Nasty, brutish and short

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: may have driven the share prices of banks near or below the offer price for new shares, putting pressure on the underwriters of the rights issues to buy the new stock. Yet market abuse, which the FSA has defined as including insider trading, spreading false information, or deliberately distorting share prices, is usually pursued by prosecuting offenders, not restricting types of activity.

And although short-selling was certainly taking place in London, the FSA has yet to show that the level of activity was great enough to dominate trading and thus distort the banks’ share prices. Data Explorers estimates that the stock on loan for HBOS, a big British bank, has been fairly constant at about 7% of its market value since it announced its rights issue.

All of which suggests that the FSA wanted to ensure banks can successfully raise capital. That is a worthy objective but it may have been better done by other means. The banks could have issued new shares at a bigger discount without, at least in theory, damaging their shareholders. And the underwriters could have stepped up to the plate.

The FSA says its measures are temporary, and promises to conduct a review with the Treasury. But the episode has a familiar ring. Once again short-sellers have found that their business is permitted and even lauded by regulators—until prices fall and the blame game begins.