Just a coincidence

I'm sure it's no more than a coincidence that the two trading sessions following the lifting of the UK's ban on short selling of financial shares have seen carnage in bank shares. Barclays plc, one of the banks that declined to accept government help back in October, is now valued at barely 150% of its expected 2008 earnings. Even the announcement today of phase 2 of the government's bank rescue plan (a phase which is, in truth, more like a rescue plan for borrowers, as Robert Peston points out) has done nothing to restore sentiment.

The removal of the short-selling ban was demanded by the hedge fund industry, with the enthusiastic support of most of the financial press. And what good has it achieved? The government's losses on its investments in the banks have been magnified, which can only serve to increase taxpayer anger at the whole rescue plan. Those banks that have tried to avoid taking the government's money -- HSBC and Standard Chartered, as well as Barclays -- will now find it much more expensive to raise capital in the markets, and may even be forced to swallow their pride and accept government money. (If media reports are to be believed, Barclays is the most likely to have to do this).

We don't need the hedge funds to tell us that banks are having a difficult time. It's nothing short of insanity that the FSA has unleashed the short sellers again at a time when confidence is so fragile.