Banking crisis: the world takes fright

Treasury
may take £50bn stake in banks | Graphic:
The world in turmoil | Iceland
faces economic collapse | Icelandic
Prime Minister warns nation | Six
solutions - and their drawbacks | Comment:
Bronwen Maddox | Comment:
Simon Barnes | Comment:
Anatole Kaletsky

Panic swept through the world’s financial markets yesterday, wiping $2,500
billion from share values, amid concern that regulators and politicians were
struggling to get a grip on the worsening crisis of confidence.

Share values plunged as some investors sold at any price and retreated to the
safety of gold and government bonds. The FTSE 100 posted its biggest ever
points fall, down 391 at 4,589, and at 7.85 per cent its biggest percentage
fall since Black Monday in October 1987, reducing the value of British
blue-chip companies by £93 billion.

The Dow Jones Industrial Average fell 370 points to 9,956, the first time it
has sunk below the 10,000 mark in four years. At one point it was down 800
points. This morning in Tokyo the Nikkei 225 index fell more than 5 per cent
within 30 minutes of opening.

The sell-off came as politicians desperately tried to soothe bank nerves, but
came up with no immediate new measures. Alistair Darling, the Chancellor,
told the Commons that he would do whatever was required to restore
stability. EU leaders issued a joint statement saying that they would take
the necessary measures to protect both the financial system and individual
depositors.

In a further attempt to build confidence, the 16-nation Eurogroup of countries
in the single currency promised to guarantee the survival of Europe’s key
banks and insurance companies. The precise method of guarantee will be
discussed today by the EU’s 27 finance ministers.

Share traders, however, were unnerved by the absence of any substantive new
measures to ease the fears plaguing banks and paralysing the loan markets.
Mr Darling played down speculation that he was about to announce a
contingency plan to inject £40 billion to £50 billion of fresh capital into
Britain’s high street banks.

He was locked in talks with bank chief executives last night to discuss how
the tax-funded part-nationalisation scheme would work. It was not clear
whether all banks would be asked to take part, although Royal Bank of
Scotland, Barclays and the merger partners Lloyds TSB and HBOS were seen as
highly likely candidates. HSBC and Banco Santander, the Spanish owner of
Abbey, Alliance & Leicester and the savings arm of Bradford &
Bingley, could also be included in such a bailout.

Gordon Brown expressed irritation that the Conservatives had gone public with
calls for a recapitalisation after private briefings with the Governor of
the Bank of England.

Iceland took control of its entire banking system yesterday in an attempt to
restore calm. In Russia and Brazil the share market falls were so extreme
that trading was suspended.

Bank shares once more bore the brunt of the selling frenzy in London. Shares
in RBS sank 20 per cent to 148p, a new low since the credit crisis struck.
HBOS was down 20 per cent and Barclays fell by 15 per cent.

Mr Brown said last night that the Government was ready to take action to
prevent irresponsible risk-taking by banks and other financial institutions.

The markets needed morals, the Prime Minister said in a speech to the United
Jewish Israel Appeal in London. “My values, the values of the country,
celebrate hard work, effort, enterprise and responsible risk-taking:
qualities that markets need to ensure that the rewards that flow are seen to
be fair.”

Crude oil prices fell below $90 a barrel to an eight-month low on fears of a
global slowdown, before rallying later. The gold price jumped more than 5
per cent.