HBOS Attacked by Malicious Traders

After the collapse of Northern Rock in the UK and Bear Stearns in the US, financial markets are wondering who’s next. In Britain, it seems a few (one hopes it is only a few) malicious traders deliberately set out to break Halifax Bank of Scotland [HBOS] earlier this week. They managed to drive the price down 17% in the first half hour of Wednesday’s trading, and it took a statement from the central bank to calm the market (somewhat). Not that there is anything wrong with short selling, but shorting a stock and spreading false stories about it, well, that’s quite different.

For those who spend their time more productively than thinking about stock market manipulation, short-selling is a nifty little trick that allows one to profit when a stock’s value drops. Essentially, one sells the stock, the price falls, and then, one buys the stock. The mechanism by which this is done is a rather tedious exercise in bookkeeping, but it is perfectly legal in almost every financial market, and it happens daily.

HBOS has seen its stock decline 39% this year while the overall UK banking sector is off only 15%. So, it appears that the market doesn’t much like HBOS. Nevertheless, a spokesman for HBOS maintained in a Reuters interview, “We’re a very diversified business with an exceptionally strong balance sheet . . . . We continue to access wholesale markets whenever we feel it is appropriate to do so.” Also, the bank raised £750 million just last week (at 9.5%, so there was a perception of risk, but not so great that the deal didn’t get done). So, why the sudden drop on Wednesday?

Sally Dewar, managing director of the Financial Services Authority (the UK’s financial regulator/watchdog), said, “There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them.”

Reports are that someone made £100 million shorting HBOS stock. The market’s current nervousness makes such rumor-mongering all the more effective, and indeed, there are reports that there was unusual trading activity in Bear Stearns stock three or four days before its precipitous collapse. As an HBOS executive told the press, “This is the modern day version of a bank robbery.” And someone needs to go to jail if that’s true.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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