24 September 2008

ASIC's shorts exposed

The long and the short of it

It has been a curly week for the Australian Securities and Investments Commission. ASIC has made a right hash of a decision about what to do about short selling of securities quoted on Australian securities markets.

Setting aside the content free dialogue that has been going on for over 6 months in the media; prompted by throw away remarks from our Federal Treasurer, Wayne Swan, about the Government's forever imminent legislative crack down on "short selling"; now that the Government and ASIC have had their hand forced by international attempts to act in a co-ordinated way to stabilise markets and reduce panic, ASIC stuffed it up.

A brief chronology:

  • Thursday, 18 September US Treasury Secretary Henry Paulson announces an $800 billion liquidity injection into the for the US financial system, in an attempt to restore confidence in the US banking system after the failure of Lehman Brothers, (amongst other stuff).
  • Friday, 19 September, ASIC issues Media Release 08-204 , "Naked short selling not permitted and covered short selling to be disclosed", this effectively announced two things:

    (i) A new
    ASIC Regulatory Guide 196, making it clear that ASIC considers naked short selling is illegal under section 1020B. Naked short selling being selling securities without "a presently exercisable and unconditional right to vest the product in the buyer"; and

    (ii) ASIC has exercised its power under section 1020F of the Corporations Act to modify section 1020B, relating to short selling, by
    class order CO 08/751, adding a new provision, section 1020BC which had the effect of requiring stock brokers to ask their clients when receiving orders to sell securities whether they were selling borrowed securities, rather than ones they owned outright, ie covered short selling, and if so reporting that to the exchange. That is they beefed up the disclosure obligations on covered shorts.

  • Sunday, 21 September, ASIC issue Media Release 08-205 which announces a change to the position announced on Friday 19 September. Instead of just requiring covered shorts to be reported, it now issues a new class order CO08/752, modifying CO08/751 of 2 days earlier, to make all short selling, even covered short selling illegal for at least 30 days.

  • Monday, 22 September, the Australian Securities Exchange (ASX), is unable to open at its scheduled 10 am opening, because of unresolved issues about existing short positions in the market, whether the writers of put and call options are shorting if they don't hold the stock, whether funds who hedge and arbitrage with short positions are able to continue, ...etc..etc

  • Tuesday, 23 September, ASIC issue Media Release AD 08-22, which seeks to clarify and create a number of exceptions to the previously announced blanket ban on covered shorts. In order to to this it issues another two new class orders CO08/753, and CO08/764 , further modifying CO08/751 to accommodate these hastily conceived exceptions.

In addition to the simply ham-fisted chopping and changing which makes them look like a bunch of badly informed and incompetent amateurs, it also looks like ASIC has also ended up getting it wrong anyway, with its general prohibition on all short selling on Sunday 21 September.

If, as seems to be the case, ASIC felt the need over the weekend to change the position it had announced on Friday 19 September that banned only naked shorts, because of the broader position being adopted in the US, UK, Ireland, Canada, France and Germany, then why didn’t it do the same as they did, and just extend the prohibition to covered shorts over securities in financial sector stocks ? ASIC instead extended its prohibition to shorting of securities in all listed companies and managed funds, stapled products.

ASIC seems to little explanation for this dramatic difference in its approach from the rest of the world other than the suggestion that the size of our market made us vulnerable to predatory shorters. Such an explanation is decidedly thin since it has been going on under ASIC's nose without intervention for years. In the circumstances it can be legitimately speculated that ASIC’s singular change over the weekend, occurred because it, or its masters in Canberra, were lobbied hard then by the likes of Macquarie and Babcock & Brown, who were vulnerable to shorters, and who also had a range of securities quoted on the ASX in addition to shares in themselves, such as hybrid, stapled, and managed fund combinations. ASIC was apparently unable in the time available to figure out an appropriate and logical mechanism to identify by category or by a list which stocks in quoted on the ASX were at risk from aggressive shorting and whose failure as a consequence might effect our financial system. ASIC accordingly seems to have resorted in the circumstance to just banning all short selling rather than try to finesse this important distinction. ASIC’s extended position otherwise doesn’t seem to have a good rationale.

The market’s price discovery process are not ordinarily interfered with just because regulators don’t understand them fully or disagree with the prices arrived at by traders. Prudent regulators might, just, justify an intervention in dispassionate market price setting processes where the integrity of the financial system may be imperiled by pricing irrationality, resulting in a run on a bank or a panic external to the actual market for a particular financial sector firm’s securities. This suggests however that any such intervention should be confined to stocks that have those characteristics. Does it really matter to market regulators if XYZ Teaching or Blue Sky Mining is aggressively over sold by shorters? It’s either a very cheap buy or it dies. That’s the market’s verdict.

Some one needs to grab ASIC by the shorts to sort this mess out. It needs to be bring itself back into line with the rest of the free world at the earliest opportunity, presumably when the inital 30 day period of this general prohibition elapses.

14 September 2008

Pat Snowden - remembered

Patrick Snowden, a dear friend, died of a brain tumour at the age of 47 on 5 September 2008. Jack Snowden, Pat's 16 year old son, Jeb Carroll and Pat's brother, Peter, each gave magnificent eulogies for Pat at his funeral service on the morning of 12 September 2008. This is the text of the brief remembrance I gave later that day at his wake, along with others, at the Longueville Pub in Sydney.


Patrick was the truest of friends.

Like many here today, Pat and Tracey have been an indelible part of the fabric of our family's life for decades. My wife, Susie, met the inseparable pair at Macquarie Uni Law School. Pat gave us the most valuable wedding gift conceivable: he passed up the opportunity to play for the 1988 Club Championship at Oatlands to attend our wedding; an act of self sacrifice in the interests of friendship that was typical of him, and for which we revere him.

We have been on family holidays with the Snowdens, staying in the same apartment with all of both our families' then very young children, and Pat has volunteered to take all six of them fishing! And what's more "alone and unassisted, brought them back".

Pat and Tracy have been the bedrock of reliability, the bricks of personal responsibility and the mortar of community mindedness that many of us mortals have looked to, to help reinforce meaning in our confused lives. And Pat, by the way he lived his life, bridged a gap that is seldom bridged, except in epic poems and ballads, that between the ideal of classical manhood and the modern Aussie bloke.

He lived a life of honour, humour and virtue.

When you were with Pat it was easy to feel you could be the best person you could be, because of the living example of chosen excellence that he so unassumingly projected. He made things that are hard for many of us, like engaging optimistically with complex clerical tasks or intimidating officials, easy and natural. And the effect of his positive personality spread to all those around him.

And there's almost no where in this state and beyond that Pat hasn't been and made friends. Anywhere in fact that that now legendary old silver Toyota Cressida of his could take him. With Pat a passing encounter with the person serving him in a milkbar in Tumut or a servo in Lithgow or a baitshop in Port Stephens, could easily, and did under Pat's orchestration, become a collective discussion involving everyone in the shop, about the special qualities of the meat pies or the vanilla milkshakes or the frozen prawns being sold there. And next year, when he next passed through, he would pick up that conversation again, as if he had just ducked out for a moment, and they would remember him, often by name, and treat him like a returning prodigal son. No-one else I have known could do that with such unaffected charm, and everyone always felt the happier for it.

My fondest memories of Pat are goatbusting. Many fellow goatbusters are here today, and although we have not all met before, we all know each other. Patrick has sent us all photos and emails of his many expeditions with each of us, and we have heard him tell the stories. I went goatbusting with him and his son Jack and and my boy, John, on trips to the hills west of Mudgee. Pat, whose call sign on our two way radios was "Goatbuster 1", always made a special point of looking out for John. He mentored him and Jack subtlety; demonstrating by his actions the delayed rewards of discipline, meticulous preparation, focus on the task and the importance of consistency and follow through.

Pat simply loved scrambling up and down that steep rocky country chasing goats. He was plotting their downfall from the moment he woke; musing on their whereabouts aloud even whilst doing his ridiculous but invariable morning stretch routine. We spent hours scouring rocky outcrops and ridges with binoculars, and then painstakingly stalking goats spotted on some distant hillside, for up to half a day or more, implementing his carefully laid plans that, often as not, came to nothing, but of which we never tired, so engrossing was the company and the task. Friendships formed in such adventures never wane, even when like me you are a lousy shot and your companions are such fine marksmen.

For Pat knew a thing or two about trajectories. He was a single figure handicapper at Concord, Oatlands and Cromer, but he still had time for hackers like me. And a round of golf with Pat was one of life's great pleasures, as all those who have had that privilege will testify.

But he lives on. He lives on in Lucy's beauty and intelligence; in Jack's competence and sense of honour and in Hannah's generosity and graciousness. And above all he loves on in Tracey's love.
And he lives on in the hearts of each of us, whose lives he touched.

03 September 2008

Beyond the rainbow: yet another Dorothy?

Who's Judy Garland now ? Barack or Sarah ?

Phew! And I thought the Democratic primary race was a blast. Following the hopeful innocent along the winding road with scruffy dogs, straw men and the heartless, whilst battling a wicked witch, to his ultimate nomination, became an almost undreamed of adventure for us rubes in the 'sphere.

But now, incredibly, another Dorothy with ruby slippers has dropped out of the sky in a hurricane and rudely intruded on our dream. And it looks like she may have finally killed off that wicked witch too. You couldn't script this, even in Oz. But it is becoming a tad confusing. Who is the real Judy Garland now?

This whole identity thing has become very messy, but what a spectacle to behold. It seems improbable now that the world could just go on supporting kindly grey haired old white guys hiding behind curtains. But who can predict anything anymore in populist politics.

This US presidential election could just be the best Olympics ever! Roll on November.