London Lashed by Lehman Jitters

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Unable to figure out what lies around the corner amid the mayhem in global financial markets, traders in the City of London retreated to familiar ground Monday, dumping banking and finance stocks and leaving the benchmark FTSE 100 index down almost 4% by the close of trading. The jitters triggered by the collapse of Lehman Bros. and the takeover of Merrill Lynch swiped almost a fifth off HBOS, Britain's biggest mortgage lender. Shares in Barclays, the U.K. bank that ditched plans to buy Lehman at the weekend, tumbled 10%.

Still, analysts say, the sell-offs are unlikely to signal bumper losses among U.K. banks directly exposed to Lehman. "I don't think there are any out there with particularly big counter-party positions," says Alex Potter, banking analyst with Collins Stewart in London. Nonetheless, fear and uncertainty over any outstanding trading positions British banks may have with Lehman will be more than enough to "increase reticence on the part of lenders to extend credit" to one another, says Richard Mcguire, strategist at RBC Capital Markets in London. The Bank of England didn't take long to respond, pumping an additional $9 billion into the money markets on Monday.

Though British lenders would surely welcome any loosening of gummed up credit markets, "the problems for U.K. banks going forward is considerably more related to domestic credit risk than global liquidity issues," maintains Jamie Dannhauser, an economist at Lombard Street Research in London. With Britain's residential and commercial property markets in freefall, real estate losses pose an even greater risk, Dannhauser says.

Just as worrying for the City, as London's financial district is known, is the collapse of Lehman Bros., which has a staff of 4,000 in London. The loss of those jobs adds to the misery of a financial services industry critical to the health of Britain's economy. The finance and business services sectors have added more jobs in the U.K. than all other service sectors combined since 2004, according to RBC Capital Market's Mcguire. Long before Lehman sought bankruptcy protection, credit services company Experian projected net job losses among banking and insurance businesses in the City would reach 10,000 before 2011. And amid chaos and confusion in the banking sector, little else can seem more certain.