It's one thing for speculators to manipulate a share price with false rumour and innuendo in the hope of making a fast buck – though even this is illegal – quite another to destabilise one of the country's major banks, with likely catastrophic knock-on consequences for the wider economy had it succeeded.
Neither the Bank of England nor the FSA mentioned HBOS by name, but it was clear who they were talking about in dismissing yesterday's wave of speculative rumour as "fantasy" and "completely unfounded". In the climate of fear that currently exists in financial markets, the rumour mill has been working overtime, with some hedge funds making hay off the back of it.
Yet what started out as another day of mayhem in banking stocks as skittish investors reacted to the latest wave of negative rumours, had by the close of play become a story more about determined market abuse by short-selling hedge funds and other variously parasitic speculators that profit from the misery of others. With uncharacteristic temper, the FSA promised to hunt 'em down and smoke 'em out.
It's always big stuff when regulators are forced to deny that a major bank is in trouble. The last time it happened in such a clear-cut fashion was with NatWest during the secondary banking crisis of the mid-1970s.
Interestingly, that particular denial came to be seen as the nadir of the crisis, but this is a rather different gig. Back then, NatWest actually was in all probability insolvent. True enough, the Bank of England didn't in the end have to rescue NatWest, but it was within a hair's breadth of having to push the button. Unless the company is lying about the numbers, this is not the case with HBOS today.
There is indeed to be a meeting today of the Governor of the Bank of England with a handful of top bankers, but it is not for the purpose of discussing the bailout of HBOS. A number of meetings by both the Governor and his colleagues have been cancelled or delayed because of the wider banking crisis, but not for the specific purpose of dealing with a major banking rescue. The Governor was never due to fly to the Far East for a meeting in the first place, so there was no trip to cancel. And finally, Bank of England employees are to be allowed to go away for the long Easter weekend. They have not, as yesterday's rumours had it, had all leave cancelled.
As for HBOS, it is obviously highly exposed to the UK mortgage market and has built up a strong business in leveraged finance, both of which are vulnerable in current conditions, but its capital and liquidity position remains strong, it has been shrinking its net new mortgage and corporate lending for some years now, and in almost every respect, it is about a million miles away from being another Northern Rock.
More than half its funding comes from £240bn of retail deposits, with only 44 per cent accounted for by wholesale markets. Most of these wholesale funds are now well diversified, both in terms of maturity and currency. There is little danger of the wholesale funding strike that sunk Northern Rock.
Even so, with the markets in feral mood, almost anyone is a target. It has become like the press coverage of the Madeleine McCann child abduction case – open season where a culture of anything goes has taken hold and all normal standards of care and responsibility have been abandoned.
The bottom line is that the speculators are playing with the livelihoods of countless thousands, as well as putting in danger the savings of millions of ordinary people. They will have been quaffing champagne at Mayfair's best restaurants last night out of the killing they made yesterday at the expense of the country's wider economic interests.
The disclosure regime around short selling is still deeply unsatisfactory, with outsiders unable to see who has been doing it and in what quantities. What makes the big institutions in charge of our pension savings lend out their stock in the quantity required to allow the practice – around a 10th of HBOS's share capital is out on loan – has always been a complete mystery to me, despite the not insignificant fees that stock lending can generate. When the purpose of the short selling is to trounce the shares to the point where the company goes bust, the practice looks doubly questionable.
With extensive powers, the FSA ought to be able to find out exactly who has been shorting and when, and through telephone recordings, who's been saying what to whom. Even so, it's not going to be easy. It's a thin line that separates the spreading of false rumour from that of simply taking a high conviction position. There is, for instance, nothing wrong with shorting HBOS because rightly or wrongly you think it might be experiencing funding difficulties. Nor is it illegal to speculate on whether the Bank of England might be holding an emergency meeting, however misinformed. Markets work on rumour and counter-rumour, some of it well-informed and some patent nonsense. No one would buy and sell at all unless they thought they knew more than the other guy.
What happened yesterday plainly falls into a more extreme and dangerous category, for it could have resulted in a self-fulfiling run on retail deposits which if it had been sustained would indeed have eventually tipped the bank into trouble. Yet chasing the miscreants down is a far from easy process.
Regrettably, the outcome of the FSA's investigation is likely to be about as fruitful as the hunt for Osama bin Laden.
Rock claims a scalp at City watchdog
Someone at the Financial Services Authority eventually had to pay for the Northern Rock debacle, so it seems entirely appropriate that the man in charge of retail banking supervision has finally been chopped. Had he still been there, I guess the FSA's former chief executive John Tiner would have been forced to fall on his sword too, but with consummate timing, he managed to leave the City watchdog just before the balloon went up.
As for Hector Sants, his successor, it would have been unfair and silly to have thrown him to the wolves. He'd only just taken up the reins when the Rock crisis hit, while in his former incarnation as head of wholesale markets at the FSA, he would have had nothing to do with the bank.
Likewise, Sir Callum McCarthy, the chairman, cannot reasonably be held directly accountable as he has no executive responsibilities. In any case, he is due to retire later this year. So it's the next man down in the chain of command, the luckless Clive Briault, frogmarched to the gallows. The calamity happened directly under his watch. Others on the Northern Rock team have already gone.
The FSA is due to publish a report on the affair next week, which as you would expect, indulges in quite a lot of self-flagellation. Yet there is said to be no smoking gun, in the sense that there was a clear warning of trouble to come which the FSA ignored. Rather, this was a case of Northern Rock, a small bank which had rapidly become quite big, falling beneath the radar screen, with no adequate appraisal of the risk it was running. The FSA was hardly alone in this regard. Many people thought Northern Rock's growth and share price unsustainable, but nobody at the time believed the securitisation model it was applying was unsafe.
It's easy to be wise after the event. The FSA deliberately runs a relatively high-risk regulatory regime, or at least did until Northern Rock caught everyone on the hop. Mr Briault has been forced to pay the price for it. Still, at least he can now look forward to more highly paid and low-risk employment in the City as a gamekeeper turned poacher.
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