Stocks skid as mortgage crisis takes toll on bonds
Financial markets took another hit Thursday as the mortgage crisis continued to bleed into other types of securities, reflecting skittish investors' general pullback from risk-taking.
The stock market's three-day advance halted, and some funds that own tax-free municipal bonds tumbled in value for a second day as investors balked at buying certain types of muni securities.
In the bond market, "You've kind of worn people down," said Howard Simons, a strategist at Bianco Research in Chicago. "Each time we get the sense that we have a handle on everything going on in the credit crisis, something else crawls out of the woodwork."
The Dow Jones industrial average slid 175.26 points, or 1.4%, to 12,376.98, taking back about half of its advance in the previous three sessions.
Investors were troubled as Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. sounded cautious about the economy on Capitol Hill.
What's more, Swiss banking giant UBS reported an $11.3-billion fourth-quarter loss, mainly because of a $13.7-billion write-down on U.S. mortgage bonds. That included a $2-billion write-down on bonds backed by so-called alt-A loans, which had been considered to be much less risky than sub-prime mortgages.
UBS shares slumped $3.05, or 8.2%, to $33.94, and fear of spreading losses in the mortgage sector hammered other financial issues as well.
Bank of America, which has agreed to buy mortgage giant Countrywide Financial, fell $1.09 to $42.24. Fannie Mae, which invests in mortgage loans, slid $1.13 to $30.34. Downey Financial dropped $1.12 to $28.22.
In the bond market, the focus Thursday was less on mortgage issues and more on municipal issues.
Demand for some types of muni securities has fallen sharply in recent weeks amid concerns about the financial health of insurance companies that guarantee the bonds. Because the insurers also have guaranteed sub-prime mortgage securities, investors are concerned that sub-prime-related losses could wipe out the insurers' capital.
New York insurance regulators have been trying to work out a plan with major banks to pump capital into the insurance firms, and Gov. Eliot Spitzer said Thursday that a deal could happen within days.
The urgency of the situation was highlighted as credit-rating firm Moody's Investors Service slashed its AAA rating on the bond insurance unit of FGIC Corp., cutting the firm's grade six notches, to A3.
