Stocks Down After Bear Stearns Deal

On top of supporting the buyout, the Federal Reserve took the extraordinary step of lowering the rate it charges to loan directly to banks on Sunday night two days before its scheduled meeting Tuesday. The central bank lowered the discount rate by a quarter point to 3.25 percent.

A buyout of Bear Stearns was certainly more appealing than the alternative: letting the investment bank collapse and causing huge losses for anyone linked to it.

And the Fed's actions Sunday night were seen as a pledge that the central bank would do everything in its power to keep the credit crisis from destroying the financial industry and the economy, said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co.

Still, the market remained extremely volatile, and a steeper drop Monday was still quite possible. The sale of Bear Stearns and the fact that JPMorgan is valuing the fifth-largest Wall Street investment bank at a paltry $2.03 a share, or $240.1 million stirred fear among investors worldwide about other banks' exposure to the troubled credit markets.

"Our economy needs to substantially delever. You're going to have some very weak players pushed out of business," Battipaglia added, saying JPMorgan's buy of Bear Stearns and Bank of America Corp.'s acquisition of mortgage lender Countrywide are probably not the only rescues the industry will witness during this credit crisis.

After a drop of more than 175 points in early trading, the Dow Jones industrial average recovered to trade down 5.70, or 0.05 percent, to 11,945.39. JPMorgan is one of the Dow components, and rose more than 10 percent.

Broader indexes also made up some lost ground. The Standard & Poor's 500 index fell 9.36, or 0.73 percent, to 1,278.78, while the Nasdaq composite index fell 20.59, or 0.93 percent, to 2,191.90.