Tokyo: Japanese share prices closed down nearly 5% Tuesday, tumbling to a more than three-year low after the collapse of US investment bank Lehman Brothers, dealers said.
Banking shares were flooded with sell orders on news that two Japanese financial institutions were top lenders to Lehman Brothers, which filed for bankruptcy protection on Monday.
The Tokyo Stock Exchange’s benchmark Nikkei-225 index fell 605.04 points or 4.95% to 11,609.72, its lowest close since 8 July, 2005.
The broader Topix index of all first-section shares plunged 59.63 points or 5.07 % to 1,117.57.
The bank’s bankruptcy filing “was a shock for players in stock markets and made them shun further risks,” said Kazuhiro Takahashi, equity head at Daiwa Securities SMBC.
Investors had hoped that other banks would put up money for Lehman or that the Federal Reserve would engineer a deal, as it did earlier when it helped JPMorgan buy Bear Stearns at a bargain price.
“There had been expectations for some sort of federal support,” Takahashi said. “Market participants now feel betrayed, though the federal government may have just thought it was doing the logical thing.”
Markets dismissed Washington’s reasoning that a bailout would encourage banks to play with fire while being insulated from the consequences — known as “moral hazard.”
US authorities “had already encouraged ‘moral hazard´ when they seized (mortgage lenders) Freddie Mac and Fannie Mae,” said Fumiaki Nakanishi, market research head at SMBC Friend Securities.
“Why are they sacrificing Lehman now when this action risks lengthening the turmoil worldwide?” he asked.
Yumi Nishimura, deputy general manager at Daiwa Securities SMBC, told Dow Jones Newswires that the next Wall Street session was unlikely to ease concerns over US financial firms.
Concern is now mounting over US insurance giant American International Group (AIG). “If financial concerns over AIG ease, then market sentiment may improve,” Nishimura said.