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'Death sentence' for short-sellers
Jonathan Prynn, Consumer Affairs Editor19.09.08
City speculators who bet on bank shares falling faced a "bloodbath" today.
The short-sellers have been blamed for this week's extraordinary market turmoil and stand to lose hundreds of millions of pounds after the practice was banned until January by the Financial Services Authority.
Analysts say the "shorts" will have to buy tens of millions of bank shares to cover their trading positions. They will have to buy them at a loss, having gambled on prices going down.
Tom Hougaard, market strategist at financial spread betting firm City Index, said: "The shortsellers have just been handed a death sentence, they are totally screwed. The market makers will be saying: 'Let's see how far I can squeeze these boys before they really start squeaking.'"
The short-sellers make money by borrowing shares that they anticipate will decline in value. After selling the shares they hope to buy them back for a lower price. The difference with the original price is their profit.
The practice has been blamed for the humbling of one of Britain's biggest banks this week, leading to short-sellers being condemned as "spivs and speculators".
Shares in HBOS, owner of the Halifax, fell so precipitously that it was forced to accept a £12.2 billion rescue takeover by Lloyds TSB in a move that unions fear will cost tens of thousands of jobs.
Aggressive short-selling also played a key role in the collapse of investment bank Lehman Brothers and the emergency bailout of US insurers AIG during the most tumultuous week on the world's financial markets for 80 years.
Yesterday Gordon Brown condemned "irresponsible behaviour" in the financial markets and promised a shake-up of the rules that govern City trading.
But the clampdown on short-sellers angered many traders, who said the authorities were just "shooting the messenger", and warned of "unintended consequences". Ian Morley, chairman of hedge fund manager Corazon Capital, said: "Blaming short-sellers is sort of ridiculous - you may as well regulate away human nature."
FSA chief executive Hector Sants justified the ban by arguing that short-selling is "perfectly legitimate" in normal market conditions but has exacerbated disorderly markets.
Angela Knight, of the British Bankers' Association, said: "These are volatile times but we are caught up in a global problem."
