Markets rattled by Goldman fraud charges
Saturday, 17 April 2010
NEW YORK: World stock markets dropped yesterday after US regulators charged Goldman Sachs Group Inc with fraud on subprime mortgages, while the euro dropped on worries about Greece’s debt crisis.
Against this backdrop, investors moved money into US government debt, pushing prices higher and yields lower.
World equities were already under pressure as Google tumbled 6.4 percent after reporting a 23 percent jump in quarterly revenue but missing analysts’ “whisper number,” the unpublished estimate that some analysts give clients.
The selling pressure on world stocks accelerated after Goldman Sachs was charged with fraud by the US Securities and Exchange Commission in the structuring and marketing of a debt product tied to subprime mortgages.
The SEC lawsuit alleges that Paulson & Co, a major hedge fund run by the billionaire John Paulson, worked with Goldman in creating the collateralised debt obligation, and stood to benefit as its value fell, costing investors more than $1bn.
Defaults on subprime mortgages and the unraveling of related derivatives and debt played a major role in the credit crunch leading to a meltdown on Wall Street and the worst US recession since the 1930s.
“I don’t think it’s going to impact the recovery and the improvement in the financial system, but it could be the beginning of a period of a regulatory cloud over Goldman and perhaps the entire investment banking industry,” said Hank Smith, chief investment officer of Haverford Trust Co in Philadelphia.
“The SEC has come out swinging,” said Cary Leahey, senior managing director of Decision Economics in New York.
“This will be a difficult case to prove. Even supposed experts on Wall Street with years of experience in this area are still scratching their heads trying to figure out who did what.”
Goldman vowed to fight the SEC civil suit. “The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” it said.
During mid-day trading in New York, the Dow Jones industrial average was down 132.25 points, or 1.19 percent, at 11,012.32, while the Standard & Poor’s 500 Index was down 21.17 points, or 1.75 percent, at 1,190.50. The Nasdaq Composite Index was down 38.19 points, or 1.52 percent, at 2,477.50.
The MSCI’s global equity index dipped 1.69 percent, moving in sympathy with US markets, though shares remained set for their seventh straight weekly gain. The pan-European FTSEurofirst 300 also was down 1.52 percent.
Overall, global shares edged off 16-month highs yesterday as persistent uncertainty over Greece’s ability to pay its debts tempered optimism over the global economic recovery.
The euro remained pressured and Greek bond yields rose after Athens said it was preparing to activate an IMF/EU financial aid package.
The euro was down 0.64 percent at $1.3492 from a previous close of $1.3579. In currencies, the dollar was up against a basket of major trading-partner currencies, with the US Dollar Index up 0.44 percent at 80.837 from a previous session close of 80.482.
Against the Japanese yen, the dollar was down 0.96 percent at 92.10 from a previous session close of 92.990.
The euro retreated against the dollar, snapping a five-day winning streak due to renewed worries over Greece’s ability to service its sovereign debt.
Greece lurched closer towards asking for international aid after it requested official talks with European authorities and the International Monetary Fund.
European Central Bank President Jean-Claude Trichet told euro zone finance ministers that the situation for Greek banks remains difficult and could deteriorate further.
The cost of insuring Greek sovereign debt rose some 10 basis points from Thursday’s close to 428.5 bps, according to CMA DataVision. Greek 10-year bond yields rose to 7.4 percent, widening the 10-year Greek/German government bond yield spread. US Treasury debt, investors’ favorite safe haven, rose.
The benchmark 10-year US Treasury note was up 17/32, with the yield at 3.77 percent, while the 2-year US Treasury note was up 4/32, with the yield at 0.95 percent. The 30-year US Treasury bond was up 19/32, with the yield at 4.68 percent.
Oil prices fell 3 percent to below $83 a barrel as news that the US government charged Goldman Sachs with fraud over subprime-related financial products dragged down markets. US crude for May delivery fell $2.40 to $83.11 a barrel by 11:51 a.m. (1651 GMT), having dropped to a low of $82.52.