The wonder of financial crises is how events can move straight from impossible to inevitable, without ever passing through improbable.

Two weeks ago nobody would have imagined that, before the end of the month, the Bush Administration would have nationalised the world's biggest insurance company, that two of the four biggest global investment banks would be out of business and that the US Government would take responsibility for three quarters of the country's new mortgage loans.

Sadly, the events of the past two weeks may be only the prelude, not the climax, of this amazing crisis. EVEN THE APPARENT RESCUE OF HALIFAX BANK OF SCOTLAND MAY RESULT IN A BIGGER CRISIS, if the drowning HBOS drags down its rescuer, Lloyds TSB. If this happens, every big bank in Britain, except possibly HSBC, will have to be nationalised, Northern Rock-style.

The same would become inevitable in the US if market speculators who have been richly rewarded by the US Government for taking down Fannie Mae, Lehman Brothers and AIG, turn their attention to the next group of stumbling financial institutions in the firing line: Washington Mutual, Wachovia, Bank of America, Morgan Stanley and Citibank. If any of these wounded giants collapses, the others will fall like dominoes and THE ENTIRE US FINANCIAL SYSTEM WILL HAVE TO BE NATIONALISED. In a financial crisis, THE IMPOSSIBLE CAN BECOME INEVITABLE IN ONE DAY, as we saw in Britain on Black Wednesday.

If the Lloyds-HBOS merger offers the enlarged bank some kind of firm government safety net - not just for depositors, but crucially also for shareholders - it will probably succeed and act as a firebreak against the financial crisis on this side of the Atlantic. If, however, the merger is presented as a "pure private sector solution", with no government support for shareholders, market attacks against HBOS will soon be revived and redirected against the merged bank.

THIS WILL LEAVE ONLY ONE SOLUTION - NATIONALISATION OF THE ENTIRE BRITISH BANKING SYSTEM. THE IMPOSSIBLE WILL SUDDENLY BECOME INEVITABLE.

The European Parliament is to promote greater use of EU symbols in order to help people to identify with the union, even though THE FLAG, MOTTO AND ANTHEM HAVE BEEN CRITICISED AS THE TRAPPINGS OF STATEHOOD.

Scrapping references to the symbols was cited by Angela Merkel, the German Chancellor, and others as a key difference between the EU Constitution - rejected by French and Dutch voters in 2005 - and its successor, the Lisbon Treaty. THEIR DISAPPEARANCE FROM THE TREATY HAS ALSO BEEN CITED AS A KEY REASON BY SOME GOVERNMENTS - INCLUDING BRITAIN - AS TO WHY REFERENDUMS WERE NOT NECESSARY ON THE NEW DOCUMENT.

Nigel Farage, leader of the UK Independence Party, said: "We were told that the symbols would disappear - of course, we knew they would not - and now they are trying to ram them down our throats."

This is one of the largest estimates of job losses so far for the banks and brokerages that pay one-fifth of the state's taxes and about one-third of city wages and salaries. Mayor Michael Bloomberg, City Comptroller William Thompson and Gov. David Paterson on Wednesday all said the profit-eating cyclone rocking banks and brokerages had not run its course.

New York City has the lion's share of the state's financial workers, with 181,000 employees in July, down 11,000 from a year ago, according to the state labor department.

Iran, embroiled in a standoff with the West over its nuclear ambitions, has said it could respond to any military attack by closing the strait at the southern end of the Gulf through which about 40 percent of the world's traded oil passes. The United States, whose naval Fifth Fleet is based in the Gulf state of Bahrain, has vowed to keep shipping lanes opened.

"At a time of war no ship can pass through the region of the Persian Gulf without being in the reach of the Revolutionary Guards' coast-to-sea missiles," Yahya Rahim-Safavi, a senior military adviser of Supreme Leader Ayatollah Ali Khamenei, was quoted by the Iran daily as saying.

Rahim-Safavi said earlier this week that Khamenei had put the elite Guards in charge of defending the Gulf against any attacks and that they would not hesitate to "confront foreign forces." The comments came amid persistent speculation about a possible U.S. or Israeli strike on Iran's nuclear facilities.

Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.

And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley - the venerable Wall Street institution and one of the last two US investment banks left standing - had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic. China? "Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "LET'S NOT LET THIS MAGNIFICENT COUNTRY GO DOWN!" IN FACT, IT REALLY DOES LOOK AS IF THE FOUNDATIONS OF US CAPITALISM HAVE SHATTERED.

"NOTHING WILL EVER BE LIKE IT WAS BEFORE," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going under." Many are drawing comparisons with the Great Depression, the national trauma that has been the benchmark for everything since. "I think it has the chance to be the worst period of time since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds that opinion, giving one story the title: "WORST CRISIS SINCE '30S, WITH NO END YET IN SIGHT."

Republican Party presidential candidate John McCain's explanation for the current crisis: "UNBRIDLED CORRUPTION AND GREED."

The collapse of Lehman Brothers - which itself looks set to cost 5,000 jobs in London alone - as well as the last-ditch bailout of AIG and the woes of HBOS shares dominated the front pages. The mood is bad, bad, bad out there," said one broker. "If Lehman can go down, and AIG can nearly fall apart - well, that makes everyone very nervous indeed."

With Merrill Lynch being taken over by Bank of America, the collapse of Lehman, and the string of consolidation across Europe, it inevitably has implications. "There may be fewer banks to deal with but there are also fewer banks to take the risks, which means liquidity can dry up," another broker says. "So we feel more than a little on edge."

So when will things improve? "I've given up on second guessing," concedes another broker. "IF AIG HAD GONE UNDER IT WOULD HAVE BEEN FINANCIAL ARMAGEDDON, but now it seems that things are okay. It's just an example of how fickle it all is. One more bit of bad news and it'll bring doom and gloom again."

Mr Brown said the government's main priority in the short-term was to ensure the stability of the financial system. But in the longer-term, he said there would be reforms of the financial system to prevent future problems.

He told the BBC: "I think we've got to look at where there has been irresponsible behaviour and I've said for some time that we need reforms in the system. I believe there's now an audience that agrees with me that we should do more. WE'VE GOT TO CLEAN UP THE FINANCIAL SYSTEM, we don't want these problems recurring in the future. I proposed a number of things to our international colleagues because this is global action that is needed to deal with a global problem, and in our own country we'll do whatever is necessary to make sure that people have confidence both in the system and we restore the prosperity of the country."

Banks in trouble will be forced to disclose their debts to the Financial Services Authority, the Bank of England and the Treasury under proposed new legislation. Vince Cable, the Lib Dem Treasury spokesman, has been pressing for banking reform and tougher controls on lending for years. He has urged the end of "lavish" City bonuses and predicted the era of "freewheeling" financial markets was coming to an end.

UPDATE – Ruthless City traders who profit from falling bank shares are facing a 'bloodbath' after they were banned in a massive crackdown by watchdogs. THE SHORT-SELLERS WHO HAVE BEEN BLAMED FOR THE EXTRAORDINARY FINANCIAL TURMOIL OF THE PAST FEW DAYS STAND TO LOSE HUNDREDS OF MILLIONS OF POUNDS.

The global credit system came close to total seizure yesterday. Key parts of the derivatives market shut down and a panic flight to safety depressed the yield on three-month US Treasury bills to almost zero for the first time since the Great Depression in 1934. The closely-watched TED-spread measuring stress in the interbanking lending market rocketed to 238 as the share prices of Morgan Stanley, Goldman Sachs, Citigroup, Wachovia, and Bank of America all went into a tailspin yesterday.

THE COLLAPSE IN INVESTOR CONFIDENCE is a harsh verdict on the judgment of the US Federal Reserve, which chose to ignore market pleas for a rate cut to halt what amounts to a modern-era run on the banking system. Almost none of the current Fed governors have market experience. Most are academic theorists. The Fed had hoped that a targeted $85bn (£47bn) bail-out for insurance giant AIG - on onerous terms - would be enough to stabilize the banks after the weekend failure of Lehman Brothers. Instead it set off a cardiac arrest at the heart of the credit system.

Bernard Connolly, global strategist at Banque AIG, said the Fed and the Treasury were doing too little, too late, to stave off disaster. Interest rates need to be cut immediately and dramatically, while Washington must prepare for a wholesale takeover of large parts of the lending system along the lines of the Scandinavian bank rescues in the early 1990s. "UNLESS THERE IS A VERY RAPID CHANGE OF MIND, DEPRESSION - WITH ALL ITS HORRORS AND CONSEQUENCES - WILL BE INEVITABLE. The judgment that letting Lehmans go would not create systemic risk depended, if it was ever going to be anything other than ludicrous, on very rapid action to shore up the financial system. Instead, Hank Paulson seems to be adding to the risk in the system," he said.

"We fear that a virtual nationalisation of the financial system will now be necessary," he said. America's Reserve Primary Fund suspended withdrawals after shareholders pulled out almost $40bn in two days on news of its heavy exposure to Lehmans' debt. The move came as the fallout from Lehmans' collapse spread worldwide. Japan's Nikkei wire said Japanese banks would suffer almost $2bn of losses on Lehmans' bond defaults.

RUSSIA SUSPENDED TRADING THE MOSCOW bourse after the Micex index crashed 24pc in two days. Officials promised $44bn to support the banking system. As Washington bails out one financial institution after another, investors have begun to doubt the long-term credit-worthiness of the US itself.

The cost of insuring against default on 10-year US Treasuries jumped to an all-time high of 30 basis points yesterday, as measured by the credit default swaps (CDS) on the derivatives markets. Germany is at 13, and France is 20. "THIS IS HISTORICALLY SIGNIFICANT BECAUSE WE HAVE NEVER SEEN ANYTHING LIKE IT BEFORE," Daniel Pfaender, sovereign credit strategist at Dresdner Kleinwort. "What we don't know yet is whether this a liquidity issue or whether it reflects the credibility of the US financial system." The Treasury's rescue of the mortgage giants Fannie Mae and Freddie Mac has added $5.3 trillion in liabilities to the US government. IT ALMOST DOUBLES THE NATIONAL DEBT (UNDER IMF DEFINITIONS), AT LEAST ON PAPER.

The Fed has now added a further $85bn in debt for AIG. While the sums are manageable so far, what worries investors is THE LIKELY AVALANCHE OF INSOLVENCIES YET TO COME. The Federal Deposit Insurance Corporation FDIC has already exhausted half its capital cleaning up after the collapse of IndyMac. It may need half a trillion dollars of fresh money to cope with the 120-odd lenders on its sick list. Professor Nouriel Roubini from New York University warns that several hundred banks will go under before this hurricane has exhausted its fury.

John Chambers, head of sovereign ratings at Standard & Poor's, said America's AAA grade is safe for now. The Fannie/Freddie bail-out is not comparable to ordinary state debt. It is backed by housing collateral, mostly based on prime mortgages. "In the worst case scenario, the losses from Fannie and Freddie will be 2.5pc of GDP. This is not to belittle the unprecedented actions of the last two weeks. For the US to lose its AAA we would have to see the sort of financial distress that occurred in the Nordic countries. It could get that bad. There's no God-given gift of a AAA rating. The US has to earn it like everyone else," he said.

Charles Dumas from Lombard Street Research said America's dependency on foreign money would carry a high price. "The ultimate test will be whether this seriously jeopardizes the reserve currency role of the US dollar. CHINA FINANCES THE US GOVERNMENT. So as long as the Chinese are willing to accept an annual loss of 15pc on their holdings of US bonds in real yuan terms, this can go on, but the decision lies in Beijing. What is clear is that it will take the US decades to pay this off," he said.

Hans Redeker, currency chief at BNP Paribas, says the US debt scare is vastly overblown. America's total government debt is 48pc of GDP on IMF measures, compared to 57pc for Germany, 94pc for Japan and 108pc for Italy."The debt levels are nothing compared to Europe, even after Fannie and Freddie. America still has great leeway," he said. "We think the next phase of this crisis is going to be a repatriation story as American investors bring their money back from frontier markets. The US broker dealers were 60 times leveraged and now they need to take assets back onto dollar balance sheets."

Albert Edwards, global strategist at Société Générale, said Washington's serial bail-outs are the inevitable result of the credit bubble of preceding years. "This was all baked in the cake long ago. WHAT WE HAVE SEEN SO FAR IS JUST A DRESS REHEARSAL FOR THE DEEP RECESSION THAT IS COMING. America is going to be losing 500,000 jobs a month. That is when we will see interest rates go to zero. The deficit will be covered with printed money as it was in Japan. The endgame will be helicopters full of cash dropped by Ben Bernanke," he said.

The takeover will lead to cost savings of in excess of £1bn, Lloyds added. Meanwhile the prime minister has said the government is "determined" to maintain the stability of the financial system and protect the UK's savers. Gordon Brown pledged to "do everything to protect depositors in Britain, who need to have confidence in the banking system". The takeover - news of which was broken by BBC business editor Robert Peston - values shares in HBOS at 232p each.

The deal comes as a crisis of confidence on global financial markets has wreaked havoc in recent days. Effectively the buy-out is a rescue deal as HBOS shares have plummeted in recent days amid concerns for its future. Earlier Chancellor Alistair Darling said the government would allow the HBOS-Lloyds TSB deal because financial stability "must trump" competition fears.

HBOS & LLOYDS TSB BRANDS

Halifax
Bank of Scotland
Birmingham Midshires
Intelligent Finance
Sainsbury's Finance
The Mortgage Business
St James's Place Bank
Colleys
Lloyds TSB
Cheltenham & Gloucester
Scottish Widows

"This is the right transaction for HBOS and its shareholders," said HBOS chairman Dennis Stevenson. "Against the backdrop of the very high levels of volatility our industry is experiencing, the combined group will be one of the strongest players in the UK financial services sector. In addition, the combined group will have excellent brands and a very powerful franchise," he added.

DAILY MAIL – UPDATE - The man who brought HBOS to the brink of collapse as chief executive is to keep his £2million-a-year job, despite leaving tens of thousands of staff facing redundancy, it has emerged. Andy Hornby, 41, will stay on after the take-over by Lloyds TSB which could see up to 1,000 branches closed in an attempt to make £1billion in annual savings.

BAROMETERS OF FINANCIAL STRESS HIT RECORD PEAKS ACROSS THE WORLD. Yields on short-term US Treasuries hit their lowest level since the London Blitz, while gold had its biggest one-day gain ever in dollar terms. Lending between banks, in effect, stopped. Speculation mounted that the Federal Reserve, which refused to cut rates on Tuesday, could be forced into an embarrassing U-turn or might further expand its market liquidity operations.

The $85bn emergency Fed loan for the troubled insurance group AIG, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a fresh wave of anxiety. One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value – or "broke the buck" – owing to losses on debt in Lehman Brothers, which filed for bankruptcy protection on Monday. This raised the risk that retail investors in other such funds could panic and pull out their money.

Andrew Brenner, co-head of structured products and emerging markets at MF Global, said: "IT FEELS LIKE NO ONE WANTS TO TAKE ANYONE'S CREDIT...IT FEELS LIKE WE ARE ON A PRECIPICE."

The Dow Jones industrial average lost about 450 points, giving it a shortfall of more than 800 so far this week. "PEOPLE ARE SCARED TO DEATH," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position? NO ONE'S GOING TO BE BELIEVING ANYBODY NOW because AIG said they were OK along with everybody else," Stone said.

He said the anxiety gripping the markets reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter. Over the past year, COMPANIES INCLUDING LEHMAN AND AIG HAVE SOUGHT TO REASSURE INVESTORS THAT THEY WEREN'T IN TROUBLE, but as market conditions have worsened the market appears distrustful of any assurances.

The two independent Wall Street investment banks left standing - Goldman Sachs Group Inc and Morgan Stanley - remain under scrutiny, as does Washington Mutual Inc, the country's largest thrift bank. Morgan Stanley revealed better-than-expected quarterly results late Tuesday and insisted that it is surviving the credit crisis that has ravaged many of its peers. "It's still uncertain ground we're treading. We just have to move on a daily basis," said Jack A. Ablin, chief investment officer at Harris Private Bank.

"PEOPLE ARE AFRAID OF THE UNKNOWN AND THEY DON'T KNOW WHAT'S ON THE BOOKS OF THESE COMPANIES," said Joe Saluzzi, co-head of equity trading at Themis Trading. "The first reaction in a situation like this is to sell." Saluzzi noted that surging gold prices and other measures of investors jitters indicate that anxiety is building.

The billionaire mayor spoke before an audience at Georgetown University, telling them it's not clear who is going to continue buying US debt as financial firms try to cope with a crisis of confidence on Wall Street. Before becoming mayor, Bloomberg made a fortune by launching a financial information company that bears his name, and he has more credibility than most politicians on economic matters.

Bloomberg said he was concerned that the credit crisis in the United States may scare off foreign investors that, until now, have been willing to buy debt that the US uses to maintain a deficit. "IT'S NOT CLEAR WHO'S GOING TO BE BUYING OUR DEBT," SAID BLOOMBERG. "IT MAY VERY WELL BE THAT THE NEXT WAVE IS GOING TO COME BACK AND BITE US."

"We have on both sides of the aisle, on both ends of Pennsylvania Avenue, thrown caution to the wind. We pay lip service to responsibility," he said, "The systemic problem is we've all gotten into a situation where we want it now, there's no pain... We keep saying we want to have it, we don't want to pay for it."

AS OF THIS MORNING, THE NATIONAL DEBT STANDS AT OVER $9.634 TRILLION. That's trillion - with a "T." And that's nearly $4 trillion more than it was on the day President Bush took office. This year alone, it's costing taxpayers more than $230 billion just to pay the interest on the national debt.

And it's getting bigger every day thanks to the relentless rush of the government spending money it has to borrow. The federal deficit for the fiscal year ending September 30 is expected in the range of $400 billion - close to the all-time high. IN FACT, THE GOVERNMENT DOESN'T HAVE THE $85 BILLION NEEDED TO BAILOUT INSURANCE GIANT AMERICAN INTERNATIONAL GROUP.

The treasury department announced this morning it would auction new debt to raise funds for the Federal Reserve's rescue plan for AIG. BUT WHERE DOES THE FEDERAL GOVERNMENT GO WHEN IT NEEDS A BAILOUT? TAXPAYERS NEED ONLY LOOK IN THE MIRROR.

Gold for December delivery rose as much as $90.40, or 11.6 percent, to $870.90 an ounce in after-hours trading on the New York Mercantile Exchange after jumping $70 to settle at $850.50 in the regular session. That was the biggest one-day price jump ever; gold's previous single-day record was a $64 gain on January 29, 1980. IN PERCENTAGE TERMS, IT WAS GOLD'S LARGEST ONE-DAY ADVANCE SINCE 1999.

The huge rally came after the government moved overnight to rescue troubled insurer American International Group Inc with an $85 million bailout loan. The Federal Reserve stepped in after AIG, teetering on collapse from losses tied to the subprime crisis and the credit crisis, failed to find adequate capital in the private sector.

The emergency measure came a day after Lehman Brothers Holdings Inc, a 158-year-old investment bank, filed for bankruptcy after failing to find a buyer. Fearing more tightening of credit markets, investors reacted swiftly and began dumping stocks and socking money into gold, silver and other safe-haven commodities. GOLD IS ESPECIALLY ATTRACTIVE DURING TIMES OF CRISIS BECAUSE THE METAL IS KNOWN FOR HOLDING ITS VALUE.

Tuesday's surprise $85 billion rescue of insurer American International Group by the U.S. Federal Reserve did little to calm investors' nerves, and U.S. stocks dropped as much as 3.6 percent. The Fed move capped a week of bailouts, a bankruptcy on Wall Street, and central banks around the world flooding the financial system with money to prevent it from seizing up. THE RESULT: A SEISMIC SHIFT IN THE FINANCIAL INDUSTRY, WITH SOME OF WALL STREET'S BIGGEST NAMES DISAPPEARING OVERNIGHT.

"THE FEAR IS WHO IS NEXT," said John O'Brien, senior vice president at MKM Partners LLC in Cleveland. "It almost feels like people scour the books and say who is the next likely target that we can put a short on. And that spreads continuous fear."

SHARES OF MORGAN STANLEY AND LARGER RIVAL GOLDMAN FELL AS MUCH AS 43 PERCENT AND 27 PERCENT, RESPECTIVELY, even after both reported better-than-expected quarterly earnings on Tuesday. "I'm assuming that Goldman Sachs and Morgan Stanley are lining up dancing partners. They don't want to be ... this week's victim," said William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts.