Just last month, rumours of a rights issue threatened to damage HBOS and the FSA was forced to step in to defend the bank and quash speculation as shares fell by as much as 17 per cent in just hours.

Turn to today and the unexpected action has caused controversy among the bank’s two million shareholders; at the end of February this year the bank boasted of its strong financial position as it announced its preliminary results for 2007.

At the time, HBOS chief executive Andy Hornby, said: “In 2007, the disciplined execution of our strategy has resulted in good earnings growth for our shareholders despite difficult market conditions. With our multi-brand distribution strength, strong balance sheet and low cost operating platforms, we are well placed to take opportunities presented by these difficult markets and deliver good growth in shareholder value over the next few years.”

HBOS’ current financial situation tells a different story. Share prices are down and the bank has been forced to make a £4 billion call for cash from investors, despite claiming that the bank is in a strong position. In the announcement of the rights issue, Mr Hornby insisted that it was a precautionary move, a result of forward thinking, and an attempt to raise its capital ratios.

“We are planning for a more challenging environment ahead and the proceeds of the rights issue should ensure that we benefit from strong ratios even if the macroeconomic environment deteriorates further.” he said

Prior to the announcement of its rights issue, HBOS’ write-downs had remained in the millions, a far cry from the £2.84 billion the bank wrote off in the wake of its rights issue announcement yesterday.

HBOS is not the first leading UK bank to make a cash call or announce larger write-downs than first expected; last week RBS announced a massive write-down of £5.9 billion, thought to be as a result of both banks’ involvement in US sub-prime mortgage lending.

Speculation is mounting that other banks are soon to follow in HBOS and RBS’ footsteps. In the last few days, rumours surrounding both Barclays and Bradford & Bingley have begun to circulate because of their failures to rule out the possibility of a rights issue.

©Fair Investment Company Ltd