Short Selling of Banks Stopped

Generali

fimonkey wrote: »

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.

You've nearly got it I think.

The Owner doesn't want to sell the shares because he thinks he's on to a good thing. If someone else disagrees then let them. If they disagree so much that they want to pay The Owner to borrow his shares to sell them short then so much the better for The Owner if he's right as he gets the borrowing fee as well as the capital gain and any dividends that are payable. If he's wrong and the shares drop in price then at least his losses are mitigated by the fact he made the borrowing fee.

Short selling isn't fraud because it's permitted so long as it's done in the right way. The buyer gets his shares, you get your money. One way to look at it I suppose is like buying something on a credit card. Why is it not theft to buy something when you don't have the money? Well you borrowed the cash in a lawful way and also intend to pay it back lawfully. It's the same with shares.

Brokers don't buy shares to hold on to them, they're just a go between. They work a bit like an estate agent, getting buyers and sellers together and taking a commission the only difference being that the broker will buy shares to sell on immediately whereas the estate agent doesn't actually handle the property in that direct way. It would be very unusual for a broker to buy shares for which he in turn didn't have a buyer.

Debt_Free_Chick

Generali wrote: »

You've nearly got it I think.

My oh my .... the irony/relevance of your signature

The mystery of government is not how Washington works but how to make it stop. P. J. O'Rourke

Way to go :T :T :T

chewmylegoff

Generali wrote: »

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.

or if you short HBOS and then someone gets annoyed and leaks the takeover and the share price increases 200%.

Debt_Free_Chick

fimonkey wrote: »

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.

Because the vendor believes that - long-term - the shares are worth having. Could be for dividends, could be for capital gain. They don't want to have to buy the shares (again) at a higher price in the future. This way, they still have their shares at the price they originally paid for them. It's the buyer that has to sell them and buy them back, in order to return them to the vendor.

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.

The brokers think they're getting the shares at a good price. Like the original vendor, there will usually be buyers who think that the shares are worth having, long-term.

Problem is that, in the current market, looking at a company and deciding whether or not to buy their shares is not happening. Shares are being bought and sold on the basis of fear - hence, fundamentally good companies like HBOS are being driven down to junk status and then snapped up cheaply!

fimonkey

OK, thanks everyone, think I may have it... is it like this? (Analogy).

I own a 1973 limited edition jeans beetle (I used to, awesome little car when it wasn't on the hard shoulder). I cannot drive this car for the next y years, but I don't want to sell it as I know it will increase in value.

My local vw deeler takes it off my hands (borrows it) and pays me £x interest every year. (1)

My dealer then sells it for £6.5K to the next man.

The new owner of the jeans beetle is then unfortunatley hit by increasing road tax due to high emmissions, and because of this the price of old cars falls dramatically. The new owner decides to sell this car back to the dealer for less than he paid (£4K), and buy a new more eco friendly car. (So the new owner looses out by 2K, but saves on his new car).

The dealer then gives the beetle back to me after the y year period. The dealer has made £2.5K out of this.

(1) If this were a share that paid dividends, who gets the dividends whilst its out of the original owners hands? If its merely 'borrowed' then surely the original owner should? Except the new owner who has 'bought' the shares would surely think that they are entitled to it?

Have it got it?

Debt_Free_Chick

fimonkey wrote: »

(1) If this were a share that paid dividends, who gets the dividends whilst its out of the original owners hands? If its merely 'borrowed' then surely the original owner should? Except the new owner who has 'bought' the shares would surely think that they are entitled to it?

The new owner. The shares are actually sold to the new owner, but no cash changes hands ... but the ownership is transferred. The new owner has all the rights of a normal owner, including title to dividends and voting rights.

The new owner then has an agreement to transfer back the same amount of shares at some point in the future.

Have it got it?

Yup!

Generali

fimonkey wrote: »

OK, thanks everyone, think I may have it... is it like this? (Analogy).

I own a 1973 limited edition jeans beetle (I used to, awesome little car when it wasn't on the hard shoulder). I cannot drive this car for the next y years, but I don't want to sell it as I know it will increase in value.

My local vw deeler takes it off my hands (borrows it) and pays me £x interest every year. (1)

My dealer then sells it for £6.5K to the next man.

The new owner of the jeans beetle is then unfortunatley hit by increasing road tax due to high emmissions, and because of this the price of old cars falls dramatically. The new owner decides to sell this car back to the dealer for less than he paid (£4K), and buy a new more eco friendly car. (So the new owner looses out by 2K, but saves on his new car).

The dealer then gives the beetle back to me after the y year period. The dealer has made £2.5K out of this.

(1) If this were a share that paid dividends, who gets the dividends whilst its out of the original owners hands? If its merely 'borrowed' then surely the original owner should? Except the new owner who has 'bought' the shares would surely think that they are entitled to it?

Have it got it?

That's about it.

Re the dividends, in almost all cases, the borrower of the shares will owe the dividend to the lender as the shares still belong to the lender. Also, the lender can demand the return of the shares at any time and with pretty much no notice.

Typically the cost of borrowing shares is around 0.30-0.50% of the value of the stock per year. If you borrow for one day it will cost the annual amount divided by 365. Company's shares that are obviously complete basket cases will cost a lot more to borrow.

Sir_Humphrey

It seems pretty clear to me that the short sellers are being made a scapegoat, and were just accelerating the inevitable. However, there is a reflexive loop (to coin Soros' term) in this short of short selling in the current paniccy atmosphere. Now this reflexive loop has gone, we have seen a huge rebound (for the time being anyway). Short sellers have to acknowledge two things: 1: This sort of intervention is part of the game and they have to accept this. 2: The market is there to provide financing for companies, not to act as a casino.

The stability of the financial system is more important than free market principles.

Generali

Sir_Humphrey wrote: »

It seems pretty clear to me that the short sellers are being made a scapegoat, and were just accelerating the inevitable. However, there is a reflexive loop (to coin Soros' term) in this short of short selling in the current paniccy atmosphere. Now this reflexive loop has gone, we have seen a huge rebound (for the time being anyway). Short sellers have to acknowledge two things: 1: This sort of intervention is part of the game and they have to accept this. 2: The market is there to provide financing for companies, not to act as a casino.

The stability of the financial system is more important than free market principles.

In reality short selling doesn't do anything more than provide liquidity as there are more sellers at any price. This idea that humble banks are being driven to the wall by the shodowy hedge fund managers makes a nice story but the reality is if you short a perfectly decent company like HBOS and the price drops a long way, someone else will step in and snap them up at a bargain price.

Long term holders gain in this instance as they get a bidder's premium (HBOS wouldn't have seen the takeover price for years IMO) as well as getting short sale fees. Short sellers have lost out in this instance as the price went against them, such is life.

Banning short selling doesn't help financial stability. Ensuring capital adequacy does as does allowing firms like Lehmans to go to the wall rather than bailing them out with yet more taxpayer's hard earned cash.

WTF?_2

Generali wrote: »

In reality short selling doesn't do anything more than provide liquidity as there are more sellers at any price. This idea that humble banks are being driven to the wall by the shodowy hedge fund managers makes a nice story but the reality is if you short a perfectly decent company like HBOS and the price drops a long way, someone else will step in and snap them up at a bargain price.

Long term holders gain in this instance as they get a bidder's premium (HBOS wouldn't have seen the takeover price for years IMO) as well as getting short sale fees. Short sellers have lost out in this instance as the price went against them, such is life.

Banning short selling doesn't help financial stability. Ensuring capital adequacy does as does allowing firms like Lehmans to go to the wall rather than bailing them out with yet more taxpayer's hard earned cash.

Don't worry - now that it's clear that debt (for banks) will be 'disappeared', no need to sell them short. They can just forget about the trillions of dollars they loaned into existence in the past and get on with creating even more useless money.

Still think we're going to have deflation, in the near term at least?