Suddenly, Going Down On Wall Street

A long period of easy credit produced "excesses" in the markets and led to "disciplines getting relaxed," Paulson said. "I think what we've got is a wakeup and we all need to be vigilant."

Some analysts said they saw yesterday's plunge coming for several months. "As one of my colleagues put it, it was a question of picking up nickels in front of a steamroller," said Thomson Financial analyst Jeoff Hall. "Now, those hands are getting rolled over. It was bound to happen."

The global flow of easy credit has buoyed the stock market in recent years, supplying borrowers with cheap money to finance homes as well as companies' buyback of shares.

But this summer has seen increasing signs that that spigot may be turned off. Investors have spurned bonds and loans sold by Wall Street to finance corporate buyouts. This week, investment banks handling the sale of Chrysler had to postpone a $12 billion debt offering. This has left the banks holding that debt on their books, at least for the time being.

"We have risk of credit contagion spreading . . . and markets are figuring that risks are rising particularly in the financial sector," said David Kotok, chief investment officer of Cumberland Advisors.

Higher oil prices also made investors jittery. The price for a barrel of crude oil on the New York Mercantile Exchange touched $77 for the first time this year, before closing lower. Energy stocks were hurt, with Exxon Mobil reporting lower-than-expected earnings.

Money managers were split on how much the credit market will tighten. Some said the situation is no more than a blip, but others cautioned more market bumps are ahead as the housing market worsens.

Yesterday, Wells Fargo, the nation's second-largest mortgage lender, said it would close its subprime wholesale lending business because the market for risky home loans is too volatile.

Three home builders -- Beazer Homes, Pulte Homes and D.R. Horton -- reported quarterly losses.

Sales of new homes dropped 6.6 percent in June, the Commerce Department estimated yesterday, a steeper drop than was forecast. Sales of all homes were off 22.3 percent in June, compared with June 2006.

Portfolio manager Neil Hennessy blamed yesterday's drop on a "market that is becoming a little irrational on a short-term basis."

Recent days have seen some solid corporate earnings reports, including a surprise profit from automaker Ford yesterday, its first in two years, attributed to cost-cutting and surging overseas sales.

Hennessy said the effects of the subprime crash are contained to the housing sector and would not ripple outward into the broader economy.

"There were a lot of people taking out loans with no intention of repaying them and investors are getting stuck with them," said Hennessy, president of Hennessy Funds. "That's not going to take down a [geographic] region."

Mark Kiesel, executive vice president at Pimco Bonds, said the housing market will bottom out over the next six to 18 months. The large number of unsold homes on the market will only grow when foreclosed houses come on the market in coming months, he said.

"It's going to lead to slower job creation, weaker corporate profit growth, tighter lending standards and weaker confidence," he said.

Staff writer Lori Montgomery contributed to this report.