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NEW YORK (AP) - Stocks tumbled Friday after a plan to alleviate a liquidity crisis at Bear Stearns Cos. touched off concerns about the severity of credit troubles. The Dow Jones industrial average gave up about 175 points.
The plan by the New York Federal Reserve and JP Morgan Chase & Co. offers Bear Stearns relief from a sudden liquidity crunch that analysts surmised could have felled the bond house. But the company’s position on the precipice of financial disaster left many investors shaken and spoiled some hopes that troubles in the moribund credit market are on the mend.
Stocks showed moderate increases in the early going after a Labor Department report showed the Consumer Price Index remained flat for February. Wall Street has been expecting inflation would show an increase. But the gains quickly disappeared after investors learned about the severity of troubles at Bear Stearns.
“This is another chapter in a book rather than a one-act play,” said Phil Orlando, chief equity market strategist at Federated Investors. He said the market is worried that further trouble in the credit markets will emerge and that the ramifications of the credit strains and a slowing economy could result in recession.
“Investors thought they are probably more than norm than the exception and maybe this is the tip of the iceberg,” he said, referring to Bear Stearns. “Our sense is that this is sort of an amoeba here and this is sort of a broadly spreading situation.”
In the final half hour of trading, the Dow fell 175.85, or 1.45 percent, to 11,969.89. The Dow had been down as much as 313 points.
Broader stock indicators also declined but pulled off their lows. The Standard & Poor’s 500 index fell 25.22, or 1.92 percent, to 1,290.26, and the Nasdaq composite index fell 45.64, or 2.02 percent, to 2,217.97.
The Russell 2000 index of smaller companies fell 14.24, or 2.10 percent, to 665.47.
Bond prices jumped as stocks retreated. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.43 percent from 3.54 percent late Thursday.
Elisa Parisi, economic analyst at RGE Monitor.com, contends the bond market has recently shown more concern about the economy.
“The stock market is increasingly catching up with signals from the bond market. Somehow the stock market could delude itself into thinking that they have nothing to do with the mortgage fallout,” she said.
Comments from the Fed might have helped corral some of investors’ nervousness Friday. The central bank said it voted unanimously to sign off on the arrangement between JP Morgan and Bear Stearns and that it is ready to provide further resources to stave off further credit troubles. Fed Chairman Ben Bernanke also said Friday he would do what was possible to aid struggling homeowners.
Still, investors remained nervous. The Chicago Board Options Exchange’s volatility index, known as the VIX, and often referred to as the “fear index,” jumped 18.7 percent.
Declining issues outnumbered advancers by about 7 to 1 on the New York Stock Exchange, where volume came to 1.19 billion shares.
“The Bear Stearns news reversed the early positive sentiment from the inflation data,” said Peter Cardillo, chief market economist at Avalon Partners. “There had been nervousness about Bear Stearns for some time and now the market’s concerns about the company have been proven true.”
Friday’s stock market pullback comes a day after an anxious stock market rebounded from an early plunge following a Standard & Poor’s prediction that financial companies are nearing the end of the massive asset write-downs that have pummeled the stock and credit markets for months. The S&P projection had given investors some hope that the seemingly unrelenting losses from the mortgage and credit crisis could have been bottoming out.
Bear Stearns’ woes rekindled investors’ nervousness about the troubles in the financial sector. The company’s shares skidded $23.83, or 42 percent, to $36.58, while JP Morgan fell $1.16, or 3 percent, to $36.95.
Other financial names declined as well. Lehman Brothers Holdings Inc. fell $5.45, or 11.9 percent, to $40.54 and Merrill Lynch & Co. slid $2.30, or 5 percent, to $43.96.
Stock market investors Friday were also eyeing the dwindling dollar and events in the soaring commodities market. Gold prices touched another fresh record Friday.
Light, sweet crude, which set a fresh record Thursday, fell 12 cents to $110.21 per barrel on the New York Mercantile Exchange. Oil came close to its record of $111 set Thursday.
The market’s fall Friday caps a big week for the markets. On Monday, stocks continued a sell-off from last week, falling more than 1 percent as oil again moved into record territory. Then, on Tuesday, stocks surged after the Fed said it would put up $200 billion to loosen tight credit markets. The Dow surged nearly 417 points, its biggest one-day percentage gain in five years. Stocks posted more modest losses and gains Wednesday and Thursday as investors speculated over how much help the Fed’s plan would ultimately provide.
On top of Friday’s concerns, Wall Street remains anxious for Tuesday’s Fed meeting at which the central bank is still expected to lower interest rates. While Wall Street would welcome cheaper access to cash to help consumers and businesses, the freer flow of money could would likely fan inflation concerns and could further weaken the dollar.
Overseas, Japan’s Nikkei stock average finished down 1.54 percent. Britain’s FTSE 100 closed down 1.07 percent, Germany’s DAX index fell 0.75 percent, and France’s CAC-40 lost 0.82 percent.
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NEW YORK - Bear Stearns Cos., one of the most venerable names on Wall Street, turned to a rival bank and the federal government for a last-minute bailout Friday to prevent it from collapsing.

The Federal Reserve responded swiftly to pleas from Bear Stearns that its coffers had “significantly deteriorated” within a 24-hour period as rumors about the bank’s situation fueled the Wall Street version of a run on the bank. Central bankers tapped a rarely used Depression-era provision to provide loans, and said they were ready to provide extra resources to combat an erosion of confidence in America’s biggest financial institutions.

Nearly half the value of Bear Stearns, or about $5.7 billion, was wiped out in a matter of minutes as investors felt the bailout signaled that the credit crisis has reached a more serious stage, and now threatens to undermine the broader financial system _ and the U.S. economy.

“My guess is by next week, there will be rumors of other large, familiar institutions” that might be in financial trouble similar to Bear Stearns, said Anil Kashyap, a professor at the Graduate School of Business at the University of Chicago.

No one has disclosed how large the financing offered to Bear Stearns is.

Bear Stearns, the nation’s fifth-largest investment bank, made its fortune dealing in opaque mortgage-backed securities _ a strategy that backfired amid the worst housing slump in a quarter century. The bank has racked up $2.75 billion in write-downs since last year, and releases first-quarter results on Monday that could show more losses.

Alan Schwartz, Bear Stearns’ chief executive, said the bank had enough money to keep operating at the start of the week. However, market speculation swelled Thursday _ leading investors, customers and lenders to withdraw their business or rescind credit lines.

By that night, Schwartz said the bank recognized that the pace of withdrawals could outstrip the company’s resources. He then contacted JPMorgan Chase & Co. _ the third-largest U.S. commercial bank _ for help.

JPMorgan, which has been hurt far less by the mortgage morass than other investment banks, is providing secured funding to Bear Stearns for 28 days, and those loans will in essence be insured by the Federal Reserve. Schwartz said this will buy Bear Stearns time _ allowing it to “convince customers and counterparties that we have the ability to fund ourselves every day, to do business as usual.”

Schwartz confirmed, as many on Wall Street suspected, that Bear Stearns could now be up for sale. He told analysts during a conference call that the short-term funding “is a bridge to a more permanent solution.” Bear Stearns is working with investment bank Lazard Ltd. to explore its options.

Top executives from Bear Stearns and JPMorgan were discussing the outright sale of Bear Stearns to JPMorgan, according to a person familiar with the talks who was not authorized to speak on the record.

The next 28 days could provide JPMorgan with the time needed to complete due diligence on Bear Stearns before buying the company, giving detail about how much risk is on the books.

JPMorgan is considered to have one of the strongest balance sheets among Wall Street banks, and is not already involved in a rescue like Bank of America’s purchase of Countrywide. In a memo sent to employees, Schwartz said the temporary financing would allow the company to “get back to business as usual.”

Bear Stearns, which has about 14,000 employees worldwide, has struggled since two hedge funds under its control lost billions of dollars after investing heavily in securities backed by pools of subprime mortgages.

“They were the dominant firm for repackaging mortgages,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC. “That’s where all earnings came from. They had the least diversified earnings stream of all of Wall Street securities firms, and as a result, they’re paying the price today.”

As delinquencies and defaults swelled among subprime mortgages _ given to customers with poor credit history _ investors shied away from purchase securities backed by the troubled loans. Those fears expanded to encompass all but the safest bonds and securities, forcing investment banks to significantly reduce the value of their holdings and drying up liquidity throughout the market. The broader financial services sector has amassed nearly $160 billion in write-downs since the middle of last year.

JPMorgan Chase said the financing would not expose its company to any material risk, though its shares dropped 3.6 percent, or $1.37, to $36.74. Bear Stearns plummeted 39 percent, or $22.50, to $34.50. The news rattled investors around the world, pushing the Dow Jones industrial average down about 225 points and pulling other indexes lower.

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AP Business Writers Madlen Read in New York and Martin Crutsinger in Washington contributed to this report.

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