In These New Times

A new paradigm for a post-imperial world

Short-sellers bet on stock market crash

Posted by smeddum on July 22, 2008

* Julia Kollewe
* Monday July 21, 2008

Investors across the world are betting more than one trillion dollars on a collapse in stock prices.

More than $1.4tn of equities worldwide are now on loan, about a third more than at the start of 2007, according to Bloomberg. Almost all of that is being used to speculate that shares will fall.

Fund managers made at least $1.4bn in July from betting against the troubled US mortgage groups Fannie Mae and Freddie Mac.

Short-selling of the two firms, which were rescued by a government loan last week, surged before the shares plummeted in the first two weeks of this month on fears that they would need a government-led bail-out that would wipe out shareholders.

Stock markets have fallen around the world on fears of recession in the wake of the credit crunch. The plunge in the FTSE 100 index to 5261 just over a week ago meant the index of Britain’s top 100 companies had fallen more than 20% since its peak – the definition of a bear market. In Karachi, shareholders smashed windows and burned tyres to protest against plummeting stock prices and the economic downturn.

While US and UK regulators are tightening rules on short sellers amid concern that they are accelerating more than $11tn in global stock losses this year, countries from Indonesia to India are opening up to the practice. Short-selling involves borrowing stock to sell it in the expectation it can be bought at a lower price before paying back the loan.

Short selling on the New York Stock Exchange rose to 4.6% of total shares last month, the highest since at least 1931.

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