Tantamount to financial terrorism

Spectator, The, Apr 26, 2008 by Barnett, Neil

Coming at a time when bank shares and the currency were already in freefall and CDS rates were going through the roof, this was calculated to turn a reverse into a rout.

A source in the British FSA confirms that it has received several reports of calls by this fund, but that the FSA has yet to launch an investigation. The ultra-litigious habits of the funds prevent naming the perpetrator at this point. But there are other instances of packs of funds attacking institutions through shorting and false rumour, which at any time would be criminal. In the present credit crunch, when the financial system is wobbling, it is tantamount to financial terrorism.

The most notorious case is the collapse of Bear Stearns in March. According to a banker with direct knowledge of the matter, who insists on anonymity, 'Bear Stearns was prime broker for several hedge funds. A number of these funds started shorting Bear stock, and at the same time creating uncertainty over its liquidity. At the same time they also withdrew their business from Bear's brokerage desk.

They created a run on the bank using black propaganda and abusing their client status.' Of course there was little sympathy for the vaguely thuggish Bear Stearns. Few on Wall Street had forgotten how the investment bank had walked out of talks on rescuing the stricken hedge fund Long Term Capital Management (LTCM) in 1998. There was, therefore, considerable schadenfreude, not only among the hedge funds, when Bear in turn was denied a bail-out and eaten up by JPMorgan.

But the next day Lehman Brothers, a far more blue-blooded institution, came under similar speculative attack from hedge funds.

A storm of rumours about the bank's health caused its stock price to dive by 50 per cent.

More seriously, some Lehman clients were panicked by specific -- but false -- rumours that both Merrill Lynch and the government of Singapore had broken their relationships with Lehman because it was in trouble.

Had the bank not been able to reassure its clients, this rumour could easily have proven self-fulfilling. Lehman survived by a whisker, and has now filed the details of the episode with the Securities and Exchange Commission. Whispers of illiquidity, while profitable for short sellers, are poison for a bank.

The arrogance, aggression and secrecy of the hedge funds which participate in this kind of activity is off the scale. Some appear to believe that they exist in a realm removed from social, moral and legal responsibility.

Many do not publicly list addresses or contact details and will not interact with the press if they are reachable at all -- although evidently some are also happy to retail unattributable lies to journalists when it suits them.

Free financial markets are desirable in order to mobilise capital and increase standards of living and wealth. It is stretching the definition of free markets to include the liberty to vandalise financial institutions, attack sovereign countries and deliberately destroy value on a huge scale.