Dow Slides on Fed Move and Bear Deal

Stock markets fell sharply at the opening bell on Monday as Wall Street reeled from a stunning series of weekend developments that confirmed investors’ worst fears about the fragile state of the financial industry.

The Dow Jones industrials plummeted at the start of trading as one of Wall Street’s most storied banks, Bear Stearns, lay on its deathbed and central bankers scrambled to stave off a devastating crisis of confidence in the investment community.

At 9:35 a.m., the Dow was down about 140 points, and the broadest measure of the American stock market, the Standard and Poor’s 500-stock index, lost 1.6 percent, as the index edged toward bear-market territory.Investors remain fearful that a panic in the credit markets — which threw Bear Stearns to the brink of bankruptcy and forced a sale to JPMorgan Chase at the humbling price of $2 a share — could spread to other big brokerage firms with extensive exposure to toxic mortgage-backed securities.

The Federal Reserve launched a pre-emptive effort on Sunday to stanch a worldwide stock sell-off, carrying out a series of emergency measures including a cut to the interest rate at which the Fed lends to banks in the hopes of shoring up confidence in the credit markets.

But the moves did not stop widespread declines in the European and Asian markets, all of which dropped more than 3 percent in overnight trading on Sunday and Monday.

“The problem is bigger than the Fed,” said Meredith A. Whitney, an Oppenheimer financial services analyst. “Trillions of dollars of securities were underwritten on the false assumption house prices could never go down on a national basis. That falsehood has put the entire financial system in a tailspin.”

Hong Kong’s benchmark index lost 5.2 percent and Tokyo’s Nikkei 225 index lost 3.7 percent to close at 11,787.51, after declining as much as 5 percent during the day.

All the major European stock indexes, from London to Paris to Berlin, were down more than 3 percent in afternoon trading.

On Wall Street, the Nasdaq composite index, heavily weighted with technology stocks, shed 1.8 percent.

The euro rose again against the dollar and investors rushed to the relative safety of United States Treasuries. The dollar fell to a 13-year low against the yen, and oil hit a new record, near $112 in Asia before falling back. Gold prices, already at record levels, also rose.

The Bank of England moved to help bolster the liquidity of the financial markets and bring down interbank lending rates by offering $10 billion in three-day loans.

Investors across Europe and Asia tried to figure out who might invest more capital to shore up Western financial institutions caught with heavy losses on their holdings of mortgage-backed securities. Chinese state-run institutions, with some of the largest cash holdings, appeared to be on the sidelines, watching as the prices of financial shares plunged, while Citic announced that it would not proceed with a previously announced deal to acquire a $2 billion stake in Bear Stearns.

The declines in Tokyo came even as the Japanese central bank, the Bank of Japan, moved to shore up financial markets by injecting $4.1 billion into short-term money markets. Asian stocks have also been hurt by the weakness of the dollar, which erodes the value in local currencies of overseas profits and forces big exporters like Toyota and Sony to raise prices in foreign markets.

Stock markets in Asia’s two emerging giants, China and India, suffered the biggest losses on Monday. The Shanghai A share market was down 3.6 percent in late trading, the Hang Seng Index in Hong Kong was down 5.2 percent and the Shenzhen A share market was down 6.4 percent. Investors in the China region were troubled not only by the ongoing financial troubles in the United States but also by a weekend of news reports of unrest in Tibet and adjacent Chinese provinces.

“Local investor sentiment is not good — the Hong Kong market is really caught in the middle between happenings in China and the United States,” said Ricky Chan, a stockbroker at Phoenix Capital Securities Ltd. in Hong Kong. With the Shanghai market declining, he said, “plus with the turmoil in Tibet, the local market is quite nervous at this point in time.”

In India, the Sensex 30 index in Bombay plunged 5.1 percent by early afternoon. The index had climbed 47 percent last year on an often speculative boom fueled to a considerable extent by foreign investment.

But India also imports nearly all of its oil, and now faces rising costs with crude oil close to $110 a barrel; this has contributed to a weakening of industrial production, up just 5.3 percent in January from the same month a year ago, and rising wholesale prices, up 5.11 percent for the week ending March 1.

Officials for the China Investment Corporation, China’s $200 billion sovereign wealth fund for domestic and overseas stock purchases, declined to comment on whether American financial companies had any appeal in the current credit market difficulties. Analysts were skeptical that the Chinese would step in while markets remain in turmoil.

“I would think the Chinese will be very careful,” said Hong Liang, a Goldman Sachs economist who specializes in China.

Investments by China’s sovereign wealth fund, the China Investment Corporation, and by Chinese state-owned entities have had a dismal track record so far in the financial sector.

The China Investment Corporation’s maiden investment as it was being organized last spring was a $3 billion nonvoting stake in the initial public offering of the Blackstone Group, the American private equity company. Acquired for only a 4.5 percent discount to the initial offering price of $31, or $29.605, the investment has already lost nearly half its value as the stock has plunged, closing at $15.78 on Friday.

The Blackstone investment has been an embarrassment for the Chinese government because its price was widely reported at the time of the deal — in contrast with bond purchases by China’s central bank for the country’s foreign-exchange reserves, which are managed with the strictest secrecy.

Martin Fackler, Susanne Fowler and David Barboza contributed reporting.
http://www.nytimes.com/2008/03/17/business/worldbusiness/17cnd-stox.html?_r=1&hp&oref=slogin

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