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Yes, somewhat surprising that above mentioned banks can short the market in Hbos.
But since they take a tremendous risk in being and organising underwriters with 62%(it might even have been 92%), they must short.
Wait for the dust to settle and the cat to bounce and then buy Hbos might be one approach.

So presumably those not in the know, ie the existing HBOS shareholders who were daft enough to take up their rights, have been shafted.

I am also wondering who the other counterparties to these short positions were, since they will also have lost a few billion.

This just reinforces my view that the whole city is morally bankrupt and that the stock market is a sophisticated scam on the general public.

May they all rot in hell.

I too had the impression that such a shorting position of such a scale had to be disclosed - but if they shorted before the rights issues had, or had not been taking up, were they not engaging in even the more suspect activity of Naked Shorting? Using stock they did not own at the time although because of the underwriting contract they contingently knew they would own.

Naked Shorting is very much against the rules (and the law) in the US since last year, and as of March here too - or so I thought - perhaps someone can explain how they have remained the right side of the regulations. I guess they must have had other stock or transactions to cover their position.

I tend to think that this is all so complex that nobody actually understand the legal and regulatory ramifications! And even if they did that it would be against anyone's interests to take any action!

Not having professional financial training I find myself having to constantly convert the goings on in the financial world into metaphors in order to even form a comprehensible idea of the situation..let alone begin to try and understand it.

For a few years now much of what has going on has seemed utterly bonkers...but in line with above ....I just kept thinking it couldn't really be bonkers and the problem must be that either I couldn't understand the language used or the concepts described ...and probably both.

In the article above (and leaving well aside any questions of morality) the concept that springs to mind is related to the sinking of the Titanic.

Dresdner and Morgan Stanley seem like to passengers who have found a lifeboat and instantly hit on the happy plan of chopping it up to make a ladder so they can climb to a higher level in the superstructure.

Yet again I obviously must have failed to fully understand the situation!....

So Robert as a responsible person you have presumably asked those in authority whether, if your facts are correct, they are going to do something about the manipulation of the market?

If you haven't, then I presume that you are not to sure of your facts?

wykhamist

With regard to your questions/points - the counterparties to the underwriters "short" have not been swindled, neither have the shareholders who took their rights up...both buyers and rights holders who took up had a choice to do so. Noone forced them.

I would have said speculation with regard to how the issue was going was not exactly a secret - the market was fully briefed on the possibility of a fail - hence the HBOS share price being below take up price for much of the offer.

With regard to the underwriters actions - it's called "pre positioning" and isn't new...all underwriters do it.

As usual Robert (Preston) your article on the role of the underwriters in the recent HBOS rights issue fiasco raises even more questions than before about insider dealing and the seemingly unacceptable way in which the money market is allowed to operate.

Perhaps you should seek clarification from the city watchdogs about this matter and then report back to us. Please do!

(scratches head)...so someone has lost money to the gain of Morgan Stanely et al...who is it? Does anyone know?

what always intrigues me about these financial operations is who lost? If the underwriters won their "bet" someone must have lost. Who was the sucker who took the bet? (and with the information the underwriters had it was a "sure thing") Surely the person/company that lost has a case against the underwriters, or am i being naïve?

Surely it would have been in their interest to take a long position to help keep the price above the Issue price ?

Then more of the Ordinary Shareholders would have taken up their Rights, thusly reducing the number of Shares they would have to place later ?

Unless they have a reason for wanting the Market price below the Issue price.

If that were the case, given their inside information, ie control of the situation, that would be a very questionable activity.

I still prefer Convertible Preference Shares, removes some of the problems of Market prices when raising capital.

Not good for Shortsellers though !

If they shorted the shares before the market was aware of the outcome of the rights issue, as they were running the show and knew how few people had taken up the shares, then surely that amounts to insider dealing !

We need at least one new bank in Scotland. The old ones are broken and of no real use to the Scottish economy.

The principle of shorting should be viewed as no greater a problem than going long.
Its just that no one likes things to go down.
Teh new rules on shorting are plain dumb and either they make them so that the rules on going long are teh same or the authorities are overtly discriminating against short sellers.
It is not going short that has ever been the problem but the rumour mungering that forces the shares to move up or down.
But that is what makes markets and helps with liquidity.
Either markets are open or they are not, and they close their liquidity when regulators lose the plot and follow a one sided arguement.
They should be looking at what the banks have "off balance sheet" and then see whether they are following the right route.
Until then its fair to conclude the FSA has become a political quango operating at the behest of a government in its last days and not the independent body it was designed to be.
Markets are losing out simply because the quality of regulators, decent as they may be individually, have insufficient experience of markets and believe that fresh regulations alone will solve the problems.
We are not re-inventing the wheel here so why don't we just go back to basics and find the 'right solution'or is that beyond the comprehension of our bloated regulatory powers who seem to be too secure in teh knowledge that no one can boot them out for incompetant management as should be the case.

Why are they paid risk money (eg a huge underwriting fee) if they are allowed to do what is effectively insider trading and stuff the genuine hbos shareholders (who ultimately pay their fees)in the process?


Wasn't this the FSA's concern with short sellers recently?

Besides which, I can't find the rule that says they can do this anyway.

Having worked in finance for many years I am upset not by what has happened, but why HBOS management did what they did in the first place.

As it happens, I did still take up my rights in the issue even though I guessed (correctly) that the share price would adjust to the 275p level or below before the closing date. That is even lower today does not surprise, or bother me. Halifax remains a strong company and with £4bn extra capital, probably even more so now!

What does gall though is that the management action has of itself created this current situation. So, as many have already reported, deserve to lose their jobs.

Rights issues are a very good form of raising fresh capital for young, growing companies. Stockmarkets (or more correctly, investors) overlook the short-term negative potential impact on the share price knowing that the earnings will continue to grow and so make the Company more valuable in the medium/longer-term. Sometimes the share price never fully "corrects" to the new share price giving a profit to existing shareholders who take up their rights.

But in this case the market knew that HBOS needed more cash merely as a buffer for bad times ahead, not to grow the company. Top management should have known this and that what they were doing was simply destroying the value of the company and upsetting the shareholders at the same time! They have issued 40% more shares at a 40% discount to the pre-rights share price. Ergo, the other 60% (or 100% of the pre-rights shares) have to be priced at 275p too....

Since this was a move forced on HBOS by tough market conditions, canny investors knew from day one that the share price would correct to this level. Management has not lied or misled anyone, the prospectus was a model of its kind... But I question why a simple rights issue? Other ways of issuing new capital - preference shares, capital bonds......do exist.

A preference share rights issue seems better since preference shares are often issued at a premium not a discount to the current share price, but with a correspondingly high dividend rate to compensate the buyer. Or Convertible bonds - giving the holder the right to convert the bonds into shares later (usually at a premium to the current share price) again with a higher interest rate on the bonds to compensate.

For a Company like HBOS that is clearly going through a tough period I would have thought that preference shares/convertible bonds could have seemed a better route. The immediate cost would have been higher in terms of dividends/interest paid, but it certainly would not have seen the ordinary share price simply cut in the same way that the recent decision has.

Or did they already know that no institution would buy their preference shares or bonds if offered???

I therefore would certainly support a no-confidence vote against the current board.

I would also like to find out if any of the Board failed to take up any of the millions of shares that they were entitled to as part of the process. If they didn't then that would just be the icing on the cake....

For the moderator

I was a broker for 20 years in the City - I think I write some valid points but you NEVER post any of my comments.

Am I doing something wrong please tell me?

The mantra from financial advisors is always 'equities will rise in the long term'. This may have been true once, but now it seems speculators have too much influence and the money is made by them from gambling on movements both ways. Therefore, it is in their interests for the markets to oscillate rather than simply rise slowly.

I cannot see the markets ever recovering while the current practices are allowed to happen, and if you are an average investor like me, you will be amongst those losing out, through your pension funds etc., and maybe it's time to ditch investing in equities. Since 2000, I've made nothing, and should have left the money in the bank.

I'm one of those who would to know who matches these short positions, i.e. the losers. Surely they should be made public too.

Why did my last posting not go on?
It looks like the ³ÉÈË¿ìÊÖ have IT problems again!!!

You report is misleading, if not defamatory.

From personal experience, people conducting rights issues are not allowed to disclose information to their companies traders.

Prove that the trading part of the business was given information from the people conducting the rights issue.

Maybe HBOS didn't use the option of Preference Shares or Convertable Bonds because of what it knows is going on 'Off Balance Sheet'!

And how does a business like a bank get to have 'Off Balance Sheet' transaction/losses/gains.

Surely this only helps make everying far less transparent than it should be?

...now it's working again, I'll have to re-write my comment.

So this is how the new regulated market works - congrats to the FSA for really 'stamping out insider information short selling'

Looks like someone hasn't (or won't) learn from their past mistakes.

It's not surprising that this has been allowed, the FSA are in a corner where they cannot enforce anything for fear of being accused of hurting the market.

To be honest they haven't got a hope in hell of regulating the markets. It's like walking into a bookies and telling everyone 'not to bet on the tips given to them in the pub' - you're not going to get much response I'm afraid.

Face facts Peston, you, me, Gordon Brown, the entire political system, the BoE, the FSA, every company in Britain - is run by these big banks. Unelected and out for their own gain.

If you're facts are correct - lets see if Merrill and Dresder get shut down by a rottweiler FSA - or the alternative where the FSA simply shut their eyes and pretend they cannot see.

14. At 09:46am on 22 Jul 2008, velosipedallist wrote:

Besides which, I can't find the rule that says they can do this anyway.


Is that how FSA rules work? Everything is banned unless it's expressly permitted?

re #14 (and #6)

velosipedallist

but see the Short Selling regulation as set out in PN0572008_instrument (a pdf file) at the FSA. (SHORT SELLING INSTRUMENT 2008)

OK, it is not as restrictive as 'Regulation SHO' of the SEC, but I think you can see why Robert Peston was caused to be concerned!

I am still concerned that the selling was 'Naked Short Selling', that is without first borrowing the stock as if they short sold BEFORE they knew the had the stock - even if it is as #6 says just "pre positioning" it would have been illegal under the regulations of the SEC - and are the two companies concerned not also regulated by the SEC?

Or, is this yet another case of the UK regulation's being more lax than the US ones so we maintain our position as the tax and regulation haven that we have created over the last ten or so years!

#4

Not quite right. The more correct metaphor is that the underwriting banks have lost a bet to be put on the Titanic. From there, they have the choice of taking the long route of holding the shares for a period - the lifeboat in your example - which would involve taking a punt on both their capital and their capital adaquacy in the short term, and long term may not yield that much, if any, profit (It would also involve them taking a punt on the UK housing market at a time when housing is not a growth industry) or taking the short option of trying to get someone else to take your place on the boat.

I have to say that shorting, whilst the timing and circumstance may not be that great from a global PR perspective, is not the worst option they could have taken.

Supercalmdown

You keep on plugging convertible preference shares, but do you have any idea of the accounting or tax on these instruments? Do you know what getting these sort of things wrong could do to the balance sheet of any company stupid enough to go there without the very best advice (and, incidentally, how expensive that advice coudl be)?

Isn't this getting things the wrong way round?

A typical short seller will borrow shares, sell them, then buy them back at a lower price and thus make a profit.

In this case Morgan Stanley and Dresdner will be left with the shares as a result of their underwriting - in other words they do not need to borrow shares because they know they will be stuck with them at the (higher) underwriting price.

Haven't they just sold short (in the sense of selling before they technically own them) in order to try to get a better price to cap their losses on the underwriting?

Very little to say except:-

"The unpleasant and unacceptable face of capitalism".

Why should I put money into a private pension, knowing that it will be invested on my behalf by the sharks, and frankly con merchants working in the City? If this sort of practise isn't illegal then it darn well ought to be!

If I've understood correctly, "selling short" is essentially a gamble, so if Dresdner and Morgan Stanley win, then someone else has presumably lost.

First, I agree with #9: whoever has lost has been royally shafted, and if I were in that position I'd be having a long chat with my lawyers.

But here's the bit that really puzzles me: everyone knows that Morgan Stanley and Dresdner were handling these shares. Surely if under those circumstances they suddenly decide to take a massive short position, that would set off alarm bells. Why on earth would anyone be crazy enough to take on the bet under those circumstances?

Am I missing something?

Robert,

If an underwriter can completely offset the risk in this way, where is the incentive for them to ensure the rights are fairly valued? Just because the market conditons are tough out there doesn't mean they should be allowed to pluck prices out of thin air.

Re # 24 response

I do see your point, and it is definitely more apt where "The Titanic" is , if not HBOS itself; then the HBOS Rights Issue.

The "Titanic " in my metaphor was meant to be the "Banking system" in general which is wallowing around seemingly bereft of direction.

The "lifeboat"was meant to be the possibility of changing the entire scenario.... in the way JP Morgan did in , organising other bankers in publically buying shares that were crashing ... expressly to influence opinion; which it did.

"Smashing up the lifeboat to build a ladder" -- was our 2008 banks doing "the smart thing" with the short term effect for them;but a larger effect of just re-inforcing the pervading sense of not only crisis, but directionless drift into deeper and wider crisis.

While nobody expects Banks to go out and altruistically lose money..... Nobody expected JP Morgan to be altruistically losing money back in 1907 either .... which was of course the entire point of his plan and his actions.


I have to say after re-examining the metaphor because of your answer, it isn't, in my post, coherent ...comparing to the original post your interpretation IS far better and makes more sense....

But anyway the explanation above is what I meant it to mean!!...

Perhaps I should have gone for a canoe with two men suffering from cold which is drifting towards a waterfall at which point they decide to burn the oars to make a cuppa while having a good think about where they go from here??.....

We here of Merchant Banks charging Millions for placing Shares etc.

How do they arrive at their expensive Bills ?

How do they justify the size of their Bills ?

Do they charge an hourly rate ?

Or just an arbitrary charge ?

I still like Preference Shares (the Convertible sort).

It sounds like a lot of people are very unhappy with the way the Stock Market is conducting itself.

Unhappy customers don't come back.

re 17
Couldn't agree more...I've thought for a long time that it's in the interests of people out to make a quick buck to find a share that oscillates and "invest" short term to take advantage of the oscillations. This has nothing to do with proper investing which is lending money to a company so they can grow and hopefully if the company does everything right, the share price goes up gradually. Maybe this is what used to happen but now that information on share prices is avilable at the touch of a button and deals can be done equally quickly the field is wide open for speculators to bet on shares over a shorter time span and indeed some people make a living as day traders.

However much regulation is in place there will always be ways round it especially if things are so complicated that the regulators don't properly understand it. A few people in the know will be able to flout the rules with impunity. I imagine the FSA is nothing more than a quango which is there to give the impression that everything is under control. Perhaps I too am a bit long in the tooth.......

Given that DKIB will probably be winding up its operations in the next couple of years, then the FSA won't get it.

Its called INSIDER TRADING

#34 - Its only insider trading if you are acting on the basis of information that is not publicly available. Whilst arguably the extent of the failure of the rights issue was not publicly available, it was pretty obvious to almost anyone with half a brain that most people will not pay 275 for something that they can readily buy at 250-260. Therefore, I cannot see anything that the underwriters would have known that would have motivated the sale and given them a competitive advantage over the people who bought the shares. Therefore, a case of insider trading is not likely to be sustainable. Indeed, that is probably what the FSA were thinking when they authorised the transactions. And lets not forget that they are only offloading shares that they are contractually bound to subscribe for, not speculatively shorting the shares for their own gain (as opposed to stemming losses).

What would have been insider trading is if they had known about the expected bids for HBOS, and not sold their shareholdings, safe in the knowledge that the share price would be rising.

Mr Peston,

Do you not think the cause of the credit crunch and the imminent repeat of the Wall Street crash is a direct result of the SEC's abolition of the uptick rule?

No one asked for this rule to be abolished, no one has complained about it (publicly at least) in the last 70 years - so why abolish it.

The removal of the rule in 2007 was just before the credit crunch hit. Although this was caused by excessive lending to unsuitable borrowers in the states, the subsequent volatility of all areas of the market is highly likely to be as a result of this change.

Can you do a piece on this as I don't think everyone is aware of this change and how it may well have affected pension funds as the hedge funds limit their losses at the expense of pensioners and ordinary investors.

I don't know what the american administration are playing at - but I wouldn't be surprised if G.W. Bush has a large hedge fund of his own, and of course he will be profiting from the volatility in the oil market.

Co-incidences are for the trusting, this is no co-incidence.

It can't be insider trading the market new the issue would fail. The underwriters were not the lead shorters the hedge funds were.

The HBOS issue forced the FSA to issue new regs on short positions during a rights issue. This was the first rights issue I have ever seen in 20 years where the rights commanded a large premium despite being well below the offer price. Why? the market knew there were shorts and those shorts could only be covered on the underwriters off loaded stock.

In the mean time anyone who had stock on loan and demanded return of nil paid rights was causing an issue for the shorters as they didin't have any rights hence demand outsripped supply and a premium was obtainable.

The really unhealthy part of this is the actions of the hedge funds this is not the first time they tried shorting HBOS. There was an FSA investigation into rumours spread in the market weeks ago. The hedge funds think should be allowed to short what they want. All they provide is unstability to a sector of the economy that no one wants or needs to have unstability in.

The issue is not what underwriters did it is what hedge funds are doing and continue to do. Believe it or not its our pension funds through stock lending that are enabling them to do it. They will be the ones left with laibility shortfalls and all for a few basis points return from stock lending.

Access to hugh pools of stock at cheap prices make this all possible. Either charge the correct rate for this business such that a 20% down turn doesn't affect the value of the pension holdings or desist form lending to these mavericks who will destroy the global economy if left unchecked.

If only 8% or so of shareholdes took up the issue, how come it was passed in the vote, did those not taking up their rights vote to continue with the issue?

A bit stupid to vote for it then not take up your shares, surely?

You don't need a shareholder resolution to perform a rights issue. Also, market conditions changed between the rights issue being decided upon, and the closing deadline for taking up the rights.

When will the UK govt learn. Foreign investors are not going to put their money here if we keep allowing banks to manipulate markets to the detriment of investors.
Given that financial services is out biggest industry and without it the UK economy is sunk, one would expect the govt to take investor confidence seriously. But no, avoiding poor headlines is so much more important.
We all sit taking pops at these clowns. But abroad they look and sigh, time to move on. No wonder our banks can't raise capital.

Actually, foreign investors should largely be neutral about this, as most are investing through hedge funds. The losers in all of this are the pension funds, who gerally take long positions on UK plc, and individual small investors.

Sorry Andrew that statement is entirely incorrect foreign investors in UK PLC is not mainly through Hedge Funds. Its through their pension funds which invest in the UK as well.

The UK exchange attracts a larger foreign interest than any other.

The SEC produced a list of banks mainly non US that it was forbidden to short without being in possession of stock most of tehm weer non-US banks and included Barclays and HBOS.

The issue as I say again is the actions of irresponsible hedge funds with too much capital cahsing returns that don't exist anymore. So in order to get them they jsut keep placing bigger and bigger single bets.

How can someone be allowed to get a short position of 8% and not declare it if they were long they would have to.

The hedge funds are manipulating prices artificially and need to be stopped

John_from_Hendon wrote:

"Or, is this yet another case of the UK regulation's being more lax than the US ones so we maintain our position as the tax and regulation haven that we have created over the last ten or so years?"

Wonder if the FSA would have prosecuted individuals over Enron? No don't answer.

re supercalmdown

Issuing new Convertible Preference or preferred stock would provide purchasers, new shareholders, with extra protection which might seem quite sensible to all except the shareowners employees the Directors of the bank. They tend to have stock options on the equity which would be then much more vulnerable.