Monday, 23 June 2008

HBOS car-crash


We have written a few times on the credit crunch impact on the UK financial services industry.

Nick wrote an excellent piece here on how slow the effects can be to feed through into the system. I contributed with a couple of posts a few months ago on the weakness of HBOS in particular. Even IPM picked up on this.

So today's revelation that Hedge Funds have some quite large short positions in the stock is no news really. However the impact is huge. Just last week another bad trading update has seen the shares slide to well below the Rights Issue price. This means it is quite likely there will be a poor take-up. In turn this means the underwriters will have to sell the shares in the market.

HBOS will get the money but the underwriters will potentially lose. Now seeing as they always make money on these deals, effectively for nothing, then this does not cause me (or others) to well up with tears.

However, it does mean more losses for the sector as a whole and the possibility of another big drop in the share price of HBOS. Where will the bottom be? Who knows, but it will leave HBOS very exposed to take-over or worse in future months.

Many journalists and financial players are bored with the credit crisis and are calling a bottom because they want a new angle and a new story or more profits. I think this episode highlights how far we are from that being the case.


NB A further point to make is that the FSA can't even get enough evidence to prove insider trading when it is obvious to everyone what happened; a bad state of affairs. I am never keen on extra regulation - but without it markets cannot operate efficiently. I am glad the FSA made the Hedgies expose their positions, a false start maybe, but signs that at least they are trying something to help investors understand the full picture.

12 comments:

alice cook said...

HBOS could be the last of the big bank rights issues. If the share price goes below the rights issue price and the underwriters are left holding some equity, then in the future, underwriters will be very reluctant to take up this kind of business.

Mark Wadsworth said...

Ta for link, I'm glad to see HBOS were underwater again recently.

Alice, if a bank does a deep-deep discounted rights issue, let's say at ten per cent of current share price, then underwriters can continue making the easy money to which they have become accustomed. HBOS' mistake (from the underwriters' point of view, at least!) was doing rights issue at two-thirds of current share price.

Mark Wadsworth said...

Anyway, what's the big difference between stock-lending/short selling and contracts for differences and a straight bet on IG Index?

The FSA will always be lumbering behind the times on this, no way can they outlaw short-selling, there's always a way of structuring a contract so that it falls outside the rules. e.g. I could write a call option and buy a put option, that comes to the same thing as short-selling (I think).

CityUnslicker said...

Alice - Well yes, although barclays is next in line when they make up their mind what to do. HBOS is not helped by the fact they are entirely exposed to the UK property market with nothing else in their business worth mentioning

CityUnslicker said...

Mark - They were greedy - also discounting the rights so heavily would be an admission of how bad things had become.

On spread betting there is a big difference. I don't mind people gambling all they like; their choice if they want to enrich Mr Wheeler.

Much different for companies whom dividends pay out our pensioners; playing pure gambling games with them - and fixing the market - is destructive to our society.

I agree the FSA is lumbering; but better that than doing nothing.

yokel said...

Has the time come for account holders to start to run?

CityUnslicker said...

Yokel - No, Alistair Darling has guaranteed all deposits up to £35,000.

monoi said...

Are you saying that without the hedge funds selling (short or not) the share price would be higher ?

In what way are they fixing the market ?

CityUnslicker said...

Welcome Monoi - There are two points that I am making. One is that HBOS is screwed becuase of what will be an in effect failed rights issue.

Secondly that the FSA is right to investigate insider trading and the links the shorting which were clearly in play in the HBOS share price back in March.

As for what the price would be without shorting that is a very hard question to answer; but the numbers add up to 5% of the shares being held in short positions - so there will be some effect, it is just technically impossible to calculate due to lack of information.

Bellx15 said...

The word 'discount' is very misleading in this context, although everyone seems to be using it.

The new shares are being offered to existing shareholders at a 'price' of £x. But they already own the rights, which have a value of £y. The true cost of a new share is £(x+y), which makes up the total market price of the new, diluted shares. There is no 'discount'.

The problem comes when the company sets the value of x too high, in which case no-one is going to pay £x for new shares when their market value has dropped below it.

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