Bottoming process begins with Bear, not bear market

By Jennifer Ablan - Analysis

NEW YORK (Reuters) - Less than a week ago, it seemed like the sky was falling on Wall Street when the spectacular unraveling of investment bank Bear Stearns BSC.N sent financial markets, in the United States and elsewhere, into panic mode.

Then the Federal Reserve swooped in. Its liquidity action and its brokering of a deal for JPMorgan Chase & Co. (JPM.N) to take over Bear Stearns made investors less fearful about the probable crippling of the American banking system that could have occurred.

Bear Stearns' fall to the brink of bankruptcy and the aggressive moves by U.S. policy makers have led many investors to believe that these events mark the beginning of a bottoming process.

For everyone who still thinks that stocks won't hit a bottom until the Standard & Poor's 500 .SPX falls into the bear market's grasp, never mind.

"We are in a bottoming process, but it will really be a 'process' because healing of this credit crisis does take time," said Dan Fuss, vice chairman of Loomis Sayles, an investment company that oversees more than $100 billion in fixed-income securities.

What gives Fuss and other major investors reason to believe that a bottom is in the making is that in nearly every previous one, there typically has been a huge failure of an institution that has led to extreme policy responses.

Think Enron and WorldCom, Long-Term Capital Management and Orange County.

"It usually took a big entity to fall over for aggressive, creative regulatory policy to develop," said Bob Doll, vice chairman and global chief investment officer of equities at BlackRock Inc, which manages more than $1.1 trillion in assets.

"That's what we saw with Bear Stearns collapsing and the Fed's extraordinary response to it. And that's why confidence is improving," he added.

AN AVALANCHE OF FEAR

Bear Stearns, which had been heavily exposed to the faltering mortgage market, faced a classic "run on the bank" as the firm burned through cash and lost access to funding when clients furiously yanked assets and unwound trades.

To make matters worse, fears abounded that Lehman Brothers LEH.N, the fourth-largest U.S. investment bank, could suffer a similar fate as Bear, the fifth-largest.

"The Fed was trying to blunt what could have been a snowballing effect of a lack of faith in the financial system," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management, which manages $22.5 billion.

"The Fed saw that they had to do something absolute to stifle what could have been a developing crisis of a full-fledged lack of faith in the investment banking sector, which could have eventually crept into the commercial money banks as well," Wirtz said.

Before Monday, Lehman Brothers LEH.N, Merrill Lynch MER.N, and even venerable Goldman Sachs (GS.N) watched their stocks get "killed" last week, he added.