Video: Markets swoon under weight of mortgage worries

updated 8/10/2007 7:34:43 AM ET 2007-08-10T11:34:43

Wall Street plunged again Thursday after a French bank said it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets. The Dow Jones industrials extended its series of triple-digit swings, this time falling more than 380 points.

The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone — institutions, investors, companies, individuals — can’t get money when they need it unnerved a stock market that has suffered through weeks of volatility triggered by concerns about tight credit and bad subprime mortgages.

A move by the European Central Bank to provide more cash to money markets intensified Wall Street’s angst. Although the bank’s loan of more than $130 billion in overnight funds to banks at a low rate of 4 percent was intended to calm investors, Wall Street saw it as confirmation of the credit markets’ problems. It was the ECB’s biggest injection ever.

The Federal Reserve added a larger-than-normal $24 billion in temporary reserves to the U.S. banking system.

The concerns that arose in Europe and spilled onto Wall Street underscored the potential worldwide ramifications of an implosion of some subprime loans. The growing problems undermined arguments that strength in the global economy could help keep profit growing among large U.S. companies that do business overseas.

The ECB’s injection of money into the system was unprecedented move, said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., adding that it shows that problems in subprime lending are, in fact, spilling into the general economy.

“This is a mini-panic,” he said. “All the things that had been denied up until this point are unraveling. On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.”

Retailers released July sales figures Thursday that were generally disappointing.

The Fed didn’t soften its stance on inflation after leaving short-term interest rates unchanged Tuesday. However, the renewed credit market concerns spurred bond traders to put more money on the idea that the Fed will cut rates at its meeting next month.

According to preliminary calculations, the Dow fell 387.18, or 2.83 percent, to 13,270.68.

Thursday’s pullback continued an erratic pattern of triple-digit moves in the Dow since the index closed at a record 14,001.41 on July 19. Eleven of the 15 ensuing sessions have ended in a triple-digit gain or loss. Gains have been evaporating at the first mention of trouble in housing, subprime lending or the credit markets.

Major Market Indices

With Thursday’s decline, the Dow is about 730 points, or 5.2 percent, below its record close. Some experts have been calling for a textbook correction — a pullback of at least 10 percent.

Bonds rose sharply as investors again sought the relative safety of Treasury securities, pushing down the yield on the benchmark 10-year note to 4.79 percent from 4.89 percent late Wednesday.

The broader Standard & Poor’s 500 index fell 44.40, or 2.96 percent, to 1,453.09, ending a three-day advance that had been the best in nearly five years.

Thursday's pullback was the biggest point drop and percentage loss for both the Dow and the S&P since a market pullback on Feb. 27, that also owed in part to concerns about subprime loans.

The Nasdaq composite index fell 56.49, or 2.16 percent, to 2,556.49.

Investors began to head for the exits after France's BNP Paribas Investment Partners said it was suspending three funds worth a total of about $3.79 billion and wouldn’t make investor redemptions until it could determine net asset values.

The funds invest in part in subprime mortgages through a process known as securitization. Investment banks bundle together mortgages — including those from subprime borrowers — and sell them off to investors such as hedge funds, mutual funds and other institutional investors. Buyers of such securities are seeking the steady flow of income from homeowners making their mortgage payments.

Shares of financial companies, which investors have fled recently amid lending concerns, took another beating. Citigroup Inc. fell 5 percent, as did fellow Dow component JPMorgan Chase & Co.

In another sign of credit market trouble, Home Depot Inc. warned that the sale of its wholesale business might bring in less than expected. Home Depot fell $1.66, or 4.4 percent, to $36.14, and was the worst performer of the 30 Dow components.

But American International Group Inc., one of the world’s largest insurers, reassured investors that it remains comfortable with its exposure to the subprime lending market as an investor, lender and mortgage insurer. AIG, which reported a 34 percent jump in second-quarter profit late Wednesday, said it has enough cash and liquidity and “does not need to liquidate any investment securities in a chaotic market.”

The dollar was mixed against other major currencies, while gold prices fell. Crude oil fell 56 cents to $71.59 per barrel on the New York Mercantile Exchange.

The Chicago Board Options Exchange’s volatility index, often called the “fear index,” hit its highest level since April 2003.

European stocks plunged. Britain’s FTSE 100 lost 1.92 percent, Germany’s DAX index fell 2.00 percent, and France’s CAC-40 fell 2.17 percent after being down more than 3 percent.

Japan’s Nikkei stock average rose 0.83 percent. Hong Kong’s Hang Seng index fell 0.43 percent.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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