$180bn of liquidity offered to banks outside the US, Short sale of UK banks is banned, Barclays claims Lehman indexes, Morgans Stanley "vol" explodes

In a co-ordinated strike, $180bn in liquidity has been offered by central banks and regulators to banks outside the US in desperate need of dollars. For its part, the Bank of England has pumped 40 billion USD (£22.3 billion) into money markets, over four times the amount it pumped in on Monday when Lehman collapsed. Other actors in the stage-play included the ECB, Bank of Canada and Bank of Japan. Lehman, HBOS and AIG this week have led to banks hoarding cash and pushing up the rates of inter-bank lending. When commercial banks end up in a liquidity freeze, central banks step in to ease the cash deadlock.

The FSA has banned the short-selling of UK financial stocks, "a move unprecedented in modern times" according to the FT on Thursday, categorising it as a "market abuse" offence. Market makers are exempt from this rule. The rule takes effect from midnight Thursday until January 2009, and there will be a review after 3o days which may result in the ban being extended to other sectors.

Barclays also staked their claim on Lehman's bond indexes.

MS redefined volatility Thursday. After 1 p.m. Thursday,MS dipped below $13 (an all time low), beginning to rally around 2:30 p.m. Morgan's shares with news of a possible government-led solution to the loan crisis, and by 3 p.m., the stock hit $23.

EuroStoxx closed at the 3000 mark, 59bps below Wednesday's close.
Lloyds TSB paid £12bn for HBOS (the transaction having been waved through by Gordon Brown, side-stepping the Competition Commission), 232p per share. City AM's headline today is "CONTAGION" with a picture of a horse and the comment "LLOYDS TSB and HBOS will create a megabank with £1 trillion in assets. Picture:PA".

In stark contrast to the seriousness of the day's events in the money markets, the london paper ran lead stories on how madonna helped Gwyneth Paltrow out of post-natal depression and how Kate Middleton, girlfriend of Prince William, fell down at a roller disco in Vauxhall.

HBOS and Lloyds TSB in merger talks, Barclays buys Lehman Brothers North America, Morgan Stanley ruminating merger

Announcement came after a third disastrous day of trading in HBOS shares. HBOS dropped 19% during the day from 182 to 147. HBOS was admitted to trading on 10 September 2001. The government instigated Lloyds TSB to take HBOS under its wing, acting quicker than it did in last year's Northern Rock crisis. Merging the two will create the UK's fourth largest bank by assets.

Barclays takeover of Lehman North America ($1.5bn for the real estate and $250m for the business) was announced. The advisers on the deal, according to Bloomberg, were Credit Suisse Group AG, Deutsche Bank AG and JP Morgan Cazenove Ltd.

The cost of credit protection on Morgan Stanley's debt has accelerated over the last two days. Morgan's stock price is down 46% this year. They are rumoured to be mulling a merger (with Wachovia). The credit crisis has meant the financial landscape is changing fast. There is huge consolidation in the banking sector. Recent turbulence suggests the market will head towards more regulation, particularly of hedge funds, and more limits on risk taking and leverage.

Market virus.

Fed Plans Rescue of AIG ($85bn bailout/NATIONALISATION)

Following bailout of Freddie Mac and Fannie Mae, the Fed plans to stave off bankruptcy of AIG, by providing $85bn in funding in exchange for 80% stake in the insurer. US is following Venezuela in nationalising financial institutions.

AIG owns 50% of City Airport, located in Royal Docks, East London, less than 3 miles from Canary Wharf . AIG bought the airport from Irish financier Dermot Desmond in October 2006. It sold its stake to GIP (an infrastructure fund founded by Credit Suisse and General Electric), in Sept 2008.

Lehman Brothers is Bankrupt, ML sold to BoA for $50bn, BoE injects £5bn into markets, Two of the World's Biggest Banks Gone in One Day

BoA purchased ML on Sunday, and early Monday morning 158-year old LEH filed for Chapter 11 bankruptcy protection. The sudden and shocking demise of Lehman Brothers followed soon after Barclays and Bank of America pulled their interest in a possible takeover. Both bidders had something up their sleeve - BoA merged with ML and Barclays seemed to be waiting for the business to collapse before cherry-picking select businesses at bargain basement prices. Pictures of Lehman's staff bearing "Iron Mountain" boxes littered the news channels and newspapers. Some time later, prior to a G-7 meeting in Washington when the aftermath of Lehman's collapse became readily apparent, French economy minister Christine Lagarde remarked: "For the equilibrium of the world financial system, this was a genuine error...once we let one domino fall, the rest risk collapsing".

Now GS and MS are left as Wall Street's biggest investment banks.

In the UK the Bank of England auctioned £5bn through an exceptional fine tuning open market operation at 9.45 Monday. These loans will mature Thursday. (BoE stated they received £24.1bn in bids for its £5bn injection).

Reaction:

"The ECB stands ready to contribute to orderly conditions in the euro money market" - ECB

"I've been in the business 35 years and these are the most extraordinary events I have seen." - Peter G Peterson, Blackstone Group

Lehman Stock Battered

CityAM reports "some analysts are forecasting that the bank...will go bust within six months".

GSEs Bow Before the FHFA

The US government has analysed the capital requirements of mortgage GSEs (Government sponsored enterprises) Freddie Mac and Fannie Mae, which have lost billions in cash as a result of the US housing crash (referred to by the Treasure as "housing correction"). The GSEs have 5.3 trillion dollars of debt outstanding and MBS securities. They will now be administered by the FHFA (Federal Housing Finance Agency).

Fortune magazine covers the "Frankenstein business model" of the two institutions in the article "The $5 trillion mess". The two companies under the FHFA will not be able to make any payments to shareholders until the end of 2009.

The statement was made by Henry Paulson, Secretary of the US Treasury, prior to which he was CEO of Goldman Sachs.

Pound sell-off versus Euro

Alistair Darling added fuel to the already dire sentiment on the British economy, sending the pound to a new low against the dollar.

To make matters worse, OECD predicted recession for the UK in second half of 2008 (a recession is defined as two consecutive quarters of negative growth).