Margareta Pagano: It's hero to zero as Paulson's own stock takes a dive

Hank Paulson must be wishing he could introduce a ban on short-selling on his own stock. For the worth of the US Treasury Secretary is sinking faster than a stone; he's fallen from hero to zero as fast as the financial stocks he has sought to protect.

It's hard to remember now but only a few weeks ago Paulson, the former chairman of Goldman Sachs, was being hailed as Superman, the only one who could save the financial system from total implosion.

But Paulson's $700bn bailout of the banks – still being hammered out in Congress – is leading to serious questions about his judgement in handling the financial meltdown, going right back to the rescue of Bear Stearns in March, and then Freddie Mac and Fannie Mae a few weeks ago.

One criticism I heard last week, from a very senior central banker, was that Paulson's real mistake was forcing Lehman Brothers to the edge, two weeks ago, with his unequivocal statements that no taxpayers' money would be used to prop it up. Instead, Paulson should have given Barclays the assurances it needed from the Treasury and the Federal Reserve to underwrite Lehman's exposure, thus allowing the merger to go through. By not doing so, the Lehman collapse sprang the coil which led to the unravelling of AIG and Washington Mutual, and then the extraordinary turmoil in the financial markets and the withdrawal of funds at Goldman Sachs and Morgan Stanley.

This has legs because Lehman's bankruptcy blew away any remaining confidence, which at times like these can be as important as liquidity.

That's history. But it was undoubtedly that weekend's total breakdown in trust which prompted Paulson's rescue package. This is now being crucified by left and right on Capitol Hill, even by his own Republican Party. One UK columnist even claimed that Paulson was to finance what Donald Rumsfeld was to military strategy. However, despite the fine rhetoric, no one has yet come up with an appropriate alternative to get the US moving again – not even the fistful of Nobel Laureate economists who have been protesting so much.

The principle of setting up a new "bad bank" is sound. It was done at Lloyd's of London with Equitas. And the architecture of this proposal, which will allow the new funds to be given in tranches, seems fine. But the devil is in the detail. Presidential candidate John McCain has already got a $400,000 cap on the pay of bankers benefiting from the bail-out – equivalent to the top pay of the US president – out of the deal, while Barack Obama has quite rightly demanded conditions that could enable US homeowners who can't pay their mortgages to keep their homes – in return for lenders taking an equity stake.

Obama is on the right track. I would go further. Paulson and his colleagues are all panicking. As any trader knows, panicking brings danger. What the government of the US – and the UK – should do is promise to guarantee the deposits of all the "ordinary" customers and investors with money invested in the banking system. Such a promise would restore confidence on Main Street where it is really needed. Leave Wall Street to sort itself out.

Emily Maitlis demands answers to help homeless children

Sleeping rough in the City: 'Newsnight' presenter Emily Maitlis hosts a fundraising quiz in aid of Action for Children at next Friday's sponsored sleep-out at London Bridge. More than 500 City and IT workers from Ernst & Young, Barclays, Royal Bank of Scotland and Cazenove among others are sleeping out at Potters Field: it could be good practice if times get tougher. Other workers will be joining events across the country, including Manchester, Birmingham and Reading, to raise at least £500,000. Joining Maitlis for the night will be Arsenal footballers, boxer Ricky Hatton and chef Ainsley Harriott, who are taking part in a silent auction. Byte Night is now in its 10th year and the money will go to help the 75,000 children thought to be homeless here.

Ban or no ban, short-sellers can always bet on bank shares at the bookies

I've already heard of one trader who has made £2,000 from shorting banking shares over the past 10 days since the short-selling ban was introduced on 29 financial stocks. He's not the only one, according to BetsForTraders, the fixed-odds financial betting firm that has seen the number of punts on banking stocks soar since the ban.

Surprise, surprise but the most popular stocks have been Royal Bank of Scotland, Lloyds TSB, which is about to buy HBOS, Goldman Sachs, Barclays, CitiGroup and Morgan Stanley. In fact Ryan Kneale, chief market analyst at the betting firm, reports a rise of 429 per cent in the number of bets.

BetsForTraders is not covered by the ban because it allows betting on the event of the share price falling, but does not include any contracts or buying or selling of the eventual shares.

This just proves how the Fincncial Services Authority's move – and similar bans by overseas regulators – was little more than shooting the messenger. If shorting did not exist, most if not all of the casualties on both sides of the Atlantic would have fallen irrespective of the bears sharpening their claws. For example, at HBOS only 3 per cent of the stock was out on loan – suggesting that it was "normal" shareholders heading for the door.

Shorting has nearly always accompanied the end game of all the famous bubbles – from Dutch Tulip to the South Sea through to the last Wall Street crash in 1929. But what is interesting, according to research by Blue Index, is that the common link is that bans tend to mark the beginning of the end of a down cycle – rather than the worst part.

Blue Index also points out that if the turmoil persists, there will be a problem when the ban is lifted because it risks an even more exaggerated decline in stocks. So while regulators were right to try to bring order, the ban may prove to be only a short-term fix.

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