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Thread: French Bank freezes US funds; Stocks Plunge on Rising Credit Anxiety

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    French Bank freezes US funds; Stocks Plunge on Rising Credit Anxiety

    Dow Plunges 387 on Deepening Fears About a Spreading Credit Crunch

    NEW YORK (AP) -- Wall Street's deepening fears about a spreading credit crunch sent stocks plunging again Thursday, with the Dow Jones industrials extending their series of triple-digit swings and falling more than 380 points. The catalyst for the market's latest skid: a French bank's announcement that it was freezing three funds that invested in U.S. subprime mortgages.


    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 and perhaps also weakened arguments that strength in the global economy could help keep profit growth going in the U.S. among large companies that do business overseas.

    The ECB's injection of money into the system is an 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, spreading 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 overall 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 who bet on its next move to predict that the Fed will cut rates at its meeting next month. Before Thursday, traders had bet on a 1 in 4 chance of such a cut.

    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 14,000.41 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.

    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. At its lowest close since the market's high, Friday's finish of 13,181.91, the Dow was 5.85 percent below the record.

    Bonds rose sharply Thursday as investors again sought the relative safety of Treasurys, 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.

    Before Thursday, the S&P had its best three-day winning streak in nearly five years. But the latest pullback was the biggest point drop and percentage loss for both the Dow and the S&P since a market decline on Feb. 27., that owed in part to concerns about subprime loans.

    The Nasdaq composite index fell 56.49, or 2.16 percent, to 2,556.49. On Wednesday, it posted its biggest point gain in more than year. And while Thursday's loss was sharp, last Friday's was more severe.

    Despite Thursday's slide, the major market indexes are still up for the week, given that stocks rose sharply the first three sessions of the week.

    The pullback came after a BNP Paribas unit said it was suspending three funds together worth 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.

    "It just kind of brought the fear back," said Douglas Peta, market strategist at J.& W. Seligman in New York.

    "In the last couple of days I think people maybe thought that an all-clear had been sounded," he said referring to some of the subprime loan concerns.

    "This just highlights that there is not going to be an immediate resolution," he said of the companies that are trying to determine their exposure to bad subprime loans.

    Shares of financial companies, which investors have fled recently amid lending concerns, took another beating Thursday. 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. The world's largest home improvement retailer, which also cut how much it intends to pay to repurchase stock, said volatility in the stock, debt and housing markets has led to the possible repricing. Home Depot fell $2.01, or 5.3 percent, to $35.79, and was the worst performer of the 30 Dow components.

    But American International Group Inc., one of the world's largest insurers, on Thursday 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."

    AIG fell $2.18, or 3.3 percent, to $64.30, however.

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

    Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to a heavy 5.76 billion shares compared with 5.3 billion shares traded Wednesday.

    The Russell 2000 index of smaller companies fell 10.79, or 1.36 percent, to 784.87.

    The Chicago Board Options Exchange's volatility index, often called the "fear index," rose Thursday to 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.



    Source: http://biz.yahoo.com/ap/070809/wall_street.html?.v=18

    Seems like the forcasted Domino-Effect will take place soon enough.




    Gruß,
    Boche

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    I wonder how many of these bad loans were to illegal aliens? Hasn't there been a big push in the past few years to let illegal aliens get home mortgages? There has been a recent crackdown on employment of illegals in the past several months so maybe they are having trouble paying their bills

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    I don't know the answer to that, but it seems a lot of the bad loans are sub-prime mortgages. In the recent real estate craze, banks were giving very poorly qualified people loans and now they are bitting the bullet as the real estate market corrects. The banks shouldn't have made such loans anyway (they just saw a chance to make a quick buck) and the people buying homes should not have accepted such loans (they just saw a chance to get a house without improving their finances first).

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    Here is an interesting theory I encountered the other day on the matter of sub-prime mortgages. Obviously it is just a guess, without strong economics to back it up yet, but it might be a hint in the right direction.

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    A lot of the home construction in recent years - along with morgages - in hot markets such as Las Vegas, Florida & Arizona, have been for speculators. People have been contracting for new homes solely for the purpose of making a quick resale & making a quick profit. There are plenty of homes out there, some of which have been completed for more then 2 years or more that have never been occupied. One of my sisters bought a house outside of Phoenix for $167,000 in 2000, in a new subdivision. Last year it was worth $330,000. The street she lives on has 12 houses, and at this time last year 2 of those house were vacant & for sale. These are nice houses. This summer one of those house was still vacant & for sale. The other house currently has a renter and is off the market. My sister's house is now worth about $295,000. Considerably more then she paid for it 7 years ago, but it lost 10% of it's market value in one year. The real estate bubble is bursting & is poised to take the whole American economy with it.

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    Quote Originally Posted by SwordOfTheVistula View Post
    I wonder how many of these bad loans were to illegal aliens? Hasn't there been a big push in the past few years to let illegal aliens get home mortgages? There has been a recent crackdown on employment of illegals in the past several months so maybe they are having trouble paying their bills
    Many of them work in construction..construction has slowed down..therefore they are losing their jobs and are unable to pay their mortgages. Many of them got ARMs to be able to afford the payments which is another problem when those interest rates reset and the payment goes up.

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    Quote Originally Posted by SineNomine View Post
    Here is an interesting theory I encountered the other day on the matter of sub-prime mortgages. Obviously it is just a guess, without strong economics to back it up yet, but it might be a hint in the right direction.
    That actually does make a lot of sense. If they are forced to sell loans to people they know are bad risks, their profit margin will be hurt.

    Quote Originally Posted by Americ View Post
    The real estate bubble is bursting & is poised to take the whole American economy with it.
    Good post, except the part about taking the whole American economy with it. People who already own homes won't be effected, and housing costs will come down a lot which will enable more people to be able to afford homes.

    Quote Originally Posted by brianweg View Post
    Many of them work in construction..construction has slowed down..therefore they are losing their jobs and are unable to pay their mortgages. Many of them got ARMs to be able to afford the payments which is another problem when those interest rates reset and the payment goes up.
    Yeah I have always thought the illegal aliens being brought in to work the construction jobs was a self-feeding cycle, now it looks like it is starting to reverse

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