A month ago HBOS was screaming about unfounded rumours as to the state of its capital. It went crying to the FSA as its share price collapsed from just over 700p to just under 400p asking that the “rogue shorter” be hunted down and hung by the neck until severely punished. Talk circulated that it should be made more difficult for shorts to be placed in the market and that the evil Hedge Funds had made the whole situation worse. 

The crying, wailing and the strong denials from HBOS coupled with stern words from the FSA allowed the stock to rally to the 620p area, were it hit resistance and fell back to 480p area.

This a quote from thisismoney.co.uk dated the 19 March which nicely recaps the events that took place:

• An investigation was under way this afternoon into the possibility of suspicious trading.The drama started to unfold at 8.31 when shares in HBOS began to wobble. What followed was one of the most remarkable morning’s trading in recent stock market history.o 8.33am: HBOS shares plunge as some traders launch a sudden raid on the stock. At the same time rumours about HBOS’s solvency and demands for funding from the Bank of England start to sweep through the market.

  o 8.51: HBOS’s shares plunge to 400¼p and the FTSE 100 dives to 5570.

  o 9.02: HBOS denies the rumours. A spokesman says it has an ‘ exceptionally sound’ balance sheet.

  o 10.15: Bank of England press officers phone news organisations including the Evening Standard to kill off rumours of crisis meetings and HBOS cash shortfalls. HBOS shares start to recover.

  o 12.30: Financial Services Authority says it is investigating suspicious trading in UK financial shares.

  Market commentators said it was unprecedented in recent history for the Bank of England to be forced to issue a denial that a major high street bank was in difficulties. The Bank denied that any bank had asked it for emergency funding or asked for a meeting with it.

  It also denied as ‘fantasy’ suggestions that Governor Mervyn King had cancelled a trip to the Far East or that all staff at the Bank had been told to cancel leave over Easter weekend because a bank might be in trouble.

Notice the speed of events, within 4 hours of the plunge in stock prices the FSA were on the hunt, the Bank of England had entered the fray and even the press had been co-opted into the defence of HBOS against the rumours.

The latest fall in price was not accompanied by the strong denials or threats of retribution and on Sunday, we found out why.
Here is a quote from Times online with their exclusive:

• THE board of HBOS will meet tomorrow to decide whether to approve a multi-billion-pound rights issue to repair the bank’s balance sheet.
  Lord Stevenson of Coddenham, chairman of the group that includes Halifax, Bank of Scotland, Clerical Medical and Birmingham Midshires, has called the discussions ahead of the bank’s annual shareholder meeting on Tuesday in Glasgow.
  The board is being asked to consider raising between £2 billion and £4 billion from investors. It is still possible that the group, which has a market value of £18 billion, could attempt to ride out the credit crisis without raising additional funds.
   

Now it is a dirty world out there and some tricks can seem worse than others but this has the hallmarks of a major collusion between HBOS, FSA, the press and the B of E to ensure that a price sensitive issue was not just denied but tainted with a hint of illegality.

The moral hazard of such a move cannot be over looked. Whatever the foundation of the original rumour it has proved to be not far off the mark. The interference from the Powers That Be has caused a mis-pricing of HBOS to occur. I would not be surprised if Institutions who went long on HBOS after the anti-short campaign are chatting with the lawyers.

The problem now is, who do you believe in the future? The market rumours or the company, FSA, Bank of England and most worryingly, the press?

Market Snippets

April 28 (Bloomberg) — Mars Inc. agreed to purchase Wm. Wrigley Jr. Co. for $23 billion, with financing from Warren Buffett’s Berkshire Hathaway Inc., combining the world’s biggest maker of chewing gum with the producer of M&Ms chocolate. Wrigley, with $5.39 billion in sales in 2007, surged 23 percent in New York trading today after the companies said Mars would pay $80 for each Wrigley share. Mars, which generates $22 billion in annual revenue, is offering 28 percent more than Wrigley’s closing price on April 25.

April 28 (Bloomberg) — Royal Bank of Scotland Group Plc may cut about 7,000 jobs at its global securities and corporate lending unit, or almost 25 percent of the workforce, following the purchase of ABN Amro Holding NV’s investment bank and credit market losses, two people with knowledge of the plan said.
Chief Executive Officer Fred Goodwin announced plans last week to raise 12 billion pounds ($23.9 billion) and sell the Edinburgh-based company’s insurance operations to shore up the balance sheet. Financial institutions worldwide are seeking about $217 billion from investors to replenish capital.

Commentary by Mick Phoenix

on behalf of CA Letters

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.