Bear Stearns rescue rattles Wall Street
News that the Federal Reserve had stepped in to help prop up faltering investment bank Bear Stearns sent a shudder through Wall Street on Friday, slamming stock prices and fanning expectations for a potentially dramatic interest rate cut by the Fed next week.
The bailout plan clearly unnerved investors, who were left wondering if the ongoing crisis in the nation’s financial markets would claim more high-profile victims. The announcement came only days after Bear Stearns executives made reassuring comments about the firm’s financial condition.
“For the situation to change so radically in just 48 hours does not help confidence,” said David G. Dietze, chief investment strategist at Point View Financial Services in Summit, N.J. “Investors are caught like a deer in the headlights, wondering what will be the next shoe to drop.”
The Dow Jones industrial average fell 194.65 points, or 1.6%, to 11,951.09. The Standard & Poor’s 500 index lost 27.34 points, or 2.1%, to 1,288.14, and the Nasdaq composite, home to many popular tech stocks, slid 51.12 points, or 2.3%, to 2,212.49.
The bailout deepened concerns that the worst might not be over for financial firms that loaded up on exotic mortgage-backed securities during the recent U.S. housing boom.
Losses on sub-prime mortgages have reached nearly $200 billion, and more are expected. On Thursday, Carlyle Capital defaulted on $16.6 billion in debt and said it expected lenders to seize its portfolio of mortgage-based bonds.
“You know if Carlyle failed there are others that are going to fail as well,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald. “Already, they’re talking about who’s going to be the next one.”
On Friday, analysts noted that it had been worse in the morning. The Dow plunged 312 points after the opening bell, and the Nasdaq and S&P; 500 were both down more than 3% in the early going. Some were encouraged that a late rally wasn’t completely snuffed out by sellers nervous about holding stocks over the weekend.
“The fact that the market didn’t have a waterfall, end-of-day sell-off going into the weekend struck me as one of those straws I can grasp at,” said John Buckingham, chief executive of Al Frank Asset Management in Laguna Beach.
Still, losers swamped winners by a 5-1 ratio on the New York Stock Exchange. And the day’s losses wiped out much of the euphoria that boosted stock prices Tuesday, when the Fed unveiled a plan to help banks and other institutions cope with their collapsing portfolios of mortgage securities.
“It’s disturbing that two days after the Fed announcement caused a 400-point rally in the Dow -- Poof! It’s gone,” said Nick Sargen, chief investment officer of Fort Washington Investment Advisors in Cincinnati.
Of the 30 stocks in the Dow, only Boeing gained ground, and 470 of the S&P; 500’s stocks were down for the day. All 10 S&P; 500 industry groups were in the red, led by financial stocks, which fell 4.6%.
Bear Stearns stock plunged to $30 -- a drop of $27 a share, or 47%. The investment bank stunned investors when it said the New York Fed was teaming with rival JPMorgan Chase to rescue the 85-year-old Wall Street stalwart. The nation’s second-biggest holder of mortgage debt, Bear Stearns said its cash reserves had “significantly deteriorated” in the last 24 hours.
Earlier in the week, Bear Stearns CEO Alan Schwartz had said the firm could weather the current turmoil in the nation’s credit markets.
“Did he not know, or was he covering up?” asked Dietze of Point View.
“Either way, it’s scary for investors.”
The Federal Reserve’s rate-setting committee meets Tuesday, and market watchers are now betting that the central bank will cut its key federal funds rate by a full percentage point from its current 3%. The Fed began cutting rates last September in an effort to ease the credit crunch and head off a recession. The yield on the 10-year Treasury note fell to 3.44% Friday from 3.53% late Thursday.
Pado at Cantor Fitzgerald doubts such an aggressive cut is in the works, mainly because it would “kill” the dollar, which fell to a record low against the euro Friday and to a 12-year low against the yen on expectations of lower rates in the U.S.
Also next week, Bear Stearns will report fiscal first-quarter earnings after the market closes Monday. Investors face a short trading week, with U.S. stock and bond markets closed for Good Friday.
The Bear Stearns debacle deflected attention from mixed economic news. The Labor Department reported that its cost-of-living index was unchanged in February. Analysts were expecting a 0.3% increase. And a widely followed gauge of consumer confidence fell less than expected this month, although it hit its lowest level in 16 years.
In other trading Friday, gold for March delivery climbed $5.80 to $998.10 an ounce, and oil fell 12 cents to $110.21 a barrel.
Stocks fell overseas, but less dramatically than in the U.S. Shares dropped 1.1% in Britain and 0.8% in Germany.
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