Markets hit by financial worries

Times Staff Writer

Wall Street slumped again Monday as worries intensified that the credit crunch soon could lead to the failure of a major financial company.

The markets’ continuing woes are boosting calls for the federal government to take more aggressive action to stop the capital drought from worsening -- by, for example, directly purchasing mortgage-backed securities or making low-rate loans to homeowners at risk of foreclosure.

In the credit markets, “There’s this huge logjam, and somebody’s got to break it up,” said Todd Leone, a veteran equities trader at Cowen & Co. in New York.

Stocks fell sharply, with some major indexes down for the seventh time in eight sessions, as many investors remained gripped by fears about the financial system.


The Dow Jones industrial average ended with a loss of 153.54 points, or 1.3%, to 11,740.15, deepening its decline from its all-time high in October to 17.1%.

Shares of brokerage Bear Stearns Cos. dived $7.78, or 11%, to $62.30 even after the company said there was “absolutely no truth” to rumors that it was facing a cash squeeze.

More troubling to some analysts was another plunge in shares of Fannie Mae and Freddie Mac, the two government-sponsored mortgage finance giants that are expected to help rescue the housing market by stepping up their purchases of home loans from lenders.

A weekend article in Barron’s magazine questioned Fannie Mae’s solvency, saying the company could be “ill-equipped to weather a serious financial crisis.” Fannie Mae stock tumbled $2.96, or 13%, to $19.81, its lowest since 1995.

Freddie Mac slid $2.26, or 11.5%, to $17.39, also the lowest since 1995, after an analyst at brokerage Credit Suisse nearly doubled his estimate of what the company could lose this year as home loan defaults continue to rise.

Burgeoning losses in mortgage-backed bonds fueled a credit crunch beginning last summer, as wounded banks and brokerages became reluctant to lend money. In recent weeks the crunch has spread well beyond the housing market, even affecting seemingly unrelated markets, such as municipal bonds.

“Capital is scarce and getting more scarce,” said Allen Sinai, head of Decision Economics Inc. in New York. The Federal Reserve’s campaign to slash short-term interest rates hasn’t loosened credit, nor have the Fed’s efforts to lend to struggling banks, Sinai said.

In recent days some large private funds that had bought mortgage-backed securities with borrowed money said their lenders were demanding that the funds put up more capital to cover the declining value of the securities. Such “margin calls” can force funds to dump securities they hold, in turn driving markets lower.


Carlyle Capital, a $21-billion-asset mortgage securities fund that was hit with margin calls last week, said Monday that it was continuing to talk to its lenders about forbearance.

After regular trading ended Monday, MFA Mortgage Investments, a New York-based fund, said it had sold $1 billion in mortgage-backed securities since Friday to pare back its use of borrowed money.

Some stock market pros say the credit turmoil is likely to lead to the failure of at least one major bank, brokerage or other financial company. Historically, market crises often have ended with a spectacular institutional failure that triggers a final wave of selling.

That was the case with the collapse of hedge fund Long-Term Capital Management in 1998, for example.


“There needs to be a catharsis, a wipeout,” said Randy Bateman, investment chief at Huntington Bancshares in Columbus, Ohio. “I think when we see that it will be time to get really bullish.”

But others say the interlinked financial system overall -- and the economy -- may be too fragile to risk the collapse of a large bank or brokerage that could, in turn, topple other institutions.

The government Friday said the economy lost a net 63,000 jobs in February, the most in five years. That strongly suggested that a recession was underway, many economists said.

As worries mount, more experts are calling for bolder moves by the government to stabilize the housing market and restore confidence in the financial system.


In a Wall Street Journal op-ed article Friday, Harvard University economist Martin Feldstein proposed a plan under which certain struggling homeowners would get a low-interest-rate government loan to pay off 20% of their current mortgage. That would lower borrowers’ payments while also infusing lenders with fresh capital, Feldstein said.

At Newport Beach-based bond fund giant Pacific Investment Management Co., or Pimco, executives Monday suggested that the Federal Reserve should begin buying mortgage-backed bonds outright to shore up that market, rather than simply lending to banks that put up such securities as collateral.

Sinai, at Decision Economics, said he also believed that direct intervention by the Fed, the Treasury or another federal entity would be necessary to reverse the contraction of credit.

“Ultimately the government will have to provide capital support to the financial system,” he said. “The Wall Street chatter is that it’s absolute murder out there now.”


In the near term the Fed is expected to continue cutting its key short-term rate. Policymakers meet next week and are expected to lower their benchmark rate from 3% to at least 2.5%.

Among Monday’s market highlights:

* Broad market indexes plummeted with the Dow. The Standard & Poor’s 500 fell 20 points, or 1.6%, to 1,273.37, a 19-month low. It is down 18.6% from its record high in October, nearing the 20% mark that is considered the threshold for a bear market.

The Nasdaq composite sank 43.15 points, or 2%, to 2,169.34. It is down 24.1% from its multiyear high in October.


* In the financial sector, Citigroup slid $1.22 to $19.69, Merrill Lynch lost $2.35 to $42.84 and bond insurer MBIA fell $1.22 to $10.77.

* Another record high in oil -- up $2.75 to $107.90 a barrel -- failed to pull up most energy stocks. The average energy stock in the S&P; 500 lost 1.2%.

* Some investors again fled to U.S. Treasury securities for safety, driving yields down. The 10-year T-note yield sank to 3.45% from 3.53% on Friday.

* The dollar fell to 102.04 yen from 103.09 on Friday. The euro edged up to $1.535 from $1.534.