 = 10,000p = £100.

The maths is exactly the same (buying price - selling price)*number of shares. Just in this instance you sold first and bought second.

fimonkey

Thanks Gracie, but if you have something you can't use (or afford?) why keep it and lend it out? Why not sell it and get its current market value, especially if you predict it's going to fall in price anyway.... The person with the bike could sell it themselves, then buy an identical one 3 months later and save thier own £500. After all, isn't this the thinking behind those who STR?... this bit confuses me greatly, cos if I had an asset I couldn't afford, I wouldn't "lend" it to anyone, I'd get rid of it and in todays climate, any brain cell who holds bank shares surely only expects them to drop?

What happens if it works the other way round btw? .. So if you take the bike of someone's ahnds with a promise to return it in 3 monts time, currently sell it, but in 3 months time the prioce has risen... I see then that the 'short seller' loses out, but what about the original owner, what do they gain? Only their bike (shares) back, which granted they can then sell, but they had no control over them during the three months they belonged to someone else.

.. does my confusion make sense? Sorry for being so dense in this area but HUGE thanks fo ryour reply.

fimonkey

Generali wrote: »

If you sell short you reverse the order in which you do things. At first you sell shares you do not own to someone (a broker usually). You hope they'll go down in price so you can buy them back for less and that way make a profit. As you don't actually own the shares you sold in the first place there is an extra step involved where you borrow the shares from someone that owns them and you pay them for the loan (typically 0.5% of the value of the stock per year).

OK, so now I see the benefit for the 'vendor' of the sahres, in that the short seller pays the vendor interest, but I don;t get why the vendor just doesn't sell their own shares in the first place.

Plus, selling what you don't actually own? Why is this not fraud? I couldn't sell your house, I don;t own it! (actually bad analogy, I probably couldn't sell your house even if I did own it in todays climate - but 'm sure you know what I mean).

And in the case of bank shares, .. are the brokers who buy these from teh short sellers completely mad? I know nothing about shares, but my daily moneyweek e-mail has been warning me about bank shared for the past month or so.

Debt_Free_Chick

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?

I've posted my thoughts on another thread, but to summarise ....

I'm more concerned with the Government (OK, via the FSA) manipulating a part of the market.


Either there's a market or there's not - which is it to be

We now have "publicly quoted financial companies" - which, I think, extends beyond simply "bank stocks" potentially being shored up, whilst all other UK quoted stocks have to take their chance in the market.

That surely cannot be right - can it?

We either "let the market dictate" no matter how unpalatable that might be, or we simply nationalise "UK PLC". To have "half-n-half" is not an option ... is it?

What should happen with PLCs in fuel - more specifically, oil? Food? Luxury goods ... or services?

Which other part of the economy should the Government control?