FTSE 100 plunges through 5000-mark as share rout continues

London index down another 178.6 pointsHBOS shares plummet more than 40%

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Graeme Wearden
guardian.co.uk,
Tuesday September 16 2008 17:55 BST
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A city worker in Tokyo looks at the falling Nikkei stock index. Photograph: Everett Kennedy Brown/ EPA
The global market panic following the bankruptcy of Lehman Brothers deepened today when the FTSE plunged through the 5,000-point mark for the first time in more than three years, led by HBOS, Britain's biggest mortgage provider.
As investors continued to reel from yesterday's high drama and central banks pumped more money into the system, the FTSE 100 index tumbled by 178.6 points to 5025.6.
HBOS, owner of Halifax, saw its shares plunge by more than 40% at one stage today, despite the company insisting that it is well capitalised. And shares in Goldman Sachs fell 10% in early trading after it posted a 70% drop in profits.
'Confidence has been shattered'
With analysts comparing the implosion of Lehman Brothers and the rescue takeover of Merrill Lynch to the crash of 1929, chancellor Alistair Darling said it was vital that the world's central banks acted together to provide stability. Shortly afterwards, the Bank of England injected another £20bn into the markets to avoid liquidity freezing up again, but despite the move the cost of overnight borrowing leapt to its highest level since 2001.
Later the US Federal Reserve offered to lend $50bn (£28bn) to banks, having put $70bn in yesterday. The Dow Jones index plunged 150 points in early trading, before recovering most of its losses by 3.45pm BST.
Today's losses mean more gloom to shareholders following yesterday's 3.9% plunge, and prompted Britain's biggest trade union, Unite, to call for urgent action.
"This global financial crisis has sent shockwaves across the industry," said Graham Goddard, Unite deputy general secretary.
"It is apparent that the free market system has completely broken down. Confidence in the financial services sector has been shattered."
Earlier today shareholders in Japan and China, where markets were closed yesterday, caught up with the unprecedented upheaval in the financial world. The Nikkei index fell by almost 5% and the Shanghai index lost 4.3%.
With most Lehman staff having cleared their desks, attention has turned to AIG, the US insurance giant. Its credit ratings were cut yesterday, adding to fears that it could become the next victim of the financial crisis.
UK inflation hit a new high of 4.7% this morning, and the price of US crude oil also fell sharply again to $91.54 a barrel.
Barclays, whose shares dropped by 2.6%, was in the spotlight after it confirmed that it is still talking to Lehman about possibly buying some assets, despite having walked away from last-ditch rescue talks on Sunday evening.
Today's losses came after Wall Street suffered its worst day's trading since the aftermath of the terrorist attacks of September 11 2001. The Dow Jones industrial average tumbled by 504 points yesterday, despite AIG being handed a $20bn lifeline. AIG's shares fell by 32% today.
The collapse of Lehman, allied with the shock takeover of Merrill Lynch by Bank of America and the troubles of AIG, have prompted speculation that the US Federal Reserve could cut American interest rates later today.
Such a cut appeared highly unlikely before the credit crunch entered its latest phase, but traders now believe rates could be cut by as much as 50 basis points to 1.5%.
The troubles of the banking sector are likely to make any US recession deeper and more painful. Speaking on BBC radio this morning, Alistair Darling said that global cooperation is needed to fight the crisis.
"We need to take action internationally, and yesterday you saw right across the world the American Fed, the ECB, our own Bank of England and Japan all intervening," he explained, citing the various injections of liquidity announced yesterday by the world's central banks.
Darling also met with Bank of England governor Mervyn King today, sparking a City rumour that the pair had met for "crisis talks". A spokesman for Gordon Brown, who also attended the meeting, insisted today that the meeting had been pre-arranged and had covered "the main economic and financial issues facing the UK".
Having pumped £5bn into the markets yesterday, the Bank of England today presented another £20bn in fresh liquidity. Banks rushed to take up the offer, which was three-times oversubscribed. This is the Bank's latest attempt to keep retail banks lending to each other. But the cost of overnight borrowing still spiked today, as banks again held onto their cash - threatening a new credit crunch.
The Bank of Japan has also acted, ploughing ¥2.5 trillion (£13.5bn) into markets today in an attempt to limit the fallout from the Lehman collapse. But despite the move, the Nikkei 225 index plunged 4.95%, or 605.04 points, to close at 11,609, its lowest level since July 2005.