link NEW YORK— Wall Street dived in early trading Thursday, yanking the Dow Jones industrials down nearly 170 points after a French bank said it was freezing three securities funds that struggled to find liquidity in the U.S. subprime mortgage market. 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 intense volatility triggered by concerns about available credit. 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 bargain rate of 4 percent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems. The Federal Reserve followed suit, adding $12 billion to U.S. markets to help ease liquidity constraints, according to Dow Jones Newswires. "This is a mini-panic," said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks' injection of money into the system an "unprecedented" move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy. "All the things that had been denied up until this point are unraveling," Battipaglia said. "On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer." Retailers were releasing their July sales figures Thursday, and overall the figures were disappointing. Bonds rose sharply as investors again sought the relative safety of Treasurys, with the yield on the benchmark 10-year note falling to 4.78 percent from 4.89 percent late Wednesday. Bond prices move opposite yields. Thursday's plunge continued an erratic pattern of triple-digit moves in the Dow for several weeks. There has been more panic and gambling in those moves rather than conviction — even when the Dow has finished up more than 280 points in a session, those gains have evaporated at the first mention of trouble in housing, subprime lending or the credit markets. In early trading, the Dow fell 169.82, or 1.24 percent, to 13,488.04 after falling more than 200 points. The Dow on Wednesday finished 2.45 percent below the record close of 14,001.41 reached on July 19. Since passing 14,000, the blue chip index has been highly volatile — in the 14 trading days since that record close, 10 have seen a triple-digit gain or loss. Some on Wall Street have been calling for a textbook correction, which is a pullback of at least 10 percent. At its lowest close since the market's high last week — a finish of 13,181.91 that came Friday — the Dow was 5.85 percent below the record. Also Thursday, the broader Standard & Poor's 500 index fell 19.11, or 1.28 percent, to 1,478.38, while the Nasdaq composite index lost 17.22, or 0.66 percent, to 2,595.76. The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude fell $1.30 to $70.85 per barrel on the New York Mercantile Exchange. News that Home Depot Inc. might amend the terms of the sale of its HD Supply business added to Wall Street's foul mood. The company said it could end up making substantial changes to the terms and financing of the deal and could reduce the $10.33 billion price tag. Home Depot said in June it would sell the business, which serves contractors, homebuilders and other business customers, to a group of private equity firms. Home Depot, which fell $2.56, or 6.7 percent, to $35.24, also said it plans to lower the price of a modified Dutch tender offer to $37 to $42 per share from $39 to $44. In July, Home Depot announced the tender offer to repurchase up to 250 million shares. In afternoon trading, Britain's FTSE 100 fell 2.15 percent, Germany's DAX index fell 2.13 percent, and France's CAC-40 fell 2.36 percent. The pullback came as the BNP Paribas unit, BNP Paribas Investment Partners, said it was suspending three funds together worth about $3.79 billion and wouldn't make investor redemptions until it could determine a net asset value for the fund. The funds are Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. The suspended funds represent about 0.79 percent of the $482.79 billion in assets the Paribas division holds. "The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said in a statement. The funds invest 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. With credit concerns dominating Wall Street, investors appeared little moved by a Labor Department report that the number of workers seeking jobless benefits rose 7,000 to 316,000 last week. In corporate news, American International Group Inc., one of the world's largest insurers, said Wednesday its second-quarter profit jumped 34 percent amid growth in its general and life insurance businesses and its asset management group. The company said it remains comfortable with its exposure to the U.S. residential mortgage market. AIG fell $1.73, or 2.6 percent, to $64.75. Internet telephone company Vonage Holdings Corp. on Thursday reported a narrower second-quarter loss as it trimmed marketing costs. However, the company also saw a sharp drop in new subscribers. The decline now puts Vonage behind cable company Comcast Corp. in the number of Internet-based telephone customers. Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 314.8 million shares. The Russell 2000 index of smaller companies fell 7.92, or 1.00 percent, to 787.74.
yes, alot of the growth in the economy is driven through consumer spending. a lot of the consumer spending is financed. look what's going on in the housing market. mortgage companies and home builders have over extended credit to what is the sub-prime market (risky borrowers). if these loans start failing, then the companies who lent the money start failing, then the banks who finance them start failing, on up the ladder
A large engine in our economy has been home building, driven by home buying. Instead of being able to buy homes with as little as zero or 5% down, buyers are going to be seeing 10% required down payments. When housing is $200K and up, 10%, plus points and fees, adds up very quickly to a lot of required ready cash. And which major industrial country has the lowest saving rate in the world? The United States. Pop! (bummer, dude) D&D. Impeach Dildo and His Battery.
yes, and to sum up deckard's eloquant post, the retailers, mortgage comapnies, and bank start clamping down on lending, putting a strain on buyers (because we don't save unfortunately) thust straining economic growth.
Bursting? It's already bursted. Did you check out AHM, DFC ...... (long list of mortgage companies going out of business) subprime, now its onto alt-A, the **** is hitting the fan.
the question to me is what's the underlying reason? the industry has been thriving on these loans for three to four years, why are people all of sudden defaulting?
i don't see this as being a product of consumer lending but rather sup-prime lending on real estate....with variable rate notes and the fed raising interest rates over and over to curb inflation. what am i missing? this definitely has an effect on the oil thread, too
The bubble is not bursting for good credits. This all started with the sub-prime housing market, then bled over into the leveraged loan market (high yield / junk bond market) for corporations. I wouldn't call it a bubble bursting so much as a re-alignment to a more rational level. The credit market was so tilted in the favor of those in need of money that it needed a minor readjustment. The adjusted terms are still very good, they are just weaker than the inflated terms were. This is largely a psychological move at least in the corporate world (less so for housing). There is a large supply of leveraged loans in backlog that need to be worked through the system or pulled, the result of huge leveraged buyouts by private equity funds. This has emboldended lenders to seek out higher interest rates and greater covenant protections. I will say this, as the money supply goes, so goes the economy. If the credit crunch spills over into all corporate credits, not just the bad ones, and the housing credit crunch spills over into the healthy credits, then access to money is restricted, and capital projects and new home purchases will decline. Reduced investment leads to reduced corporate profits and reduced spending. Consumer spending represents 2/3rds of GDP so the economy would certainly be impacted by a larger scale credit pullback. We aren't there yet, but this has the makings of one. Corporate earnings are still very very strong. The stock market level is still very very high. The economy is very solid right now.
Subprime mortgages helped a lot of poor people get into homes they couldn't otherwise afford or get into. Now, their all unable to comply with the terms of the loan and they lose their home. This is why we have trailer parks. If you couldn't qualify for an A-paper loan or regular loan, then chances are you are not going to be able to meet the stiffer terms of a subprime mortgage. So, what is even the point of getting a subprime mortgage...to live for a few months in a home you pretend to own but cannot really afford? I guess common sense never factors into this or most of the people just don't know what their getting into when they get this type of loan, i.e. brimming with overconfidence on their ability to keep up with the loan terms.
Welcome to America, the land of blame someone else for your own misfortunes. If you have no money, do you deserve a house? In the old days, we said "no". Earn it and then buy. Now we say "why not? the market keeps going up". We are a spend it now society and have the attention span of a fruitfly. Some people believe credit cards are an asset. I do many retirement presentations and one of the most commonly asked questions is: "How do I shield my assets from the government so Medicaid can pay for my nursing home care." Yes, protect your family at the expense of everyone else. That's the problem with today's society - let someone else hold the bag because I deserve everything.
all their arms and such are resetting after the initial period. So now instead of that 3% they will have to refinance at 8%. It is people getting in over their heads but there are also a lot of shady unethical brokers getting ignorant people into these loans.
in the end people need to take responsibility for their own actions, but i think alot of subprime lenders have been taking advantage of lower-income people for the last few years. home sales consultants too. they know that in the lower-end market about 1/4 of the people they sell homes too will lose them w/in a year or two, yet are still willing to sell them a house. an honest lender/sales person will tell you that they can tell which buyers will end up getting foreclosed, but they are still willing to finance or sell them a home. you can go drive a centex, kb or gateway neighborhood where they are still building and there are twice as many resale homes as inventory/spec homes. all these homes that arent even a year old are up for resale. not a good sign.
ill second that. again, people need to take responsibility for their own actions, but the market is very predatory and takes advantage of people's ignorance.
wait a second...what's with all the "responsibility" talk?? people are losing their homes. that's "taking responisibility!" it's dealing with the consequences. when they finanaced, rates were low...someone suggested a variable rate loan or something other than fixed...they were shown a monthly payment they knew they could meet. they paid it. rates changed. they can't afford it. so loans are called and homes are foreclosed on. i don't see how this all creeps into a sermon on personal responsibility. i didn't hear anyone complain when these same folks were buying appliances and other items for these homes, further fueling the economy.
Um, it's called reading the loan agreement. If you are unable to read a loan agreement and understand that the rates may change, then you aren't prepared to make what will in most cases be the largest investment of your life -- your house. Is it too much to ask to read a loan agreement? Ask questions of your mortgage broker when you don't understand. Taking responsibility means understanding what obligations you are taking on. You are aware that the investors (customers) of the banks that underwrote these loans are left with losses correct? So don't even play the 'woe is me card' here, Max. The sub-prime home owners' defaults are paid for by hard working Americans, you know. This all set off what could end up being a contagion, so don't go trying to play that John Edwards poor people have it so rough crap here.
Taking on debt you cannot afford is not taking responsibility. It's no different than people buying everything in sight and then complain about being in debt. They didn't know rates could change? They didn't know that if rates went up, they wouldn't be able to afford it? Let's see. You bought a house for $200,000. You owe $200,000. The house is now worth $175,000. You can't make the loan payments and now your house is worth less than what you stupidly paid for it so you walk away as if nothing happened. Yes you lost your house, a house you shouldn't have been able to buy in the first place.
people are defaulting because of a few reasons. one is that they were getting loans that were too big for their income. the subprime mortgage industry was more concerned with getting people locked into loans and not caring if they could actually repay them. the people could afford the payments to start because of teaser rates for the first 2 years. now the teaser rates are ending and people can't afford the loan payments. further, you have housing prices on the decline so you end up paying on a loan that is far greater than the value of the house. bottom line...the subprime lenders were involved in very shady lending practices and now they are getting their asses handed to them because of their wrecklessness. now the other stuff going on in the market I don't exactly understand but I have been making a lot shorting companies related to subprime. I understand the basics it but I don't exactly understand how everything functions in the debt market. all I know is the cost of insuring debt has skyrocketed off historically tight spreads and that mortgage backed securities are getting raped due to defaults and home values declining. if you want to read a good book check out "Traders, Guns, and Money". basically goes thru the cycles of greed and people thinking their models were perfect for the market and would never bust...like they are busting again for the umpteenth time
Trust me, I would never try to play any card regarding compassion with you, TJ. No sweat. I'm not trying to sell you anything.
