Over coffee the other day a senior City figure passed on an intriguing tale. Back in December a major British high street bank (not HBOS) went to the Bank for International Settlements for emergency funding.

The secret bailout by the central bankers' central bank stabilised the struggling institution and allowed it to claim quite truthfully that it had not gone cap in hand to the Bank of England; it had cunningly used a different lifeboat altogether.

My informant had the information from an excellent source but could not swear it was true. Was this City grandee peddling a rumour? Absolutely. Was he right to do so? Emphatically yes. Much scuttlebutt turns out to be rubbish but a lot is true or contains a kernel of truth. Markets would not function properly without the free flow of rumour and hearsay. If only official information sanctioned by boards, approved by lawyers and sanitised and buffed up by PR consultants was allowed to be propagated, we would all be seriously in the dark.

Rumours help to flush out the truth. Speculation hastens disclosure. Markets are ultimately kept better informed because of freedom of speech, freedom to gossip and freedom to speculate. Companies with embarrassing secrets would be silent, or at least a lot slower in fessing up to their shareholders, if there was no danger of a leak.

The important point was that my friend had not shorted the bank's shares. He had not embellished the story. He was set to make no financial gain. I have no intention of naming the bank unless I am able to confirm the truth of the tale. (It is a long shot: the Basle-based BIS does not normally do business directly with commercial banks.)

The Financial Services Authority is right to sound off about crooks who place “down bets” on share prices and put out false rumours to profit from their lies. These “trash and cash” merchants are cheats, although it should be emphasised that stock market investors are grown-ups - they are not compelled to believe what they hear nor to trade on it.

Blaming bears can be the last refuge of the scoundrel: Ken Lay's main defence plank was that Enron was in fact a robust business brought low by deceitful bears.

It is important to distinguish between downright lies and genuinely held negative opinion. It would be disastrous if the FSA's salvo against “spreading false rumours” deterred sceptics from raising legitimate concerns about specific listed companies. It would be monstrous if analysts were further deterred from issuing “sell” recommendations, already a rare sighting at many banks.

Bears in normal times are in a minority. They provide a vital counter-point to the tidal wave of voices usually in favour or neutral on any company. When half the City was employed in puffing up Robert Maxwell's house of cards, thank goodness for contrarians such as Simon Caukwell for voicing a different opinion. Often the bears are wrong but not in the case of share bubbles such as Polly Peck, Spring Ram and Marconi.

Bears do not topple companies; the seeds of their destruction are already sown by their incompetent managers. Bears merely help to hasten the change in investor sentiment. In so doing, they prevent more bulls and creditors being burnt. They ensure a more efficient allocation of capital.

Till last summer, the City and Wall Street were becoming places where publicly to express scepticism about an investment was to invite disapproval and to risk being expensively ostracised.Yes, the HBOS short-selling raid was wicked, but three cheers for market gossip and thank goodness for bears.

patrick.hosking@thetimes.co.uk

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