Subprime mortgages/ are loans/ to people/ who may not have enough money/ to repay them. These and other risky housing loans/ are often grouped/ with other mortgages/ and sold as debt investments.
Investors/ all over the world/ have bought bonds and other securities/ based on subprime mortgages/ as a way/ to earn higher returns.
Sometimes, the investors/ are banks/ that want to spread their risk/ by investing/ in several different countries. What happened/ in late July/ to a German bank, however, is an example/ of spreading risk/ with bad results.
IKB Deutsche Industriebank/ had put money/ into American debt securities, including some/ based on subprime loans. Some of those loans/ started to fail.
The bank/ was in danger/ of not being able to pay/ its short-term debts. Other German banks, led by the government-owned KfW Group, agreed to provide almost five billion dollars/ to aid IKB.
In early August, the French bank BNP Paribas/ had to temporarily bar investors/ from withdrawing money/ from three investment funds. Their value/ dropped by twenty percent/ in less than two weeks. The bank/ blamed difficulties/ in valuing its holdings/ in the subprime market.
Worries/ over subprime loans/ have hurt even some of the biggest lenders/ in the United States. On August sixteenth, the nation's biggest housing lender, Countrywide Financial, had to turn to banks/ to finance its short-term debt. Normally/ the company/ would raise the money/ in financial markets.
Many/ took this/ as a sign/ that investors/ were becoming unwilling/ to provide short-term loans/ to companies. Especially/ companies/ involved with subprime loans.
A shrinking debt market, a credit crunch, can affect stock markets. Not only have subprime losses/ hurt financial stocks. Many companies/ depend on credit. Private equity groups/ often use borrowed money/ to finance buyouts/ of publicly traded companies. Hedge funds/ also use borrowed money/ for their investment activities.
In an effort/ to calm financial markets, the Federal Reserve/ two weeks ago/ cut the rate/ it charges banks/ to borrow money. Many investors/ hope/ the central bank/ will cut its main short-term interest rate/ when policymakers/ meet/ on September eighteenth.