The Bear Raid

Square Mile Magazine  –  May 2012

Just months into my City career a friendly trader educated me about the potential profits to be made from a nice bit of market manipulation. Over a quiet pint he told me of a ‘friend’ (almost certainly him) who had spread false take-over rumours about a crappy little pharmaceutical company whose shares had been festering on his books for weeks. The share price began to rise and, once Reuters had mysteriously been informed of this ‘likely development’, was soon rocketing. This seemed to confirm that something was up and the stock rose even further. Before you could say ‘fit and proper person’ this ‘friend’ had sold his £4m holding in the company for a 13% profit – netting his firm over half a million pounds. I think it was just after hearing this story that I realised banking might be the career for me!

Back in the late 90’s the markets were rising and mergers and acquisitions were two-a-penny. Hence, this ‘pump and dump’ strategy was the order of the day – especially in the sector that I analyzed: UK utilities. Barely a day went by without spurious nonsense being spread by a trader or fund manager who wanted to make a fast buck. Since a lot of the UK water and electricity companies were being gobbled up by foreign buyers these rumours seemed plausible and so financial journalists, desperate for a bit of gossip, were easily conned into spreading this contemptible horse manure. Everyone was a winner … those really were the good old days!

But this ‘pump and dump’ strategy had an evil cousin that only reared its ugly head when markets were weak and confidence was low. This brutal tactic was utilized by vicious psychopaths who would happily sell their grandmothers for a few quid since it could, if properly executed, destroy a company. It was most certainly ‘the dark side of the force’ and was only discussed in hushed tones behind closed doors. I refer, of course, to ‘the bear raid’.

A bear raid is the mirror-image to the ‘pump and dump’ gambit and subsequently became extremely popular about five years ago when markets began to falter and uncertainty began spreading. It generally begins with a bunch of dodgy hedge fund managers sitting around a titty-bar discussing how to get even richer. Like a pride of lions selecting an injured wildebeest they identify a weak company whose share price is teetering on a precipice. After numerous hasty trips to the toilet cubicles they feel confident they know which company is most susceptible to rumours of imminent bankruptcy and the next day they sell short shares in said company and begin to tell all their City contacts that a profit warning is imminent. The shares begin to tank and, after Bloomberg and Reuters start spreading ‘the news’, a vicious circle begins that soon results in the share price falling quicker than Kerry Katona’s thong at a Chippendales party.

Of course, the companies most vulnerable to this type of attack are banks. If a bank loses the confidence of the market then other banks won’t be willing to lend it money which means it itself can’t lend cash – which obviously poses a bit of problem when that’s how you make a living. Investment banks are particularly susceptible because no-one’s silly enough to trade with an insecure counter-party that may not be able to fulfil its obligations and no-one wants advisory work off a firm that might not be there in a year’s time. A bank whose share price goes into freefall might therefore actually go bust which, of course, is the Holy Grail for any bear raid

There were a lot of rumours that dodgy hedge fund managers began undertaking bear raids on banks as soon as there was the first whiff of the sub-prime mortgage crisis. On November 1, 2007, Citigroup experienced large spikes in short selling and trading volume that many later viewed as a coordinated bear raid. The number of borrowed shares increased by approximately 130m to 3.8 times the 3-month moving average and many believed a cabal of hedgies who were spreading false rumours about regulatory investigations were behind the trades.

However, appropriately enough it was Bear Stearns that was arguably the credit crunch’s first bear raid victim. It was forced into an emergency sale in mid-March 2008 following a rapidly declining share price, that seems likely to have been exacerbated by a serious bout of coordinated short-selling. The demise of Bear Stearns led to the kind of insecure financial environment that further bear raids would thrive in and henceforth groups of cunning hedgies just needed to spread rumours about who would be the credit crunch’s next victim, go short and rake in the cash. These characters were also smart enough to make a massive multiple of any ensuing share price decline by using futures, options and credit default swaps – instruments that were designed to hedge a position for someone who held the underlying stock but were generally abused by speculators wanting to make a quick buck.

On March 19, 2008, a couple of days after Bear Stearns went down, shares in HBOS fell 17% in a few hours. I remember hearing a plausible but entirely spurious rumour that was swirling around the Square Mile that day involving the Governor of the Bank of England cancelling his Easter travel plans in order to resolve a liquidity problem at the bank. The FSA investigation into that situation later concluded that ‘the rumours contributed to the fall in the share price’ though they could not find any evidence of ‘a concerted attempt by individuals to profit by manipulating the share price.’ But, as every half-decent trader knows, it’s almost impossible to identify the individuals who begin idle gossip and those who profit from a rumour-related share price movement can always claim that they were just lucky or clever. Because virtually no-one ever gets convicted for market manipulation and Cityboys assess risk and reward 24/7 it remains an attractive option for those after easy money.

As 2008 progressed and the financial crisis grew ever more hideous short-selling banks’ shares became the only game in town. Long-only funds looked on in despair as asset prices fell but certain hedge funds could hardly contain their joy at the millions they were making from the ensuing chaos. Understandably, this upset certain bank CEOs which is why Lehman’s lovely under-stated boss Dick Fuld declared to a startled assembly of his employees that ‘when I find a short seller, I want to tear his heart out and eat it before his eyes … while he’s still alive.’ Of course, it was convenient nonsense to blame Lehman’s problems on short sellers. In reality, Lehmans had got itself into trouble by gearing itself up to a preposterous degree and exposing itself to worthless mortgages but there can be no doubt that its problems were exacerbated by ne’er-do-wells who wanted to make their trades against it a sure bet. It is these characters who the Archbishop of York, Dr John Sentamu, later called “bank robbers and asset strippers” and it was their actions that led to the controversial ban on shorting financial companies on both sides of the pond that was imposed in late 2008.

I’m not claiming hedge fund managers created the credit crunch, the banks did, but I’ve got very little doubt that they worsened it. Defensive hedgies point to the fact that often only a few percent of the failing banks’ equity was borrowed (a figure that reflects how much was being shorted) but such an amount can still have a significant downward impact on a share price especially when futures, put options and CDSs were also out there adding to the perception of imminent collapse. Indeed, I genuinely believe that Lehmans may not have failed if no-one had been playing the bear raid game. When uncertainty abounds false rumours take on an added significance and small trades can tip the balance in the favour of those who act decisively.

So, the bear raiders working away in late 2008 may just have been the straw that broke the camel’s back and if Lehmans hadn’t gone bust then the credit crunch wouldn’t have entered the critical stage that saw the wheels of capitalism grind to a halt making a global recession an inevitability. In other words, jobs were lost, businesses went bust and homes repossessed from San Francisco to Singapore partially because of a bunch of greed-mongers who didn’t give a tinker’s cuss about the social implications of their get-rich-quick ‘investment strategy’!

It was this analysis that led me to think about whether a bunch of Cityboys (and girls) could take down a reasonably healthy bank even a few years after the worst of the credit crunch was over. It seemed to me that a bank with only minor problems could fall victim to a bear raid if the tactics were sophisticated enough. Hence, my latest book ‘Payback Time’ (out 21st June) considers what damage a bunch of university friends working in the City could do after they become convinced that their friend committed suicide as a result of being fired from her bank. Surely a regulator, a hedge fund manager, a financial journalist, a fund manager and a stockbroker working at said bank could bring it to its knees and earn a shed-load of money if they were smart enough? I think so. In fact, I genuinely believe that with the right insiders, a willingness to break about seven different laws and a vicious computer virus I could take about 15-20% off a medium-sized bank’s share price in a few days!

And if I’m right there’s every chance that there are groups of people out there wondering how they could exacerbate the current crisis to make a fast buck. Hell, I have no doubt that there are numerous cabals right now doing their damndest to bring down banks and whole countries to make the Euro fail irrespective of the damage it causes society!

Free and unfettered markets are one thing but when a few greedy speculators are powerful enough to be able to successfully conspire to bring down multi-national corporations, and in so doing help create economic chaos, we’ve got to ask ourselves one question: has the current system become too open to abuse?

Because there’s one thing that twelve years in the City convinced me of … if a system is open to abuse, then it will be abused!

Thoughts ?

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