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back to article Bear squeeze blues: How to destroy a bank

With the banks apparently unable to cope with the markets anymore, the poor dears, short selling has been banned to protect them. HBOS is being taken over cheaply, even compared to what a mortgage bank is worth in this rotten market. Allegedly, "spivs" conducted a whispering campaign, and used short selling to make money out of …

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Stop

Ill Informed nonsense

I can't be bothered to correct some of the many glaring errors in this article, but I'll have a go at the main Express reading premise.

Shorting had nothing to do with the demise of HBOS. The laughable secret "Control Index" is usually refererred to as "short interest" or "% Market Cap on Loan", and information on it is widely available.

Here for instance: http://tinyurl.com/hbosshort

As you can see from that chart, HBOS had a short interest of less than 3% when it was forced into Lloyds's embrace - a negligible amount. Normal investors - pension funds, insurance companies, fund managers and even retail investors were selling. Of course the FSA had this data on their desks - but the politcal pressure from the tabloids and Gordon Brown was too much, so they spinelessly banned short selling.

Today, even with short selling banned, Bradford and Bingley have gone under proving what a nonsense this ban is.

Stick to headhunting.

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Drivel once more

Dominic clearly knows three tenths of naff all about risk management and market movement mechanics. Althought the conclusions of his piece are approximately correct, this is probably only by accident.

For example, his assertion that shorting per se is less risky is laughable. In pure volatility terms, the probability of prices going up or down within any given time period is about the same, but with a naked short the range of potential outcomes is far worse.

Consider the following questions. If you buy a share, how much can you lose when prices goes down? If you short a share, how much can you lose when prices go up? In the first case your losses are limited to the value of the share when you bought it (limited liability) but in the second, your losses are potentially unlimited.

EC

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Joke

I allways thought that

BSC stood for bronze swimming certificat

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Pirate

Inaccuracies aside...

It does dovetail quite nicely with an interested outsiders view that people with a firm grasp of economics have no place working in the financial sector.

Shiver me pension funds...

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Using shorter words

As it happens I *do* have a Bronze Swimming Cert :)

"Evil Consultant" shows an understanding of risk so limited, I assume he works for the FSA ?

I was describing strategies where going short and long were mixed for more efficient risk taking.

In any case, the fact that the worst case scenario in one strategy is higher than in another, misses the point big time. The *PROBABILITY* of the nightmare scenario is important as well, as is one's ability to get out of it as it begins to go tits up.

Prices can indeed bounce up, and it Evil Consultant had actually got as far as reading the title of the piece, he would have seen "Bear Squeeze", where the horrors of a naked short position knock on your door.

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risk

EC

While your statement

"If you short a share, how much can you lose when prices go up? In the first case your losses are limited to the value of the share when you bought it (limited liability) but in the second, your losses are potentially unlimited."

is technically true, de facto large jumps are much more likely to the downside than to the upside.

And I don't think Dominic argued that naked shorts are less risky, just that a long-short strategy is less risky.

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Spivs

So he's a headhunter admitting that he helped them do it ?

At least that's honest

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Heart

Patrick Byrne

Was right all this time! There was a conspiracy to destroy his company and as proof I give you the talking heads Chris and Evil Consultant. It's plain to see that they are in the employee of the Sith Lord behind all the recent banking woes.

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Anonymous Coward

Dick Cheney is to blame

Clinton put it right when he said that there was too much cash flushing around the US, that cash went where there was money being made, into property, but it meant they had to make more home loans and had to invent new ways to sell them. The no-income-no-job type loans as the most extreme example.

You want to know who to blame? Dick Cheney. Not short sellers, or over-leveraged banks even, Dick Cheney.

You can blame the treasury for hiding M3, or playing games to hide the real inflation rate, but they're just covering for Cheney.

You can blame the bankers for over leveraging, but they were trying to soak up the money Cheney's actions were pumping into the system.

You can blame short sellers or whisperers, but they are just vultures feeding on near dead road kill.

You can blame Bush for over spending and under taxing and not listening to Greenspan's repeated warnings, but he was never really in charge. He just reads the speeches they put in front of him.

Nah, Cheney is to blame. He knew the consequences of his actions, but reckoned it wouldn't hit him personally.

The attack on short sellers is just a cover, a deflection, so you don't look at the basic cause of this. Cheney!

IMHO, the $700 billion they plan to pump in will drive the dollar down and devalue dollar based assets, driving a few more banks to the wall, but hey, Dick is doing well out of this:

http://articles.moneycentral.msn.com/Investing/Extra/CheneysBettingonBadNews.aspx

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Great Article

Dominic has again produced a very clever insightful article. Clearly Chris and Evil Consultant either didn't read the article, have no clue, or more likely, both. I suspected that this short selling ban was somewhat cleverly constructed. The market was desperate for confidence. Bank stocks going down was putting them all at risk of credit downgrades which would make funding far more expensive and make their business models less tenable. The way the regulators engineered confidence was very interesting. They got lots of high profile people to complain about the demon of short-selling; then slayed the demon. It massively aided confidence, and the stocks bounced back to more realistic levels reducing the likelihood of credit downgrades. Whether short sellers were responsible or not was largely irrelevant (and I think they weren't responsible in the same way Dominic thinks); what mattered was the injection of confidence.

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Flame

They profit, we repay

Who gives a toss whether the short-sellers were really to blame - what I want to know is why Gordon Brown has not come down like a ton of bricks on the bastards who have been making multimillion pound "bonuses" for the last few years, but now claim to be incapable of saving their investors' money.

Never mind stealing, sorry, "borrowing" more money from the low paid who can ill afford it, how about raiding some of the executive slush funds and bank accounts for once?

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Bah!

Dominic,

A long-short strategy may have been what you MEANT to describe, but sadly it wasn't what you actually did describe. To whit...

"Hedge funds have made respectable money shorting financial stocks and using the proceeds to go long on energy shares..."

What you actually described was a sequential taking of one position and then another, which is not going to enhance your risk profile. In common with much of the rest of the article, your arguments are weak and confused; although as I said, your conclusions are more or less right.

Your title "Bear squeeze blues: how to destroy a bank" makes little logical sense on the grounds that the banks are not being destroyed by getting squeezed on short positions. Others have taken short positions in them and are not, in general, getting squeezed as a result. So why the title? Op ed license or just bad journalism?

Furthermore in the final chapter you try to argue that notification of short positions will move markets against you (i.e. up)...

"Normally one tries to avoid being conspicuous, since the more you buy or sell the more the market learns about you, and moves the prices against you."

...which wrong under the vast majority of circumstances. Remarkably enough, selling activity tends to drive prices down and buying tends drive prices up, and unless you're talking about an illiquid, highly regulated or shallow market then the market is not going to take some anthropomorphic "position against you" because no one actor is going to be able to reverse sentiment most of the time.

EC

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Stop

"Massively aided confidence"

you say massively aided confidence, I say created a short term false market.

Oh yes. The FTSE closed at 4,880.00 before the ban. Today it closed at 4835.74, and 5 banks went titsup today. (Fortis, Glitnir, B&B, Wachovia, Fortis). All this with no short selling!

+1 to Evil's comment about Bear squeezes - That would mean the price of the share was going up, not down. But let's not let reality get in the way of a crap story.

Chris/Darth Sidious.

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Alert

FTSE close

Oops, make that 4818.77.

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Moving the Markets

Evil, For reasons of space and focus I did not explain about "Market Impact Modeling", which is the craft of trying to execute trades without driving the price up (or own) more than is necessary.

Google on Market impact if you don't believe me, it's bog standard finance.

If you'd worked on a trading desk you'd know that you don't want the market to know that you are buying a load of X, because they will put up their prices. That's not anthro-anythin,g it's human nature, supply and demand.

If the market works out that you are going to sell more, then it is going to cost you, some people have profitable trading strategies based solely on their model of the inventory of others in the market.

Again googling on inventory and market microstructure will make you better informed.

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Aktualee Pimp boy...

Googling supply and demand might be more productive for you.

Market makers may try to move prices against you if you are trying to sell stock. That's true if you hold the stock and are trying to sell or whether you have borrowed it and are trying to sell.

So what's your point? These are just issues of trade execution - that's why people pay code monkeys to come up with algorithmic trading methods. You can even buy solutions more or less of the shelf now.

The disclosure you are looking for (as I mentioned above) is a combination of the %MCOL and the utilisation (how much of the available to borrow stock is actually borrowed). This is easily available information. It would be a very naive (and short lived) trader who took a large short position in a stock with a high %MCOL and a high utilisation. The mechanism of that trader's execution would be a short (or bear) squeeze.

Stick to recruitment - how's that going for you?

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Unhappy

> They profit, we repay

I wish.

Ideal outcome:

Parliament (and Congress, just to make sure we get most of the Anglo-Saxon system) legislate that bonuses in the finance industry, over the period of the "boom" (last 10-ish years, I'm thinking) shall be retrospectively taxed at 100% (or higher, to account for inflation).

It would be claimed to be unworkable, it would be lobbied out of existence even if Brown (unlikely) or Bush (very unlikely) considered it.

Nice to dream of though.

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Question of Principal - GIGO You Know

You can't blame short selling alone on the current World Economic Crisis...You can really only blame the US which sets the standards for market rules in most of the Western World. I'm from the US and I can tell you first hand that certain people have really screwed up ideas about "business"...The entrance of the terms "vertical", and "short term returns" (among others) really fucked up college kid's learning and resulted in a generation of businesses that don't give a damn about pragmatic practices or sustainability...

This is best demonstrated in the practice of short selling (which is why it has such a big media focus lately), where you sell something you don't own...it's OK if it deals with fake money and spreadsheets but in the real (non-virtual world) it doesn't work:

Selling things you don't own was historically called a scam or a "con" - but because things like short selling can massively manipulate numbers on the Exchange then they are OK... Hopefully we all know better now. Sort of like selling uncollectable debt to someone... Lots of lessons in these challenging times - hopefully someone will listen and learn.

Bad policies, bad results. It hasn't ever changed and never will. (You computer (IT) people often refer to this principle and GIGO).

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perceptive writing, well crafted

@"Chris," Did someone step on your dork today? Perhaps you are expecting an essay which would be a little less complex and multidimensional.

Regardless, the rating agencies' involvement in the hurricane of blame is not to be underestimated. In fact I think an entire article, or perhaps even a series - could be written about them. The point is that their role as hapless deconstructors of obfuscated risk is correct; however, coupled with their natural posture as structuring-addiction enablers makes their talent disadvantage look a lot more like a young Darth Vader in nursery school, than a suave David Niven as a catburgular.

That is, they bungled, lied, stole, lied more, denied it all, hid, went out for cocktails, the lied some more. Then they pretended to be good at math. They really want to be evil, but they're just so...well, incompetent.

Here is what Dominic's article covered with such elegance: that all the moving parts in the financial markets are related, and their dependence is complicated (got that, "Chris"?)

Keep up the good work Dominic.

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Dead Vulture

Patrick Byrne

Do I faintly hear the voice of Patrick Byrne saying "I told you so"?

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money -> ? -> more money

The problem I see is that money in the market is not 'real' money, it is more like play money or at best potential money. Might as well be WoW golds. It's only when you cash it in and convert it to currency that it gets any real value. There is a boundary between the real world and the market world. Somebody mines iron ore, somebody buys a car. In between lots of people make money. some of it through the market. BUT the money originates from the iron ore, or the oil or the cotton or the oranges or whatever.

Shares are (supposedly) based on a fraction of a real world enterprise. If you gamble in Futures you are betting on events in the real world and how they effect the world of the market. Short selling however never crosses into the real world. Pension fund manager A could short sell to B, B may later sell, A could buy from B and cover the original sale. If he's done it right A has made money.

A trading circle has been completed but nothing has happened in the real world. Except, and this is the important bit, Market 'Play' money has been converted into real money. Money has been taken out of the market without a link to real world events. If it where not a nett money making scheme nobody would bother so the generally the money is removed from the market by short selling. That money has to come back into the market somehow, sometime. I think that this is the money GW is trying to get congress to pay. This is the $700 billion that has come out of the market in the past few years and been spent on city bonus parties, cars, penthouses and huge estates in Palm Beach.

They say that if two antique dealers were marooned on a desert island with one Sheraton writing desk between them they would both make a good living. It's clearly absurd. What we now have is that two traders can be marooned on a desert island with nothing but a stack of B&B shares and both make an excellent living. somebody is going to pay sometime and it's us, now.

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On Short-termism

See Yahoo/Icahn for how individuals absolutely do not care if a market gets screwed as long as they get to do the screwing.

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Dead Vulture

Interesting

They guy has tried to explain complicated stuff, and he's done pretty well. I don't know if HBOS and B&B got shafted by short sellers, but on my desk we heard the same stories Dominic did.

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DR
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blame short selling?

umm, I think it's been shown and proven time over that short selling had bugger all to do with the HBOS merger.

there was hardly any short selling before the merger.

and hardly any short selling in lehman bros before their collapse either...

also banning short selling to save banks was perhaps the biggest hipocracy since banks are generally the biggest short sellers.

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Stop

Taxes on bonuses etc

There has been a lot of talk lately about taxing bonuses and taxing the rich in general, whilst this is an admirable goal let's not forget the reality that exists.

The Inland Revenue employs a lot of accountants and I am sure some very good people but on the whole the best accountants and tax lawyers exist in the private arena not in the government sector because like anyone intelligent they appreciate their take home salary can be tripled by servicing the wealthy.

This therefore means that these folk are able to employ their best tax avoidance (not evasion because that's illegal) strategies to ensure their clients pay the least amount of tax, in fact on paper a large majority of millionaires etc actually appear to earn less than day to day workers in the financial sector.

Who always end up bearing the brunt of these government knee-jerk tax rules? The middle-class those earning about £50K which to be honest is not a hell of a lot of money, even those people earning over £100k aren't that well off even though that may sound like a lot of money to most people.

Anyone earning over at least £200k can start to afford the best tax people and lets not even think of those folks earning over a mil.

The mob always screams for blood but 9 times out 10 its the wrong people who end up bleeding to appease the media frenzy and the governments pandering to over-reactive savants.

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Alien

Sadly

Sadly this is not the first in countrywide bank failures nor the last as the great Republican Elephant stinky myth doo doo droppings of the mysterious all enveloping self regulation controls the entire free capital Wall Street Market system they claim .

Episodes of country wide bank failures have occurred in 1991 both in Scandinavia and down under in Oz in the same year as well both happened as a result of some very stupid decisions at both the Board and top ten bank managers concluding in 1986 they have an infinite amount of funds to lend to all comers with zero assets to spend however they please and there are no overseer lending comptrollers or regulators to worry about period to say no this is both stupid and dumb and the man authorising the lending is an absolute idiot/moron .

The Scandinavian one cause and effect can be easily googled/yahoo'd under "Scandinavian Banking Crisis" it's chief problem came from the massive cash inflows from North Sea Oil revenues flooding the banks with lots of cheap short term cash which they promptly lent long on zero assets which cooked the home values to new ridiculous heights of insanity . When the price of oil fell so did the banks source of lending departed , the final nail was the implosion/destruction of the old Soviet Union killing the bulk of the countries export income revenue stream oops banks were insolvent customers unemployed unable to repay massive lending debts . Scandinavian government solution take over all banks to protect all savings and depositor funds and refinance debts on other terms or take over all securities to be sold off at a later more favorable date at non fire sale one cent in the dollar terms and then cancel all shares on issue as they were held only by idiots and slackers thus end of bank crisis problem .

In Oz , the Bob Hawke Labour Government deregulated all banks promptly returning the 3-5% security deposit held by the reserve bank and said your big boys now no more lending guidelines from us . The result a lending explosion for virtually anything and everything without exclusion or security , resulted in a massive speculative property/commercial asset take over kaboom , by 1990 the banks could no longer conceal the very rotten non existent foundation they stood on. End result 1991 all State governments were left holding an empty bag of some 30 billion dollars of bad debts on non existent worthless securities and a rather lot of irate depositors and two of the oldest Trading banks in the land teetering on the edge of insolvency.

Oz solution sell off the state banks depositors and force merger with the federal government bank but keep the bad unpayable assets . The commercial private banks had to find their own solutions which was basically a massive credit squeeze and sell down all drawable assets and sack staff , one bank actually withdrew the entire excess in its pension fund which in today's financial collapse will require a massive capital injection to make it fully funded now.

The American Bank collapse had it's roots in the Phil Gramm law of 1999 under Bill Clinton , it was designed to facilitate bank mergers based on debt financing take overs however he being smarter ensured the Federal Reserve kept all US banks under a very tight leash until he left office on January 9th 2001

The Republicans in the US are all basically very greedy money vampire piglets and denialists in stance and nature as they tightly controlled US congress from 1994 until 2006 .

George Junior had known from about 2006 onwards all was very sick as between 2001 and 2006 numerous banks had been taken over by FDIC due to crap elephant doo doo lending as he chose self control banking which we all know never works as who watches the policeman non other then himself which means rafferty rules the roost. As a sidebar they all blame Bill Clinton as he signed the Gramm bill into power even though they left a huge pile of crap lending elephant doo doo in the White House and all over Capitol Hill in 1992 thanks to one GHW Bush who brought down the bulk of the thrift banks or S&L's. Interestingly they still blame both Bill and the very wise Jimmy Carter for that pile of stinky Elephant doo doo too , even though Bill cleaned up the stinky mess on the carpet and made massive inroads into the countries external debts , which junior Bush has promptly doubled!

Who ever takes over the oval office on January 10th 2009 watch all the repukes blame the current financial crisis on the new comer without fail .

Obama appears to know what is required and the age of the super dooper pooper scooper over paid CEO is coming to an end if he wins since the government being the largest shareholder will out vote every one and say no and will veto pay rises and ensure an equitable return for all taxpayers and zero current corporate tax fraud KPMG style as they get the Audit control committee too.

It certainly looks like the entire US of A is covered in one massive pile of stinky republican elephant doo doo higher than Mt McKinley , which will in turn wipe out the rest of the world as it stench will blow every stock market in every continent over if not removed properly .

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Unhappy

G.w.B

It was George W Bush who a few days ago drawled on national TV:

'...an ahh maintain that amerrrcn dihmahcrossy is the behst sestim invehnnid...'

<apols to any Texans reading this - its very difficult to accurately transcribe a Texan accent!>

Basically he is promoting the virtues of a system whose basis is greed and lack of basic respect for others, neatly described by Dominics article.

Oh hang on, this is the president who orchestrated the bombing and occupation of Iraq based on non existent evidence of a non existent threat for purely selfish political reasons. Riiiiight, now I see where it started going wrong....

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Anonymous Coward

Just a point of view

I know absolutely nothing about short selling, I know absolutely next to nothing about the solutions needed to solve this crisis.

I do know in my own life, I don't rob Peter to pay Paul. If I can't afford to buy a new oven this month, I have to wait until I can afford to buy it.

I also now know that if I were a banker, I can rob Peter to pay Paul, and if I can't afford an oven at the moment wtf I'll just whip out the old credit card and max it on a lot of other stuff in the shop that takes my fancy, when the card's done I'll just run up an unauthorised overdraft approximately about 10 times the amount I'll ever be able to repay in my lifetime.

When that all goes wrong and I'm facing utter destruction through my own actions, I'll just ask my local Godfather for some help in a new scheme/scam and then go back to old ways of conning the public and not giving 1 iota for them.

Just like a banker, methinks it's not short selling, it's not even a credit crunch, not much to do with the markets, it just piss poor financial planning, just like WE ALL do in our own personal lives.

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Legality

It is no use blaming traders for short selling - they are supposed to make as much profit for thier companies and clients as possible. As long as the methods they use are legal, they are doing their jobs. It is up to governments and regulatory bodies to create viable legal infrastructures that maintain stability and an environment in which people and organisations can borrow or invest money.

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@Chris

"5 banks went titsup today. (Fortis, Glitnir, B&B, Wachovia, Fortis). "

That would be four banks then. And I'm not sure I want to trust your maths on anything else.

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Stop

Short sellers = Scape goats

Short sellers are being made scapegoats in whole of this debacle. Why did short selling take out all institutions one by one. They work on information not assumptions. The total shortfall with UK banks is 650 Billion in outstanding obligations. This is = to approx 50 Billion Pm.

The system is not generating anywhere near 50 billion per month. As cheap money is not available to repay these obligations unless govt gives banks money the situation will get worse.

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Black Helicopters

Where were the controls?

[This turned out to be a rant. You're free not to read it]

I'm amazed by the synchronicity of event in UK and US. It started with politics: both sides attarcted "leadership" which emerged rather quickly not to be too bothered about reality as long as it didn't interfere with their chums emptying the trough as fast as they could now they finally had the chance. Both sides relied extensively on spin, lies and as little transparency as they could get away with (whilst claiming to fight for the opposite, of course) and as much abuse of the nation's controls as they could muster (look up "bush signing statements" if you want to see just how much an alleged democracy was turned into something else entirely by Bush).

The rest is textbook stuff. Use or stage a calamity to scare the population into being quiet, destroy living conditions and schooling so that the average voter is far too busy surviving to think and keep it going for as long as possible. Cooking up a war is also a good way to push some tax revenue into the hands of the small cabal who sell weapons without too many objections, it's "fighting EVIL", innit?

That also needed hollowing out regulatory control. Start checking just who exactly limited the regulatory budgets. Who ensured the competent people disappeared? If you think only rating agencies employ cheap staff, you should look at the UK National Audit Office who drafts in consultancies, who (obviously clever enough not to derail the gravy train) employ the most junior people for investigations. The advantage of juniors is that they can also be overruled very easily, in the unlikely case they would see through some of the scams at, say, the ID Card project. The strategy worked, and where it threatened to fail, key people were given new jobs, designed to compromise them enough to make sure they wouldn't speak up either. It's everywhere. Health, military, finance - no wonder both nations have almost gone to the wall.

Here's a simple question: does anyone remember just where T Blair went to work, and how well they have done out of the crisis? If that surprises you you haven't been cynical enough, and you may take this as a hint that the crisis wasn't so unexpected as it appears (OK, we're now in conspiracy land, but you must admit that coincidences stack up in a staggeringly convincing way).

The trough is almost empty now. A last moment effort chalked up another loan on the tax payer's bill ($700bn, "because it's a nice big number") so that the bad players can escape in luxury with a nice pension, probably to another country. I wonder what this in the UK will look like, but the players are already positioning, including the returned master of spin, Mandelson, who will probably be tasked with explaining that it wasn't the government's fault and that a more active celebration of Guy Fawkes' day to get some people to take personal responsibility won't help (mainly because they have already retired to another country).

What these people have done amounts IMHO to treason. There is no other word that comes close to describing the full scale of what they have been doing for the last 8 years, and the misery that they have caused by their selfish behaviour. This was really treating people like money producing cattle.

I'll have my coat now, thanks, I have a plane to catch. The last one out doesn't need to bother turning off the light.

The lights will go out all by themselves.

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