Stocks Tumble On Plan To Aid Bear Stearns

Stocks have suffered another big drop Friday after The Federal Reserve invoked a rarely used Depression-era procedure to bolster troubled Bear Stearns Cos., touching off concerns about the severity of the credit market's overall troubles.

Friday's plan by the New York Federal Reserve and JP Morgan Chase & Co. offers Bear Stearns relief from a sudden liquidity crunch that analysts surmised could have felled the investment bank. But the company's position on the precipice of financial disaster has left many investors shaken and spoils some hopes that the moribund credit market is on the mend.

The Dow Jones industrial average has closed down about 194 points at the 11,951 level.

The action won praise from the administration, with President Bush saying that Fed Chairman Ben Bernanke was "doing a good job under tough circumstances."

Bernanke, delivering a speech later Friday, told a housing group he had had a "busy morning." He did not elaborate on the Fed's action regarding Bear Stearns.

"The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system," the board said in its statement. It said members had voted unanimously to approve the arrangement, announced by JP Morgan Chase and Bear Stearns earlier.

Delivering a speech on the economy in New York, Bush voiced confidence in the Fed's actions to aggressively cut interest rates and the Fed announcement last week that it would supply up to $200 billion in loans to cash-strapped financial institutions.

"It was a strong action by the Fed and they did so because some financial institutions that borrowed money to buy securities in the housing industry must now repair their balance sheets before they can make further loans," Bush said. "Today's actions are fast moving, but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets."

The investment bank, set to report earnings next Wednesday, was the largest underwriter of global mortgage-backed securities in 2007 and second only to Lehman Brothers in U.S. mortgage-backed securities, reports the Wall Street Journal.

CBS News anchor Katie Couric reports that there had been whispers of trouble at Bear Stearns - Wall Street's 5th biggest investment bank - for weeks. By Friday's opening bell, it was a full blown alarm: the 85-year-old investment bank was on the brink of a liquidity crisis.

"The danger of Bear Stearns having a liquidity crisis," Morningstar's Ryan Lentell told CBS News, "is that they could quickly be out of business."

Bear Stearns is heavily invested in complex financial instruments tied to risky subprime mortgages. As fears grew that the value of theseinvestments could plummet, other firms stopped pumping new money into Bear Stearns - or they cashed out.

The plan announced Friday will supply secured funding to Bear Stearns for an initial period of 28 days, seeking to provide short-term relief for the investment bank.

Senior Federal Reserve staffers said the arrangement allows JPMorgan Chase and Co. to borrow from the Fed's discount window and put up collateral from Bear Stearns to back up the loans.

"If they hadn't," said Harvard Business School professor Samuel Hayes, "this would have been a domino which would have probably caused other firms to go under as well."

JP Morgan, a bank, has access to the discount window to obtain direct loans from the Fed, but Bear Stearns, an investment house, does not.

This type of procedure, Fed officials said, dates back to the Great Depression of the 1930s but has rarely been used since that time.

In his speech, Bush said the administration had a plan to deal with the problems in credit and housing markets and said he opposed a number of measures pending in Congress to go further by allocating billions of dollars to purchase abandoned and foreclosed home and changing the bankruptcy code to allow judges to adjust mortgage terms.

However, Senate Banking Committee Chairman Christopher Dodd, D-Conn., said the problems at Bearn Stearns, one of the country's largest investment banks, highlighed the need for more aggressive efforts.

"Instead of cheerleading and reacting with tepid measures, the administration should act boldly and decisively to prevent the looming foreclosure crisis from having catastrophic consequences for our economy and our markets," Dodd said in a statement.

Treasury Secretary Henry Paulson praised the Fed's leadership and said that the country's financial system would be able to weather the problems.

"As we have been saying for some time, there are challenges in our financial markets and we continue to address them," Paulson said in a statement. "This is another challenge that market participants and regulators are addressing. We are working closely with the Federal Reserve" and the Securities and Exchange Commission.

Paulson said he appreciated the leadership of the Fed "in enhancing the stability and orderliness of our markets."

The action by the Fed board in Washington represented an endorsement of a rescue effort for Bear Stearns that had already been arranged by JPMorgan and the Federal Reserve's New York regional bank.

It was seen as a last-ditch effort to save the investment bank, which on Friday acknowledged its serious financial problems after a week of denials.

JPMorgan Chase is providing an undisclosed amount of secured funding to Bear for 28 days, backstopped by the Federal Reserve Bank of New York.

The Securities and Exchange Commission issued a statement saying it has been "in close contact" with Treasury, the Federal Reserve and the Federal Reserve Bank of New York during discussions concerning an agreement by J.P. Morgan Chase & Co. to provide a secured loan facility to The Bear Stearns Companies.

But Couric reports, the financial rescue did nothing to keep Bear Stearns stock from falling more than 40 percent today, with one stock analyst predicting it could soon be worthless.

"The difficulty in a relationship, even in a financial relationship, trust is very important," UBS Financial Services' Arthur Cashin told Couric. "And when trust is shaken, it takes a while to get it back."