* Global stocks hammered after Lehman files for Chapter 11
* Investors flee risk; high-grade debt, gold, yen in demand
* Fed, ECB, BoE turn on liquidity taps
* Focus turns to Fed policy
(Updates throughout, adds quotes, update prices)
By Veronica Brown
LONDON, Sept 15 (Reuters) - Global share prices sank on
Monday after Lehman Brothers <LEH.N> filed for bankruptcy
protection, prompting a sharp exit from risk across world
financial markets.
The dollar lost traction against the yen, setting the
Japanese unit on track for its best daily performance in nearly
2 years, but rallied against other major currencies as
deleveraging kicked in.
Reflecting a growing sense of panic, futures markets jumped
to price in a near 80-percent chance of a quarter-point cut in
Federal Reserve interest rates at its meeting on Tuesday.
U.S. stock market futures <SPc2> <DJc2> <NDc2> fell by
between 2.6 and 3.7 percent, pointing to a sharply lower open,
while European stocks shed more than 4 percent. Among them,
Lehman Brothers shares in Frankfurt tanked 90 percent <LHMH.F>.
Adding to worries was a report that American International
Group Inc <AIG.N>, one of the world's largest insurers, had
asked the Fed for a $40 billion bridge loan, while the Fed
itself said it had expanded its liquidity provision facilities.
European stocks followed their Asian counterparts down after
share prices in Australia, Singapore and Taiwan all dropped 3 to
4 percent, while Indian stocks <> fell 5 percent.
The FTSEurofirst 300 <> index of top European shares
was down 4.5 percent at 1,109.85 points.
Banking stocks led the fallers across Europe, with UBS
<UBSN.VX>, HSBC <HSBA.L>, Royal Bank of Scotland <RBS.L>,
Societe Generale <SOGN.PA>, BNP Paribas <BNPP.PA> and Credit
Agricole <CAGR.PA> trading 7-22 percent lower.
"This is a perfect storm in a perfect storm," said Justin
Urquhart Stewart, investment director at 7 Investment
Management. "It's a return to pure capitalism, the survival of
the fittest -- government can't and won't bail everybody out."
Lehman filed for bankruptcy protection after trying to
finance too many risky assets with too little capital, making it
the largest and highest-profile casualty of the global credit
crunch. ((For all Lehman stories see [].))
Also in the financial sector, Bank of America Corp <BAC.N>
agreed to buy Merrill Lynch <MER.N> in an all-stock transaction
that Bank of America said is worth $50 billion.
TIDAL SWELL AGAINST RISK
Turmoil on Wall Street, just a week after the U.S.
government bailed out mortgage giants Fannie Mae and Freddie
Mac, sparked a wave of risk aversion through all asset classes.
The dollar tumbled more than 3 percent at one point versus
the yen. Yen gains were later trimmed after China cut its
benchmark interest rates and reserve requirements. [].
The U.S. currency rallied elsewhere, gaining more than 2
percent versus the high-yielding Australian <AUD=> and New
Zealand <NZD=> dollars. It rose to the euro <EUR=> as investors
unwound riskier currency plays and repatriated dollars.
"There is a high likelihood that the distress in financial
markets and wider evidence of slowing global growth are
prompting investors, particularly U.S. investors to repatriate
those flows back into the U.S.," said Lee Hardman, currency
economist at Bank of Tokyo Mitsubishi-UFJ.
A classic safe-haven, gold, initially jumped 2 percent
<XAU=> before paring gains, while U.S. Treasury yields, which
fall as prices rise, hit multi-month lows.
Growing unease pushed the cost of borrowing overnight dollar
funds up.
The bank-to-bank premium paid for overnight dollar funds was
fixed at 3.10625 percent, according to the British Bankers
Association's latest daily fixing, up nearly a full percentage
point at its highest since late June.
The price of insurance against default on debt soared, with
the investment-grade Markit iTraxx Europe index <ITEEU5Y=GF> at
124.5 basis points, 21.5 basis points wider than late on Friday.
The Swiss franc and yen, associated with stability in times
of stress, strengthened. The dollar was last down roughly 2
percent to 105.87 yen <JPY=> and was down 0.6 percent at 1.1237
Swiss francs <CHF=>.
But the euro fell 0.6 pecent to stand roughly 3 cents down
from session highs seen earlier <EUR=>, while sterling also shed
0.6 percent <GBP=>.
FED, ECB, BOE OFFER LIQUIDITY
The Fed said it would begin accepting equities as collateral
for emergency loans for the first time -- a step likely to help
surviving financial institutions find cash but which may not do
much to boost global confidence in the U.S. financial system.
The European Central Bank and Bank of England both announced
fine-tuning operations, signalling they were prepared to open
the funding taps to try and ease money market tension.
In addition, 10 of the world's biggest banks agreed to
establish a $70 billion borrowing facility to bolster liquidity.
While the U.S. financial system loomed large in investors'
minds, initial reports that Hurricane Ike had not severely
damaged infrastructure in Texas knocked benchmark oil prices
fall to a six-month low. [].
(Additional reporting by Ian Chua in London, editing by Mike
Peacock)
