Oh, dear, what a setback. The usual suspects have slipped through the net. They will have to be locked up in the Financial Services Authority’s waterside fortress for 42 days, while the investigators try again to find some evidence.
These suspects are the short sellers: everyone’s favourite scapegoat. They are accused of rocking the banks’ leaky boats, of destabilising the stock market, of profiting from other people’s misfortunes, of driving share prices downwards to suit their own book. If it wasn’t for them, we should all be rich, or richer, at any rate, than we are now — or so we are led to believe.
The textbook way to become a short seller is to borrow some shares and then sell them. You hope to be able to buy them back at a lower price, and then return them. Modern financial technology has come up with new ways of doing this, but they all amount to a bet that the price of the shares will go down. If the selling itself drives the price down, this becomes a self-fulfilling prophecy.
Earlier this year some heavy sellers knocked the shares of HBOS, the combination of Halifax and Bank of Scotland, just when it was planning to raise much-needed new capital. The board of HBOS protested, and the FSA smelt a number of rats. It looked forward to catching and poisoning them, but has now abandoned the search with nothing to show for it. Instead, the FSA has come up with some new rules — supposedly the world’s strictest — to make short sellers disclose their positions when new money is being raised. Even this is not quite the deterrent the regulators had hoped for. We can now see who in the City is betting that, for the banks, the worst is not yet over.
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