IRISH BANK shares lost some of the gains made earlier this week on the US government's bail-out of mortgage giants Fannie Mae and Freddie Mac after US investment bank Lehman Brothers posted the largest quarterly loss in its 158-year history.
AIB shed the most, falling 7.4 per cent, as the losses at Lehman Brothers helped push the Iseq index of Irish shares down almost 3.5 per cent.
Bank of Ireland closed down 6.4 per cent, while Anglo Irish Bank fell 6 per cent. Irish Life Permanent finished down 5 per cent.
A stronger dollar and falling oil prices helped ease concerns as US stocks rose, with investors betting that the difficulties at Lehman would not lead to further deterioration in the global credit crisis.
The bank announced a quarterly loss of $3.9 billion (€2.8 billion) and unveiled plans to sell a majority stake in its asset management business and spin off its commercial property loan portfolio worth €25-30 billion into a separate company in a bid to restore confidence and ensure survival.
Oil prices fell below $100 a barrel after the US government revealed that stockpiles of fuel had fallen less than expected last week in the aftermath of hurricane Gustav in the Gulf of Mexico.
Signs of weaker global demand for oil offset the surprise decision by Opec, the 13-nation group of oil-producers, to reduce supply levels.
The dollar rose slightly, valued at $1.40 against the euro.
Lehman said it was in "advanced discussions" with a number of possible buyers for 55 per cent of its investment management division.
Shares in the fourth largest US investment bank rose 5 per cent after it lost almost half its value on Tuesday amid fears about its financial health as it struggled to raise much-needed capital.
The bank was forced to rush out its third-quarter results a week early in an effort to boost confidence among investors. The bank is also cutting its annual dividend to 5 cent a share from 68 cent, saving $450 million a year, in an effort to shore up capital.
Lehman had explored options including selling a stake to South Korea's state-run Korea Development Bank and had hoped to secure a deal before announcing its third-quarter results.
The Korean bank, which had been seeking a controlling stake in Lehman for about $6 billion, abandoned talks with the US investment bank, blaming disagreement over the terms of a deal and financial market conditions.
Lehman is coming under pressure to restore the business to profitability after posting $6.7 billion in losses in the last two quarters. It has cut 1,500 jobs since May.
Mortgage losses contributed to $5.6 billion in writedowns in the third quarter, in addition to more than $7 billion in losses and write-downs since the global credit crisis began 13 months ago.
Lehman will cut its exposure to risky assets by selling a $4 billion portfolio of UK mortgages to BlackRock, the US asset manager. This will reduce the bank's residential mortgage exposure to $13 billion from about $25 billion at the end of the second quarter.
Ever since Bear Stearns collapsed in March, investors and rival bankers have questioned whether Lehman might suffer a similar fate, although the bank, unlike Bear, has access to a Federal Reserve facility that allows it to maintain its liquidity.
Despite the record loss at Lehman and bank stocks declining across Europe, Josef Ackermann, the head of Germany's biggest bank, Deutsche Bank, told a conference yesterday he was confident the crisis was nearing an end.
He said global conditions were "very positive" and that sectors in the real economy, which produce goods and services, but not the financial markets, remained "at a relatively high level". - (Additional reporting: wire agencies)
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