NEW YORK (AP) - Wall Street is facing a paradox as the damage from the credit crisis spreads -- the more investors find out about the problems caused by billions of dollars in failed mortgages and investments, the more unknowns seem to crop up. The Street is hoping that this week, the Federal Reserve and the fallout from the near-collapse of Bear Stearns Cos. provide some answers instead of more new questions.
The Fed has been using the various tools at its disposal -- even creating some that investors have never seen before -- to try to mend the ailing financial markets. Just last week, the Fed said it would pump up to $200 billion into the system by taking mortgage-backed securities as collateral. Then, with the aid of JPMorgan Chase & Co., it created a plan to lend funds to Bear Stearns after the investment bank ran short of cash.
There were media reports Sunday that JPMorgan Chase was close to a deal to buy Bear Stearns. That could alleviate worries about the investment bank going under, but it would also underscore how devastating the fallout from the credit crisis has become.
The Fed, in trying to lessen the impact of the credit crisis and calm the markets has had mixed success with the latter goal. Wall Street has felt relief that the Fed is willing to act aggressively. But investors are more anxious than they've been in years; many didn't believe the credit crisis that began last year due to spiking mortgage defaults would reach this magnitude.
Because the litany of bad credit-related news hasn't stopped, the Fed's attempts so far to alleviate the paralysis in the credit markets -- including a series of interest rate cuts and steps to inject hundreds of billions of dollars into the banking system -- have had only short-term benefits. And the market has questioned how much the Fed ultimately can do.
'We're sort of in uncharted waters here,' said Brandon Thomas, chief investment officer for Portfolio Management Consultants, the investment arm of Envestnet. 'Usually the market does a really good job discounting things that are unknown. Now it seems like the unknown is too unknown -- they don't know how to discount it.'
The worst fear is that Bear Stearns, while it was more heavily exposed to risky mortgage backed securities than some of its competitors, may be the tripwire that spreads serious problems to other companies.
While the market waited to see how Bear Stearns' situation would shake out, the question weighing on investors was exactly how sick Bear Stearns is -- and what that might say about the rest of the financial sector. Some answers will come this week, when quarterly earnings reports are due from Bear Stearns, Lehman Brothers Holdings Inc., Goldman Sachs Group Inc., and Morgan Stanley.
Last week was a fitful one for Wall Street. After soaring early in the week on news that the Fed was taking new steps to try to end the near paralysis in the credit markets, stocks pulled back Friday on news that Bear Stearns had to be bailed out. The major indexes finished the week little changed. The Dow rose 0.48 percent, the Standard & Poor's 500 index slipped 0.40 percent, and the Nasdaq composite index ended flat.
World markets also may have something to say about the problems when they open, too. Lately, they have reacted badly to the worsening credit market in the U.S., prompting foreign central banks to join the Fed in trying to calm investors.
The Fed said it will lend as much as $200 billion to banks and brokerages to try to create a market for mortgage-backed assets, which no one wants to buy right now.
However, the Fed's loan plan is only a temporary solution. 'The banks will eventually recognize their losses,' said Swiss Re chief U.S. economist Kurt Karl. 'It will be a tough year for everybody except maybe those manufacturers exclusively devoted to exporting.'
'It's hard to see how we're not going to have a recession,' Karl said. 'We could scrape by with a non-technical recession ... but it's pretty ugly.'
The Fed is expected to take another step this week to help the economy -- on Tuesday, it holds a regularly scheduled meeting on interest rates. The Fed is going to have to make a big rate move and a powerful statement to reassure the markets, and most analysts expect at least a half-point reduction in the key fed funds rate, which now stands at 3 percent. Some believe the Fed will slash rates by a full point.
This week's economic data is expected to show more weakness in the economy but some easing in inflation pressures.
Economists surveyed by Thomson Financial/IFR anticipate the Commerce Department on Tuesday to report declines in February housing starts and building permits; the Labor Department on Tuesday to report a modest increase in February producer prices; and the Philadelphia Fed on Thursday to report another contraction in the region's business activity.
Meanwhile, credit card processor Visa Inc. is expected to launch what it anticipates to be the largest initial public offering in U.S. history.
Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.