Monday, February 4, 2008

Wall Street, Bear Stearns Hit Again By Investors Fleeing Mortgage Sector

The nation's weak housing sector sent another shudder through Wall Street, with insurers and lenders taking further hits and Bear Stearns Cos. shutting off withdrawals from a mortgage-investment fund.

The stock market, which had been up sharply early yesterday, reversed course abruptly amid renewed concerns about loans and securities derived from home mortgages. The Dow Jones Industrial Average, which had been up more than 140 points, closed down 146.32 points, or 1.1% from a day earlier, at 13211.99 -- a swing of nearly 300 points, or more than 2%. U.S. Treasury bonds rallied as investors sought the stability of government-backed bonds.

The nervousness was fed by rumors of troubles at hedge funds that are invested heavily in mortgage securities. Bear Stearns, its reputation already dented after two of its hedge funds that bet heavily on securities connected to risky home loans blew up in June, has prevented investors from taking their money from another fund that put about $850 million into mortgage investments.

In recent weeks, as the housing market continued to weaken and trading firms began to price many mortgage investments at discounted levels, Bear executives realized their Asset-Backed Securities Fund was facing a rough July, said people familiar with their thinking.

Unlike Bear's other two funds, these people said, the asset-backed fund borrowed no capital and had practically no exposure to subprime mortgages, as home loans extended to people with weak credit are known. But a combination of markdowns on a broad range of mortgages and a series of refund requests could force the fund out of business eventually, according to one person familiar with the situation.

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