Financial Confidence Crisis Clutches Markets, Sends Stocks Plummeting

By , Money Morning •

By Jennifer Yousfi
Managing Editor

Global financial stocks plunged, dragging world markets lower yesterday (Monday) as the collapse and subsequent sale of The Bear Stearns Cos. Inc. (BSC) stoked new fears about the world credit markets.

“If you get a crisis of confidence in the wholesale banking space and something the size of Bear Stearns could go under, then people start to panic. You get a real fear factor,” Simon Maughan, an analyst at MF Global Ltd. (MF) in London, told Reuters.

Financial shares bore the brunt as panicked investors sought to cash in, but the anticipation of an additional rate cut later today (Tuesday) from the U.S. Federal Reserve and a late-afternoon blue-chip rally helped the U.S. markets to stabilize and pare back on early losses. [For a related story on the Federal Reserve in today’s issue, please click here.]

At the New York close, the blue-chip Dow Jones Industrial Average Index, after being down 200 points earlier in the day had an increase of 18.07 points (0.15%), to close at 11,969.16. The tech-laden Nasdaq Composite Index shed 35.48 points (-1.60%), to reach 2,177.01. And the broader Standard & Poor’s 500 Index lost 11.60 points (-0.90%), to settle at 1,276.54.

The greenback lost ground to both the euro and yen, helping to send dollar-denominated oil to a new high of nearly $112 per barrel. Inflation-wary gold bugs sent gold rocketing upwards to more than $1,030 per ounce.

Bear Stearns shares, which had been already gutted on Friday, plunged another $25.19, over 83%, to close at $4.81. Employees and major stakeholders lost billions as the stock plunged deeply below its 52-week high of $159.36.

It is estimated that the largest shareholders, Barrow, Hanley, Mewhinney & Strauss Inc. and reclusive British investor Joseph C. Lewis, have each lost over $1 billion each on their approximately 10% stakes. [For a list of Bear Stearns top 10 investors, please see the chart below.]

The financial sector was hit hard in early morning trading as the surprise Sunday move from the U.S. Federal Reserve did little to calm the spooked markets. Bear Stearns was the fifth largest U.S. securities firm and the remaining top four all suffered heavy losses yesterday.

“They sold Bear Stearns for $2 a share, so you have to wonder how many of the other firms might be getting close to liquidation,” Ken Tower, chief market strategist at Covered Bridge Tactical, told MarketWatch.

Shares of Lehman Brothers Holdings Inc. (LEH) were particularly hard hit as it is seen as the most vulnerable. Shares dropped 19% with a $7.51 decline to close at $31.75.

“There's a lot of speculation about whether Lehman is going to go the same route as Bear,” Brian Overby, an options analyst at TradeKing Inc. in Charlotte, North Carolina, told Bloomberg News. “The market is extremely willing to pay a lot for [Lehman] options. This is an enormous spike in implied volatility.”

Options traders are betting that Lehman shares will decline by 50% before the end of this month.

Also falling, were shares of Merrill Lynch & Co. Inc. (MER) with a 5% decline, while shares of Morgan Stanley (MS) dropped 8%. Goldman Sachs Group Inc. (GS), the largest U.S. securities firm declined almost 4%.

Other financial institutions suffered similar losses as shares of Citigroup Inc. (C) dropped over 5% and American International Group Inc. (AIG) stock was down 3%.  

But Bear Stearns buyer JPMorgan Chase & Co. (JPM) gained 10% with a $3.77 increase to close at $40.31 despite estimates the firm would rack up $6 billion in merger-related costs due to the acquisition.

A Global Financial Problem

In overseas markets, Japan’s Nikkei Index plunged 454.09 points to close at 11,787.51 after a decline of almost 4%. It represented a two-and-a-half year closing low for the Nikkei as a strong yen – the dollar is at a 13-year low versus the yen – continues to drag on exports for firms such as Toyota Motor Corp. (TM).

Masaru Hamasaki, a senior strategist at Toyota Asset Management, said the yen had advanced so much in such a short time that companies would find it hard to cope, Reuters reported.

“If the yen stays around this level, exporters' earnings will be negatively impacted, not only this year but next year,” Hamasaki said.

“After the de facto bankruptcy of Bear Stearns, investors will likely keep a lookout for similar problems at other banks, though I think we have already seen the extreme situation,” he added.

Hong Kong’s blue-chip Hang Seng Index dropped over 5% with a 1,152.50-point decline to close at 21,084.61. While H shares, Hong Kong-listed shares of mainland China companies, tumbled 7% to close at 11,037.09.

“The mood is one of disbelief that something could happen so quickly, but there's a sense of relief that JPMorgan stepped up to provide some kind of platform," Miles Remington, sales and trading director at BNP Paribas (OTC:BNPQY), told Reuters.

Speaking of the Hang Seng index, he added, “You would suspect in the short term we would test 20,000 [points]. If we are in trouble, we should be wiping out the gains of the last six months.”

In Europe, major indices dropped across the board as financial shares plunged. The Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted declines.

The FTSEurofirst 300 Index, which includes the top 300 European shares, closed 4.4% lower 1,199.80 points. Zurich-based UBS AG (UBS) closed down 11% at $24.66. London-based Barclays PLC (BCS) shed over 7% to close at $32.27.

“It is really – and I don't want to use the broadly quoted word 'panic' here – but it is an absolute confidence crisis and a liquidity crisis. Nobody trusts anyone anymore. It is not a nice situation,” Roland Hirschmueller, an equities trader at German brokerage Baader in Stuttgart, told Reuters.

News and Related Story Links:

Top 10 Bear Stearns Investors

1. Barrow Hanley Mewhinny & Strauss

2. Joseph C. Lewis

3. Morgan Stanley (MS)

4. James E. “Jimmy” Cayne

5. Legg Mason Capital Management (LM)

6. Private Capital Management

7. Barclays Global Investors (BCS)

8. State Street Corp. (STT)

9. The Vanguard Group, Inc.

10. Janus Capital Management (JNS)

Source: The Financial Times, Money Morning Research