Bad Mortgage News Roils Markets

There is turmoil in the financial markets. The Dow Jones fell nearly 400 points on Thursday and that is having an impact on financial markets across the globe.

The markets are reacting to a crisis in the U.S. mortgage market. There are fears that homeowners defaulting on subprime loans will cause a ripple effect throughout the world economy.

On Friday, the Fed injected some $35 billion into U.S. financial markets. They say they will pump as much cash as is necessary to keep money flowing through the economy, in an effort to avert bankruptcies and new debts throughout the economy.

All of this has been triggered by the subprime loan problem, and lots of financial institutions all over the world are feeling the impact.

Fed's Cash Infusions Settle Markets Somewhat

Japanese share prices fall 406.51 points to close at 16,764.09 points at the Tokyo Stock Exchange. i i

Japanese share prices fall 406.51 points to close at 16,764.09 points at the Tokyo Stock Exchange at a near five-month low, mirroring sharp losses on other global bourses. Yoshikazu Tsuno/AFP/Getty Images hide caption

itoggle caption Yoshikazu Tsuno/AFP/Getty Images
Japanese share prices fall 406.51 points to close at 16,764.09 points at the Tokyo Stock Exchange.

Japanese share prices fall 406.51 points to close at 16,764.09 points at the Tokyo Stock Exchange at a near five-month low, mirroring sharp losses on other global bourses.

Yoshikazu Tsuno/AFP/Getty Images
Fed Statement on Market Liquidity

 

The Federal Reserve is providing liquidity to facilitate the orderly functioning of financial markets.

 

The Federal Reserve will provide reserves as necessary through open market operations to promote trading in the federal funds market at rates close to the Federal Open Market Committee's target rate of 5-1/4 percent. In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets. As always, the discount window is available as a source of funding.

 

Source: Federal Reserve

Volatile stock activity defined the U.S. market Friday as investors absorbed the Federal Reserve's commitment to provide enough cash to underpin a wobbly credit system.

The Fed made the comment Friday morning in a bid to quell financial turmoil on Wall Street created by a credit crunch triggered by growing defaults in the mortgage market that set off sharp selling in the U.S. and abroad.

A short statement by the Federal Reserve read that it would provide "reserves as necessary" to underpin the markets. The central bank did not provide details but said it would do all it can to "facilitate the orderly functioning of financial markets."

The Fed stepped in with three cash infusions on Friday, causing wild gyrations throughout the trading session.

The Dow Jones industrial average, which had been down more than 200 points, finished with a loss of 31 points at 13,240, but up more than 57 points on the week. Declining issues on the New York Stock Exchange led gainers 5-3 on volume of 5 billion shares. The Nasdaq composite index was down 11.5 points to 2,545, cutting the weeks' gain to 33 points; 3 billion shares traded on the tech-heavy exchange.

And the S&P 500 added a fraction of a point, closing at 1,453 — up 20 points for the week.

Those results came after markets around the world were unnerved by the U.S. credit crisis, leading many to fall in sympathy late Thursday and early Friday.

London's FTSE 100 dropped 3.7 percent. Tokyo's Nikkei index dropped 2.4 percent. Markets in Korea, Hong Kong, Singapore and the Philippines also reacted negatively to concern about credit weakness in the U.S.

The Bank of Japan joined its U.S. and European counterparts in pouring cash into money markets to calm growing jitters.

Wall Street's credit debacle ratcheted up early Thursday. 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.

"Overnight (Thursday) we found that banks in Europe and France in particular had liquidity issues which raised the questions," said Mike Englund, chief economist at the research firm Action Economics. "Of course those liquidity problems are intertwined with our own since our banks operate in Europe and the European banks operate here."

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 the U.S. heard the news of BNP Paribas with alarm.

"There was the first one, the bank in Paris was the second one, and now the fear is 'OK, it's spread overseas, there's holders overseas, how big is this?" said Tim Alward, president and CEO of Ford Equity Research.

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 a lot of 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.

"It seems that every few days we take a new run at prices with some new rumor of a hedge fund that's going under or a bank that might be having problems," Englund said.

As prices slid, President Bush tried to reassure investors. At a news conference, he said the U.S. economy remained fundamentally sound and could ride out any liquidity problems. But investors seemed unconvinced and prices continued to decline.

They were also having to digest more bad news.

Two more lenders issued warnings about the state of the credit markets late Thursday. Washington Mutual, the nation's largest savings and loan, said the ongoing troubles in the credit market 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.

From NPR reports and The Associated Press

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