Fresh concern about Lehman Brothers’ ability to raise extra capital and worries about the health of other financial institutions plunged US equity markets into the red as the boost the markets received from the US government’s bail-out of Fannie and Freddie all but disintegrated.
Lehman shares plunged by as much as 46pc, the largest one-day percentage fall since the beleaguered investment bank went public in 1994, while the Dow Jones Industrial Average closed down 280.01 points at 11230.73, erasing almost all of Monday’s gains.
Other financials to be hit included AIG, the world’s largest insurer, whose shares fell 19.3pc, and Washington Mutual, whose shares slumped 19.9pc as investors continued to worry about the state of the credit markets.
At the close, Lehman’s shares were down 45pc at $7.79, their lowest level since October 1998, valuing the bank at $5.4bn, just a third of its book value.
Such was the concern for Lehman on Wall Street that the bank’s chairman and chief executive, Dick Fuld, last night announced that he will disclose the bank’s third-quarter results this morning alongside what he called “key strategic initiatives”.
The move was designed to calm investors who had originally expected the bank to publish its results next Thursday.
The bank’s price collapse began yesterday morning after it appeared that the Korea Development Bank (KDB) had ended talks over a potential capital injection, leading investors to become nervous about the lack of public comment from the beleaguered investment bank.
Jun Kwang-woo, who chairs South Korea’s Financial Services Commission (FSC), said KDB was no longer talking to Lehman, spooking investors in spite of the fact that the US bank is thought to be talking to a number of other potential investors including Nomura.
The situation was complicated yet further, however, when Min Euoo-sung, KDB’s chief executive who used to run Lehman’s operations in the Asian nation, said he could not comment due to the “sensitivity involved”, leading some in the market to suggest that the FSC was merely lobbying on price.
Yesterday’s fall deepened after credit ratings agency Standard & Poor’s placed Lehman on a negative ratings watch.
S&P cited the “heightened uncertainty” surrounding Lehman’s ability to raise extra capital as a result of the share price fall, adding that it believes the bank incurred a substantial net loss in the third quarter due to difficult investment banking conditions and deteriorating conditions in the mortgage market.
Lehman’s Wall Street rivals rallied around to offer their support, however, with a Goldman Sachs spokesman saying the bank was a “willing counterparty to Lehman across all of its businesses”.
In addition, Merrill Lynch, JP Morgan Chase, Citigroup and Morgan Stanley all confirmed they were trading with Lehman normally. But the assurances were not enough to stop Lehman’s share slide.
Mr Fuld had hoped to hold on to Lehman’s investment management arm Neuberger Berman – seen as the jewel in Lehman’s now tarnished crown – and instead raise capital by selling an equity stake in the bank.
But as a result of the KDB talks ending, he is now understood to have included senior Neuberger staff in ongoing discussions with private equity houses looking to purchase stakes in part of that business.
Private equity houses KKR and Blackstone are understood to be engaged in conversations about buying part of Neuberger, along with certain alternative and real estate assets.
