Global Stocks Plunge as U.S. Crisis Spreads

Riding on fears from the U.S. subprime mortgage crisis, a worldwide stock sell-off has involved some of the worst market declines since Sept. 11, 2001.
By Neil Irwin and Zachary A. Goldfarb
Washington Post Staff Writers
Tuesday, January 22, 2008

Stock markets around the world plummeted yesterday as a financial crisis that began in the market for U.S. home mortgages spread to almost all corners of the globe.

U.S. markets were closed for Martin Luther King Jr. Day, but all the world's other major economies experienced sell-offs. Stock prices fell more than 7 percent in Germany and India, 5.1 percent in China, 5.5 percent in Britain and 3.9 percent in Japan. Many countries experienced their worst market declines since Sept. 11, 2001, and the only country whose stock market rose was Sri Lanka.

Asian markets continued their steep drop today, with Japan down 4.4 percent in morning trading. As the market opened in India, shares fell nearly 10 percent, triggering an automatic halt to trading.

"Where the bottom is now is anyone's guess," said Wesley Fogel, a market strategist for HSBC.

Officials at the Treasury Department, in the Federal Reserve system and at major stock exchanges worked the phones yesterday -- calling one another and their counterparts around the world. They were preparing for what looks likely to be a volatile week on Wall Street: Futures markets yesterday forecast a 4.5 percent drop in the Standard & Poor's 500-stock index when exchanges open this morning.

A Treasury spokeswoman said only that the department is always monitoring markets and in touch with participants. A spokeswoman for the Fed declined to comment.

The markets fell as fears spread that massive losses on loans made to U.S. home buyers would cascade through the world financial system. Some of the firms that play important, but usually invisible, roles in the global financial architecture are turning out to be exposed to the downturn in the housing market in such a way that their ability to function is threatened.

The companies that insure bond investors against defaults are having to make massive payouts. One, ACA Financial, owes $60 billion that it cannot afford to pay and has been taken over by the Maryland insurance regulator. Its credit rating has been lowered.

The problems among bond insurers have meant that a wide variety of financial institutions cannot count on receiving payments due them, causing further losses.

Other news yesterday shows just how widely the damage has spread. A Chinese newspaper reported that the Bank of China is exposed to subprime U.S. mortgage loans to a degree it had not previously disclosed and may have to write down the value of its $8 billion in such investments. Several large European banks have taken similar hits.

Those losses could have importance beyond the hit they cause to the banks' share prices. Banks and other financial institutions play an important role in an economic downturn: lending to businesses and consumers so they can help the economy get back on track. The multibillion-dollar losses could make them unable to play that role.

Moreover, foreign investors have been plowing capital into U.S. banks to help them continue lending, which made the losses particularly worrisome, some analysts said.

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