Under-pressure finance firms are increasingly distorting realities to avoid revealing the extent of their difficulties, writes Proinsias O'Mahony
WHEN ONE hears the words "complaints", "financial regulator" and "stock market" in the same sentence, one assumes that it's yet another allegation of scurrilous rumour-mongering against sneaky short sellers or injudicious journalists. This time, however, it's the rumour-monger doing the complaining , with a Daily Telegraph journalist making an "official complaint" to the UK's Financial Services Authority and demanding an investigation into whether British bank Bradford Bingley (BB) created a "false market" in its shares.
On April 13th, the Sunday Telegraph reported that the Yorkshire bank had enlisted the help of Citigroup in preparing a rights issue. A forthright denial followed, with BB saying it was "not intending to issue equity capital by way of a rights issue or otherwise". Reports to the contrary were just "press speculation". That line was reiterated in an interim statement on April 22nd, with the bank stressing its "strong capital base" and emphasising that it remained "funded into 2009".
On Thursday of this week, BB CEO Steven Crawshaw announced a £300 million (€376 million) rights issue underwritten by Citigroup and UBS.
Investors weren't happy, driving the share price to all-time lows, and neither was Damien Reece, the Telegraph's business editor. "There was no doubt in our minds that the mortgage lender was working on a capital raising and we even knew the code name under which the project was being hatched," he writes.
BB's rejection of the use of the word "emergency" in the original report does little to placate him. "If BB wasn't doing a rights issue to bolster its balance sheet, what would it be facing? A calm, relaxed situation where everything was hunky-dory or a situation rather more grave? When a bank needs to raise 30 per cent of its market value to strengthen its capital position by issuing new shares at a 48 per cent discount to Tuesday's closing price, that's an emergency."
Whether intentional or otherwise, it's but the latest in a long line of recent corporate flights of fancy. Martin Sullivan, chief executive of insurance giant AIG, told investors in December that any writedowns it would suffer would be "manageable". They have now exceeded $19 billion, forcing the company to announce a $12.5 billion rights issue last week.
In March, Michael Callen, chief executive of bond insurer Ambac, tried to soothe investor nerves by saying that "the worst may be behind us". It wasn't - the share price almost halved in a single day after the company posted results the following month.
March also saw General Electric chief executive Jeffrey Immelt promise "pretty gosh-darn good" results. A profits warning followed a month later, prompting the stock's largest one-day sell-off since Black Monday in 1987.
And what about Bear Stearns chief executive Alan Schwartz? Liquidity pressures caused the bank to collapse just two days after he told CNBC viewers that "our liquidity position has not changed at all, our balance sheet has not changed at all".
Damien Reece is not the first journalist to question the plausibility of financial chief executives' pronouncements. Rumours that Halifax Bank of Scotland (HBOS) was facing a serious liquidity crisis caused the shares to nosedive in the immediate aftermath of the Bear Stearns debacle, prompting an official investigation into alleged market manipulation by short sellers.
Just weeks later, however, HBOS announced a £4 billion rights issue, which prompted a cool response from Paul Murphy, editor of FT Alphaville, the Financial Times blog. "Since an unnamed HBOS spokesman was gaily telling the news wires at the time that HBOS had 'an exceptionally strong balance sheet', asserting now that the rumour-mongers were somehow criminally off-beam back in March is laughable," Murphy scoffed.
Libor rates also suggest that banks are being economical with the truth. Libor is a measure of the average inter-bank lending rate and is calculated each morning.
The system depends on banks reporting the rates they're paying for short-term loans. Suspicions are growing that banks have been lying about their lending rates, with the Wall Street Journal reporting in April that "some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash". The results of an investigation by the British Bankers' Association are to be announced on May 30th.
So what's an investor to do? How do you know if you're being fed porkies? Some US hedge funds use the services of Business Intelligence Advisors (BIA), a Boston firm that employs a number of former CIA operatives to analyse the behavioural tics of chief executives and other corporate high-fliers. During interviews and earnings conference calls, when journalists and analysts are looking for facts and figures, the BIA honchos are analysing managers' verbal and non-verbal behaviour.
Might they have spotted something in Bradford Bingley's April denials? The giveaway, it seems, is the reference that BB would "monitor" its balance sheet, a classic "fudge", according to Reece. "I won't believe another word he or his fellow board members utter about Bradford Bingley. If I were a shareholder, I'd have similar doubts."
