Markets dragged down by credit crisis
Global stock markets fell today, in a mass sell-off stemming from the sub-prime mortgage crisis in the United States. The Dow Jones Industrial Average recoiled late in the day after falling more than 250 points, ending the day at about even. The UK’s FTSE-100 index fell 232.90 points to 6038.30, and Japan’s Nikkei Average dived 406.51 points to 16764.09 points.
Central banks across the world are injecting funds into their banking systems to stimulate liquidity, fearing that many financial firms with sub-prime ties will be insolvent. Yesterday, the U.S. Federal Reserve transferred $24 billion to temporary reserves, following the European Central Bank, which authorized a record $83.6 billion addition to its banks. Today, the Fed entered into a $38 billion dollar repurchase agreement of mortgage-backed securities, easing stockholder worries.
The Federal Reserve met this week, but decided to maintain its target rate of 5.25%, although today the federal funds rate was hovering around 6%, indicating a drop in liquidity.
The week-long mass sell off began last Friday with Bear Stearn’s stocks tumbling as a result from its complete loss of two major hedge funds worth more than $1.5 billion. The hedge funds had been dangerously exposed to the massive sub-prime mortgage failure, and the company announced it was unable to return any money to investors.
Washington Mutual, and Countrywide Financial, both very large U.S. home loan lenders, saw shares fall. Countrywide Financial made a statement this week, saying they will be forced to retain a greater proportion of mortgage. American Home Mortgage Investment Corp, another large lender, recently filed for bankruptcy. The U.S. housing market has been declining for more than 2 years after the Federal Reserve raised interest rates 17 times. Now, lenders are in a quagmire from millions of people who are unable to repay loans after taking teaser, or piggyback rates.
Jim Cramer, of CNBC’s Mad Money, remarked that as many as 7 million people will lose their homes from bad mortgages. Last Friday, Cramer went on a tirade and called for the Fed to lower rates immediately.
Asian and European markets have become increasingly entangled in the sub-prime mortgage crisis in the U.S. Deutsche Bank of Germany lost almost $3.5 billion in share value, forcing the government to organize a bail-out. France’s largest bank, BNP Paribas SA, halted withdrawals from three large investment funds which were crippled by sub-prime exposure.
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