HBOS Pulls FTSE 100 Down, FSA Pulls Antenna Up

HBOS, owner of one of the UK's largest mortgage lending company, The Halifax and also The Bank Of Scotland, saw its shares crash within a span of 2 hours even as the Bank Of England quickly took steps to squash any rumors of the Bank being in financial doldrums by calling up the media and assuring that all was well with the group. However, the damage was done as HBOS lost almost 20% of its value at one time during the bear rampage.

After facing 2 consequent shocks of the Northern Rock in the UK, followed by Bear Stearns in the US, jittery investors seem to be reacting with panic at any news that involves banks or hedge funds.

The Bank Of England stated that no bank had requested for any emergency funds or had asked to arrange a meeting with it. It also brushed off rumors that Governor Mervyn King canceled the trip to the Far East, and that its employees were denied leave on Easter weekend since the Bank was facing problems.

After past experiences, the Bank of England seems to have got its act together and has moved quite quickly to douse out any rumors. The crash of HBOS shares has also alerted The Financial Services Authority [FSA], which has now launched an investigation into possible foul play by probing as to, whether someone had illegally gained profits by orchestrating such a crash. The FSA has given out a strict warning to traders that persons trying to make a killing in the market by starting false rumors and then trying to cash into the fallen market will not be tolerated.

Other banks too felt the effects of the rumor and banks such as Alliance and Leicester, Lloyds TSB, among others also saw their shares drop significantly. But HBOS had to bear the brunt of the rumor and HBOS quickly responded by saying that “There is not a shred of substance whatsoever to any of these malicious and unfounded allegations that have affected UK banks this morning.” The bank also stated that its liquidity was backed up by large deposits and drew attention to the fact that just a week back the bank had collected 750 million pounds in its offer, which was oversubscribed twice.

Support for HBOS came in from other quarters as well, with David Buik, a seasoned stock market player stating that he had been familiar with the dealings of The Bank Of Scotland and The Halifax Building Society, whose common owner is HBOS, and he believed that they were very conservative units and that their culture had remained unchanged. By afternoon though, HBOS had managed to recover around 7% of its lost value. Industry regulators put the blame on short sellers, who might have wanted to buy back the same shares at a lower rate after selling them at a higher rate and then spreading rumors to pull it down.

HBOS has the largest number of private shareholders in the UK and most of them are also its customers too and they have been handed out 130 million pounds as dividend in the last 6 months by HBOS. So, even as HBOS shares tumbled down to 446.25p, many of Britain's large banks were proposing that the Bank Of England follow in the footsteps of the US Federal Reserve by acting fast to stamp out any negative influence on the market and to build up the confidence in the market.

The move by the FSA to launch an investigation into possible foul play looks confidence inspiring but in reality will be a hard task since short selling by itself is not illegal and catching hold of traders who could have spread those rumors and linking them to illegal profits made in the market could be very difficult to prove. The reaction to such a rumor and the scalping of the Banks shares in such a short time only shows the vulnerability of the market and the nervous state of its players.