There are, nevertheless, times when there is legitimate cause to restrict price discovery. I’m certainly overjoyed about one form of the Libor price fixing. Libor is a measure of what banks will lend to each other at. Back in the dark days of 2008 banks would not lend to each other. Libor was thus rather high, if it existed at all, but the banks continued to report numbers which were little out of line with the mundane and ordinary. A bit naughty perhaps, but surely preferable to the world’s reference interest rate being quoted as infinite.

33 thoughts on “Elsewhere”

  1. You cannot short-sell LIBOR.
    One can choose to lend at LIBOR+x% or borrow at LIBOR+y% but the misreporting of LIBOR, encouraged by the regulator, is nothing to do with the increased “efficiency” of the market due to short-selling.
    Before Gordon Brown the BoE had quietly managed the banking market without a single bank run in more than a century (even when there had been systematic fraud in a not-ethnically-English bank). Under Gordon Bennett’s new rules the BoE had to condone/?encourage mis-statements to avoid a bank run and the son of a New Labour Peer caused one by misleading TV on Northern Rock.
    It is not univerally true that banks would not lend to one another in 2008 – there were vast sums lent on the overnight inter-bank market, but at rates that reflected perceived risk. Banks that needed to borrow reported their actual borrowing rates but Banks that did not need to borrow that particular night were able and encouraged to report the rate at which they would have liked to borrow rather than the rate at which they would have been able to borrow,
    That is probably as clear as mud – maybe BraveFart or Chris Miller can clarify.

  2. Another bit where economics should be more likened to weather.
    Back then I did some investigating and described Libor to colleages as being like the outdoor temperature. You can no more fiddle Libor than you can fiddle a thermometer. In the absense of anybody measuring today’s temperature you can report the last temperature you measured, or what temperature you would expect it to be if you had measured it, or what temperature you would like it to be.
    But the Libor “fiddle” was essentially a case of The Boss demanding today’s tempertures when the thermometer was broken.

  3. Not sure if that wasn’t exactly what Tim was trying to say, john77. Of course one could neither short or long Libor. It’s a report, not a commodity. But in a stock-market sense, it’s like asking dealers what they’d like to be dealing at rather than the actual market price. In a falling market it’d include the offers didn’t attract bids & in a rising vice versa. Either way you’d be lagging whatever the market was actually doing.
    Of course brokers are rather brighter than bankers & know that all transactions have two sides.

  4. “Shiller’s great example was the US housing market boom. It’s very difficult, impossible actually, to short sell houses.”

    Yep. Movie “The Big Short” was about Michael Burry’s search for a way to short houses.

  5. The difference with housing is we would like supply to react to pricing (which it does slowly and badly). Shares do zip in response to pricing, they just sit there. The number of shares is the same as before when prices move.

    Physical supply of rice, professors of practice, and scandium may respond more rapidly to price changes, and thus short-sellers could help adjust supply by anticipating reduced future needs, but things for which supply does not react to price changes are not going to find their supply reduced by short speculators any more than they find it increased by long speculators.

  6. “The number of shares is the same as before when prices move.”

    Not strictly true, that. Individual firms can, and will, issue more shares, or will carry out stock splits.

    For the market as a whole, new firms will list.

    So, in rising markets, the total number of shares available will increase, probably much faster than houses can be built.

  7. When you short shares, you borrow some of someone who owns them and sell them. At some point you have to give them back. But each share is identical.

    Try doing that with houses. If someone borrowed my house and I was either forced to leave it or move into a place that was technically identical, I would not be overjoyed. My barrel is special to me

  8. Diogenes; if (!) you were able to short naked, then the liquidity (supply) in that share increases.
    If you have to borrow, then the liquidity also increases, as the stock lender was long, and by definition wasn’t going to sell into the market, as otherwise, wouldn’t have been thinking of lending.

  9. The thing that puzzles me is that even the libor market was self-healing. Banks did not enter into transactions with parties they did not trust, regardless of the fixing of the rates.

    I am still not sure who really got harmed by this. Was the whole furore just the fury of the regulators that they had been duped and shown up to be useless? Perhaps some individuals on libor-based mortgages might have paid a few pounds more some months.

    Did anyone make out like bandits and make serious money from the rate fixing?

  10. The banks had trading desk, attempting to make profits from the spreads between actual interbank rates and the reported rate.
    Those desks were independent of the treasury function of their respective banks.
    Nothing really wrong with that, as far as it goes, but; the LIBOR desks could get so good at making profits that the rate the treasury groups would be paying when they needed to borrow could be damaging to the bank itself. I’d have to assume that the profits from the desks would be potentially quite volatile, and that once profits got made, the desks became powerful within the banks, making it difficult for the boring old treasury peeps to get control, and it was the treasury bods doing the reporting to the BoE, not the desks. At a guess, LIBOR itself would become more volatile, increasing the risk of interbank lending itself.
    Seems that there was a possibility of a systemic crisis building just there, regardless of anything else going on at the time.

    Now, that’s all fine in itself, but there doesn’t seem to be any collusion between the treasury group and the desks to make LIBOR better for any bank’s borrowing requirement. So my suspicion is that the charges thrown around were the only ones available that could obscure the failures in the regulatory regime. Which would be handy for the PM, who introduced it while Chancellor, particularly given what else was going on at the time.

    Did the guys on the desks make out like bandits? Yes. Were they doing any better than any other particular group? God only knows, but probably not, over time.
    Did anyone suffer losses because of it? Possibly, given the use of LIBOR as a base in derivative contracts. But then the rate was known to the counterparties anyway, who are big boys, as otherwise they should not have been dicking about with derivatives in the first place. There does seem to be a distinct lack of identified parties with actual losses in the reporting.

  11. Ducky,

    future supply as reduced expected prices keeps suppliers out of the market. Of course short-sellers can increase virtual supply almost infinitely in the short term (vide Porsche/VW).

  12. Big, I am puzzled by this. Are you saying that short selling of shares, which reduces the share price of a particular company, inhibits other suppliers moving into the part of the market covered by the share being shorted?

    If you extend this into commodity markets, we have the example of Bunker Hunt shorting the tin market. Tin suppliers kept up production rates until Hunt was bankrupted – he was unable either to buy back all the tin he had sold or to make delivery of physical tin.

    This example suggests that your reasoning might need adjustment

  13. BiG,
    Prices or returns? Or volume? Liquidity has it’s own value. Also, first buyer doctrine. A firm selling equity, or a builder selling a house, only receives cash from the first transaction.
    And what about buyers? If they expect future prices to be lower, they’ll delay (save) or substitute as well. But, if they can usefully do neither, they’ve just got to eat it.

  14. Well spotted Tim. Somehow I mixed up Hunt’s attempt to corner the silver market which ended in his bankruptcy through court action and the shenanigans of the International Tin Council attempting to shore up tin prices

    “The sharp recession of 1981–82 proved to be quite harsh on the tin industry. Tin consumption declined dramatically. The ITC was able to avoid truly steep declines through accelerated buying for its buffer stockpile; this activity required the ITC to borrow extensively from banks and metal trading firms to augment its resources. The ITC continued to borrow until late 1985 when it reached its credit limit. Immediately, a major “tin crisis” followed — tin was delisted from trading on the London Metal Exchange for about three years, the ITC dissolved soon afterward, and the price of tin, now in a free-market environment, plummeted sharply to $4 per pound and remained at that level through the 1990s.”

    Amusingly neither example deals with short sellers but I seem to remember the pressures building on both the Hunts and the ITC as a result of shorters. However despite this market activity, supplies of both metals did not change significantly although demand did

  15. Diogenes,

    I understand short positions are not generally held for long, so the impact on the decisions made by a company mature enough to list is likely to be negligible.

    The supply of shares in any company is fixed. There is only 100% of Apple to go around, thus allowing or prohibiting short positions has no influence on supply, only on liquidity and price. The artificially-inflated supply can in fact get you into a heap of trouble as the Porsche/VW incident illustrated.

    Likewise the supply of housing is essentially fixed – the rate of increase in supply is not particularly elastic as long as (1) regulations and land availability put a cap on building, (2) prices exceed the cost of new supply. Quite apart from the fact that anyone lunatic enough to believe they can get rich by going short housing had better set up a political party dedicated to burning down the planning regs, a short position on housing on any scale other than decades is going to have to move future price expectations massively to influence supply (in what is obviously the wrong direction for the present).

  16. Ok BIG, Ducky has tried to tell you that the supply of shares is not fixed and can be altered. Tim and I have given examples of how attempted price manipulation had no influence on supply of tin and silver. I give another example, the company IQE was hit by short-sellers late in 2017 and this shorting still continues today over 15 months later and the company has not adjusted its output in any way as a result. Its turnover is increasing. This is a bit more than a short-term thing and it is affecting, or not, a wafer manufacturer, where timescales are measured in minutes rather than years.

    However, you refer to some incident involving Porsche and VW where short-selling led to increased supply – at least this is how I interpret what you are writing here:

    “allowing or prohibiting short positions has no influence on supply, only on liquidity and price. The artificially-inflated supply can in fact get you into a heap of trouble as the Porsche/VW incident illustrated”

    The second sentence seems to bely the first? If shorting has no impact on supply, how can it lead to an artificially-inflated supply? But then I don’t know what situation you are alluding to.

    Perhaps you can clarify, as you seem to have said that short-selling can lead both to reduced and increased supply

  17. “anyone lunatic enough to believe they can get rich by going short housing”
    Can think of a couple periods I’d have been a very happy lunatic, short of a house or three. You could have bought the stock back for peanuts.
    Trouble with the housing market, isn’t it? The gearing’s so high. Any downturn shakes out the punters who can’t weather the storm.

  18. And while I think about it;

    “I understand short positions are not generally held for long, so the impact on the decisions made by a company mature enough to list is likely to be negligible.”

    Whut? We (well, OGH, actually) began by talking about the role of shorts in the market price discovery process, not upon managers’ decision making. But since you mentioned that;


    That’s the FT, so you might have to register, or cough up, but it’s about Carillion.
    Roughly, the short positions had been around 18% of outstanding shares for about 18 months, peaking at about 30%(!) of outstanding. During that time, in it’s A&R, the firm announced plans to cut debt.

    There is research that suggests that the average short position is closed in 27 days. So 18 months, being, umm, 18x that, is pretty good going, really. But, it does depend on who is doing the shorting. The hedgies who do it for a living might well regard 12-18 months as normal, if they are sure they’ve done the work correctly, and there really is a problem with the firm.

    The Porsche/VW trade; I think that trade had been knocking around for years.

  19. BiS; Schiller’s point was a hedging one, not a speculative one. Individual houseowners with mortgages, had no way of insuring their equity against a downturn. Similarly, no lender had a way of insuring against a fall in prices wiping out the equity in the house, and then eating into capital value of the loan. Additionally, with no hedging instrument available, there was no visible price that could be observed to suggest that house prices were too high, and thus cause lenders to either stop lending or raise the cost of the loan. So everyone just kept lending and borrowing, increasing the gearing. Also, the US mortgage system has some curious features that don’t exist in the UK.

    If Schiller’s idea ever got off the ground, it’s unlikely you’d be able to get a short position/hedge on a specific property. However, you would be able to get a position on the market as a whole, or on specific sectors. BiG assumes that such an instrument would not be able to usefully influence supply, which is curious, as gold mining firms already do this, via hedging on the price of gold using the futures market. And the funny thing about physical gold is that it’s reasonably similar to the housing market, in that the greatest chunk of gold in use, was first mined really quite some time ago. And with ~25,000,000 dwellings in the UK, new supply is about 1% of that stock annually, or about 20~25% of annual transactions.

  20. So changing the number of shares (while the proportion cannot exceed 100%) takes, to be generous to my counterproposal, at least an order of magnitude of time longer than the longest demonstrable short position is held.

    I think I kinda won this one.

  21. And, I think you’ll find that the demonstrated short position reduced the number of shares to zero over the time period, as the firm went completely tits up, and the short position only required somewhere between 18% and 30% of the issue, not 100%.

    Although, it’s worth pointing out, in case you missed it, what with having your wannabe Kraut head up your wannabe Kraut arse at the time, that the short position itself was not the cause of the firm’s failure, but part of the price discovery process, which led to the owners of 100% of the issued capital, and it is 100% as you have to include the stock lenders, discovering that the issued share capital was worth precisely jack shit.

  22. You cannot have more than 100% of a company.

    Of course short selling can change that, short term. Porsche ended up owning over 100% of VW. VW was briefly the world’s most valuable company as the hedgies desperately tried to cover their positions. One prominent investor was ruined and threw himself under a train.

    All because, whatever short selling does to virtual supply in the short term, at the end of the day there is only 100% of VW to actually own. If short selling could really have increased that to 120%, we wouldn’t have had bankrupt hedge funds.

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