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Markets Stem Earlier Loss From Bear Sale, Fed Cuts

CNBC.com With Reuters
Monday, 17 Mar 2008 | 10:12 AM ET

Financial markets recovered some of their earlier losses after the weekend "fire sale" of Bear Stearns to JP Morgan Chase and the Federal Reserve's moves to shore up the credit markets.

Late Sunday, JPMorgan announced it will pay just $2 a share for Bear, or a total of $236 million, a fraction of what it was worth on Friday.

At the same time, the Fed made an emergency quarter-point cut in its discount rate and agreed to finance up to $30 billion of Bear's assets. The Fed also set up a program to provide cash to a wider range of big financial firms previously unable to borrow directly from the central bank.

U.S. Treasury Secretary Henry Paulson pledged the U.S. government is prepared to do "what it takes" to maintain the stability of the financial system.

Still, the news did little to calm investors around the globe.

Asian markets plunged to their weakest levels in almost eight weeks, while major European markets also tumbled.

US stocks also opened lower, led by financials.

"There's turmoil in all markets after Bear Stearns, and equities is not the place to be," BNP Paribas strategist Edmund Shing told Reuters. "Everyone's asking: Who's next? Is there a Bear Stearns in Europe, could investment banks start to fail?"

The shock news, the biggest sign yet of how devastating the credit crisis is for Wall Street, slammed the U.S. dollar to a record low against the euro and boosted gold and low-risk bonds.

"The fear is how many more skeletons in the closet are still there in the global credit markets?" said David Cohen, economist at Action Economics in Singapore. "This is another effort by the Fed to calm things down, but the cloud on the horizon is just how much more of these credit issues are still out there."

Faced with an economy that may already be mired in recession, the Fed is expected to pull another tool out of its box on Tuesday by slashing its key benchmark overnight interest rate by as much as 125 basis points.

It has already cut the rate by a total of 2-ΒΌ percentage points to 3 percent since mid-September -- putting downward pressure on the U.S. dollar.

The Fed's latest moves were seen as an attempt to prevent others from suffering the same fate as Bear, the fifth-largest U.S. investment bank. Bear in essence faced Wall Street's version of a run on the bank as customers stopped trading with the firm and demanded their cash late last week.

"It's scary for what it says about the value of financial assets, if a company is worth only a small percentage of book value," said Emanuel Weintraub, managing director of Integre Advisors, a New York-based money management firm.

That worry has put put bank stocks at risk of falling as much as 50 percent, Oppenheimer analyst Meredith Whitney said.

"While we believe Bear Stearns's case is unique, what will not be unique, in our view, is a resulting major negative revaluation of financials," said Whitney in a note to clients
Monday.

Similar sentiment was voiced by Lehman Brothers analyst Jason Goldberg. He said the valuation paid by JPMorgan for Bear Stearns "in general could be disconcerting to bank stock investors."

Bear Stearns, which has more than 14,000 employees, trades interest-rate swaps, credit default swaps, and other derivatives with dozens of banks globally. If Bear Stearns went bankrupt, its trading partners could face big losses and stop lending, paralyzing the global financial system.

"It wouldn't just be Bear's problem, it would be everyone's problem," said Marino Marin, an investment banker at Gruppo, Levey & Co who has restructured banks in the past but is not involved in this deal. "It would be apocalyptic."

That's why policymakers moved swiftly on Sunday.

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