Markets: False rumours abound
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Markets: False rumours abound

It’s pitiful trying to blame short sellers for the woes of the financial system.

The UK’s banking regulator, the Financial Services Authority, got very excited in March when rumours that HBOS might be facing a liquidity squeeze led to a 19% drop in the mortgage lender’s share price and set off worries of yet another bank failure.

In the event, HBOS was not pushed over the edge. But Sally Dewar, director of the wholesale and institutional division of the FSA, was bouncing around on her seat as she scolded the market over a series of unfounded rumours, sometimes accompanied by short selling. What, one wonders, might have persuaded sensible people that a bank should be in trouble? Perhaps the Bank of England auctioning £5 billion of liquidity that same week and getting hit by bids for £23 billion of it.

No matter: the FSA won’t stand for market participants taking advantage of market conditions to commit abuse by spreading false rumours and dealing on the back of them. Oh no.

There’s no word yet from the FSA on how it will deal with those bank executives who spread false rumours that building large long-term loan books financed on short-term capital markets borrowing was a sustainable business.

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