Investors edgy as US stocks fall

Investors are concerned that financial markets will remain volatile.

US stock markets sank in early trade on fears the bailout of insurance giant AIG would not be enough to dispel the gloom engulfing the financial world.

AIG’s rescue and a potential takeover of UK lender HBOS had earlier boosted confidence in Asia and Europe.

But markets were volatile as nervous investors tried to make sense of the dramatic events that have unfolded in recent days.

The widely watched Dow Jones industrial average was down 1.9% at 10,849.

Top UK mortgage lender HBOS, which has faced heavy selling this week, fell as much as 50% before recovering after it emerged that it was in advanced talks to be taken over by Lloyds TSB.

HBOS shares were down 13% at 160 pence in London, the biggest faller in the FTSE 100, after being the top gainer at one point.

It has been a tumultuous week on financial markets, with significant changes in the financial landscape.

Key events on Wednesday included:

• Beleaguered HBOS in merger talks with Lloyds TSB after a steep fall in its share price
• US insurance giant AIG being bailed out by the US government
• Volatile stock markets as global investors remain nervous
• Trading on the Russian stock exchange being suspended
• Barclays snapping up key assets from Lehman Brothers after its bankruptcy

I don’t think anyone has got any or much confidence in market direction for more than a few days Darren Winder, Cazenove

The FTSE 100 index of top UK shares was down 0.48% at 5,001.4, reversing earlier gains, with some banking shares hard hit.

Shares in Barclays were up 9.8%, Lloyds TSB climbed 7.9% while Royal Bank of Scotland was down 2.6%.

Topsy-turvy trade

Trade is likely to remain rocky amid concern that financial system instability will continue after the dramatic events of the past few days.

“I don’t think anyone has got any or much confidence in market direction for more than a few days,” said Darren Winder, a strategist at Cazenove.

AIG’s bail-out follows the collapse of US investment bank Lehman Brothers, which caused share prices to plummet across the world’s financial markets.

Another investment bank, Merrill Lynch, has been sold off to Bank of America.

France’s Cac 40 share index was down 0.24%, while Germany’s Dax index was 0.64% lower, reversing earlier gains as Wall Street opened.

Russia’s stock exchange suspended trade following steep falls in shares.

Asian shares had a mixed session. Stocks in Tokyo, Taipei, and Seoul all rose, although prices in Hong Kong, Shanghai and Australia lost ground.

Japan’s Nikkei 225 index ended up 1.2% at 11,749.79, having risen by as much as 2.3% earlier in the day. The index had hit a three-year low on Tuesday.

Hong Kong’s Hang Seng index ended down 3.6% at 17,637.19 points.

Lehman set to go into insolvency

Preparations are being made for Lehman Brothers, the fourth-largest investment bank in the US, to file for bankruptcy.

The two strongest potential buyers appear to have pulled out of talks to rescue Lehman – the latest victim of the American credit crisis.

If no new financing comes before Wall Street opens, it will have to seek “Chapter 11” bankruptcy protection.

This could result in a severe shock to the global financial system, as banks unwind their complex deals with Lehman.

Late on Sunday the US central bank, the Federal Reserve, announced new moves to ease access to emergency credit for struggling financial companies.

The Fed said the step – which broadens the types of securities financial institutions can use to obtain emergency loans – was designed to mitigate the potential risks and disruptions to markets.

In a related move, a consortium of 10 investment banks announced a $70bn (£39bn) loan program that troubled financial companies can use to help ease the credit shortage.

The banks – Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS – each agreed to provide $7bn (£4bn) to the pool.

On Monday, Asian stock markets fell amid concerns over the fate of Lehman Brothers.

Singapore stocks dropped 2.26% in morning trading and shares in Taiwan fell 1.83%.

Markets in Tokyo, Hong Kong, Shanghai and Seoul were closed for public holidays.

Lehman employs about 25,000 worldwide, including 5,000 in the UK.

Accountancy firm PWC has already been lined up to run the British operations of Lehman should the firm go into administration.

BBC business editor Robert Peston says UK bank Barclays’ decision to walk away from a Lehman deal was a huge setback for the effort to rescue the Lehman.

Barclays terminated the negotiations because it was unable to obtain guarantees in relation to financial commitments faced by Lehman when markets open on Monday.

Bad bank, good bank

The rescue effort for Lehman was being co-ordinated by the US Treasury and the New York Federal Reserve.

No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value Peter Morici University of Maryland

The US government had hoped to arrange a bailout under which other US investment banks would finance a “bad bank” that would hold the most “toxic” investments of Lehman in the property and mortgage market.

The “good bank” or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK’s Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks.

However, it appears that this plan is falling apart.

“The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers’ money,” a banker close to the talks told the BBC, but added that US Treasury Secretary “Hank Paulson has made it clear he doesn’t want to do that”.

Hard choices

Bank of America, meanwhile, is said to be unconvinced that buying Lehman would be in the interest of its shareholders.

Instead, according to a report in the New York Times, Bank of America is in “advanced talks” to buy investment bank Merrill Lynch for more than $38bn.

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Like other US investment banks Merrill has suffered losses of tens of billions of dollars in the subprime crisis, and has seen its share price plummet during recent months.

“No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value,” said Peter Morici of the business school of the University of Maryland.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm’s share price has plummeted as fears over its future have mounted.

Former Federal Reserve boss Alan Greenspan said the US government faced “very difficult decisions” over Lehman if it could not secure a rescue deal that did not involve public funds.

Yet Mr Greenspan said it would be “unsustainable” for the government to bail out every US bank that got itself into difficulty.

Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem.

“The ordinary course of financial change has winners and losers,” he said.

Talks over sale of Lehman resume

Lehman is the fourth largest US investment bank

Negotiations have restarted to find a buyer for troubled US investment bank Lehman Brothers, before a Sunday evening deadline.

Bank of America and UK lender Barclays are said to be the main candidates to buy all or part of the company.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm’s share price has plummeted as fears over its future have mounted.

‘Rescue package’

The talks to sell Lehman are being led by senior officials from the US Treasury Department and the Federal Reserve.

It is understood that the US government wishes to arrange a bailout package under which other US investment banks – such as Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs – would contribute funds to a rescue deal which would see Lehman’s balance sheet cleaned up before its sale.

Although this is expected to cost the banks many millions, the alternative would likely be a sharp fall in their share prices if Lehman was to fail.

A number of sources report that US Treasury Secretary Henry Paulson is determined that no tax payers’ money will be used to help Lehman.

‘Difficult decision’

Former Federal Reserve boss Alan Greenspan said the US government faces “very difficult decisions” over Lehman if it cannot secure a rescue deal that does not involve public funds.

” “They [will then] have to make a very difficult decision as to whether or not they allow it to liquidate or they support it,” he said.

Yet Mr Greenspan said it would be “unsustainable” for the government to bail-out every US bank that got itself into difficulty.

Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem.

“The ordinary course of financial change has winners and losers,” he said.

Bad mortgage woes

Lehman could be sold off as one company, or else broken up into parts and sold separately.

While the firm got itself into financial difficulty due to extensive bad mortgage debts, its fund management business is in relatively good shape, analysts say.

Neither Bank of America or Barclays have made any comment.

Lehman’s shares lost 80% of their value last week, and its quarterly loss was the largest in its history.

The firm is the fourth-largest US investment bank.

Concerns over the fate of Lehman follow the bail-out last weekend of mortgage giants Freddie Mac and Fannie Mae.

The lenders were thrown into financial difficulty after the collapse of the US sub-prime mortgage market.

Man’s ‘pants’ password is changed

The bank apologised to Mr Jetley in a statement

A man who chose “Lloyds is pants” as
his telephone banking password said he found it had been changed by a
member of staff to “no it’s not”.

Steve Jetley, from Shrewsbury, said he chose the password after
falling out with Lloyds TSB over insurance that came free with an
account.

He said he was then banned from changing it back or to another password of “Barclays is better”.

The bank apologized and said the staff member no longer worked there.

Mr Jetley said he first realized his security
password had been changed when a call centre staff member told him his
code word did not match with the one on the computer.

“I thought it was actually quite a funny response,” he said.

I tried ‘Barclays is better’ and that didn’t go down too well either Steve Jetley

“But what really incensed me was when I was told I could not change
it back to ‘Lloyds is pants’ because they said it was not appropriate.

“I asked if it was ‘pants’ they didn’t like, and would ‘Lloyds is rubbish’ do? But they didn’t think so.

“So I tried ‘Barclays is better’ and that didn’t go down too well either.

“The rules seemed to change, and they told me it had to be one
word, so I tried ‘censorship’, but they didn’t like that, and then said
it had to be no more than six letters long.”

‘Very disappointing’

Mr Jetley said he was still trying to find a suitable password which met the conditions.

He said his dispute with the bank started over some travel
insurance, but that issue had been dealt with by managers
independently.

A statement released by the bank said: “We would like to apologise to Mr Jetley.

“It is very disappointing that he felt the need to express his
upset with our service in this way. Customers can have any password
they choose and it is not our policy to allow staff to change the
password without the customer’s permission.

“The member of staff involved no longer works for Lloyds TSB.”

Lloyds TSB stressed there was no security lapse in this case.

A spokesperson said: “On the majority of transactions advisors cannot read customers’ passwords.

“In this case it was a business banking customer using a system
where more than one person from a business can check their balance.

“In these cases an advisor can read the full password.

“But if such customers require more complex transactions, then
full security procedures apply and advisors cannot read secure
information.”