OK Sarah, tell me about short selling

Sarah Vine has a column in today's Times suggesting that the financial sector would be a lot more stable if there were more women in senior positions in the City. To illustrate her point, she talks about going to a mortgage broker (with her husband, Michael Gove, who is a member of the Tory shadow cabinet) to arrange a mortgage. The broker recommended a deal with HBOS, and according to Sarah, she was the only one who thought to ask what would happen if HBOS got into trouble. Seemingly the broker poured scorn on the very suggestion.

That broker may not seem so smart now, although I don't suppose there are many people out there who can say that they saw the demise of HBOS coming. But more to the point, how exactly does this story show that Sarah Vine is smart? She wasn't planning on putting money into the bank, she was trying to arrange a loan. Does she think that all those people lined up outside Northern Rock branches this time last year were distraught borrowers looking to repay their loans?

If I knew for sure that a bank was getting into trouble, and if I were that sort of person -- which thank the Lord I'm not, sir, and I'm sure Sarah Vine isn't either -- I'd try to hit it up for the biggest loan I could wangle. After all, once the crisis hit, it might take the bank a good long time to come after me for the money. Judging by the soaring delinquency rates at Northern Rock, quite a few people are thinking in those terms.

So Sarah, you may well have a point about women in the City, but I'm not sure your own experience goes very far to prove it. Still, never mind, maybe you can help me to understand something about short selling that still puzzles me, even after all my years in the financial sector.

Short sellers are being widely blamed for the demise of HBOS and Lehman and for the pressure that Morgan Stanley finds itself facing. Short selling has been around for a long time and its defenders claim that it adds to market efficiency and liquidity. I'm not sure about that, but I do know that it's always blamed when financial crises hit, and regulators regularly ban it, only to relent and allow it again once markets stabilise.

You can't just go into the market and sell a stock that you don't own. You have to go out and borrow it first, from a pension fund or some other long-term investor. You pay them a small fee for the shares and hope that by the time the borrowed stock has to be returned, the price has gone down and you can repurchase it ("cover your short") at a lower price, allowing you to pocket a nice profit.

Here's the part that puzzles me. Why would a long-term investor lend stock to a short seller? You'd know the only reason they're borrowing it is to drive down the price of your asset, so why on earth would you help them out? If I came to you and offered you £100 to borrow your car for a day, but told you I was planning to write it off, you wouldn't lend it to me, would you? I'm sure Sarah Vine would agree with me on that one.