The Financial Services Authority will this week start its criminal investigation to find the trader alleged to have made £100m from spreading malicious rumours that HBOS, the UK's biggest mortgage lender, was in danger of collapse.
A team of the FSA's 40 market monitoring officials will begin sieving through five million transactions reports, telephone tape recordings and emails relating to the trading in HBOS shares, which lost a fifth of their value on Wednesday morning. The collapse prompted the Bank of England to make an unprecedented statement denying that HBOS, which provides one in six of all the mortgages in the UK, was in trouble.
An FSA spokesman said at the weekend that its investigators have received most of the tapes and other information relating to the early-morning manipulated trading activities, now being called "a modern-day bank robbery".
The FSA is understood to have already pinpointed three or four "market participants" who may have been involved in the scam to spread unfounded rumours about HBOS's financial health and make money out of the news by short-selling the bank's shares. It is believed that the rumours originated overnight in the Far East, possibly Singapore, and then circulated in London at the start of dealing.
The spokesman said: "Our evidence shows that these rumours were malicious and focused. We have powers similar to the police and have every intention of pursuing criminal proceedings if we can discover the source."
But John McFall, chairman of the influential Treasury Select Committee, warned that the regulator faces an uphill battle bringing the culprits to justice.
"If we are going to maintain confidence in the City, then it has to be policed well," said Mr McFall. "The FSA needs more resources and facilities to tackle the problems it's facing. We have an abysmal record of catching people for insider trading – the need for plea bargaining is now more pressing than ever."
After one of the most hair-raising weeks in the financial markets for decades, the City is looking to see whether the decision by the Bank of England to increase liquidity in the system will restore some calm.
One of the City's most senior figures, Michael Spencer of Icap, the world's biggest inter-dealer broker, said: "In 30 years of working in the markets I've never seen such paranoia, nervousness or terror in New York or London. The markets have got themselves in a state of panic and I have no idea when it will end."
Mr Spencer added: "But I am not in the super-bear club. There are many fundamental problems in the world economy, exacerbated by the chicanery in the US mortgage market, which was scandalous. But financial markets are always cyclical. After the euphoric bull run we had the asset bubble, which is now being burst."
Whether the commercial banks will ease the situation by lending to each other again will become apparent this week following the decision by the Governor of the Bank of England, Mervyn King, to pump money into the banking system. He had been reluctant to do so but the HBOS scare, along with the collapse of the US investment bank Bear Stearns, is said to have persuaded him that action was needed to restore confidence.
Mr King is due to testify this week before Parliament, while his counterpart at the European Central Bank, Jean-Claude Trichet, will be speaking at the European Parliament's economic forum. Mr King's handling of the crisis engulfing British markets is once again in the spotlight, with commentators criticising what is perceived to be his reactive approach.
David Kern, economic adviser to the British Chamber of Commerce, said: "The UK has so far reacted to the crisis in a more relaxed and laid-back fashion than the US. However, this attitude could prove to be dangerously complacent. We may face in the near future a critical need for urgent corrective measures, and the authorities must have in their armoury effective contingency plans."
Central bankers in Europe and America face another tough week as the markets digest a raft of economic data to be released on both sides of the Atlantic.
Wednesday sees the publication of the German IFO index, which measures business confidence. Analysts hope this remains resolutely robust in the face of market headwinds. Meanwhile, American markets open tomorrow with home sales data.
Consumer confidence, GDP and inflation numbers are likely to dictate the direction of equity markets. In the UK, all eyes will be on the housing market data due tomorrow from online estate agents Rightmove, and from the Nationwide building society at the end of the week. Rightmove, which measures the prices asked by sellers rather than the actual sale prices, is likely to show that sellers are still not accepting the fall in the market, holding out for high prices.
Analysts have warned that the increasing fragility of the housing market in Britain could be the deciding factor as to whether the economy slips into recession.
City traders using derivatives to bet on the value of residential house prices in Britain are currently predicting a 12.5 per cent fall in the average price of a house by the end of the year.Reuse content