US AUTHORITIES sought yesterday to limit an unprecedented upheaval on Wall Street after the collapse of one major investment bank and the takeover of another by throwing a $20 billion lifeline to AIG, one of the world's biggest insurers.
New York state regulators agreed to allow AIG to borrow $20 billion from its own subsidiaries to shore up its balance sheet after the company's shares fell by more than 70 per cent in early trading.
Shares fell sharply as investors across the world reacted to a dramatic reshaping of Wall Street following the bankruptcy of Lehman Brothers and the sale of Merrill Lynch to Bank of America for the knockdown price of $50 billion.
Irish banks' shares plummeted early on as investors reacted to one of the most traumatic days in US financial history, but they recovered some ground later.
Shares in Anglo Irish Bank, which has a heavy exposure to the commercial property market, dropped 21.6 per cent in trading before closing down 7.7 per cent.
Irish Life & Permanent, the largest mortgage lender in the country, was the biggest loser, ending the day down 13.3 per cent.
AIB and Bank of Ireland dipped to their lowest same-day trading levels of recent years, falling 15.6 per cent and 13 per cent respectively, before closing down 5.9 per cent and 4.7 per cent.
A spokeswoman for the Central Bank said that it had participated in an injection of €30 billion in one-day money by the European Central Bank (ECB) in a move that aimed to improve liquidity across the European banking sector.
"We are carefully monitoring the emerging developments on the global financial markets," she said.
The UK's biggest mortgage lender, HBOS, which owns Bank of Scotland (Ireland) and its Irish retail bank Halifax, fell the most since it began trading seven years ago after Lehman's bankruptcy raised fears about the British property market.
US treasury secretary Hank Paulson insisted that the American financial system remained sound and promised to take further action if necessary to maintain stability.
"I'm committed to working with regulators here and abroad, as well as policymakers in Congress, to take additional necessary steps to maintain the stability and orderliness of our financial markets."
Mr Paulson said he had never considered using public funds to bail out Lehman Brothers, which filed for bankruptcy protection yesterday after the failure of efforts to sell the 158-year-old firm over the weekend.
AIG, which employs about 400 staff in Dublin, approached New York state officials for help yesterday as ratings agencies threatened to downgrade the insurance giant's credit rating, a move that could trigger a flood of capital out of the company.
The company is seeking further help from the federal government, possibly in the form of a $20 billion bridging loan. AIG's troubles stem from its role as one of the biggest underwriters of complex debt contracts known as credit default swaps, which are used as insurance for a wide range of financial products, including mortgage instruments that have seen their value collapse in recent months.
President George Bush said he sympathised with employees of the stricken Wall Street companies but added that the federal government's focus was on the country as a whole.
"We are working to reduce disruptions and minimise the impact of these financial market developments on the broader economy."