WSJ: Rumours Engulf Foreign Banks

By CARRICK MOLLENKAMP, ALISTAIR MACDONALD and
AARON LUCCHETTI

In the world of financial stocks, fear and rumor have the upper hand.

Bank executives and regulators globally are facing a grueling test as the swift demise of Bear Stearns Cos. has left investors grasping at rumors, sending stocks gyrating at the slightest whiff of trouble. Yesterday, HBOS PLC, the United Kingdom's largest mortgage lender by gross lending, publicly denied that it had funding problems, as its stock took a wild ride.

Shares of securities firms Lehman Brothers Holdings Inc. and MF Global Ltd. also have been roller coasters in the past few days amid worries of a cash crunch.

At 8:30 a.m. in London yesterday, rumors spread that HBOS was short on cash. That prompted the Financial Services Authority, the U.K. markets regulator, to issue a highly unusual statement that it was investigating the possibility that traders were seeking to profit on investors' concerns, by spreading "false rumors" about troubles at U.K. Banks.

A Bank of England spokesman denounced as "utter rubbish" that the central bank had met with U.K. banks about providing emergency funding. After an 18% drop in the first 50 minutes of trading, HBOS shares recovered to end down 7.1% at 446.25 pence ($8.96) on the London Stock Exchange.

In the U.S., the downfall of Bear Stearns has prompted a Securities and Exchange Commission investigation of a spike in options contracts betting that the company's stock price would drop precipitously, according to a person familiar with the matter.

Bear tried feverishly -- but unsuccessfully -- last week to reassure investors and customers of its prime-brokerage business, which makes loans and executes trades for hedge funds, that its financial footing was sound.

Regulators face a delicate task when dealing with rumors. Issuing public statements denying there is trouble could set a precedent. Saying nothing could be interpreted as a signal that the speculation is true.

The fears spawned by baseless rumors can nevertheless create "a self-fulfilling prophecy,"
especially at companies that rely on customer confidence, says Michael Gooch, chief executive of GFI Group Inc., a New York brokerage firm that arranges trades between investment banks. GFI saw its shares tumble as much as 50% Monday amid rumors of
possible trading losses.

The company said the speculation was groundless because GFI just collects commissions and doesn't take any trading risks.

Also whipsawed by speculation has been MF Global, a brokerage firm catering to clients who use futures and options to take high-stakes bets on market moves. On Monday, the company denied that British billionaire Joseph Lewis, who stands to lose almost all of his investment of more than $1 billion in Bear Stearns, was either a big MF Global customer or a major shareholder. Another rumor: MF Global faced losses in repurchase securities,
where big investment dealers swap cash and securities for short periods. That sent the stock down 65%.

MF said it doesn't borrow using the repurchase market. A spokesman for Mr. Lewis said he has "absolutely nothing to do with MF Global." Despite issuing a letter to employees Tuesday and a news release yesterday, MF Global saw its shares slide 46% from their Friday closing price. Yesterday, the stock rose $1.19, or 15%, to $9.36 in 4 p.m. New York Stock Exchange composite trading.

"It is deeply disappointing and frustrating to have these types of rumors erode confidence in a company that is performing well," Jeremy Skule, MF Global's vice president of investor relations, said in an interview.

At HBOS, analysts following the bank had issued reports expressing increasing concern that HBOS and other U.K. banks faced funding questions. Yesterday, HBOS spokesman Shane O'Riordain said the bank has ready access to large retail deposits and continues to access other borrowings. "HBOS is one of the strongest financial institutions in the
world," Mr. O'Riordain said.

Within 20 minutes of the market's opening in London yesterday, HBOS fell 3.5%. A half-hour into trading, rumors began spreading among traders that HBOS was having cash problems, prompting media inquiries to HBOS, a person familiar with the matter said.

Mark Lovett, who manages funds at RCM Ltd.'s London office, said he heard the rumor from his trading desk. He says his reaction was: "It's extraordinary. We are in pretty jittery times." Mr. Lovett declined to discuss his holdings.

HBOS officials quickly began speaking with or phoning newswires and newspapers to say there were no liquidity problems. But the stock kept sliding.

By 9:30 a.m., bank trading desks at London's Canary Wharf financial district were sorting through other rumors, too. Other bank stocks, such as Barclays PLC and HSBC Holdings PLC, fell, though not as sharply.

At about 10 a.m., the Bank of England phoned the FSA, where officials already had noticed the sharp price moves, people familiar with the situation said. At the central bank's office in the City, London's other financial district, Bank of England officials were fending off as untrue a rumor that Governor Mervyn King had canceled a trip to Asia.

By 11 a.m., Bank of England officials decided to take the unusual step of making public statements saying they hadn't had emergency meetings with U.K. banks to discuss funding-and weren't planning to. The Bank's coming meeting with financial institutions was previously scheduled, the Bank said.

By this time, the FSA and Bank of England feared that investors who profit when shares fall -- by borrowing shares and selling them and then buying replacement shares later at a lower price -- were behind the rumors.

At about lunchtime, Sally Dewar, who oversees wholesale and institutional markets for the FSA, issued a statement denouncing "a series of completely unfounded rumors about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumors and dealing on the back
of them."