Stocks head down as subprime woes pile up
NEW YORK » Stocks plunged today, driving the Dow Jones industrials down more than 240 points to their second-biggest drop in almost four years, as troubles piled up for subprime lenders.
Investors, bracing for a wilting economy, fled the already deflated subprime mortgage sector on more news that lenders New Century Financial Corp., Accredited Home Lenders Holding Co. and General Motors Acceptance Corp.'s residential unit are facing financial problems. The Mortgage Bankers Association bolstered the belief that the struggles are widespread after it said new foreclosures surged to an all-time high in the last quarter of 2006.
"The market's still jittery, and they're starting to get full-blown concerns over a bleed in the larger subprime mortgage market," said Matt Kelmon, portfolio manager of the Kelmoore Strategy Funds.
Subprime lenders provide mortgages to people with poor credit. Though they are a relatively small part of the U.S. economy, their difficulties raise larger concerns about the housing market, which until its slowdown in recent years was a big source of money for consumers. That, coupled with the U.S. Commerce Department's report Tuesday that U.S. retailers eked out a meager 0.1 percent rise in sales last month, led Wall Street to reconsider whether Americans' buying power will withstand an economic slowdown.
The Dow fell 242.66, or 1.97 percent, to 12,075.96. The Standard & Poor's 500 index fell 28.65, or 2.04 percent, to 1,377.95, and the Nasdaq composite index slid 51.72, or 2.15 percent, to 2,350.57.
The Russell 2000 index of smaller companies fell 19.88, or 2.52 percent, to 769.12.
Subprime lending jitters and sluggish retail sales drove up bond prices. The yield on the benchmark 10-year Treasury note fell to 4.50 percent from 4.56 percent late Monday.
Gold prices fell, and the dollar was lower against most major currencies. A drop in the dollar versus the yen renewed anxiety about traders unwinding their yen "carry trades," or taking money out of high-yielding dollar assets bought with the low-yielding yen.
Light, sweet crude fell 98 cents to settle at $57.93 per barrel on the New York Mercantile Exchange.
The subprime worries have been mounting for weeks now, but came to a head when the New York Stock Exchange took steps to delist shares of New Century, which said Tuesday that the Securities and Exchange Commission would be probing accounting errors that inflated its loan portfolio.
Accredited Home contributed to the anxiety after it said it is in need of cash. Its shares plunged $7.43, or 65 percent, to $3.97.
Late in the session, General Motors Acceptance Corp. -- General Motors Corp.'s part-owned financing arm -- reported that its fourth-quarter profit rose, but struggles in its Residential Capital LLC unit were eating into earnings. That news gave investors extra motivation to sell.
"The fear index is rising," said Steven Cochrane, senior managing director for Moody's Economy.com. "(Subprime mortgages) are our No. 1 concern right now."