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Wall Street hopes for, and braces for, answers

Wall Street begins the new week trying to come to terms with just how bad the fallout from the credit crisis is.
/ Source: The Associated Press

Wall Street begins the new week trying to come to terms with just how bad the fallout from the credit crisis is — so bad that an investment bank worth $20 billion weeks ago has been bought for just $236 million.

The news late Sunday that JPMorgan Chase & Co. will buy Bear Stearns for a sum that’s considered paltry by Wall Street standards is likely to leave investors shaken. What might give stocks some support is the Federal Reserve’s latest steps to inject cash into the banking system — steps aimed at lifting the economy but also to restore some confidence to investors. But how much that will help stocks, and for how long, is a big question on the Street.

Wall Street faces a paradox as trading opens — 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. And the near-collapse of Bear Stearns after it invested heavily in risky mortgage-backed securities, while it ends uncertainty about one company, still raises concerns about how badly wounded other financial institutions might be.

Some answers will come this week, when quarterly earnings reports are due from Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., and Morgan Stanley. Bear Stearns was scheduled to report its results Monday; it wasn’t clear if it would go ahead with that plan.

Meanwhile, 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.

On Sunday, the central bank cut its discount rate, the interest it charges financial institutions, to 3.25 percent from 3.50 percent, effective immediately, and created another lending facility for big investment banks to secure short-term loans.

The steps are “designed to bolster market liquidity and promote orderly market functioning,” the Fed said in a statement. “Liquid well-functioning markets are essential for the promotion of economic growth.”

And last week, the Fed said it would pump up to $200 billion into the system by taking mortgage-backed securities as collateral.

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.

The question is whether the Fed, which has had mixed success in lessening the impact of the credit crisis and calming the markets, can restore confidence to Wall Street. While investors have felt relief that the Fed is willing to act aggressively, they 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. The positive effect of past Fed moves have quickly evaporated.

Investors are also worried as they see increasing signs of a possible recession in the United States — companies are cutting jobs and the housing market shows few, if any, signs of coming out of its slump.

“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.”

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.

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.