Bail-outs fail to end global financial panic

London, September 18:

A proposed £10 billion takeover of Britain’s biggest lender, HBOS, failed to halt deepening crisis in the world’s financial markets last night as a wave of fresh speculation on global stock markets saw two of Wall Street’s most prestigious investment banks targeted as latest victims of the credit crunch.

Shares in London fell for a third day and Wall Street suffered hefty losses in early trading despite attempts to restore calm through the proposed takeover of HBOS by British bank Lloyds TSB and the nationalisation of the US insurance giant AIG. The FTSE 100 index in London dropped more than two per cent to close at 4912.4 — its lowest level in more than three years.

UK prime minister Gordon Brown intervened to broker a solution to HBOS and Downing Street made clear it was prepared to rip up Britain’s competition laws to allow the takeover — a move that may cause the loss of tens of thousands of jobs and closure of up to 500 branches.

In an extraordinary day of trading for HBOS, shares in the bank halved within the

first hour of trading and at one stage stood at 88 pence. The sell-off prompted news of the proposed takeover, part of a contingency plan drawn up by the government to prevent a repeat of the Northern Rock fiasco.

HBOS shares leapt above their opening level briefly before enduring another sell-off to close the day down 20 per cent. Other banks were also caught up in the turmoil. Royal Bank of Scotland fell 10 per cent. By the close of business in London, shares in Morgan Stanley and Goldman Sachs had been pummelled. The last two remaining investment banks after the collapse of Lehman Brothers and the takeover of Merrill Lynch were facing questions about their ability to withstand the global turmoil, and there was talk last night of yet another bailout by the US Treasury to safeguard their future. Shares in Goldman Sachs were down 25 per cent while Morgan Stanley suffered a 37 per cent decline.

The Dow Jones industrial average fell by more than 300 points in the first four hours

of trading, prompting Securities and Exchange Commission — the US financial watchdog — to announce a clampdown on short-selling of shares, a process whereby speculators borrow stock in order to sell it and then buy it back at a lower price.

A terse statement to the stock exchange by HBOS confirmed it was in talks with Lloyds TSB over a merger. “In the light of market speculation, the board of HBOS confirms it is in advanced talks with Lloyds TSB which may or may not lead to an offer being made for HBOS.”

A link-up between the two British banks would normally fall foul of Britain’s tough competition laws, but government sources said that the severity of the financial crisis meant there was no alternative but to waive normal competition rules.