Uncharted Territory

January 23, 2009

It’s Definitely the Short-Sellers

Filed under: Credit crisis, Economics, Markets — Tim Joslin @ 7:36 pm

This is ridiculous.  Following yesterday’s post, there’s another front-page Guardian article about recent short-selling:

“Lansdowne Partners, which also profited from the fall in the share price of Northern Rock at the height of its problems, sold Barclays shares last Friday – when the bank lost almost a quarter of its value in frenzied trading – and bought them back again on Wednesday after they had fallen by almost £1.”

Lansdowne made a profit of £12m, according to the Guardian.  Well, trading in Barclays shares may have been frantic last Friday (somewhere around 150m changed hands, judging from Yahoo!’s graph), but a large part of it was due to Landowne’s activities.  If they made £12m profit they must have sold short somewhere between 12m and 24m shares (50p – £1 profit on each).  This tallies with the 8bn or so Barclays shares in circulation, and Lansdowne’s declared 0.25% position (today’s Guardian article confuses what this represents). 0.25% of 8bn is 1/400th of 8,000 million, i.e. 20 million, around 1/3 of the average daily volume of Barclays shared traded over the last 3 months, according to Yahoo!.

And there may have been other short-sellers, perhaps under the 0.25% reporting limit.  It’s odd that Lansdowne are just over it – maybe they didn’t intend to have to report the position but made a mistake.

Some of the rest of the 150 million shares will have been panicked investors (as opposed to speculators), including those with stop-loss facilities that will have kicked in as the share price fell.  This is a complete screw-up and a windfall to the speculators.   Short-selling of financial stocks should only have been reintroduced once stability had returned – probably in a year or two.

I find it absolutely incredible that the FSA is apparently insisting that the reintroduction of short-selling hasn’t pushed down UK bank share prices – resulting in jitters wiping tens of billions off share prices around the world.  Today the Guardian noted:

“While bank shares, particularly those of Barclays, Royal Bank of Scotland and the newly formed Lloyds Banking Group, have been savaged since the ban was lifted, the FSA insisted yesterday that short-sellers were not to blame.”

Quite.

****

On a slightly different note, there was – and it pains me to admit to such a thing – an inaccuracy in my previous post on this subject.  I said:

“Yes, Vince and I (as befits fellow SPS graduates) agree on one point: it was lunacy to lift the short-selling ban.”

Actually Vince Cable didn’t read SPS – he did Economics.  I know this because he was on Desert Island Discs [note to self – this link will go out of date, will need to update when Vince is archived!] this morning.  SPS didn’t even exist when Vince was at Cambridge, fully 20 years before me.  What we have in common is that we both started out doing Natural Sciences and switched completely.

Maybe we have less in common than I thought, as Vince’s music selection was – how can I put it – boring.  No No More Heroes, Ruby Tuesday or even Enola Gay, just classical stuff.

And, of course, Economics is just a tiny subset of Social & Political Sciences.  You need to understand the whole to really understand any of its parts, such as Economics.  But then, you need to study SPS to know this!  Whilst SPS is universal, the Economics Vince studied will eventually be but a footnote of our history explaining the quaint ideas of the fossil energy industrial period.  Perhaps our different studies explain why Cable is the champion of nationalisation and I see it as a huge blunder.  At least both Cable and I are members of that vanishing species, polymaths.

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