U.S. News

Market Buzz: More Credit Problems Surface, Rattling Investors

By Jim Kingsland

More credit problems surfaced in the financial sector on Tuesday, battering stocks and fueling worries that things will get worse before they get better.

"The market is still jittery," said Stephen Porpora, managing floor broker with William O'Neil. "Everybody's looking for the next shoe to drop in this subprime problem."

Thornburg Mortgage was among the hardest hit. Its shares plunged 46% amid concerns about liquidity. After the market closed, the residential mortgage lender said it was delaying payment of its second quarter dividend by a month, citing "significant disruptions" in the mortgage market.

Thornburg's president told CNBC that the mortgage lender is having problems raising financing but has "no intention" of filing for Chapter 11 protection. "We've been able to meet all of our obligations," Goldstone said. "We've been rolling over and financing our portfolio. It's been an amazing struggle to get that done."

Fund Halts Withdrawals

Earlier in the day, Sentinel Management Group, an Illinois-based cash-management firm for institutional investors, spooked markets by saying it plans to halt some redemptions in its money market funds because so many investors wanted to pull their money out.

"We had previously thought that the market would return to some semblance of order and that our clients would not join in the panic," Sentinel said in a letter to clients. "Unfortunately, this has not been the case."

Sentinel added that it is "concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients."

Meanwhile, Delta Financial, a Woodbury, N.Y., mortgage firm said it has received substantial margin calls recently, reflecting the worries in the subprime mortgage industry.

In a filing with the Securities and Exchange Commission, Delta said the margin calls has hurt its liquidity and forced it to seek new sources of capital and change its operations.

Other Problems

Also on Tuesday, Sanford C. Bernstein said Citigroup could suffer as much as $3 billion in losses from credit turmoil in the third quarter. And Fortress Investment Group became the latest hedge fund to disclose problems, posting a wider loss for the second quarter.

Though the Federal Reserve has calmed the markets somewhat in the past few days by adding billions of dollars to the banking system, many experts think the Fed still has a lot of work to do.

Related Stocks

"The market psychology is very brittle right now," Alec Young, equity market strategist at Standard & Poor's, told CNBC.com. "Right now we should be seeing some signs of stabilization, but we're having trouble getting momentum.  The financials are the anchor that keeps weighing down the market. People don't know where the bodies are buried."

Credit Crunch Protection

Though calls for an immediate Fed cut in interest rates have subsided somewhat, many still think Chairman Ben Bernanke will eventally have to abandon his anti-inflation stance and start easing rates.

Northern Trust economist Paul Kasreil says the Fed will be forced to start lowering interest rates this fall "in an effort to avert recession."

Beyond the troubles in the credit markets, the Fed is confronting a possible slowdown in consumer spending.  Wal-Mart and Home Depot, two of the nation's largest retailers, posted declining earnings and warned that higher energy costs and troubles for housing and credit markets will hurt earnings the rest of the year.

Inflation Hotter

Inflation hasn't subsided, however. The latest producer price index data showed a larger than expected 0.6% rise in wholesale prices during July, led by another surge in the cost of energy. While the core rate of the PPI rose a less than expected 0.1%, the ongoing rise in overall prices has kept the Fed on high alert for further inflation pressures.

"I still think there are a lot of problems that are going to come to the surface," says Peter Yastrow, market strategist at MS Global in Chicago.  Even so, Yastrow says Bernanke is to be applauded for his actions thus far.

"It shows that Bernanke’s actually really sharp and he’s very clever, whereas (former Fed chairman Alan) Greenspan was using a sledge hammer to open walnuts," Yastrow said. "Mr. Bernanke seems to have the perfect tools and he pulls them out like he's Inspector Gadget."

Yastrow added: "I really have to take my hat off to Dr. Bernanke and tell him thank you for educating all of us for better ways to conduct monetary policy."