Forget the staggering American commercial and investment banks like Citigroup and Lehman Brothers, the next big problem for financial stocks is in London and it’s intimately connected to the country’s plunging property market.

It’s been there for months, ever since Northern Rock had to be rescued by the British Government last September, just after the credit crunch erupted, but it has returned to Britain in recent weeks as bad news and figures about property have poured forth, almost daily.

There’s a chance the problem could spill over into Australia. HBOS faces the prospect of its $US8 billion rights issue failing, which could see it forced to sell Bankwest, and the problems at Babcock & Brown could see it unable to lead a multi-billion dollar deal with another UK major, Royal Bank of Scotland, for a train leasing business.

Consider these developments from just this week.

Barratt Developments, one of Britain’s biggest homebuilders, is a basket case. It’s tottering on the edge of the abyss after its shares lost more than 50% of their value this week; they’re now down 94% from their highs 13 months ago in May 2007. As the Financial Times said so succinctly yesterday: “Welcome to the 90% club”.

Meanwhile, rival Taylor Wimpey is another to have found the footings under its share price non-existent, weak and crumbling. They shed 20% in value yesterday and are down 74% from their all-time highs a year ago. Analysts at Merrill Lynch, Goldman Sachs and Dresdner Kleinwort have slashed their estimates for the sector, even though Barratt’s issued a statement saying it still expected to meet forecast earnings targets. London media reports say Dresdner Kleinwort made its views on Barratt known in a note titled: “Don’t buy [at any price].”

The sector has lost billions of dollars in value since the beginning of the year. However, Barratt has been the hardest hit: in May of last year it completed its $A4.5 billion takeover of rival Wilson Bowden, but yesterday it had a value of just a tick under $A490 million: it still has around $A3.4 billion in debt (sounds like a combination of Centro, Allco and MFS).

HBOS is looking to raise $US4 billion in new capital and its shares yesterday fell below the issue price on the London Stock Exchange and remained there at the close: a development that could see the issue fail and the underwriters forced to pay for shortfall.

HBOS was forced to issue the second trading update in a month when the shares fell below the 275p issue price and stayed there. The update didn’t help and the shares closed under the issue price.

The drop in the share price was a shock as just 24 hours earlier the giant Royal Bank of Scotland managed to raise 95% of its $US12 billion from shareholders and declared the issue a success: but it still has to raise $US8-$US12 billion from the sale of insurance and its Angel train leasing assets. The train leasing deal is looking shaky as the rumoured buyer, Babcock & Brown faces a crisis of confidence in Australia where the share price has plunged this week.

The Bradford & Bingley mortgage bank, the UK’s 8th biggest bank, was “rescued” almost two weeks ago by US buyout group, TPG, but the London Times this week revealed that there is more to the B&B situation. The country’s leading regulator, the Financial Services Authority, had pressured some of its rivals to fund part of the issue.

The Financial Services Authority took the unprecedented step of pressuring Britain’s five biggest banks into supporting the revised rescue capital-raising at Bradford & Bingley last week, The Times has learnt. HSBC, Royal Bank of Scotland, Barclays, Lloyds TSB and HBOS are understood to have each agreed to sub-underwrite £20 million-worth of the reworked £258 million rights issue.

The banks agreed to step in when Citigroup and UBS, the lead underwriters, could find no one to whom they could lay off some of the risk. Underwriters typically pass on some of the risk to institutions known as sub-underwriters. The FSA, worried that too much Bradford & Bingley stock would be left with UBS and Citigroup, which are already under pressure, decided in the middle of last week to ask the big five to take some of the risk.

Earlier, it had asked them for a Bradford & Bingley back-up rescue plan in case the revised restructuring hammered together nine days ago fell apart.