When Pundits Discover the Repo Market

If you want to get a good idea of the disconnect between politics and the markets, try looking across the pond, to Will Hutton's 1200-word jeremiad against hedge funds. Hutton is a highly respected political commentator, but he clearly knows nothing of the markets: most of his complaint isn't really about hedge funds per se so much as it is about the repo market, of all things.

Chancellor Alistair Darling and the Financial Services Authority announced that sellers should disclose their identity. The results are revelatory. The hedge funds weren't even buying back the shares, they were 'borrowing' them from pension funds to manipulate the market...
A spotlight has been shone on some very murky corners of the financial markets. There practices occur that challenge the very conception of what we consider a company to be, and the accompanying obligations of ownership. A multi-billion pound business has emerged in which shareholders lend their shares to hedge funds to be played with. For a tiny fee, a hedge fund will arrange to borrow shares from a great insurance company or pension fund which it proceeds to sell. Share-loans are believed to exceed a stunning £7.5 trillion.

Yes, repos are a "very murky corner of the financial markets". Who could have known that people were borrowing (sorry, 'borrowing' - mustn't forget the scare quotes) securities? Imagine what the Chancellor must have thought when he found out! We can't let these devices get into the wrong hands, lest we endanger capitalism as we know it:

The impact on companies is devastating. British firms no longer have long-term owners who share their long-term mission and purpose. Instead their owners have become their enemies.

Ah, I see a hint of a solution: let's start selling British firms to private equity shops!

I've been rude in the past about hedge fund apologists like Sebastian Mallaby. But after reading Hutton, I'm beginning to see who Mallaby has in mind when he talks about the opponents of hedge funds. When you venture out of the business section and start reading the opinion pages of papers like the Observer, the amount of financial illiteracy you encounter is quite astonishing.

No one in Britain would ever publish a column expressing astonishment at the revelation that the prime minister isn't directly elected by the people, but rather only by the MPs in his own party. Some vague knowledge of what you're talking about is expected of anybody writing about politics. But clearly that's not the case when it comes to the markets. Britain might be a nation of shareholders, but it's obviously much easier for the likes of Will Hutton to participate in the stock market than it is for them to bother to find out how it works.

(HT: Robinson)

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