17
Apr
10

SEC tries to ride Goldman Sachs Group back to credibility

NEWS
SEC tries to ride Goldman Sachs Group back to credibility

Saturday, April 17, 2010

Financial shares led the stock market sharply lower after federal regulators filed civil fraud charges against Goldman Sachs over its dealings in subprime mortgages.

The Dow Jones industrial average lost about 125 points, having been down as much as 170 points. At times, it fell below 11,000 after closing above that level on Monday for the first time in more than a year and a half.

Analysts say the market was poised to fall after a steady run of gains the past two months, and the Goldman Sachs news gave investors a reason to sell and take some profits.

“Basically it’s sell, and ask questions later,” said Quincy Krosby, market strategist at Prudential Financial. “A market that wants to sell off will find an excuse.”

Stocks were already lower before news of the Securities and Exchange Commission’s charges against the leading investment bank. Investors were disappointed after Google reported earnings that didn’t live up to forecasts.

General Electric Co. and Bank of America Corp. also reported profits that topped forecasts, but their stocks still fell. GE’s revenue came up short of expectations, while Bank of America said loan losses remain high.

The SEC charged Goldman and one of its vice presidents with failing to disclose key information to investors regarding complex mortgage-backed securities.

“It’s all a knee-jerk reaction to Goldman,” said Steven Goldman, chief market strategist at Weeden & Co., referring to the market’s drop. He said the fundamentals of the market have not changed.

The charges come as the Obama administration seeks greater regulation of America’s banks and their trading of exotic securities like those involved in the Goldman case. These kinds of investments are widely seen as one of the triggers of the financial crisis that crippled the nation’s financial system in the (northern) autumn of 2008.

“Road blocks for financial regulation have taken a hit today,” said Thomas Villalta, co-portfolio manager of the Jones Villalta Opportunity Fund.

Analysts say other banks that also traded these types of securities will be closely scrutinised. That means the financial industry could continue to struggle because of uncertainty about reform and other potential investigations.

Investors looked past economic news. The Commerce Department said housing construction rose to a 16-month high in March. However, construction of single-family homes, the most important segment of the market, fell.

Economists are also concerned about continued hurdles in the housing market, like rising mortgage rates and the end this month of a homebuyer tax credit. A separate report showed consumer sentiment fell this month.

Friday’s drop comes after six straight days of gains that pushed the Dow to its highest close in more than 18 months. Stocks have been steadily rising in recent months on growing signs that the economy is recovering, albeit slowly.

The Dow Jones Industrial Average fell 127.34 points or 1.14 per cent, to 11,017.23 points.

The tech-rich Nasdaq composite slipped 33.98 points or 1.35 per cent, to 2,481.71 and the broad-market Standard Poor’s 500 index dipped 18.54 points or 1.53 per cent, to 1,193.13.

After mixed early trades, the SEC announcement, and its refusal to rule out further charges across the financial sector, sent shares in some of Wall Streets biggest firms deep into negative territory.

Goldman stocks were over 10 per cent down, slicing $20 off each share. They were followed by Bank of America, JP Morgan and Morgan Stanley, whose stocks were between three and five per cent off.

Trading had got off to a subdued start despite larger-than-forecasted increases in housing starts and building permits in March, as well as favourable earnings reports from Bank of America and General Electric.

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