Investors cautious amid turmoil

Asian share prices have continued to fall as confidence remains low

European stocks rise in cautious trade as Lloyds TSB’s takeover of UK lender HBOS dispelled some of the gloom hanging over financial markets.

Asian shares had earlier fallen sharply on fears that more companies could fall victim to the global financial crisis.

London’s FTSE 100 index was up 0.8% at 4,951 points shortly after the open and France’s main stock index rose 0.6%.

In Asia, Tokyo’s Nikkei share index dropped by 2% while Hong Kong’s main stock index slid by 7%.

Share indexes in Shanghai, Taiwan and India fell by between 3 and 5%.

Hong Kong’s Hang Seng index dropped below the 17,000 mark and Australian shares closed 4% lower.

On Wednesday, the Dow Jones index of leading US stocks fell by more than 4%.

Flight to safety

Brokers in Japan say the markets are in freefall because investors fear the US government’s efforts to stop the turmoil in the financial system are not working.

As a result, investors are looking for safer places to put their money than stocks and shares.

Traders saw plummeting shares on Wall Street on Wednesday

Many Japanese institutions have assets insured by AIG, the insurance company that was rescued by the US government on Tuesday.

And in Singapore, for the second day running, hundreds of AIG policyholders queued up outside its offices trying to surrender or cancel policies they fear could turn out to be worthless.

Feverish speculation

The US Federal Reserve’s AIG rescue package followed the collapse earlier this week of 150-year-old US investment bank Lehman Brothers, which sent shockwaves through the world’s financial community and sparked a global share price plummet.

Another investment bank, Merrill Lynch, has since been sold off to Bank of America. And in the UK, HBOS is being taken over by Lloyds TSB in a £12.2bn deal.

There has also been feverish speculation about the future of two other leading US banks – Morgan Stanley and Washington Mutual.

The New York Times quoted unnamed sources as saying an auction for Washington Mutual was under way. The Wall Street Journal reported that both banking giant Citigroup and Wells Fargo had expressed an interest in a takeover.

Meanwhile the Reuters news agency reported that Morgan Stanley, the second largest US investment bank in the US which on Wednesday saw a quarter of its value wiped off its share price, had held preliminary takeover talks with Wachovia.

None of the companies involved has made any comment on the speculation and no negotiations can be confirmed.

Banks take action

The Bank of Japan has injected another 1.5 trillion yen ($14.4bn; £7.9bn) into money markets to help stabilise them. Australia took similar steps.

The Japanese central bank’s injection was the third consecutive day it had tried to shore up cash markets as the Nikkei trades at a three-year low.

Across Asia, central banks have already pumped $33bn into money markets this week in an attempt to allay investors’ concerns and ensure the supply of funds does not dry up.

Lehman set to go into insolvency

Preparations are being made for Lehman Brothers, the fourth-largest investment bank in the US, to file for bankruptcy.

The two strongest potential buyers appear to have pulled out of talks to rescue Lehman – the latest victim of the American credit crisis.

If no new financing comes before Wall Street opens, it will have to seek “Chapter 11” bankruptcy protection.

This could result in a severe shock to the global financial system, as banks unwind their complex deals with Lehman.

Late on Sunday the US central bank, the Federal Reserve, announced new moves to ease access to emergency credit for struggling financial companies.

The Fed said the step – which broadens the types of securities financial institutions can use to obtain emergency loans – was designed to mitigate the potential risks and disruptions to markets.

In a related move, a consortium of 10 investment banks announced a $70bn (£39bn) loan program that troubled financial companies can use to help ease the credit shortage.

The banks – Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS – each agreed to provide $7bn (£4bn) to the pool.

On Monday, Asian stock markets fell amid concerns over the fate of Lehman Brothers.

Singapore stocks dropped 2.26% in morning trading and shares in Taiwan fell 1.83%.

Markets in Tokyo, Hong Kong, Shanghai and Seoul were closed for public holidays.

Lehman employs about 25,000 worldwide, including 5,000 in the UK.

Accountancy firm PWC has already been lined up to run the British operations of Lehman should the firm go into administration.

BBC business editor Robert Peston says UK bank Barclays’ decision to walk away from a Lehman deal was a huge setback for the effort to rescue the Lehman.

Barclays terminated the negotiations because it was unable to obtain guarantees in relation to financial commitments faced by Lehman when markets open on Monday.

Bad bank, good bank

The rescue effort for Lehman was being co-ordinated by the US Treasury and the New York Federal Reserve.

No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value Peter Morici University of Maryland

The US government had hoped to arrange a bailout under which other US investment banks would finance a “bad bank” that would hold the most “toxic” investments of Lehman in the property and mortgage market.

The “good bank” or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK’s Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks.

However, it appears that this plan is falling apart.

“The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers’ money,” a banker close to the talks told the BBC, but added that US Treasury Secretary “Hank Paulson has made it clear he doesn’t want to do that”.

Hard choices

Bank of America, meanwhile, is said to be unconvinced that buying Lehman would be in the interest of its shareholders.

Instead, according to a report in the New York Times, Bank of America is in “advanced talks” to buy investment bank Merrill Lynch for more than $38bn.

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Like other US investment banks Merrill has suffered losses of tens of billions of dollars in the subprime crisis, and has seen its share price plummet during recent months.

“No other large firm should buy Lehman whole – its toxic real estate and securities are too difficult to value,” said Peter Morici of the business school of the University of Maryland.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm’s share price has plummeted as fears over its future have mounted.

Former Federal Reserve boss Alan Greenspan said the US government faced “very difficult decisions” over Lehman if it could not secure a rescue deal that did not involve public funds.

Yet Mr Greenspan said it would be “unsustainable” for the government to bail out every US bank that got itself into difficulty.

Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem.

“The ordinary course of financial change has winners and losers,” he said.

Bush chides Beijing over rights

US President George W Bush has expressed “deep concerns” over China’s human rights record in a speech on the eve of the Beijing Olympics.

“The US believes the people of China deserve the fundamental liberty that is the natural right of all human beings,” he said in the Thai capital Bangkok.

He praised China’s economy but said only respect for human rights would let it realise its full potential.

Mr Bush has been criticised by some campaigners for going to the Games.

He was due to fly to Beijing following the speech in Bangkok, a stop on his final trip to Asia before he leaves office in January.

The wide-ranging address, which included criticism of the regime in Burma, was more nuanced than Mr Bush’s past speeches on China.

It is unlikely to cause much offence in China, our correspondent says, and many people will see it more as a valedictory speech for Mr Bush’s record in Asia rather than an outline of future US policy.

‘Firm opposition’

President Bush said he was optimistic about China’s future and said change in China would arrive “on its own terms”.

Young people who grow up with the freedom to trade goods will ultimately demand the freedom to trade ideas… George W Bush US president

But his criticisms of China’s human rights record were clear.

“America stands in firm opposition to China’s detention of political dissidents, human rights advocates and religious activists,” he said.

When it was controversially awarded the games in 2001 by the International Olympic Committee, Beijing promised to make improvements in human rights, media freedoms and the provision of health and education.

But campaigners, such as Amnesty International, say Chinese activists have been jailed, people made homeless, journalists detained and websites blocked, while there has been increased use of labour camps and prison beatings.

In March, China suppressed violent anti-government protests in Tibet. Beijing said rioters killed at least 19 people, but Tibetan exiles said security forces killed dozens of protesters in the worst unrest in Tibet for 20 years.

The Dalai Lama, Tibet’s exiled Buddhist leader, rejected Beijing’s claims he was behind the riots and said he expressed good wishes for the success of Games.

On Thursday, at least 1,500 Buddhists were holding a protest in the Nepalese capital Kathmandu against what they called China’s violation of religious freedom in Tibet. Correspondents say there have been scuffles with police.

In Beijing, police dragged away three US Christians who tried to demonstrate on Tiananmen Square in support of religious freedom.

Four pro-Tibet activists from Britain and the US were arrested and held briefly in the city on Wednesday after a protest close to the Olympic stadium.

Burma refugees

In his address, Mr Bush said the US recognised that the growth sparked by China’s free market reforms was “good for the Chinese people” and the country’s’ purchasing power was “good for the world”.

On foreign policy, he commended China’s “critical leadership role” in the negotiations to end North Korea’s nuclear weapons programme, and the “constructive relationship” between Beijing and Washington over Taiwan.

He also called for an end to what he described as tyranny in Thailand’s neighbour, Burma.

Friday’s Olympic opening ceremony coincides with the 20th anniversary of a democracy uprising in Burma, which was crushed by the military.

First lady Laura Bush flew to the Thai-Burmese border to spend the day at the Mae La refugee camp where about 35,000 refugees live, having fled their homes.