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  1. #1
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    Short sellers face FSA probe

    Short sellers face FSA probe

    Hemscott, 19/03/08 10:47
    The market regulator is investigating trading in UK financial stocks after unfounded rumours sparked a panic that sent HBOS lower by 18%.



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    The Financial Services Authority said it had started an investigation into the trading of bank and financial services stocks in recent days. The markets watchdog also warned that it "would not tolerate" malicious rumour-mongering by short-sellers.

    "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," the regulator's managing director for wholesale and institutional markets, Sally Dewar, said in an unusually blunt statement.

    "We remind market participants of the need to take extra care, in this market climate, to adhere to the market code of conduct."

    The FSA's warning came after shares in HBOS, Britain's biggest mortgage lender, tumbled 18% to 398p in opening trade, then pared the drop after officials moved to dampen dealing-room speculation about the strength of its balance sheet and its access to wholesale credit markets.

    The rumours - including one that HBOS had approached the Bank of England for emergency funding - were "complete and utter nonsense" and was "totally unfounded and without a shred of substance whatsoever", a spokesman for the mortgage lender said.

    Meanwhile, the BOE was forced to deny that it was planning to discus the stability of any UK institution, and that the nine-member Monetary Policy Committee had been asked to cancel any Easter holiday plans in case of a crisis meeting.

    Today's volatile trading is symptomatic of the nervousness created by Bear Stearns' collapse, with short sellers targeting institutions they believe are reliant on the wholesale markets for short-term funding. This week alone, Alliance & Leicester, Barclays, Bradford & Bingley, the hedge fund Man Group and the inter-broker dealer Icap have all seen share prices fall on what appear to be spurious rumours about their financial strength.



    Such tales are easy to believe because of gridlock in credit markets, as intervention by central banks has yet to have any effect on UK wholesale borrowing costs. The three-month London InterBank Offered Rate (LIBOR) today rose to 5.98%, from 5.97% yesterday and 5.96% on Monday, as cash traders speculated that the BOE will be forced into an emergency move to inject liquidity.

    Moreover, today's gossip about problems at HBOS had been stoked by some bearish broker research; JP Morgan, in a research note on the financial sector, argued that HBOS was among the most distressed in the European sector with a capital shortfall of £11.4bn. Overall, its team said the UK banking industry had been left with a £37bn capital shortfall following full-year results, compared to £25bn before the reporting season.

    "We believe the banks to be still very much in the denial phase," nalyst Carla Antunes da Silva told cients.

    "Structurally we believe (HBOS) to be one of the most impaired banks in the European banking sector and the risk is that we could see a significant balance sheet de-leverage process taking place in the future, with the undesired side-effects in terms of macro economic growth that this may entail, given that HBOS has 20% of the UK mortgage market share."

    Da Silva highlighted that HBOS last week propped up its Tier 1 capital ratio by raising £750m of preference capital. It managed to raise the cash in a two-day "window of opportunity" between the US Federal Reserve boosting liquidity measures on Wednesday and the run on Bear Stearns on Friday.

    This credit line was agreed at an 9.5% interest rate - some 350 basis-points higher than the average rates HBOS is charging its mortgage customers.

    "With an estimated £17bn of debt issuance due in 2008 and another £15bn in 2009, last week’s issuance is clearly a drop in the ocean in terms of funding," the JP Morgan analyst wote. "HBOS remains as one of the highest short-term funding needs of the UK banks - especially given the short term duration (average 2-3 years) where residential mortgages account for circa 55% of total loans and 35% if total assets."

    The broker maintained an "underweight" stance on HBOS shares, which it said started the day trading at nine times 2008 capital adjusted earnings. Da Silva forecasts 2008 EPS of 90p, which is 13% below consensus levels but still assumes the bank will be able to grow its balance sheet at about 4% this year.

    Jonathan Pierce, banking analyst at Credit Suisse, argued that HBOS's balance sheet looked in "reasonable shape". His model suggests that HBOS has a £493bn group funding requirement, of which £215bn is retail and corporate deposits and the remaining £278bn is wholesale funding.

    Of the wholesale line, £164bn matures within one year. But £140bn of this is in shorter term bank deposits that would be expected to roll over.

    "That the market is nervous on liquidity issues more broadly is completely understandable - as we've flagged many times over recent weeks, liquidity in the cash markets is poor - but we believe the Bank of England is standing by ready to assist where necessary," Pierce said.

    "Fundamentally we remain cautious on bank shares, including HBOS, given the continued uncertainty in markets and the implications on longer term asset quality of everything we are seeing now."

    Separately, JP Morgan repeated "neutral" recommendations on both Barclays and Royal Bank of Scotland, based on concerns about further asset write-downs. The US broker was also neutral on Lloyds TSB because of an "uncompelling" valuation.
    Without being too direct a member of the McQuirrel clan who had access to HBOS read an internal email a few months back about HBOS and it''s SPM losses and how it was a lot larger than they were intitially letting on.
    It was infact possibly going to be the largest of the UK banks.

  2. #2
    Thailand Expat

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    oops wrong forum

    MODS

    move it somewhere else

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