The ban on short selling implemented in many markets during September was necessary to restore order...
The ban on short selling implemented in many markets during September was necessary to restore order in the markets, although short selling was not really the problem that needed to be addressed, according to Castlestone Management's founder and joint managing director, Angus Murray.
He said among the unintended consequences of the ban - which was rushed into place after the collapse of Lehman Brothers and the wobbles at Goldman Sachs and Morgan Stanley - would be an increase in the risk profile of long/short funds, which have been highly favoured by cautious investors during the market turmoil of the past year.
The ban would even hurt some of those it ostensibly sought to protect, such as the merger arbitrage division of Goldman Sachs, which Murray said was "one of the best in the business".
However, he added: "Will it achieve the right result? If the right result is higher share prices and more stability, then yes - people will feel safer. The epitome of capitalism is anarchy, and if this demonstration of control had not been put in place, it might have turned from a rational investment market into wholesale panic. The regulator and the US Treasury have done a good job."
Murray said the lawmakers needed to tread carefully, citing the onerous post-Enron Sarbanes-Oxley law as evidence that the first response to a crisis is seldom the best.
While he said tighter regulation would help restore order, Murray challenged the assumption that short sellers had caused the financial crisis.
"Why there has been this problem is poor management, a lack of risk controls and disproportionate gearing relative to shareholders' equity," he said.
He pointed out that Ford had a far greater proportion of its share capital outstanding in short positions than either Goldman Sachs or Morgan Stanley when the ban was introduced, yet Ford's share price was down 26% year-to-date while Morgan Stanley's was down 41%.
"If you are investing in the current environment, you don't want to lose more money. But if the institutions are selling their index funds, the index funds have to sell shares to meet the redemptions, and financials are a very large part of these indices. So there's a lack of buying, index funds selling, and institutions deleveraging - these are the fundamental reasons for the falls in financial stocks," he concluded.
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