ECB gushes cash as credit market turmoil spreads

Stocks Tumble as French Bank
Reacts to Home Loan Worries

By Jeremy W. Peters
The New York Times
Thursday, August 9, 2007

http://www.nytimes.com/2007/08/10/business/worldbusiness/10bank-web.html...

Stocks dropped sharply as soon as trading opened today after a French bank, BNP Paribas, suspended operations of three of its funds in the wake of turmoil in the American market for home loans and the European Central Bank injected cash into the financial system because of tightening credit markets.

The Dow Jones industrial average fell more than 200 points, or 1.5 percent, while the Standard & Poor's 500-stock index and the Nasdaq composite index were down just as much. By 10:30 a.m., the Dow and S&P. 500 had recovered about half their losses, and the Nasdaq was up slightly for the session. The plunge came after a sell-off in Europe, which was prompted after BNP, the largest publicly traded bank in France, became the latest European lender to announce problems linked to the worsening credit market in the United States, where several large companies have already announced losses.

A German central bank meeting was under way to discuss details of a rescue package for the lender IKB, another victim of exposure to the crisis in subprime lending.

Jonathan Mullen, a spokesman for BNP, said that the credit squeeze in the United States had made it impossible to calculate the value of the underlying assets of the funds and that the bank was obliged by market conditions to halt holders of the funds from cashing out or new investors from buying shares in the funds.

"It's quite exceptional to suspend funds, and it means that people can’t buy in or sell out of the funds," Mr. Mullen said. "But we hope this is going to be temporary and that the market will come back."

Mr. Mullen said that about one-third of the funds were exposed to subprime loans but that those investments were in high quality parts of that market. "We've seen no degradation in the quality of these assets, none of which have been put on watch for a downgrade," Mr. Mullen said. "This is just a technical problem about liquidity."

With banks pulling back on lending over all, the European Central Bank lent more than $130 billion overnight at a rate of 4 percent to inject cash into the financial system.

A key question is whether some European lenders know the full extent of their exposure to the subprime lending crisis. Only last week, BNP's chief executive, Baudouin Prot, said the bank's exposure to subprime woes was "absolutely negligible."

BNP shares fell more than 5 percent in early trading, but Mr. Mullen reiterated that the bank itself had almost no exposure to the subprime crisis. He said the funds are held by BNP clients and represent just a fraction, or 1.6 billion euros, of the 600 billion euros the bank currently has under management.

Some analysts have said it is difficult to determine the exposure of banks to the United States subprime market because they are often held through collateralized debt obligations, financial products that bundle securities and help spread risks, and banks often do not disclose their exposure.

Standard & Poor's, the debt rating agency, in July cut credit ratings on $6.39 billion of bonds backed by subprime mortgages.

Fitch Ratings said it was reviewing $7.1 billion, including 19 collateralized debt obligations, for a possible downgrade.

Concern among investors about possible effects of subprime investments and recent woes in the credit markets have outweighed rising earnings at European banks last month.

Shares of Deutsche Bank and BNP dropped on Aug. 1 even though both reported better-than-expected profit in the first half. Investors are reducing their exposure to banks with large investment banking arms, fearing losses from leveraged loans they have underwritten but cannot sell on to investors.

Analysts at Keefe, Bruyette & Woods, said earlier this month that while exposures to subprime may lead to "modest losses or slightly lower revenue" among European banks -- but that would be "entirely manageable."

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