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Paul Vallely: Profiting from the Farage-NatWest saga

04 August 2023

Short selling might be legal, but it is ethically dubious, says Paul Vallely

Alamy

Nigel Farage speaks near his home in in Westerham, Kent, last week

Nigel Farage speaks near his home in in Westerham, Kent, last week

BEHIND the scenes of the hokey-cokey over Nigel Farage’s Coutts bank account, something striking has gone largely unreported and totally unremarked. The arch-Brexiteer complained very loudly about the way in which his private banking arrangements had been made public by Dame Alison Rose, the chief executive of Coutts’ parent bank, NatWest. She had to resign after her flagrant breach of client confidentiality. The crisis wiped almost £1 billion off the NatWest share price.

That much everybody knows, thanks to Mr Farage’s talent for populist publicity, much of it conducted via his show on the GB News channel. But what largely slipped beneath the radar is that Marshall Wace — the hedge fund of Sir Paul Marshall, one of the owners of GB News — made about £5 million from the slump in the NatWest share price after its chief executive was forced out.

Only one national paper reported this, The Daily Telegraph, which took care to add that the hedge fund’s bet against NatWest was “mostly computer driven”, using software that analyses the views of economists and indicates where to invest.

The type of speculation taken by Mr Wace is known in the City as “building a short position”. In lay language, “short selling” involves an investor selling shares that they do not actually own, but which they have borrowed, having paid a fee to borrow them. They do this, gambling that the share price is likely to fall. Then, they buy the same number of shares at the lower price, return them to the lender, and pocket the difference.

The idea that you can sell something that you don’t own feels ethically disturbing. It smacks of stealing, since my profit is contingent on someone else’s losing money. And, since it targets companies that are deemed over-valued or in a weak financial position, “shorting” can be a self-fulfilling prophecy. It can fuel negative rumours that push share prices down, as other investors panic and sell.

None of this is new. Merchants in Amsterdam shorted shares in the Dutch East India Company until the practice was outlawed in 1612. And it was banned temporarily during the 2007-08 global financial crisis, when Lord Sentamu, then Archbishop of York, decried “shorters” as “bank robbers and asset strippers” — only to be accused of financial illiteracy. Defenders insisted that the practice identifies companies that are over-priced — thus preventing investors’ losing money by investing in stocks that are about to encounter choppy waters.

Yet the disquiet persists. At the Brexit referendum, Leave-supporting hedge funds were accused by a former Permanent Secretary at the Treasury of “shorting the pound and the country, with the British people the main loser”. A former Chancellor, Philip Hammond, later claimed that the Prime Minister, Boris Johnson, was “backed by speculators who have bet billions on a hard Brexit — and there is only one option that works for them: a crash-out no-deal that sends the currency tumbling and inflation soaring”.

There were similar claims after Kwasi Kwarteng’s Budget wiped £75 billion off the nation’s pension pots. The manager of one hedge fund — for which Mr Kwarteng once worked — has called his bets against Britain’s government bonds “the gifts that keep on giving”.

None of this is illegal. Whether it is immoral is another question.

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