Investigation Against Goldman Sachs Frightens Investors

Weaker macroeconomic data than expected and the initiation of a criminal investigation against Goldman Sachs caused a sharp decline in stock prices on Wall Street on Friday, with leading indices falling at the highest rate on a weekly basis since January.

The Dow Jones index fell by 158 points, or 1.42 percent, to 11,008 points, while the S&P 500 dropped 1.66 percent to 1,186 points, and the Nasdaq index fell 2.02 percent to 2,461 points. From the very beginning of yesterday’s trading, stock prices slid slightly as investors were disappointed by the 3.2 percent growth in U.S. gross domestic product in the first quarter, while a growth of 3.4 percent was expected. Although this is the third consecutive quarter of economic strengthening, investors are disappointed as growth is slowing, given that in the previous quarter, thanks to government stimulus measures, GDP strengthened by 5.6 percent. Only higher growth rates than in the first quarter would represent a healthy recovery of the economy from recession, as it is estimated that only a GDP growth of 5 percent for the entire year would mean a decrease in the unemployment rate, which stands at a high 9.7 percent, by one percentage point. "GDP growth is somewhat weaker than expected, but it shows that the economic recovery is likely sustainable, and that the economy will avoid a double-dip recession," says Peter Cardillo, an analyst at Avalon Partners.

The market was also negatively affected by data showing that consumers remain cautious. The consumer sentiment index did rise in April from the initially estimated 69.5 to 72.2 points, but it is lower than in March, when it was 73.6 points. However, investors were most shaken by the news that the state attorney in New York has launched a criminal investigation against Goldman Sachs, after the Securities and Exchange Commission (SEC) filed a civil lawsuit against the bank two weeks ago for misleading investors by selling them complex financial derivatives based on mortgage loans while simultaneously betting on a decline in their value in the market. As a result, Goldman’s stock price fell more than 9 percent yesterday. In the last two weeks, since the SEC filed charges against Goldman, the market value of the investment bank has fallen by more than 20 billion dollars. Because of all this, analysts at Standard & Poor’s downgraded their recommendation for the stock to ‘sell.’ "Authorities have indeed taken a strong stance against Goldman.

This has unsettled investors, and they now fear that this case could shake the entire banking industry. We have returned to a phase of uncertainty, which is never good for the market," says Ryan Detrick, an analyst at Schaeffer’s Investment Research. The investigation against Goldman has shaken the entire financial sector, causing the S&P index of that sector to fall 2.5 percent yesterday. Throughout the past week, the Dow Jones index lost 1.2 percent, while the S&P 500 fell 2.5 percent, and the Nasdaq index dropped 2.7 percent. This is the largest weekly decline of leading indices on Wall Street since the end of January. However, in April, the indices recorded growth for the third consecutive month. The Dow Jones index strengthened by 1.4 percent, the S&P by 1.5 percent, and the Nasdaq index by 2.6 percent. This is mainly due to excellent quarterly business results from companies. Of the companies that have reported so far, nearly 80 percent have achieved better results than expected. On European exchanges, stock prices fell yesterday. The London FTSE index dropped 1.15 percent to 5,553 points, while the Frankfurt DAX weakened by 0.15 percent to 6,135 points, and the Paris CAC fell 0.62 percent to 3,816 points. (H)