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City braced for meltdown
30.09.08
The City braced itself today for further pain after watching Asian markets plunge to record lows overnight following the rejection of a $700bn bank bail-out.
Experts suggested billions could be wiped off the value of blue chip stocks in London - adding to the £64 billion loss yesterday.
Traders will be watching intently when US president George Bush makes a statement on the rescue plan later today.
In the US, the fall-out from the House of Representatives' refusal to back the rescue plan was immediately followed by a drop of nearly 5% in the Dow Jones Industrial Average.
The drop was followed by sharp falls in all Asian markets immediately after opening.
Japan's benchmark Nikkei 225 index saw a tumble of 544 points, or 4.6%, to 11,199.07. Top stocks like Sony suffered, down 6.8%, and Toyota down 4.6%.
Traders in Hong Kong saw a nosedive of 3.6% in the Hang Seng index.
Taiwan's key index fell by 6.1% despite pleas by vice premier Paul Chiu for investor confidence in the island's economy.
In Australia, South Korea and the Philippines the news was no better with all markets dropping sharply.
Australian prime minister Kevin Rudd said of the turmoil: "This is a bad development" and urged US politicians to try again to reach a deal.
"The attitude that we will adopt, and I believe other friends and allies of the US will adopt, is to urge the US Congress to pass this or a similar measure when it is re-presented to the Congress later this week," he said.
Within half an hour of opening Australia's benchmark S&P/ASX-200 had fallen more than 5.3%. Later in the day it recouped some of those losses and was down 3.7% by the afternoon trading session.
After the turbulence in the Asian markets the dollar dropped against the yen and was trading at 104.14 yen in Asia today.
The turbulent trading expected today in London comes after a day in which the FTSE plunged 269.7 points to 4818.8 - a 5.3% fall and its lowest close since April 2005.
Responding to last night's vote in the US, Justin Urquhart Stewart, of Seven Investment Management, said: "This is not good news at all. Although 700 billion dollars wouldn't have solved the problem, it would have helped. Things could get nasty."
David Buik, of Cantor Index, said: "They will have to go back and renegotiate. To have no agreement is a non-option, it is just ridiculous. Those who have have voted No have engaged their backsides rather than their brains."
He said renegotiations could take up to a week, but would have to come.
"The FTSE could drop a further 200 points today if nothing happens. But whatever happens, something has to be renegotiated," Mr Buik said.
Uncertainty over the effectiveness of the proposed rescue package had already hit the FTSE 100 Index.
But it was not the only factor in the 250-plus point fall in yesterday's trading.
The index also suffered from the pound experiencing its biggest one-day loss in 15 years amid the stock market turmoil.
News of the co-ordinated European governmental rescue of Belgium's Fortis bank fuelled concerns of contagion across Europe.
Bank of England figures revealing that mortgage lending plummeted by 95% during August also added to the Footsie bloodbath.
The US plan, which needed approval from both houses of Congress, would have given the administration broad power to use taxpayers' money to purchase billions of home mortgage-related assets held by cash-starved financial firms.
David Jones, chief market strategist at IG Index, said government actions were being seen merely as "sticking plasters" for an ever deepening crisis.
"Recent events would seem to confirm that markets are too big to be swayed from their path by any one organisation - whether it is government or corporate," he said.
"The worry is still what is unknown and yet to come out of the financial sector."
European markets were shaken badly by the Fortis deal, which marked the largest bail-out of a European financial institution so far.
The governments of Belgium, Luxembourg and the
Netherlands combined forces to pump in 11.2 billion euros (£8.9 billion) cash to help prop up Fortis.
In London, Royal Bank of Scotland suffered a 13% drop as it emerged that Fortis must now sell its stake in ABN, bought as part of the near £50 billion takeover led by RBS last year.
Fortis, which is the UK's third largest private car insurer, paid 24 billion euros (£19 billion) for its holding in October last year, and said before Sunday's bail-out that it needed to raise around five billion euro (£3.9 billion) in cash to meet the costs of integrating ABN's Dutch retail operations.
Fortis previously insisted it could meet that shortfall by selling other assets.
Meanwhile, the Icelandic government said it was taking control of the struggling Glitnir bank, marking the first major banking nationalisation in the country since the start of the credit crisis.
The worries for the wider European banking sector compounded caution among investors over the US government plans to help buy "toxic" bank debts.
Reader views (17)
Things are so bad in the City that they have started to dismantle the Gherkin. Which building will be next?
- Jb, London
After years of making a killing, they failed to listen to their Granny and saved for a rainy day!!!
the so called intelligent bankers have only themselves to blame, and when it doesn't turn out the way they planned they ask government to bail them out.
QUESTION: when they were making Billions, did they put some money back in the pocket they are TAKING FROM NOW? probably not!
- Stu, Cape Town
Only £15 Bn? You've seen nothing yet.
Merril Lynch have given us a useful measure of the cost of recent corporate welfare handouts.
Last month ML sold off $30bn of "toxic" debt, for just $6.7bn - a write-down to 22 cents on the dollar.
On top of that loss of 78% of 'book' value, there is the knock-on effect on the balance sheet of further house price falls.
The jolly good but ever so incompetent chaps who densely populate Whitehall and the City, would have us believe that they and their cronies are such splendid business bods that they can turn that kind of a position into a profit. Question: at what cost in terms of health and education services?
- Jack, London
Guys this is only the beginning.. so far none of the big 4 is mentioned yet.. just like in a bull market you look for hidden gems.. where its less talked about.. the same goes for bear market, you look for hidden stones unturned. RBS???
- Paul, manchester
Let the shareholders who thought bad banking practice was cool lose their shirts, let the bad practice banks close and may new banks (clean ones) spring up in their place with Government support (money and regulation!).
- Tallulah, Hove, Uk
Maybe you missed it but the Congress of the US did not agree to the bailout because they can't figure out who they are bailing out. They just want money but refuse to tell us who gets the money. Maybe when they get a little more honesty the bailout will come.
- Rich, San Angelo USA
A case of "chickens home to roost" here, stemming from Thatcherite policies so willingly embraced by the public at the time. Firstly, the privatisation of mutual associations/building societies into banks - by way of duping their members into selling their souls for a mere £1000 or so for what was already theirs - was effectively daylight robbery. (The same applies to the privatisation of the utility companies, and we all know the consequences of this now). Secondly, the selling off of council houses created a huge gap in the housing market, thus forcing a massive - and necessary - expansion in 'buy to let' mortgages to enable private landlords to carry out the government's work for them - i.e. providing rented accommodation for people unable to buy their own homes. No good crying now - the general public loved it at the time through their own greed, vanity (ooh, I'm a shareholder now) and ignorance, and now their children and grandchildren are paying the price.
- Patricia, East Kent UK
Richard - Debt is profitable and is only regarded as 'toxic' if the assumption is all holders of the debt default which is highly unlikely as they are secured against assets in the first place which in turn will grow again once things stabilise i.e the likelihood that the public will be left with the sort of writedowns that the press hark on about (and the gullible believe) is fantasy. In fact Northern Rock is expected to be turning a profit in 2-3 years, then it will be likely be sold back to the private sector for a profit.
- Big Andy, London
Having come back to the UK after ten years what has amazed me is that in the relatively poor town I live the number of people driving expensive cars which are the product of remortgages. The State should have *****ed the housing bubble that was developing at least four yars ago - the FSA is culpable but ordinary people will pay. If you remove personal responsibility from Corporations and individuals and put it in the hands of bodies like the FSA then in one way or another trouble is inevitable and that's what you will now get. What you have in the UK is a large number of small banks in the shape of demutualised Building Society's run by people who think they are masters of the universe and they will crumble like Gordons Browns sagging face. The only guarantee you had from them resided in the inflated egos of their Chief Executives and you can rest assured that they will depart with their expensive cars and mega pay offs when their shoddy empires collapse.
- Mjc, Britain
When multi million pound bonuses were being paid out in the city, I wasn't aware that the tax payer received a penny, then why should it be that now that the banks are going bust, its the tax payer that should pay for their arrogance and mis-management, surely the government should seek damages for those at the top and strip them off their assets before asking the tax payer to dig deep into their pockets!
- Raminder Bhalla, Northolt
In any lending situation there are responsibilities on borrowers and lenders to behave prudently. Sure, borrowers were foolish to take out too much debt, but meny lenders were as foolish, perhaps more so since they supposedly understand the market better,lending for example more than a property was worth. Equally we had a Government that must have seen what was going on but was too eager to accept the extra revenues such foolishness generated.
- James Elliott, Eastbourne UK
Big Andy what is the asset transfer here pray tell. The asset transfer are the savers who have been sold to Santander, the debt has been transferred to us the taxpayer. To boot much of this DEBT TRANSFER is TOXIC, meaning that not only will the government not make any money out of this but will lose a substantial part of the £41 BILLION DEBT which we have to eat. So Andy enlighten me on the transfer of asset that you write about
- Richard K, Nottingham
Why are people at the top - this Santander fellow and our own dear Gordon - always going on about 'hard-earned, hard-working, hard-pressed' ordinary folk? It's so condescending!
- John Problem, Hackney Wick, London, UK
I agree with Michael, I didn't hear anyone complaining when the price of their house doubled. The government made huge sums from stamp duty, capital gains tax (property and shares) on new builds and council taxes. When the markets were good. Also, the huge amounts of tax paid by financial services and tax on city bonuses etc etc
These 'nationalisations' are merely the transfer of the ownership of the asset, they are no 'bail outs'. The government will make more money out of the deal.
And as for poor regulation? Speed limits are only as good as an authorities willingness to enforce them.
- Big Andy, London
What I don't get about the situation in the UK and the US is the outcry from the "tax payer" lobby. The sub-prime crisis started when people defaulted on their mortgages, for which they had to put down far too little or in fact no deposit at all. Interest rates have been kept way too low for too long fueling unsustainable levels of debt and leverage. Now we are witnessing the unwind of the situation and it should be a government's responsibility to absorb the slack in the economy. In fact the idle assets being talked about in terms of being bought, will probably be able to be sold by governments at a later date for a profit. I believe that in the US on two previous occasions, after the 1929 stock market crash and after the Savings and Loans collapse this was the case. The taxpayer in fact did not end up footing the bill.
- Michael, Switzerland
I wonder how the European Bank would have treated the UK banking system if we had joined the Euro?
- Richard, Thame
At the end of this process the taxpayer will owe billions of pounds to the wealthy banking families, predominantly the Rothschilds. As they already possess most of the world's wealth, you might be wondering who's pulling the strings of this banking "crisis".
- Neil, london uk, Airstrip ONE .
