European shares tumble on Lehman bankruptcy

European stocks tumbled in early trade on Monday after Wall Street firm Lehman Brothers filed for bankruptcy protection, sending fresh tremours into financial markets.
By 0720 GMT, the FTSEurofirst 300 index of top European shares was down 3.1% at 1,126.08 points. The benchmark closed 1.9% higher on Friday.
Lehman filed for bankruptcy protection, after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crisis. Its shares plummeted 84% in Frankfurt.
Lehman is one of the biggest investment banks to collapse since 1990, when Drexel Burnham Lambert filed for bankruptcy protection amid a collapse in the junk bond market.
Banks were the biggest weighted losers on the index, with BNP Paribas, Credit Agricole, Dexia, Fortis, Societe Generale down between 6 and 9%.
Investors were also rattled by news on American International Group Inc. The New York Times said that the insurer, working to stave off rating downgrades and shore up the capital of its holding company, has made an unprecedented approach to the U.S. Federal Reserve seeking $40 bln in short-term financing.
AIG officials did not immediately respond to requests for comment.
"It can be the final clean up, but you have a risk within the financial system to see a lot of downgrading and losses. Beyond this point, my concern is the real economy," said Valerie Plagnol, chief strategist at CM-CIC Securities, in Paris.
"We are faced with quite a dramatic credit crunch…the fact that the central bank is widening its collateral to include stocks may prove to bring some support to the market, but I don't know. The Fed is really doing its best to avoid any major crash."
The Federal Reserve took a series of new steps on Sunday to ease trading disruptions as Lehman Brothers headed for bankruptcy and other top financial companies teetered on the brink of collapse.
The Fed said it would begin accepting equities as collateral for emergency loans for the first time ever, and also said it would increase the amount of Treasury securities it auctions regularily under one of its lending programs. Also in the financial sector, Bank of America Corp agreed to buy Merrill Lynch in an all-stock transaction that Bank of America said is worth $50 bln.
And a newspaper reported on Sunday that Swiss bank UBS would have to write down another $5 bln on its risky investments in the second half of the year. Its shares were down 8.4%.
A number of Asian markets, Japan, Hong Kong, South Korea and China, were closed on Monday for holiday. BASF fell 2.7% after the world's biggest chemicals group said it planned to take over Swiss specialty chemicals company Ciba to strengthen its position in that speciality business..
Ciba jumped 28%, a rare European gainer.