A bogeyman named ‘fear and greed’


So now we know who has undermined Western financial market capitalism, seemingly bringing to an end the longest period of economic growth in the likes of Britain and the United States on record. We know now what all but destroyed the once sparkling financial derivatives industry, which for so long promised to turn bad credits into good credits, only for it all to be eaten up in the Great Crunch.


It’s the bogeyman.


This mythical, ghost-like figure is better known for scaring children in their beds. But adults can be affected also. Especially if they are looking round trying to find something to be scared of.


The bogeyman in Western financial markets right now is the so-called “short-seller” – or, depending on what media you consume, the “modern-day bank robber”, “the racketeer”, the “trash and cash merchant” or so many other evocative epithets. This is the stock manipulator – the evil, faceless scoundrel profiting from other people’s distress.


He popped up first in New York, the week before last, frightening the very lives out of all those good customers of the local brokerage house, Bear Stearns – causing such a commotion that the customers panicked, withdrew their assets, and caused the bank to crash. He left traces of his presence in the stock option market, where heavy buying of near-term, out-of-the-money “put” options (giving the right to sell stock at a price markedly below the prevailing market level) allowed him to harvest massive profits from Bear’s demise.


America’s Securities and Exchange Commission has promised to investigate.


Encouraged by his success in New York, the bogeyman popped over to London last week, where he launched a devastating attack on a poor, blameless bank called HBOS. His tactics on this occasion involved dreaming up all manner of malicious thoughts – like the possibility that HBOS might have wholesale funding problems – which he then wrote in e-mails and circulated, secretly, all over the City of London.


But this time the bogeyman wasn’t stealthy enough. While shares in HBOS started to fall, authorities, including the Bank of England and the Financial Services Authority, tipped off to his presence by good people in the market, chased the bogeyman away.


Shares in HBOS recovered, the bank making a lucky escape – and now everyone with an interest in keeping London a safe place in which to play with your money has promised to find this evil market manipulator and put him out of business for good.


Which might take a while – because, as all grown-up people should know, the bogeyman doesn’t really exist.


The lifeblood of all markets – not just financial – is information. The quicker it circulates, and the greater the depth of this information, the better the quality of the market.


All participants in a financial market believe that their information is good – either that, or the person already in the market fears that their information is bad. They either hope to profit from their information or fear losing money because they have not got enough of the right information. It is summed up by the phrase “fear and greed”.


During times of stress – such as when a great period of progress has come to an end, when a bull run has become a bear market, possibly for no better reason than the fact that economies moves in cycles – the number of people affected by fear can greatly exceed those encouraged by greed. It is at moments like these that paranoia sets in – a sense that the very information upon which market participants are relying is somehow tainted.


Because people don’t like to admit they got something wrong they have a tendency, in such circumstances, to claim that they are victims – that they have been manipulated for someone else’s malignant ends, that someone has profited unfairly at their expense.


They believe, in short, that the bogeyman’s got them.


Funnily enough, during times when the number of people in the market feeling greedy far exceeds those racked by fear, allegations of manipulation and the like are nowhere to be seen.


Those e-mails and telephone whispers doing the rounds – as they do each and every day, whatever the financial


weather – warning of good news that is going to push prices up, are not reported to the authorities.


No one is accused of manipulating prices higher – unless, of course, they subsequently come crashing down. When prices go up, no one cries foul.


The bogeyman is nowhere to be seen. In fact, no one believes he really exists. They’re adults, right? Smart adults. That’s why they’re making good money.


- Paul Murphy is associate editor of the Financial Times