TWO pieces of good news this morning and it is crystal-clear they are related.
The FTSE 100 has stormed up 7 per cent, or more than 340 points, in the wake of the UK temporary ban on short-selling financial stocks.
As with all deeply logical moves, it seems stunningly obvious in hindsight.
Short-selling in banks and, to a lesser extent insurers, was legal but it was increasingly turning the stock market into a casino. And a casino playing with a rigged deck at that.
Part of the reason HBOS has fallen into the arms of Lloyds TSB was hedge funds deliberately crucifying HBOS’s share price to make money.
Such action was only previously illegal if you spread false negative rumours about a company to cause the share price fall.
But it was increasingly clear the hedge funds did not need to spread such false rumours to profit.
Purely the knowledge that hedge funds are sellers of a mountain of the stock, with a weight of shares for sale overhanging the market, is enough to do the damage.
No false rumours necessary. Short-selling was becoming a self-fulfilling prophecy.
Companies’ stock market capitalisations could be virtually destroyed almost on a whim, or just the knowledge there were enough speculators who were sellers, for whatever reason.
The difference is that with quoted financial institutions it was not just the companies themselves that were affected but the whole interlinked financial system that sustains us all.
That is why the FSA has acted in banning short-selling in financial stocks until 16 January and it is right to do so. Otherwise the stability of the financial system could be undermined as what Alex Salmond has called ‘spivs and speculators’ set about making financial institutions fall like dominoes.
There was even talk immediately after yesterday’s Lloyds TSB/Halifax merger announcement that the new enlarged group might be the next to be targeted.
With a core tier one capital ratio of 5.9 per cent _ the proportion of cash reserves underpinning a bank’s loans _ the enlarged Lloyds/HBOS is felt by some City analysts to be under-capitalised.
If Britain’s major bank rescue, another reason for the stock market’s leap this morning, turned out to be a flop that would be disastrous for the stability of our financial system.
Mounting speculation that the US government is shortly to announce a comprehensive solution to bad banking assets is also powering up European stock markets today.
If a credible plan is announced, together with the FSA’s decisive action on cynical ‘shorting’, there is just a hope the rally in stock markets will prove sustainable.
