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Subprime Market Miseries Spread to Wall Street

SCOTT SIMON, host:

This is WEEKEND EDITION from NPR News. I'm Scott Simon.

Many of the reports from Wall Street this week used the same metaphor, a rollercoaster ride. But actually it was more like an elevator ride straight down. While the Dow ended up slightly for the week, fears remain that the market might resume its downward slide.

Our friend from the world of business, Joe Nocera, a columnist for the New York Times, joins us now from our studios in New York.

Joe, thanks very much for being with us.

Mr. JOSEPH NOCERA (Columnist, New York Times): Thanks for having me, Scott.

SIMON: What caused the downturn this week?

Mr. NOCERA: Well, you remember all those people who said that the subprime problems from the beginning of the year would not infect the rest of the market, they were wrong. This really is about a contagion that began with a fairly serious problem, having to do with the subprime market and its effect on Wall Street and which has now spread throughout Wall Street and created fairly severe credit problems and some - as we say in the trade - liquidity problems.

SIMON: It's hopped over to Europe, too, right? Weren't there some European hedge funds, yeah?

Mr. NOCERA: Has there, big time. I mean, one of the things that happened this week that really spooked the market was the announcement by a Paribas that it was freezing three hedge funds that it ran because - the way they said it was, we can't price the securities. What they meant was they couldn't find any buyers for the securities.

SIMON: Yeah.

Mr. NOCERA: The market had completely dried up. And that caused the European Central Bank to infuse somewhere on the order of a hundred billion dollars into the banking system just to keep it liquid.

SIMON: Let me ask you about this specific case of, I guess, it's Countrywide Home Loans.

Mr. NOCERA: Right.

SIMON: ...which is the biggest mortgage lender but not, as I understand it, a subprime lender.

Mr. NOCERA: Well, they do have a substantial subprime business. But they also have a sort of a regular business, too. The problem is because companies like Countrywide make their money by parceling out loans to Wall Street, selling their mortgage loans to Wall Street, which allows them to make more loans.

So all of a sudden, they can't sell their paper. So they can't make more loans because their own cash is tied up in the ones they've already made. And the fact that Wall Street isn't buying this means that there's almost a freeze in the marketplace.

SIMON: Which I guess would also explain why the Paris bank can't sell any of the properties that they bought, yeah.

Mr. NOCERA: That's right. But then it cascades, Scott, because it started with this thing called subprime. And then it moved to derivative traders and hedge funds, and then it spread to general equities. And so when you see the market fall by 300 and, I think, 80 points it was on Thursday, it's because psychology takes over.

SIMON: What could change?

Mr. NOCERA: Well, look at what happened on Friday. The market started; within 10 minutes, the market was down a hundred points, and at a certain point of the day, it was down over 200 points. And it closed down around 30. The Federal Reserve rushes in and sort of decides to infuse money into the marketplace and basically, a bunch of analysts and economists on Wall Street say, hey, you know, the economy is in fundamentally good shape and it's not the end of the world, and so on and so forth. So traders decide well, maybe things aren't so bad and they start to buy and they start to think well, maybe the worst is over.

Now, we don't really know here this morning whether the worst is over or not.

SIMON: What are you going to be looking at over the next couple of weeks?

Mr. NOCERA: Well, first of all, you're looking at the stock market itself. Second of all, you're looking at what Ben Bernanke, the Fed chairman, is going to do. I mean, he's under a lot of pressure on Wall Street to lower rates and so on, which he doesn't really want to do. And the third thing to watch really is, you know, will credit keep contracting? Will hedge funds keep starting to fail? Or, will it simply be a case of where people take losses on equities but the system sort of regains its liquidity and you're waiting to see whether it continues to lock or whether it kind of unfreezes, I don't know quite how else to describe it.

SIMON: Joe Nocera in New York, thanks very much.

Mr. NOCERA: Thanks a lot, Scott. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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