City watchdog put ban on bank short-selling

A City watchdog earlier this week took drastic measures of banning the short-selling of financial stocks a move unprecedented in modern times.

The temporary ban was agreed ay a meeting at 11 Downing Street between Alistair Darling, chancellor, Mervyn King, Bank of England governor, Sir Callum McCarthy, outgoing Financial Services Authority chairman, and his successor, Lord Turner.

Gordon Brown weighed in promising a crackdown on “irresponsible behaviour”. “We have got to clean up the financial system. We don’t want these problems occurring in the future,” prime minister Brown said.

The ban, which will last initially for four months, will prevent investors from creating or adding to short positions in publicly quoted financial companies. Short-sellers sell stock they do not own in the hope of buying it back at a lower price later.

Short-sellers have been blamed for driving down the share price of HBOS, the banking group confirmed that it was being rescued through takeover by Lloyds TSB.

Hector Sants, FSA chief executive, said that while he regarded short-selling as “a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly market conditions”.

The FSA was acting to “protect the fundamental integrity and quality of markets”. Traders said that the FSA’s move could lead to further volatility as it would coincide with quarterly expiry of futures and options contracts.

The rule change is the FSA’s second attempt to restrict short selling. It moved earlier this year to force disclosure of short positions in stocks undergoing a rights issue.

Andrew Cuomo, New York attorney-general, also announced an immediate investigation into short-selling activity of shares in Lehman Brothers, AIG, Morgan Stanley, Goldman Sachs and other financial firms.

He highlighted: “Short-selling is not illegal is not illegal, but when combined when combined with the spread of wrong information, that is illegal……We will fully prosecute wrongdoers to the fullest extent of the law.”

In a sign of growing investor concern about the issue, some of the world’s biggest institutional investors said they were no longer lending their shares of Morgan Stanley and Goldman Sachs to make it more difficult to short the stock.