NEW YORK (AP) - Wall Street is facing a
paradox as the damage from the credit crisis spreads -- 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. The Street is hoping that this
week, the Federal Reserve and the fallout from the near-collapse of Bear Stearns
Cos. provide some answers instead of more new questions.
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. Just last week, the Fed said it would pump up to $200 billion
into the system by taking mortgage-backed securities as collateral. Then, with
the aid of JPMorgan Chase & Co., it created a plan to lend funds to Bear Stearns
after the investment bank ran short of cash.
There were media reports Sunday that JPMorgan Chase was close to a deal to
buy Bear Stearns. That could alleviate worries about the investment bank going
under, but it would also underscore how devastating the fallout from the credit
crisis has become.
The Fed, in trying to lessen the impact of the credit crisis and calm the
markets has had mixed success with the latter goal. Wall Street has felt relief
that the Fed is willing to act aggressively. But investors 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.
Because the litany of bad credit-related news hasn't stopped, the Fed's
attempts so far to alleviate the paralysis in the credit markets -- including a
series of interest rate cuts and steps to inject hundreds of billions of dollars
into the banking system -- have had only short-term benefits. And the market has
questioned how much the Fed ultimately can do.
"We're sort of in uncharted waters here," said Brandon Thomas, chief
investment officer for Portfolio Management Consultants, the investment arm of
Envestnet. "Usually the market does a really good job discounting things that
are unknown. Now it seems like the unknown is too unknown -- they don't know how
to discount it."
The worst fear is that Bear Stearns, while it was more heavily exposed to
risky mortgage backed securities than some of its competitors, may be the
tripwire that spreads serious problems to other companies.
While the market waited to see how Bear Stearns' situation would shake out,
the question weighing on investors was exactly how sick Bear Stearns is -- and
what that might say about the rest of the financial sector. Some answers will
come this week, when quarterly earnings reports are due from Bear Stearns,
Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., and Morgan Stanley.
Last week was a fitful one for Wall Street. After soaring early in the week
on news that the Fed was taking new steps to try to end the near paralysis in
the credit markets, stocks pulled back Friday on news that Bear Stearns had to
be bailed out. The major indexes finished the week little changed. The Dow rose
0.48 percent, the Standard & Poor's 500 index slipped 0.40 percent, and the
Nasdaq composite index ended flat.
World markets also may have something to say about the problems when they
open, too. Lately, they have reacted badly to the worsening credit market in the
U.S., prompting foreign central banks to join the Fed in trying to calm
investors.
The Fed said it will lend as much as $200 billion to banks and brokerages to
try to create a market for mortgage-backed assets, which no one wants to buy
right now.
However, the Fed's loan plan is only a temporary solution. "The banks will
eventually recognize their losses," said Swiss Re chief U.S. economist Kurt
Karl. "It will be a tough year for everybody except maybe those manufacturers
exclusively devoted to exporting."
"It's hard to see how we're not going to have a recession," Karl said. "We
could scrape by with a non-technical recession ... but it's pretty ugly."
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.
This week's economic data is expected to show more weakness in the economy
but some easing in inflation pressures.
Economists surveyed by Thomson Financial/IFR anticipate the Commerce
Department on Tuesday to report declines in February housing starts and building
permits; the Labor Department on Tuesday to report a modest increase in February
producer prices; and the Philadelphia Fed on Thursday to report another
contraction in the region's business activity.
Meanwhile, credit card processor Visa Inc. is expected to launch what it
anticipates to be the largest initial public offering in U.S. history.
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