HBOS is worst hit by meltdown in markets

HBOS was the biggest casualty yesterday when London's leading shares plunged to a three-year low in the aftermath of the Lehman Brothers collapse.

The Financial Services Authority (FSA) took the unusual step of issuing a statement supporting Edinburgh-based HBOS on a day when its shares dropped by 40 per cent before rallying.

Analysts suggested HBOS's woes were caused by City speculators making a "fast buck".

Meanwhile, the Bank of England pumped £20 billion into frozen money markets – following the £5 billion injected on Monday – as banks, fearing losses, raised lending rates to one another. During a second day of market turmoil, experts predicted banks would now be less willing to lend to one another and the result would cause customers further headaches.

And there were warnings that job losses in the financial sector – spearheaded by Lehman redundancies – would force the UK government to cut spending.

But experts told The Scotsman a lack of economic activity could prompt a fall in oil prices, which would lead to a drop in inflation and potentially let central banks make interest-rate cuts.

The FTSE 100 briefly fell below the 5,000 mark for the first time since June 2005 before recovering some ground later to close at 5,025.6 amid late-session hopes of a US government rescue for the insurance giant AIG, whose shares tumbled by 21 per cent yesterday.

AIG has already received a federal cash injection and its collapse would have a huge impact on financial markets and individual customers.

The US Federal Reserve left its key interest rates unchanged at 2 per cent last night, prompting a late rally on Wall Street.

There was hope for Lehmans last night with Barclays expected to buy some of its investment banking and trading operations.

The two days of FTSE losses – the worst for the index since July 2002 – have wiped £93 billion off the UK's leading shares.

HBOS eventually closed 22 per cent down and was also downgraded by a ratings agency. Analysts have said it needs to refinance more than £100 billion of funding in the coming months, all the more challenging after the blow to confidence from Lehman's demise.

Other banking casualties included Royal Bank of Scotland, which has written off billions in losses on investments linked to the US housing market. The NatWest parent saw shares slump 10 per cent.

The FSA said: "We can confirm, as HBOS has already stated, it has a strong capital base and continues to perform satisfactorily."

Bryan Johnston, of analysts Bell Lawrie, said the share price drop was down to traders trying to make a "fast buck". He also said there was a reluctance to lend because "no-one knows who owes what to whom".

David Bell, professor of economics at Stirling University, said: "I'm a little concerned that its share price has been pushed down by people wishing to make a very swift buck from that."

Concerns were also recently raised when it emerged that HBOS owned two firms – Grampian Funding and Mound Securitisation – which are believed to be tied to heavy mortgage debt. Prof Bell said: "The other long-term aspect of this is what effect it's going to have on government finances, which I suspect are going to be in considerable difficulty. The net result will be – maybe after the next election if it can be delayed until then – that a time will come when taxes will have to be raised or spending cut, or a combination of both. I suspect the political approach will be for reducing spending."

Mervyn King, the governor of the Bank of England, met Gordon Brown, the Prime Minister, and Alistair Darling, the Chancellor, yesterday morning for "a routine and long-standing meeting".

Amid a day of gloom – which came after the investment bank Merrill Lynch sought a safe haven in a £28 billion takeover by Bank of America – there was news Barclays could bid for some parts of Lehman Brothers.

Nick McGregor, oil and gas analyst with Redmayne Bentley, said: "Anything that implies low economic activity, which all of this does really, is likely to lower the oil price further.

"In the long run, a low oil price will help because it gives central banks room for manoeuvre by cutting interest rates.

"I think it is probably, ironically, one of the few silver linings in this for consumers."

Another could be better savings products. Michelle Slade, at Moneyfacts.co.uk, said a number of high-interest savings accounts had been released in the past few days.

'Anyone with half a brain is worried' – bad day in the life of Scots bank

THE Saltires continued to fly proudly on the roof of HBOS's global headquarters yesterday, defiant in the Edinburgh downpour and in the financial panic carried on the winds whipping the capital.

But in the throats of investors, analysts and customers, that panic was rising as the HBOS share price, plagued by short-selling, fell to another yearly low.

Concerns over the health of the banking giant had been escalating since the fall of US investment Lehman Brothers earlier in the week.

And those concerns all came to rest on the shoulders of the HBOS chief executive and wonder kid, Andy Hornby.

The bank is so enamoured with the 41-year-old Oxford and Harvard graduate it paid him a £2 million bonus to stop him decamping to Boots as CEO.

But yesterday, HBOS refused a request for an interview with Mr Hornby or any of his fellow executives, or to give any details of the efforts the bank was making throughout the day to alleviate staff and shareholder fears.

Instead, a spokesman issued a rather bland statement

pointing out the bank is the UK's largest savings institution and has £258 billion of deposits, a 12 per cent increase in three months.

He added: "HBOS has a strong capital base. The group has the strongest capital ratio, a key measure of financial strength, of all the major UK domestic banks. HBOS is a strong bank."

Although the Financial Services Authority watchdog later took the unexpected step of endorsing the bank's funding, sources told The Scotsman there would likely have been panic among the 72,000 UK staff.

One banking insider said: "Deals slow down because people worry about their jobs but if the share price is through the floor, there is the extra worry they will go under."

He said that staff would be trying to complete transactions. Against this, competitors would be ratcheting up their efforts to snatch HBOS business, claiming they were in a better position to see a deal through to the end.

HE added: "It's spreading to Europe. We all thought Wall Street would keep everyone busy and now we are talking about HBOS and RBS."

As the share price plunged in the morning, analysts said this was likely to be a result of short-selling – traders offering stock they do not yet own at a price they hope will be higher than the share price when they buy.

Professor David Bell, of Stirling University, said there were "difficulties" at the bank and "clearly aspects of its portfolio are, at the moment, not very marketable".

Bryan Johnston, of the analysts Bell Lawrie, commented: "I think it's a speculative 'raid', prompted by short-sellers on the knowledge the company has to find funding.

"The hysterics are in charge of the asylum and it will continue for a day or two.I don't think its survival is in any doubt but its earnings profile may take a hard hit. There is always a risk but (collapse] is the least likely outcome."

Despite the calls for calm and the insistence from some quarters that yesterday's share price was merely a blip on the graph, HBOS's customers were still hurting – particularly in Edinburgh, where the Bank of Scotland is a cherished institution.

At the Morningside branch, one customer, retired John McTavish, said: "Anyone with half a brain is concerned.

"The bad news has been creeping out, but who knows how bad it will get. People are selling their shares in HBOS, but at the same time the company is supposed to have a very secure asset base."

Another pensioner, Jim Hamilton, said he had worked for HBOS and was given shares as a bonus. He has seen those shares plummet 75 per cent in a year.

He said: "This is a big blow to take and I am seriously worried as I have not only lost a huge chunk of my share value, but I also have other investments with the company.

"I'm concerned about my bank pension and so will each and every other bank pensioner. But I haven't taken my money out of HBOS because where else should I put it?"

There was also anger. Margaret Souness, a nanny from East Lothian, said the crisis was "the fault of the greedy banks, who are gambling with other people's money".

And Nick Williamson, a 48-year-old management consultant, said: "The banks have overstretched themselves and completely mucked up the whole situation.

"When Halifax and Bank of Scotland merged, they had the wrong management team in charge."

Professor Robin Browning, a former general manager of the Bank of Scotland, said no-one could have foreseen the dramatic impact on share price of the decisions of the past five years. He said: "I am never enthusiastic about the merger of Halifax and Bank of Scotland. I thought it was a marriage of convenience. It's very easy to be wise after the event, but I think the concerns I and others had at the time have borne fruit.

"It is also easy for the current senior people in banks – not just HBOS – to point the finger at the worldwide financial catastrophe facing so many of them.

"But, at the end of the day, although they are maybe partially victims of external circumstances, it was they who took the decision to make credit so easy, and perhaps to the point of taking it to reckless levels."

THERE are more than two million private shareholders in HBOS – the biggest private shareholder base in the UK – and they have already had their loyalty tested this year.

They were offered the chance to buy into a £4 billion rights issue. By the time of the deadline, the share price had dropped well below the offer price, leaving the underwriters to pick up the tab.

Prof Bell said: "It's very difficult to say if they would have to look for finance again.

"I don't think we will see many takeovers for a while because potential predators will themselves be scared about the content of the portfolio. It is partly because it's difficult to ascertain the true underlying position."

While Mr Hornby and his fellow bank chiefs have faced accusations of fuelling the crisis, a collapse of HBOS is good news for no-one.

Profit before tax at HBOS was £5,708 million in 2007, up 3 per cent from £5,537 million in 2006. In 2007, the UK Exchequer received a total of £1,656 million in tax from HBOS and its staff – enough to pay the yearly salaries of more than 46,500 secondary teachers.

• Additional reporting by Ben Bailey.