Asian Markets Drop on News of Lehman Brothers Collapse, Merrill Buyout

Asian stock markets dropped sharply Monday after one of the world's biggest investment banks declared bankruptcy and another was taken over. Stock markets in Australia, Taiwan and Singapore dropped three-to-four percent on fears that the credit market crisis could spread beyond the failed Lehman Brothers investment house. Daniel Schearf reports from Beijing.

Asian investors were reacting to Lehman Brothers' announcement the company is declaring bankruptcy, Monday.

Lehman was hard hit by the American credit crunch and was in talks for a takeover by Barclays Bank, but failed to close the deal.

Also, rival investment bank Merrill Lynch was bought out by Bank of America. Both Lehman and Merrill have extensive operations in Asia.

Callum Henderson is head of foreign exchange strategy for Standard Chartered Bank in Singapore. He says Asian markets are particularly vulnerable.

"Asia has the highest exposure, in terms of any emerging market region, to global trade," Henderson said. "And, obviously, when the global economy goes into a slowdown, it's more exposed than anyone else."

The shake-ups raise further concerns about the stability of financial markets. The crisis began a year ago as banks began having trouble with so-called subprime mortgages - loans made to weak borrowers.

"It spread as those loans went bad because banks and investment funds had invested heavily in complex securities based on mortgages," he explained. "While many financial experts say Asian banks have relatively low exposure to these risky investments, the crisis restricts the amount of capital available for lending and hurts international companies that invest in the region."

Ten of the world's largest banks have agreed to provide $7 billion each to make more cash available to the financial markets. The banks hope to stabilize what they call "unprecedented volatility" in global equity and debt markets.

The U.S. Federal Reserve has also eased access to emergency lending for investment banks.

Henderson says despite the measures, Asian markets are likely to stay under significant pressure.

"Investors here at least will continue to focus on slowing growth, still relatively high inflation, and also the prospect of further outflows in terms of portfolio investors," Henderson said. "All of that is negative for Asian assets and negative for Asian currencies."

Henderson says more pro-growth policies are needed in Asia such as cutting interest rates or reducing bank reserve requirements.

Stock markets in Hong Kong, Japan, and South Korea were closed for a holiday Monday.