Late selling smacks down U.S. stocks; Dow loses 387

NEW YORK -- U.S. stocks tumbled Thursday after BNP Paribas, a large French bank, said it would stop calculating net asset values for three of its hedge funds that have invested in the U.S. subprime mortgage market.

The Dow Jones industrial average fell 387.18 points, or 2.8%, to 13,270.68. The Standard & Poor's 500 Index closed down 44.40 points, or 3%, at 1453.09. The Nasdaq composite index lost 56.49 points, or 2.2%, to 2556.49.

Thursday's pullback continued an erratic pattern of triple-digit moves in the Dow since the index closed at a record 14,001.41 on July 19. Eleven of the 15 ensuing sessions have ended in a triple-digit gain or loss. Gains have been evaporating at the first mention of trouble in housing, subprime lending or the credit markets.

With Thursday's decline, the Dow is about 730 points, or 5.2%, below its record close. Some experts have been calling for a textbook correction — a pullback of at least 10%. At its lowest close since the market's high, Friday's finish of 13,181.91, the Dow was 5.85% below the record.

Before Thursday, the S&P had its best three-day winning streak in nearly five years. But the latest pullback was the biggest point drop and percentage loss for both the Dow and the S&P since a market decline on Feb. 27.

Despite Thursday's slide, the major market indexes are still up for the week, given that stocks rose sharply the first three sessions of the week.

Bonds rose sharply as investors again sought the relative safety of Treasurys, pushing down the yield on the benchmark 10-year note to 4.79% from 4.89% late Wednesday.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where consolidated volume came to a heavy 5.76 billion shares compared with 5.3 billion shares traded Wednesday.

The Chicago Board Options Exchange's volatility index, often called the "fear index," rose Thursday to its highest level since April 2003.

The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone — institutions, investors, companies, individuals — can't get money when they need it unnerved a stock market that has suffered through weeks of volatility triggered by concerns about tight credit and bad subprime mortgages.

Stocks plunged in Europe but came off their lows by the end of trading. Britain's FTSE 100 stock index lost 1.9%, Germany's DAX index fell 2.0%, and France's CAC-40 fell 2.2% after being down more than 3%.

BNP's action prompted the European Central Bank to inject $130 billion in liquidity to calm the continent's money markets. The central bank, which controls monetary policy for the 13-nation euro zone, made the move after banks appeared less willing to lend in a jittery market.

That move perhaps intensified Wall Street's angst. Although the central bank's loan of more than $130 billion in overnight funds to banks at a bargain rate of 4% was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems.

The Federal Reserve added a larger-than-normal $24 billion in temporary reserves to the U.S. banking system.

The ECB's injection of money into the system is an unprecedented move, said Joseph Battipaglia, chief investment officer at Ryan Beck & Co., adding that it shows that problems in subprime lending are, in fact, spilling into the general economy.

"This is a mini-panic," he said.

"All the things that had been denied up until this point are unraveling," Battipaglia said. "On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer."

The Fed didn't soften its stance on inflation after leaving short-term interest rates unchanged Tuesday. However, the renewed credit market concerns spurred bond traders who bet on its next move to predict that the Fed will cut rates at its meeting next month. Before Thursday, traders had bet on a 1 in 4 chance of such a cut.

The announcement by BNP Paribas Investment Partners sent shock waves through an already sensitive money market.

The bank, France's largest bank by market value, said it was suspending three funds worth a total of 2 billion euros ($2.75 billion): Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. All funds combined at BNP Paribas Investment Partners are worth more than 350 billion euros ($482.79 billion).

"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said.

"The situation is such that it is no longer possible to value fairly the underlying U.S. ABS assets in the three above-mentioned funds" and "therefore unable to calculate a reliable net asset value, NAV, for the funds," the company said.

Defaults on subprime loans, or those made to people with less than prime credit, have climbed sharply in recent months and have triggered concern about the impact on credit markets worldwide. BNP's announcement sent European stock markets lower and stirred concerns that problems among subprime borrowers would further roil markets.

"Who knows where the subprime story is going to pop up again," said Adam Cole of RBC Capital Markets.

BNP Paribas shares dropped 3% to 82.81 euros ($114.23) Thursday.

When the bank posted second-quarter results last week, Chief Executive Baudouin Prot assured investors the bank would be virtually untouched by the plummeting valuation of some subprime mortgage portfolios in the U.S. because it has little exposure to the market.

BNP's actions come amid a panic period and the prices of assets remain volatile, said Celent analyst Cubillas Ding.

"Securitized assets that have underpinnings in the U.S. subprime market may now be difficult to put a price tag on given market sentiment — as there is still lingering uncertainty whether the meltdown has greater knock-on effects down the line," he said.

American International Group aig, one of the world's largest insurers, on Thursday reassured investors that it remains comfortable with its exposure to the subprime lending market as an investor, lender and mortgage insurer. AIG, which reported a 34% jump in second-quarter profit late Wednesday, said it has enough cash and liquidity and "does not need to liquidate any investment securities in a chaotic market."

AIG fell $2.18, or 3.3%, to $64.30, however.

Germany's financial watchdog, BaFin, said Thursday that it has yet to see any firm reason to examine the extent of that nation's banks' exposure to the U.S. subprime market.

This week WestLB Mellon Asset Management, the asset management joint venture of German state bank WestLB and The Bank of New York Mellon Corp., suspended redemptions from its asset-backed securities ABS Fund, which is part of the West LB Mellon Compass Fund.

WestLB denied speculation on Thursday that it is facing a fund liquidity problem.

Other companies, including Union Investment Asset Management, a German mutual fund manager, and Frankfurt Trust, a unit of BHF-Bank, have also halted redemptions.

The dollar was mixed against other major currencies, while gold prices fell. Light, sweet crude fell 56 cents to $71.59 per barrel on the New York Mercantile Exchange.