Staring into the abyss

It has been a historic and turbulent week for share markets around the world as the credit crunch, which began last year, became a financial hurricane, sweeping all and sundry.

This Monday saw the collapse of Lehman Brothers, once the fourth biggest US investment bank and the first major bank to collapse since the start of the credit crisis. After a seven-hour hearing yesterday that ended past midnight, an US bankruptcy judge backed UK bank Barclays' plan to buy the core business of the company for $1.3bn (£700m).

Lehman's demise was then followed by the once-mighty US bank Merrill Lynch agreeing to be taken over by Bank of America for $50bn, to prevent it becoming extinct. Meanwhile a takeover of the UK's biggest mortgage lender HBOS (Halifax Bank of Scotland) by Lloyds TSB was approved by the government to forestall a run on it by customers and in the US, the Federal Reserve supplied an $85bn (£48bn) rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy.

And now American officials say they will hammer out a "comprehensive" plan to help ease what has become a global financial maelstrom. The US Treasury is proposing a fund worth up to $800bn (£440bn) to buy back a large proportion of the bad debt in the US mortgage market.

When you add the nationalisation of Northern Rock in Britain, followed by the acquisition of Wall Street's fifth-largest bank, Bear Stearns, by larger rival JP Morgan Chase in a $240m deal backed by $30bn of central bank loans (a year earlier, Bear Stearns had been worth £18bn), and the rescue of mortgage lenders Fannie Mae and Freddie Mac (which account for nearly half of the outstanding mortgages in the US) by the American government, this is the worst financial markets crisis for decades.

So where do we go from here? Just because Dubya and the US Treasury are acting like the Cavalry riding to the rescue, it doesn't mean this is over. The ripples from this week's events are already spreading outwards - redundancies will be a certain by-product of the HBOS-Lloyds TSB merger. Before filing for bankruptcy, Lehman Bros employed about 25,000 staff worldwide, including 5,000 in the UK. Leading economists have warned British taxpayers face up to 5p in the pound in extra taxes because of the credit crunch.


Whatever is decided, to do nothing is considered far more costly than the $800bn bill estimated for the bailout (actually, make that more likely $1 trillion). And some serious questions will need to be asked by taxpayers on both sides of the Atlantic...
Timeline: Global credit crunch