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TOPICAL DEBATES Financial Stability

I have only a scarce couple of minutes in which to make my speech. It may shock my constituents that I have sought to address these problems within such a short time scale, but equally I think they would consider it remiss of me not to seek to do so. I want to focus on three key problems and on responses to them. The first is reserving policies in insurance companies, the second is the difficulties with rating agencies, and the third is shorting in the market. I then want to look at three other issues: how the Government's proposals deal with pensioners approaching the age where they have to convert their fund into an annuity; local authorities and the need for them to have their funds safeguarded; and business interest rates. I have been saying for many years that we need to look at the adequacy of reserving policies in our insurance companies, and I will not on this occasion add to the remarks I have made on the subject over a protracted. To minimise the risk from the sub-prime loans, companies paid rating agencies to advise how to securitise those bundles and turn them into a higher investment grade. Often, that meant packaging them with an insurance policy to cover the expected rate of default. This was, in effect, the modern version of alchemy—turning base metal into gold. There was a clear conflict of interest, as rating agencies were paid to advise how this process of securitisation could happen when their proper job was to police it. This is one of the key issues that the Government need to address to create financial stability. Shorting in the market is where someone promises to sell a stock they do not own in order to drive down its value in the expectation that they can then buy it at a lower price before having to deliver it to the person they sold it to at the higher price. That is how traders make money in a falling market. I call for two further changes. The seller must effect delivery of any shorted stock to the buyer within three days of the original agreement to sell. That will reduce the time in which a speculator can buy at a lower price than the original sale. Cutting this arbitrage window will discourage aggressive speculation by shorting. The second change would be to introduce a rule that allows shorting of a stock only where the price of that stock has actually risen in the pervious trading period—the uptick rule, as it has been called in America. That would make it much more difficult for traders and hedge funds to engage in a concerted and repeated market attack to drive down the price of a particular share. I hope that my right hon. Friend the Financial Secretary will consider these two solutions, and in deference to him I shall give him a couple of minutes to respond to the debate.