News that JPMorgan Chase & Co. and the Federal Reserve Bank of New York teamed up to throw a lifeline to Bear Stearns Cos. weighed heavily on financial stocks Friday.
The news ended days of speculation about Bear Stearns' ability to maintain liquidity during the credit crisis. JPMorgan Chase said Friday morning that it had agreed to access the Fed's discount window and provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days. The Fed would provide non-recourse, back-to-back financing to JPMorgan Chase, which said it would work closely with Bear Stearns on securing permanent financing or other alternatives for the company.
Bear Stearns also said it moved up the reporting of first-quarter earnings to after the markets close Monday.
The news sent Bear Stearns' shares into a tailspin. They plunged 47.4% Friday, closing at $30. On March 7 the stock had closed at $70.08, marking a one-week decline of 57.2% in a week. JPMorgan Chase fell 4.1% Friday.
The shares initially got a little bump after the Bear Stearns news hit the wires at 9:13 a.m., said Jack A. Ablin, the chief investment officer at Bank of Montreal's Harris Private Bank in Chicago. However, investor sentiment about the rescue soon "went from buyout to bailout in about 30 minutes."
The Dow Jones industrial average fell 1.6%, shedding 194 points. The Standard & Poor's 500 fell 2.1%.
The American Banker index of 225 bank stocks lost 4.1%, the index of the top 50 banks fell 4.2%, and the thrift index dropped 4.9%.
Volatility was such that the Federal Reserve Board said Friday morning that it was "monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system."
The Fed's policy arm is set to meet Tuesday, and Wall Street expects further cuts to the federal funds rate, which has dropped to 3% in a series of cuts since September. While most on Wall Street were calling for a rate cut of 50 or 75 basis points, on Friday evening Dow Jones said Citigroup Inc. was calling for the Fed to slash rates by a full point or more.
Shares of Citi, which also has been hit hard by the mortgage meltdown and had to shore up capital recently, fell 6% Friday.
Earlier Dow Jones reported that two of the company's structured investment vehicles had used their liquidity cushions. It also reported that in a meeting with analysts, Vikram Pandit, Citi's chief executive, reiterated a plan to shed assets and continue making leadership changes.
Shares of Washington Mutual Inc. and National City Corp., two companies that also have stumbled from mortgage losses, fell sharply.
Wamu's shares dropped 12.7% Friday. Moody's Investors Service Inc. lowered the struggling Seattle company's senior unsecured rating to Baa3, from Baa2. Washington Mutual Bank's long-term deposit rating was cut to Baa2, from Baa1. Moody's also put a negative outlook on all Wamu ratings, because of "the rapid deterioration" of the housing sector.
National City Corp. fell 12.4%, a day after rumors flew that the company was looking for buyers.
Late Thursday, Moody's downgraded its senior ratings to A3, from A2. National City Bank's financial strength rating was downgraded to C-plus, from B-minus, and deposits were downgraded to A2, from A1, with the ratings still on review for possible downgrade.
Lehman Brothers fell 14.6%. The brokerage said it closed a $2 billion unsecured three-year revolving credit facility, which was oversubscribed as 40 banks participated.
Other brokers fared better. Merrill Lynch & Co. Inc fell 6%, Goldman Sachs Group Inc. dropped 5%, and Morgan Stanley fell 5%.
"People are scared," said Anthony Conroy, the head trader at Bank of New York Mellon Corp.'s BNY ConvergEx Group. "They don't know what to do. Is it a systemic problem? Is it a Bear Stearns issue? What's the real problem here?"
Until those questions are answered, the banking stocks will not catch up, Mr. Conroy said.
