Bear's Crisis Shocks Stock Markets

Bear's Crisis Shocks Stock Markets
Brokerage Slumps 47%, Other Financials Slide; DJIA Carves Off 194.65

By GREGORY ZUCKERMAN
March 15, 2008; Page B1

Stocks were pummeled after a plan to alleviate a liquidity crisis at Bear Stearns sparked concerns about the depth of the problems in the already roiled financial markets.
The Dow Jones Industrial Average opened higher Friday, boosted by better-than-expected inflation data, before developments in the financial sector pushed the index down more than 300 points early in the session. The industrials finished down 194.65 points, off 1.6%, at 11951.09, with 29 of its 30 components in the red.
Bear's stock price tumbled 47% after the firm turned to J.P. Morgan Chase and the Federal Reserve for a 28-day loan of as-yet undetermined size.
Other financial stocks took a beating. Lehman Brothers Holdings fell 15%. Citigroup slid 6.1%, at one point reaching its lowest intraday price since December 1998. American Express ended down 4%, and J.P. Morgan, Bank of America and American International Group each declined more than 3%.
For much of the past year, investors have demonstrated an aversion to potentially risky assets, shunning stocks, "junk" bonds and mortgage debt. In the past few weeks, they have even fled seemingly safe products such as municipal bonds or debt issued by Fannie Mae and Freddie Mac, which are government-sponsored enterprises.
Worried about a housing meltdown and an economic downturn, investors instead are flocking to U.S. Treasurys and gold, customary havens.
Bear Stearns's troubles threaten to push the markets' concerns to a new level. Earlier in the week, executives at Bear had said that the firm's financial health was OK. Friday, Bear said the situation has deteriorated rapidly. So, investors and traders are now wondering if that means the financial markets are so hobbled that even a big brokerage can turn desperate in a matter of hours.
Perhaps most important, does the move by Bear suggest the markets are closer to their nightmare scenario, in which doubts about financial companies that serve as counterparties in billions of dollars of transactions suddenly freeze trading, or force investors to unwind existing trades, causing a domino effect that cripples the markets?
The trickiest problem for central bankers and Wall Street executives to solve has been a lack of confidence among firms in one another's ability to make good on their trades, which has led to a seizing up in the market for some securities held even by players who have sufficient collateral in hand.
On a conference call, Bear Stearns painted itself as a victim to this process. "A lot of people, it seemed, wanted to protect themselves from the possibility of rumors being true and act later to learn the facts," Bear Chief Executive Alan Schwartz said.
The past week's market losses are disconcerting because the Federal Reserve has taken a series of significant steps in recent months to head off the building financial crisis. Early in the week, the Fed and other central banks initiated a plan to add as much as $200 billion to the credit markets and let financial firms use a broader range of securities as collateral for borrowing. It was initially met with enthusiasm. Stocks soared.
In the coming week, the Fed is expected to cut short-term rates by at least half a percentage point, which some on Wall Street want, to lower borrowing costs throughout the economy and spur growth.
But the good feelings in anticipation of these moves dissipated with Bear's sudden news.
"The market thinks this is just one of many shoes to drop," said Gregory Peters, head of credit strategy at Morgan Stanley. "Investors still have broader concerns, especially about how quickly this can all deteriorate."
Some traders also took note that Bear turned to J.P. Morgan and the Fed, rather than another investor such as the deep-pocketed arms of foreign governments that have been buying stakes in financial companies in the past year. That might suggest that these sovereign-wealth funds are tapped out or unwilling to risk more losses from recent forays into financial shares.
Some see a potential silver lining in all the hand-wringing by investors. David Rosenberg, a Merrill Lynch economist, argues that the economy's problems now are "mainstream thought and priced in, or at least largely priced in" stock and bond prices.
The Standard & Poor's 500-stock index fell 2.1%, or 27.34 points, at 1288.14, with all of its sectors posting declines, led by a 3.6% plunge in the broad measure's financial components as a group. The technology-stock-focused Nasdaq Composite Index was down 2.3%, or 51.12 points, at 2212.49.
Other financial markets gyrated. The 10-year Treasury note shot up 30/32, or $9.375 per $1,000 invested, to push down the yield to 3.423%. The two-year note gained 12/32 to yield 1.424%.
The dollar fell below 100 yen to trade at 99.23 yen, down from 100.78 yen late Thursday in New York. The euro was up to $1.5671 from $1.5609 late Thursday.
Gold futures crossed above the $1,000 mark before finishing shy of that, up $5.80, or 0.6%, at a record close $998.10 an ounce. Crude-oil futures fell 12 cents, or 0.1%, to $110.21 a barrel in New York.