Stocks, Oil Drop as Dollar Gains After SEC Sues Goldman Sachs
By Michael P. Regan
April 16 (Bloomberg) -- Stocks and commodities tumbled, while the dollar and Treasuries gained, as Securities and Exchange Commission accusations of fraud against Goldman Sachs Group Inc. triggered a flight from riskier assets.
The Standard & Poor’s 500 Index sank 1.6 percent to 1,192.13 at 4 p.m. in New York, the most since Feb. 4. Oil slid 2.7 percent to $83.24 a barrel and gold, copper and lead declined at least 2 percent. The Dollar Index, which gauges the currency against those of six major U.S. trading partners, rose 0.4 percent while 10-year Treasury yields slid seven basis points to 3.77 percent and 2-year yields fell below 1 percent for the first time in almost a month.
Goldman Sachs plummeted 13 percent after the SEC claimed the most-profitable Wall Street firm in history misstated key facts about collateralized debt obligations tied to subprime mortgages. The SEC’s announcement triggered a plunge in banking shares and extended a retreat from stocks and commodities that began after earnings at Google Inc. trailed some estimates and consumer confidence unexpectedly dropped.
“The SEC move marks an escalation in the battle to expose conflicts of interest on Wall Street,” said Christopher Whalen, a managing director of IRA Advisory Service in Torrance, California. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another.”
Today’s decline in the S&P 500 wiped out what would have been a seventh straight weekly advance, leaving the benchmark index down 0.2 percent on the week and dragging it down from an 18-month high.
Financials Tumble
Financial shares in the S&P 500 tumbled 3.8 percent to lead declines in all 10 of the index’s main industry groups. Citigroup Inc. sank 5.2 percent, Morgan Stanley lost 5.6 percent and Bank of America Corp. fell 5.5 percent.
Berkshire Hathaway Inc., billionaire investor Warren Buffett’s holding company that paid $5 billion for Goldman Sachs warrants in September 2008, fell 1.7 percent for its biggest retreat in two months. The stake lost $1.02 billion in value, according to data compiled by Bloomberg.
“Regulatory risk just got a lot bigger,” said Paul Miller, a former bank examiner for the Federal Reserve Bank of Philadelphia who’s now an analyst for FBR Capital Markets Corp. in Arlington, Virginia. “People are wondering whether Goldman was the only company that had a senior vice president lying and misrepresenting a security and the market’s thinking, ‘probably not,’” Miller said. “That’s what the market is selling off on, the unknown.”
$1 Billion Trade
Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them, the SEC said in a statement today. The government’s civil suit claims investors in the CDO lost more than $1 billion.
Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre, a Goldman Sachs vice president who helped create the CDOs.
“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman Sachs said in a statement today. The company said it lost more than $90 million on the transaction.
The cost to protect Goldman Sachs debt from default jumped the most in a year, rising 35 basis points to 125 basis points, according to data from CMA Datavision.
Gold Sinks
Gold fell the most in two months as the SEC’s auction spurred investors to seek a haven in the dollar and eroding the precious metal’s appeal as an alternative asset. Futures for June delivery slid 2 percent to $1,136.90 an ounce.
The SPDR Gold Trust, a $41.7 billion exchange traded fund designed to reflect the performance of the precious metal, sank 2.1 percent to $111.24. Paulson & Co. is the largest shareholder in the fund with an 8.4 percent stake, according to Bloomberg data. Goldman Sachs owns about 0.6 percent and is the 11th largest investor, the data shows.
“Goldman is a major player in gold, silver, all commodities,” said Frank McGhee, the head dealer at Integrated Brokerage Services Inc. in Chicago. “They have massive positions. This puts a big question mark on all commodity activity.”
Dollar, Yen Rally
The dollar gained against 15 of 16 major counterparts, rallying most against commodity-producing nations, with gains of more than 1 percent against the Australian dollar, the Canadian dollar and the South African rand. The U.S. currency fell 1 percent against the yen, which climbed against all 16 major currencies as demand for higher-yielding assets decreased.
The Stoxx Europe 600 Index slid 1.6 percent after the Goldman Sachs lawsuit. HSBC Holdings Plc lost 2 percent in London, Deutsche Bank AG slid 7.3 percent in Frankfurt and BNP Paribas fell 3.8 percent in Paris.
British Airways Plc dropped 3.1 percent in London while Air France-KLM Group lost 3.4 percent in Paris as a cloud of ash from a volcano in Iceland shut airports in northern Europe for a second day.
The MSCI Emerging Markets Index tumbled 1.5 percent, retreating from its highest level since July 2008. to Brazil’s Bovespa index sank 1.6 percent.
The Shanghai Composite tumbled 1.1 percent, the most since March 25, after China today raised requirements for down- payments on some home purchases. China Overseas Land & Investment Ltd., controlled by the country’s construction ministry, lost 4.8 percent in Hong Kong.
China’s stock-index futures rose in their first day of trading as investors bet the nation’s equities may advance later this year on an improving outlook for the property market. The four contracts based on the CSI 300 Index, which tracks the 300 biggest stocks on the Shanghai and Shenzhen stock, all advanced at the close.
Thailand’s SET Index retreated 3.3 percent to its lowest level in a month after the government said the nation’s deadliest political clash in 20 years may hurt growth.
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