The Long and the Short of It

For anyone with any sort of equity investment - unit trusts, shares, pension funds, it will be a great relief to see the dramatic rise of the stock market today, partly as a result of rescue strategies of failing banks and partly because of the stop on ‘short’ trading. As many professionals have pointed out in the media, short trading has not caused the media crunch or the failing banks, but to laymen like me, they have - like an animal spotting a wounded prey - gone in for the kill. The injured beasts, the failing banks, may have brought it on themselves by their foolish behaviour, but the short sellers are not entirely innocent of helping them along a bit.

I picked up two expressions from my radio in the car yesterday. Trash and Cash; Pump and Dump. This apparently was the act of spreading rumours about specific shares. In the first case - a rumour could be spread that a company was doing badly; as the price dropped, so the short sellers would ‘sell’ a large batch of shares. In practice this would be borrowed from large institutions; this is a normal way of dealing in the financial world. As the price dropped significantly, the seller would buy back the shares; without every having owned them, he/she would make a considerable profit. The other way round would be for a trader to spread a good news rumour; I assume he would have already purchased these shares; as the price rose, so he would ‘dump’ them, having ‘pumped’ up their price, via rumour. This may not be the norm, and in fact, it probably isn’t, since short and long trading is normal, and financial markets, on the whole, work well with small ups and downs allowing them to tick over. And these practices would not have brought down a bank. It was a probably a justified lack of confidence that affected the currently suffering financial organisations. Pension funds and unit trust managers, were apparently taking their money out, to safeguard their own customers/pensioners.

Halifax BoS will now be merging with LloydsTSB, who are apparently, old fashioned bankers, who haven’t been getting involved with all the fancy means of parcelling up debt in things called derivatives. Well thank goodness for some old fashioned banking.

If confidence is returned to the market place, then things will quieten down, and most of us can sleep easier in our beds. Because the financial organisations need our confidence. Probably none of them could go down to the vaults and take out the large sums of money that would be needed in the case of a run on the bank. You only need to watch - for the 100th time - It’s a Wonderful Life - to realise that. But the credit crunch hasn’t gone away. Nothing changes the fact that many people borrowed money that they should not have done and financial organisations irresponsibly allowed them to do that. We are still going to have to learn caution in the next couple of years.