HBOS shares plunge in Lehman crisis

UK shares continued to tumble this afternoon after the credit crunch claimed one of the world's biggest investment banks - with Britain's biggest mortgage lender the worst affected.

Lehman Brothers, which has been hit by billions of dollars-worth of sub-prime mortgage losses, announced overnight that it was planning to file for Chapter 11 bankruptcy. Rival Merrill Lynch - another casualty of the sub-prime crisis during the past year - also took shelter in a takeover by the Bank of America.

Some analysts were forecasting that today would go down as 'Black Monday' in the financial annals - with the credit crunch entering a new phase one year on from its start.

In London, the FTSE 100 Index was down nearly 5 per cent by 2pm amid the fresh turmoil, although it recovered to just under a 4 per cent fall on the day.

Shares in HBOS, Britain's biggest mortgage lender and owner of the Halifax, fell by more than 17 per cent over the day. Friends Provident, Bradford & Bingley and Royal Bank of Scotland also saw big falls.

The losses were despite action from the Bank of England, which pumped an extra £5bn into money markets in an attempt to calm anxieties. The European Central Bank also made undisclosed funds available to financial institutions.

The moves came as 10 investment and commercial banks announced a $70bn (£39bn) credit line to mitigate "unprecedented volatility and other challenges affecting global debt and equity markets".

Other European markets also saw heavy falls, particularly in France and Germany. Asian markets were also hit, with India's Sensex down more than 3 per cent, Taiwan's benchmark index off 4.1 per cent, Australia's main market down 2 per cent. Japan and Hong Kong's markets were closed today.

And the gloom continued this afternoon when the Dow Jones fell more than 2 per cent.

Lehman's move follows the collapse of a rescue deal for the bank during a weekend of fevered activity on Wall Street, making the 158-year-old finance house arguably the world's biggest casualty of the crisis gripping the global financial system.

Chapter 11 bankruptcy gives companies time to reorganise and work out a plan to pay creditors over time.

Under the terms of its bankruptcy petition, Lehman Brothers' holding company, Lehman Brothers Holdings International, is still pursuing the sale of its broker-dealer operations, as well as its investment management division.

Another subsidiary, Lehman Brothers Asset Management, will also not be subject to the petition.

Lehman said in a statement: "The board of directors of Lehman Brothers Holdings International authorised the filing of the Chapter 11 petition in order to protect its assets and maximise value."

The group - the bank employs about 25,000 staff worldwide including around 5,000 in the UK - racked up a third quarter net loss of $3.9bn (£2.2bn), after a $7bn (£3.9bn) hit from commercial property and sub-prime mortgage losses.

In the UK, Lehman employs staff at its regional headquarters in Canary Wharf, London, as well as its office in High Wycombe, Buckinghamshire.

Barclays reportedly walked away from a rescue deal after failing to obtain guarantees over Lehman's financial commitments.

Today it said it considered a merger transaction but decided it "was not in the best interests of Barclays shareholders".