António Borges understands market risk. Over the course of his 30-year career in finance, the 58-year-old has served as a central banker in his native Portugal, dean of the business school Insead in France, vice chairman of Goldman Sachs International in the U.K. and consultant to the U.S. Treasury. Now the affable Stanford University–trained economist, who was named chairman of the U.K.-based Hedge Fund Standards Board in late June, must defend the $1.93 trillion industry amid widespread claims that hedge fund managers have exacerbated market volatility by spreading rumors about troubled banks and driving down their stocks. Regulators in the U.S., Europe and Asia slapped temporary bans on short-selling in key financial companies last month. Meanwhile, hedge fund managers are scrambling to stanch their own losses, stay hedged and secure reliable counterparty and brokerage services in the wake of bank collapses. Late last month, on his way to Washington to meet with U.S. Treasury officials, Borges discussed the state of the financial industry — and the demonization of hedge funds — with Institutional Investor London Bureau Chief Loch Adamson.
1 Institutional Investor: Does the ban on shorting financials make it harder to short anything?
Borges: Yes. That’s the worst part of it. Only a very small number of hedge fund firms are actually specialists in short-selling; most managers simply use shorting as a tool to hedge out risk. If investors cannot use short-selling and managers cannot hedge their portfolios, then a lot of people will find the market a lot more volatile than they are prepared to cope with — and ultimately a lot of people will abandon the equity market. Depending on how long the ban remains in place, it could have a very counterproductive effect, because it will reduce liquidity and shrink the financial sector even more.
2 Will the ban protect banks from progressive devaluation?
No. It could be justified only as a way to try to alter the psychology of the markets, because there is no evidence that short-selling had an impact on the collapse of the banks. It is not accurate to blame the short-sellers for what happened. When the stock market is this volatile, the whole market sells off at the slightest signal of trouble. That is not short-selling — that’s just everyone selling, full stop.
3 Has the investment bank model failed?
I wouldn’t say that the model has failed. Goldman Sachs and Morgan Stanley made the decision to move into the regulatory world of commercial banks for their own protection, but that doesn’t mean they’re going to set up huge retail networks across the country. They will still function as investment banks. It just means that they will have better access to deposits and therefore have a much better way of dealing with their own liquidity. Traditional investment banking doesn’t involve taking large risky positions and keeping them on your balance sheet, as Lehman did. Lehman was very efficiently run, but it was vulnerable.
4 Will the U.S. Treasury’s proposed $700 billion bailout plan work?
The restoration of market stability depends on restoring investors’ confidence. If investors want to go back to cash because that is the only thing they think is safe, then there is no financial sector anymore. So the most important thing of all is to restore confidence, which is exactly what the U.S. Treasury is trying to do. If the plan works, the prices of certain assets will have some real support and the banks will be able to restore some of their capital. If confidence comes back, the problem is over, because many of these assets do have critical value. But in the current environment, it is very difficult to convince people to wait patiently.
5 Are we still in a state of relative emergency?
Yes. No one can rule out another wave of panic.
