No good can come of City stories appearing amongst the general news. A move to the front of the newspaper from the back will inevitably turn the details back to front.
First we had Northern Rock, and an overly bombastic BBC report that quickened the drama’s lurch into crisis. Then came Jerome Kerviel, whose muddled biography as evil mastermind, incompetent loner and anarchist poster-boy drowned out the more intriguing aspects of the case. (Remind us again, SocGen: how exactly can a single rogue trader lose £3.6bn undetected?)
Now we have “trash and cash” - the preferred journalistic shorthand for the practice of selling borrowed equities and spreading scare stories. Malicious scuttlebutt, we’re told, wiped billions off the value of HBOS last week, and did the same to Lehman Brothers on Thursday. Market lowlifes are talking down stocks and profiting at the expense of your ISA and your pension fund. It's an outrage. Something should be done.
Let’s be honest here: it isn't and it shouldn’t.
“Trash and cash” is nothing more than a derivative of fear and greed, the twin forces being channelled successfully through markets since time immemorial. Those invested at both ends of the spectrum will always be tempted to stretch truths and cherry-pick data to support their own view. But to suggest that a few baleful traders can distort multi-billion pound markets with nothing more than a few emails hugely underestimates both the system and the City itself.
Moreover, such claims of market manipulation might carry a little more weight if they involved any sector other than banking. It’s an industry whose fundamental economics amount to little more than a precarious confidence trick. Yet for at least a decade, our biggest banks have been behaving as if a veneer of trust and stability was no longer required. Just as the totemic marble-clad offices were sold off and replaced by call centres in Bangalore, customer deposits were superseded by cheap wholesale borrowing as the backstop for the lending book.
So after a decade of this untamed greed, we’re back to fear. But it’s important to remember that the fear is not some invention of City traders; it’s coming from within the banking industry itself.
Since September, when the US housing crash petrified credit markets, the banks have been unable to raise funds by their favoured method of packaging up mortgages and selling them on as asset-backed bonds. Their reaction has been to hoard cash. That alone would suggest either that they have reservations about their own financial stability, or they don't trust the stability of their peers.
It’s worth noting also that the debt market has remained paralyzed even as the Bank of England discussed potential lifelines for the distressed. Three-month sterling Libor - the interest rate the lenders will lend to each other – this week reached a 2008 high of 6%. That will push up funding costs for any business reliant on the wholesale markets, and those costs will have to be passed on to customers.
Of course, if you are Britain’s largest mortgage lender, passing on costs to customers will be no easy task in the current market conditions.
That’s the real explanation as to why HBOS shares lost 18% inside a few hours last week. It’s undeniable that a few bearish emails were circulating the City at the time of the slump, some of which were offering inaccurate and perhaps even malicious gossip. But the figures they contained were all taken straight from HBOS’s annual report: £493bn of group funding versus £215bn in deposits; £164bn of wholesale loans due to mature inside 12 months; and more than £11bn of potentially toxic debt on its balance sheet.
These are the kind of data that make HBOS shares look like nothing more than a double-or-quits bet on the credit and housing markets. And let’s not forget that just a few days earlier, Bear Stearns was nailed inside 24 hours by the pernicious logic that it could collapse if wholesale lenders withdrew funding, leading it to collapse as wholesale lenders withdrew funding. In that context, an 18% share-price move for HBOS begins to look quite rational.
There can be no doubt that many of Britain’s biggest banks are deep in a mire of their own creation. Meanwhile, inexperienced investors will have taken these fictions about “trash and cash” criminals as a reason to buy shares without fully recognising the risks being incorporated into the price. In that sense, you could argue that newspaper sensationalism is doing more damage to an orderly market than a few bearish emails ever could.
Perhaps the noise will abate soon, allowing a clearer picture to emerge. All that’s required is that news editors return to the accepted practice of putting anything about money into its quarantine zone, next to the crossword, at least ten pages away from the central fold.
