Quite predictably, Lehman BrothersÆ decision to file for bankruptcy has sent Asian stock markets into a tailspin, and thereÆs something eerie about what lies ahead.

Normally, in a situation like this, fund managers û who unlike brokers and sell-side analysts take a much longer-term view û would come out in full force to provide some perspective. Many would normally try and turn the situation around by urging investors to scoop up shares of fundamentally sound companies selling at bargain basement prices.

This time around, however, the bold optimistic statements are few and far between. No one can blame them. After all, when a major US investment bank like Lehman Brothers files for bankruptcy, it isnÆt unreasonable to ask which one will be next. Merrill LynchÆs sale to Bank of America and American International GroupÆs efforts to raise funds are compounding the problem, leading investors to ask exactly how deep and how long the crisis will run.

Ian Beattie, London-based head of Asian equities at New Star Institutional Managers, is among those who are bracing for tougher times ahead.

ôUS authorities have to draw a line somewhere and brokers are generally on the wrong side of it. This is normal in such an extreme situation though the interconnection of the business these days meant that Bear Stearns was the exception, possibly because it was first and happened quickly while Lehman had been getting bad for a while and had played brinkmanship which was probably a mistake on their part and not helpful from a systemic viewpoint,ö Beattie says.

ôMerrill would have been next in the firing line but jumped before they were pushed and did the deal with Bank of America and that looks smart and decisive. AIG is crucial now,ö he adds.

AsiaÆs reaction to the drama that unfolded on Wall Street over the weekend was swift.

Major stock markets in Japan, South Korea and Hong Kong were among those that suffered huge losses on Tuesday, belatedly reacting to the developments in the US because their markets were closed for various holidays on Monday. Japan's benchmark Nikkei 225 index ended 5% down at 11,609.72, its lowest close since July 2005. Hong KongÆs Hang Seng Index ended 5.4% down at 18,300.61, its lowest close since October 2006. The Korea Composite Stock Price Index (Kospi) ended 6% down at 1387.75, its lowest close since March 2007.

The fact that markets in Asia ended close to their intraday lows shows that bargain hunting didnÆt occur for most of the shares even after investors had time to digest the latest developments. This means a quick turnaround in the coming days is unlikely.

ôMarkets could easily slide a bit further in the next month or so until the dust settles, but ultimately I think this is the sort of æblood on the streetsÆ and investor capitulation needed for a market bottom,ö says Shane Oliver, Sydney-based head of investment strategy and chief economist at AMP Capital Investors.

Over the medium-term, Asian exporters are the most vulnerable given the likelihood that the ongoing turmoil in the US will lead to a further slowdown in G7 countries and, consequently, demand for Asian exports, says Oliver. Consumer staples companies are likely to be least affected, he adds.

Investors should stick to companies with little or no leverage, that are mindful of their shareholders and are making true economic profit with healthy cash flows or strong franchises, New Star's Beattie says.

AsiaÆs central banks and finance officials were quick to lend their support to their respective markets, in a bid to stave off any severe aftershocks.

The Bank of Japan injected Ñ2.5 trillion ($24 billion) into money markets and said it would take measures to maintain stability in the country's financial markets. The Bank of Korea said it would provide extra foreign currency liquidity through the swap markets, if necessary, to keep the local market stable. Joseph Yam, chief executive of the Hong Kong Monetary Authority (the de-facto central bank), said he doesnÆt expect any structural problems despite the volatility in the local market.

Schroder Investment Management was among the fund houses that remained decidedly bullish. Opting to look at the bright side, David MacKenzie, Hong Kong-based product manager for Asia equities ex-Japan at Schroders, says the regionÆs markets are starting to look oversold and offer a good opportunity for long-term investors.

Further easing in monetary conditions is one measure that could sow the seeds for a recovery in capital markets worldwide, fund managers say.

ôWith oil prices falling and global growth slowing inflation will become yesterdayÆs issue, allowing interest rates to fall across Asia, with China leading the way,ö says AMP Capital's Oliver.

The PeopleÆs Bank of China has reduced lending rates for the first time since February 2002 by 27 basis points to 7.2%. It has also eased the reserve requirement ratio of smaller banks by 1% to 16.5% to help ease liquidity.

Indeed, all eyes were on the US Federal Reserve, the barometer for interest rates worldwide. The Fed chose to keep its key federal funds target rate steady at 2%, however, disappointing investors who expected the central bank to respond to Wall Street's turmoil with another liquidity-easing rate cut. While acknowledging that "strains in financial markets have increased significantly", the Fed notes that interest rates are low enough to help promote moderate economic growth.

The Dow Jones Industrial Average managed to end up 1.3% at 11,059.02, thanks to reports that surfaced late in the US trading session on Tuesday that the Fed may finance a rescue of AIG. (On Monday, the Dow fell 4.4% to end at 10,917.51, suffering its worst point drop since September 19, 2001, which was when US markets reopened after the 9/11 terrorist attacks.)

For now, the liquidity crunch in the US will likely continue and this will affect the flow of capital to and within Asia.

ôI think things are probably going to get worse before they get better,ö says Ken Yap, head of Asia-Pacific research at Cerulli Associates. ôAs a whole, the mutual fund industry in Asia has been resilient so far û assets have shrunk but net flows are still positive for the first half. Assets will likely decline further and flows might reverse in the second half.ö

Even before the events of this past weekend, Fitch Ratings projected that capital inflows to Asia would slow further due to the heightened risk aversion of global investors and the regionÆs deteriorating economic fundamentals. For the first six months of the year, foreign net selling in Asian equity markets totalled $13.7 billion, the worst on record since Fitch started collecting this data in June 2001.

The lesson to be learned from LehmanÆs filing of bankruptcy goes back to risk management. There is nothing new to be learned here, fund managers say. It is the same problem that started the subprime crisis to begin with û the slackening of lending standards in the US since 2000.

ôThis clearly went way too far and has led to the problems Lehman and others have faced,ö AMP Capital's Oliver says. ôThe trick is for banks and governments to avoid a re-run, but history suggests the lessons will be quickly forgotten.ö