It’s not just shareholders of banks and housebuilders who have been panicking in the past few days. The surprise decision from the Financial Services Authority to force short-sellers during rights issues to unmask themselves suggests that the regulators have been spooked too.

It is unprecedented for Canary Wharf to do anything without prolonged consultation. Yet the new rules are being imposed in seven days and the City just has to lump it.

The suspicion is that if the companies being targeted by short-sellers had been metal-bashers or oil explorers, the FSA wouldn’t have worried much. But the victims are banks, and banks — built on confidence alone — are different.

The FSA’s worst nightmare seems to be that a bank rights issue flops and that the ensuing share price slump triggers a panic not just in the share market, but among depositors. Those Northern Rock queues are fresh in the memory.

The FSA is right to want to nail the rogues who place down bets on companies and then disseminate damaging false rumours to ensure those bets come good. But yesterday’s threatened crackdown is not about that. The FSA argument now is that short-sellers are guilty of market abuse even when silent. Just by virtue of driving a price below the intrinsic worth of the company in a vulnerable moment like a rights issue, they are guilty of manipulation.

This looks a highly contentious philosophy. If prices really are being driven artificially low, then other investors — hedgies and traditional institutions alike — would surely pile in, in pursuit of easy profits. No one is forcing the underwriters to sell at a discount.

So what if the HBOS rights issue were to flop? It is fully underwritten. The bank would still get its money. If, as regulators insist, HBOS is rock solid, the share price would quickly recover. The underwriters, so long as they stood firm, would clean up.

The FSA move on better disclosure is modest. But its threat to restrict stock lending in rights issue periods and to prevent short-sellers from hedging themselves by buying nil-paid rights is altogether more draconian. It was enough to get the bears, their fingers burnt, to close their positions abruptly yesterday.

If implemented, these tougher measures would at a stroke eliminate short-selling in rights issues — but probably increase the cost of capital-raising. Underwriters would demand sweeter terms if they were in effect denied access to the emergency exit that shorting, in extremis, gives them.

Regulators need to be careful that in their attempts to foster financial stability they do not demonise short-sellers, who make a positive contribution to financial markets, nor that they give moral support to banks that have been lamentably slow and opaque in keeping their shareholders properly informed.

Shares at the very nadir of the bear raid on HBOS in March fell only to 398p. They are now trading much lower since the bank revealed it needed a £4 billion equity top-up. Who was guilty of market manipulation back then — the supposed shadowy gang of Singaporean short-sellers, or the Bank of England, which rushed to tell journalists that HBOS was not in any kind of difficulty?

Conspiracy theorists believe some banks have no choice but to dribble out the bad news slowly because in truth they are bust. By holding back the whole picture they can sucker investors into throwing good money after bad. This round of rights issues, they argue, will be followed by another in six or 12 months.

That is surely too pessimistic. However, the FSA’s heavy-handed approach — far from restoring confidence — risks inflaming suspicions that, perhaps for a greater good, investors aren’t hearing quite the whole truth.

patrick.hosking@thetimes.co.uk

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