Mortgage Meltdown: concerns hit US markets
Pastor Dale Morgan
*Mortgage Meltdown: concerns hit US markets*
US shares have tumbled amid fears that a wobble in the mortgage market
may prompt a global credit crunch.
The Dow Jones index fell 199.24 points, or 1.5%, to 13,458.62. The S&P
shed 1.7% and the Nasdaq lost 1.4%.
European indexes slumped earlier after the European Central Bank said it
was pumping money into the banking market.
There also were reports that the US Federal Reserve was doing something
similar to ensure that there was enough cash available for banks to use.
Analysts said that the markets would remain volatile in the near future.
"Markets are taking this latest news seriously with the risk appetite on
the back foot," said David Corbell, analyst at IFR Markets.
Spreading out
The latest trigger for the slump was an announcement by French bank BNP
Paribas that it was suspending three investment funds worth 2bn euros
(£1.35bn) because of problems with the US sub-prime mortgage sector.
Sub-prime lenders offer loans to consumers with a poor credit history.
You're looking at the foundation of a marketplace that has imploded somewhat
Steve Goldman, Weeden & Co
In recent months, the number of loan defaults has increased because of
higher interest rates, raising concerns that the wobble in the housing
market will affect other parts of the economy and then start hurting
other nations.
The worry is that should banks make losses then it would hurt their
earnings and their profitability making them less willing to fund the
takeovers and buyouts that have underpinned much of the stock markets'
recent gains.
The recent collapse of American Home Mortgage, the 10th largest lender
in the US, has intensified those concerns.
"You're looking at the foundation of a marketplace that has imploded
somewhat," said Steve Goldman, an analyst at Weeden & Co.
Tighter times
At the same time, banks have suddenly started charging significantly
more for the money they lend to each other, signalling that they are
looking to limit their risks, analysts said.
In response, the European Central Bank (ECB) said on Thursday that it
had pumped 95bn euros into the eurozone banking market to allay fears
about a credit crunch and lack of liquidity.
The conditions for the marketplace working through these issues are good
President George W Bush
The move represented the ECB's single largest intervention in the
banking sector since the immediate aftermath of the 9/11 attacks on the
US in 2001.
Calling it a "fine-tuning operation", the ECB made the money in the form
of loans, an offer taken up by 49 banks and other financial institutions.
In the US, the Federal Reserve, also was reported to have taken similar
action, pumping about $24bn (£12bn) into the US banking system.
Analysts said that a credit crunch - when it becomes harder for banks,
companies and consumers to get access to loans and cash to run their
operations - was a serious occurrence that could lead to a recession.
Soothing words?
The declines in the US markets came despite attempts by President George
W Bush to calm market fears.
Speaking after a meeting with his top economic advisers, President Bush
acknowledged there had been "disquiet" on Wall Street over the housing
slump.
But President Bush said he believed the markets were set for a "soft
landing".
President Bush said he expected the markets to focus increasingly on the
underlying health of the global economy and robust US prospects.
"The underpinnings of our economy are strong," he said, adding that
second-quarter growth had been strong, while both inflation and
unemployment remained low.
"So the conditions for the marketplace working through these issues are
good. My hope is that the market, if it functions normally, will be able
to yield a soft landing."