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Markets sharply lower amid fears of another U -

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Markets sharply lower amid fears of another US bank collapse

The World Today - Wednesday, 10 September , 2008 12:22:00

Reporter: Richard Lindell

ELEANOR HALL: Fears that another US bank may collapse has sent markets around the globe sharply
lower.

Wall Street's fourth biggest investment bank Lehman Brothers lost close to half its value, on
speculation that a potential Korean investor has decided not to invest $8-billion in the group.

The news has added more fuel into an already volatile mix as investors rush in and out of the
market with equal fervour.

The markets have now given up all the gains made earlier this week on the news of another major
banking move, the government bailout of US mortgage funds Fannie Mae and Freddie Mac.

Richard Lindell has been trying to make sense of the wild swings on global markets and he joins us
now.

So Richard earlier in the year, Bear Stearns was rescued by the government and by JP Morgan, then
there was Fannie Mae and Freddie Mac over the weekend and now Lehman Brothers, what went wrong this
time?

RICHARD LINDELL: All of these cases that you mention Eleanor go back to issues in the US housing
market and those subprime loans we've heard so much about over the past year.

These banks made big bets on the US housing market on complex financial instruments like CDOs or
Collateralised Debt Obligations, and now the US housing market is collapsing, so too are all the
banks that funded all those mortgages.

So Lehman Brothers has been out and about looking for a big injection of cash, about $8-billion,
but it now appears that one suitor, the Korean Development Bank has pulled out and that saw shares
fall 45 per cent overnight.

Still John Bussey at the Wall Street Journal says Lehman's is likely to survive in one form or
another.

JOHN BUSSEY: The question about whether or not Lehman's stays standing of course, is a big one,
there is kind of fundamental conjecture in the market place that this is probably not going to be
another instance of a forced marriage. That after its sales of assets, it will remain standing but
in a smaller form

RICHARD LINDELL: And Eleanor, surviving in a cut down form is probably the fate for a number of
other Wall Street banks as well.

That's been reflected in a seven per cent drop in financial stocks in the US overnight, while the
overall market, the S and P 500 lost around 3.5 per cent.

Interestingly Lehman Brothers also has an Australian arm having bought Grange Securities last year,
and by the way Grange has been out there selling these CDOs to local councils here for many years
now, and many of those are probably going to lose their money as well.

Not surprisingly, the local markets followed Wall Street down, the ASX 200 at midday was around 2
per cent lower.

ELEANOR HALL: The markets have been volatile for a while now, but why are investors still buying
with such conviction on news that the bail-out of Freddie Mac and Fannie Mae had happened, and
they're running with similar conviction at the Lehman Brothers problems?

RICHARD LINDELL: Well I guess on Monday lots of people were out there trying to pick a bottom, if
we go back to the Bear Stearns bail-out in March, the Australia market bounced 16 per cent after
that so history shows that there was a lot of money to be made at the time.

Some may have thought that Sunday night's bail-out of Fannie Mae and Freddie Mac would produce a
similar bounce, but a short history of the last couple of days has probably ended that hope.

It's also interesting to note the market has lost all of the 16 per cent gains since March so we're
pretty much back to where we started.

Here's how Melbourne stockbroker Marcus Padley sees the current volatility

MARCUS PADLEY: I think the reason we had the 289 point rise on Wall Street two days ago, was
because people felt the bail-out of Fannie Mae and Freddie Mac had reduced the uncertainty in the
market and provided a bit of confidence.

I think the realisation with the 280 point fall overnight is that Fannie Mae and Freddie Mac have
really done very little to solve the main problems in the US equity market and in fact the bail-out
is a sign of significant financial weakness in the US rather than any sort of strength at all, and
it's not something we should take any sort of confidence from at all.

ELEANOR HALL: That's Melbourne stock broker Marcus Padley.

Richard, we keep hearing that Australia is doing relatively well and will avoid the hard landing of
the US and parts of Europe, why is the local market being hit so hard if the economic fundamentals
are sound?

RICHARD LINDELL: A lot of it is to do with sentiment, or rather the change in sentiment towards
resources stocks and the Australian Dollar, and we're seeing that once again this morning with BHP
Billiton and Rio Tinto both down about five per cent.

20-40 per cent of local shares are held by global investors, including hedge funds which have bet
big on Australia and more particularly our resource stocks, so there's been huge amounts of money
pouring into Australia over past five years.

And now with the Australian Dollar falling, its lost about 20 per cent in the last few months
alone, these institutions are running for the exits.

Marcus Padley thinks though, that these global investors and hedge funds are making cold, hard
decisions, and ones that are not necessarily based on the fundamentals of the stocks that they're
selling.

MARCUS PADLEY: When you're the man in the moon looking at the whole world and looking where to
invest, if you suddenly got the impression that the US Dollar is going up and the Australian Dollar
and the Canadian Dollar is going down, you sit in an asset allocation meeting which is looking at
your weightings in various countries and through one five minute conversation, the decision will be
made to cut the Australian exposure to zero or by a per cent.

And in so doing it'll be pulling a billion dollars out of the Australian market, and because of
that small decisions at big international institutions are having massive impacts on our market.

ELEANOR HALL: That's Melbourne stock broker Marcus Padley again, and that analysis from Richard
Lindell.