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Monday, 6 October 2008

Having it both ways?

From a sidebar at our “adopted half-sister paper”:

Some of the most vocal critics of short selling have found themselves accused of double standards as the extent to which shorting is part of standard investment practice has been revealed.

The Church of England, Britain’s Liberal Democrats and John Mack, chief executive of Morgan Stanley, have all attacked shorting in intemperate terms.

Mr Mack told employees at the height of the panic over the bank that “we’re in the midst of a market controlled by fear and rumours, and short sellers are driving our stock down”. In a memo two days before the short selling ban was introduced in mid-September, he said he had raised the issue with the US Treasury and the market watchdog, and was telling shareholders and customers about the bank’s financial strength.

This did him little good, with clients deserting the bank as credit default swaps – the cost of insuring against default on loans – soared to levels indicating market concern about Morgan Stanley’s survival.

It also annoyed an important group of clients: the hedge funds that relied on Morgan Stanley’s prime brokerage, the world’s largest, to help them with their business – including short selling.

The Church of England and the LibDems were also found to be profiting from the actions of hedge funds that use short selling.

The Church is now reviewing its policy of lending out foreign stock, which aids shorting, although it defends its investment in the Man Group, saying it does not invest in the hedge fund manager’s products.

After the LibDems launched an attack on the Conservatives, the main UK opposition party, claiming they did not want a ban on shorting because they had accepted donations from several large hedge funds, it took only hours for the Tories to dig up the fact that one of the LibDems’ biggest donors is a hedge fund manager. The pension fund of members of the UK parliament, including LibDem MPs, also invests in hedge funds.


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