Dow Falls 387 Points, Second-Biggest Drop of the Year

Aug. 9, 2007 — -- Stocks went on a free-fall moments after the opening bell rang this morning, following more bad news related to investments in subprime mortgages and never recovered.

The Dow Jones industrial average closed down 387, losing more than 2.8 percent of its value in its second biggest-single drop of the calendar year. On Feb. 27, the Dow lost 416 points, or 3.3 percent.

Still for the week, the Dow is up 88 points, following three strong, but wild days on Wall Street.

Today was the ninth greatest point loss in the Dow's history. But it didn't crack the top 20 list of biggest percentage drops in the market.

The NASAQ lost 2.16 percent of its value and the Standard & Poor's 500 fell 2.96 percent.

The market has seen tremendous swings in the last few weeks, leaving many investors on edge and wondering who will be next.

A handful of hedge funds have collapsed after falling victim to the nation's growing mortgage problems, and several others have warned that they no longer know their precise value due to the same mortgage issues.

What initially began as a problem on the fringes of the market is starting to frighten a larger part of the mainstream.

The latest blow came this morning from Paris, where France's biggest listed bank, BNP Paribas, froze $2.2 billion worth of funds, citing the U.S. subprime mortgage problems.

BNP Paribas -- like several U.S. firms -- said it was barring investors from redeeming cash from the funds.

Other European banks have also signaled problems stemming from the U.S. housing market. The European Central Bank moved to provide more cash to money markets, a move that only intensified Wall Street's fears as investors saw it as confirmation of the credit markets' problems.

An already-jittery Wall Street did not react favorably to any of the news. The Dow Jones industrial average fell 235 points in the market's first five minutes of trading before recovering a bit.

Similar repercussions have spread beyond the markets. Many of the nation's lenders have tightened their grip on credit. Homeowners now need to provide more documents and are subject to more reviews in order to get mortgages. Businesses are also finding it harder to secure a line of credit which they need to grow and -- for larger corporations -- to acquire other companies.

So how did this happen?

The route from the individual mortgage sector to Wall Street is long and sometimes opaque.

Banks and other lenders issued mortgages to people looking to buy homes. Such mortgages are then often bundled together and sold to investors who take on the risk. Those investors can then in turn sell the loans again.