* Global stock mkts hammered after Lehman files for Chpt 11
* Investors flee risk; high-grade debt, gold, yen in demand
* Fed, ECB, BoE turn on liquidity taps
* Focus turns to Fed policy decision on Tuesday
(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, turning up the heat on financial market stress and
prompting a sharp exit from risk across assets.
The dollar also lost traction, with its recent rally
abruptly stalled, setting the yen on track for its best daily
performance since 2002.
Reflecting a growing sense of panic, futures markets jumped
to price in a more than 80 percent chance of a Federal Reserve
interest rate cut to 1.75 percent at its meeting on Tuesday.
U.S. stock market futures <SPc2> <DJc2> <NDc2> were down
between 2.8 and 3.5 percent, pointing to a sharply lower open,
while European stocks shed 3.7 percent. Among them, Lehman
Brothers shares in Frankfurt tanked 80 percent <LHMH.F>.
Adding to the mix of ingredients feeding the latest
financial storm, American International Group Inc <AIG.N>, one
of the world's largest insurers, was reported to have asked the
U.S. Federal Reserve for a $40 billion bridge loan, and the Fed
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 almost 4 percent at 1,116.00 points.
Banks topped the losers list with BNP Paribas <BNPP.PA>,
Credit Agricole <CAGR.PA>, Dexia <DEXI.BR>, Fortis <FOR.BR> and
Societe Generale <SOGN.PA> down between 6 and 9 percent.
"This is a perfect storm in a perfect storm. It's a return
to pure capitalism, the survival of the fittest -- the
government can't and won't bail everybody out," said Justin
Urquhart Stewart, investment director at 7 Investment
Management.
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.
TIDE TURNS 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, setting the Japanese currency on track for its biggest
daily gain since early 2002.
Yen gains were later trimmed after China cut its benchmark
interest rates and reserve requirements. [].
Classic financial market safe-haven gold jumped 2 percent
<XAU=> while U.S. Treasury yields, which move in the opposite
direction to prices, fell to multi-month lows.
"The next question is are we going to continue seeing a U.S.
centric financial sector meltdown or are we going to see
something broader, which may highlight additional uncertainty.
Obviously that might act as a catalyst for preventing further
dollar falls," said Jeremy Stretch, strategist at Rabobank.
Growing unease pushed the cost of borrowing overnight dollar
funds up. They were indicated at 3 percent, a full percentage
point above the Fed's federal funds overnight target rate.
The price of insurance against default on debt soared, with
the investment-grade Markit iTraxx Europe index <ITEEU5Y=GF> at
128.5 basis points, 25.5 basis points wider than late on Friday.
The Swiss franc and yen, associated with stability in times
of stress, strengthened, especially against the dollar.
The dollar fell roughly 3 percent to 104.55 yen <JPY=> and
was down 1.4 percent at 1.1148 Swiss francs <CHF=>. The euro
<EUR=> rose 0.1 percent to $1.4240 -- with gains capped by
ongoing concerns about the euro area economy.
"Increasingly markets may begin to look at who else is
exposed to Lehman and that won't be confined to the U.S. ...
Also the news flow in Europe hasn't been great either," says
Daragh Maher, deputy head of global FX strategy at Calyon.
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.
U.S. Treasury yields fell sharply. The yield on the
policy-sensitive two-year Treasury note <US2YT=RR> briefly hit a
five-month low below 1.8 percent. The 10-year yield <US10YT=RR>
was also at the lowest since April, at 3.465 percent.
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 below $99 a barrel. []
Oil <CLc1> dropped 4 percent to $96.90 a barrel, its lowest
mid February. Gold rose 2 percent, last trading at $772.50 an
ounce <XAU=>.
(Additional reporting by Kevin Plumberg in Hong Kong and Ian
Chua in London, editing by Mike Peacock)
