Stocks Dive On News of Turmoil at Bear Stearns
Sell-Off in Financials Negates Positive Economic Reports

By Alejandro Lazo and Neil Irwin
Washington Post Staff Writers
Saturday, March 15, 2008

U.S. stocks plunged yesterday, the third day of volatile trading this week, as investors sold off financial shares on news that the Wall Street investment bank Bear Stearns was teetering on collapse and in need of a bailout from the Federal Reserve and J.P. Morgan Chase.

Shares of Bear Stearns fell by nearly half, to close at $30. It was the largest drop ever in the company's shares, according to Bloomberg. The news of the investment bank's troubles overwhelmed reports that showed that inflation was stable in February and consumer confidence was stronger than expected.

Friday's drop in the markets erased much of the gains from earlier in the week, after the Fed announced a plan to inject cash into the financial system.

"It is pretty darn negative," said Todd Clark, director of trading at Nollenberger Capital Partners. "You are talking about major cramps in the financial sector, and people are selling first and asking questions later."

The blue chip Dow Jones industrial average lost 194.65, or 1.6 percent, to close at 11,951.09 yesterday. The Standard & Poor's 500-stock index, a broader measure of stocks, retreated 27.34, or 2.1 percent, to 1288.14. The tech-heavy Nasdaq composite index decreased 51.12, or 2.3 percent, to 2212.49.

The market dive yesterday came in the face of relatively positive economic news. The Labor Department reported that prices -- as measured by the consumer price index -- were unchanged in February, a welcome respite to months of increasing inflation. The index remained flat even when volatile food and energy prices were excluded.

Gasoline prices fell 2 percent in the month, helping cancel out a 0.4 percent rise in the price of food. Prices were up 4 percent for the year ended in February, however, and some economists were skeptical of the seemingly positive news, as energy prices are expected to rise in the spring if the dollar continues its decline.

"It seems to be more of a mysterious disappearing act for inflation," said Stuart G. Hoffman, chief economist at PNC Financial Services Group. "And I imagine it will probably reappear with a vengeance in the next couple of months with the rise in energy prices. . . . Nobody thinks of it as a permanent improvement."

The flat February inflation rate should, however, provide some solace to the Federal Reserve as it prepares to decide on Tuesday whether and how much to cut a key interest rate it controls.

Many market participants are hoping for a cut of at least three-quarters of a percentage point in the federal funds rate. Some Fed leaders worry that such a large cut would prompt fears the central bank is not sufficiently concerned about inflation.

Consumer confidence fell slightly, according to the University of Michigan's monthly survey, though the March reading beat economists' expectations.

Every major stock sector was down yesterday, with financial shares leading the fall with a decline of 4 percent, according to Standard & Poor's. Information technology stocks declined 2 percent.

The news about Bear Stearns, which holds large investments in mortgage-backed securities, led the sell-off.

"That was the trigger today," said Denis J. Amato, chief investment officer with Ancora Advisors in Cleveland. "When you got a big firm like that faltering, it is sort of like peeling an onion layer by layer: The more you peel, the more you find, and the more you want to start crying."

After three days of denying market rumors that its cash position was in trouble, Bear Stearns said yesterday that its access to cash "had significantly deteriorated," and it announced a plan in which J.P. Morgan, a rival, would borrow money from the Fed's discount window and lend it to Bear Stearns for up to 28 days.

Traders said investors were fearful that Bear Stearns, one of Wall Street's biggest players, would dump assets, which would likely put further pressure on prices and cause other Wall Street firms to write down similar assets.

"If Bear Stearns is forced to sell assets, that will force the other firms to have to mark to market," said Sal Morreale, sales trader at Cantor Fitzgerald. "That is a big issue."

Shares of Lehman Brothers, the largest underwriter of U.S. mortgage bonds, tumbled $6.73, or 14.6 percent, to $39.26, after getting a $2 billion line of credit. Citigroup, J.P. Morgan and Bank of America also each dropped more than 3 percent.

Also yesterday, Federal Reserve Chairman Ben S. Bernanke said the central bank will act aggressively to help homeowners at risk of foreclosure. The institution is committed to "fully employing our authority, expertise and resources to help alleviate their distress," Bernanke told the National Community Reinvestment Coalition at its annual meeting in Washington.

Staff writer Tomoeh Murakami Tse in New York contributed to this report.

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