US financial stocks slumped to their lowest level since 1997 on Tuesday as the escalating global credit crisis forced the UK to announce the partial nationalisation of its banking system.
Gordon Brown, UK prime minister, agreed to inject £35bn-£50bn ($61bn-$88bn) into several of the biggest UK banks, after a crisis of confidence sent financial shares plummeting. RBS fell 39 per cent to add to a 20 per cent tumble the day before. Rival HBOS has fallen more than 50 per cent over two days.
The UK turmoil was followed by an afternoon sell-off on Wall Street that saw the S&P 500 drop 5.7 per cent, taking it below the psychologically important level of 1,000 for the first time in four years. The S&P financials index dropped 11.5 per cent to its lowest level in 11 years. It is now 58 per cent down from its peak last year.
Bank of America led the US financial sector lower as its shares fell 26 per cent, knocking $38bn off its market value. It was harmed by a poor reaction to its earnings for the third quarter, which it announced after the market closed on Monday, and by speculation that it would have difficulty raising capital to finance its acquisition of Merrill Lynch.
Morgan Stanley closed 25 per cent lower, having fallen 40 per cent at one point, in spite of reassuring investors that its agreement to raise up to $9bn in capital from Mitsubishi UFJ Group of Japan remained in place.
Credit markets, however, were relatively stable, as traders reacted to strong hints from Ben Bernanke, Federal Reserve chairman, of rate cuts in the offing. Early indications suggested that the rates at which banks lend to each other would fall today, although only marginally.
Several other governments announced rescue packages for their domestic banks. Spain became the first European country to follow the US in offering to buy assets from its banks to restore liquidity, announcing an emergency fund worth €30-€50bn ($41bn-$68bn).
Earlier, Russia had said it would pump $37bn in long-term subordinated loans into state-controlled banks, and suspended share trading for a second successive day, in another bid to quell the crisis.
The UK scheme is expected to be executed through the government acquiring preferred shares. Mr Brown is expected to insist the taxpayer receives generous dividends and profits if share prices recover.
Royal Bank of Scotland, Barclays and Lloyds TSB – which is in the midst of a takeover of HBOS – are expected to be the main recipients of the capital. It was unclear whether HSBC, which already has stronger capital reserves, would participate in the plan, although if it does it is likely to take a smaller amount.
Details may not be given until this morning, although Mr Brown’s team said a statement would be given before the London markets opened.
The plan could include provisions to ensure government representation on the boards of the banks and possible caps on future remuneration for bank chiefs, as well as a fund to ensure they can continue to fund day-to-day operations.
Mr Brown had wanted more time to develop a package, but was pressed into acting by the markets, after reports circulated that banks were demanding an injection of public money.
by Chris Giles | Victor Mallet and Mark Mulligan FT.com
