Market Likely Uneasy Over Bear Stearns

The news late Sunday that JPMorgan Chase & Co. will buy Bear Stearns for a sum that's considered paltry by Wall Street standards is likely to leave investors shaken. What might give stocks some support is the Federal Reserve's latest steps to inject cash into the banking system steps aimed at lifting the economy but also to restore some confidence to investors. But how much that will help stocks, and for how long, is a big question on the Street.

Wall Street faces a paradox as trading opens the more investors find out about the problems caused by billions of dollars in failed mortgages and investments, the more unknowns seem to crop up. And the near-collapse of Bear Stearns after it invested heavily in risky mortgage-backed securities, while it ends uncertainty about one company, still raises concerns about how badly wounded other financial institutions might be.

Some answers will come this week, when quarterly earnings reports are due from Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., and Morgan Stanley. Bear Stearns was scheduled to report its results Monday; it wasn't clear if it would go ahead with that plan.

Meanwhile, the Fed has been using the various tools at its disposal even creating some that investors have never seen before to try to mend the ailing financial markets.

On Sunday, the central bank cut its discount rate, the interest it charges financial institutions, to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

The steps are "designed to bolster market liquidity and promote orderly market functioning," the Fed said in a statement. "Liquid well-functioning markets are essential for the promotion of economic growth."

And last week, the Fed said it would pump up to $200 billion into the system by taking mortgage-backed securities as collateral.

The Fed is expected to take another step this week to help the economy on Tuesday, it holds a regularly scheduled meeting on interest rates. The Fed is going to have to make a big rate move and a powerful statement to reassure the markets, and most analysts expect at least a half-point reduction in the key fed funds rate, which now stands at 3 percent. Some believe the Fed will slash rates by a full point.

The question is whether the Fed, which has had mixed success in lessening the impact of the credit crisis and calming the markets, can restore confidence to Wall Street. While investors have felt relief that the Fed is willing to act aggressively, they are more anxious than they've been in years; many didn't believe the credit crisis that began last year due to spiking mortgage defaults would reach this magnitude. The positive effect of past Fed moves have quickly evaporated.