Stock borrowing is part of a sophisticated market - it is not witchcraft

The equities markets are still falling and plenty of individual stocks are being short-sold, but those who had previously been blaming stock lenders and margin borrowers for the financial obliteration of otherwise healthy companies are increasingly being exposed as witch hunters.

Of course there are some lone riders still wanting to seek other answers for why their shares are being hammered, and the one that most recently springs to mind is Andrew Forrest, the founder and main shareholder in iron ore hopeful Fortescue Metals.

Ten days ago he fired off to the stock exchange a rather curious missive saying that 10 per cent of the company's shares had been the subject of stock loans.

The stock was owned by one of his apparently great supporters, the Wall Street investment supremo Phil Falcone. According to Forrest, Falcone's custodian had lent the stock, without Falcone's knowledge, presumably to cover some other trader's short position.

There are two flaws in this statement. The first is that custodians need the permission of the owner to lend the stock.

The other problem with Forrest's explanation of why his share price was tanking is that it has continued to fall even after he said he had rectified the situation.

And it is hard to argue with the fact that, stock lending or no stock lending, short selling or no short selling, Fortescue was going to fall.

This is because concerns are emerging about the sustainability of the buoyant mineral commodities boom. The other big players in the sector are also feeling it.

The reason Fortescue feels the heat more acutely is that it has only just begun to dribble out the first of its product to the Chinese market. It is a stock priced on future returns.

Rio Tinto and BHP are already making handsome returns from their well-established mineral commodities businesses. In simple terms, Fortescue is far riskier. And while this appears to make it more vulnerable to short-sellers, the reality is that when it is adjusted for risk, it is not.

If you want to short Fortescue it is a costly exercise. It is a bit like betting on the Melbourne Cup winner when it is racing against a line-up in the Wagga Wagga picnic races.

To short Fortescue costs a fortune because of the likelihood that its share price will fall. It is like investing $1 to get a $1.20 return.

And this brings us to all those other companies such as Allco, Babcock & Brown and ABC Learning.

For months their demise was blamed on short-sellers. But the shorting days are well and truly over and their shares are bouncing around the bottom - or arein suspension.

The short-sellers might have hastened their falls but investors have left them there because that is the perceived value of their equity, based on their earnings ability.

This is not to say that all this trading has been entirely clean and transparent. The courts will be left to umpire whether Opes Prime clients were the victims of less-than-stellar transparency when they took out margin loans with this particular broker.

But margin loans and stock lending are two distinct practices. Neither is bad and, in the case of stock lending, it is a well-used and legitimate tool for institutional investors to rent their shares for a fee to others who want to make a bit of extra income.

And it is a well-used practice whether markets are going up or down and works best when there is volatility.

Those who borrow the stock could be covering short-selling positions but they could also be using the borrowed stock as part of a hedging strategy, or as an arbitrage. This is all part of the operation of a fluid and sophisticated financial market. It isnot witchcraft.

It is also well understood by the Australian Securities Exchange. And while there is room for the Government to assess whether the regulations are being respected or whether in some areas there could be greater transparency, any serious attempt to limit stock lending or margin lending could be counterproductive to Australia's reputation as a sophisticated market.