The US Government�s $85bn (£47.5bn) lifeline for American International Group provided a brief respite to battered equity markets yesterday.
The US Government's $85bn (£47.5bn) lifeline for American International Group provided a brief respite to battered equity markets yesterday after two consecutive sessions of turmoil but stocks in London and other European financial centres surrendered early gains after Wall Street opened with sharp losses.
News that HBOS and Lloyds TSB were in merger talks that could reshape British banking and that Barclays was buying parts of bankrupt Lehman Brothers Holdings for $1.75bn also gave stocks a lift early in the session.
However, gains in Europe vanished when shares in New York dived after the opening bell. All the major European bourses closed lower.
In London, some financial stocks took another beating after posting initial gains. Royal Bank of Scotland ended 10.4% lower, while the troubled HBOS banking group closed 19% weaker. Potential merger partner Lloyds TSB ended flat but Barclays finished 3.1% higher.
Shares in Aviva, the insurance group, fell by 1% after the group revealed it had exposure of £148m to AIG.
In Dublin, shares in Bank of Ireland closed 3.3% lower after it said financial turmoil will hit its earnings and dividends, dragging other Irish banks down. The big Swiss banking company UBS shed around 4%.
The UK Stock Exchange's FTSE-100 blue-chip index ended below the key 5000-point level, finishing 113.2 points adrift at 4912.4, having touched a low of 4903.3 and a high of 5124.4 in volatile dealing. The benchmark index fell to its lowest closing level in more than three years on Tuesday, sliding by 3.4% and extending Monday's 3.9% fall after US investment bank Lehman Brothers filed for bankruptcy protection. Concerns had also mounted about the financial health of AIG.
The week has already seen the disappearance of two major Wall Street names. As Lehman declared bankruptcy, Merrill Lynch was snapped up by Bank of America.
New York-listed stocks tumbled again as investors remained worried about chaos in the US financial market even after the Federal Reserve forged an extraordinary $85bn rescue of AIG, which is a huge player in credit default swap insurance cover that underpins banks' valuations of their assets.
The Federal Reserve's emergency loan to shore up AIG, which is reeling from billions in souring mortgage debt, temporarily lifted some of the uncertainty about the stability of the US financial system, but the market fell again as investors kept a wary eye on the stumbling economy.
The two Wall Street investment banks left standing - Goldman Sachs Group and Morgan Stanley - remain under scrutiny. And the troubles in banking could exacerbate economic problems. The Commerce Department said housing starts fell by 6.2% in August to the slowest building pace since January 1991.
In early trading, the Dow Jones industrial average fell more than 300 points at the 10,700 level. It closed the session 449.36 points down at 10,609.66.
A 500-point drop on Monday, sparked by the collapse of Lehman, marked the biggest point drop in the Dow Jones industrials since the September 11, 2001 terrorist attacks. The venerable Wall Street firm made the biggest bankruptcy filing in American history, in a stunning upheaval of the US economic landscape.
Investors fear that a failure of AIG, the world's largest insurer, would set off even more financial turmoil than the collapse of Lehman.
The Fed said it was acting to shore up AIG after determining that a disorderly failure of the company, whose financial dealings stretch around the world, could severely damage the already delicate markets and the economy.
"We dodged a bullet, but we want to make sure it's a complete ceasefire," said Jack Ablin, chief investment officer at Harris Private Bank, noting that AIG still needs to unwind its investment positions, sell assets, and possibly add cash.
The US Government was taking other measure to help alleviate the turmoil. The Treasury said it will start selling bonds for the Fed in an unprecedented effort to aid it with its lending efforts, while the Securities and Exchange Commission said it will strictly prohibit naked short-selling.
Financial market contagion has also spread to Russia. Stock and bond trading was suspended yesterday amid the worst market falls since the country's 1998 financial collapse and the Finance Ministry pledged a total of $60bn of financing to help local banks.
