Pub Chat Could Crash UK Economy - FSA

[TonyGosling]

British authorities try to quell damaging financial rumors
By Julia Werdigier
Published: March 19, 2008

LONDON: In a rare move to calm investors' nerves, British financial authorities stepped forward on Wednesday to quench a string of "unfounded rumors" that had sent some financial stocks in London into a tailspin.

The Financial Services Authority said it had started an investigation into whether some traders spread rumors about British financial institutions over the last few days and might have profited from the decline in the stocks' share prices. Separately, the Bank of England, which almost never makes public statements about specific lenders, denied rumors that it met or scheduled to meet with executives at a British bank to discuss potential liquidity problems.

The twin moves come days after the U.S. central bank's extraordinary rescue of Bear Stearns and illustrates the lengths authorities are going to on both sides of the Atlantic to prevent a crisis of confidence in the financial sector from spiraling out of control. A day after Wall Street soared in response to a Federal Reserve interest rate cut, markets in Europe and the United States fell again, with the Dow Jones industrial average down 1.6 percent in afternoon trading. (Page 15)

"It reveals how nervous the authorities are that rumors can actually bring serious problems to a financial institution," said Alistair Milne, senior lecturer at Cass Business School in London.

Trading rooms were buzzing with rumors Wednesday morning that HBOS, the largest mortgage lender in Britain, was in trouble. The speculation had wiped about £3 billion, or $6 billion, off its market value before the Edinburgh-based lender could deny them, saying it had "ready access" to funding.

"We will not tolerate market participants taking advantage of current market conditions to commit abuse by spreading false rumors and dealing on the back of them," said Sally Dewar, the FSA's managing director for wholesale and institutional markets.

The announcements came a day after the U.S. Securities and Exchange Commission said it had opened an investigation into whether investors spread false rumors about Bear Stearn's health last week while taking short positions, a practice where traders bet that the value of their shares would drop.

It also coincided with concerns over the effectiveness of the FSA, Britain's financial regulator. The authority has come under pressure to change the way it oversees the markets and its participants ever since the collapse and nationalization of Northern Rock, a British mortgage lender, earlier this year. A parliamentary inquiry into Northern Rock's demise concluded that the FSA had failed in its supervisory duties.

The Bank of England on Wednesday denied speculation that its governor, Mervyn King, had called off a trip to Asia, saying there was never one scheduled, or that staff members were told to cancel their Easter vacations because of the current market turmoil. The central bank confirmed that King did defer a trip this week to stay in London and "monitor conditions" and plans to attend a scheduled meeting with British banks later this week to discuss the current market situation.

"They are trying to stamp on malicious rumors and foul play, but it's difficult because the markets have always worked on rumors," said Keith Bowman, equity analyst at Hargreaves Lansdown, a stockbrokerage firm in London. "Especially in a down market, the fact that investors can equally make money by taking short positions has accelerated the rumor mills."

Trouble at Bear Stearns that led last weekend to the sale of the American bank to JPMorgan Chase had prompted fears among investors that other lenders might also fail. In New York, Goldman Sachs and Lehman Brothers on Tuesday eased worries about their financial health that had weighed on their stock prices by reporting first-quarter earnings that beat analysts' expectations. Morgan Stanley followed on Wednesday.

In London, shares of some banks, including Royal Bank of Scotland, Alliance & Leicester and Bradford & Bingley, fell despite the authorities' denials and comments by some analysts, including Collins Stewart's Alex Potter, that the share declines are "irrational."

HBOS recovered somewhat from an earlier record drop of 17 percent but still closed down 7 percent at 446.25 pence. "It's always a vulnerable time ahead of a long weekend, and the market sentiment is very fragile," said Michael Foot, chairman of the Promontory Financial Group consulting firm in London, referring to the Easter holiday on Sunday.

The FSA's investigation into this week's banking rumors coincided with the announcement of the departure of Clive Briault, head of its retail financial markets division, at the end of next month. The authority said Briault would leave "by mutual agreement," but some former FSA managers indicated that he had been dismissed as part of a management change aimed at improving the organization's performance.

The FSA's chief executive, Hector Sants, also appointed directors "to strengthen our capacity in the key areas of large retail group supervision and financial stability."

http://www.iht.com/articles/2008/03/19/business/ukbank.php