IRISH STOCKS suffered their greatest fall in more than a quarter of a century, shedding almost €6.5 billion in value yesterday, and stock markets were braced for further falls following last night's rejection by the US House of Representatives of the government's $700 billion bailout for the country's financial system.
Discussions between senior Irish bank executives and the Financial Regulator intensified yesterday as bank shares plummeted, prompting the regulator to step up its contingency planning to protect the Irish banking system from any potential failures amid the worsening global banking crisis.
Sources close to the discussions said a "systemic" solution requiring some form of Government support may have to put in place in the coming days as Irish banks face further pressure due to the growing financial turmoil.
The regulator is ranking Irish financial institutions on the risks they face and is closely assessing potential exposures facing smaller lenders in the banking sector and how they might be protected, with Department of Finance officials also involved in discussions.
Potential mergers and tie-ups between institutions to strengthen the sector are being actively considered. A spokesman for the regulator declined to comment.
US president George W Bush, who said after the Congress vote "we've got a big problem", moved to reassure markets that his administration will use all tools at its disposal to confront the instability in the financial system. "Our strategy is to continue to address this economic situation head-on," he told reporters.
Treasury secretary Hank Paulson, chief architect of the plan, said "we need to put something back together that works" because the toolkit currently available to the government was "substantial but insufficient".
"Our banking system has been holding up very well considering all the pressure," he said. "I have committed to continue to work with my fellow regulators to use all the tools available to protect our financial system and our economy."
The 228-to-205 vote against the plan prompted a sharp drop in the US stock markets, which registered the worst losses since the October 1987 stock market crash. The Dow Jones industrial average recorded its biggest one-day point drop ever.
The vote marked a big setback to US treasury secretary Hank Paulson, who championed the plan as a cornerstone of the governments strategy to restore calm to the financial markets. Having accepted several compromises to include measures to protect US taxpayers in the plan, Mr Paulson started emergency consultations with chairman of the Federal Reserve Ben Bernanke and Congressional leaders.
Republican representatives voted against the bailout plan by margin of 2-to-1 and a majority of Democrats were in favour. The voting period was kept open for about 40 minutes past the allotted time as Congressional leaders tried to persuade No voters to change their mind.
Republicans and Democrats blamed one another for the failure of the Bill. House Speaker Nancy Pelosi was blamed by Republicans for the failure to pass the measure, claiming the "partisan tone" of her speech in support of the legislation led supportive Republican voters to change their mind. Democrats claimed Republicans had backed away because they feared it was unpopular and that they could pay a price at the polls in November.
In the continuing financial crisis,three major European banks were rescued in state bailouts yesterday, while Wachovia, the sixth largest US bank, which was in talks to buy investment bank Morgan Stanley last week, was itself acquired by Citigroup in a $2.16 billion rescue.
UK mortgage lender Bradford Bingley, German commercial property bank Hypo Real Estate, which owns Dublin-based public sector lender Depfa Bank, and Belgian-Dutch financial giant Fortis, which owns 50 per cent of the Irish savings bank Postbank with An Post, were all rescued with state bailouts.
The Iseq index of Irish shares closed down 13 per cent, the biggest fall since January 1983. The four publicly quoted Irish banks fell to record lows of recent years. Anglo Irish Bank, the country's third-largest bank, fell the most, shedding 46 per cent, its steepest decline in more than two decades, dragged down by concerns over the commercial property market amid the emerging problems at Hypo.
Anglo has lost 87 per cent of its value in the last 16 months.
