PHILIP FALCONE, the American hedge-fund manager who made a killing by betting against the shares of HBOS, now has the UK’s second-largest retail bank in his sights.

In the past week his hedge fund, Harbinger Capital, has built up a €208m (£165m) short position in Santander, the eurozone’s largest bank and owner of Abbey National, Alliance & Leicester (A&L) and Bradford & Bingley (B&B) in the UK.

While the shorting of financial shares is still temporarily banned in Britain, this is not the case in Spain. Falcone has made similar bets against BBVA and Banco Popular, Spain’s next two largest banks. He has built up short positions of €225m and €139.8m in those stocks respectively. Being targeted by one of the wiliest investors in the sector will worry investors, especially because shares in the companies have already dropped so much in value. Santander shares have shed a third of their value over the past year, while BBVA and Banco Popular have lost nearly half their value.

Falcone has done well by making the right calls before. According to the hedge-fund trade magazine Alpha, he pocketed $1.7 billion last year, making him one of the sector’s top-five earners.

Santander and its chairman, Emilio Botin, have been lionised for stepping in to save both A&L and B&B. Spanish banks have skated relatively unscathed through the credit crunch, but questions are being asked over whether that will last.

They are heavily exposed to Spain’s plummeting housing and construction markets. Unemployment in the country recently hit 11%. According to filings with Spain’s market regulator, Harbinger increased its bets against the banks on Thursday and again on Friday, when stocks around the world ended the worst trading week since the stock-market crash of 1987.

Falcone previously built a near-4% short position on HBOS and was vilified along with other short sellers for his perceived role in the shares’ nosedive that led to the government-brokered rescue deal with Lloyds TSB. Regulators in America and Europe, including Britain’s Financial Services Authority, have since imposed a temporary ban on short-selling on some financial stocks.

Short sellers borrow shares in a stock on the assumption that by the time they have to return them they will have fallen in value, and then pocket the difference.

Next week Falcone will be among five prominent hedge-fund managers who will testify before the US Congress about his business and any possible deleterious effects that it may have on financial stability.

Henry Waxman, chairman of the House Oversight and Government Reform committee, said in a letter to Falcone: “I ask that you be prepared to testify about whether hedge funds, including yours, pose systemic risks to the financial markets.”

Geroge Soros, John Paulson of Paulson & Co, Kenneth Griffin at Citadel Investment Group, and James Simons of Renaissance Technologies will also testify.

In total, short sellers hold 2% of Santander stock, 1% of BBVA and 8% of Banco Popular. Lansdowne Partners, the London hedge fund that shorted Northern Rock in the months before the lender was nationalised last year, has taken a 0.42% short position in Banco Popular.

Fidelity International has also placed a bet against the company.

Times Recommends

• Lloyds TSB wins vote for HBOS merger
• Bank of England discussed 2% rate cut
• Woolworths dives as it confirms takeover talks