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Financial stocks dip after Goldman allegations

Published:Sunday | April 18, 2010 | 12:00 AM

Financial shares dragged the stock market lower Friday as investors worried that the government's mortgage-related fraud charges against Goldman Sachs & Co could mean intensified scrutiny for the industry.

The Securities and Exchange Commission accused the Wall Street powerhouse of failing to disclose conflicts of interest in selling certain mortgage investments that led to steep losses for clients. Goldman Sachs denied the allegations.

The federal agency also said it was looking into a wide range of practices related to the subprime mortgage crisis, prompting fears that the investigation could broaden.

"If the government wants to make a case and set some examples, the industry could be in for a fair amount of heartburn," said Jack Ablin, chief investment officer for Harris Private Bank in Chicago.

A pair of worrisome economic reports also weighed down shares of financial companies.

Financial companies took the biggest hit on the Standard & Poor's 500 index, with the S&P 500 financial sector index closing down 3.8 per cent. Goldman Sachs shares sank US$23.57, or about 13 per cent, to US$160.70.

Short-term earnings loss

Ultimately, the SEC probe will likely result in a short-term earnings loss in the form of fees and settlements, said Joseph Battipaglia, a market strategist for the private client group at Stifel Nicolaus & Co in Yardley, Pennsylvania. Of greater importance for the industry will be the performance of the broader economy, he said.

The decline in financial stocks was spread across all sectors of the industry. Investment bank Morgan Stanley fell US$1.72, or 5.6 per cent, to US$29.16. Large national banks slid as well, with Citigroup Inc falling 5.2 per cent and Bank of America Corp shares falling about 5.5 per cent.

Investors were also concerned about Bank of America's loan losses, which showed improvement, but remained high. The Charlotte, North Carolina-based bank said Friday that it set aside US$9.8 billion to cover soured loans during the quarter.

Regional banks SunTrust Banks Inc, Fifth Third Bancorp, Marshall & Isley Corp, Zions Bancorp and Synovus Financial Corp all fell more than four per cent and some lost as much as 6.0 per cent, during the trading day. Insurers, including Genworth Financial Inc and Hartford Financial Services Group, lost three per cent or more, while credit card lenders American Express Co, Capital One Financial Corp and Discover Financial Services all slid at least four per cent, before regaining some ground.

Four per cent drop

Exchanges including CME Group Inc and IntercontinentalExchange Inc were down between two and four per cent, earlier in the session. Asset managers weren't spared, with Franklin Resources Inc down 2.3 per cent, T. Rowe Price Group Inc down 3.4 per cent, and Janus Capital Group Inc dropping four per cent.

The SEC lawsuit against Goldman Sachs is the government's most significant legal action related to the subprime mortgage crisis that ushered the country into a deep recession.

Stocks have advanced in recent months on a steady trickle of signs that the economy is recovering. On Friday, however, more worrisome economic data sent the market lower.

The Commerce Department reported a drop in construction of single-family homes, a vital segment of the market. A separate report showed that consumer sentiment fell.

Meanwhile, lawmakers on Capitol Hill are negotiating legislation that would tighten regulations in the banking industry, including the trading of complex securities like those involved in the Goldman case.

According to preliminary calculations, the Dow fell 125.91, or 1.13 per cent, to 11,018.66. The Standard & Poor's 500 index dropped 1.61 per cent to 1,192 and the Nasdaq composite index fell 1.37 per cent to close at 2,481.

- AP