KEY POINTS:
Fear and uncertainty returned to global markets yesterday, just days after the US Government's multibillion-dollar bailout of Freddie Mac and Fannie Mae was greeted as a turning point for the troubled financial sector.
Concerns about the viability of US investment bank Lehman Bros erased any last vestiges of
positivity as a Wall St slump spread around the world. Fears that Lehman will be unable to raise new capital sparked speculation that it may need to be bailed out by the US Treasury.
Lehman - the fourth largest US securities firm - was forced to rush the release of its third-quarter results to the market overnight after it lost 45 per cent of its value in Tuesday trading on Wall St.
The Lehman sell off was contagious. In Australia the ASX fell 1.5 per cent yesterday and
Japan's Nikkei closed down 0.4 per cent.
In New Zealand the NZX dropped almost 1 per cent. The negative sentiment helped push Telecom to a fresh 15-year low.
The stock dropped as low as $3.01 before recovering to $3.03 - its lowest close since February 1993.
Telecom was particularly vulnerable to the global slump because it was already out of favour with investors while they waited for more details of how management plans to turn it around, analysts said.
The biggest stock on the NZX has now shed 30 per cent of its value since the start of the year.
In New York, Lehman shares - which shed 88 per cent of their value this year - nosedived on Tuesday after talks with Korea Development Bank about a capital infusion ended.
The Korean bank is one of several companies that Lehman has been in discussions with in recent weeks.
Lehman is also understood to be in talks with private-equity firms including Kohlberg Kravis Roberts and Carlyle Group about selling its asset-management business.
Nomura Holdings, Japan's biggest investment bank, may also bid for a stake, according to Japanese news reports.
Lehman has been trying to raise capital and shed devalued real-estate assets that contributed to a US$2.8 billion loss last quarter and saddled the company with US$8.2 billion in writedowns and credit losses in the past year. Once the biggest US underwriter of mortgage-backed securities, Lehman was stuck with the assets after two Bear Stearns hedge funds that invested in the instruments collapsed in July last year, causing the market to freeze.
The ensuing credit contraction ultimately led to the takeover of Bear Stearns, once the fifth-biggest US securities firm, by JPMorgan Chase & Co. in March for US$10 a share in a deal backed by the US Federal Reserve.
On Monday the Federal Reserve took control of struggling US mortgage lenders Freddie Mac and Fannie Mae in a bailout that could end up being the biggest in history - costing taxpayers up to US$200 billion.
The move was widely hailed as turning point for market sentiment.
While the Government would be very reluctant to intervene yet again, especially if it required taxpayers' money, several experts say there may be no alternative to avoid a systemic financial crisis.
Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke may be forced to act to preserve stability in the rest of the financial system.
Founded in 1850 by three Jewish immigrants from Germany, Lehman has managed to avert previous potential disasters and is among the handful of US financial firms that have endured for more than a century.
Lehman has been on the verge of collapse at least four times: in 1929, when the stock market crashed; in 1973, when the firm lost $6.7 million betting on interest rates; in 1984, when internal dissension led to a takeover by American Express; and in 1994, when newly independent Lehman faced a capital shortage.
LEHMAN BROS
* The fourth-biggest US investment bank.
* It has about US$65 billion in mortgage-related assets.
* It employs about 26,000, but plans to cut about 1000 jobs this month.
* It has already cut about 6400, or 22 per cent, of workers in the past 12 months.
