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Sector Summary: S&P 500 Financial Index 220.22, -8.42; Financials Hammered as SEC Announces Investigation of Goldman
The S&P 500 Financial Index was hammered as news of the SEC investigation against Goldman Sachs (GS -13.3%) crossed wires. Financials across the board were hit as investors looked to unwind positions and digest the news. The one exception was the mortgage insurers who are viewed as the main benefactors (AIG, PMI, MTG, RDN, ABK, XL) on this investigation. The announcement came at a time when valuation concerns already had investors looking for a catalyst to unwind positions. We were provided a brief view of things to come yesterday afternoon when the FAS saw a harsh rejection when it tested HoD and financials slid lower into the close.

The S&P 500 Financial Index fell all the way to 216, its lowest level since April 1. The index has recovered four points to 220 but now faces potential headwinds as the market braces for a busy calendar of financial earnings reports next week. The reaction should prove interesting as the sell off provides the potential for money on the sidelines to come into play at these depressed levels. The question is, will investors take advantage of the dip in financials or look for a safer area to place money until the smoke clears? Couple this with next weeks G-20 meeting, which is expected to produce regulatory reform headlines, and discussions of the Senate bringing the Dodd Financial reform to the floor and we could be looking at a very volatile week in the group.

The big news of course was the announcement that the SEC is bringing a civil suit against Goldman Sachs (GS). SEC charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages. The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.

There has been a significant market reaction to this news for several reasons: 1) this is the first charge of its kind against a major institution, and the potential liability to GS -- a premier financial stock -- is virtually unknown at this point; 2) given the massive amount of losses that resulted from complex derivative instruments, this potentially opens the door for a flood of lawsuits and other charges against other firms involved in similar trading; and 3) the SEC indicated that this is the first case brought by the "Structured and New Products Unit", which will specialize in cases involving these kinds of complex products -- fueling the idea that there are more charges to come.

Other items of note: 1) Bank of America (BAC -4.5%) reported Q1 results today, beating bottom line expectations by 18 cents and coming in slightly above expectations on revenues. Credit costs and provision builds remained a key concern as neither showed signs of abating compared to Q4. BAC did state 2010 is starting off in line with the opinions expressed in January. The improvement in credit quality is probably better than expectations in January and outlook for the rest of the year has also improved. However, do have revenue head winds in the second half of the year as customers continue to de-lever, and realize the full adoption of regulations which will impact net interest income, card and service charges. From an earnings perspective it will depend on how fast credit improves and expenses are kept under control versus the drop in revenue. However, by the end of the year should start to see some stabilization in revenue levels at which time it may be able to talk about growth due to improved consumer and commercial