* 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
(Updates prices, adds quote, details, U.S. and European
futures)
By Kevin Plumberg
HONG KONG, Sept 15 (Reuters) - Stocks and the U.S. dollar
tumbled on Monday as Lehman Brothers was expected to file for
bankruptcy, leading to grave uncertainties about other banks
and shaken confidence in the financial system, and sending
safe-haven Treasury debt and gold prices soaring.
U.S. stock market futures <SPc2> <DJc2> <NDc2> were down
more than 3 percent, pointing to sharply lower open, while
major European markets were set for falls of between 2 and 3.2
percent, according to one financial spread-betting firm.
The dollar plunged 2 percent against the yen, on track for
its biggest daily fall in more than six years, as U.S.
investment bank Lehman Brothers <LEH.N> looked set on a path to
bankruptcy in a massive blow to investors' willingness to take
risks. []
While a lack of confidence was sucking down Lehman, a lack
of short-term funding was hurting one of the world's largest
insurers American International Group Inc <AIG.N>. The firm was
asking the Federal Reserve for a bridge loan of $40 billion,
according to the New York Times, an unprecedented move that
further battered the dollar and knocked down 2-year U.S.
government debt yields to a five-month low.
Stock markets in Australia, Singapore and Taiwan all
dropped 3 to 4 percent as investors tried to slice off 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.
Holidays in most major Asian markets kept volume thin
though price action belied a desire to seek safety first and
ask questions later.
"The exact ramifications of the liquidation process and the
unwinding of positions pertaining to the Lehman situation
remain unclear. Hence, over the next 48 hours at least,
financial markets are likely to be volatile and tense," said
economists with United Overseas Bank in Singapore in a note.
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 to
shore up the economy from financial fallout.
The U.S. dollar dropped 2.4 percent against the yen at
105.29 yen <JPY=>, on track for the largest daily decline since
March 2002. The dollar was off 2 percent against the Swiss
franc to 1.1075 francs <CHF=>.
The euro rose by more than a cent against the dollar to
$1.4460, up 1.6 percent from late Friday in New York.
In the spot market, gold rose 2.7 percent to $783.95 an
ounce <XAU=>.
FED SUPPLIES LIQUIDITY, NOT CONFIDENCE
The Fed on Monday said it would begin accepting equities as
collateral for emergency loans for the first time and would as
it tried to ease the spiralling crisis.
The steps would likely help surviving financial
institutions to find cash but may not do much to boost global
confidence in the U.S. financial system.
"The mere fact that they are forced to do this and they may
still yet do some more indicates the breadth and depth of the
trouble that the system is in," said V. Anantha Nageswaran,
head of investment research, Asia-Pacific with Bank Julius Baer
in Singapore.
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 after it meets on Tuesday.
The yield on the policy-sensitive two-year Treasury note
<US2YT=RR> hit a five-month low of 1.96 percent. 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.
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.
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 4.2 percent to the lowest since November 2005.
Singapore's Straits Times index <.FTSTI> was at the lowest
since October 2006, down 3 percent.
"The financial sector in the region is very volatile now
and we don't expect investors' confidence to recover quickly in
just a few days or one week," said Alex Huang, a vice president
at Taiwan's Mega International Securities.
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. []
Oil <CLc1> fell $2.06 to $99.12 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 and Baker
Li in TAIPEI; Editing by Lincoln Feast)
