After AIG rescue, HBOS of Britain is in talks to be acquired by Lloyds TSB
By
Lee Su Shyan, Assistant Money Editor
A NEW front in the financial crisis has erupted in Britain just a day after a stunning US$85 billion (S$122 billion) rescue of the world's largest insurer American International Group (AIG) by the US government.
Embattled Edinburgh-based mortgage giant HBOS, which has one-fifth of British mortgages, is in advanced talks to be acquired by British financial giant Lloyds TSB Group.
The AIG lifeline
The Fed gives a US$85 billion (S$122 billion) loan to AIG in exchange for a near 80 per cent stake in the company.
All of AIG's assets and those of its subsidiaries are pledged to secure the loan.
In an all-too-familiar pattern, HBOS' share price has plunged 80 per cent from its peak last year amid fears it might be the next financial titan to face collapse.
HBOS, the parent of Halifax and the Bank of Scotland, was heavily exposed to the toxic US sub-prime mortgage crisis, which triggered the wider financial crisis. Britain's housing market is also slumping.
Yesterday, the Bank of England also extended a scheme to help banks navigate the grim market conditions. It involves swapping crisis-hit mortgage backed securities for much more secure bonds.
The AIG rescue was a breathtaking U-turn by the US government which had refused to help the insurer on Sunday. The US Federal Reserve explained the emergency deal will mean the 'least possible disruption to the overall economy'.
The move provided some modest initial respite to shell-shocked markets, but could not calm Wall Street investors worried about more financial turmoil ahead.
The Dow Jones Industrial Average, in its first reaction to the AIG news, opened sharply lower by 203.47 points down, or 1.84 per cent, at 10,855.55.
Analysts also questioned whether the Fed's move is just worsening the crisis. The Fed has spent some US$900 billion this year, shoring up US mortgage giants Fannie Mae and Freddie Mac; rescuing another Wall Street bank, Bear Stearns; and pumping funds into a shaky market.
One question is how these bailouts will be funded - mostly by the greenback printing press, analysts fear.
Another question is that investors with the smell of blood in their nostrils will bet on selling shares of struggling firms in a bid to push them over the brink, confident that the US government will ride to the rescue.
At least short-selling, as this practice is known, will be more difficult after the US Securities and Exchange Commission tightened rules against manipulative short-selling yesterday.
But analysts agreed that had AIG collapsed, the repercussions would have been far-reaching.
AIG insures a wide variety of products, but the disastrous move that nearly brought it to its knees was insuring investors who bought complex debt securities.
If these risky securities defaulted, then AIG would have been forced to pay out billions of dollars to meet its obligations.
And if AIG had been unable to pay off these claims, investors would have had to slash the value of the asset securities.
'It would have been a chain reaction,' the New York Times reported Dr Uwe Reinhardt, a professor of economics at Princeton University, as saying. 'The spillover effects could have been incredible.'
Under the rescue deal, the Fed will give a two-year loan to AIG and get a 79.9 per cent stake. AIG has to repay the loan, probably by selling assets.
Management will go. Former Allstate chief executive Edward Liddy will take the helm at AIG, replacing ousted Robert Willumstad.
Markets which had taken a beating on Monday and Tuesday over AIG's woes and Lehman Brothers' bankruptcy reacted with relief after the news was released yesterday morning.
Singapore's market opened 1.4 per cent higher, Japan rose 1.1 per cent, Hong Kong also surged 2.1 per cent. European markets similarly reacted positively, with the FTSE rallying 1.5 per cent and the French CAC also up by 1.4 per cent.
However, the Fed's Tuesday decision to leave its benchmark interest rate unchanged at 2 per cent instead of cutting rates to boost confidence, was a dampener on investor sentiment.
Despite their hopeful openings, Asian markets ended mixed. The Straits Times Index fell to a fresh two-year low of 2,419.29 points after disappointing trade figures. The Hang Seng Index dived 3.6 per cent although the Nikkei bucked the trend, up 1.2 per cent. European markets ended about 2 per cent lower.
The US economy did not provide much cheer as data showed that construction of new homes fell by 6.2 per cent, pushing activity to the lowest level in 17 years.
The massive US trade deficit also increased by 4.3 per cent to US$183.1 billion in the April-June quarter.
Meanwhile, Britain's third-largest bank Barclays said that it may buy parts of Lehman's European investment bank after agreeing to acquire its American business for US$1.75 billion.
Investment banking giant Morgan Stanley rushed out better-than-expected financial results, but its shares and that of Goldman Sachs lost ground as worries over their financial health remain.
