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Lehman collapse sends shares diving
Jonathan Prynn, Consumer Affairs Editor15 Sep 2008
Shares plunged on the London Stock Exchange today as Wall Street giant Lehman Brothers became the biggest victim of the credit crunch.
The world's fourth largest investment bank collapsed after it was unable to find a buyer because of its huge exposure to the US sub-prime mortgage market.
A second bank, Merrill Lynch, had to be rescued by Bank of America for $50 billion (£28billion) before it suffered the same fate.
Stock markets around the world crashed on the dramatic worsening of the biggest financial crisis since the start of the Great Depression in 1929.
In the City the FTSE-100 plummeted almost 300 points before recovering slightly to stand at 5165.7, down 251 points, by lunchtime. Banks were the worst hit, with Halifax banking group HBOS losing 30 per cent of its value and shares in Barclays and Royal Bank of Scotland dropping by 15 per cent.
The Wall Street meltdown has sharply increased fears that the economy is heading for a major recession-The price of a barrel of crude oil slumped by more than $6 to $91.36 because of falling demand from the rapidly slowing global economy.
There are now fears that the world's biggest insurer, AIG, could be the next to face collapse.
The Bank of England moved to reassure the City with £5billion of support for the money markets while the European Central Bank injected a further ¤30 billion (£24 billion) into European financial markets.
A spokesman for Gordon Brown said the Bank of England, the Treasury and the Financial Services Authority were working with US financial authorities in a bid to contain the damage from the fall of Lehman.
He said: "The tripartite authorities are in very close contact with their US counterpart and their international counterparts. What the events of this weekend show is that these are challenges affecting financial markets in every country across the world," he said. "These are clearly challenging global market conditions."
Liberal Democrat T reasury spokesman Vince Cable warned of further US intervention in the markets. Speaking on Radio 4's Today programme, Mr Cable said Merrill and Lehman "hold the security to trillions of dollars worth of derivatives, swaps, futures, options".
He added: "If this pack of cards collapses, then the whole of the international financial system goes down with it so they are not going to be allowed to let it go bust. There will be an intervention."
Only a week ago America's two biggest mortgage companies, Fannie Mae and Freddie Mac, had to be rescued in a move that briefly reassured the financial markets.
The US Federal Reserve called in the heads of Wall Street's biggest banks to organise a rescue similar to the JP Morgan takeover of Bear Stearns in March. However, no bank was prepared to accept the risk of taking over Lehman, which has total debts of $613 billion.
The last two potential buyers, Barclays and Bank of America, walked away last night leaving Lehman chairman Richard Fuld no option but to seek protection for the bank from its creditors under America's so-called Chapter 11 bankruptcy laws.
Lehman said in a statement: "The board of directors of Lehman Brothers Holdings International authorised the filing of the Chapter 11 petition in order to protect its assets and maximise value."
But while Wall Street was still reeling from that news, Merrill Lynch, which has already lost more than $40 billion on writedowns and losses in the US mortgage market, said it would be sold for $29 a share to Bank of America in a $50 billion deal.
Although it was no secret that Merrill had been badly mauled by the credit crunch, the speed of its demise came as a shock. The sale was seen as a desperate attempt to stop the financial crisis spiralling out of control and tipping the world economy into a deep recession.
Peter Goldman, portfolio manager at Front Barnett Associates in Chicago, said: "What they are doing is shoring up the next domino. They're putting Merrill in as safe hands as possible to halt the downward spiral."
Peter Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the Seventies and a secretary of commerce in the Nixon administration, said: "My goodness. I've been in the business 35 years, and these are the most extraordinary events I've ever seen."
