Traders who sell stocks short know that the companies they target will not be happy. Now they are learning that the authorities may be similarly upset if the target is a financial institution that they might have to bail out.
In the United States, there are investigations of traders who sold Bear Stearns and Lehman shares short, as the authorities seek evidence that they spread false rumors. The fact the shorts were right on the merits has only intensified the pressure to find a way to punish them.
In Britain, after some bank shares plunged following the announcement of rights offerings, the Financial Services Authority, the regulator of all things financial, stepped in with a new rule, and a threat of more to come unless share prices stop tumbling.
Starting at midnight Thursday night, London time, short-sellers must disclose any net short position in a stock with a rights offering, if that amounts to a quarter of one percent of the company’s shares.
The F.S.A.’s announcement last Friday explained the problem:
“In current market conditions, there is increased potential for market abuse through short selling during rights issues. As a result, there has been severe volatility in the shares of companies conducting rights issues. This is potentially damaging not only to the issuers in question but also to confidence in the overall fairness and quality of the U.K. market. It can be particularly prejudicial to the interests of small investors.”
Rights issues are far more common in Britain than in the United States. In them, a company that wants to raise more capital distributes rights to its shareholders, allowing them to buy shares at a price discounted from the market price. Since the rights can be sold, that assures the capital will come in — unless the share price plunges below the price of the rights issue. Then things get dicey. If no one exercises the rights, a company must try again, or find some other way to raise capital.
The F.S.A. clearly wants to make sure the banks can get their money. If shares of companies announcing rights issues do not stop falling, it will do more:
“We are currently examining a number of options including the following: restricting the lending of stock of securities in rights issues for the purposes of enabling short selling; and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.”
Variants of those rules are in effect in the United States. You’re not supposed to use shares bought in a public offering to cover a short position, for example. But the disclosure requirement is still roiling the hedge fund world. Even when a short position is not based on a fundamental opinion — for example, shorting stocks in an index while owning an index future, a strategy aimed at capturing a spread in prices — disclosure will be required.
Moreover, there is no grandfather clause. So funds that value confidentiality but had short positions in place had to either make the required disclosure or hurriedly cover their positions.
Other traders were more than happy to seek to profit from such a dilemma, raising the price of covering a short position. HBOS, a bank with a rights issue that seemed to be in trouble, soared from 283 British pence last Thursday to 326 pence on Tuesday, although it has since slipped back under 300 pence.
It is worth noting that Britain has had rights issues for a long time, but never felt a need to impose these rules until the banks got in trouble. The government has already stumbled into acquiring one bank, Northern Rock, when efforts to reassure depositors backfired, and it has no desire to take on more.
Short sellers seeking to profit from the woes of major financial institutions might want to recall a comment attributed to Saul Steinberg, an American businessman who had a stock that was flying high — until he tried to use it in 1969 to take over Chemical Bank, then a major New York bank. Suddenly, the share price of his company collapsed, and the takeover try was thwarted.
“I always knew there was an establishment,” he said. “I just used to think I was a part of it.”
http://norris.blogs.nytimes.com/2008/06/19/its-not-nice-to-short-bank-stocks/
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
