At least when it comes to short selling in today’s troubled markets, the UK Financial Services Authority’s vaunted light touch has given way to a heavy handed approach that makes the US regulators appear light touch. The US regulators have been content to be silent spectators while outspoken short sellers attack key financial institutions. Ackman has brought the bond insurer MBIA to its knees and Einhort has put enormous pressure on Lehman without any rebuke from any regulator.
By contrast, the FSA in the UK has ham handedly pursued those who shorted the leading UK banks particularly HBOS. In April, I blogged about the FSA initiating a probe into short selling in HBOS shares. Since then, HBOS shares have fallen by almost 50% as a stream of bad news has come out of the bank. In late April, HBOS launched a rights issue at what was then a deeply discounted price of 275p. On a couple of occasions recently, the share price has dropped below the rights issue price threatening the success of this capital raising effort. The FSA stepped in earlier this month with fresh regulations against short selling in companies which are conducting rights issues. The new regulations require public disclosures of any short position exceeding 0.25% of the issued capital of a company that is conducting a rights issue. The FSA stated:
The FSA views short selling as a legitimate technique which assists liquidity and is not in itself abusive. But it is also the case that the rights issue process provides greater scope for what might amount to market abuse, particularly in current conditions. ...
In addition to the new disclosure regime, we are also giving consideration to whether it might be necessary to take further measures in this area. We are currently examining a number of options including the following: restricting the lending of stock of securities in rights issues for the purposes of enabling short selling; and restricting short sellers from covering their positions by acquiring the rights to the newly issued shares.
Much of this is silly. It is precisely when a company is raising billions of pounds of new capital from the public that investors need the genuine price discovery that is promoted by short selling. As it is, the FSA is dangerously close to complicity in a scheme to sell overpriced shares to the public on the basis of an artificially elevated share price. The FSA has been saved from this only by the ineffectiveness of its measures in propping up the share price on a sustained basis. After a short spike, the price has again been testing the 275 level.
Meanwhile, press reports state that the FSA is ending the probe that it launched in April – apparently, it is unable to put together a case against anybody in that case. If true, this vindicates all those who thought that the investigation itself was misguided.
I think what we are seeing is a clear regulatory conflict of interest. In its role as the supervisor of HBOS, the FSA seems to be putting the health of HBOS above the health of the capital market which it regulates.