Dow Falls 300 Points on Rocky Day
MICHELE NORRIS, Host:
This is ALL THINGS CONSIDERED from NPR News. I'm Michele Norris.
ANDREA SEABROOK, Host:
And I'm Andrea Seabrook.
It was another bad day on Wall Street. The Dow plunged 387 points, that's at 2.8 percent loss. The broader S&P index was down even more at 2.9 percent. And here is the big issue today: problems in the subprime mortgage market appeared to be going global. President Bush tried to reassure the nation. He said the economic fundamentals are good and that he doesn't think current problems in the credit markets will derail the economy.
NPR's Jim Zarroli joins me now. Jim, what did caused the stocks to fall today?
JIM ZARROLI: Well, this is something that started in Europe, and it involves the big French bank BNP Paribas. The bank said recently that two of its security funds have lost a lot of money in the U.S. mortgage-backed securities market, which is one more interesting example of how intertwined the economies of the world are these days.
Today, the bank said it was freezing withdrawals on the funds. It said it was doing this because it couldn't value them properly. Now, what does that mean? That means that investors in the funds are rushing in to get their money back as they tend to do at times like this, and the bank may have to sell off the assets and the funds to pay them. But it really doesn't know how much it can get for them at this point.
Now, BNP Paribas is not - it's not going to fail, it's got lots of money, but it needs time to figure out what to do with the funds.
SEABROOK: And the European Central Bank intervened right away.
ZARROLI: Right. Basically, as soon as BNP Paribas made its announcement about freezing the withdrawals, overnight interest rates in Europe started going up, which is what happens when investors get nervous. So the European Central Bank came along and said to the banks, we will make money available to you at four percent interest, and this will ensure everyone who's worried that BNP Paribas has time to work out its problems. What they did was they basically poured a really extraordinary amount of money into the financial system, almost 100 million euros...
ZARROLI: ...which is $130 billion. And this was meant to reassure the markets that things were - that the European Central Bank was on top of the situation, and it seemed to work. At least temporarily, interest rates came back down.
SEABROOK: Jim, we all know by this time that we live in a globalized economy, but still, why would a French bank and the European Central Bank and all these affect stock prices in the U.S. so much?
ZARROLI: Well, it is the same problem that's been plaguing the markets for weeks. It's this fear of a credit crunch. The problem is this: you have all of these hedge funds and pension funds and banks and other institutional investors. They all lost a lot of money in the mortgage business. And people in the stock market look at this, they get worried. They're thinking, you know, at some point, these institutional investors are going to lose so much money that they won't want to invest in anything. They won't invest in real estate, or stocks, or corporate bonds, and you're already seeing some signs of these companies that maybe have, you know, less than perfect balance sheets or having trouble borrowing.
Now, if this happens enough, you get a recession that scares the markets. And every time you have a fund in trouble, like those at BNP Paribas, it preys on people's fears because people just don't know where it's going to end.
SEABROOK: The R-word, recession.
President Bush made several remarks about the economy at his news conference at the White House today. At one point, he was asked if he thought the mortgage crisis would spill over into the economy as a whole. Let's listen to part of his answer.
GEORGE W: Another factor, one that's got to look at is the amount of liquidity in the system. Is there enough liquidity to enable markets to be able to correct? And I am told there is enough liquidity in the system to enable markets to correct.
SEABROOK: Jim, what is liquidity in the markets?
ZARROLI: Well, I think, in essence, the president is saying here, you know, everybody should take a deep breath and relax. He's saying, you know, there's still a lot of money out there.
SEABROOK: That's what the liquidity is - cash.
ZARROLI: Right. Right. If people have good credit, they want to borrow, they can. If companies want to borrow and their balance sheets are good, they can. In a way, it's similar to the kind of low-key approach that was taken by the Federal Reserve yesterday. The Fed's been a under a lot of pressure to lower interest rates in response to these problems, especially the housing crisis.
Yesterday, they said, you know, we're watching this, but we're not all that concerned. The economy is strong. We can get through this.
SEABROOK: Jim, just quickly, the president seemed to be choosing his words really carefully today...
SEABROOK: ...when he spoke about the financial markets. Why is he being so careful?
ZARROLI: Well, you know, any U.S. president has to try to be circumspect on economic issues because, you know, anything he says is going to move the markets. He can't, for instance, be seen as trying to influence the Federal Reserve. Presidents try not to do that. And whenever there's a threat on the economic horizon, the president has to try to strike a balance between, you know, acting concerned but conveying a sense of calm. I think Bush is just trying to do that.
SEABROOK: Thanks very much, Jim.
ZARROLI: You're welcome.
SEABROOK: NPR's Jim Zarroli in New York.
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