U.S. Stocks Drop as SEC Sues Goldman Sachs for Fraud on CDOs

By Joanna Ossinger
April 16 (Bloomberg) -- U.S. stocks tumbled the most since February as Securities and Exchange Commission fraud accusations against Goldman Sachs Group Inc. spurred concern the fallout from the financial crisis isn’t over.
Goldman Sachs tumbled as much as 16 percent, the most in 15 months, after the SEC sued the company and one of its vice presidents for misstating and omitting key facts about a collateralized debt obligation. JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley sank at least 3.3 percent as all 27 shares in a gauge of banks and brokerages retreated.
Google Inc. plunged 6.5 percent after its earnings trailed some analyst estimates.
The Standard & Poor’s 500 Index fell 1.8 percent to 1,189.80 at 12:33 p.m. in New York and retreated 1.9 percent earlier, the most intraday since Feb. 4. The Dow Jones Industrial Average declined 145.10 points, or 1.3 percent, to 10,999.47. Both slipped from their highest levels since September 2008, the month Lehman Brothers Holdings Inc.’s bankruptcy intensified the credit crisis.
"People are watching to see what the fallout is going to be," said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York, who doesn’t own Goldman Sachs shares. "There are uncertainties if other institutions are involved. Only time will tell if that could have a larger effect on the economy. We don’t know that yet."

Winning Streak Ends

Before today’s losses, the S&P 500 was rising for a seventh straight week, which would have been the longest winning streak since May 2007.
Trading volume of 8.19 billion shares on U.S. stock exchanges was almost double the amount at the same time a week ago.
Financial shares in the S&P 500 led the market lower after the SEC announced the case against Goldman Sachs, the most profitable firm in Wall Street history. The S&P 500 Financials Index slid as much as 5.3 percent, the most since September.
Goldman dropped 14 percent to $161.09 and slid as low as $155.55.
The SEC alleged that Goldman Sachs structured and marketed CDOs that hinged on the performance of subprime mortgage-backed securities. The firm failed to disclose to investors that hedge fund Paulson & Co. was betting against the CDO, known as Abacus, and influenced the selection of securities for the portfolio, the SEC said. Paulson wasn’t accused of wrongdoing.
Goldman Sachs said in a statement that the SEC’s claims are "completely unfounded."

‘Lot of Issues’

"Everybody knew there were a lot of issues with subprime securitization," said David Lutz, managing director of equity trading at Stifel Nicolaus & Co. in Baltimore. "But the fact that they’re targeting Goldman Sachs weighs on the psychology of the financial sector."
JPMorgan lost 3.7 percent to $46.04, Bank of America Corp.
retreated 4.6 percent to $18.59 and Morgan Stanley slumped 5.1 percent to $29.32.
Google lost 6.5 percent to $556.83. The owner of the world’s most popular Internet search engine reported first- quarter profit excluding some items of $6.76 a share, missing the average analyst estimate in a Bloomberg survey of $6.91, underscoring the rising cost of pursuing growth in new markets.
Google led the market lower in early trading after posting its results yesterday following the close of financial markets.

Consumer Sentiment

Equities extended declines as a gauge of consumer confidence trailed estimates. The Reuters/University of Michigan preliminary index of consumer sentiment dropped to 69.5, the lowest level in five months, from a reading of 73.6 in March.
The gauge was projected to rise to 75, according to the median forecast in a Bloomberg News survey of 69 economists.
General Electric Co. fell 3.7 percent to $18.78. The SEC is reviewing GE’S 2008 disclosures after ex-Treasury Secretary Henry Paulson said the firm told him at the peak of the financial crisis it struggled to sell debt.
Separately, GE reported first-quarter profit excluding some items of 21 cents a share, beating the average analyst forecast of 16 cents.
Advanced Micro Devices Inc., the second-largest maker of microprocessors, fell 6.2 percent to $9.53 after it reported first-quarter sales growth trailed gains at Intel Corp., signaling it may be losing out to its larger rival as demand recovers.

Earnings Season

The first-quarter earnings season began in the U.S. this week, with analysts predicting combined profit for S&P 500 companies increased 30 percent from a year earlier, according to estimates compiled by Bloomberg. JPMorgan, Intel and United Parcel Service Inc. were among companies posting better-than- estimated results.
"The earnings season so far has been a home run, and we expect that to continue," said Philip Orlando, chief equity- market strategist at Federated Investors, which manages about $400 billion. "These numbers are much stronger than expected."
Global equities retreated earlier as China’s cabinet yesterday increased down payment ratios for some home purchases, saying "more forceful" steps are needed to cool speculation.
China’s economic growth in the first quarter was the fastest pace in almost three years.