Jitters Spread As Us Financial Giant Collapses

The Age

Tuesday September 16, 2008

By Vanessa O'Shaughnessy and Eric Johnston with Tim Colebatch, Peter Martin

THE collapse of one of Wall Street's oldest investment banks, Lehman Brothers, has triggered a fresh wave of selling across global markets, and reinforced fears that the world is heading into recession.

European markets went into a tailspin last night, with share prices in Britain, France and Germany down by more than 4% in early trade. Wall Street was also bracing for a sell-off.

Earlier, the Australian sharemarket slumped to its lowest level since January 2006, on the back of a spate of negative news from the United States.

Lehman Brothers' move to file for bankruptcy came as rival Merrill Lynch was bailed out in a $US50 billion ($A62 billion) merger with Bank of America, and as 10 of the world's biggest banks moved to create a $US70 billion emergency fund.

Former US Federal Reserve chairman Alan Greenspan declared that the US credit crisis was a "once-in-a-century" event that was "in the process of outstripping anything I've seen, and it still is not resolved and it still has a way to go".

Adding to the nervousness, the US Government appeared unwilling to inject more money into the credit market after its bail-out of mortgage financiers Freddie Mac and Fannie Mae.

The gloom in the markets prompted investors to predict that the Reserve Bank of Australia would deliver another interest rate cut next month, on top of this month's 0.25 percentage point reduction.

Treasurer Wayne Swan tried to sooth nerves, saying local banks did not face the same problems as US ones. "While our economy is not immune from international financial market turbulence, we are better placed than most countries to weather the storm," Mr Swan said.

Lehman Brothers has lost money in investments tied to the low-end US mortgage market. The collapse prompted the suspension of its Australian arm from the sharemarket, and has put in doubt the jobs of 130 Australian-based workers.

-- With TIM COLEBATCH, PETER MARTIN

FALLS AND RESCUES

? Merrill Lynch in $US50 billion merger with Bank of America.

? Ten banks in $A70 billion rescue package.

? Insurance giant AIG faces potential insolvency.

? Investment bank Lehman Brothers collapses.

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