I have been writing about securities lending and short selling for a number of years. I have never pretended to understand the nuances and subtleties of the arguments for or against either practice, let alone their everyday practice, but in the extraordinary circumstances of recent times I have been giving it rather more thought than I normally might.
In the current climate, I think a case is mounting for the banning of short selling. I am not saying that I am in favour of such a ban, or against it, but I find myself, as a journalist who has been writing about the international financial markets for nearly 24 years, wondering not so much why short selling is allowed in the first place, but why any shareholder would want to facilitate the destruction of value it can bring about by lending the shares the short seller needs.
Think about it in everyday terms. If I asked to borrow your Porsche, valued at £50,000, paying you a fee of £100, and returned it to you two weeks later in such a state that it was worth only £5,000, would you think that was a good piece of business? Probably not, I would bet. Yet as far as I can see, that is precisely what can happen with the lending of securities to enable short-selling. A pension fund lends HBOS shares worth £xm pounds to a short seller, directly or indirectly, in return for a fee that amounts to a few pounds. Short selling drives down the price, enabling the short seller to buy the securities at a lower value, and return them to the original owner.
I am routinely told that short selling is one of the signs of a mature, sophisticated financial market. That it increases liquidity. I am increasingly convinced that the wearing of no clothes is one of the signs of a mature, sophisticated emperor.
I am generally in favour of free markets. In fact, if children wanted to climb up chimneys, I'd see no reason to stop them. But short selling that can drive a relatively sound business into the arms of a white knight on a black horse just doesn't look right.
Maybe we shouldn't ban short selling. But maybe, just maybe, we should insist that all short selling is naked. Selling a stock short without having guaranteed access to the stock needed to cover the trade: that really would take balls.