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Mortgage malaise infects the Dow

Investors catch the subprime willies as a couple of foreign banks hunker down.

By HELEN HUNTLEY Times Staff Writer
Published August 10, 2007

Stocks had their second-worst day of the year Thursday, with the Dow Jones Industrial Average plunging 387.18 points to close at 13,270.68. Here's a look at what's rattling U.S. and - increasingly - global investors:

What happened to provoke the selloff in stocks?

A major French bank triggered alarm on Wall Street when it said it would not permit any redemptions from three funds because it couldn't figure out the value of the funds' investments in U.S. mortgage-backed securities - pools of mortgages traded like stocks. Some German funds also have suspended redemptions, signs that the crisis in the mortgage-backed securities market is getting worse. "This is a mini-panic" is the way Ryan Beck chief investment officer Joseph Battipaglia described it.

Why is it so difficult to figure out how much these types of securities are worth?

The market for them has "seized up" by some accounts, with lots of people wanting to sell and few willing to buy. Some market watchers have compared the situation to a run on a bank. "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," the French bank, BNP Paribas, said in a statement.

Why don't people want to buy?

In the past, investors bought mortgage-backed securities because they had higher yields than Treasuries or CDs and were believed to be safe investments. It turns out they were riskier than investors thought. Mortgage defaults are rising and nobody knows how high they will go. In Florida, for example, one in every 267 households is in some stage of foreclosure. That's a lot.

Why would a problem with mortgages make people sell stocks?

Anything that creates fear and uncertainty in the financial markets is bad for stocks. There also are deeper worries that mortgage defaults coupled with housing market woes will derail the economy. Mediocre retail sales numbers out Thursday gave some support to that view. However, not everyone is worried. "There will be some restraint on overall growth, but it doesn't look like it's going to be enough to push the economy into a recession," said Scott Brown, economist at Raymond James & Associates in St. Petersburg.

How did Tampa Bay area stocks hold up?

Some better than others. Most stocks fell by single-digit percentages. Others, like builder-developer WCI Communities, down 10.2 percent, were harder hit. But shares in filtermaker Flanders Corp. rose 7.4 percent.

What's anybody doing about this?

The European Central Bank and the Federal Reserve both took the unusual step of making cash more readily available Thursday, providing banks with money they can spend or lend to keep markets functioning. In addition, bond traders are betting that the Fed will cut short-term interest rates before the end of the year to help keep the economy humming.

Wouldn't an interest rate cut be good for stocks?

Yes. But that's not what investors were focusing on Thursday.

Information from the Associated Press was used in this report.

 Helen Huntley can be reached at hhuntley@sptimes.com or 727 893-8230.

[Last modified August 9, 2007, 23:38:30]