Time for a wider debate on shorting
The ban on short-selling in financial stocks brought in at the end of last week by the FSA and the SEC was greeted with some scepticism as well as relief, but it has been credited with helping to boost the stock market after its recent plunges. The actions of the regulators have been mirrored by some of the world’s major pension funds, which have also moved to prevent their shares in various financial companies being lent out to short-sellers.
So far, however, there is little talk of wider action on short-selling, either by regulators or pension funds, and it seems clear that shorting is not going to exit the stock-trading stage quietly. The Head of Public Relations at Watson Wyatt, while recognising the need for the ban as a short-term measure, added “…it will be good to see this decision reviewed as soon as possible to give back to skilled investment managers their full suite of tools with which to generate returns and control risk for institutional investors”. Oh – so that’s what short-sellers are doing when they aren’t destroying major financial institutions?
While speculation on share prices is as old as the stock market, borrowing stock you don’t own to make a bet on its share price going down pits your interests as a shareholder directly against that of the company whose shares you have borrowed. This makes a mockery of the corporate governance system in the UK, which requires directors to serve shareholder interests and makes company directors accountable to shareholders. How can a board of directors serve shareholders who stand to gain from destroying their company’s share price? And how can the responsibilities of share ownership be exercised by those who ultimately see themselves as traders rather than long-term owners?
Time for a rethink?