Wall Street in crisis of confidence

NEW YORK (CNNMoney.com) -- Stocks looked set for a miserable start Monday as the distressed sale of Bear Stearns for only a fraction of its recent value and emergency action by the Federal Reserve deepened fears about the health of the financial sector.

Less than three hours before the start of trading, Nasdaq and S&P futures were sharply lower, suggesting heavy losses at the market open.

Markets in Asia and and Europe took a hit, with Japan's Nikkei closing down 3.7% to close below the 12,000 mark for the first time in two years. Major European markets sank more than 2% in early trading.

"It's a deepening of a crisis of confidence," said Peter Cardillo, chief market economist for Avalon Partners. "The Fed has taken extraordinary steps but with the collapse of Bear Stearns, the question is who's next? The perception is that the Fed has lost control of this."

The Fed lowered the rate at which it lends loans to financial institutions to 3.25% on Sunday. It also announced that it would now lend directly to big Wall Street firms, starting Monday, in a move to stem the credit crisis.

"Personally, I think the Fed has not lost control, it's doing everything it can," said Cardillo. But he said there's little the Fed can do at this point to help stem the crisis of confidence. "Even if they cut the fed funds rate today, I don't think that would help."

The cut to the discount rate comes ahead of the regularly scheduled Fed meeting set for Tuesday, at which another deep cut to the fed funds rate, a key short-term interest rate, is expected.

Also on Sunday, JP Morgan Chase & Co. (JPM, Fortune 500) agreed to buy troubled Wall Street firm Bear Stearns Cos. (BSC, Fortune 500) for just $2 a share, or about $236 million. That's less than 4% of Bear's value at the close on Thursday. Bear Stearns shares closed at $30 on Friday after plunging 47%.

JP Morgan Chase shares fell 3% in early Frankfurt trading Monday, while rival Citigroup (C, Fortune 500) fell 5%. Other major Wall Street firms also were battered in early Frankfurt trading. Merrill Lynch (MER, Fortune 500), the nation's largest brokerage, was down 6.2%, while Goldman Sachs (GS, Fortune 500) lost 7.8% and Lehman Brothers (LEH, Fortune 500) plunged 20.3% in early trading there.

In other markets, the dollar plunged to a near 13-year low against the yen, and oil prices soared to a record trading high near $112 a barrel.

Most recently, oil prices were off that high at $110.45 for a barrel of light, sweet crude, but that's still up 24 cents from Friday's close.

Gold soared above the $1,000 an ounce mark once again, rising $11.70 to $1,009.90.

In other corporate news, Citigroup announced a new chairman and a new CEO for its institutional clients group, which includes its markets and banking unit as well as its alternative investments operation.

Away from the finance sector, Weyerhaeuser (WY, Fortune 500) announced early Monday the sale of its containerboard packaging and recycling business to International Paper (IP, Fortune 500) for $6 billion in cash.