A shake-up of monumental proportions in the U.S. financial sector roiled Asian markets on Monday, as those regional bourses that were open for trading and financial shares traded sharply lower. Analysts expressed concern about the exposure of major Asian banks to Lehman Brothers Holdings bankruptcy and feared a steeper global downturn driven by the U.S. housing crisis, which has yet to wind down.  Stock markets in Australia, Singapore and Taiwan lost more than 2% each, while markets in Hong Kong, China, Japan and Korea were closed for a holiday. Stalling its two-month rally, the dollar fell against the euro and the yen, which have risen 1.7% and 2.25%, respectively, against the dollar since Friday. Investors sought cover in gold, which rose 2.5% as the dollar weakened.  As late-hour news unfolded that Lehman (nyse: LEH - news - people ) would file for bankruptcy, Bank of America (nyse: BAC - news - people ) would buy Merrill Lynch (nyse: MER - news - people ) for $50 billion, and insurance giant American International Group (nyse: AIG - news - people ) needed a $40 billion lifeline from the Federal Reserve, Asian markets took a beating. Taiwans benchmark index plummeted by 4.4%, Australias ASX 200 fell 2.1% and Singapores Straits Times index was down 2.9%.  Banks in particular were feeling the pain . We would assume that all of the major banks have a counterparty risk with both Lehman and AIG. Theres no way to know the amount and type of exposure, said Daniel Tabbush, a regional banking analyst for CLSA. Asian banks holdings of transactions, particularly derivatives, underwritten by Lehman now expose them to a great deal of risk. HSBC (nyse: HBC - news - people ), especially, is "likely exposed" because of its active off-balance-sheet activities in the credit derivatives market and exposure to the United States and United Kingdom, he said.  In afternoon trading, Australian financial firms Babcock & Brown (other-otc: BBNLF - news - people ), Macquarie Group (other-otc: MQBKY - news - people ) and Allco Finance Group (other-otc: AOFNF - news - people ) plummeted 14.5%, 10.5% and 14.3%, respectively. The deleveraging process will bring more and more pain, Tabbush added.  For many, there was ample warning, though. The lead time in terms of knowing that Lehman is kind of unwinding gave various banks a chance to take pre-emptive steps to reduce their exposure, said Trevor Kalcic, Singapore-based banking analyst for ABN Amro. He said the impact of a steeper global downturn on Singapore banks was of greater concern than their very limited direct exposure to Lehman.  The sense that the U.S. housing crisis has not bottomed out stoked further worry. The delinquencies for U.S. mortgages [are] showing no sign of plateau, Kalcic said. As far as residential and commercial markets in the U.S. are concerned, were probably still on the way down.  Meanwhile, Singapores leading sovereign wealth fund, Temasek Holdings, has seen its 14% stake, totaling more than $8 billion, in Merrill Lynch fall sharply in value. It is unclear how Singapore will handle these holdings once the U.S. firm's assets and liabilities are transferred to Bank of America.  In Taiwan, Cathay Financial Holding (other-otc: CHYFF - news - people ) and Fubon Financial Holding (other-otc: FUIZF - news - people ) fell 6.9% and 3.7%, respectively.
Markets tumbled in places where they were open for business--Australia, Singapore and Taiwan, primarily--on news of Lehman's bankruptcy and American International Group's woes.