Bull Market In Bear Raids
The de-leveraging process clearly is not going to be pretty. Bear Stearns leverage dropped from roughly 44 to 1 to 30 to 1 over the last 9 months, but was undone, in part, to the rumor mill which saw blood in the water and finished them off.
Paranoia is paramount, and transparency will be hard to come by any time soon. The SEC is investigating short selling in Bear Stearns’ stock last week, and across the Pond more of the same is going down:
In an unusual move to calm investors’ nerves, two of Britain’s top financial authorities stepped forward on Wednesday to quash a spate of rumors that had sent some financial stocks in London into a tailspin.
The Financial Services Authority said it was investigating whether some traders had spread “unfounded rumors” about British financial institutions over the last few days and profited from the resultant decline in the share price by shorting the stock, or betting that the value of shares would drop. ....Trading rooms were buzzing Wednesday morning with rumors that HBOS, the country’s largest mortgage lender, was in trouble. Selling of its shares wiped about £3 billion ($5.95 billion) off its market value before the lender, based in Edinburgh, could deny the rumors, saying it had “ready access” to funds. The stock recovered slightly from an earlier record drop of 17 percent in London, but remained significantly below Tuesday’s close.
“We will not tolerate market participants taking advantage of current market conditions to commit abuse by spreading false rumors and dealing on the back of them,” Sally Dewar, the F.S.A. managing director for wholesale and institutional markets, said in a statement. New York Times
Hedge funds are the least transparent of all, and the coming weeks should witness a bull market in rumor mongering. The tumble is not likely to stop with John Meriwether’s travails and traders might want to turn off Instant Messaging systems as the Great Unwind moves into the final sessions of 2008’s first quarter.
Bear Raid-The illegal practice of attempting to push the price of a stock lower by taking large short positions and spreading unfavorable rumors about the target firm.
In a bear raid, the manipulators profit on the difference between the original stock price and the lower (manipulated) price. This was a popular practice in the early 1900s.
Investopedia
Britain Tries to Quash Rumors in Markets
New York Times
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