Bear's Bailout Spooks Stock Market

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the company’s president and CEO Alan Schwartz said in a statement. "We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

Initial relief that Bear had secured a financial lifeline turned to fear as traders wondered if other financial institutions were in a similar position.

A Fed spokesman said the central bank’s action on Bear earlier had precedent in the 1930s and 1960s and the ultimate size of Fed support was uncertain, dependent on the firm's needs and collateral. So far the Fed is playing its cards close to the chest, notes Action Economics, with the central bank stating that it is "closely monitoring developments" on its website.

U.S. Treasury Secretary Paulson said he is working closely with the Fed and SEC to enhance stability and orderliness of the markets, which remain flexible and resilient. He noted that the trio were continuing to address challenges in the financial markets and is confident that they will minimize disruptions.

"We see this as a move by the Fed to prop up the firm in a time of crisis, but think the long-term viability of the firm as a standalone entity may be challenged," says S&P Equity Research.

“This is going to be a big tell for the market going forward,” says Pat Dorsey, director of stock analysis at Morningstar. “You’ve had Countrywide…. [but] this is the first very large institution suffering something that could be close to terminal.”

"It’s going to be an interesting weekend," adds Dorsey. "Everybody is a counterparty to Bear. If Bear does go under, the whole system freezes up because everybody has counterparty risk. I have a hard time seeing the Fed letting that happen."

Standard & Poor's Ratings Services lowered its long-term counterparty credit rating on Bear to BBB from A and placed its long- and short-term ratings on CreditWatch with negative implications.

"[A]lthough we view the liquidity support to Bear as positive, we consider it a short-term solution to a longer term issue that does not entirely affect Bear's confidence crisis," wrote S&P analysts. "We also remain concerned about Bear's ability to generate sustainable revenues in an ongoing volatile market environment."

Tremors were felt elsewhere in the financial sector. Moody's downgraded Washington Mutual (BSC) to BAA3 – one notch above junk -- with a negative outlook on its senior unsecured rating, reflecting the "rapid deterioration of the residential housing sector in Q1." WaMu shares were trading 6.5% lower.

The University of Michigan U.S. consumer sentiment March final reading was 70.5, little changed from 70.8 in the preliminary report, and above the 69.0 expected by the market. The current economic conditions index edged up to 84.6 from 83.8 in February, while expectations dipped to 61.4 from 62.4. The one-year ahead inflation index jumped to 4.5% from 3.6%.

The overall weak consumer sentiment figures are now approaching levels that historically have been seen during recession, says S&P Economics.

The U.S. consumer price index was unchanged in February, along with the core index which excludes food and energy. On a year over year basis, headline CPI slowed to 4%, from 4.3%, and the core rate fell from 2.5% to 2.3%. "Those are much milder than expected," Action Economics says, but warns "this could be more of a one-off."

The slowing economy and high levels of inflation had given rise to concerns about a return of 1970s-style stagflation. But the CPI data gives the Federal Reserve "a free hand to cut rates substantially next week," Action Economics says.

Fed chairman Ben Bernanke spoke Friday afternoon on "Fostering Sustainable Homeownership" but did not deviate from the subject of his speech. Also Friday, President Bush said in a speech in New York that the government is acting swiftly on the credit crisis.

April NYMEX crude oil last traded down 23 cents at $110.10 per barrel, after ranging between $108.84 and $110.92. Comex April gold futures rose $5.20 to $999.00 after the dollar, up at the outset of trading, fell as U.S. stocks skidded on Bear Stearns' bailout.

Among stocks in the news Friday, Boeing (BA) was reportedly upgraded by a Morgan Stanley analyst from equal-weight to overweight.

AnnTaylor Stores Corp. (ANN) posted an 11-cent per share loss, vs. earnings of 31 cents a year ago, as same-store sales fell 3.2% and total sales rose 3.7%. The retailer expects the next quarter to be the most challenging of the year.

Harley-Davidson (ANN) fell after Citigroup removed the stock from its Top Pick Live list.

European stocks fell Friday after Wall Street’s stumble. In London, the FTSE 100 index shed 1.11% to 5,629.10. In Paris, the CAC 40 index fell 0.91% to 4,588.11. Germany’s DAX index lost 0.97% to trade at 6,437.45.

Asian indexes lost ground. Japan’s Nikkei 225 index dropped 1.54% to 12,241.60. In Hong Kong, the Hang Seng index fell 0.29% to 22,237.11.

Treasury market

Treasuries rallied as unchanged February CPI eased inflation concerns. A flight to safety bid contributed to gains on back of news that the Federal Reserve is coordinating with JP Morgan Chase to bolster Bear Stearns, who said its liquidity position had deteriorated significantly.

The 10-year note rose 25/32 to 100-19/32 for a yield of 3.43%. The 30-year bond soared

46/32 to 100-09/32 for a yield of 4.36%.