Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Mahathirism thriving in US and UK

Mahathir was Prime Minister of Malaysia during the Asian Crisis a
decade ago and shocked the world with controversial responses that
stretched the limits about how responsible governments are supposed to
behave. Looking around the world today, it is clear that Mahathirism
is alive and kicking in the heart of the developed world. The actions
of the US in the Bear Stearns bail out and of the UK in pursuing the
enemies of HBOS smack of the same intolerance of market forces and
preference for crony capitalism that characterized Mahathir.

The legal problems with the Bear Stearns deal have been analysed
very ably by Prof. Davidoff in a series of articles in his Deal
Professor column in the New York Times Dealbook (one,
two,
three,
four,
five,
six,
seven,
eight,
and nine.)
Davidoff argues that the deal violates NYSE listing regulations (but
the worst that NYSE can do is to delist Bear Stearns and this is going
to happen anyway after the merger) and probably violates Delaware
corporate law too. The circumstantial evidence certainly points to a
deal that was imposed by the government with scant concern for the
requirements of good corporate governance. Davidoff is also right in
raising questions about the Bear Stearns directors selling their
shares in the market rather than tendering it to the acquirer under
the deal that they have approved. It is also evident that the
creditors of Bear Stearns (and to a lesser extent, its shareholders)
have been bailed out.

The story about HBOS in the UK is Mahathirism of a different
kind. Since HBOS is known to have considerable exposure to the
mortgage market, it has attracted considerable short interest. After
rumours spread about liquidity problems at HBOS, the Bank of England
took the extra-ordinary step of denying problems at this bank. The
Bank of England does not usually talk about individual
institutions. For example, during the Northern Rock hearings, the
Chairman of the Treasury Committee of the Parliament had the following
exchange with the Governor and another Director of the Bank of
England:

Q129 Chairman: … Are there any others in potential trouble? You
do not need to name them!

Mr King: I think you know perfectly well that central bank
governors cannot go —

Q130 Chairman: Governor, I was not even talking to you; I was
talking to Paul Tucker.

Mr Tucker: Central bank directors take the same approach.

Yet, the Bank of England went out of its way to deny the HBOS
rumours. Moreover, though the BOE statement has been reported very
widely in the press, I cannot find the text of the statement at the
web site of the Bank of England despite searching its web site and
also running down its list of press releases. So much about
transparency.

The Financial Services Authority went further with a probe into the
short selling episode. Its statement
is quite bland, but press reports clearly indicate that the FSA is
taking the probe very seriously. The FT Alphaville blog
describes an imaginary conversation between the FSA and speculator
showing how silly this whole idea of probing the short sales really is:

FSA: Why did you short this bank?

Speculator: Because I thought it might have liquidity problems.

FSA: Why did you then tell the salesman at X broker that you
thought this bank had liquidity problems.

Speculator: Because I thought it might have liquidity problems.

FSA: But it doesn’t have liquidity problems.

Speculator: Really?

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