U.S. Stocks Fall, Led by Banks; Bear Stearns Drops Most Ever

By Eric Martin

http://www.bloomberg.com/apps/news?pid=20601087&sid=azRkY7mPr148&refer=home

March 14 (Bloomberg) -- U.S. stocks plunged for the third day this week after Bear Stearns Cos. required a bailout from the Federal Reserve and JPMorgan Chase & Co. to avoid collapse.
Bear Stearns, the second-largest underwriter of U.S. mortgage bonds, tumbled the most ever after the brokerage said its liquidity deteriorated in the past day. The announcement overwhelmed economic reports that showed inflation ground to a halt and consumer confidence unexpectedly rose.

The Standard & Poor's 500 Index retreated 22.58, or 1.7 percent, to 1,292.9 at 11:56 a.m. in New York. The Dow Jones Industrial Average lost 172.35, or 1.4 percent, to 11,973.39. The Nasdaq Composite Index decreased 39.71, or 1.8 percent, to 2,223.9. The S&P 500 Financials Index lost 2.6 percent as 90 of 92 members retreated.

``The real problem is the uncertainty,'' said John Kattar, who oversees about $2 billion as chief investment officer at Eastern Investment Advisors in Boston. ``The fact that the issue is so serious that the New York Fed directly has to intervene demonstrates that there are pretty big problems here with pretty big uncertainties.''

The S&P 500 is up 0.4 percent on the week. The benchmark for U.S. equities had been poised for its best week since the end of January before today after the Federal Reserve pumped $200 billion into the financial system to shore up banks and S&P predicted an end to subprime mortgage writedowns.

More than seven stocks fell for every one that rose on the New York Stock Exchange today.
Bear Stearns

Bear Stearns, the manager of two hedge funds that collapsed in July, dropped $22.50, or 39 percent, to $34.50. After denying for three days that access to capital was at risk, Bear Stearns said today that its cash position had ``significantly deteriorated.'' The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement today. Traders have been reluctant to engage in long-term transactions with Bear Stearns, the Wall Street Journal reported yesterday.

``We have tried to confront and dispel these rumors and parse fact from fiction,'' Chief Executive Officer Alan Schwartz said in a statement. ``Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.''

Options traders increased bets that Bear Stearns's survival is in doubt. Implied volatility, a measure of how much investors are paying to insure against further stock-price losses, surpassed 300 today for the New York-based firm. That's a level Ambac Financial Group Inc. and Thornburg Mortgage Inc. reached this year when their viability was questioned.
Lehman, National City

Lehman Brothers Holdings Inc., the largest underwriter of mortgage bonds, tumbled $4.96, or 11 percent, to $41.03.

Citigroup Inc., JPMorgan and Bank of America Corp., the three largest U.S. banks, each dropped more than 1 percent. Washington Mutual Inc., the largest savings and loan, lost 84 cents to $11.29.

National City Corp., Ohio's largest bank, dropped $1.21 to $13.80 after Moody's Investors Service downgraded its credit ratings because of likely mortgage-related losses. Moody's said the housing market downturn may cause further losses in National City's holdings of home loans and commercial real-estate debt. Another downgrade is possible, Moody's said.

The world's biggest banks and securities firms have posted $195 billion in asset writedowns and credit losses since the beginning of 2007 as the subprime mortgage market collapsed.
`Broader, Deeper and Worse'

``Throughout this whole process, it's been broader, deeper and worse than we were told it was going to be,'' said Steve Lehman, who manages $2 billion at Federated Investors Inc. in Pittsburgh. ``It's a mess on unprecedented scale, at least that I know of.''

Boeing Co. posted the bigger of only two gains in the Dow average, adding $2.02 to $76.20 after Morgan Stanley upgraded the world's second-largest commercial-aircraft maker to ``overweight'' from ``equal-weight.''

Traders now price in a 38 percent chance the Fed will cut its benchmark rate by a full percentage point to 2 percent by March 18, an outcome they had ruled out yesterday, according to Fed fund futures. The rest of the bets are for a 0.75 percentage point cut from the current 3 percent.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 70.5 from 70.8 in February. The measure is the lowest reading since February 1992 and compares with an average 85.6 in 2007. Economists had forecast the confidence measure would fall to 69.3, according to a Bloomberg News survey.

The steady reading in the cost of living index followed a 0.4 percent gain in January, the Labor Department said. Economists surveyed by Bloomberg had forecast an advance of 0.3 percent. So-called core prices, which exclude food and energy, were also unchanged, the first time they didn't increase since November 2006.