* Investors flee for safety after Lehman buyout talks fail
* High-grade debt, gold, yen in demand on bank industry
storm
* Focus turns to Fed policy decision on Tuesday
(Repeats to additional subscribers with no change to text)
By Kevin Plumberg
HONG KONG, Sept 15 (Reuters) - The U.S. dollar tumbled and
Treasury debt and gold prices jumped on Monday after talks to
sell Lehman Brothers faltered, leading to grave uncertainties
about other banks and shaken confidence in the financial
system.
Stock markets in Australia, Singapore and Taiwan dropped
between 1 to 2 percent as investors excised any trace of risk
in their portfolios, loading up on investment-grade debt as
consolidation in the financial sector sent shockwaves through
almost all asset classes.
After a tumultuous weekend in which Britain's Barclays Plc
<BARC.L> pulled out of the bidding for Lehman <LEH.N>, putting
the bank on a path to bankruptcy, an extraordinary Sunday
trading session in the $455 trillion derivatives market opened
in the United States so dealers could limit the damage from the
fallen giant.
Most major Asian equity markets were closed for public
holidays but whatever traders that were around followed a
simple dictum: seek safety first and ask questions later.
The Swiss franc and yen, currencies associated with
stability in times of duress, strengthened, especially against
the dollar, which reeled as some in the market speculated the
Federal Reserve may have to cut interest rates on Tuesday when
it meets to shore up the economy from financial fallout.
Investors may have to adjust their views on the financial
sector since the U.S. government refused to back a Lehman deal
the way that it did with JPMorgan Chase's purchase of Bear
Stearns six months ago. Events seemed to show the private
sector will have to sort itself out.
Bank of America <BAC.N> is in advanced talks to acquire
Merrill Lynch & Co Inc <MER.N>, people briefed on the matter
told Reuters.
"Presumably the most important reason to teach Wall Street
this lesson is that they will change their behavior, and not
take the decisions that are reliant on a public bailout," said
Alan Ruskin, chief international strategist with RBS Greenwich
in Greenwich, Connecticut. "For many, but not all, this is an
impossible lesson to learn in the middle of the worst financial
storm since the Great Depression," he said in a note.
The dollar dropped 1.5 percent against the yen at 106.29
yen <JPY=> and was off 1 percent against the Swiss franc to
1.1189 francs <CHF=>.
The euro rose by a cent against the dollar in thin trade to
$1.4321, up 0.7 percent from late Friday in New York.
In the spot market, gold rose 2.6 percent to $783.15 an
ounce <XAU=>.
WHAT WILL THE FED DO?
U.S. Treasury yields fell sharply in early Asian trade on
Monday and Eurodollars <O#ED:> surged as concerns about the
stability of the U.S. financial system sparked talk of
emergency liquidity measures by the Federal Reserve or even a
cut in interest rates.
The Fed is expected to accept as collateral a wider array
of securities, including equities, the Wall Street Journal
reported. [].
The yield on the policy-sensitive two-year Treasury note
<US2YT=RR> hit a five-month low of 1.96 percent, with the price
up 15/32. The 10-year yield <US10YT=RR> was also at the lowest
since April, at 3.57 percent compared with 3.72 percent late on
Friday.
"It appears that Lehman will file for bankruptcy and the
risk of an immediate tsunami is related to the unwind of
derivative and swap-related positions worldwide in the dealer,
hedge fund, and buyside universe," Bill Gross, the chief
investment officer of Pacific Investment Management Co (Pimco),
told Reuters. Pimco oversees more than $812 billion in assets.
Australia's benchmark S&P/ASX 200 index <> fell 1.4
percent, weighed by shares of the country's top banks such as
Commonwealth Bank of Australia <CBA.AX> and Macquarie Group Ltd
<MQG.AX>.
Taiwan's TAIEX <>, the only stock market open in north
Asia, dropped 2.5 percent to the lowest since November 2005.
Singapore's Straits Times index <.FTSTI> was at the lowest
since October 2006, down 1.6 percent.
European and U.S. equity markets would very likely open
lower. U.S. stock index futures pared pointed to a steep drop
when trading begins on Monday, with S&P 500 futures <SPc2> down
38 points, or 3.05 percent.
While the fate of the U.S. financial system loomed in
investors' minds around the world, initial reports that the
passing of Hurricane Ike through country's energy production
centre had not severely damaged infrastructure in Texas saw
benchmark oil prices fall to a six-month low below $99 a
barrel. []
"The oil market is selling off because the early
indications show Ike didn't do as much damage as feared," said
Chris Jarvis, senior analyst at Caprock Risk Management. "That
said, this sell-off could prove to be a bit premature, since it
could be a while before things get back to normal."
Oil <CLc1> fell $1.58 to $99.60 a barrel after falling as
low as $98.46 -- the lowest since February 26 -- adding to a
steady downward trend in prices since mid-July's peak of over
$147 a barrel as evidence mounts that high energy costs and a
weakening economy are cutting into fuel consumption.
(Additional reporting by Nick Edwards in NEW YORK; Editing by
Lincoln Feast)
