Archive for the ‘HBOS’ Tag

Shorting and Hedging

The British government has decided, temporarily, to ban short-selling of financial stocks; amidst much outcry from the hedge fund managers who now say that being forced even to reveal their open short positions will fundamentally destroy their business.

This outcry reveals the fundamental wrongness of the hedge fund business as it now stands.

Short selling anything is fundamentally a deception: you are selling something you do not have. Its origins lie in the days when back-office settlement of share trades took weeks; now that settlement can take place in real time, there is no reason whatsoever to permit it because it is a deception.

But what about the hedge funds? It’s quite obvious that for years they’ve been doing a lot more than hedging. Hedging is a sane financial practice: if you’ve got a contractual liability to pay a million bucks in three months’ time, and a matching revenue stream of half a million quid, and at today’s exchange rate all is clear, you can hedge the transaction by buying and/or selling appropriate exchange rate options. But that’s not what hedge funds have been doing. They’ve been betting against the financial institutions and bringing them to collapse.

But sauce for the goose is sauce for the gander. Hedge funds don’t short sell financial stocks in a bull market; if HBOS hadn’t had the funding gap on the horizon (because its mortgage book exceeds the size of its retail deposits, the gap funded by rapidly-maturing wholesale debt), they wouldn’t have been shorted. HBOS didn’t publicise the funding gap, but you didn’t have to be a genius to figure out that it was there. Once the downwards pressure was on, shorting becomes a one-way bet: as the share price falls, so does the bank’s market cap, and the solvency ratios look worse and worse.

The ban on short selling should be permanent, and it shouldn’t just apply to bank stocks. It’s simple: you shouldn’t be allowed to sell stuff you haven’t got. But, at the same time, banks shouldn’t be shy about revealing the size, and imminence, of their funding gaps.