Monetary Crisis … Hedge Funds and Short Selling

In the previous chapters we touched on the media and politicians preoccupation with Hedge Funds and short selling being the cause of the UK woes.

Can short selling truly, cause the downfall of a company?

The straight answer is no.

HBOS wasn't killed by short selling … it was killed by its investors trying to get out. A well managed and sound company will be able to defend against short sales. It will have the confidence of its investors, who will see a flood of short selling as an opportunity to make a lot of money as they slowly starve the short sellers of available equity. The most money I have ever made on the stock exchange was during a “Bear Squeeze” which happens when the prime investors in the company start picking up all the shares the bears are unloading … eventually it reaches a point where the short sellers have to close out their positions and they have to accept shares at any price. I managed to make 5000% over 3 months by being one of the fortunate people who had shares to unload at the top of the market.

Short selling can only damage a company that is damaged anyway. A flood of short selling of a share is simply a warning to the market that they should be looking a little closer at the company … that maybe it is hiding some ugly skeletons. If we stop short selling we have an artificial market. The capitalist system can only work where the market is free to find the true value of anything.

Oh! How naïve I am, in spite of my scepticism of the veracity of politicians the world over, I thought when the government announced that they had brokered a deal between Lloyds and HBOS, that is was a done deal. I thought that spreading false rumours in order to influence the market is a criminal offence … here is what I wrote on the Sunday following the announcement:

“The question I would like to ask is … Why was trading in HBOS shares not suspended before the markets opened on Friday the deal for Lloyds to take over had surely been hammered out in the days preceding. There had to be Government approval of the deal so sufficient knowledge must have existed that the shares were trading some 40p below the effective price of the deal on Thursday night … then why were those shares traded for 5 minutes before the announcement when almost a million shares changed hands at about 40p below the projected strike valuation?

Who purchased those shares? Who knew … The Bank of England, the Treasury, the FSA, the Exchequer, the PM, and executives of the two Banks … someone's hands are dirty! And then why was there no cautionary in the days preceding … the LSE rules require a cautionary if negotiations are in progress that are likely to have a major impact on the value of the shares.

Was this an attempt to prevent a run on the Bank?”

Anyway, we now know, that there was in fact no deal at that point in time … and there still is no deal at this point in time … so what was Gordon Brown up to?

Most should have got wise to Gordon when he proposed that the developed nations securitize their future development aid budgets … sell them off in the capital markets and be able to pump in vast amounts of money to the developing countries now. Oh isn't off Balance Sheet wonderful, CEO's and CFO's get sent to prison for that type of activity.

So much for the parochial view, I have tried to show that much of the pooh in the UK economy;

is directly attributable to the policies of Gordon Brown

and his love for buy now pay later … in the 50's we called it “the never, never!”.

Leave a Reply