HBOS headed another rout of banking shares yesterday as the new ban on taking short positions in financial stocks failed to offset worries that the US might not succeed in drawing a line under the credit crisis with its proposed $700bn (£377bn) bail-out fund.
The mortgage giant HBOS fell by nearly 14 per cent to 180.2p while Bradford & Bingley dropped 12 per cent to 24.75p as the banks most exposed to the wholesale funding markets bore the brunt of the sell-off.
Last week's agreed takeover by Lloyds TSB failed to support HBOS, which was trading 17 per cent below the effective offer price of 218p last night. Traders said the ban on shorting could have taken liquidity out of the market and reported jitters that the deal with Lloyds could face problems if the financial turbulence persists.
Mike Trippitt, banking analyst at Oriel Securities, said: "I personally think the Lloyds deal will go through, but the share price is telling us that something is wrong. There are clearly risks remaining in HBOS's balance sheet and that is what the price is saying."
An industry observer argued the deal would not be allowed to fail because the Government had staked its reputation on it. "This is no ordinary transaction. Every major regulatory and Government body in the UK is behind this deal."
Money markets continued to show signs of strain. Though the Bank of England succeeded in bringing the overnight inter-bank rate below base rate, the rate for three-month sterling continued to rise, hitting 6.07 per cent, the highest since late December.
Yesterday saw the deadline set by the Financial Services Authority, for investors to disclose short positions in the UK banks. While some of the under-fire hedge funds were nowhere to be seen, "$3.7bn man" John Paulson emerged as the most significant investor to maintain short positions in the sector. Mr Paulson reportedly made $3.7bn himself in 2007 after a strategy of shorting the US mortgage market as the credit crunch hit.
His hedge fund Paulson & Co put out a series of statements yesterday revealing it had significant short positions in some of Britain's biggest banks. In a series of disclosures throughout the day, it revealed a 1.18 per cent short of Barclays stock, 0.95 per cent in HBOS, 0.87 per cent of Royal Bank of Scotland and 1.76 per cent of Lloyds TSB.
In an attempt to head off adverse reaction, the group said it "empathises with financial firms as to the difficult positions in which many find themselves. We support the FSA's desire to establish fair trading practices and to eliminate fraud and market manipulation. We will continue to comply with the FSA's requirements".
The fund was one of 10 firms that announced short positions after the FSA's surprise ban on shorting of financial stocks on Thursday. The measures also forced the disclosure of investors with short positions in the firms of more than 0.25 per cent.
The first to put its head above the parapet was Fortelus Capital Management, a London fund that targets distressed investments, which put out a statement at 11.30am. The group's Special Situations Master Fund revealed it had a 5.33 per cent short position in London Scottish Bank. The small financial group is attempting to refocus its strategy, but continues to make losses.
Calypso Capital Management revealed a 0.48 per cent holding in Anglo Irish Bank, and Odey Asset Management, run by hedge fund star Crispin Odey, revealed a 0.35 per cent short in Investec. Mr Odey has profited from correctly calling the credit crunch and has shorted stocks including Bradford & Bingley this year.
Caught short: Investors with bank investments
* Adelphi Capital – Bank of Ireland
* Barclays Global Investors – St James's Place
* Calypso Capital Management – Anglo Irish Bank
* Eton Park International – HSBC
* Fortelus Capital Management – London Scottish Bank
* Kynikos Associates – Bank of Ireland, Allied Irish Bank
* Odey Asset Management – Investec
* Paulson & Co – Barclays, HBOS, Lloyds TSB, Royal Bank of Scotland
*Steadfast Capital Management – Bradford & Bingley
* Steadfast International – Bradford & BingleyReuse content