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Finance: Short Selling

Volume 704: debated on Thursday 16 October 2008

asked Her Majesty’s Government:

What plans they have regarding the short selling of shares in publicly quoted financial-sector companies after 16 January 2009.

We welcome the measures that the Financial Services Authority has taken on short selling against the backdrop of the present turbulence in the markets. The FSA will review their effectiveness and the general policy in this area, consulting where appropriate. An extension of these measures will be kept under review in the light of market conditions.The UK authorities will continue to work together to take all necessary steps to ensure the stability of the UK financial system.

My Lords, I thank my noble friend for that reply. Will he use all efforts possible to prevent an early resumption of short-term selling, which led to avarice and greed, the casino society and the destabilisation of certain companies? Will he also join me in congratulating the Prime Minister on his efforts to solve the credit crisis not only in this country and in Europe but throughout the world?

My Lords, I take pleasure in the second part of that question. It shows the importance of an overall strategy, which is being adopted and followed worldwide. Short selling is a relatively small dimension of the crisis in the markets, as I am sure my noble friend appreciates. That is why we have put restrictions on it—120 days—and we will keep the position under review, as I indicated in my original Answer.

My Lords, does my noble friend agree that right now, at a time of instability in the financial sector, the limitation on short selling is a wise and sensible move but that, in the longer term, short selling is quite a useful market pricing mechanism and that it would be a great shame if it were villainised as being the cause of the problems that we now have?

My Lords, I am grateful to my noble friend because she has helped to establish the context in which the issue needs to be analysed. There is no doubt that in the extreme turbulence in the market, short selling played its part in aggravating the problem. She is also quite right that in more normal times short selling is an indicator of the value of a company and therefore plays its part in the genuine valuation of company operations.

My Lords, first, I congratulate the FSA and the Government on bringing in the ban on short selling. I wish they had done it rather sooner, as was called for by my colleague, Vince Cable. Does the Minister agree—from the answer that we have just had, he obviously does not—that short selling, particularly in banks, is very dangerous indeed because it is effectively a bet against the taxpayer? He should understand that the hedge fund hyenas should not be allowed to do that.

Secondly—I disagree with the noble Baroness, Lady Kingsmill—I have been managing pension funds for 30 years; I must have done 20,000 or 30,000 transactions but I have never short sold and I do not believe that that hurt my funds. Is it not time that the Stock Exchange got back to its real purpose, which is to raise money for companies so that they can invest, employ and serve their customers? Frankly, short selling is a wart on the face of capitalism.

My Lords, I certainly agree with the noble Lord that the primary responsibility of the Stock Exchange is to raise capital for companies so that they can develop their operations. I agree that short selling can be—indeed, was—an abuse and a contributory factor in all the major economies to the problems that we have experienced. We will review the position because we do not regard it as a fundamental cause of the crisis; nor do we think that short selling is always and in all circumstances necessarily exploitative or a bad thing.

My Lords, what plans are there for the House to have the opportunity of a full debate on the crisis? Is it not a little curious that there has not been such an opportunity already? Does the Minister agree that, first, it would not be adequate to wait until the debate on the Queen’s Speech and, secondly, that the Government might find helpful the knowledge and views that might be expressed in this House?

My Lords, the Government certainly do find helpful the knowledge and views expressed in this House; they are expressed forcefully on fairly frequent occasions in my immediate recollection. The noble Lord will recognise that in this period there are great pressures on government business, and he will see how demanding that business is over the next six or seven weeks. I appreciate his point about the value of an economics debate and would personally look forward to one, so I shall relay it to the usual channels.

My Lords, I support the suggestion made by my noble friend Lord Marlesford. On the specific question of short selling, is the Minister aware—I suspect that he is—that there may be arguments against short selling and arguments, which were well put by the noble Baroness, in favour of short selling, but that it is all rather academic? In the real globalised world in which we live, a long-term ban on short selling would, quite simply, be unenforceable.

My Lords, the noble Lord is right that the definition of short selling is difficult to establish in legal terms. However, he will appreciate the obvious factor that—I refer to what the noble Lord, Lord Oakeshott said—warts on a face are more dramatic when the patient is ill. It is important that we restore the patient to health.