NEW YORK – U.S. stocks plunged Tuesday in their second-worst sell-off of the year as the impact of losses in the subprime mortgage group cascaded across the financial sector, knocking down shares of investment banks and traditional lenders.
The Dow Jones industrial average dropped 242.66 points, or 1.97 percent, to end at 12,075.96. The Standard & Poor's 500 Index slid 28.65 points, or 2.04 percent, to 1,377.95. The Nasdaq Composite Index tumbled 51.72 points, or 2.15 percent, to 2,350.57.
The Mortgage Bankers Association reported the proportion of mortgages in the initial stages of foreclosure rose to the highest rate on record, while the chief executive of the largest U.S. home lender said the subprime mortgage industry is now in a "liquidity crisis." The subprime sector caters to borrowers with weak credit.
An unexpected drop in retail sales for February added to concerns.
"Just when you thought it was safe to go back to the stock market, a new panic has taken hold. This time it was the report by the Mortgage Bankers Association," said Phil Flynn, vice president and senior market analyst at Alaron Trading in Chicago.
Shares of financial services companies with exposure to the mortgage market were among the biggest decliners. Citigroup Inc. (C) was the biggest drag on the S&P 500, followed by JPMorgan (JPM) Chase & Co. and Bank of America Corp. (BAC), while JPMorgan was the Dow's biggest decliner.
Even shares of Goldman Sachs Group Inc. (GS), which posted record quarterly earnings, ended down 1.8 percent, or $3.57, at $199.03.
Wall Street's fear gauge, the Chicago Board Options Exchange Volatility Index , jumped on Tuesday afternoon after the MBA's report on foreclosures. The VIX shot up 29.69 percent to close at 18.13.
U.S. Treasury debt prices climbed on Tuesday as investors sought a safe harbor. Concerns about risky investments also propelled the yen higher against the dollar.
The benchmark 10-year U.S. Treasury note was up 17/32, with the yield at 4.495 percent.
Investors worry that fallout from rising loan defaults in the subprime market could hurt consumer spending as lenders tighten credit amid the housing slowdown. The subprime mortgage market caters to borrowers with weak credit.
Before Tuesday's sell-off, U.S. stocks had been in a recovery mode following the market's slide two weeks ago, which wiped out index gains for the year and took the S&P 500 to its lowest level in more than four years. The move was part of a global sell-off that started with the biggest drop in China's main stock index in a decade.
In an interview with CNBC television, Countrywide Financial Corp. Chief Executive Angelo Mozilo said the U.S. mortgage sector is entering a "liquidity crisis," but that investors and speculators are overreacting by punishing healthier lenders as well as marginal ones.
"This is now becoming a liquidity crisis," and "it's going to get uglier," Mozilo said in an interview with CNBC television.
The Philadelphia Keefe Bruyette & Woods index of bank stocks slid 3.3 percent.
Shares of Citigroup fell 3.2 percent, or $1.61, to $48.75, while JPMorgan's stock lost 4.4 percent, or $2.14, to $46.70, and shares of Bank of America declined 3.2 percent, or $1.63, to $49.46, all in NYSE trading.
Countrywide's shares dropped 4.7 percent, or $1.65, to $33.49.
Adding to woes in the subprime market, New Century Financial Corp. said the Securities and Exchange Commission is investigating the subprime mortgage lender's accounting. The company also said it was the target of a criminal probe by the Justice Department. The New York Stock Exchange delisted the stock, which now trades over the counter on the Pink Sheets.
General Motors Acceptance Corp., the former finance arm of General Motors Corp., said it would receive another $1 billion from GM and warned it would be hit by pressure from a weakening market for U.S. mortgages.
Shares of GM dropped 2.6 percent, or 81 cents, to $30.51.
The biggest percentage loser on the Nasdaq was Accredited Home Lenders Holding Co., down 65.2 percent, or $7.43, at $3.97, after hitting a lifetime low at $3.77. The San Diego-based company, which caters to subprime borrowers, said it needed to raise cash after paying $190 million demanded by its lenders.
"The delinquencies really set the market on a downward trajectory. It was marginally worse than what people were expecting, and that data is confirming fears that credit deterioration is spreading rather than being isolated," said Mike Binger, portfolio manager at Thrivent Financial in Minneapolis.
The New York Stock Exchange instituted trading curbs at 3:04 p.m. as stock selling accelerated.
Before the open, the Commerce Department said retail sales, excluding automobiles, unexpectedly declined in February, raising worries about economic growth.
Trading was heavy on the NYSE, with about 1.97 billion shares changing hands, above last year's estimated daily average of 1.84 billion, while on Nasdaq, about 2.24 billion shares traded, above last year's daily average of 2.02 billion.
Declining stocks outnumbered advancing ones by a ratio of about 9 to 2 on the NYSE and by 5 to 1 on Nasdaq.