Turmoil in the City as the FTSE 100 drops nearly five percent in a morning.
The announced closures of Lehman Brothers and Merrill Lynch have led to a further loss of confidence in the financial sector among investors.
Traders were leading the flight from financial stocks and equities as a whole, putting their money instead into safer government bonds and gold. As a consequence, the FTSE 100 is suffering its worst day in years, down 4.85 percent at 14:06 BST.
Lehman was forced in to bankruptcy after a 94 percent collapse in its share prices. This in turn was due to investors' worries about the bank's liquidity, or the amount of ready-to-spend cash it was holding in reserve. Merrill was facing similar concerns - and similar share price erosion - and its newly-announced $50 billion merger with Bank of America is therefore widely seen as a pre-emptive move against collapse.
Both Lehman and Merrill had been highly exposed to complex mortgage-backed financial products, which themselves dropped in value with the US housing market collapse and the onset of the credit crunch last summer. With nobody sure how many of the toxic assets were being held on the banks' balance sheets, confidence in the firms' financial positions was eroded.
Speaking to the Daily Telegraph, Simon Denham of Capital Spreads said: "I would say this is the most serious weekend we've had over the last year. The consequences of what has gone over the last three days will probably dictate what is going to happen for the next six months. It can't be emphasised how serious this is."
He added: "We as a company are wondering where to put our money… If you have a sizeable sum of money, where the hell would you put it?"
