In a letter to FSA chairman Sir Callum McCarthy dated 18 March 2008, published today by the Parliamentary Commission on Banking Standards, Stevenson said HBOS was “robust” and will be “boringly boring” for the next year or two.
On 19 March 2008 the FSA confirmed that it would be conducting an investigation into trading in HBOS following a sharp fall in its share price that resulted from what it described as “completely unfounded rumours”.
On Tuesday, 18 March 2008 the HBOS share price closed at 480p. Prior to market opening and throughout the morning of Wednesday 19 March 2008, various rumours circulated in the market that a British bank faced funding difficulties.
Several of the rumours identified HBOS by name and alleged that the Governor of the Bank of England had cancelled his Easter travel plans in order to resolve a liquidity problem at HBOS and that the Bank of England was bailing out HBOS.
HBOS, the Bank of England and the FSA all made public statements during the course of the day.
HBOS made a statement that the bank had an ‘exceptionally strong balance sheet’. News agencies were reporting the Bank of England’s denial that it had cancelled leave for its Monetary Policy Committee members.
The FSA warned market participants against spreading false rumours and dealing on the back of them.
But in its final report on the affair, published five months later on 1 August 2008, the FSA said that while it was likely the rumours contributed to the fall in the share price, the FSA had found no evidence that the rumours were spread by individuals to profit from manipulation of the share price.
Despite this its primary concern was about the source of the rumours and stated, “where there is evidence of market abuse then we will take enforcement – including criminal – action”.
Rather than reviewing how it dealt with the UK’s biggest banks it said it was reviewing “the systems and controls at firms for dealing with rumours”.
Two months later in October 2008, Lloyds bought HBOS before the merged firm, Lloyds Banking Group was bailed out by the Government to the tune of £21bn.
In his March 2008 letter Stevenson told the FSA that HBOS was a “highly conservative” institution with “high quality” assets, and claimed the bank had no problem financing itself, even on the “hairiest of days and weeks”.
He wrote: “My soberly considered view is that given the extraordinary external environment, HBOS in an admittedly uncertain and worrying world is in as secure a position as it could be. Happy to be cross questioned on this but I hope you know me well enough to know this neither bravura nor an ill considered statement.
“The new 24/7 problem of rumour feeding upon rumour and creating a wholly irrational ‘hit’ or ‘run’ on an institution – probably but not necessarily generated with criminal intent – that create self fulfilling prophecies that are difficult to stem. That is my number one worry.”