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Lehmans and Merrill: First analysis

After a weekend of bad news stateside during which Lehman Brothers finally fell, UK mortgage giants have already began feeling the crushing impact of the collapse.

Just hours after the news broke, which signals another nail in the coffin of the US economy, early trading saw HBOS’ share price fall a staggering 32% to just 180p.

Royal Bank of Scotland was also badly hit falling 18% to 202p while Barclays and Bradford & Bingley fell 16% and 14% respectively.

No one was unaffected with Lloyds TSB dropping by 7% and HSBC falling by 4%.

The fallout from the US has once again dealt a huge blow to the UK.

Despite a last ditch effort just seven days ago to save the financial world (and to save face) with the nationalisation of Fannie Mae and Freddie Mac the mortgage sector in America has come crashing down.

It seems while the government was concentrating on saving the quasi-public
bodies that dominate the American mortgage market the two investment banks were struggling to keep their heads above water.

You have to feel for the Federal Reserve.

At close of play on Friday night it thinks it’s solved everything. Yes the US public may pick up the bill but the economy is safe, the credit crunch may well be coming to an end and it’s all thanks to the good ol’ US of A.

Just 48 hours later and Lehman Brothers has filed for bankruptcy.

After suffering loses amounting to billions of dollars the fourth largest investment bank in the US opted for chapter 11 bankruptcy protection after
it struggled to find a buyer.

Rumour mills in the industry have been in over drive about the flagging
lender for weeks so the weekend’s news is not really a surprise.

But it does mark one of the most significant periods in the US’s financial history.

The investment bank has been a stalwart of Wall Street and indeed the US sub-prime market since it was founded in 1850 by three Jewish immigrants.

While its bankruptcy is not wholly unexpected the industry is still coming
to terms with the demise of one of the most famous investment banks in the world.

And, in what will go down in history as the weekend the US mortgage market fell to its knees, it was also announced that Merrill Lynch, another giant of Wall Street, has been bought by Bank of America for $50bn.

In the last four days of trading last week Merrill’s shares price fell by around 38%. It was rumoured that many of the firms who looked at buying Lehmans held back in the hope of buying Merrill instead.

The acquisition means Bank of America will be a force to be reckoned with in the industry but also signals the lack of confidence investors had in Merrill.

Last week brought some hope that the mortgage market might finally be picking up.

The Fed was launching a rescue plan, the UK government was at least attempting to look like it was doing something to help and some industry commentators were even signalling the end of the crunch.

Now it seems things are worse than ever.

After bailing out Fannie Mae and Freddie Mac in a move that could cost US taxpayers $25bn dollars the US government and the Fed quite rightly refused
to step in and help the failing investment banks in order to protect the public.

But this year has been nothing if not eventful and we all know by now that even when the biggest crisis possible hits, the UK mortgage market still gets through it. There’s been Northern Rock, Bear Stearns, countless closures – they’ve all been and gone and the UK mortgage market is still here.

Now it just remains to be seen whether the market can weather this storm too.

But it’s important to keep a level head. We may be still up shit creek but we’re still desperately clinging to the paddle.

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