Global Stocks, U.S. Futures, Dollar Tumble on Lehman Bankruptcy

By Chua Kong Ho and Shani Raja
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Sept. 15 (Bloomberg) -- Stocks in Europe and Asia tumbled, while U.S. futures and the dollar slumped as credit market turmoil pushed Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch & Co. to accept a takeover from Bank of America Corp.

UBS AG, the European bank hardest hit by subprime-related losses, sank 7.2 percent, and Macquarie Group Ltd., Australia's biggest investment bank, slumped 10 percent as the New York Times reported American International Group Inc. is seeking a $40 billion bridge loan from the Federal Reserve. Stock indexes fell more than 3 percent in France, Spain, Taiwan, the Philippines and India. Standard & Poor's 500 Index futures expiring in December retreated 2.9 percent to 1,220.20.

The dollar declined against the yen, while Treasuries and gold rose, as investors sought safer assets. The cost to protect corporate bonds from default surged on concern the tumult on Wall Street will tip the global economy into a recession.

``It's mayhem,'' said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management, which holds about $128 billion of assets. ``If you thought the U.S. economy was slowing, that fear has been amplified, and that has implications for overall global economic activity.''

Europe's Dow Jones Stoxx 600 Index declined 2.7 percent as of 8:30 a.m. in London, while the MSCI Asia Pacific excluding Japan Index lost 1.5 percent. Stock markets in Japan, South Korea, Hong Kong and China are closed for holidays, tempering losses for the Asian gauge.

Centro Properties Group, the shopping mall owner facing a Sept. 30 deadline to repay some of its debt, plunged 31 percent to 7.2 Australian cents after a planned U.S. asset sale fell through. Indiabulls Financial Services Ltd., an Indian lender backed by billionaire Lakshmi Mittal, tumbled 12 percent.

Global Rout

The MSCI World Index has slumped 20 percent this year as the worst U.S. housing recession since the Great Depression caused the subprime debt market to collapse, widening credit spreads and weighing on global economic growth.

To help Wall Street brace for Lehman's bankruptcy, the Federal Reserve widened the collateral it accepts for emergency loans to securities firms. A group of 10 banks that includes JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc. separately formed a $70 billion fund to ensure market liquidity.

Lehman, once the fourth-largest U.S. investment bank, filed for bankruptcy after Barclays Plc and Bank of America abandoned talks to buy the crippled firm. Bank of America agreed to acquire Merrill Lynch & Co., the world's biggest brokerage firm, for about $50 billion.

`Cathartic Sell-Off'

``We need that final cathartic sell-off in the markets to say here's the bottom, it held, that's it, and this is the kind of event that could trigger it,'' said Peter Sorrentino, who helps manage $16.5 billion at Huntington Asset Management in Cincinnati.

UBS lost 7.2 percent to 21.82 francs. Societe Generale SA, France's third-largest bank by assets, sank 5.8 percent to 61.26 euros.

Macquarie declined 10 percent to A$39.46, the most since Jan. 22. Babcock & Brown Ltd., an Australian infrastructure manager, tumbled 15 percent to A$1.625. Shin Kong Financial Holding Co., the owner of Taiwan's third-largest life insurer, tumbled 6.9 percent to NT$14.80. Indiabulls slumped 12 percent to 199 rupees.

The U.S. dollar fell 1.9 percent to 105.93 yen as investors reduced so-called carry trades, where funds are borrowed in a country with low interest rates and used to buy assets where returns are higher, earning the spread between the two. India's rupee slumped to a two-year low as investors dump riskier assets, including emerging-market securities.

Treasuries surged, sending two-year notes up the most since January. The yield on two-year notes dropped 33 basis points, or 0.33 percentage point, to 1.88 percent as of 11:06 a.m. in Singapore, according to bond broker BGCantor Market Data.

Stagnation?


``Trading started with a bang,'' said Andrew Brenner, co- head of structured products in New York at MF Global Ltd., the world's largest broker of exchange-traded futures and options contracts. ``Banks are no longer lending. All this is going to get people talking about a Fed ease.''

Traders see a 12 percent chance the Fed will cut its benchmark lending rate to 1.75 percent from 2 percent on Sept. 16, according to Fed funds futures. That's up from nil a week ago.

The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.

``Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,'' said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. ``Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.''

Default Swaps

Credit-default swaps in Australia and Asia outside Japan rose by the most in at least five months, data compiled by Bloomberg show.

Lihir Gold Ltd. surged the most in nine months in Sydney, jumping 15 percent to A$2.09. Newcrest Mining Ltd., Australia's largest gold producer, added 7.7 percent to A$21.01. Gold for immediate delivery rose as much as 2.6 percent to $785.70 an ounce today.

``The global credit crisis has permeated through all markets,'' said Jason Teh, who helps manage the equivalent of $5.7 billion at Investors Mutual Ltd. in Sydney. ``The real economy will feel the effects of this because it takes time for the banking system to restore itself.''

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