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Fear and loathing in the money markets

Easter is now behind us and turning from the spiritual to the temporal, while these past couple of weeks have bordered on the apocalyptic there’s been little time for reflection.

For a start there was the Bear Stearns fire sale to JP Morgan Chase for the knockdown price of $2 per share, although at their height last year its shares were trading at $170.

In a painful echo of Northern Rock, rumours of a cash shortage led to a run on the US bank, with investors reported to have withdrawn $17bn in just two days.

But unlike NR, the US authorities didn’t take six months to act and facilitated a weekend deal to fund up to $30bn of Bear Stearns’ less liquid assets.

But despite this timely intervention, many of our banks saw their share prices fall on the back of the Bear Stearns crisis.

On March 17, shares in HBOS declined by just under 10% from 528p to 478p, Barclays’ share price fell 6.47% from 433p to 405p and Lloyds TSB saw its stock drop 3.86% from 421p to 405p. Shares in the Royal Bank of Scotland also fell 7.79% from 333p to 307p.

Such is the way of the markets. They are motivated by fear and greed and part of that fear may have been driven by the threat of recession heading our way across the Atlantic at a rate of knots, or by the Bank of England’s decision to make a further £5bn available because LIBOR has virtually dried up. No-one knows.

There were a few crumbs of comfort. Investment banks Lehman Brothers and Goldman Sachs reported better than expected figures, slightly buoying the markets.

But the cold comfort ended not with news that NR plans to axe up to 2,000 jobs over the next three years but with rumours in the London market that HBOS was about to become another NR and had been knocking on the doors of the BoE with a large begging bowl.

Fortunately this was untrue but we’re living in panicky times and shares in HBOS tumbled by more than 17% as a result.

Of course, JP Morgan then increased its offer for Bear Stearns to $10 a share. And on the back of HBOS chief executive Andy Hornby putting his money where his mouth is by using his annual bonus to buy shares in the UK giant, at the time of writing HBOS’ share price had recovered to pre-panic levels.

It turns out speculators had been spreading malicious rumours and selling HBOS short, and the matter is now under investigation. But can you say a crisis was averted or that another banking catastrophe was avoided? Either way, there are lots of investors who aren’t convinced that the tripartite authority has mended its ways – and that’s scary.

• For more John Murray, visit


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