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’ who had spread false take-over rumours about a pharmaceutical company whose shares had been festering on his books for weeks. The share price began to rise and, once the media had mysteriously been informed of this ‘likely development’, was soon rocketing. 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!
But this ‘pump and dump’ strategy had an evil cousin that only reared its ugly head when markets were weak : ‘the bear raid’. A bear raid generally begins with a bunch of dodgy hedge fund managers sitting around a strip-joint 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. 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 the media start spreading ‘the news’, a vicious circle begins that soon results in the share price falling.
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 and, appropriately enough, it was Bear Stearns that was probably 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.
As 2008 progressed and the financial crisis grew ever more hideous, short-selling bank shares became the only game in town. I’m not claiming hedge fund managers created the credit crunch - the banks did - but I’ve got very little doubt that they made it worse.
It was this analysis that led me to think about whether a bunch of Cityboys 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 today) 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.
It may sound far-fetched, but 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! 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!
‘Payback Time’ (Headline, £7.99) by Geraint Anderson comes out Thursday.
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