HBOS shares dive

Shares in HBOS were back under pressure today after a short-lived recovery for London's leading share index.

Britain's biggest mortgage lender, whose funding position has been in the spotlight in the wake of the Lehman Brothers collapse, saw its stock suddenly plunge 30% despite starting the session up around 7% higher.

HBOS shares have now more than halved in value since Monday morning.

The FTSE 100 index also saw a 1% increase in the wake of the multibillion-dollar bail-out of US insurance giant AIG fade away during the first hour of trade, to fall back into the red.

The Footsie fell back below the 5000 level - which happened briefly during yesterday's turmoil - to its lowest level since May 2005.

Its reversal performance follows a 1.3% rise for Wall Street's leading share index last night, and similar gains for Asia's main stock markets in Japan and Hong Kong overnight.

HBOS topped the fallers board, after briefly heading the index's leading risers when the market opened.

The UK's main financial regulator, the Financial Services Authority, also stressed today that the bank was well-funded.

It said: "Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.

"We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way."

The HBOS group sought yesterday to reassure investors over its funding, but it failed to prevent its shares slumping for the third day in a row. The bank's stock fell almost 40% at one point yesterday before closing 22% lower.

Analysts have said HBOS needs to refinance more than £100bn (€125.5bn) of funding during the coming months, which could be more challenging after the blow to confidence from Lehman's demise.

Inter-bank lending rates increased sharply yesterday and overnight, making funding more expensive.

There were also suspicions today that HBOS might have been a victim of "short-selling", where investors make money by effectively betting on the price of a company falling.

The other global stock market recoveries came after the Fed's huge rescue package for AIG, which is the US's biggest insurer as well as the shirt sponsor of Manchester United Football Club.

US regulators said a "disorderly failure" of AIG could undermine already fragile financial markets. The US government will receive a 79.9% equity stake in AIG as part of the rescue deal.

Sentiment also looked to have been buoyed by Barclays' agreement to buy up some of Lehman's US operations and assets.

The third-biggest bank in the UK withdrew from talks with Lehman Brothers about a possible outright acquisition at the weekend.

But it has now agreed to buy Lehman's North American banking operations, which include Lehman's fixed income and equities sales, trading and research and investment banking business, for US$250m (€175.75m) in cash. About 10,000 employees work in the divisions.

The bank is also buying Lehman's New York headquarters and its two data centres in New Jersey for 1.5bn (€1.05bn).

HBOS issued a statement to the City yesterday, saying: "HBOS has a strong capital base and continues to fund very satisfactorily."

A spokesman added: "We are the country's largest savings institution and therefore have more retail deposits than any other UK bank.

"The credit crunch has been going on for over a year, and during that period we have demonstrated the sheer resilience of our funding franchise.

"We continue to access the wholesale markets whenever we choose to do so."

HBOS has around 20% of the mortgage market. It also has £258bn (€323.9bn) of retail deposits and around 15 million savers.

Earlier this year the bank raised £4bn (€5bn) of new capital to bolster its balance sheet amid the credit crunch turmoil.

In July the group revealed sharply lower profits and said it was concerned about rising bad debts as customers struggle with repayments.

Pre-tax profits during the first six months of the year plummeted 72% to £848m (€1.06bn). The bank said it suffered a £1.1bn (€1.3bn) hit on investments hurt by the credit market woes.