Stockmarket turmoil as US bank flops
The FTSE 100 has fallen below the 5,000 mark, hitting lows not seen for three years, in the wake of the collapse of Lehman Brothers.
The falls come a day after the US investment bank declared itself bust, resulting in Wall Street suffering its worst day of trading since 9/11. Although the UK stockmarket was fairly quite this morning, experts predicted that traders were waiting for the American markets to open.
And once they did, all hell broke loose, with share prices tumbling. The same effect is being felt across the globe, with Asian stockmarkets taking a hard knock following public holidays yesterday.
In the UK, banking stock has been particularly hit; HBOS has been named as one of the biggest losers, with nearly 30% of its value wiped off in wake of the crisis. In contrast, Centrica - the owner of British Gas - has fared relatively well.
The FTSE 100 plunged more than 40% after Lehman Brothers, one of Wall Street’s biggest names, filed for bankruptcy over the weekend.
Lehman Brothers, an American investment bank with operations across the world including the UK, has applied to the US Bankruptcy Court to wind down its business. Its board of directors says the action will "protect its assets and maximise value".
The bank was involved in discussions over the weekend with both the Bank of America and Barclays regarding a rescue bid, but has been forced to file a bankruptcy petition after these discussions collapsed.
Barclays says any rescue of Lehman Brothers would not have been in the best interest of its shareholders. However, it is now is discussions regarding the acquisition of some of Lehman's investment assets.
Meanwhile, Bank of America instead decided to buy another US investment bank, Merrill Lynch, in a $50 billion deal that will see the combined business become the third largest underwriter of global equity in the world.
The weekend’s events have had a traumatic impact on the stockmarket this morning, with the FTSE 100 opening 2.5% down and falling further in the early hours of trading on Monday.
UK banks took a particular battering, with HBOS’ share price falling by 40% at one point. Meanwhile, Royal Bank of Scotland and Barclays saw their share prices plunge by 15% and 16% respectively, Lloyds TSB by nearly 8% and Alliance & Leicester by 4%. Bradford & Bingley and HSBC both suffered marginal falls of around 4%.
The Financial Services Authority says it is working with market practitioners, including the London Clearing House, to ensure Lehman Brother’s bankruptcy process is completed "in an orderly manner to minimise any market disruption".
Simon Denham, managing director of Capital Spreads, says the banks will
continue to suffer this week, as investors and depositors worry about
their financial stability.
“While many readers might like to smile at the woes of the financial
institutions, they should remember that the prosperity and fiscal
certainty of the global economy depends upon the banking system,” he
adds. “If the current problems continue and more banks fail then
companies with cash on deposit will lose it, loans will be called in
and no new lending will be forthcoming (there can be no real growth and
wealth creation without lending).”
The collapse of Lehman Brothers, the latest casualty of the credit
crunch, does suggest that the economic troubles facing global
economies, banks and consumers are far from over and that there is
worse to come.
On one hand, Denham says that Barclays’ rescue package, despite ultimately failing, does offer a glimmer of hope.
However, he adds: “The fact that Barclays has felt rich enough to even
consider taking on the Lehman disaster, might seem a vote of
confidence, but investors should note that this was before they
realised that there was to be no Bear Sterns Fed giveaway this time.”
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.