With naked short selling. sellers not only don't own the assets they're selling, they haven't even borrowed them either, all they are doing is selling a promise of shares, of which they hope the price falls, then they try to buy the shares they've sold. They are in effect selling securities that don't yet exist. Naked shorting can grant short sellers opportunities to wreck companies and economies, they do this by flooding the market with low-cost ghosts.
Particular problems can arise with "naked" short selling and CDS, which involves selling shares you don't own or taking out insurance on an instrument you don't own - it's a bit like taking out insurance on your neighbour's house, giving you the incentive to burn it down and collect the insurance. (Credit Default Swaps (CDS) is a form of government debt insurance)
ie When Greece had problems, investors also rushed to buy CDS, (including investors who did not even own Greek bonds), but who would still get paid in the event of a default. This in turn causes greater demand for CDS and this means higher prices for this form of insurance, this in turn makes the bonds seem riskier than they actually are, thus forcing higher interest rates on the government and hurting the economy.
Short selling was blamed for the demise of banks such as Lehman Brothers, Merrill Lynch and HBoS.
Now almost every country condemns naked short selling and wants it banned because of the huge risks it presents to the economy. It has been prohibited in the US, Japan, Hong Kong, Australia and Brazil: ( none of which are renowned for undue regulation of markets). The European parliament has drafted a directive to bring it to an end within the EU. However, there is one group frantically seeking to protect naked shorting and strangle the directive: the British Treasury, and Conservative MEPs acting on its instructions.
At a committee meeting in the European parliament in February 2011 one Tory MEP Syed Kamall protested vehemently against the ban, insisting his position "reflects that within the Tory government". The Treasury confirmed this: "The UK does not support permanent restrictions on the uncovered short sales of either equities or sovereign debt … we believe it will do much to impair liquidity." Tory MEPs will be instructed by the whips to oppose the ban when they vote on 28 February. The UK government will then oppose it in the European council.
In March 2011 -A new EU directive places conditions on the use of credit default swaps (CDS) -. Read here EU Parliament Legislative Observatory.
The vote was taken by the European Parliament's Monetary and Economic Affairs Committee.
However, the practice of short selling and naked short selling has not been banned, just restricted.
Member States adopted in May their version of the text. This text waters down the initial proposal of the European Commission. The restrictions on naked short selling are considerably softened and the powers of the European supervision authority (ESMA) are limited. Short Selling Regulation
September 2008 - Just before the practice of naked short selling was temporarily banned in 2008 it emerges that David Cameron had taken large donations from hedge-fund managers whose firms placed bets short-selling shares in some of Britain’s crisis-hit banks. He accepted almost £2m from hedge-fund managers who for £50.000 get membership of an exclusive dining club reserved for financial backers of the Conservative party.
Big donors of which Six leading hedge-fund managers are eligible to automatic membership of the "Leader's Club" where they get exclusive access to Cameron.
Members of the group are promised that they will be ‘kept close to policy developments and meet with David Cameron several times a year at small 'leader's' dinners or lunches’.
Its activities are shrouded in secrecy. Its existence was not even acknowledged on the party’s website until after a Channel 4 documentary and the Daily Mail newspaper made enquiries about its membership.
Meet Some Tory "Doning" Hedge Funders and City Bankers:
John Nash - The Hedgie - is also a founder of City firm Sovereign Capital and is chairman of Care UK -Tory Donor, donated £750.000 to Tories and £22.000 to Health secretary,Andrew Lansley's office.
Michael Spencer - Short selling shares in Bradford & Bingly when it was collapsing in 2008 - Donated through his company IPLG Ktd; Former Tory Treasurer, Cameron made him Treasurer against advice but was forced to sideline him after negative press coverage about his financial dealings. Criticised for advising several local authorities to invest heavily in Icelandic banks shortly before they collapsed. Fined £490.000 by the FSA in 2010.
Michael Hintze - Manages Hedge Fund Donated £660.000 To the Tories.
Pierre Lagrange and wife Catherine - donated £50.000 to Tories Mr Lagrange, one of two managers of GLG, had paid himself £400million after using complex financial instruments to make money in the global downturn
The company has previously paid more than £1.5million to American authorities to settle claims of illegal short-selling, without admitting or denying the allegations. £21 Million house in David Cameron's Oxfordshire constituency. Was forced to declare his company’s ‘short’ position on Bradford & Bingley, along with Mr Hintze’s outfit CQS, after the Financial Services Authority (FSA) ordered institutions to do so.
Paul Ruddock - Lansdowne Partners donated £260.000 to Tories Lansdowne is reported to have made £100million by betting that Northern Rock would collapse and has helped to drive down the value of Barclays by selling shares in the bank worth £151million in recent months.
David Craigen - Lansdowne Partners £260.000 to Tories -
Andrew Cook - a millionaire Tory donor, who successfully lobbied for the cancellation of a government loan to a promising engineering company, admitted he had wanted to invest in it himself. The Tories' largest donor in Yorkshire, who subsidised David Cameron's flights in opposition to the tune of £54,000 – also donated £750.000 to Tory coffers.
Jon Wood - Swiss-resident, The controversial hedge fund manager who gave £500,000 to the Tories and has faced questions about his tax status last night after official records suggested that he is resident in Switzerland. Millionaire Jon Wood caused controversy when it was alleged he did not pay tax in the UK until around 2010.Mr Wood is British, and even managed to sign himself on to the electoral roll a fortnight before making his donation. Wood, a former star UBS trader who founded the hedge fund SRM Global, gave £50,000 to the NOtoAV campaign. He was the biggest shareholder in Northern Rock when it collapsed and he later tried to sue the then [Labour] government over its handling of the bank's nationalisation. He described the government's taking of controlling stakes in Lloyds and Royal Bank of Scotland as "theft"!!!
Louis Bacon - An American hedge fund billionaire was behind £250,000 of donations to the Conservative Party, it has emerged.
The Tories accepted the money from a firm run by Mr Bacon who has luxury homes in New York, the Bahamas, Colorado and London. Mr Bacon's hedge fund - which aims to make huge profits quickly for investors by trading on financial markets worldwide - was fined £16 million in April by the U.S. authorities over charges that a former manager tried to manipulate market prices for platinum. In Mr bacon's case, it is not even clear if American Mr Bacon, 54, has the right to be on the electoral roll. In information released by the Electoral Commission show that it was Moore Europe Capital Management Ltd - Mr Bacon's middle name is Moore - which gave the Tories £200,000 in June, on top of £50,000 [donation]. Documents at Companies House show that the parent company of Moore Europe Capital Management Ltd is Moore Capital Holdings in America - which is 'controlled by L M Bacon'. His hedge fund has given him a reputed personal fortune of £1.1billion, which would make him the 49th richest person in Britain. One of his London traders was arrested as part of a Financial Service Authority investigation into insider trading.
Abdul Majid-Jafar - Donated £55.000 - Executive Director, Crescent Petroleum. United Arab Emirates
Henry Angest - Swiss born Chairman and Chief Executive who donated through *Arbuthnot* Banking Group plc. Loaned £5.5 million to the Conservative party - Lot 20 in the Tory Fund raiser Black and White ball was a week's internship which went for £30.000
Peter Cruddas and wife Fiona - Donated £400.000 to No campaign.
Founder of CMC Markets, said to be the richest man in the City. Donated around £200,000 to the Conservative party in 2009. His wife Fiona is also a dedicated Conservative fundraiser.
Michael Farmer - £100.000 to No Campaign - Hedge fund founder who donated £2.3m to the Tories, making him a regular fixture on the list of Britain's biggest political donors.
FIL Investment Management Ltd - Fidelity – city brokerage company. - Two six-figure donations to the Conservatives were from businesses that appear to be linked to the fund management giant Fidelity, with £355,000 from FIL Investment Management and £345,000 from Fidelity Investment. Its political affiliations have caused disquiet among investor groups in the past, but the group is not listed on the UK stock exchange so there is no requirement for shareholder approval FIL also donated £50.000 to no campaign.
BSN Capital Partners, a hedge fund that is an associate company of Icap, gave the Tories £170,000.
James Lyle - Financier, Hedge Fund manager. Has donated upwards of £500.000 to the Conservatives. Also donated £50.000 to NO campaign.
Christopher Rokos - Founder of the Brevan Howard Hedge Fund - One of the Conservatives’ city backers, a millionaire fund manager, gave the Conservatives £400.850 - Also donated £30.000 to no campaign.
Lord (Stanley) Fink - Hedge fund manager, co-treasurer of Conservative party. recently ennobled by David Cameron. A former chief executive of hedge fund operator Man Group, his personal worth is put at £100 million has donated £1.945.141 also donated £28.000 to NO campaign.
Adrian Beecroft - a well-known figure in the venture capital industry. - Donated £537.076 The venture capitalist, 63, co founded Apax Partners and has an estimated £85m fortune
One of the three founders of private equity firm Apax Partners, he now chairs Dawn Capital and owns four Aston Martins.
David Rowland - Donated £4.031.016 - A financier and property investor worth £730m who is estimated to be the 25th richest man in Britain.
George Magan - Donated to the Tories £485.000 A financier and dealmaker aged 64 who pocketed an estimated £20m from his first business, Hambro Magan.
Jeremy Hosking - co-founder and investment portfolio manager for private investment fund Marathon. Has 25% share holding in Crystal Palace F.C.. Hosking was ranked number 333 on the Sunday Times Rich List in 2009, with a value of £170M In December 2009, Hosking donated £30,000 for funding research support, to Conservative MP David Davis. In Q42009, Hosking donated £125,000 to Conservatives. Also donated £25,000 to no campaign.
Hugh Sloane - Number 291 in The Sunday Times rich list 2009. One of the founders of hedge fund Sloane Robinson. Sloane’s compensation level exceeds even the reported £50 Million “bonus” paid to a Goldman Sachs director and the huge compensation package of Roger Jenkins, leader of Barclays Capital. Sloane Robinson has a Cayman Islands base. Sloane donated >£100,000 to Conservatives in 2008 Also donated £15.000 to No campaign in 2011.
Peter Hargreaves - Founder and Chief Executive of broker and investment adviser Hargreaves Lansdown, Mr Hargreaves was ranked No 111 in The Sunday Times Rich List, with a personal fortune put at £570 million. Supporter of Thatcher, critical of Cameron and Con-Dem coalition. Also donated £10.000 to no campaign.
David Mayhew - Tory donor - Ole Etonian- the former chairman of Cazenove - known as the Queen's stockbroker, which was taken over by JP Morgan in 2001 - Donated £52.000 to the Tories – gave £30,000 to the NO to AV campaign. Charged in the Guiness share support scandal in the late 80's but the case collapsed.
Andrew Sells - Venture capitalist - Treasurer Policy Exchange Think Tank (David Cameron's favourite think tank!) - donated £85 .000 to Tories and also donate £25.000 to no campaign.
Naguib Kheraj - the former Barclays finance director also donated £10,000.
Jeremy Isaacs - Heads his own investment firm
Stepped down from running Lehman Brothers’ European operations just before the crash. Now runs his own investment firm with ex-colleague Roger Nagioff, who was head of Lehmans’ fixed income division. Has been a big party donor. Donated over £345.000 to ToriesPaul Killick- Killik & Co LLP Stockbroker - Donated £78.000 to Tories - also donated £25,000 to no campaign.
Richard Hoare - of Hoare banking Industry - donated £65.000 to Tories in 2010 The Tories also have an outstanding loan of £150.000 with C. Hoare & Co.
Robert (Robin) Fleming - member of Fleming Banking Industry - One of Tory's biggest donors, donated £1.7 million also donated £10.000 to No campaign. Mr Fleming was also a personal donor to David Cameron when he was Shadow Home Secretary.
Alex Knaster, a Russian financier, who set up London-based Pamplona Capital Management with $1bn to help Russian firms invest overseas - Gave £50.000 to Cameron's No campaign
Shore Capital -Stockbroking and corporate finance group Shore Capital has given £25,000 to the Tories No campaign.
Crispin Odey - Odey Asset Management Group has donated £20,000 to No campaign. Odey, a former Barings banker, is one of London's leading hedge fund managers who awarded himself a £28m bonus in 2008 after predicting that the banks would fall and shorting UK bank stocks. Odey is closely involved with the Conservatives and is married to Nichola Pease, who belongs to one of the Barclays founding families and is the deputy chairman of private wealth group JO Hambro. Like many hedge funders, he has threatened to relocate to avoid the 50% tax rate
Nick Finegold - who pocketed some £10m last year when he sold his share-dealing brokerage Execution Noble to Banco Espirito Santo de Investimento and became a vice-chairman of the Portuguese investment bank. Gave £10.000 to No campaign.
Michael-Alen Buckley - Chairman, RAB Capital
Founded the hedge fund with Phillip Richards on 1 April 1999. The company was floated in 2004, getting high-profile backers such as Lakshmi Mittal, although profits have faltered in the wake of the economic downturn. Has donated to the party
So who is possibly benefiting out of this latest round of market turbulence?
The extent to which the Conservatives have been bankrolled by City fatcats is astonishing.