Barclays denies £10bn hit while shares slide

The global credit crisis intensified yesterday on both sides of the Atlantic, pulling stock markets lower, with Barclays in London rumoured to be facing a £10bn write off. Its shares are down 12% over the course of the week.

The bank is the subject of intense speculation about its potential exposure to investment vehicles caught by the crunch arising from the value of American sub-prime mortgages. At one point yesterday, trading in Barclays became so intense dealing had to be briefly halted to ensure orders had been properly executed.

Shares in the bank, due to release what will be a closely watched trading update on November 27, briefly touched their lowest level for three years before closing down 2.5% at 474.50p. At the start of the month they traded at more than 600p.

Barclays denied rumours that its Barclays Capital investment banking division would have to write off £10bn. It also moved to quell talk that chief executive John Varley or Bob Diamond, who runs Barclays Capital, were to resign.

Royal Bank of Scotland, also picked out by share traders as potentially exposed, remained silent about its potential involvement. After recently winning a battle against Barclays for control of ABN Amro, RBS has seen more than a fifth of its stock market value wiped out this month. RBS shares closed down 3% at just over 400p yesterday, having earlier been at levels not plumbed since 2000.

Chairman Sir Tom McKillop spent £495,000 yesterday buying up 118,000 shares, a move traders described as intended to show confidence. Non-executive director Robert Scott and his wife, meanwhile, bought 10,000 shares.

In the United States, the $1.5bn Carina fund began liquidating assets when its credit rating was slashed to junk status. Rumours flew that more than a dozen other highly leveraged investment vehicles were also in trouble.

There was escalating panic as America's fourth largest bank, Wachovia, admitted it lost $1.1bn in October alone as the value of its sub-prime debt plunged. Investment bank Dresdner, meanwhile, announced it had taken a €575m (£400m) hit over three months as valuations of asset-backed securities, such as mortgages, sank.

The crisis began with escalating levels of bad debt among US mortgage lenders as home owners defaulted on loans. Defaults are particularly severe in the sub-prime market, where borrowers tend to be low-income or high-credit-risk. Banks had been bundling these mortgages (tending to pay out over 20 years or more) into so-called collateralised debt obligations (CDOs) and selling them on to other investors. In turn, these investors set up vehicles (like the Carina fund) to buy them, and funded those purchases by issuing their own instruments or asset-backed commercial paper - with a much shorter payback period than the mortgages.

The sub-prime collapse caused panic among traders of commercial paper fearing a plunge in the value of the assets on which their investment was based; the market for paper dried up, causing the CDO investment vehicles to run out of cash.