Sky News business editor Michael Wilson
The markets are having their Heather Mills moment. You might as well make it up and see what you can get.
Get a good rumour going – that for example our leading mortgage lender, HBOS has been begging for cash from the Bank of England; that the Governor of the Bank of England has cancelled a trip to the Far East in order to keep an eye on things; and that all Bank of England staff have had weekend leave cancelled, just in case one of the leading UK banks chucks the towel in when the rest of us are cracking Easter eggs.
Never mind the categorical denials from all parties, HBOS shares languish as I write this, down over 8%, and the rest of the banking sector is as feeble as Lady Mucca's financial claims.
Rumours of course are up and running, of course, before truth has got its boots on, but if a behemoth like Bear Stearns can go belly up, then why not Britain's biggest mortgage lender? Or better yet, since trouble and strife – no, I'm not talking Lady McCartney here – is in plentiful supply, why not make some capital out of it?
Especially as you may have missed out on that meteoric rise on Wall Street after the Fed's confident rate cut.
It's one of the oldest tricks in the book. Called 'shorting', it's the practise of selling a stock which you don't actually own. You think that the price of a stock is going down, so you borrow the stock from a broker and sell it.
You buy the stock back on the open market at your predicted lower price and trouser your profit. All perfectly legal. What's decidedly shady is borrowing the stock you want to short, and then placing scurrilous rumours which force the share's price down, and then taking your money.
Who's to say this has been going on? Well, HBOS itself looks to have a loan book well supported by its customer deposits. According to some estimates it is exposed to part of the US sub prime problems, but not the 'toxic' rubbish which has infected so much of the financial system, not to mention Bear Stearns.
But as I have mentioned the Bear, how interesting it is that the US financial authorities are investigating whether or not someone was trying to profit from the bank's problems by forcing the share price down.
And how interesting it is that after this morning's make-believe market, our very own financial watchdog has belatedly announced that it's mounting a similar operation to monitor the rumours around banking stocks, including, and one hopes, especially HBOS.
It all goes to show, as Ms Mills has found, there's plenty of money in make believe.
Rogue traders making millions through rumour and speculation was headline news this week. And the headlines are right. The problem isn’t new. But the scale is now such that it threatens the very existence of many firms in the City of London and elsewhere.
Speculation is global. Speculation is now rampant. London, as the main centre for global finance, is a focal point of such activity.
Much of the activity is legal, as long as you are not too concerned about the spirit of the law.
The problem is that financial wizardry is always well ahead of the lawmakers. And that is allowing some to make billions at the expense of the honest and the prudent.
And that is also one of the themes of my recently published financial thriller “One Step to Danger.”
The novel includes a trader who spreads rumour and manipulates markets, a bank that has to be rescued after it overstretched itself and billions of dollars of speculative dealings in exotic stocks and shares. Hold on that sounds a bit like this week’s headlines, Northern Rock and the alleged French rogue trader Kerviel! You really couldn’t make it up.
The old fashion world of “my word is my bond” is dead and buried.
Now we have people blinded by the potential to make billions. And those billions are often made by major organisations in the financial sector – hedge funds, secretive sovereign wealth funds, banks.
Behind those organisations lies the underclass of mega millionaires paid to speculate, with huge personal incentives to win at any price. And their price of failure can be oblivion. The starkness of that choice puts pressure on them all. Some of them will do absolutely anything!
Do such people really exist in the real world? Many would claim that I exaggerate.
Is speculation really rampant? Are the gamblers actually in charge of the casino? To some extent they are.
How else could banks in the USA and the UK now crash in such a spectacular way?
Where else would people bet their all on products they don’t really understand?
Why are new City billionaires appearing just a few years into their careers?
It’s a global marketplace. Some people work by the rules and the spirit of the law; some work on the fringes. As the main character in my novel cynically says:
“I want to work in the grey area of banking and finance. There are always rules waiting to be broken and legally. With a good legal team there is no risk. Bugger drugs and guns. I am going to work with technology and the law.”
Technology has made it both easier and harder. It allows deals to be traced by the authorities but that takes time and effort.
And when the trade is fast, for you can sell and buy most financial stocks and shares within minutes, who is one step ahead and how do you catch them?
And if you want to buy and sell at a super-fast profit, something has to move the market. And rumour is the best way.
So where does the profit go? Can the money be laundered? Can it disappear?
You can deal within the day; bank profits within the next day or so and then move money across a myriad of accounts to another country within a further couple of hours. And where will the money go? Will it go to offshore accounts in jurisdictions where banking secrecy protects all and bankers prefer to turn a blind eye?
The markets are always hungry for transactions. That’s their life blood. They listen to rumour, especially when business is bad. And, let’s face it, it does not get much worse than it is today!
Once again the main character in “One Step to Danger” explains:
“The market was falling. Bad news was needed. We invented some more stories. Some were laughable. Others were simply outrageous. No sane person could have believed half of them. But the market was falling and keen to fall further. So they believed them.”
Suspicion is that amateurs get caught. But is there big money behind some of the major market movements? Does it affect currencies? Does it affect government debt? And is the stock market and bank shares just a small part of the issue?
Have the City of London and the other financial capitals of the world become the killing fields of the next generation underworld?
As a former banker, my question is how do they get away with it? Why don’t the controls work?
Everyone is expected to know their customer and to make sure they act properly. But who is the customer in today’s complex global market place? Is it the bank that gives the broker the order? Or is it the bank’s client, perhaps a fund which is part of another fund that is owned by dodgy individuals somewhere in the world?
The financial world is so global. Most in it are honest. But not all. The trouble is that the growing number, who act on or beyond the fringes of the law, play big time. They want to move markets by sheer volume of money or by any other means. They are rampant! And they want to be in control.
The big loophole is that laws differ from country to country. Some countries are deemed beyond the pale. Some will not deal with anyone from those countries. But others will. And they provide the gateway to the unwelcome.
Anyone can buy anything even if the system tries to keep them out. The rewards are high enough. At a price there is always a way. Now so many are losing, the unscrupulous are able to make billions. These massive amounts of money attract the unwelcome. It must fascinate the world of crime.
There is a huge problem. Rules, regulation and laws, as many believe, are not there for the others. There are too many countries with dodgy laws protecting the wrong doers. These are used by the characters in my novel and by those in the real world. All fiction has an element of fact!
The City is slowly being strangled by fear. Fear of the power of those speculators. There is now a realisation that blind folly has led to the creation of financial time bombs that could destroy major organisations. They can be put in play by shadowy characters, just as in my novel, who cash in on the hunger for profit of big business.
And what can be done to make sure it does not happen? Nothing much other than to punish the guilty. That is if you can find them!
As my novel warns, in this crazy world, “Many people never know how close they come to opening a paper and seeing their bank is bust.”
The City now faces a major challenge. It is the centre for much of the world financial markets. It is the most global. It is the most attractive. And it has to lead the fight against the rot that has set in. Or it will lose credibility. Its reputation will be gone. And that is bad for investors. It is bad for business. And it’s bad for you.
Posted by: john Gubert UK 23 Mar 2008 18:04:07
Sir
In the instance of HBOS rumours and rogue trader share dealing where is the FSA - this institution is clearly incompetent as was illustrated in the Northern Rock debacle and now in regulating city insider trades that affect the helpless consumer pension fund value and other investments. The FSA needs a complete overhaul although I persoanlly have no faith in this government or chancellor to institute such a process. I suggest a Sky poll to clarify consumer confidence in the FSA as regulator and if an overhaul is recommended in light of recent events - this may just persuade this government to act.
Posted by: neil macarthur harpenden herts 20 Mar 2008 11:25:27
honesty what honesty ?if you have to buy a house the total intrest over 25 years is crimminal.estate agents lawyers .banks building societies are parasites.i think they deserve what they get .shareholders from northern rock bleating like a load of miss herded sheep.would they bleat as loud if you couldnt pay your morgage?.shares are just pieces of paper promiseing divedends and future growth and profits.the bankers should all be in prison for fraud.as should the corrupt .in bed toghther republicans and democrats.civil unrest is comeing.heads will roll
Posted by: geoff bedfordshire 20 Mar 2008 07:38:36
We all know that in the real world, people will be selfish. I highly doubt that these traders are squeaky clean, and the whole rumours thing is most likely exactly what is happening. Though can you blame them? The banks are making it ridiculously easy for them. Bear Stearns turns around and says there is not problem and 24 hours they're bust? Clearly, no matter how many times the Fed or any 'official' entity reassures us you can only look at that example and say "well they lied to us before, why not now?" and people are capitalizing on this fear.
Posted by: Zac Imam,London 19 Mar 2008 22:15:38
When the Stock Market was being dragged into the 21st Century and computerised there were fears it would spiral out of control by the instant reaction to rumour and gossip. This did'nt happen, up until now that is. So, what has changed, well the Dealers employed by supposed responsible Banks are now encouraged in their search for bonuses to behave like they are in a Casino. Yes that's right, it is now a full time occupation at these pillars of society to gamble.
If it is'nt happening for you, your gambles are'nt paying off then start a nasty rumour about any Financial Institution then bet, yes bet that this Company's stock price will fall.
Now this is'nt made up, your guess is right though, it is "Alice in Wonderland". Welcome to the fiscal order of 2008, regulate it! you would be better certifying it.
Posted by: Robert, Scotland 19 Mar 2008 18:52:30
This suspicion re HBOS selling short, just goes to re-confirm my view that the status of the worlds financial markets is all fixed by the players. I am sure that there are many 'players' that have made millions out of the market turmoil that they have been instrumental in causing.
Posted by: Rick, Sweden 19 Mar 2008 17:01:32
Sir
Indeed as you say, there is a lot of money in the [Land Of Make Beleive], however, is it not in the interest of all to ensure they make it with honesty so as to avoid looking over ones shoulder for the rest of their spending days, however, short they may be?
Banks as well as the financial sector, notwithstanding the housing and legal practices have been accustomed to these practices, making it difficult to ascertain real estate from virtual ones, as indeed Ms Mills found out to her delight alongside many others.
Today, as the markets settle and more truths emerge, surely as easter approaches, some housholds will keep their [Bucks Fizz] in short supply as they learn that not all that glitters is gold.
But who created all these rumours in the first place, so as to make a profit?
Happy Easter!
Posted by: Khalid 19 Mar 2008 15:14:00