ANALYSTS' VIEW: Lehman files for bankruptcy

SINGAPORE (Reuters) - Lehman Brothers Holdings filed for bankruptcy protection on Monday, while Bank of America announced it will buy Merrill Lynch, in latest developments in the troubled U.S. financial sector.

Meanwhile, the U.S. Federal Reserve and major banks announced steps to mitigate market volatility.

ANALYSTS' COMMENTS

MARCO ANNUZIATA, GLOBAL CHIEF ECONOMIST, UNICREDIT, LONDON

"There is now speculation that the Fed might decide an emergency rate cut to help the market absorb the stress this cannot be excluded if signs of meltdown materialise, but we think the Fed will try to avoid this step, which would be a reversal of the previous shift to more targeted measures.

"The US Treasury has decided it was time for shock therapy, and taken an extremely gutsy gamble by letting Lehman fail, against widespread expectations that a solution would be brokered over the weekend. The financial system now faces the unprecedented challenge of absorbing the unwinding of a major broker. If it works, it should boost considerably the hopes that the global financial system can work itself out of the year-long crisis. But the risk is enormous.

"As markets open in Europe today, we can expect equity markets to take a hammering, with major safe haven flight to government bonds and gold. The USD will likely be under pressure given the major question marks on the US financial system, to the benefit of safe haven currencies like CHF.

"We are witnessing a turning point in the modern history of the financial system, as three major brokers have now disappeared from the scene. The coming days and weeks will be truly crucial to the global economic outlook."

JUSTIN URQUHART STEWART, INVESTMENT DIRECTOR AT 7 INVESTMENT

MANAGEMENT

This is a perfect storm in a perfect storm. There are two ways of looking at it: one, as financial Armageddon, the other as a dose of realisation of the level of complexity of the problem people are dealing with.

It's a return to pure capitalism, the survival of the fittest -- the government can't and won't bail everybody out. Investors will now retreat to the trustworthy banks, though that's not a phrase that trips off the tongue easily nowadays.

There are three issues: the counterparties in derivative trades with Lehman, the people who hold Lehman stock and debt, and third and most important, market confidence.

The eye of cynicism now falls on European banks, highlighting the weaker ones.

ALAN RUSKIN AT RBS GREENWICH CAPITAL

"At the time of writing it seems the US Treasury has decided to teach us ALL a lesson, that they will not backstop every deal in the wave of financial sector consolidation that is upon us.

"Their motivation is part fiscal and part moral hazard. I suspect more the latter. Presumably the most important reason to teach Wall Street this lesson, is that they will change their behaviour, and not take the decisions that are reliant on a public bail-out. For many, but not all, this is an impossible lesson to learn in the middle of the worst financial storm since the Great Depression.

"Firstly, if institutions thought they were too big to fail and took unnecessary risks, those mistakes have long been made. The barn door was long left open (in part by the Fed), and this horse has long bolted. This would have been an invaluable lesson to have learned five years ago, but in the next year, it will encourage more defensive behaviour. Defensive behaviour from anyone with meaningful open exposure, whether they be financial counterparties; Joe Public scouring the FDIC rulebooks on deposit insurance; or, those exposed to particular fire sale asset classes.

"Teaching moral hazard in a crisis is inherently procyclical."

BROWN BROTHERS HARRIMAN FX STRATEGISTS

"We have argued that each major cathartic event (new lending facilities by the Fed, Bear Stearns, the Treasury announcement it would seek authority to take over Fannie and Freddie, and then when it actually did), the dollar rallied each time. This time is different.

"That may be infamous last words, but the reason it is different is that this is not a cathartic event. Lehman's demise will not make things more transparent or increase the appetite for risk. Quite on the contrary, its failure raises perceptions of risk. The fall of the house of Lehman means that others in the same situation, i.e., not posing significant systemic risk are increasingly vulnerable."

EARLIER COMMENTS

- PETER DOUGLAS, FOUNDER OF HEDGE FUND CONSULTANCY GFIA:

"The U.S. and the Fed in particular, appear to be drawing a line under public funding.

"In the near term, this will be very disturbing for markets, as the "Bernanke put" clearly applies to a finite number of entities, and not to any large institution merely by virtue of its size."

"Longer term this is very healthy as it accelerates the clearing process, and therefore the rehabilitation of the financial system."

- ROHAN WALSH, INVESTMENT MANAGER AT KARARA CAPITAL,

MELBOURNE:

"I suppose Merrill being bought might be a good thing, going to a stronger balance sheet. That's not necessarily a bad thing for the market.

"But Lehman is obviously creating uncertainty on how the counterparty risks work through, and how the derivatives exposures work through. It can't be a good thing and also the market is very worried about AIG.

"There is a number of implications and counterparties... obviously a big development and very concerning in terms of the broader impact on the financial system. It's hard to know what the implications are and what are the related exposures."

- MUHAMMAD AURANGZEB , MANAGING DIRECTOR RBS FOR

SOUTHEAST ASIA AND PAKISTAN (IN REMARKS TO REPORTERS):

"Unlike Bear Stearns, where literally things happened overnight, this has been in the news as it has been unravelling over the past few days.

"That has allowed time for the banks and for the markets to look at this risk situation, look at their respective positions which in turn gives me the hope and view that we will probably see a orderly resolution to this."

- V.ANANTHA NAGESWARAN, HEAD OF INVESTMENT RESEARCH,

ASIA-PACIFIC, BANK JULIUS BAER, SINGAPORE:

"To me the financial sector problems are a side-show. The real show is the U.S. economic slowdown and the consumer deleveraging, and that will play out for a couple of years if not longer.

"The retail sales number we saw on Friday was just the beginning."

- SEAN CALLOW, STRATEGIST, WESTPAC BANK, SYDNEY:

"The whole fresh wave of financial turmoil - Lehman, Washington Mutual, Merrill Lynch, AIG, etc - should play USD negative, especially as Feb 2009 Fed funds have rallied 20 basis points since Friday."

- CHRISTOFFER MOLTKE-LETH, HEAD OF SALES TRADING, SAXO

CAPITAL MARKETS, SINGAPORE:

"It's going to have a major effect on financials in particular, but it will spill over into all the sectors as well.

"This just confirms that we are nowhere near the end of the crisis. And it could get really ugly in the next 6 months or so cos there's a lot more to be uncovered."

KEY POINTS:

-- If Lehman and Merrill disappear or get taken over, then three of the top five U.S. investment banks would have dissolved or been bought inside six months. Bear Stearns was acquired in a fire sale by JPMorgan in March.

-- Expectations Lehman was heading into bankruptcy prompted a rare emergency trading session to allow Wall Street dealers in the $455 trillion (252.1 trillion pounds) derivatives market to reduce their exposure to the firm.

-- Bank of America said it is buying Merrill Lynch in a $50 billion all-stock transaction.

-- To help provide liquidity, the Federal Reserve said it would accept a wider array of securities as collateral at its key borrowing windows.

(Reporting by Vidya Ranganathan, Brenda Goh and Saeed Azhar in Singapore, Mette Fraende in Sydney; editing by Neil Fullick)