Dow rises, S&P and Nasdaq down after Bear deal

NEW YORK (Reuters) - The Dow industrials ended slightly higher, but the S&P 500 and the Nasdaq fell on Monday after JPMorgan Chase & Co’s deal to buy struggling brokerage Bear Stearns at a rock bottom price failed to dispel fears of deeper fallout from the escalating credit crisis.

In a deal backed by the Federal Reserve, JPMorgan said it would buy Bear Stearns for $2 per share, or one-fifteenth of the price at Friday’s close, rescuing the investment bank from collapsing under the weight of heavy bets on mortgages.

JPMorgan shares rose 10.3 percent to $40.31 and gave the Dow enough of a lift to enable it to finish slightly higher after an earlier slide of more than 190 points. Investors bought JPMorgan shares on optimism that the bank will turn a profit on its bargain basement investment in what was the No. 5 U.S. investment bank.

But most investment banking shares got clobbered. Lehman Brothers fell 19.1 percent to $31.75 on fears it was vulnerable to the same credit-related forces that took Bear down so quickly. Lehman’s stock hit a session low at $20.55, its lowest since June 2000, earlier in the day.

The market has “been pretty much dominated by one thing and one thing only, and that’s Bear Stearns and ... who we think may be next,” said Kevin Kruszenski, head of listed trading at KeyBanc Capital Markets in Cleveland.

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The Dow Jones industrial average rose 21.16 points, or 0.18 percent, to end at 11,972.25. The Standard & Poor’s 500 Index slipped 11.54 points, or 0.90 percent, to 1,276.60. The Nasdaq Composite Index dropped 35.48 points, or 1.60 percent, to 2,177.01.

Other banking shares held their own in Monday’s volatile session as investors took heart from a series of Federal Reserve moves to shore up the financial system, including expectations of an interest-rate cut of 1 percentage point at Tuesday’s policy meeting.

Wells Fargo rose 1.2 percent to $28.78, while Bank of America gained 0.8 percent to $35.96.

Shares of Bear, which recently had ranked as the fifth-largest U.S. investment bank, had reached a high of $172.61 last year.

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On Monday, Bear’s stock plummeted 84.4 percent to close at $4.81. It topped the list of the biggest percentage losers on the New York Stock Exchange.

Interest-rate futures have been pricing in a 1-percentage-point point cut in benchmark U.S. interest rates by the Fed when it meets tomorrow. Since mid-September, the Fed has reduced interest rates by 2.25 percentage points to ease strains in credit markets.

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The “fire sale” of Bear has put U.S. banks at risk as it will lead to valuation adjustments that could result in a drop in stock prices of as much as 50 percent, Oppenheimer & Co analyst Meredith Whitney wrote.

Energy shares were among the top drags on the Dow and the S&P 500 after oil prices tumbled more than 4 percent in New York as investors dumped crude on concerns about a slowing economy.

The heaviest weights in the energy sector included Occidental Petroleum Corp, down 5.9 percent at $70.67, and Schlumberger Ltd, down 3.2 percent at $81.23.

The New York Federal Reserve Bank reported an unexpectedly steep drop in its manufacturing survey and a rise in prices paid. It was the worst reading of business conditions in the state of New York since the index was launched in July 2001.

Trading was heavy on the New York Stock Exchange, with about 2.0 billion shares changing hands, above last year’s estimated daily average of roughly 1.9 billion, while on Nasdaq, about 2.38 billion shares traded, above last year’s daily average of 2.17 billion.

Declining stocks outnumbered advancing ones by a ratio of about 5 to 1 on the NYSE and on the Nasdaq, by about 3 to 1.

Editing by Jan Paschal