Friday, December 19, 2008


"On the thirteenth day 'fore Christmas my true love sent to me thirteen institutions voting, twelve funds dismembering, eleven registrars counting, ten shareholders leaping, nine directors dancing, eight managers bonusing, seven brokers selling, six citizens complaining, five legal rules, four billion puts, three commission judges, two governments fighting and a Bank of Scotland in a Bear Tree."
On that day, last Friday, of the HBOS shareholders’ meeting in Birmingham, just over 1% of shares changed hands in both Lloyds TSB and HBOS, enough for their prices to fall by 17% and 23%? HBOS attained the same price as that contemplated on the same day by the Scottish Government for a new bridge over the Forth! How to reconcile such equations in our dysfunctional economy? Obvious, we can’t! A natural response to the events of the past year, credit crunch, then recession everywhere, is to say, as many commentators have said in various ways, that irresponsible hubris has been unmasked and now we face the unpleasant truth of fundamental realities. But, that is like imagining there is something more true about the wreck of a car crash than the dangerous driving that caused it.
In the morning of Friday a truck was careering on the M6. This caused three other trucks and a car to crash. Several people were seriously injured and traffic backed up for many miles in both directions. The M6 was closed outside Birmingham for over 9 hours northbound and 13 hours southbound! How many shareholders were unable to make it to the meeting we cannot know. It may have made no difference to balance of the vote, since that had been managed, counted and receipted days earlier.
When the six stalwarts of the Merger Action group lost their appeal case over competition law on Wednesday and gallantly decided it was now up to shareholders to carry on the fight for the bank, they may not have realised the vote was already in the bag. Nearly all the voting was booked before the 12th. 46.5% of all shareholders voted for, 8.8% against, the takeover merger. Votes collected on the day were less than 1%. Nearly 45% of shareholdings failed to vote at all? Possibly half of the bank’s missing votes were shares loaned out, voting with their feet by selling the bank short in the markets! That was the amount on loan in June and July when the bank’s share price plummeted at the time of its botched share issue. There is now a much larger issue open over Christmas, but this time underwritten by Government. When shares are about to be diluted by new issues, it is a glorious time for short-sellers - traders who prodit on price falls. Stock markets have fallen all year, misery for investors, but for short-sellers it has been Christmas all year long!
Stock lending may in normal times of orderly markets be useful for reasons other than short selling. But, in a long falling market, stock lending is overwhelmingly for short selling. This is when stock is borrowed by one trader for a few days and sells into the automated markets where FTSE index funds and last week’s short-sellers are buying. When the price falls enough that day or next day, the trader who borrowed can buy it back for less than he sold it, keeping the profitable difference. We do not know how much of trillions wiped off share prices are short-sellers’ profits, mainly gained by hedge funds. We can surmise it is substantial!
Imagine all the giving and swapping of Christmas gifts as if a loan that cost more before Christmas than you would pay for the same in the January sales. If you have the receipts, take them back to the shops in January, and maybe you can buy something more or something better for less and make a profit. Short selling depends on the ease and low cost of stock borrowing for short periods of a week or a month. Borrowers require lenders. Stock lending is a practice with 200 years of history. It is over-the-counter dealing, which means it is not transacted via exchanges. It used to be an honourable business of a bilateral agreement between two parties. In recent years it has increasingly become a marketplace brokered by intermediaries, a divisional profit centre with banks and fund managers sweating their assets, like blinkered racehorses blind to others. Investment funds appear comparable to landlords renting out buy-to-lets for a month only to get them back trashed, costing far more to repair than the rent and deposit!
All we know about stock-lending is part guesswork. We know it can account for more than half of trading on the LSE and other exchanges. We also know that lots of small sell orders can move a share price far more than one big sell order. The FSA’s code and ban on ‘naked short-selling’ is a sick joke. In Europe and the USA there may be nearly $20 trillion of securities owned by investment funds that are available for lending for a short time, a week say or a month, for a small percentage fee. As we saw on Friday, it takes only 1% of shares to be sold for the share price to fall twenty times this! Shareholdings of 3% or more have to be published. The FSA requires short positions of 0.25% in bank stocks to be reported to it, but will drop this requirement on the 19th January. Such restraints on short-selling are a joke to all involved! More serious embarassment awaits the stock lneders if the FSA publishes its report about them. This may not happen, however, since the funds are busy remontrating with the FSA to drop the publication idea for fear of exposiing their (or more likely that of the custodians and collateral holders) stock lending 'strategies' - surely another egregious joke at impoverished shareholders' expense.
Another compelling report would be about shareholder meeting votes and how these can be very effectively 'managed' by the banks' board. There are rules for restricting the voting by funds where there is cross-ownership. This is especially importan in takeover situations such as Lloyds and HBOS. The few institutions (about ten) who voted more than half of the votes registered at the Lloyd TSB and HBOS shareholder meetings all have small 1-3% holdings in each other. This is one reason why financial authorities in Europe and at times in the USA too do not like bankassurance groups like Lloyds TSB with Scottish Widows or HBOS with Clerical Medical where a bank owns insurance fund subsidiaries, whose capital may count in the parents tier 1 capital and yet can also risk this while also trading, including stock lending and borrowing of its parent’s shares. If small shareholders and the general public were to become truly aware of the cabalistic machinations available to, and practised by, large financial groups in organising the result of shareholders’ votes… sorry must go catch and stuff the turkey, happy Christmas to all, and a prosperous… and so on.

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