Markets in turmoil as Lehman teeters

Fears that Lehman Brothers, a pillar of US finance, would fold in the face of massive bad debts dominated markets yesterday.

On a volatile day's trading, shares surged late in Australia and across Asia as rumours spread that a Korean bank may yet take a major stake in the ailing US firm. But the report was quickly scotched, driving shares back down again.

The benchmark ASX200 finished 74.6 points, or 1.5 per cent, lower at 4905.5. US stocks had earlier tumbled, with the S&P 500 index plunging 3.4 per cent, its biggest since February 2007, and the the Dow Jones industrial average losing 2.43 per cent to 11,230.73.

Last night, embattled Lehman executives were briefing investors on the firm's quarterly results and its strategy to avoid the fate of its crippled cousin, Bear Stearns. Lehman rushed forward the briefing, scheduled for next week, after its shares crashed 45 per cent on Tuesday.

There are concerns that unless the bank can find a saviour, the US Government will once again have to extend an olive branch to a company that, until the past year, had reaped prodigious profits from its deals.

But it is uncertain whether the Bush Administration will have the stomach to rescue another bank, after taking responsibility for mortgage-backers Fannie Mae and Freddie Mac this week.

Yesterday afternoon, a report hit trading desks that the Korean Development Bank, previously thought to have ditched plans to invest in Lehman, would take a 25 per cent stake in the firm.

The report sparked a rally in the Australian dollar, which had sunk as low as US79.83c, and a revival in local financial stocks.

Macquarie Group shares, for example, had tumbled due to the dire news from Wall Street. But in a manner of minutes, the Korean report drove them almost $3 higher to $45.90.

The respite was shortlived. Within half an hour, the state-owned KDB said it had ended talks with the troubled firm.

Macquarie shares quickly ped back to $43.50.

"This really is bedlam," said Westpac's chief currency strategist, Robert Rennie.

"This has got nothing to do with the economy. Financial markets are transfixed by this Lehman story but nobody knows anything about it."

Lehman's briefing last night was expected to provide details on how it might manage the disposal of some $US60 billion ($74 billion) of mortgages and related securities sitting on its books. One report said Lehman would sell some British mortgages to investment firm Blackrock. Another, that the company might be split in two.

"The way I see it is that all we've done so far is avoid catastrophe," the head of research at nabCapital, Peter Jolly, said. "The failure of Fannie Mae or Freddie Mac would have been a disaster. We've avoided that but the outlook for the economy is not good."

The international turmoil is playing havoc with the Australian dollar. The currency was trading at US80.77c last night, down from Tuesday's close of US81.14c.

Oil prices were volatile as OPEC moved to cut output.

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