DS Group is a major shareholder in SEM Group, which is competing with Thomson Group for the acquisition of Reuters.
Therefore, when shorting Reuters' stock price, Barron would not use companies related to him—at least not overtly related—to do so, as this could easily lead to suspicions of unfair competition.
He was very careful about this.
Therefore, this large-scale short sell of Thomson Group was carried out by a fund company registered in Hong Kong by Tianhe Capital.
Their short sell of Thomson Group wasn't simply for profit; it was primarily due to the fact that Thomson Group's acquisition of Reuters was a combination of cash and stock. While cash accounted for the majority of the investment, the decline in Thomson Group's stock price meant a reduction in the total acquisition price.
Furthermore, a sharp drop in its stock price would trigger a series of chain reactions, potentially causing Reuters to reconsider whether a merger with Thomson Group would be detrimental to its own performance.
Of course, Thomson Group could use its own funds to "support" the market.
Although the Thomson family controls 70% of Thomson Group's shares through Woodbridge Investments, with only around 30% outstanding, this was enough to cause a significant drop in its stock price.
The most important factor was the timing they chose this time.
Under normal circumstances, relying solely on their own funds to short a company of Thomson Group's size would be effective, but not necessarily sustainable, and the effectiveness would be questionable.
After all, the opponent's strength is evident, and Thomson Group's fundamentals are not significantly flawed.
However, it's important to note that October is approaching, and the US stock market is about to reach its peak before the subprime mortgage crisis. Further impacts from the subprime mortgage crisis will then trigger a downward trend across the market.
It's like a boulder already perched on a mountaintop; all it needs is a small push to tumble downward... Given this trend, Tianhe Capital's massive short position will only accelerate the boulder's descent...
If the Thomson family attempts to maintain its stock price against this trend, their efforts will be ineffective.
At this point, not only Tianhe Capital began shorting Thomson, but also various markets, from the US to European, and even Japanese and Korean stock markets.
"We began shorting Lehman Brothers when the stock price was above $80. Now, its share price continues to rise, approaching $86. We increased our short position, and the stock price quickly reflected this: its rise has stopped and is beginning to fall slightly. This indicates that the funds bullish on Lehman Brothers have been exhausted, which is good news for us."
The Black Swan Fund had entered its second phase, moving from trading in subprime mortgage debt obligations (CDOs) and related insured bonds (CDSs), into a comprehensive shorting of the stock market.
In the first phase, the Black Swan Fund secured over $35 billion from the five major Wall Street investment banks—Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns—as well as a series of other investment banks, including Citigroup, Credit Suisse, Deutsche Bank, and BNP Paribas, through CDO betting agreements and the sale of CDSs.
To this day, the Black Swan Fund still holds a significant number of CDS bonds and will participate in claims against insurance companies, including the American Insurance Group...
In the second phase, the Black Swan Fund will intensify its short-selling of the US stock market!
Their primary targets are financial and insurance stocks, including Merrill Lynch, Lehman Brothers, and Bear Stearns. Furthermore, due to their massive capital base, shorting these stocks only consumes a fraction of their funds, with the remaining funds allocated to stocks across a wider range of industries, including stock index futures.
For example, Lehman Brothers, with its current share price above $80, has a market capitalization of nearly $40 billion—making it an ideal short-selling target. With its high market capitalization and high liquidity, and as one of the two Wall Street investment banks most deeply involved in subprime mortgage lending, it will be most affected by the crisis.
The other bank is Merrill Lynch, which is even larger than Lehman Brothers and is also a key target for the Black Swan Fund's short-selling. In Europe, firms including DS Group's funds and William Weber Capital have also laid out a tight net. Their short selling began with the banking sector, and has since targeted numerous stocks in credit-intensive manufacturing sectors like telecommunications, technology, and automotive.
Tianhe Capital and Rich23 Capital are primarily engaged in Asia. Besides Tianhe Capital's Hong Kong-based fund's short position against Thomson Reuters, they have also deployed short positions in the Japanese and Korean stock markets, as well as those in Hong Kong and Lijiapo.
However, Barron's primary focus right now isn't on this, nor is it SEM Group's acquisition of Reuters. It's on...
On September 25th, the Bank of England announced it would inject £10 billion into the money market and provide a bailout loan to Northern Rock Bank.
In fact, a run on Northern Rock Bank had already begun on the 14th...
When things got tough, Northern Rock issued a profit warning, citing an unexpected rise in interest rates and a slowdown in asset growth caused by credit contraction. Pre-tax profits for 2007 were projected to be around 20% lower than expected.
This announcement immediately triggered a widespread run on
the bank that day. Northern Rock customers began queuing at branches, trying to withdraw their deposits.
Initially, the lines were small, but the panic intensified.
Soon, the lines grew longer...
According to the UK's 2001 Deposit Compensation Scheme, depositors with deposits under £2,000 are guaranteed a full refund in the event of a bank's insolvency. Depositors with deposits between £2,000 and £31,000 receive a 90% refund, while depositors with deposits above that amount receive no refund at all.
This was the root cause of the depositors' anxiety!
Because this means that unless your bank deposit is less than 2,000 pounds, if you deposit 31,000 pounds and the bank goes bankrupt, you can only get back 28,100 pounds...
Well, if your deposit exceeds this amount, it is very likely that you can only get back 28,100 pounds, because deposits above 31,000 pounds are not guaranteed!
After this situation occurred, the media also came out to add fuel to the fire, and their reports further exacerbated the situation.
The Financial Times reported:
"The Bank of England has always been adamantly opposed to bailing out banks that make rash lending decisions, so expecting it to rescue Northern Rock is impossible. The reputation and credibility of Melvin King, the bank's boss and chairman, are at stake. He has never been more insecure than today, and indeed, his credibility is under the spotlight..."
The Independent wrote:
"One thing is certain: Northern Rock will have to fight to repair its reputational damage. On the one hand, as a brand, it no longer commands the trust of customers seeking loans and mortgages; on the other, if it is rescued by the central bank, it will forever be stigmatized as a bank-bailout."
Clearly, Barron welcomed these media reports. After all, not only did Catherine Neville short Northern Rock's share price, but he also held a significant position.
After the incident broke, he directed his funds to intensify their short-selling efforts against Northern Rock.
That day, Northern Rock Bank's stock price plummeted by over 40%!