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Fed Closely Watching Markets, Has Paulson s Backing (Update2)

By Vincent Del Giudice

March 14 (Bloomberg) -- The Federal Reserve Board approved the bailout of Bear Stearns Cos. and assured investors it will act as needed to stabilize financial markets. Treasury Secretary Henry Paulson praised the central bank's ``leadership.''

Shares of Bear Stearns plummeted after the securities firm said it obtained emergency funding from JPMorgan Chase & Co. and the New York Fed because its cash position had ``significantly deteriorated.'' The New York Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said. The announcement sent stocks lower.

The Fed ``is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system,'' the central bank said in a statement in Washington, adding that it voted unanimously to approve the Bear Sterns-JPMorgan arrangement.

``The best thing that you can say is it's a move to stop the rot,'' said Neil MacKinnon, chief economist at London-based hedge fund ECU Group PLC. ``It looks pretty horrible. We are facing a potential black hole for all financial markets.''

Paulson, in a statement issued 20 minutes after the Fed's release, said ``there are challenges in our financial markets, and we continue to address them.'' Treasury is ``working closely'' with the Fed and the Securities and Exchange Commission.

``I appreciate the leadership of the Federal Reserve in enhancing the stability and orderliness of our markets,'' Paulson said. ``Our financial system is flexible and resilient and I am confident that the efforts of regulators and market participants will minimize disruption to the system.''

The Standard & Poor's 500 Index retreated 24.57, or 1.9 percent, to 1,290.91 at 11:22 a.m. in New York. The Dow Jones Industrial Average lost 187.98, or 1.6 percent, to 11,957.76. The Nasdaq Composite decreased 42.46, or 1.9 percent, to 2,221.15.