Exciting day on Wall Street as the Securities and Exchange Commission sends a shot across the bow of Goldman Sachs.
The stock market started out mildly higher, when midmorning, the SEC charged Wall Street’s most influential bank with fraud over its marketing of a subprime mortgage product designed to fail. The SEC says a Goldman vice president was also charged with fraud for his responsibility for creating the questionable mortgage product, known as ABACUS. Surprisingly, criminal charges were not filed.
However, this makes many question whether the bull run of the last year is over.
According to Reuters, the SEC alleged that Goldman structured and marketed ABACUS, a synthetic collateralized debt obligation that hinged on the performance of subprime residential mortgage-backed securities. However, Goldman allegedly didn’t tell investors “vital information” about ABACUS, including that the hedge fund Paulson & Co helped choose the securities in the portfolio. Run by John Paulson, the hedge fund made billions of dollars betting that the housing market would crash. The SEC also alleged that Paulson took a short position against the CDO in a bet that its value would fall, reported Reuters. “This included an estimated $1 billion from the transaction detailed in the SEC lawsuit, which the agency said cost other investors more than $1 billion,” said Reuters.
Many people on Wall Street have said this is a politically motivated moved as Congress begins debating reform of financial industry regulation.
Goldman denied the charges. Its stock fell $23.57, or 12.8%, to $160.70, and it brought down the entire market with the Dow Jones Industrial Average losing 126 points, or 1.1% to 11018.66. The S&P 500 dropped 19.5 points, or 1.6%, to 1192.13.
Obviously, this means a lot of movement among ETFs.
The Direxion Daily Financial Bear 3x (FAZ) jumped $1.14, or 10.3%, to $12.18, posting the third-largest volume of the market gainers, 209.7 million shares.
ProShares UltraShort S&P 500 (SDS) gained 94 cents, or 3.3%, to $29.72.
ProShares UltraShort Financials (SKF) jumped $1.15, or 6.8%, to $18.11.
The Financials Select Sector SPDR (XLF) fell 62 cents, or 3.7%, to $16.36.