Moment of truth for HBoS rights issue

Jun 25 2008 by Bill Gleeson, Liverpool Daily Post

WHEN does specul- ation become market abuse? The question lies at the heart of the Financial Services Authority’s attempt to clamp down on speculators intent on driving Halifax Bank of Scotland’s share price down beneath its rights issue price.

Such speculation is a classic case of people putting their own short- term interests ahead of the wider public good.

The health of the country’s banking sector is vital to each and every one of us, yet HBoS’s attempt to shore up its balance sheet by raising £4bn through a rights issue could fail because of the behaviour of hedge fund managers.

Similarly, there has been considerable debate in recent weeks about the role of speculators in forcing up the price of oil. With the oil price more than doubling in the past 18 months, somebody somewhere has made a killing.

We have shown an ambivalent attitude to speculators over the years. Wall Street investor George Soros, for example, famously bet against the pound in September, 1992, making £1bn in the process. That episode, when Britain was forced to leave Europe’s Exchange Rate Mechanism, cost the government billions of pounds in lost foreign currency reserves it had staked on the other side of the bet. Yet, despite the harm done to the public purse, Mr Soros has ever since been seen as an investment guru.

On the other hand, speculation is seen by some commentators as nothing more than a high-risk, short-term gamble that doesn’t necessarily reflect real economic conditions.

But can we live without speculators?

Arguably they serve a useful purpose, for example by weeding out the weak or bringing a speedy resolution to a problem.

Mr Soros’s bet against the pound was a catalyst for something that had to happen anyway. Britain had to get out of the ERM because the system was keeping sterling artificially high. Had we stayed in, unemployment could have risen sharply and the economic growth enjoyed in subsequent years could have been stalled. Seen this way, Mr Soros did the country a favour.

Speculators can only push up the price of a barrel of oil if there is some fundamental imbalance in the oil market.

They may push oil prices up further or faster than they would otherwise go, but speculators couldn’t do so unless demand for oil was significantly out of kilter with supply. Whatever the cause, high oil prices forced heads of government, including Gordon Brown, to place the issue at the top of the agenda at an inter-governmental meeting in Jeddah earlier this week. The high price is also forcing car manufacturers and consumers to think hard about alternative forms of fuel and energy.

Nor is it impossible that the same is true with HBoS. HBoS shares may be easing due to the slowdown in the housing market and much lower mortgage lending.

But, among analysts I spoke to yesterday, the feeling lingers that something sinister or abusive is occurring. HBoS was the subject of scurrilous rumours a few months ago that claimed it was about to do a Northern Rock and go cap in hand to the government for emergency funds. The concern is that those false rumours, which could easily have sparked a run on the bank, were spread by speculators looking to turn a quick profit by short-selling the bank’s shares.

The disclosures to the FSA yesterday, revealing hedge fund positions in HBoS shares, give credence to the idea that speculators are at work.

The acid test comes tomorrow when HBoS’s board must decide whether to persist with their plans for a rights issue at the advertised price, or to cave in to the pressures on its shares.