Wachovia, one of the biggest retail banks in the US, put itself up for sale last night after a tumultuous day for banking shares across the world.
Unprecedented central bank intervention failed to prevent further distress in the markets, with credit spreads rising to previously unseen levels and equity prices tumbling.
In the wake of the political wrangle over the $700bn (£380bn) Paulson plan, and the collapse of Washington Mutual, the markets seemed to be on the hunt for their next victims. Fears in the UK have focused on the fate of Bradford & Bingley, but the anxiety has been global. Wachovia and the Belgian-Dutch Fortis group were hit hardest.
In the US, the failure of Washington Mutual on Thursday night was the largest banking collapse in the country's history, triggering a new wave of concern over other tottering groups. Wachovia, which only a few days ago had been negotiating the takeover of the mighty Wall Street investment bank Morgan Stanley, slumped 27 per cent on concern it too is burdened by delinquent mortgages that have undermined its balance sheet. Last night, it was said to be seeking to be rescued by Citigroup, the world's largest bank, although takeover talks are at a preliminary stage. It has also reached out to Wells Fargo and Banco Santander.
Other casualties yesterday included National City. Once one of the largest US banks, which has been on probation with regulators concerned about its solvency for several months, it lost 26 per cent of its value. Morgan Stanley fell 9 per cent, prompting John Mack, its chief executive, to write a memo to staff assuring them talks about an $8.5bn capital infusion from the Japanese bank Mitsubishi were still on track.
In the European banking sector, Fortis moved to quell rumours it faced a liquidity crisis, and its shares sank for the fifth day in a row. Fortis also revealed plans to raise up to €10bn (£8bn) from offloading assets. It issued its second statement on consecutive days attempting to calm investor fears. Earlier this month, it was forced to deny speculation it was preparing to launch a rights issue. The group said yesterday it had a funding base of €300bn. Its chief executive, Herman Verwilst, said: "We are flabbergasted by what is reflected in the market capitalisation of Fortis."
Bad news from the "real economy" didn't help: US GDP expanded at a slower- than-forecast annualised rate of 2.8 per cent, compared with a preliminary estimate of 3.3 per cent issued last month.
Concerns about the Paulson plan prompted a concerted effort by the world's central banks to provide liquidity and confidence. The Bank of England, the US Federal Reserve, the European Central Bank and the Swiss National Bank led the official posse, with smaller reserve banks from Denmark to South Korea also chipping in.
An extra $74bn of one-week funding is being made available, a move widely welcomed. Crucially, according to market professionals, the Bank of England is offering a weekly injection of three-month liquidity, starting on Monday. This supplements its existing arrangements to the tune of £40bn allocated, almost as large as the initial estimates for its Special Liquidity Scheme, still in operation until the end of January.
Despite all this, money markets remained virtually frozen. The cost of borrowing in dollars for three months stayed near its peak for the year and the key index of distress in the interbank market, the OIS/LIBOR spread, soared again. This has now reached a full 2 percentage points: it averaged a mere 8 basis points before the credit crunch.
"It's just a complete breakdown of the interbank lending market," said Sean Maloney, a fixed-income strategist at Nomura. "We are now in a very fear-driven environment. Banks are no longer lending to each other."
Real or perceived problems in funding their activities once again hit some banks hard on both sides of the Atlantic. Bradford & Bingley at one point lost a further fifth of its market capitalisation. It closed down 5 per cent at a new low of 20p, a decline of 93 per cent this year, cutting its market value to £256m, less than the £400m it raised in a 55p-per-share rights issue last month. Lloyds TSB, due to take over the troubled HBOS in a government-brokered deal, fell by 8 per cent. HBOS fell 5.8 per cent.
After the shortcomings revealed during last year's Northern Rock crisis, the "tripartite authorities" – the Bank of England, the Financial Services Authority and the Treasury – will not wish to be seen to be "asleep at the wheel". "The time has come now for the central banks basically to offer something a little bit different other than liquidity in deference to the fact that the economic downturn is gathering momentum," said George Magnus, senior economic adviser to UBS.