Dow off 387 as subprime mess goes global

The subprime mortgage mess metastasized into a full-blown global credit crisis today, crushing stocks in Europe and in the United States.

Today's meltdown, which began in France, forced central banks to put cash into the credit markets to keep the financial system operating smoothly. It wasn't clear when the problem will be fully understood, let alone fixed.

The Dow Jones industrials fell more than 387 points, or 2.8%, to just under 13,271 today. It was the biggest loss for the blue-chip index since it fell 416 points on Feb. 27 and the sixth-largest daily point loss since the end of 1999. In the 15 trading sessions since July 19, when the Dow peaked at 14,000, the blue-chip index has moved up or down more than 100 points 11 times.

The Standard & Poor's 500 Index closed down 44 points, or nearly 3%, to 1,453, and the Nasdaq Composite Index was down more than 56 points to 2,556.

Trading volume was a record 2.8 billion shares on the New York Stock Exchange. More than 3.6 billion changed hands on Nasdaq.

But thanks to Monday's huge rally, the three indexes are still showing gains for the week.

Unlike recent sell-offs that were concentrated in financial and home-building stocks, today's selling across the entire stock market. Investors increasingly seem to fear that the problems among the big investment banks are proving bigger than expected.

The dilemma is that no one knows what "big" means. Or, as James McGuire of LaBranche & Co., said on CNBC this afternoon: "We don't know what we don't know."

Since the issue is not fully understood, neither is the solution. One reaction early in the day was futures traders' betting big that the Federal Reserve would cut its key federal funds rate at its Sept. 18 meeting. By the end of the day, the dead certainty of a rate cut from the current 5.25% fell back to about an 80% certainty.

More volatility on Friday?

Friday is likely to be another volatile day. The Japanese stock market was tumbling in early trading. At 9 p.m. ET, the Nikkei 225 Index ($N225) was down 342 points, or 2%, to 16,828.

And shares of Countrywide Financial (CFC, news, msgs), the nation's biggest mortgage lender, were down nearly 13% to $25 in after-hours trading. The company said in a Securities and Exchange Commission filing late today that "unprecedented disruptions" in the nation's credit markets could hurt its results, especially in the short term. The company is being forced to keep many mortgages it normally sells as investments, and it is working on shoring up its balance sheet. It says it believes it can fund all of its operations.

The company also said that 5% of its total loan portfolio is behind at least 30 days on payments. That includes 20% of its nonprime loans, up from 14% a year ago. About 4% of nonprime loans are facing foreclosure up from 2.5% a year ago.

Delinquencies among prime loans -- loans made to borrowers who qualified using traditional standards -- were 2.7% of the group, up from 2.2% a year ago. Loans facing foreclosure in the prime group were less than 0.5% of the total. Prime loans represent about 83% of the loans that Countrywide services.

Countrywide shares are down more than 44% since peaking in February.

Even the year's big winners took a hit

Today's damage even hit some of the market's biggest winners of late, suggesting that some investors were being forced to liquidate positions to meet margin calls.

Amazon.com (AMZN, news, msgs) fell 4.7% to $74.11. Apple (AAPL, news, msgs) was down nearly 5.7% to $126.39. Google (GOOG, news, msgs) fell more than 2.1% to just under $515. Dow component Caterpillar (CAT, news, msgs) was down 3% to $78.48.

Even short-sellers were being forced to sell positions. Some home building stocks were actually rising. Lennar (LEN, news, msgs) rose 1.25% to $36.48. The Philadelphia Housing Sector Index ($HGX.X), however, was down nearly 1% to 188.

Energy stocks were also hit hard by the selling, in part because crude oil fell 56 cents to $71.59 a barrel in New York. The Amex Oil Index $XOI.X fell 3.4% to 1,305. ExxonMobil (XOM, news, msgs) fell 4.5% to $83.60, contributing 32 points to the Dow's loss. Marathon Oil (MRO, news, msgs) fell 5.4% to $49.24.

The BNP Paribas problem

The American sell-off came as stocks in Europe sold off heavily after the French bank BNP Paribas said it was suspending trading in three hedge funds because it couldn't value them due to huge losses in the subprime mortgage market.

"It is impossible to price assets in the funds because there is a lack of liquidity," BNP's spokesman Jonathan Mullen added. Translation: There was no market for the assets in the funds.

The three BNP funds -- Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia -- had about $2.8 billion of assets at the end of July.

Just last week, BNP Chief Executive Officer Baudouin Prot reported the bank's 20% rise in profit for the second quarter and said that the company is "not directly impacted" by the U.S. subprime market.

BNP's news came just weeks after Bear Stearns had to shut down two subprime-mortgage- backed hedge funds amid huge losses; shares of Bear Stearns have plunged 25% since the beginning of the year.

The BNP news it devastated European stock markets. The German Xetra Dax Index ($DE:DAX) fell 2% to just under 7,454. The FTSE 100 Index ($GB:UKX) in London was off nearly 2% to 6,271. The CAC-40 Index ($FR:PX1) in France was down 2.2% to 5,625.

• Get free, real-time stock quotes on MSN Money

The panic was so bad that the banks in London raised the London Interbank Offering Rate (or LIBOR) from 5.35% to 5.86%, an action that signaled the banks weren't sure of each other's financial strength.

That forced the European Central Bank to inject more than $130 billion into the continental banking system so it wouldn't seize up entirely. Standard & Poor's said that move was unprecedented. The Federal Reserve put more than $24 billion extra into the U.S. banking system.

The selling in the United States came after three days of rallies. Markets rose late Wednesday, after another volatile session sent the markets on a roller coaster. Stocks had given up big gains at the end of the trading day amid rumors that Goldman Sachs (GS, news, msgs) was having some financial problems with one of its hedge funds. After Goldman denied the rumors, stocks rallied at the close.

But today The Wall Street Journal reported that the fund in question, Goldman's Global Alpha fund, is down 16% for the year. The fund, which manages approximately $9 billion, lost 8% in July alone, the paper reported. Goldman shares were down $11.05, or 5.7%, to $182.25.

Financials take the brunt of the selling

Today's battering hit the areas of the U.S. markets that had been weakest this year: brokers and banks.

In addition to Goldman's loss, Bear Stearns (BSC, news, msgs) tumbled 5.8% to $114.05; Lehman Bros. (LEH, news, msgs)was off 7.2% to $60.15, and Merrill Lynch (MER, news, msgs) was down 4.5% to $74.68.

• Video: Bear Stearns execs cash out

The two big banks in the Dow, JPMorgan Chase (JPM, news, msgs) and Citigroup (C, news, msgs), were also taking a hit. JPMorgan was down 5%, to $44.17. Citigroup was down 5.2% to $46.90.

The Amex Securities Broker/Dealer Index ($XBD.X) was down 3.7% to 223. The Select Sector SPDR Financial (XLF, news, msgs) exchange-traded fund, which is mirrors the S&P 500 financial sector was down 3.6% to $33.50.

Industry groups that had the smallest losses were airlines, real estate investment trusts and semiconductors. The Amex Airline Index ($XAL.X) was unchanged at 46.65, the only index without a loss of the 41 indexes that Market Dispatches tracks. The MSCI U.S. REIT Index ($RMZ.X) was down 0.5% to 974.90. The Philadelphia Semiconductor Index ($SOX.X) was down 0.7% to 502.

Only one of the 30 Dow stocks finished with a gain: General Motors (GM, news, msgs), up 3 cents to $34.85. Home Depot (HD, news, msgs) was the biggest Dow loser, down 5.3% to $35.79.

The home-improvement retailer said it may have to scale back a stock buyback because it may get a lower selling price for its contractor-supply business.

More than 420 S&P 500 stocks were lower.

Short hits from the markets -- 4 p.m. ET

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	4.720%	4.805%	-0.085	-1.87%	-3.38%
5-year Treasury note yield	4.584%	4.692%	-0.108	-0.39%	-2.49%
10-year Treasury note yield	4.790%	4.860%	-0.070	0.40%	1.70%
30-year Treasury bond yield	5.029%	5.023%	0.006	2.17%	4.38%
Currencies
U.S. Dollar Index	80.23	80.37	-0.14	-0.53%	-3.84%
British pound in dollars	$2.0239	$2.0243	-0.0004	-0.04%	3.28%
Dollar in British pounds	£0.4941	£0.4940	0.0001	0.04%	-3.17%
Euro in dollars	1.3682	1.3682	0.0000	0.16%	3.65%
Dollar in euros	€ 0.7309	€ 0.7309	0.0000	-0.16%	-3.52%
Dollar in yen	¥118.24	¥118.11	0.13	0.38%	-0.66%
Commodities
Gold	$672.80	$686.30	-$13.50	-0.96%	5.45%
Copper	$3.7200	$3.4390	$0.281	1.96%	29.57%
Silver	$13.1700	#REF!	-$0.47	1.18%	1.82%
Crude oil (NYMEX) (per barrel)	$71.59	$72.15	-$0.56	-8.46%	17.26%

So what does all of this mean?

There are a lots of opinions about what the subprime mess will do to the economy and investors -- and what to do about it.

"The Fed's going to have to ease," said Peter Yastrow, market strategist with MF Global, on CNBC this morning. "When you take it all the way out, you realize in the end it's all collateralized by somebody's house, which isn't worth what they said it was worth when they borrowed the money for the house."

Janet Tavakoli, founder and president of Tavakoli Structured Finance, told CNBC the problems are going to hit not only hedge funds, but real-estate investment trusts (REITs), closed-end mutual funds and even high-yield, fixed-income open-end mutual funds.

"It takes a long time to value these things," Tavakoli said.

Subprime mortgages are loans made to high-risk borrowers. The mortgage market has been collapsing because of the U.S. housing market slump, and higher interest rates and falling home prices have hit subprime borrowers in particular.

The ensuing rise in delinquencies and defaults has, in turn, caused more than 20 subprime lenders to shut down.

AIG: Mortgage delinquencies are rising

American International Group (AIG, news, msgs) said today that residential mortgage defaults and delinquencies were rising among borrowers beyond the subprime market. Shares fell 3.3% to $64.30 on the news.

AIG said it has $28.7 billion invested in subprime-backed mortgages, making up less than one-third of the company's real-estate investment portfolio. Total delinquencies had hit 2.5% of the company's $25.9 billion real estate business, AIG said.

• Video: More on AIG's earnings

Separately, AIG reported a 34% rise in profit for the second quarter late Wednesday. The company said net income was $4.28 billion, or $1.64 per share, up from $3.19 billion, or $1.21 per share, in the same quarter last year.

"We continue to be very comfortable with our exposure to the U.S. residential mortgage market, both in our operations and our investment activities," CEO Martin Sullivan said in a statement. But the company's mortgage guaranty business reported a loss of $78 million in the quarter, down from a profit of $110 million in the same period last year.

Home Depot could lower price of supply unit

Home-improvement retailer Home Depot said today that it was talking to private-equity firms Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice about lowering the price of its HD Supply unit.

In June, Home Depot had agreed to sell the division to the three firms for $10.3 billion.

Home Depot also reduced the price range of a previously announced Dutch tender auction for 250 million outstanding shares, citing current market conditions.

A Dutch auction is an auction where share prices are lowered until a first bid is made, and then shares are sold at that price.

Campbell to sell Godiva?

Chocolate soup may not seem so tasty for Campbell Soup (CPB, news, msgs), which is considering a sale of its famous Godiva Chocolatier business.

Campbell is exploring strategic alternatives, it said this morning, to focus on its core food and snacks.

Shares of Campbell -- which also owns Pepperidge Farm and V8 brands -- were down 4.6% to $35.25.

Energy prices -- New York close

	Thur.	Wed.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$71.59	$72.15	-$0.56	-8.46%	17.26%
Heating oil (per gallon)	$1.9892	$1.9668	$0.0224	-5.28%	24.49%
Natural gas (per million BTU)	$6.5860	$6.2200	$0.3660	6.38%	4.56%
Unleaded gasoline (per gallon)	$1.9340	$1.9377	-$0.0037	-9.66%	20.72%

News Corp. reports a profit

Shares of media giant News Corp. (NWS, news, msgs) were 1.7% lower to $22.41 today, a victim of the stock market's plunge. But it also appeared that Wall Street was not impressed by the company's fiscal fourth-quarter earnings report.

News Corp. said late Wednesday that it earned $890 million, or 28 cents per share, up from $852 million, or 27 cents per share in the same quarter last year. Earnings were in line with analysts' consensus estimate.

• Video: Where did the real estate flippers go?

Revenue jumped to $7.37 billion, up from last year's $6.78 billion and ahead of analysts' estimate of $7.27 billion.

News Corp. said revenue from its cable networks rose to $1.1 billion from $934 million, helping offset weakness in its movie business.

"News Corp. is showing the benefit of being a conglomerate," Jason Helfstein, an analyst at CIBC World Markets, told Bloomberg News Wednesday. "It is now going to be about how they successfully integrate Dow Jones."

CEO Rupert Murdoch didn't overlook his latest purchase on Wednesday's conference call. "We don't have any firing plans at all," Murdoch said, noting that The Wall Street Journal and Dow Jones have "powerful brand names, unassailable credibility, and worldwide reach," which is why he paid such a high premium for the company.

Murdoch paid $5 billion for Dow Jones in a deal that was finalized on July 31.

July retail sales report

Retailers reported July sales today, although the market's turmoil overshadowed some good reports.

Costco Wholesale (COST, news, msgs) reported a 7% rise in sales at stores open at least one year. Analysts had been looking for a 5.5% rise in July. Shares fell 2.6% to $63.24.

Nordstrom (JWN, news, msgs) said same-store sales rose 9.4% in July, well above analysts' estimate of a 4.2% rise. The stock fell 1% to $50.58.

Retail bellwether Wal-Mart Stores (WMT, news, msgs) reported same-stores sales up 1.9%, ahead of the consensus estimate of 1.5%. Wal-Mart said same-store sales would rise between 1% and 2% for August. The stock stumbled 4.1% to $46.45.

But things at the Gap (GPS, news, msgs) weren't as rosy: The retailer said same-store sales fell 7% in July, worse than the consensus estimate of a 4.9% decline. But shares fell only 0.5% to $15.66.

By Charley Blaine and Elizabeth Strott