The FTSE has followed Asian markets in falling today after the shock sale of Bear Stearns to JPMorgan Chase.
By 11:00 the FTSE was down 2.54 per cent to 5488.40 in response to the sale.
The banking sector was hit in particular, with Alliance & Leicester, HBOS, Royal Bank of Scotland and Barclays all recording falls.
In Frankfurt the Dax was 3.25 per cent down, while the Cac 40 in Paris fell almost 2.5 per cent.
The Nikkei 225 closed down 3.71 per cent, while the Hang Seng saw a drop of 5.18 per cent.
Share prices fell amid fears Bears Stearns loss of liquidity may be contagious.
The loss in confidence bringing about the falls came despite Federal Reserve action to calm the markets by bolstering market liquidity through creating a six-month lending facility to improve financing in the securitisation markets and a cut to its discount rate of 0.25 percentage points.
A Fed statement read: “Liquid, well-functioning markets are essential for the promotion of economic growth.”
There are now fears the markets are being propped by central bank cash, which is distorting the market.
Former governor of the Federal Reserve Robert Heller told BBC Radio 4’s Today programme that without the quick action from the Fed to save market confidence, the fallout from a Bear Stearns collapse would have been much greater.
“Give it another three or four days and if there had been no resolution to this problem, quite a few very small financial institutions would have been in difficulty.”
He added this was because Bear Stearns had a fairly significant position versus a lot of small, mutually-financed small hedge funds.
“[Bear Stearns] provided facilities, even office space and they were running the books for these institutions, so this could have led to difficulties in literally hundreds of small financial institutions, and therefore there was a bit of a problem for a systemic risk for the US financial system.”
All eyes are now on the US markets to see how they will respond to the crisis.
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