Lehman collapse causes turmoil

The collapse of Lehman Brothers, the fourth-biggest investment bank in the US, and the emergency takeover of Merrill Lynch, led yesterday to the worst day in the world's financial markets since the credit crunch began. Stock markets around the world tumbled, with America's Dow Jones industrial average falling 504 points - its worst slump since that caused by the 9/11 attacks in 2001. In the UK, the FTSE 100 index fell 4 per cent, as £50bn was wiped off the value of shares, while the 4,500 Lehman staff cleared their desks. This morning, Japan's Nikkei index fell 5 per cent to a three-year low.

Last night the US government was seeking to put together a $40bn rescue package for American International Group (AIG), the world's biggest insurance firm. Concern is growing for AIG, with Goldman Sachs and JP Morgan joining forces to try and raise a $75bn financing package to support it.

In London, the share price of Halifax Bank of Scotland, one of Britain's biggest mortgage lenders, slumped by 36 per cent at one point, before recovering to close almost twenty per cent down.

The collapse of Lehman Brothers, precipitated after it incurred losses of billions of dollars in the US mortgage market, came after a weekend of intense negotiations. Hank Paulson, the US treasury secretary, had lined up British bank Barclays as a purchaser, but that deal fell through at the last minute.