RENEWED TURMOIL in global markets delivered sharp reversals to the main Irish banking stocks as analysts questioned the viability of Lehman Brothers, the troubled US bank reported to be in talks with potential buyers after a survival plan met with a cool response from investors.
The renewed sell-off of Irish financial shares all but eroded gains they made early this week after the federal authorities in the US intervened to rescue wholesale mortgage providers Fannie Mae and Freddie Mac.
With international attention centred on the financial difficulties at Lehman Brothers, Irish institutions were the subject of negative commentary when analysts at investment bank Dresdner Kleinwort said their bad debts may rise and suggested AIB and Bank of Ireland could be left with capital shortfalls.
While Bank of Ireland has previously ruled out a need to raise further capital, it declined to comment yesterday as it has a market update next Wednesday. AIB said it would not have any need to raise equity and had a strong level of capital.
Bank of Ireland was worst hit on the Dublin market, dropping 7.8 per cent to €5.09. Anglo Irish Bank fell 5.4 per cent to €5.07, Irish Life & Permanent lost 3.7 per cent to finish the day at €6.55 and AIB lost 3 per cent to close at €7.85.
"The four main measures that Lehman Brothers announced yesterday to stabilise its business do not look like they will end the uncertainty that continues to dog the company," said analysts at NCB Stockbrokers in Dublin.
"The market's reaction to these moves was muted and, until confidence is fully restored, Lehman Brothers' future will remain 'in the air'. This looks set to leave a cloud over the whole financial services sector in the medium term."
News emerged from New York late yesterday that Lehman Brothers, in business for 158 years and one of Wall Street's most venerable institutions, had opened its books for examination by bankers from other firms. Bank of America was named as a potential buyer in some reports.
Talks on the sale of Lehman Brothers came as its shares encountered renewed pressure as investors sought more detail on its plan to sell some of its most lucrative units and spin off lossmaking property assets.
The survival plan, which followed Lehman's failure to reach agreement on a capital infusion from Korea Development Bank, led credit rating agency Moody's to call on the company to find a "stronger financial partner".
Lehman shares fell 42 per cent to $4.22 at close of business yesterday in New York as analysts in other institutions raised doubts about the restructuring strategy.
Other financial stocks also fell sharply in early trading. However, news of the potential sale of Lehman lifted Washington Mutual 22 per cent to $2.83, American International Group ended up 0.3 per cent at $17.55 and Bank of America closed up 2 per cent at $33.06.
Donald Kohn, vice-chairman of the Federal Reserve, said the fall in US housing prices, triggered by the subprime collapse, wasn't showing signs of tapering off.
Meanwhile, UK stocks fell as Bank of England policymaker David Blanchflower said job losses would triple as the economy slows.
Bank of England governor Mervyn King warned the UK government to control spending and to avoid guaranteeing new mortgage lending as the country verges on recession.
Mr King said state guarantees would impede necessary restructuring in banks, would prove expensive and were likely to be long lasting. The Bank of England governor announced that he would set out a new interim liquidity support facility for banks next week
- (Additional reporting, Financial Times service, Bloomberg)
:quality(70)/cloudfront-eu-central-1.images.arcpublishing.com/irishtimes/VR3765MFOBH2NMV2QNICYDF67M.png)