Investors see spillover from subprime loans
Investors haven’t liked the underlying threats posed by the mortgage mess and the way lenders doled out billions of dollars to businesses and homeowners who wanted it—even if they could not afford to repay. But with the Dow Jones industrial average hitting new highs day after day earlier this month, investors kept wearing tense smiles and stayed to play in the market.
That changed last week, however, when it became clear that housing troubles are not as contained as some of Wall Street’s elite had suggested, and the feared spillover into the financial system began.
In response, investors dumped stocks, sending the Dow down more than 585 points, or 4.2 percent, for the week. And investors with high-yield bonds came to recognize the riskiest of bonds for what they are — junk.
“It’s like a switch has been flipped,” said bond manager Marilyn Cohen, of Envision Capital Management in Los Angeles.