Credit Crunch In U.S. Upends Global Markets

By Tomoeh Murakami Tse and David Cho
Washington Post Staff Writers
Friday, August 10, 2007

NEW YORK, Aug. 9 -- The turmoil in the U.S. credit markets turned global Thursday, prompting central banks in Europe and the United States to pump more than $150 billion into the financial system to keep it operating smoothly.

U.S. stocks suffered their second-worst decline of the year as the cost of borrowing for corporations continued to rise and some investors urged policymakers to help.

Some economists predicted that the tightening credit market would be a drag on the economy, but others said the impact would be minimal. Yet signs were emerging that the nation's credit problems were spreading in unpredicted ways.

Home buyers in the Washington area, for example, where housing costs have surged, are facing higher rates for "jumbo" mortgages. New companies, which rely on credit, are finding it harder to get loans for business needs. And it may be more complicated to close major deals, such as the $45 billion acquisition of TXU by the buyout firm Kohlberg Kravis Roberts.

The injection of $130 billion into the financial markets by the European Central Bank was the largest amount ever provided in a single operation, exceeding the amount added after the Sept. 11, 2001, attacks. It came after France's biggest bank, BNP Paribas, froze three funds that had invested in the troubled U.S. mortgage market. The move sent banks in Europe scrambling for cash. The Federal Reserve followed by adding $24 billion to the U.S. banking system.

[In Japan, the central bank added $8.4 billion to money markets Friday, the Associated Press reported.]

Jonathan Muellen, a spokesman for BNP Paribas, said the bank froze the three funds after liquidity, or the ability to easily trade assets, evaporated in the U.S. mortgage market. He said about a third of the funds, which had a value of $2.2 billion as of Aug. 7, were invested in securities backed by U.S. mortgage loans made to borrowers with poor credit.

"We've no longer been able to find prices for the assets, despite the fact the quality of the underlying assets has remained high," he said. "If there's no pricing . . . we can't find the net asset value for the funds each day, which is something we must do to allow people to buy in and exit the funds."

U.S. stocks dropped significantly on the news. The prices of "safe" investments, such as U.S. Treasurys, soared. Major indexes gyrated throughout the day from speculation that other mutual funds were frozen or that more hedge funds had suffered credit-related blowups.

"Shock waves are reverberating from Europe," said Les Satlow, portfolio manager at Cabot Money Management. "It just illustrates how on edge the market it is."

[The stock market in Tokyo was down about 2 percent by mid-afternoon Friday. Other Asian markets also fell, with Hong Kong's Hang Seng index down 3 percent and South Korea's Kospi index down 4 percent.]

The Dow Jones industrial average of 30 blue-chip stocks fell 387.18 points Thursday, or 2.8 percent, to close at 13270.68. On Feb. 27, the Dow dropped 3.5 percent on concerns about the housing market and other economic issues. The Standard & Poor's 500-stock index, a broader market measure, fell 44.40 points, or 3 percent, to 1453.09. The tech-heavy Nasdaq dropped 56.49, or 2.2 percent, to 2556.49.

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