Saturday, January 17, 2009

Translating Guido

In between spreading scurrilous gossip about the government and overusing the "c"-word, Guido Fawkes makes the occasional sensible post about financial markets. Unfortunately, he does so in the lingo of willy-waving trader types (he worked for a hedge fund before losing it all after falling out with his business partner, so this is probably the lingo he used in the office).

Femme-de-Resistance has asked me to translate some of these posts for the benefit of F&M readers, so here goes (linky):
Most of the losses occurred in the last hour of trading. The City is awash with rumours as to why.
The price of Barclays shares fell dramatically on Friday evening just before the Stock Exchange closed for the weekend. (It went back up again during trading in New York after the London markets closed). There wasn't any obvious piece of published information which explained this, so traders in their pubs and wine bars after a hard week's work speculated about what was really happening.
With the Treasury looking at a second round of bank bail-outs it looks like the taxpayer is going to need a lot of lube for another big shafting.
The simple and obvious explanation is that rumours of this government bailout plan announced near midnight, but presumably agreed earlier (you think that they work late on Friday nights in the Treasury?) had spread to some savvy traders. Given that Barclays took dodgy Middle Eastern money rather than accepting a taxpayer bailout last time round, it is likely that they won't do too well out of another round of bailouts.

The market was presumably already spooked because another bank that had been expected to survive without a bailout (Bank of America) had been bailed out by the Americans the night before. Saying you can survive without being bailed out now looks increasingly like hubris.
Admittedly it could just be an old-fashioned bear ambush now shorting financial stocks is permitted again...
Short selling is borrowing a share, selling it, and hoping to buy it back at a lower price before you need to return it. Basically, it is a way to bet on a share going down in price. Short selling bank shares was banned for the last three months for two reasons:
  1. Short selling is the fastest way for negative information about a company to affect the share price. So bank executives who wanted to shoot the messenger blamed eevil short sellers for falling share prices, rather than the fact that they were losing other people's money by the billion.
  2. Unscrupulous traders at hedge funds might sell bank shares short, spread malicious rumours to force down the share price, and then buy the shares back cheaply. This is fraud, and is technically illegal. The law is very difficult to enforce, because it requires pinning down the people who started a rumour. Because false rumours in a credit crunch could start a Northern-Rock style bank run, the regulators felt it was safer to ban short selling altogether.
Guido thinks that there is an outside chance that some hedge fund type was stupid enough to try an illegal short-selling trick the first day short selling was allowed. But he thinks (as do I) that it is more likely that a true rumour leaked out on a Friday evening.
*Guido covered his gilt short anyway. when fear grips the markets government bonds tend to rally. Will short gilts again later...
Guido has been short selling UK government bonds. Because the UK government can't go bust (it can just print money) the price of government bonds is driven by long term interest rates. Basically, Guido was betting that UK interest rates will go up a lot at some point in the next 10 years or so - presumably because he expects to see massive inflation. He is temporarily taking this bet off because he thinks investors will panic and buy government bonds (the safest possible asset). Even though government bond prices are driven by long term interest rates in the long run, they are driven by supply and demand in the short run, and he thinks that there will be a temporary increase (rally) in bond prices which does not affect the long-term downward trend.

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