Asian Stocks, Dollar Drop, Japanese Bonds Gain, on Lehman, AIG

By Chua Kong Ho and Shani Raja
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Sept. 16 (Bloomberg) -- Asian stocks plunged, the dollar fell and Japanese bonds rose as debt-rating downgrades threatened American International Group Inc.'s efforts to survive a credit-market slump.

Mitsubishi UFJ Financial Group Inc. and Aozora Bank Ltd. led the steepest decline by Japan's banks since 1987's ``Black Monday'' on concern the bankruptcy of Lehman Brothers Holdings Inc. will add to loan losses. AIG plunged 61 percent yesterday in New York, part of the biggest tumble in U.S. stocks since the September 2001 terrorist attacks. Oil fell to a seven-month low and the cost to protect corporate bonds from default surged.

``You're going to get a massive flight to safety,'' said Nader Naeimi, a Sydney-based senior investment strategist at AMP Capital Investors, which manages about $108 billion. ``Banking stocks are guilty by association. There's no place to hide.''

The MSCI Asia Pacific Index declined 4.2 percent to 110.79 at 3:01 p.m. in Tokyo, the biggest decline since Jan. 22. Benchmark indexes in Japan, Hong Kong, South Korea, Taiwan and the Philippines retreated more than 4 percent. The dollar fell 0.8 percent to 103.82, the lowest since July 16. It was little changed at $1.4244 per euro.

South Korea's Kospi Index tumbled 6.1 percent. The won slumped 4.6 percent to 1,160 per dollar, leading declines in emerging-market currencies. Vice Finance Minister Kim Dong Soo said the government may provide more funds to help stabilize financial markets.

Policy Makers Act

Taiwan's government instructed its four major funds and state-owned banks to buy shares, the Bank of Japan added 2.5 trillion yen ($24 billion) to the financial system and China yesterday cut interest rates for the first time in six years.

Markets in Japan, China, Hong Kong and South Korea were shut for public holidays yesterday, meaning investors had their first opportunity to react to Lehman's bankruptcy today. At least seven Japanese banks lent the company a total of $1.62 billion, according to the Chapter 11 filing by Lehman.

Mitsubishi UFJ fell 7.7 percent to 792 yen, while Aozora Bank dropped 16 percent to 171 yen. The 84-stock Topix Banks Index fell as much as 10 percent, the most since October 20, 1987, the day after the ``Black Monday'' global stock market crash. U.S. stocks tumbled yesterday, pushing the Standard & Poor's 500 Index down 4.7 percent. S&P 500 futures lost 0.4 percent today.

Lehman Exposure

In South Korea, Kookmin Bank, the nation's largest, dropped 8 percent to 55,300 won, while Woori Finance Holdings Co., which controls the nation's second-biggest bank, fell 14 percent to 13,050 won. South Korea's Financial Services Commission said yesterday the country's firms have invested about $720 million in loans and securities linked to Lehman.

Oil fell 3.8 percent to $92.08 on the New York Mercantile Exchange, sending energy producers lower. Inpex Holdings Inc., Japan's largest oil explorer, plunged 11 percent to 894,000 yen. Woodside Petroleum Ltd., Australia's second-biggest oil and gas producer, slid 3.2 percent to A$50.36.

AIG, the biggest U.S. insurer by assets, may be propped up by $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co., according to people familiar with the situation. S&P cut the insurer's long-term counterparty rating to A- from AA-.

`Brave Souls'

``Any brave souls who step up out there and buy today may well be seen as heroes in two or three years time,'' said Prasad Patkar, who helps manage the equivalent of about $1.8 billion at Platypus Asset Management in Sydney. ``There's an old saying which says `sell when the victory bugles are sounding, and buy when the canons are firing.' Well, the canons are firing.''

Japanese five-year government bond yields fell 7.5 basis points to 1.04 percent. Yields on U.S. two-year notes dropped 1 basis point, or 0.01 percentage point, to 1.72 percent, according to bond broker BGCantor Market Data. Futures contracts on the Chicago Board of Trade indicate the odds of a quarter- point Fed rate cut today surged to 68 percent from zero percent a week ago.

The cost to protect Japanese company debt from default increased the most since 2004, credit default swaps show. The Markit iTraxx Japan index rose 45 basis points to 175 compared with the end of trading on Sept. 12, Morgan Stanley data shows.

Credit-default swaps protect bonds against default and traders use them to speculate on changes in credit quality. They pay the buyer face value in exchange for the underlying securities should a company fail to adhere to debt agreements.

``The financial crisis continues to look worse and not better,'' said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon, who helps invest $2.8 billion. ``The Fed will cut to try to calm the financial waters. I see yields falling.''

The Australian and New Zealand dollars dropped to the weakest in more than two years against the yen as investors lost appetite for higher-yielding assets. The Australian dollar fell 2.8 percent to 82.51 yen, from 84.91 yen in late Asian trading. New Zealand's currency declined to 67.99 yen from 69.21 yen.

``It's the end of the world as we know it, at least that is how it feels,'' said Greg Gibbs, a currency strategist at ABN Amro Holdings NV in Sydney. ``The main beneficiary has been the yen.''

To contact the reporter for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.