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Financials Lead Sell-Off After Carlyle News

Stocks plunged Thursday following news of the imminent collapse of Carlyle Capital and the dollar's 12-year low against the yen.

The Dow Jones Industrial Average held onto a triple-digit point loss throughout the morning and all 30 Dow stocks were lower. The Nasdaq and S&P 500 index also fell sharply.

Netherlands-listed fund Carlyle Capital, an affiliate of U.S. buyout firm Carlyle Group, failed to make a deal with lenders and is on the brink of collapse. Carlyle Capital's lenders have begun to force the sale of its assets as the unit has missed margin calls, is now in default on about $16.6 billion of its loans and expects to default on the rest.

Among the lenders that have begun to sell Carlyle assets are J.P. Morgan , Merrill Lynch and Bear Stearns .

Bear Stearns shares has it own share of problems this week, with rumors circulating about liquidity problems at the brokerage. The company has come out and said there aren't any such problems, but investors don't seem to be convinced.

The Carlyle news was particularly unsettling as it means the credit crunch has moved beyond subprime. Carlyle Capital has mostly AAA-rated mortgage-backed securities issued by Fannie Mae and Freddie Mac in its portfolio.

Financials led the decline, with the S&P financial index, the biggest decliner among 10 key S&P sector indexes, down about 3 percent. Financial stocks, including Citigroup and Bank of America, accounted for four of the top five decliners on the Dow.

The Dow's top decliner was General Motors , after Morgan Stanley said it now expects the top U.S. auto maker to post a loss for 2008. The brokerage also widened its loss estimate for No. 3 Ford .

The other thing weighing heavily on the market is the dollar's fall below 100 yen to a 12-year low against the Japanese currency. The euro rose above $1.56 against the dollar during the session.

Treasury Secretary Henry Paulson said he and top policy makers are calling for an overhaul of rules for credit markets and mortgage brokers.

"The objective here is to get the balance right -- regulation needs to catch up with innovation and help restore investors confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it," Paulson, who heads the panel, said in a speech to the New York Press Club in Washington this morning.

Economic news didn't help the market either.

Retail sales fell 0.6 percent in February, the Commerce Department reported, a sharp drop from the 0.2 percent increase economists had expected. That followed a revised 0.4 percent gain in January. Excluding autos, sales fell 0.2 percent.

Jobless claims were unchanged at 353,000 last week, according to the Labor Department, while the number of people remaining on unemployment aid held at its highest level in nearly two and a half years -- after Hurricane Katrina. The four-week moving average dropped to 358,500.

U.S. import prices rose by 0.2 percent, less than expected, last month as petroleum prices slipped. Export prices increased by 0.9 percent, more than expected, the Labor Department reported.

Business inventories rose 0.8 percent, more than expected, in January, though sales posted their biggest increase in almost a year, according to the Commerce Department.

The weak dollar lent more support to oil prices, and New York light crude futures hovered around $110 a barrel.

The converging burdens on the market served as notice that this week's aggressive move by the Federal Reserve to add liquidity to the credit market may not be sufficient to save Wall Street from further pain.

Ambac Keeps Top Ratings; EA Offer Turns Hostile

Shares of Ambac skidded even as the bond insurer kept its top rating from Moody's and S&P after raising $1.5 billion in capital.

And a British hedge fund approached Washington Mutual offering to participate in a consortium to recapitalize the bank.

In the tech sector, Electronic Arts' effort to acquire Take-Two Interactive Software has turned hostile, with EA launching a tender offer for its rival at $26 a share. Take-Two, publisher of the popular "Grand Theft Auto" video game, last month rejected EA's $2 billion unsolicited all-cash offer.

Target shares skidded. After the closing bell Wednesday, the discount retailer said it is in talks to sell half of its credit-card receivables business.

Elsewhere in retail, shares of Men's Warehouse declined as the chain beat earnings expectations, but issued an earnings outlook of 20 to 24 cents a share, well below the expected 44 cents a share.

Some analysts have suggested the retail sector may already be in a recession.

"It certainly feels like a recession," Men's Warehouse CEO George Zimmer said.

Airline stocks skidded amid reports that major airlines will begin paring their flight schedules due soaring jet-fuel prices and weak demand for air travel. United , American parent AMR and Northwest were slammed with some of the heaviest declines.

Send comments to cindy.perman@nbcuni.com.