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Thursday, September 18, 2008


On Newsnight Scotland last night there was pretty much agreement that the short selling of HBoS stock had been on a pretty small scale. That there had been no massive flight by shareholders.

Basically if there are very few sellers but equally few buyers a small sale sets the price. This means that the selling which let Lloyds TSB take over a £280 billion company may have been triggered by sales amounting to only a few million. This was the 3rd such instance. There was a selling panic a year ago, another 4 months ago in the middle of a rights issue.

In 1986 Ernest Saunders, the CEO of Guinness arranged for Ivan Boesky to spend £100 million to ramp up the price of Guinness shares artificially so that it could take over United Distillers by paying for it in artificially inflated Guinness shares. Though Saunders was jailed for this & according to his Harley Street doctor, began suffering from senile dementia - which led to his release, following which he became the first person ever to recover from this condition - Guinness did not lose the fruits of his fraud & indeed it is difficult to see how such a merger could be corrected in a manner just to everybody.

I hope there will be a serious enquiry into who did this short selling & why. Anybody who sold shares (even if they didn't have them, which is how short selling works) at below the price Lloyd's are offering for them has made a very large loss & would be expected to be in trouble if the purpose of the sale was purely to gamble on the price falling further. assuming it wasn't a fraudulent attempt to fix the price they are likely to lose their jobs. If it was I would like to think they will lose their liberty. Here's hoping.

In the longer term an industry where mergers are more important than start ups is one in decline. If most of the business of UK banks is in selling & moving around mortgages then a substantial decline may be both inevitable & desirable. We know that houses prices could be a quarter of what they now are. If so people would not have to spend their lives in thrall to the "financial services industry". The "post industrial society" beloved by those in power where everybody is getting rich selling pieces of paper to each other has reached the end of its road bit we are perfectly capable to doing the sort of high technology manufacturing the world needs - if only those in power would let us.

We have to start making things.....Americans have got to understand that moving money around in circles is not actually production; that most "services" in the service economy aren't actually need or producing much -- did we need 100,000 sales agents for high risk mortgages that put illegal immigrants into $400,000 houses on interest only loans? Sure there are real service jobs, like mechanics and plumbers, who take things that don't work and make things that do work, but that's not the same as selling bad mortgages to people who shouldn't be borrowing money in the first place.

I don't see any intellectual problem with short selling.

Insider trading = totally unfair, illegal, bad.
Spreading malicious rumours = illegal, bad.
Propping up own share price = probably illegal, but certainly bad.

Gambling on a company's share price falling = perfectly acceptable. All it does is speed up inevitable future movements. If the company is sound, then the inevitable movement is upwards anyway, and the short seller gets wiped out.
Actually rethinking this I probably shouldn't have put the title Short Selling on this. My criticism was of propping down a share price to make it easier to take over, which can be done by short selling but is not the same thing.
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