QUEUES formed around the Singapore offices of an AIG subsidiary yesterday, as the world’s biggest insurance company collapsed, losing 70% of its share price.
At the same time Britain’s biggest bank, HBOS, crashed 35%.
The world stock markets were in freefall, after the bankruptcy of the fourth largest US bank Lehman Brothers on Monday.
Wall Street tumbled when it opened at 2.30BST and the UK’s FTSE 100 shed 4.1%, falling through the 5000 mark for the first time since 2005.
The FTSE 100 index of leading UK shares fell 213 points to 4,991 in early afternoon trade and closed 181.10 points down at 5023.10.
Shares in Japan, South Korea and Hong Kong buckled by more than 5%, having been shut on Monday for public holidays.
Japan’s Nikkei 225 index collapsed 5% to a three-year low, while shares in South Korea and Hong Kong shed 6% and Shanghai 3%. Markets in Taipei and Singapore were sharply down, as in Australia and New Zealand.
Royal Bank of Scotland was down more than 15%, in Paris, Credit Agricole, Societe Generale, and BNP Paribas dropped more than 7%, Germany’s Commerzbank fell 17% and Deutsche Bank fell 6.8%.
Japanese-registered Lehman Brothers Japan and Lehman Brothers Holdings applied to the Tokyo District Court for bankruptcy protection.
US Treasury Secretary Henry Paulson said the US was ‘working through a difficult period in our financial markets right now as we work off some of the past excesses’.
Paulson said Americans could remain confident in the ‘soundness and resilience’ of the US financial system. But he warned that uncertainty remained and it was likely that there would be further ‘rough spots’ ahead until the correction of the US housing market was completed.
Paulson said he was committed to working with regulators in the US and abroad, as well as policymakers in Congress to take the necessary steps ‘to maintain the stability and orderliness of our financial markets’.
But he gave no details of what such steps might mean.
Fears for the future of US insurance giant AIG mounted as its shares fell 70% in early trade.
On Monday, AIG had been thrown a $20 billion (£11.2bn) lifeline from New York state authorities, but it failed to buoy the insurer up. It apparently required another £60bn.
More than 100 worried customers of an AIG subsidiary, American International Assurance (AIA), queued outside its Singapore office to try to recover their assets.
Singapore’s central bank tried to reassure investors, claiming AIA ‘has sufficient assets in its insurance funds to meet liabilities to policy holders’.
AIG is much more than an insurance company. It also has a financial products division that is at the heart of many of the firm’s current problems.
‘Its tentacles reach into every part of the economy,’ said Matthew Bishop of the Economist.
He said the consequences of the collapse of AIG would be devastating for the financial system.
‘It’s worse than insurance policies not being valid.
‘They are writing derivative contracts and these have the potential to leave a lot of other banks holding massive losses that they will have to deal with.’
Many of AIG’s problems are thought to stem from credit default swaps, which insure against companies going bust.
Howard Davies, former chairman of the Financial Services Authority, said: ‘AIG is absolutely enormous.
It would create knock-on consequences in insurance markets. It is huge in China for example. That would export the American financial crisis there, so it would have all kinds of political consequences.’
• Second news story
INFLATION RATE UP 4.7%
IN HIS letter to Chancellor Alistair Darling on Monday, Governor of the Bank of England Mervyn King reported a rise in the CPI inflation rate to 4.7%.
King also admitted he hadn’t got a clue in which direction the British economy is headed.
The UK’s annual rate of inflation rose to 4.7% in August, up from 4.4% in July.
Under the rules the Bank of England Governor has to write a letter to Chancellor Darling explaining why inflation is higher than the government’s 2% target.
King wrote ‘there are considerable uncertainties, in both directions, around the precise profile for inflation in the coming months’.
He said: ‘Sterling has depreciated by 15% since its peak last July’.
He continued: ‘Although the factors accounting for the rise in inflation are the same as I described in June, the expected peak in inflation later this year is now likely to be significantly higher than anticipated in June.
‘The Monetary Policy committee now expects inflation to peak soon at around 5%’.
King admitted to Darling that ‘in the year to August:
• Food prices in shops rose by 13%;
• Petrol prices rose by around 20%;
l Retail gas and electricity prices rose by around 25%.’
Inflation as measured by the Retail Prices Index (RPI) – often used in pay negotiations – fell to 4.8% from 5%.
King blamed ‘sharp, largely unanticipated’ increases in food and energy prices for pushing inflation well above the government’s target.
He said that these pressures were pushing up consumer prices around the world, with eurozone inflation at 4% and US CPI at 5.6%.