US stocks fell today after a cash crunch forced investment bank Bear Stearns to secure emergency funding, triggering a sell-off in financial shares and fanning concerns about an escalating credit crisis.
All three major indexes briefly lost more than 2 per cent after JPMorgan Chase & Co and the Federal Reserve Bank of New York agreed to provide emergency short-term financing to Bear Stearns , the fifth-largest US investment bank.
Bear Stearns, whose stock plunged as much as 50 per cent in morning trading, said the money would let it continue normal operations.
The Standard & Poor's financial index fell 3.7 per cent as investors feared there could be more trouble in the financial sector.
Exposure to the escalating housing crisis prompted Moody's Investors Service to downgrade Washington Mutual to one notch above junk status, sending the largest US savings-and-loan's shares down 9.7 per cent.
Top drags included shares of Lehman Brothers Holdings, which fell 10.7 per cent; Citigroup Inc, down 5.7 per cent, and JPMorgan Chase, which fell 3.4 per cent.
The Dow Jones industrial average shed 228.52 points, or 1.88 per cent, to 11,917.22. The Standard & Poor's 500 Index slid 29.74 points, or 2.26 per cent, to 1,285.74. The Nasdaq Composite Index dropped 51.59 points, or 2.28 per cent, to 2,212.02.
Bear Stearns Chief Executive Alan Schwartz said on a conference call that concerns among customers and lenders got to the point where a lot of people wanted to get their cash out. Before the opening bell, the firm said its liquidity position had deteriorated significantly in the last 24 hours.
Bear Stearns shares dropped 36 per cent to $36.48, after falling as low as $28.42 earlier on the liquidity revelation.
After the news on Bear Stearns, US interest-rate futures showed the market fully expects that the Fed will cut short-term benchmark interest rates by 75 basis points, or three quarters of a percentage point, at its scheduled rate-setting meeting next Tuesday.
This would bring the federal funds target rate down to 2.25 per cent from the current 3 per cent, following cuts by the Fed totaling 2.25 percentage points since mid-September.