The U.S. Federal Reserve cut to its lending rate to 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 Federal Reserve headquarters in Washington, DC.

U.S. stock index futures rose on Sunday evening after the unexpected rate cut. S&P 500 futures were up 5.3 points and Dow Jones Industrial Average futures rose 84 points. Nasdaq 100 futures gained 5 points.

The moves were part of a series of new steps to help provide relief to a spreading credit crisis that threatens to plunge the U.S. economy into recession.

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.”

The new lending facility will be available to financial institutions on Monday.

It will be in place for at least six months and “may be extended as conditions warrant,” the Fed said. The interest rate will be 3.25 percent and a range of collateral will be accepted to back the loans.

The Fed also approved the financing arrangement announced Sunday in which JPMorgan Chase [JPM 36.54 -1.57 (-4.12%)] will acquire rival Bear Stearns [BSC 30.0 -27.00 (-47.37%)]. The deal valued at $236.2 million, a stunning collapse for one of the world’s largest and most venerable investment banks. The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

The Fed’s actions are the latest in a recent string of unconventional steps to deal with a worsening credit crisis that has unhinged Wall Street. And, the action comes just two days before the central bank’s scheduled meeting on Tuesday, where another big cut to a key interest rate that affects millions of people and businesses is expected to be ordered.

The “discount” rate cut announced Sunday covers only short-term loans that financial institutions get directly from the Federal Reserve.

Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating.

The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis. Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.

The Fed this past week also said it would pour as much as $200 billion into big Wall Street banks and investment houses and allow them to put up risky home-loan packages as collateral. This maneuver was intended to bring sorely needed relief in the market for mortgage securities. The Fed also has offered as much as $200 billion in short-term loans to banks and large financial institutions.

Source CNBC

Japan’s benchmark Nikkei stock index plunged more than 3 percent early Monday as traders sold exporter issues on a weaker dollar, which plunged to a 12 1/2-year low.

The Nikkei 225 stock index fell 407.81 points, or 3.33 percent, to 11,833.79 on the Tokyo Stock Exchange about half an hour after the market opened Monday. The index lost 1.54 percent Friday after losing 3.33 percent Thursday.

Players snubbed reports that JPMorgan will buy ailing Bear Stearns and that the U.S. Fed approved a discount rate cut, which was announced shortly before the market opened in Tokyo.

Exporter issues were among the early decliners as the dollar fell to 97.46 yen, plunging to the lowest level since Sept. 1995.

Financial issues also were lower.

The rocky ride for the U.S. stock market is likely to intensify this week with investors focusing on a deal to save one of the biggest investment banks while regulators rapidly burn through options to limit more damage to the financial system.

All eyes will again be on Bear Stearns Cos after news on Sunday that the fifth-largest U.S. investment bank was close to selling itself to JPMorgan Chase & Co.

On Friday the Federal Reserve and JPMorgan stepped in to rescue Bear Stearns with emergency funding as fallout from the global credit crisis took its toll on the brokerage’s cash position.

Bear was hoping to announce a deal before the open of Asian markets, the Wall Street Journal said on Sunday.

News of the imminent announcement did not stop U.S. stock indexes futures from opening the week lower Sunday evening in New York. S&P 500 futures pointed to a lower U.S. stock market open on Monday, falling 7 points, or 0.5 percent, while Nasdaq futures were down 7.0 point also at 1717 .

The U.S. dollar also breached a new low of $1.57 against the euro in early Monday morning Asian trading.

“It will be a logical outcome if the (U.S.) market kept panicking over fears of who is next,” said Chip Hanlon, president Delta Global Advisors, Inc. in Huntington Beach, California on Sunday.

Beyond Bear Stearns the focus will be on how investment banks weathered the credit market meltdown in their first quarter when four major Wall Street firms report earnings this week. Bear Stearns will report its results on Monday.

Bear Stearns is first out of the block on Monday. Bear moved up its earnings release, which was initially scheduled for Thursday. Lehman Brothers and Goldman Sachs will report earnings on Tuesday, followed by Morgan Stanley on Wednesday.

On Friday, Lehman’s stock was the second-biggest decliner among investment banks, falling 14.6 percent, or $6.73, to close at $39.26 on the New York Stock Exchange.

Forecasts and stock prices have come down sharply for all the big banks, as the credit crunch spreads across almost every market.

FED FOCUS

The Federal Reserve’s policy-setting meeting on Tuesday will also be a highlight of the holiday-shortened week. The U.S. stock market will be closed for Good Friday.

U.S. interest-rate futures showed more than a 50 percent chance on Friday that the central bank will cut its benchmark fed funds rate target by 100 basis points this week to revive an economy that many say is already in recession.

“Most of the focus will be on the Federal Reserve. Will the Fed cut rates? And if so, how much? And most importantly, what will the statement that accompanies the decision say?” asked Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany, New York. “Frankly, the Fed said it all in their bailout of Bear Stearns.”

Market participants have questioned the effectiveness of the U.S. central bank’s efforts. On Tuesday, March 11, the Fed teamed up with other central banks to get up to $200 billion in fresh funds to cash-starved markets. The market rallied sharply for its best day in five years, but most of the gains were gone by the end of the week.

Then on Friday, Bear Stearns said a cash crunch forced it to turn to the Federal Reserve and JPMorgan Chase for emergency funds, before news late Sunday that JPMorgan Chase & Co is close to rescuing the fifth-largest U.S. investment bank.

SKATES CLOSE TO THE BEAR

For US stocks broadly, the S&P500 index was close to falling into a bear market last week. If it drops further this week, it could cross a threshold that normally indicates a bear market, a drop of 20 percent from its October closing high. The Nasdaq turned bearish last month.

The Dow Jones industrial average <.DJI> fell 194.65 points, or 1.60 percent, to end on Friday at 11,951.09, with only one of the 30 Dow components, Boeing Co. , finishing higher. The Standard & Poor’s 500 index <.SPX> fell 27.34 points, or 2.08 percent, to 1,288.14, and the Nasdaq Composite Index <.IXIC> lost 51.12 points, or 2.26 percent, to close at 2,212.49.

For the week, the Dow industrials gained 0.48 percent though, thanks to Tuesday’s huge rally, but the Standard & Poor’s 500 index <.SPX> slipped 0.40 percent and the Nasdaq was unchanged.

For the year, the Dow is down 9.90 percent, the S&P 500 is off 12.27 percent and the Nasdaq has lost 16.58 percent.

PPI, HOUSING AND RECESSION

Among the coming week’s key economic data will be the U.S. Producer Price Index on Tuesday, with investors concerned about rising inflation even as the economy slows. Economists polled by Reuters expect February core PPI, excluding volatile food and energy prices, to rise 0.2 percent. In January, core PPI gained 0.4 percent.

On Friday, a government report unexpectedly showed February’s Consumer Price Index, another top inflation gauge, was unchanged. While that leaves more room for the Federal Reserve to cut interest rates, analysts were skeptical about the tame inflation picture painted by the data because prices of oil, gold and other commodities recently hit record highs.

Wall Street will get some other economic data this week that could give more clues about the U.S. economy’s health, with industrial production and capacity utilization due Monday and February housing starts set for Tuesday.

Weekly jobless claims and a March index of regional business activity from the Federal Reserve Bank of Philadelphia will round out the economic week on Thursday.

For economists’ forecasts on these and other economic indicators for the week starting March 17, please click on

Wall Street will have one thing in mind as it watches the week’s stream of numbers, Johnson said.

“The question is: Did the economy enter a recession in February? We will get an answer to that question when we see the industrial production and housing numbers,” he said.

 Bear Stearns was founded in 1923 and in recent years was best known for its aggressive investing in mortgage-backed securities–and what was once a cash cow turned into the investment bank’s undoing.

In June, two Bear-managed hedge funds worth billions of dollars collapsed. The funds were heavily invested in securities backed by subprime mortgages. Until that point, subprime mortgage-backed securities were immensely popular with investors because of their profitability.

The funds’ collapse and subsequent problems in the credit markets called into question Bear Stearns’ ability to manage its own risk and the leadership ability of then-Chief Executive James Cayne. Critics of the company said Cayne spent too much time away from the office last year playing golf and bridge as the problems unfolded.

Cayne is the same executive who refused to let Bear Stearns provide support as part of a Federal Reserve-led plan to rescue Long-Term Capital Management in 1998. His reticence was said to deeply anger some of his fellow Wall Street CEOs, and the episode came up every time Bear was reported to be in trouble in recent months.

Cayne took over from the legendary Alan “Ace” Greenberg in 1993. Greenberg joined Bear Stearns as a clerk, working his way up through the ranks to eventually take over as CEO in 1978. Greenberg was known for his irreverent style, and his regular memos to employees were turned into a book called “Memos from the Chairman.”

Before Greenberg’s ascendancy to CEO, Bear Stearns began to expand from its New York roots throughout the 1950s and 1960s, opening international offices and expanding its U.S. operations.

The company was opened in 1923 as an equity trading shop. Today, it has subsidiaries providing a wide array of financial services products for individuals, corporations, institutions and governments. Generally, it provides capital markets, wealth management and global clearing services to its customers.

Tags | bear, bear stearns, bsc, bsc sold for $2 per share, bsc sold to jpm, Credit Crisis, discount rate cut, fed rate cut, rate cut, recession