Bear Stearns...

The Fed, working closely with bank regulators and the Treasury Department, raced to complete the deal Sunday night in order to prevent investors from panicking on Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments.

In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.​

As Michael Feroli of J.P. Morgan Chase notes: “in a short period of time the Fed could have up to $400 billion of mortgage assets on its balance sheet.”​

Meanwhile, worries persist that other securities firms and commercial banks might be on shaky ground. Lehman Brothers Holdings Inc. Chief Executive Richard Fuld, concerned about the markets and possible fallout from Bear Stearns's troubles, cut short a trip to India and returned home Sunday, ahead of schedule, according to people familiar with the matter. The decision came after a series of calls Saturday to both senior executives at the firm and Treasury Secretary Henry Paulson, these people say.​

In Europe banks were the heaviest falling stocks as investors worried about which financial institution would be the next to experience problems with creditors.

UBS, the Swiss bank, fell 10.6 per cent, while in the UK Royal Bank of Scotland and Barclays both fell about 7 per cent. Alliance & Leicester, a mortgage lender, tumbled 10.5 per cent.

An announcement by the Bank of England that it was to inject an extra £5bn into distressed money markets did nothing to restore confidence, and the FTSE 100 in London fell 2.9 per cent to 5,469.3.

In Europe, the FTSE Eurofirst 300 plunged 3.8 per cent to 1,207.91, while Germany’s Xetra Dax fell 3.8 per cent to 6,205.41, and in France the CAC 40 dropped 3.2 per cent to 4,447.34.​

US equity markets fell sharply in opening trade on Monday, as financial stocks sold off amid deepening worries about the health of the world’s financial institutions.

The benchmark S&P 500 index fell 1.7 per cent to 1,266.80, while the Dow Jones industrial average fell 1.3 per cent to 11,799.74. The Nasdaq composite index fell 1.9 per cent to 2,170.15.

The Federal Reserve spooked traders and analysts when it launched a series of radical initiatives over the weekend designed to bolster the liquidity and confidence of financial markets.​

We have put in place with the Federal Reserve a special lending facility. It's a non recourse facility to JPMorgan Chase for up to $30b or so of illiquid assets, largely mortgage-related. So that is in doing our due diligence an area that we needed to get comfort upon, was some of the more illiquid assets on the balance sheet. So obviously couldn't be in stronger hands than to be -- arrange for financing through the Federal Reserve and again with no recourse to JPMorgan Chase.​

Two dollars per share is an astonishingly low price to pay for Bear Stearns: when I first saw it I honestly thought it was a misprint. If Bear is essentially worth nothing, that means other banks - Lehman seems to be the latest in the crosshairs - are also worth less than the market thought on Friday. But overall the rescue of Bear Stearns by JP Morgan is a good thing for the international financial system, and a good thing for the markets. Here's a bit of late-Sunday-night analysis to set you up for what's likely to be a very volatile Monday....

The big risk with this deal is that the markets will take the price paid for Bear as a mark, and will sell off the other four investment banks accordingly. After all, if you strip out the value of the headquarters building, Bear's shareholders are essentially paying JP Morgan $1 billion to take the bank off their hands. If Bear's worth less than zero, is Lehman really worth $20 billion?

And that's why I'm not a huge fan of the cut in the Fed's primary credit rate, either: it seems panicky and prone to backfiring. What's more, if they're cutting the discount rate - and it seems that that's exactly what they're doing - they should say so, rather than just talking about a "primary credit rate" which no one's ever heard of. In any case, given that they were scheduled to cut the discount rate on Tuesday, did they really need to do that now, and make themselves seem even more jittery and panicky than they needed to?

In any case, the Fed is now lending money to investment banks - which it doesn't regulate - at exactly the same rate at which it lends to regulated commercial banks. While Jamie Dimon has shown himself to be decisive and opportunistic this weekend, Ben Bernanke looks increasingly like a schmuck who'll do anything Wall Street asks him to do.​