Subprime Drama Sinks Stocks

Updated from 5:33 p.m. EST

The subprime chickens came home to roost again Tuesday, despite some early morning crowing from Wall Street's prized rooster.

Blowout earnings from Goldman Sachs (GS Quote) helped to contain early losses despite a weaker-than-expected February retail sales report. But Goldman's strong stance was ultimately overshadowed by more drama in the subprime space.

The Dow Jones Industrial Average closed down 242.66 points, or 2%, to 12,075.96; the S&P 500 lost 28.65, or 2%, to 1377.95; and the Nasdaq Composite shed 51.72, or 2.2%, to 2350.57.

Fueling the selloff were the latest developments in the rapidly deteriorating business of lending to homebuyers with weak credit histories:

Accredited Home Lenders (LEND Quote) said its cash has been used up by margin calls and forced loan repurchases. Shares plummeted 65%.

A day after Countrywide Financial (CFC Quote) said foreclosures rose to a five-year high, hurting its earnings, the lender said it will cut 108 jobs in its wholesale unit. Shares fell 4.7%.

New Century Financial shares were suspended for good from New York Stock Exchange trading a day after a session-long trading halt. Separately, the company said it is being investigated by the Securities and Exchange Commission regarding "the events leading up to the company's previous announcement of the need to restate certain financial statements."

Homebuilding stocks such as Beazer Homes (BZH Quote), Hovnanian (HOV Quote) and Standard Pacific (SPF Quote) tumbled in response. The S&P Homebuilding SPDR (XHB Quote) fell 3.5%.

Goldman's morning glory helped contain the early negative response to the subprime woes, as major averages were initially down modestly. But the wheels came off after the noon release of the Mortgage Bankers Association's report on fourth-quarter delinquencies and foreclosures. The data showed higher-than-expected overall delinquency rates and a four-year high for the subprime category.

Selling accelerated in reaction to the data, and major averages closed just a hair above their worst levels of the session. (Programming note: Tonight's Real Story podcast features an exclusive interview with Doug Kass of Seabreeze Partners, who helps break down today's selloff and the implications of the subprime debacle, about which he has strong feelings .)

The selling was intense and widespread, approaching the drama seen during the week of Feb. 26. In NYSE trading, decliners led advancing stocks by 27 to 5, and down volume was 94% of the 3.5-billion-share total. In Nasdaq activity, decliners led advancing stocks 5 to 1, and down volume was 88% of the 2.2-billion-share total.