17th January 2018

Stop the shorting monster

A short sale is a transaction in which an investor sells borrowed securities in anticipation of a price drop and is required to return an equal number of shares at some point in the future. 

A short seller makes money if the stock goes down, a lot of money if it drops a lot. 

Shorting is legal. But is it morally acceptable?

This is a question that many outside the financial services industry will be asking, especially when there is such a baying for the blood for directors’failures, political failures, huge salaries being paid for gardening leave and in particular the huge sums of money being owed to small contractors and in fact to Carillion by those it worked for.

Hedge funds have made paper profits of hundreds of millions of dollars over the last year. Shorting of Carillion stock will have done their bit to boost the coffers.

The thirty thousand small firms in Carillion’s supply chain now face an anxious wait to see if they will be eligible for any government help to pay an estimated £1bn of outstanding bills. Many will fail, quite possibly because without the cash they cannot pay their tax bills on the 31st January, but the hedge funds will have no such dilemas

Rudi Klein, chief executive of SEC Group, which represents thousands of small businesses, said it was “inexcusable” that Carillion had “imperiled the supply chain”.

Hedge funds shorting will not have helped.

Conservative MP Bernard Jenkin amazingly came out with that great stock phrase so often used in times of collective failure, on Tuesday’s Channel 4 news, that he would be calling the company’s management, employees and customers as part of a bid to “learn lessons” from this unholy governmental fuelled mess.

What!!!!! 

Why not the hedge funds too, who could see only too well that this was coming ages ago? 

I think all those small businesses who worked on Carillion contracts that had payment terms of 120 days may think that this is too little too late. 

Perhaps now is the time for the FCA to look at shorting and considering banning the practice as shorting just rubs salt into a very large and gaping Carillion wound and will continue to do so when this type of thing happens again, which it will.

Just a thought.

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Comments (5)

Nonsense. Short selling is a market action that disciplines bad management. Remember there is the other side to the transaction - a buyer. The speculator is necessary to take the slack out of markets. By all means take a deeper look into why so much of this goes on, but you'll always end up at government and bureaucratic failure - not with slack regulation - but with money printing, credit expansion, ZIRP, mis-regulation (on an apocalyptic scale). For God's sake DO NOT petition the Financial Catastrophe Authority to do anything. They'll just mess it all up - again.

Steven Farrall   17/01/2018   11:23
Buying and selling of securities in the secondary market has minimal impact on the payment of suppliers, it is a well-run PROFITABLE business that does that. If Carillion was well run and PROFITABLE the supply chain would be intact and the shorts burned.

See her for a reasonable argument for short selling;

https://www.ft.com/content/cb22ac84-3cdb-11e0-bbff-00144feabdc0

and see here for another view and the possible role some of the other actors in this event;

https://www.zerohedge.com/news/2018-01-16/carillion-collpases-who-blame


Could be just that some of Bastiats unseen consequences of economic actions have come to light.

Stuart R   17/01/2018   12:40
Stuart. Yep. Seconded

Steven Farrall   17/01/2018   12:47
Thanks Steve,

Sadly, our comments are wasted on most of the zombies I our society, they just want their Soylent Green/Soma (QE, ZIRP?). Cannot blame them for the predominant education system that most of us go through but with the advent of the web there is now no excuse to be ignorant to what is going on.

Stuart R   17/01/2018   13:06
What's happened at Carillion has nowt to do with short selling. The practice of such is a way of keeping supply and demand in balance, amongst other things.

What concerns me about the Carillion affair is that the banks, who must have seen this coming, gladly financed small suppliers to Carillion. Now they're asking those suppliers how exposed they are and considering reducing/cancelling facilities to them on the back of their own stupidity and/or negligence!

Richard Brown   17/01/2018   18:45

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