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The FSA want to clamp down on “short selling”

Posted by Mark Harrison on June 13, 2008

The FSA announced today that they want to clamp down on short selling of companies in the middle of rights issues.

Short selling is when you sell something (normally a share) you don’t own… in the expectation that the price is about to fall, and you’ll be able to buy it back quickly enough to make a profit.

There are various ways to carry out this trick – but the one the FSA are particularly concerned with is where the person doing this borrows the share from someone else (for a short period, for a fee, of course.)

The more people who want a share to fall, of course (and anyone who’s shorted has a vested interest in seeing a fall), the more likely falls are. The key question is whether this is overall a good thing or a bad thing. In the past people like Jim Rogers have (from memory, since I don’t have the book in front of me, but I’m 99% sure it is him I’m thinking of) written in defense of the practice, not on the basis of personal ability to make money, but in terms of how it overall helps economies!

On today’s move, the various commentators have jumped onto this with different approaches:

  • Robert Peston (at the BBC) has blasted short-selling in the past, and applauds the FSA’s move.
  • Chris Dillow (who writes for Investors Chronicle, but has posted on his personal blog) is pro short-selling.

In the past, I’ve been very much a Peston fan (I think his coverage of the Northern Rock debacle was second to none), but in this case, I’m firmly with Chris Dillow.

Peston’s argument is actually aimed at the people who LEND the shares, enabling the shorting. He claims it’s “short-termist and thick” (because it causes shares to fall in value, and thus harms the institutions doing the lending). I disagree – the lenders know this, but it’s more than counter-balanced overall (in their experience and opinion) by the fees they get from doing the lending! (Win some, lose some, end up ahead, rather than win every one, of course.)

Chris Dillow’s article outlines the case for promoting short selling very well, so I’ll not even try to re-run the issues here… however, taking a step back, I wonder whether the FSA mightn’t be onto a good thing.

The FSA aren’t saying that people can’t short, though… They are saying that anyone who shorts a material number of shares (more than 0.25% of any company) should have to make a public declaration of this position.

In the past, I’ve spoken out in favour of transparency, liquidity, and fungibility… shorting doesn’t affect fungibility, and improves liquidity… so adding transparency to the shorting process is something I’d approve of.

Unlike the FSA, however, I don’t want to “clamp down” on shorting… just bring it into the light a bit more.


Posted in Economics, Investment | Tagged: , , , | Leave a Comment »

Northern Rock – politicians’ responses

Posted by Mark Harrison on November 20, 2007

In my earlier post about Northern Rock, I made the comment:

Sadly, the whole thing has degenerated into a political circus.

I’ve had an interesting email response from someone who, for whatever reason, didn’t want to post an open comment on this blog.

The gist of the comment was that I was being a bit harsh on politicians from constituencies where a lot of people stood to lose their jobs, since supporting local people is surely the point of being elected.

Actually, thinking about it over the last few hours, I can respect that viewpoint. Our own local MP spent several years defending her party’s official line on our local hospitals, and saw a huge swing against her, only just holding on to her seat. Since her re-election, her line has changed, and she’s more able to balance what local people want with what the central party view is.

My issue with the political wrangling isn’t that politicians are looking to support local jobs… but that they appear to want to do so at such a ludicrous price to the whole community. If the bulk of Northern Rock jobs are in a small part of the UK, by all means spend the money on growth for the whole community, INCLUDING the 6,500 NR staff who are at risk… don’t spend £4,000,000 per head propping up a failing business.

Another comment that’s been made is that this is a loan, not a payment. I am aware of that, but while the Government are saying that they would be “first in line” to receive any payouts if NR goes under, I’ve also seen differing legal opinions on the subject! Anyone who lends money to a business in serious trouble had better be willing to lose it all.

As an aside, if you have views, especially if you disagree with me, please feel free to post them as comments. I’d rather be shot down in flames and learn something than stick to my own position if you can come up with viewpoints or evidence I’ve not considered!

Posted in Economics, Investment, Northern Rock, Rants | Leave a Comment »

Northern Rock – the story that wouldn’t die

Posted by Mark Harrison on November 20, 2007

Back in September, I wrote a series of articles about Northern Rock, the troubled UK bank. It would appear that the shouting is continuing.

Just to re-cap the facts to date:

  • Northern Rock stopped being a building society and turned into a bank some years back
  • Because of this, it is now owned by Shareholders, who are completely different to the “savers” who have accounts with the bank
  • It made a bunch of loans, on the assumption that it would be able to borrow the money back from other banks
  • Because of the US Problems,  it wasn’t able to, so the Bank of England stepped in (after some pressure from the Treasury), to provide it with a loan facility of tens of billions of pounds
  • The news of this got out, and there was a run on the bank, people queued in the streets to get the cash back out of their accounts (about £10,000,000,000 – that’s Ten Billion has been withdrawn in the last 8 weeks).
  • Because of THAT, the shares collapsed

Key point is that SAVERS are protected (up to about £30,000 per saver), but shareholders aren’t.

There have been a few bids to buy the bank outright, and several more to buy out part of the bank. However, because Alastair Darling, the Chancellor has refused to make any on-going promises that the Bank of England loan will be held in place much into the new year, Northern Rock is seen as a very risky proposition.

Here endeth the factual part of the post – now onto the opinionated part 🙂

At the time, some financial journalists were tipping the bank as a “hot buy”, certain that the shares would rebound. I was not convinced, and it looks like my caution was right – the shares have continued to go down.

Sadly, the whole thing has degenerated into a political circus. Some MPs, who have large NR offices in their constituencies, are making speeches about how the government  should “save jobs” – though at a loan of £25 billion for a company that has 6,500 jobs at risk, that does work out at almost £4 million per job!

Personally, I would have thought that loaning £4 million on favourable terms to a bunch of small businesses would probably create a lot more employment, and wealth, than propping up a fallen giant. Hell, lend me my £4 million on an “if it fails, that’s OK” basis, and I’ll promise to employ 10 people, not just one! I’ll even guarantee that 3 of those 10 will be former Northern Rock employees – they certainly have some polite helpful staff in my local branch, and I’m sure I could find something for them to do if the government were paying.

There’s an interesting followup to the idea of “saving jobs”, though, and whether it works. The figures below are from Tom Peters, and represent the period from 1980 to 1998.

During this period, the European Union had a policy of “protecting jobs”, wheras the US had a policy of “making it easy for businesses to get rid of people”. (The logic being that, if it was going to be easy to get rid of someone, a small business was more likely to take a punt on hiring them in the first place… and that would overall create more employment.)

In that period, the EU gained 4,000,000 jobs… (to be fair, most of these were in the public sector, but still 4 million extra people working is a good thing, surely?)

Over the same period, American companies laid off 44,000,000 people – 44 million people out of work…

… but created a new 73,000,000 jobs over the same period (at other companies, obviously.)

So, over the same period, by having a policy of “make it easy to lose jobs”, the US economy managed to add a net total of 29,000,000 new employees to the workforce. (29 = 73-44)… over 7 times as many extra people working, in a similar sized economy, as a result of a “don’t bother to save jobs – instead concentrate on ‘flexibility’ in the labour pool” policy.

Makes you think, doesn’t it?

(Oh, and for what it’s worth, I’m in favour of using public money to protect Northern Rock savers AND Northern Rock staff, by making sure that they get decent redundancy payouts… but NOT in favour of supporting Northern Rock Shareholders at the public cost, or in favour of putting up £4million per job to keep 6,500 employed.)

Posted in Economics, Investment, Northern Rock | 3 Comments »

The Bank of England and Northern Rock

Posted by Mark Harrison on September 14, 2007

Oh joy, Northern Rock has a “short-term liquidity crisis”, does it?

For those who haven’t been watching the newsfeeds, the Bank of England did something slightly unusual today (in the sense of, they did something they hadn’t had to do since they went independent about ten years ago) – they agreed to provide a set of high-interest funding to a bank.

Right, time for a quick bit of background.

A long time ago (in a galaxy far, far, away), there were these things called Building Societies. People paid into deposit accounts, and earnt some interest. Then, the Building Societies made loans to other people, and charged them a higher rate of interest. The difference paid for the running costs of the Building Societies, and any left over went back to the people with deposit accounts in the form of extra payments.

Then the Building Societies figured that, if they were banks, they could give the “any left over” to shareholders instead of savers. Oh, and by the way, have some extra options in the kinds of transactions they were allowed to do. A set of deals were stuck whereby savers got some “free shares”, and a lot more got sold to the general public and other financial institutions.

Nowadays, some of these make loads of loans, but rather than financing them out of savers’ money, they in turn borrow the money from other banks.

Normally, this has worked.

In the wake of the US market crash, however, the banks with loads of cash have gotten cold feet about lending to each other, and jacked up the rates at which they’ll do so… or just plain stopped.

This is when the Central Banks, in our case the BoE have to step is as the “lender of last resort”. The BoE does this lending all the time on an “overnight basis”, and again, nothing unusual is seen.

Where the Northern Rock deal is odd is that the BoE have agreed to lend a LOT of money, on a rather longer basis… the day after they said they wouldn’t. (I suspect that the Treasury and the FSA have been leaning on them heavily, and reminding them that while they are bankers, they are also public servants.)

Northern Rock got into this problem because, compared to many other lenders, they borrow rather MORE on the money markets, and fund their loans far less just from savers’ money.

Under the circumstances, the savers have been queuing up to get their money out in cash, and the shareholders have seen their Northern Rock shares worth about a third less than they were yesterday.

Frankly, if I had money in a Northern Rock account, I’d probably be wanting the banknotes today as well! (There’s no downside to having cash in hand over the weekend.)

Now, some journalists are writing about how Northern Rock shares are now “so cheap” that they’ll be taken over… Well, maybe.

Two possibilities:

  • It’ll turn out that Northern Rock has some seriously “toxic” loans, and that they’ll just sink under the weight of the bad debt that lives on their books.
  • It’ll turn out that Northern Rock are OK, but why would anyone pay a “goodwill premium” for them at the moment? As far as I can make out, they have no goodwill.

It MIGHT be worth buying some NR shares and hoping they rebound on Monday, but it’d be a “gutsy gamble” from where I’m sitting.

Overall, though, I’m more worried about the knock-on effects. The whole idea that the US sub-prime market failure will be “contained” is, well, rubbish. The liquidity (lack of cash) issues are already knocking onto the core of the UK banking system. Every lender is going to look at those rates, and be less willing to give out cheap mortgages, or high loans-to-value, or high income multiples.

None of that would help UK house prices carry on going up.

Personally, I don’t believe we’ll see a “fast crash”, but this might, just maybe, be one of the signs that things are going to be flat for a while again…

… cashflow properties, anyone?

Posted in Economics, Investment, Northern Rock | 8 Comments »

Yes, I read a lot…

Posted by Mark Harrison on August 6, 2007

A couple of years ago, Daniel Wagner interviewed me for “Property Habits”, and one of the questions he asked was how many books on “business and investment” I had.

At the time, I counted, and the answer was a bit over 100.

It turns out I missed a bookcase –  sorry about that, Daniel.

Anyway, as the number of books I own increased, I was running into the problem where I’d buy something that looked interesting, only to find that I’d already got a copy – so I had to start cataloguing.

My fiction, I just catalogued in a spreadsheet, but for the non-fiction, I was recommended an Internet-based tool called Gurulib.

The big advantage of Gurulib is that I can just type in the ISBN number, and it will look up the title, author and publisher for me – in many cases, even providing the cover art.

So, I can safely report that I now have (at least) 409 books in the “Business and Investment” section of my library…

… and you can see them here at gurulib 

Posted in Book Review, Building Businesses, Investment, Investor Psychology | Leave a Comment »

Market Crash – part 2

Posted by Mark Harrison on August 3, 2007

Interesting – had lots of feedback by email. (People – feel free to leave comments) on this one. I’m glad to report that the property investors seem to be a lot more grounded than the Web2.0 “pundits” who have all said the same thing, so time for a little overkill 🙂

“This time it’s different. You don’t understand Tulips. People will always want beautiful things.”

– Tulip Investor, 1636

“This time it’s different. You don’t understand Asia. People will always seek to trade.”

– South Sea Company Investor, 1720

“This time it’s different. You don’t understand land. People will always need houses.”

– UK property investor, 1880, 1989
– Japanese property investor, 1985
– Californian property investor, 2006

“This time it’s different. You don’t understand the Internet. It will change everything.”

– Tech investor, 1999

“This time it’s different. You don’t understand Social Networks. Kids will grow up with this stuff.”

– Web 2.0 investor, 2007

Well, guess what…

People still:

– want beautiful things
– want to trade
– need homes
– use the Internet
– generate their own content

Of course, none of these stopped the first four (eight) crashes…

… but heh, it’s your money.

Posted in Economics, Investment, SNO, Social Networking, Social Networking Optimisation | 5 Comments »

Making Movies (well, funding them)

Posted by Mark Harrison on June 28, 2007

I’ve had a couple of interesting meetings over the last week, that (for once) have nothing to do with Property or Insurance… but to do with making movies.

A friend introduced me to a Film Producer who is putting together a “project” which is going to cost about£4million. She’s already raised just over £3million of this, leaving her, well, nine-hundred-and-something-thousand to raise.

The film sounds exciting – sort of an Irish version of Lock Stock, with Billy Boyd and Vinnie Jones already signed up into some of the lead roles!

What I’d not realised about Movie Making, was that if you invested “a lot” you get listed on the credits as “Executive Producer”… and if invest “a fair bit” you get to spend time on the set (if you want to), and generally be involved with making the film…. plus the kudos of being able to say that you’re a movie backer.

Obviously, investing in movies is risky, a lot end up going “straight to DVD”, but at least with this one there is a professional sales agent involved, the Director has made four films previously, and the rest of the team have good track records.

If you have £100k to spend, and are interested, let me know, and I’ll put you in touch with the producer. Alternatively, a mate is thinking of putting together a consortium of people with £10k each to invest, who fancy a flutter. (Again, let me know, and I’ll pass on details.)

I’ve said I’m up for meeting the production team in the next couple of weeks!

Posted in Alternative Investment, Investment | 4 Comments »