A riposte to the Archbishop

When Rowan Williams and John Sentamu took up their crosiers against short-sellers, they chose strange company: Ken Lay, the disgraced chief executive of Enron, Dennis Kozlowski, the jailed boss of Tyco (who took out full-page ads against short-sellers, before his company sank under the burden of accounting fraud) and the former prime minister of Malaysia Dr Mahathir Mohamad are probably the most renowned critics of short-sellers. In recent weeks they have been joined by assorted Labour frontbenchers, including Yvette Cooper and Hazel Blears.

They are a motley crew. The common thread, linking business executives and politicians, is blame shifting — or to use a more biblical term, ‘scapegoating’.

The best short-sellers, on the other hand — the likes of Jim Chanos of Kynikos, or David Einhorn — see themselves as defenders of truth, lone rangers who take on the might of corporations such as Enron, Tyco, Freddie Mac, Fannie Mae and Lehman Brothers and shine a light on flawed business strategies and bad practice. So who is right?

Regulators around the world appear to have endorsed the criticisms of short-sellers in recent weeks by imposing a variety of restrictions, ranging from greater disclosure (Spain) to an uptick rule (Taiwan) to bans on naked shorts (Belgium, Germany, Netherlands, Portugal) to outright bans (the UK, US, Ireland, Australia, Switzerland). Our own FSA has led the charge with the longest outright ban — three months — of any market in the world.

But there is a pattern in the severity of the measures and it is not in relation to malpractice. The scale of restrictions in each country is more or less in direct proportion to the weakness of the banking system. So the paradox is that it is the developed markets and not the developing ones which are imposing restrictions on short-selling.