Banks Add More Funds To Stabilize Markets

"We're just having some incredibly strong volatility both ways, as much as I've ever seen," said Bart Barnett, head of equity trading at Morgan Keegan & Co. "Every time I see a market spike like we're seeing right now, I just start looking for headlines. People are watching the news wires like hawks."

On Friday, Deutsche Bank said the value of one of its investment funds had fallen by 30 percent since the end of July. The German bank said assets of its DWS ABS Fund fell even though it had no exposure to the risky American subprime mortgage market, the epicenter of the credit problems.

"The uncertainties surrounding the U.S. mortgage crisis has constricted liquidity in this market," the company said in a statement. Deutsche Bank said it was leaving the fund open at the request of investors who might want to sell, even at a discount.

Shares of Countrywide Financial and Washington Mutual fell Friday after the release of regulatory filings late Thursday in which the mortgage lenders declared that it had become more difficult to find new money for home loans. Washington Mutual, of Seattle, said that since late July, liquidity for non-conforming loans -- those not backed by Freddie Mac and Fannie Mae, or made to borrowers with spotty credit -- "diminished significantly."

Many big lenders package home loans into bonds and sell them to investors in what is known as the secondary market. The rising rate of foreclosures and delinquencies among subprime borrowers, who generally have blemished credit histories, coupled with a drop in home prices, has made investors leery of buying those bonds.

As the market for such bonds -- which are divided and packaged with other types of debt -- screeched to a halt, the pricing on the hard-to-value securities has become even more opaque.

Countrywide, of Calabasas, Calif., the country's biggest mortgage lender, said it had adequate cash to cope with the credit crunch -- about $190.3 billion in short-term liquidity -- but warned that "the secondary market and funding liquidity situation is rapidly evolving and the potential impact on the company is unknown."

"Liquidity is essential to the company's business," Washington Mutual said in a statement. "The Company's liquidity may be affected by an inability to access the capital markets or by unforeseen demands on cash."

Also hurt Friday were companies that are buyout targets, the viability of which is increasingly being questioned as the cost of borrowing used in such takeovers rises. Among those companies is TXU, which is being sought in a $45 billion deal by the buyout firm Kohlberg Kravis Roberts and TPG.

Shares of TXU, which agreed to sell itself for $69.25 a share, fell to $63.65 in heavy trading Friday. SLM Corp, better known as Sallie Mae, fell 95 cents, to $48.20 a share, significantly less than $60 a share price being paid by private-equity firm J.C. Flowers. And First Data closed at $31.05, down 4 cents, still below the $34 a share offered by KKR. The decline in these stocks show that the markets do not believe the buyouts will go through as advertised, analysts said. The trouble in the credit markets is raising the cost of financing these deals, and some of the deals may be renegotiated.

The Securities and Exchange Commission has sent inspectors in recent weeks to look inside some of the nation's largest broker-dealers to make sure they are properly valuing subprime mortgage assets for risk purposes.

Most of these brokers engage in daily "mark-to-market" valuations of these instruments to ensure they have enough capital on hand. The valuations are supposed to correspond to what the assets would fetch in the open market, but some of the securities trade so rarely that it can be difficult to put a price tag on them.

In the days ahead, the challenge for regulators and central bankers will be balancing the need to keep markets running smoothly and letting them self-correct. Fed officials gave no sign they were moving toward lowering interest rates, having worried for several years that investors were underestimating the risk of certain assets. They now welcome investors' willingness to reprice assets to better reflect their risk.

Hugh Moore, partner at Guerite Advisors and former chief financial officer of a subprime mortgage company, said: "There's relatively little they can do because they don't really control the securitization market," which packages mortgages into securities that are then sold off in pieces to investors around the world, including large hedge funds, pension funds and insurance funds. "It's not like the savings and loans crisis."

Trejos reported from Washington. Staff writers Nell Henderson, Carrie Johnson and David Cho in Washington contributed to this report.