Lehman Brothers to file Bankruptcy - Markets Crash

Global equities took a beating on Monday as the US financial market crisis worsened with Lehman Brothers Holdings Inc set to file bankruptcy.

Taiwan's Taiex plummeted 4.09 per cent, Australia's ASX fell 1.76 per cent, Singapore's Straits Times declined 3.11 per cent and Philippines PSEi dropped 4.16 per cent. The BSE Sensex plunged 4.66 per cent below 14000 and NSE's Nifty tumbled 4.85 per cent.

Lehman has been driven to file for Chapter 11 following failure of talks between prospective buyers and the US government declining to fund a takeover of the ailing investment Bank. Barclays Plc was the first to pull out for want of guarantees from the government and Wall Street firms against losses on Lehman's assets. Bank of America Corp. withdrew later, opting instead to acquire Merrill Lynch & Co. for $50 billion.

Adding fuel to fire, American International Group Inc plans to approach the Federal Reserve for help, even as it looks to sell some of its assets and raise more capital.

The US mortgage market is worth about $12 trillion and consumer credit is $2.59 trillion. So far, the losses suffered by securities firms are only 3.4 per cent of the consumer credit and mortagage credit available.

Freddie Mac and Fannie Mae, which were bailed out by the US government, both control nearly half of the $12 trillion mortgage market. The failure of these housing credit giants triggered default swaps to the tune of $1.6 trillion.

What isn't known is how all of this credit was leveraged. By conservative estimates, if this credit was leveraged five times, then a $1 trillion credit loss turns into a $5 trillion liquidity loss. A $2 trillion loss becomes a $10 trillion liquidity loss, which is only $3 trillion less of the US GDP.

The losses will increase as more people miss their mortgage payments. Credit card debt will also rise as people who just lost their jobs default.

"Given the likelihood of more credit losses, it will choke global liquidity. This crisis will slow the global economy without exception. Sectors related to exports such as IT and auto will feel the heat. The next major effect will be on real estate as funding for the same is through PE money.

The sector is already starved for funds. FIIs may not have funds to divert to Indian markets. Rupee will depreciate further, which in turn will make imports costlier. Overall, a total muddle," said V Theegala, analyst at large brokerage.

BSE IT index plunged 6.71 per cent, Auto index declined 2.52 per cent and Realty slumped 9 per cent.

Said Ranjan Sadhu, fund manager at Raxson Global, "Financials (stocks) will continue to be slammed, commodities won't have the same 'fire' we saw over the past few years, and debt-heavy corporations will find it harder to rollover their bonds."

BSE Bankex dropped 5.24 per cent.

"Gold and silver don't do well in deflationary environment. We expect them to under perform over the next twelve months," Sadhu added. Gold in international market was trading at $781 per ounce.

- Economic times