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Monday 15 September - afternoon update
Share prices slumped in London today in the wake of the Lehman Brothers decision to file for Chapter 11 bankruptcy protection in the US.
As traders began picking over the bones of what remained of the once-mighty American banking system, the bears were having a field day selling short the stocks likely to suffer most from the credit crunch.
In the event, the sell-off in London saw the FTSE 100 index touch a new low for the year of 5124.9, before reducing the deficit to 219.6 points at 5197.1 in wafer-thin trading conditions. The broader FTSE 250 index was down 304 points at 8672.7.
The Tokyo and Hong Kong markets were closed for holidays today. That meant London was the first of the major global players to react to the news overnight from New York.
All eyes focused on Wall Street this afternoon, where the Dow slumped 278.7 to 11,143.3. Further volatility is expected during the next few days.
One thing is for sure. The downfall of Lehman, the purchase of Merrill Lynch by Bank of America before it could go to the wall and the $40 billion (£22 billion) call for emergency cash by American International Group means the credit crunch is likely to continue for a lot longer than some experts had forecast.
The London Stock Exchange was forced first thing this morning to rush out an announcement calling a halt to trading with Lehman until further clarification of its position. Shares of Lehman in London slumped 84% to 42 cents before rallying to 72 cents.
Naturally enough it was the financials that bore the brunt of the sell-off, in particular the banks. HBOS, which is still struggling to digest its recent £4 billion rights issue, slumped 51½p to 230½p. So its shares are now trading below the 275p at which its cash call was priced. Its business model makes HBOS vulnerable to short-term funding, and it could thus be difficult to raise fresh funds if the credit crunch worsens.
Royal Bank of Scotland dropped 29½p to 210¼p, Lloyds TSB 18p to 271½p and Bradford & Bingley 4½p to 32¾p. Barclays, which pulled out of weekend talks to buy Lehman, was down 36¾p at 313¾p. Collins Stewart is urging clients to buy RBS and go short of Barclays with a 339p target.
Though it sees the latter's pull-out as positive, it feels that mulling a deal in the first place reveals management reluctance to deliver on balance-sheet strength.
Keefe, Bruyette & Woods warns that Lehman's collapse will unnerve the markets and result in short-term weakness for European banks as markets digest the systemic consequences.
Peter Dixon at Commerzbank says: “The problems today are not focused on individual firms, but they are systemic. There is a sense today that
the financial landscape has changed irrevocably.”
The plea for emergency funding by the world's biggest insurer, AIG, sent a shudder through the UK insurance industry.
AIG got into hot water by insuring against losses on various bonds. It has already lost $18.5 billion in the past three quarters and urgently needs the money to prop up its ailing balance sheet, despite having already raised $20 billion earlier this year.
Among UK insurers, Friends Provident fell 16.3p to 82.3p, Prudential lost 57½p at 493½p and Old Mutual shed 7.5p at 90.7p. Hedge fund operator Man Group also ran into selling, leaving the shares down 49p at 464½p. Inter-dealer broker Icap shed 56¾p at 431¾p.
The worst casualties among second-liners were the housebuilders. Taylor Wimpey lost 8¼p to 45¾p, Barratt Developments 12¼p to 133¼p and Persimmon 30¼p to 370p.
One of the few blue chips to make progress was Scottish and Southern, up 21p at 1401p on talk of a bid from Swedish rival Vattenfall. National Grid firmed 3½p to 720½p.
