Bears dominate small caps

The Russell 2000 (NYSE: IWM) and the other major U.S. indices are falling following news of the emergency sale of Bear Stearns. At 1:55 p.m. ET, the small-cap index had dropped 13.52 points, or 2.04%, to 649.38. The Dow Jones Industrial Average (INDU) was off 84.75 points, or 0.71%, to 11,866.34.

Wall Street is in a very bearish mood on news that investment bank JPMorgan Chase & Co. (NYSE:JPM) has purchased Bear Stearns (NYSE:BSC) for just $2 per share, according to an announcement on Sunday.

The buyout was unprecedented, as the U.S. Federal Reserve gave JPMorgan $30 billion in special financing to complete the deal and prevent a domino effect that would have wreaked havoc on other major financial institutions and deepened the current turmoil.

The U.S. Central Bank also lowered its discount rate, the rate at which it lends funds to commercial banks, to 3.25% from 3.50%, on Sunday.

“It is a measure of the severity of the current financial crisis,” said Dr. Bob Webb, professor of derivatives, trading and fixed income securities at the McIntire School of Commerce at the University of Virginia, in an e-mail. “It is also an indication of how poorly past attempts by the Fed and other central banks to deal with the crisis have fared.”

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