Panic returned to Wall Street yesterday after a major French bank said it was freezing three funds that invested in U.S. subprime mortgages, prompting the European Central Bank and Federal Reserve to infuse $154 billion in emergency loans into the markets.
The Dow Jones Industrial Average plummeted 387 points despite the rescue effort, which appeared to represent a reversal for the Fed only two days after it said credit concerns posed little risk for market liquidity or the economy.
With yesterday’s drop, the Dow is down about 730 points, or 5.2 percent, from its record close of 14,001 on July 19.
The European bank offered a record $130 billion of overnight loans to keep money flowing to European markets after BNP Paribas, France’s largest bank, said it was freezing redemptions from U.S. mortgage funds because it could not properly determine their market value. It was the latest of a raft of subprime problems reported by European banks and investment funds.
The bank’s action raised questions about the value and solvency of investments held widely around the world, and spurred a global stock drubbing as investors sought to dump risky securities.
European stock indexes plunged by 2 percent, and the Dow and other Wall Street stock indexes followed with even bigger drops near 3 percent. The Dow ended down 2.8 percent at 13,271, while the Standard & Poor’s 500 Index fell by 3 percent, even after the Fed followed up on the European bank’s rescue effort with a larger-than-normal $24 billion cash infusion from its New York lending window.
David Adler, U.S. government bond strategist at RBS Greenwich Capital, said the central banks’ actions showed they were worried about a liquidity crisis, which came close to happening yesterday.
“There are still serious concerns about short-term funding ability,” he said. “This concern, when combined with the broader implications of tightening credit and a softening housing market, can have a potentially painful impact on the economy.”
Stock losses were led by financial firms Citigroup and J.P. Morgan but occurred in nearly every sector. They accelerated after U.S. retailers reported poor sales during July, suggesting U.S. consumers are being hurt by the fall in house prices and tightening credit conditions.
Markets were not comforted by assurances from American International Group Inc., a large insurance company that is heavily invested in subprime mortgages, that it can withstand increasing defaults because its holdings are concentrated in better-quality mortgages.
“It would take declines in housing values to reach Depression proportions, along with default frequencies never experienced, before our AAA and AA investments would be impaired,” said Robert Lewis, chief risk officer of the nation’s largest insurer.
President Bush appeared to add to the market tumult yesterday by saying he is adamantly opposed to any bailout of mortgage lenders, such as allowing Fannie Mae and Freddie Mac to purchase some of the loans being shunned by private investors. The mortgage agencies are subject to government-imposed limits on their total holdings of mortgages as well as the number of subprime loans in their portfolios.
“I’m for letting the market work,” said Mr. Bush. “My biggest concern when it comes to the mortgage industry is the lendee, not the lender. It’s the person to whom people have lent money. … I’m worried about people having their homes foreclosed. I’m worried about people buying into a deal that they’re not certain as to what they’re buying into.”
Rather than provide more money for potentially bad loans, Mr. Bush said the government should require full disclosure from lenders, crack down on predatory lenders and update Federal Housing Administration programs for subprime borrowers and others who need help buying homes or refinancing out of bad loans.
“People are reassessing risk,” the president said, siding with analysts who say the credit squeeze on Wall Street is a healthy one aimed at weeding out bad lending practices by charging more for risky loans. “The good news is we got ample liquidity in our society to be able to deal with this.”
Housing Secretary Alphonso R. Jackson, who earlier this week said he was considering enlarging the role of Fannie Mae and Freddie Mac, appeared to reverse course yesterday and said the administration does not want to do anything to prevent further declines in home prices and other adjustments needed to re-establish a healthy market.
“I am glad we had this correction in the market, because we cannot sustain the continuous growth we had in the housing industry — that is, in prices,” he said.
The White House’s dismissal of a larger role for Fannie Mae, which is backed by Democratic lawmakers, prompted a scornful response from Sen. Charles E. Schumer, New York Democrat.
“The Bush administration is putting its head in the sand” and denying a problem that has spread well beyond subprime mortgages to better-rated mortgages and business loans, he said. “We need short-term solutions and long-term vision, not stalling, rhetoric and ideology.”