stock lending & ratings downgrades

The quality of price discovery is a whole issue of markets regulation that has been off the agenda for far too long, for years while the mantra was lower cost of execution and fragmenting the markets, Europe's especially, partly thanks to MiFid. FT's Lex welcomes the ban on short selling (SS) saying that it had moved from a mechanism of price discovery to one of price creation.
The short sellers are more a school of Piranhas than an organised conspiracy. They can only feed on what's already bleeding and under water. They don't 'make prices'. That was the role of market-makers and professional brokers who were serving customers' orders and looking to buy and sell and therefore needing two-way markets. Stock lending allows traders to run one way bets. Many may now, emboldened by recent gains, get burned.
Today's markets are too vulnerable to stock lending and advance notice of ratings downgrades.
Stock lending in Europe first became dominant in Frankfurt where more money was made from lending than spreads and from there the fashion spread across Europe.
What can institutional investors gain from lending stock to short sellers? It's like hoteliers finding the rooms they've rented out have been totally trashed by coked up rock stars. But, they are so slow to do anything. Only now, after a year of everyone taking it in the shorts, are there signs of institutional investors at last cutting back on stock lending. Why hold stocks and allow others to war-game them, only to get back a loss valuation?
Institutional Investors and Pension Funds restraint is not timely, but it coincides with regulators' bans on short selling that we can today see massively restoring genune investor confidence. There will be profit-taking and continuing volatility, but shares should ratchet steadily up now as we approach end of year.
The regulators could and should have acted earlier in acting to bring order to disorderly markets and warned strongly on stock lending, which might have voluntarily choked off the problem earlier without regulators having to introduce formal SS bans. Short selling will not disappear, but merely move to the more orderly options and futures.
The next problem is the ratings agencies. Moody's are pre-announcing they forecast 20% higher losses on residential mortgage exposures and may downgrade the biggest monolines by several notches. S&P are also coat-trailing that they may downgrade the Lloyds TSB/HBoS bank merger (both currently AA-). The ratings agencies are playing fast and loose, mongering rumours, to coin a phrase, creating prices, just like the SS piranha, with medium term forecasts that are mere probabilities whose timings are uncertain that can become self-fulfilling prophecies, and causing confusion between PIT (point-in-time) and TTC (Through-the-cycle) grades. The ratings agencies have immense power to kill off any bouts of renewed confidence in the interbank money markets. It is a hard business when downgrades ripple through all of banks' banking and trading books through to bank credit limits and counterparty risk spreads.
The regulators should ban ratings agencies from announcing possible downgrades in advance. This may be reasonable practise in orderly markets where market sentiment is diverse and complex, but not in disorderly markets where market sentiment is one-way and simple. The ratings agencies pre-announcements have been directly feeding the SS piranha and are for now fully part of the problem.
How should ratings agencies become part of the solution? By being more transparant? Beginning with admitting their uncertainties, the limits to forecasting the present credit and economic risk cycle and ensure their published grades are genuinely based on historical experience, which is their advertised job, and not merely fanning the flames of gloom & doom!