WASHINGTON — Seeking to quell incipient panic on Wall Street, the Federal Reserve on Friday dusted off a tool last used during the era of the 1930s Great Depression and gave emergency credit to investment bank Bear Stearns Cos. to help it stave off insolvency.
The rare action underscored a deepening crisis of confidence in financial markets and how hard the Fed is working to prevent bank failures, which could have a catastrophic domino effect in the shaken U.S. financial world.
Federal Reserve Chairman Ben Bernanke is swimming against difficult currents. On Friday, oil remained at record high prices, the dollar continued skidding against major currencies and stocks plunged again. Investors took refuge in perceived safer bets, running up the price of gold and silver while driving down yields on Treasury securities.
Even before Friday's equivalent of a bank run on Bear Stearns, the Fed had pledged to make about half a trillion dollars' worth of credit available to banks and securities dealers. As part of Friday's move, the Fed assumed default risks associated with the emergency loan.
That set the stage for a complicated week ahead. The Federal Reserve's policy-making body meets Tuesday and is expected to cut short-term interest rates again by half a percentage point or more. And several major investment banks, shunned as stock-market lepers, are due to report earnings amid heightened fears. Several said Friday that they'd report their earnings early in the week in the hope of reducing volatility.
In a previously scheduled appearance Friday before the Economic Club of New York, President Bush supported the Fed chief and sought to calm markets.
"I respect Ben Bernanke. I think he is doing a good job under tough circumstances," Bush said in a speech that essentially touted the nation's strong economic fundamentals despite financial market turmoil.
Referring to the Fed's move to save Bear Stearns, Bush noted that it "seems like I showed up in a interesting moment (laughter) — during an interesting time."
Just 48 hours earlier, Bear Stearns Chief Executive Officer Alan Schwartz had said that the bank's balance sheet was fine. By Friday's close, the share price of the onetime titan had fallen by 47 percent and $27 in a single day to $30.
It was an extremely volatile day on Wall Street. The Dow Jones Industrial Average plunged more than 300 points in early trading, swung sharply up and down throughout the day and closed down 194.65 points, to 11,951.09. Similarly, the S&P 500 closed down 27.34 points to 1288.14 and the NASDAQ finished down 51.12 points to 2212.49.
As investors fled stocks, money washed through the commodities market, where assets such as gold, wheat and oil are considered safer bets. Contracts for delivery of gold in April pushed into quadruple digits before settling at $999.50 an ounce. Gold often is considered an alternative to the dollar in periods of economic weakness.
Oil prices crossed into another all-time high of $111 a barrel before settling at $110.21 on the New York Mercantile Exchange.
Many traders were projecting oil prices at $115 a barrel or more next week because oil prices are rising in tandem with the fall of the U.S. dollar against the euro, the currency of the European Union.
Middle Eastern oil producers are paid in dollars and their currencies are pegged to the dollar. But their imports are largely from Europe, so they're demanding higher oil prices to make up for the dollar's weakening. The euro hit another all-time high against the dollar Friday; it now takes $1.57 to purchase one euro.
If the Fed lowers its benchmark federal-funds rate Tuesday as expected, that will weaken the dollar further and probably push oil prices still higher. Gasoline prices will follow. Lower U.S. interest rates make the dollar less attractive in currency markets, because yields on U.S. debt instruments are lower than alternatives abroad.
About the only good economic news of late was Friday's inflation report from the Bureau of Labor Statistics, which showed inflation largely unchanged last month.
Even so, while the prices of food and beverages rose 4.6 percent over the past 12 months, a closer look at February data shows that in that 12-month period, eggs jumped 25 percent, milk more than 18 percent and bread almost 13 percent. Coupled with rising costs for gasoline and home heating, the inflation data show that consumers are stretched more to pay for essential items than they have been in decades.
The catalyst for Friday's financial volatility came from the early morning announcement that the Fed, in conjunction with the Treasury Department and the Securities and Exchange Commission, had authorized a rare financial lifeline to Bear Stearns. A Fed staffer confirmed for McClatchy that this mechanism is part of the Federal Reserve Act, which created the modern Fed, and that the provision hadn't been tapped since the Depression era.
The Fed's credit will flow through JP Morgan Chase, which will re-lend it to Bear Stearns. The size is limited to the amount of collateral that the troubled bank can put up, and the Fed assumes the risk of any default.
Wall Street was awash in rumors that JP Morgan Chase or some other big bank might purchase Bear Stearns by early next week.
The shocking turn of events for a storied Wall Street name followed the collapse earlier in the week of Carlyle Capital, a $22 billion fund owned by private-equity giant Carlyle Group. The troubled fund couldn't meet banks' demands for greater collateral against its loans and collapsed.
Treasury Secretary Henry Paulson issued a statement Friday intended to calm markets, stressing that the "financial system is flexible and resilient and I am confident that the efforts of regulators and market participants will minimize disruption to the system."