LONDON (Reuters) – Quarterly profits at top U.S. investment bank Goldman Sachs slid 70 percent on Tuesday 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 U.S.-based American International Group and as markets faced the fallout from the failure of investment bank Lehman Brothers.
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 on Monday 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 U.S. investment bank filed for bankruptcy protection.
Barclays is in talks to buy Lehman’s core U.S. broker-dealer business, people familiar with the matter told Reuters on Tuesday. 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 percent by 1230 GMT, while the Dow Jones Stoxx bank index was 6.2 percent weaker. UBS fell 11.7 percent, HBOS lost 24.1 percent, and Barclays was 7.3 percent lower.
Earlier, AIG’s illiquid shares on the Frankfurt stock exchange were 40 percent 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.
In Singapore, hundreds of anxious investors thronged the office of an AIG unit to redeem their policies.
Shares in AIG plunged nearly 61 percent on Monday and the U.S. Federal Reserve hired investment bank Morgan Stanley to review options for the firm, a person familiar with the situation said on Monday.
AIG has lost 92 percent of its value this year.
BRITS STEP IN
Barclays — which quit frantic talks over the weekend to rescue Lehman after U.S. authorities failed to guarantee trading obligations — is now looking to buy Lehman’s U.S. broker-dealer business, including equity, fixed income, M&A advisory and other parts, the sources said.
The talks mainly involve the core U.S. business, with 8,000 to 10,000 staff, but could include some of its global businesses, the sources said, and a deal could save thousands of jobs and many of the core investment bank operations.
There is an urgency to the talks, as a deal would need to be struck before staff and clients leave and damage the franchise, the sources also said.
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.
“This would have a much bigger impact than a bank going down like Lehman or Bear (Stearns) or even a Wachovia or WaMu in the U.S. AIG has a much bigger presence globally. Their reach to a global customer base is quite sizable,” she said.
Top U.S. savings and loan Washington Mutual Inc saw its rating cut to “junk” status by Standard & Poor’s amid concerns about mortgage losses. Its shares slid in after-hours trading after a 27 percent drop in the regular session.
Moody’s Investors Service cut AIG’s rating to A2 from Aa3, a two-notch downgrade. S&P lowered the rating to A-minus from AA-minus, a three-peg reduction, and Fitch Ratings reduced its standing to A from AA-minus, a two-notch cut.
AIG’s ratings are still investment grade, although all three agencies said more downgrades could follow.
Again seeking a private solution to Wall Street’s woes, the Fed had asked JPMorgan Chase & Co and Goldman Sachs Group Inc to explore arranging $70-$75 billion in loans to support AIG, among other financing options, another person familiar with the situation said.
AIG turned to the Fed late on Sunday after failed talks with several buyout firms and Warren Buffett’s Berkshire Hathaway. The company has also said it was exploring asset sales.
European credit spreads widened sharply early on Tuesday, surpassing last session’s high, after AIG’s downgrade.
By 1117 GMT, the investment-grade Markit iTraxx Europe index was at 153.5 basis points, according to data from Markit, 28.5 basis points wider versus late on Monday.
“The second leg of the subprime crisis has begun,” Jun Kwang-woo, head of South Korea’s Financial Services Commission told reporters. “It could be painful but a recovery, once in place, may be rapid.”
Asian stocks tumbled across the board, with Tokyo down more than 5 percent at a three-year low.
Japanese government bond futures jumped by their daily limit of three full points as investors fled to safe havens, while Japan’s central bank said it would strive to maintain stability in financial markets.
Darkening one of the few bright spots from the weekend’s mayhem, Bank of America — which would surpass Citigroup Inc as the largest U.S. bank by assets with the planned takeover of Merrill — saw its shares plunge by 21 percent.
“The concern for Bank of America is the debt that they are acquiring,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.
The state of New York, where AIG is based, sought to bolster the stricken insurer with a complex asset swap giving it a $20 billion lifeline, but its longer-term rescue depended on additional funding.
By Douwe Miedema
(Additional reporting by Steve Slater, Maya Thatcher, Lilla Zuill, Umesh Desai, Michael Flaherty, Kevin Plumberg and Tom Miles)
(Editing by Ian Geoghegan and Sue Thomas)