FactCheck: did Gordon Brown lead the way on short-selling ban?
Updated on 21 September 2008
Gordon Brown claims that where he led in cleaning up the city, the United States followed. FactCheck rewinds the clock.
The Claim
"We stopped the speculative trading in what you call "short-term sales", which was causing a lot of damage, and that made a difference overnight. And then America followed and then France and Germany."
Gordon Brown, Prime Minister, Andrew Marr Show, BBC 1, 21 September 2008
The background
It's been a turbulent week for the financial world and for Gordon Brown.
Despite increasing calls for a leadership contest, the prime minister seems determined that he will not be clearing out his desk like the Lehman Bros employees.
The former "iron chancellor" has repeatedly staked his reputation on his management of the economy, and this time of trouble is no exception.
"I've got the experience to deal with these events," he told Andrew Marr this morning. "I think you have seen over the last few days that we have been making the right decisions, sometimes ahead of other countries because Alistair Darling and I have anticipated events as they're happening."
He talked up his role in rescuing the floundering global markets, saying that the US followed the UK's lead in banning "short-selling".
But is our PM really the world leader he claims to be?
The analysis
The PM claims to have led the way in tackling "short-term sales" or "short-selling". This is the practice of selling shares that have been borrowed in the hope that the seller will later be able to buy them back at a lower price.
It is, essentially, betting that the price of the shares will fall.
Say the seller borrows 1,000 shares in a company and sells them on for £1,000 (£1 per share). They must buy the shares back within an allocated timeframe and return them to the lender.
If the share price falls to 90p per share, the seller can buy them back for £900, making £100 profit, minus a fee to the original shareholder.
It was the US SEC that first announced on 17 September 2008, some measures to tackle the most aggressive form of short-selling.
It is this practice that companies such as HBOS seem to have fallen victim to this week. So in order to stop other companies from suffering the same fate, several nations have banned the practice temporarily.
But who announced the ban first?
Looking at the events of the last week, it was the US Securities and Exchange Commission (SEC) that first announced on 17 September 2008, some measures to tackle the most aggressive form of short-selling - "naked short selling". This is where the seller doesn't even borrow the shares in advance of the sale.
The board of the UK Financial Services Authority (FSA) met the following day to discuss the crisis.
After the London Stock Exchange closed that evening, the FSA went a step further than the US by banning all short-selling on 32 companies and groups, including all major banks (the original list contained 29 groups, but was later reviewed).
Hector Sants, chief executive of the FSA, said, "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets.
"As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector."
The ban is in place until 16 January 2009, but will be reviewed after 30 days.
Then, on 19 September, the SEC announced that it would also ban short-selling on around 799 companies.
In their its statement, the SEC said they were "acting in concert with the UK Financial Services Authority ...The UK FSA took similar action yesterday."
So it seems, while the FSA raised the bar by including more forms of short-selling in their ban, it was the SEC that first took steps to stop the most aggressive forms of the practice.
The verdict
While we don't know exactly what was going on behind the scenes, it seems the UK's lead is not quite so decisive as Gordon Brown would have us believe.
The US Securities and Exchange Commission does nod towards the UK's Financial Services Authority when its British counterpart announced the larger ban on short-selling, but the SEC already started the ball rolling.
The Labour leadership clearly thinks the "whatever it takes" mantra on the economy will prove effective with voters and perhaps that influenced Brown's form of words this morning.
Whatever the reason, Brown has overplayed his hand as the world's economic trailblazer.
FactCheck rating: 3
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