Alliance & Leicester Denies Problems After Shares Plunge
September 18th, 2007Remember the roughly $1 billion dollar bet that the Eurostoxx 50 index would decline sharply in September? Those put options expire on the 21st.
What follows is almost certainly worthless rambling, but I’m going to do it anyway, just in case:
Let’s assume that the option bet isn’t simply cost-of-doing-business hedging for some large fund.
I couldn’t help wondering if someone is standing upwind of a large pile of dry brush and trying to strike a match with this Alliance & Leicester thing.
I’ve seen it happen before on a single stock (AMZN) at option expiration. But the mystery trader needs an entire basket of stocks to crash, not just couple. Even I have to stretch my tinfoil a bit thin at the prospect.
Outside of a false flag operation, I tried to think of an event that could deliver the necessary result for the mystery trader.
There’s only one thing that I could think of, given the timing: the Fed rate decision. The markets have priced in a 100% chance that the Fed will cut rates, the only question is, will it be 1/4 or 1/2 of a point?
I’m absolutely not saying that this is likely to happen, but a Fed rate hike would have roughly the same effect as a bomb going off in global equity markets. Many banks would be decapitated on the spot from the resulting loss of liquidity.
Anyone who trades knows that insiders know the news before it hits. Read my piece about spotting irregular activity on stocks for more detail on this. What just happened on Alliance & Leicester is kind of the same thing, but short. What’s the key to the move? It happened on no news specific to Alliance & Leicester, which might mean, someone already knows the news that isn’t news just yet. Again, read about Dow theory and the distribution phase; in summary, insiders bail while the sheep get slaughtered.
Of course, it wouldn’t take much to spark a sell off on U.K. bank shares these days. In this climate, a sufficiently deep pocketed market maker would just have to start the ball rolling. It’s like standing on the right side of a flock of sheep and clapping your hands if you want them to move to the left. It doesn’t take much effort and look at the result.
In any event, the next few days are going to be very interesting.
Sorry for the confusing ramble. It’s almost certainly all or mostly wrong, which convinced me to focus on it a bit. I routinely run Devil’s Advocate exercises in my head, but I don’t usually write the raw output down.
Via: Guardian:
Fears that Alliance & Leicester would be forced to seek emergency funding from the Bank of England heightened yesterday after it lost more than a third of its value on the London stock market.
A massive sale of the bank’s shares prompted speculation it was the latest victim of the credit squeeze that has brought international money markets to a standstill and sparked the collapse in confidence at Northern Rock, Britain’s fifth largest mortgage lender.
$1 billion dollars after placing 245,000 put options on the Dow Jones Eurostoxx 50 index
Article continues
Alliance & Leicester is the next largest mortgage bank with 5.5m customers, but denied it could suffer the same fate.
In a statement after the stock market closed, it said: “We have not approached the Bank of England for assistance. We have a very different business model to Northern Rock, and our funding is not overly reliant on wholesale markets.”
Banks lend to each other on the wholesale money markets. In the wake of the US sub-prime mortgage crisis they have dramatically restricted their lending, fearing that some banks have a black hole in their accounts.
Alliance & Leicester shares dropped by 31%, or 273p, to 600p in the last minutes of trading which, combined with the falls at Northern Rock, dragged the FTSE 100 index down 102.4 points to 6186.9.
A spokesman for the bank said he “knew of no reason why the shares fell”.
