Saturday, March 22, 2008

Rumour Mill Mafia

Amid widening financial aridity, there's one enterprise that is not just coping but thriving. Where many banks and hedge funds are gasping for liquidity, this unconventional operation is a gushing well.

But don't bother looking for details at Companies House or the Stock Exchange's noticeboard. The entity to which I refer keeps no records. It is located beyond regulation - in the twilight zone of spivvy blogs and illicit whispers. It is, of course, the Rumour Mill.

This is a ruthless business, but highly effective. Its raw material is a sinister blend of greed, fear, ignorance, credulity and stupidity. Its product is the enrichment of a few insiders at the expense of the rest of us, with a capacity to destroy mighty fortunes and fancy reputations.

On Wednesday, the Rumour Mill was churning out messages of doom about HBOS, the combination of Halifax and Bank of Scotland. Even before the bank's branches had opened, the City was buzzing with talk that HBOS required emergency funding. An email, which falsely claimed that the Bank of England would become involved, pinged between brokers' screens.

The upshot, for a while, was carnage: about £3 billion wiped off HBOS's value, as jittery shareholders dived for cover. The reaction told us much about the market's unstable mindset. After the unravelling of Northern Rock and Bear Stearns, tawdry gossip can be readily traded as 24-carat fact.

The reasons are clear. When the Rock started to disintegrate, first its directors, then the regulators and finally the Chancellor insisted that the business was sound. But depositors called their bluff and the company's finances crumbled. The bank exists today, thanks entirely to the taxpayer.

Something not dissimilar happened at the Bear. As the Rumour Mill began shaking the bank's foundations, Alan Schwarz, its chief executive, told CNBC that the firm's position was "strong", describing it as "virtually unchanged" from the end of last year. A few days later - whoosh! The cash surpluses were gone and with them went the business. Schwarz's promises were empty.

Not unreasonably, savers are asking: "Who's next?" They have concluded that, in a crisis, banks cannot always give the full picture without triggering calamity. So, when faced with a share-price chart that resembles the cardiogram of a heart-attack victim, investors have learned to panic first and ask questions later. Neurosis overcomes analysis.

Last week, Paul Krugman, professor of economics at Princeton university, warned of an unholy financial mess that will cause trillions of dollars of losses. "Things are falling apart," he wrote in the New York Times. In such conditions, the Rumour Mill mafia has a gun to our heads. It extorts vast sums from the system by frightening us - and we're already terrified.

These banksters, as one of our readers branded them, profit from a system of "trash and cash". They trash the shares with unfounded tales, and then cash in by cheating gullible investors. It works because traders are allowed to sell stock they don't own, as long as they buy enough in time for future delivery.

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