Short-sellers nearly brought down UK's HBOS

According to testimony by the former head of risk at HBOS, short-sellers deliberately started a rumor about the bank encountering financial difficulty.

Your humble blogger's interest in this testimony is that it highlights one of the problems with banks providing disclosure that leaves them resembling 'black boxes'.  The problem is that market participants do not have ready access to the information they need to dispel such a rumor.

This problem would go away if banks were required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

As reported by the Guardian,

Stock market speculators nearly brought down HBOS in March 2008, the bank's head of risk at the time has told a parliamentary hearing. 

Peter Hickman, group risk director of HBOS in 2007-8, said assurances from the Financial Services Authority over rumours of the bank being in trouble helped to restore confidence.

By making these assurance, the FSA created a moral hazard.  Any investor who relied on the FSA's assurance about HBOS' solvency should have been spared from any losses as they relied on what the FSA said.

Regular readers know that requiring the banks to provide ultra transparency eliminates the need for regulators to opine about the solvency of a bank and the moral hazard that goes along with offering the opinion.

Referring to 20 March 2008, when the bank's shares plunged almost 20%, Hickman said there appeared to have been a "deliberate attempt" by short-sellers – who sell shares they do not own in the hope of making a profit from buying them back at lower prices – to spread rumours about the bank being in financial difficulty. 

The bank had been "threatened by short-selling in March and deposits were being withdrawn. They could have threatened the bank's existence if the FSA hadn't given assurances at the time," Hickman told a panel established by the banking standards commission to look at the collapse and rescue of HBOS....

 By the way, HBOS needed to be rescued despite the assurance of FSA.

Hodkinson said HBOS, like other banks, had not expected the funding markets to dry up completely, the problem that led to the nationalisation of Northern Rock. 

"We stress-tested funding plans rigorously. We had stress-tested against what would happen if some wholesale markets were closed to banks. The event which did bring down the bank, that all wholesale markets would be closed to banks for some period of time, was not conceivable," Hodkinson said.