Financial Markets Tumble Amid Credit Crunch

Trouble in the credit markets unnerves financial markets. The Standard & Poor's 500 index had its worst one-day sell-off since February, losing nearly 3 percent of its value. Stock futures are predicting a further decline on Wall Street today.

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STEVE INSKEEP, host:

Got to tell you, stock prices continued falling in the U.S. this morning. Got to tell you, stock prices continued falling in the United States this morning. The Dow Jones Industrials are down 93 points, this after the bad day yesterday. Now there are efforts to encourage stability. This morning, the Federal Reserve pumped $19 billion of new cash into the banking system. The concern here has to do with credit. Trouble in the American mortgage market led to trouble at a major bank yesterday, and that was part of yesterday's big decline.

NPR's Jim Zarroli reports.

JIM ZARROLI: The trouble yesterday started early. Even before the market opened, there was word that BNP Paribas had decided to freeze withdrawals from three of its securities funds. The bank said the funds had lost a lot of money by investing in the U.S. subprime mortgage market.

Mike Englund is chief economist at the research firm Action Economics.

Mr. MIKE ENGLUND (Founder and Director, Action Economics): Overnight, we found banks in Europe, and in France in particular, had liquidity issues, which raised the question: Are the problems we're facing here in the U.S. rippling through across overseas? And, of course, those liquidity problems are intertwined with our own since our banks operate in Europe and the European banks operate here.

ZARROLI: The announcement sent overnight interest rates rising, and the European Central Bank quickly intervened to bring them down again. The problems at BNP Paribas follow months of bad news in the U.S. housing market. Bad mortgage investments have already killed off two hedge funds at Bear Stearns, so investors in this country heard the news with alarm.

Tim Alward is president and CEO of Ford Equity Research.

Mr. TIM ALWARD (President and CEO, Ford Equity Research): There was the first one. You know, this bank in Paris is the second one. And now the theory is, okay, it's spread overseas, there's holders overseas. How big is this?

ZARROLI: Stock prices began to slide, and by the end of the day, the Dow Jones Industrial Average had lost 387 points. The nervousness in the markets this week has been aggravated by rumors about mortgage losses. Goldman Sachs has repeatedly denied rumors about its hedge funds. Yesterday, Goldman declined to comment on reports that one fund was being forced to sell off assets because of heavy losses. Mike Englund says that's how the market has been lately.

Mr. ENGLUND: I think confused might be the best approach, you know? Essentially, there's a lot of news rocketing through the market each day, but there's little raw information in the news. You know, it seems every three or four days, we take a new run at prices with some new rumor of a hedge fund that's going under, of a bank that might be having problems.

ZARROLI: As prices slid, President Bush tried to reassure investors. At a news conference, he said the U.S. economy remains fundamentally sound and can ride out any liquidity problems. But investors seemed unconvinced and prices kept declining. By the end of the day, nearly every one of the 30 stocks in the Dow was down. General Electric alone had its worst day in 18 months.

And the troubles for the credit markets aren't over. As the week ends, investors are having to digest more bad news. Two more lenders issued warnings about the state of the credit markets late yesterday. Washington Mutual, the nation's largest savings and loan, said the ongoing credit troubles could affect its ability to issue loans. And Countrywide, the biggest mortgage company, warned that it faces unprecedented disruptions in the debt market and they could adversely affect its bottom line.

Jim Zarroli, NPR News, New York.

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