Financial shares dragged the stock market lower Friday after federal regulators accused investment bank Goldman Sachs & Co. of fraud for some of its dealings during the mortgage meltdown.
The Securities and Exchange Commission also said it was looking into a wide range of practices related to the subprime mortgage crisis, prompting fears that the investigation could broaden.
"If the government wants to make a case and set some examples, the industry could be in for a fair amount of heartburn," said Jack Ablin, chief investment officer for Harris Private Bank in Chicago.
Financial companies took the biggest hit on the Standard & Poor's 500 index, with the S&P 500 financial sector index down 3 percent in afternoon trading after earlier falling around 4 percent. Goldman Sachs shares sank $21.64, or about 12 percent, to $162.64.
Ultimately, the SEC probe will likely result in a short-term earnings loss in the form of fees and settlements, said Joseph Battipaglia, a market strategist for the private client group at Stifel Nicolaus & Co. in Yardley, Pa.
The decline in financial stocks was spread across all sectors of the industry. Investment bank Morgan Stanley fell $1.28, or 4.1 percent, to $29.60. Large national banks slid as well, with Citigroup Inc. falling 3.5 percent and Bank of America Corp. shares falling about 4 percent.
Investors were also concerned about Bank of America's loan losses, which showed improvement, but remained high. The Charlotte, N.C.-based bank said Friday that it set aside $9.8 billion to cover soured loans during the quarter.
Regional banks SunTrust Banks Inc., Fifth Third Bancorp, Marshall & Isley Corp., Zions Bancorp and Synovus Financial Corp. all fell more than 4 percent and some lost as much as 6 percent, during the trading day. Insurers including Genworth Financial Inc. and Hartford Financial Services Group lost 3 percent or more, while credit card lenders American Express Co., Capital One Financial Corp. and Discover Financial Services all slid at least 4 percent, before regaining some ground.
Exchanges including CME Group Inc. and IntercontinentalExchange Inc. were down between 2 percent and 4 percent, earlier in the session. Asset managers weren't spared, with Franklin Resources Inc. down 3.3 percent, T. Rowe Price Group Inc. down 3.8 percent and Janus Capital Group Inc. down as much as 5 percent, before recovering some of those losses.
The SEC lawsuit against Goldman Sachs is the government's most significant legal action related to the subprime mortgage crisis that ushered the country into a recession.
Stocks have advanced in recent months on a steady trickle of signs that the economy is recovering. On Friday, however, there was more worrisome news for financial companies.
The Commerce Department reported a drop in construction of single-family homes, a vital segment of the market. A separate report showed that consumer sentiment fell.
Meanwhile, lawmakers on Capitol Hill are negotiating legislation that would tighten regulations in the banking industry, including the trading of complex securities like those involved in the Goldman case.
The Dow Jones industrial average at one point fell below 11,000, after closing above that level for the first time in more than 18 months on Monday. Like many financial stocks, the index also regained some ground, but was still down around 100 points in late afternoon trading.
The S&P 500 index and Nasdaq composite index fell about 1.2 percent.
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