Quarterly profits at top US investment bank Goldman Sachs slid 70 per cent on today and shares in Britain's HBOS plunged by about a third as financial sector carnage snowballed beyond insurer AIG.
The cost of borrowing between banks surged as financing troubles piled up for US-based American International Group and as markets faced the fallout from the failure of investment bank Lehman Brothers.
Goldman Sachs, the largest remaining investment bank reported net income of $845 million, or $1.81 a share, for the quarter ended August 29th, down from $2.85 billion, or $6.13 a share, a year earlier. Net revenue fell by half to $6.04 billion from $12.3 billion.
"This was a challenging quarter as we saw a marked decrease in client activity and declining asset valuations," Lloyd Blankfein, Goldman's chief executive, said in a statement.
The results come as the year-long credit crunch gains steam. Six months after Bear Stearns collapsed and was acquired by JPMorgan Chase, Lehman Brothers Holdings Inc on Monday filed for bankruptcy protection while Merrill Lynch & Co rushed into the arms of Bank of America.
Concerns intensified that AIG, once the world's largest insurer by market value, could be the next victim after a ratings downgrade, causing a rout in stock markets already battered yesterday after the collapse of the talks.
"We expect near-term weakness for the European banks as markets digest the systemic consequences of the failure ... we are undeniably more cautious following the weekend's events," Keefe, Bruyette & Woods said in a note.
Britain's Barclays emerged as the possible buyer of some Lehman Brothers assets, as talks resumed after the US investment bank filed for bankruptcy protection.
Barclays is in talks to buy Lehman's core US broker-dealer business, people familiar with the matter told Reuters today. The UK bank said it was in talks with Lehman, but it would not say which units it was looking at.
Leading European stock indices extended their losses in mid-day trading, as interbank lending rates jumped in a sign of faltering confidence between banks. The overnight LIBOR dollar fixing was the highest since January 2001.
Europe's FTSEurofirst 300 was down 3 per cent by 1.30pm, while the Dow Jones Stoxx bank index was 6.2 per cent weaker. UBS fell 11.7 per cent, HBOS lost 24.1 per cent, and Barclays was 7.3 per cent lower.
Earlier, AIG's illiquid shares on the Frankfurt stock exchange were 40 per cent off.
Both Moody's and Fitch Ratings cut AIG's - which received a $20 billion lifeline by New York state officials - rating down two notches, while Standard & Poor's Rating Services lowered its rating by three pegs.
Asian share markets, many of them closed for a holiday on Monday, tumbled as investors absorbed the weekend's dramatic events on Wall Street, where Merrill Lynch agreed to be sold to Bank of America for $50 billion.
But markets focused on AIG's ratings downgrade, which could force it to post more collateral and nullify insurance contracts, possibly setting in motion a chain reaction that could threaten its survival.
"You don't just have a potential impact on the reinsurer side, you have it on the institutions that might be holding AIG paper," said Lorraine Tan, director of research for Asia at debt rating agency Standard and Poor's in Singapore.