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FSA acts as rumours send bank shares crashing

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The Financial Services Authority is combing through share transactions today as it investigates whether anyone was manipulating the market on Wednesday when rumours about Halifax Bank of Scotland sent its shares crashing down.

HBOS shares fell more than 17 per cent in early trading yesterday and took other bank shares down with them. The FSA put out a statement condemning the rumour-mongering and associated short selling - betting on share prices falling.

There is nothing wrong with selling shares you believe will fall, as long as you are not spreading false rumours to drive the price down. Share transactions leave an obvious paper trail and banks routinely record staff phone calls but finding the provenance of rumours is harder to do.

Sally Dewar, managing director of the FSA, said: "There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling. We will not tolerate market participants taking advantage of the current market conditions to commit abuse by spreading false rumours and dealing on the back of them."

The Bank of England also got involved - it put out a statement denying that HBOS has asked for funding help. But given recent failures like Bear Sterns and the paranoid nature of the markets right now almost no rumour seems too extreme.

Meanwhile on Wall Street US regulators are taking similar action.

The Securities and Exchange Commission is investigating suspected short selling and market manipulation surrounding Lehman Brothers - its shares fell 40 per cent on Monday. The SEC has also launched a formal investigation into trading in Bear Sterns shares prior to its purchase by JP Morgan.

In related news UK High Street banks are meeting the Bank of England to ask for more help in persuading their creditors that all is well. They will ask Mervyn King to reassure customers that the Bank of England would step in if any UK bank suffered a cash shortage.

The FTSE 100 is trading slightly down this morning.®

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