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By Jason Simpkins
The credit mess that started as a slowdown in the U.S. housing industry, and then spread to the sub-prime mortgage market, morphed into a full-blown global credit crisis yesterday (Thursday), forcing the European Central Bank into action.
Yesterday’s developments were no surprise to us, for we’ve been saying for months that the fallout from the housing-market meltdown was going to balloon into a worldwide financial problem [Click here to read our recent news report on this topic: Never Trust an Investor With a Microscope].
And the financial tsunami seemed as if it traversed the globe yesterday.
In its biggest plunge since it underwent a 416-point dead drop on Feb. 27, the Dow Jones Industrial Average yesterday plunged 387 points, or 2.8%, to close at 13,271. For the closely watched blue-chip index, it was the sixth-largest single-day point loss since the closing portion of 1999. And it was also the 11th time in the past 15 trading sessions that the 30-stock Dow posted a daily change of more than 100 points – a sign that the burgeoning credit crisis has caused volatility to spike.
The scorching decline was touched off after the European Central Bank yesterday (Thursday) loaned more than $130 billion to banks at a rate of 4%, intending it as a cash infusion to assuage a credit crunch brought on by the collapse of the U.S. sub-prime-mortgage market. The ECB stated that this was the largest amount ever dispensed in a single “fine-tuning” operation, exceeding the $95 billion given out on Sept. 12, 2001, the day after the terror attacks on New York.
In recent weeks, it was clear that the credit problems were spreading to other markets worldwide: A hedge fund collapsed in Australia, and sub-prime losses stung a bank in Germany .
The ECB has now stepped in where U.S. Federal Reserve Chairman Ben S. Bernanke and the U.S. central bank couldn’t or didn’t. The ECB, which is responsible for the monetary policy of 13 nations in and around Europe, allocated the funds to ensure orderly market conditions. [For some perspective on the ECB’s action, click here to check out what our resident global trading expert and newest team member had to say].
Yesterday’s problem first began when the largest bank in France, BNP Paribas SA, halted withdrawals from three asset-backed funds linked to U.S. sub-prime mortgages. It was a move eerily reminiscent of those made by The U.S.-based Bear Stearns Cos. (NYSE: BSC) . As a result, stocks in both the U.S. and U.K. markets plunged, and the overnight rates banks charge each other to lend in dollars soared to a six-year high. At that point the ECB was prompted to mobilize.
The U.S. Federal Reserve added $24 billion in temporary reserves to the banking system yesterday, the most since April. Federal Reserve policymakers met Tuesday to discuss the outlook of the U.S. economy, but afterward announced that inflation – and not the credit crunch – remained its primary concern. The ECB decision should not be immediately interpreted as the right decision however. An effort to prop up a market could backfire and actually perpetuate a lack in investor confidence.
European stocks were badly blistered, too. Britain’s FTSE 100 index closed down 1.9% yesterday, dropping 122 points. Germany's DAX index fell 2%. And France's CAC-40 index – down more than 3% at one point – closed down nearly 2.2%.
Asian shares were mixed. Hong Kong’s Hang Seng index dropped 0.43%. Japan’s Nikkei index rose 0.83%.
The happenings abroad surely played their part, but just as devastating to the Dow was a report from AIG that mortgage defaults are spreading from the sub-prime to the prime sector of real estate.