Stocks End Mixed After Bear Scare

Updated from 4:09 p.m. EDT

Stocks in the U.S. endured a chaotic session and ended mixed Monday, as the major averages rebounded from the early panic that ripped through the market following the swift downfall of Bear Stearns (BSC Quote - Cramer on BSC - Stock Picks).

The Dow Jones Industrial Average, down nearly 200 points in the morning, rallied to go positive. At the close, it was up 21.16 points, or 0.2%, at 11,972.25, aided by a 10.3% jump in JPMorgan Chase (JPM Quote - Cramer on JPM - Stock Picks), which agreed to buy Bear Stearns at a fire-sale price.

The broader averages closed with losses, but they had been deeper in the red. The S&P 500 was down 11.54 points, or 0.9%, at 1276.60, and the Nasdaq was off 35.48 points, or 1.6%, at 2177.01.

"It could have been a lot worse," said Peter Cardillo, chief market economist with Avalon Partners. "I think the fear factor is obviously quite high and will continue until we really get a handle on the credit markets, but the [Federal Reserve] is certainly throwing a lot of ammunition and a lot of lifesavers out there, and I think that's helping to spur some of the volatility."

Breadth was poor. Some 5.78 billion shares changed hands on the New York Stock Exchange, with decliners outpacing advancers by a 7-to-2 margin. The Nasdaq saw volume reach 2.38 billion shares as losers trounced winners 4 to 1.

When the market opened, New York stocks slumped amid worries that other firms could meet the same fate as Bear Stearns, one of Wall Street's most prominent institutions. Concern about Bear's viability peaked last week, and customer defections forced the 85-year-old firm to seek Fed-backed funding from JPMorgan on Friday.

Then, over the weekend, JPMorgan reached a deal to buy Bear for $2 a share -- a thin sliver of what the investment bank was worth last week, let alone a year ago, when it was trading around $150. In total, the buyout is worth $236.2 million. That compares with Bear's $4.08 billion market capitalization last week after losing nearly half of its value in a single session. Bear closed down 84% at $4.81.

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"Is it any surprise that someone imploded in one of the biggest credit crises in U.S. history?" asked Richard Yamarone, chief economist with Argus Research. "I think people would be naïve to think we could escape this without it happening to somebody."

Still, Bear's collapse was shockingly rapid, and the Fed followed it by cutting its discount window lending rate by a quarter-point to 3.25%. Simultaneously, the Fed said it will, for at least six months, let securities dealers borrow at the discount window in a manner similar to commercial banks. The central bank hasn't done this on a regular basis since the Great Depression.

These actions show that the Fed is "willing to do whatever it takes to get the liquidity crunch behind us," said Arun Raha, vice president and senior economist with Swiss Re.

Jason Pride, director of research at Haverford Investments, said it seems like the Fed "is doing everything it can" to prevent another failure among financials.

"We think it's a good thing that they're getting their arms around the entire system, instead of just the commercial banks," he said.

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