NEW YORK — Many financial stocks turned postive Monday — including Goldman Sachs Group Inc. — as signs the Securities and Exchange Commission was split in pursuing fraud charges against Goldman helped the sector shrug off the news.
Traders may have also been jockeying for positions ahead of Goldman's first-quarter report, expected Tuesday morning, following Friday's sharp 13% selloff.
Goldman's shares moved to the black after a Bloomberg report that the SEC was split 3-to-2 along party lines to approve the charges against Goldman, citing two people with knowledge of the vote.
Alan Villalon, a senior analyst at First American Funds, said the vote speculation had swirled as early as mid-morning, and he thinks it's good news for Goldman's shares because it shows even within the SEC, there were differing opinions on whether the company should be charged.
Villalon said he thinks the SEC case has been somewhat of a Trojan horse to get support for a financial reform bill. The Senate Finance Committee is set to hold a hearing on a bank tax Tuesday morning, which seems pretty coincidental, he said.
Bank stocks sold off broadly Friday after the SEC charged Goldman and one of its executives of defrauding investors by peddling a financial product it knew was doomed to fail as the housing market collapsed. But Keefe, Bruyette & Woods analysts said in a note that they think Friday's selloff in financials was overdone, since the SEC action is unlikely to reduce Goldman's value in line with Friday's decline in market capitalization — which fell about $13 billion in one day.
The SEC is now investigating whether other mortgage deals arranged by some of Wall Street's biggest firms may have crossed the line into misleading investors, The Wall Street Journal reported Monday. Though it isn't known what deals the SEC is investigating, among the firms that created mortgage deals that soon went sour were Deutsche Bank AG, UBS AG and Merrill Lynch, now owned by Bank Of America Corp.
In recent trading, Goldman Sachs was up 0.9% at $162.14. Wells Fargo & Co. and Morgan Stanley also turned higher, rising 0.3% to $32.65 and 0.9% to $29.41, respectively.
Other banks were down less than they had been earlier, as Switzerland-based UBS fell 0.4% to $16.61 and Germany's Deutsche Bank slipped 0.9% to $73.48. Bank of America Corp., which saw good first-quarter results overshadowed by the Goldman news Friday, was off 1% at $18.23. J.P. Morgan Chase & Co. declined 0.8% to $45.23.
As for Goldman, it called the SEC accusations "completely unfounded in law and fact," and refuted key points of the complaint in an extensive rebuttal, including that the firm itself lost $90 million in the transactions.
The news raises fears that the charges against Goldman will make it more likely Congress will slap restrictive controls on Wall Street.
"Investors should not ignore the potential regulatory spiral that may follow the SEC's recent actions," and the potential for an overhang on the shares despite a strong operating environment, analysts at FBR Capital Markets wrote in a note to clients.
In fact, earlier Monday, Rep. Barney Frank, D-Mass., said in an interview on CNBC that the allegations against Goldman Sachs improve the prospects of a financial reform. Frank, who serves as chairman of the House Financial Services Committee, has been very active in forming and advocating for the financial-reform bill.
Separately, Citigroup was among the outliers, rising 5.3% to $4.80, after reporting its first-quarter profit more than doubled and the giant bank saw increased revenue. Still, its securities and banking arm saw revenue decline 34% as profit fell 48%, contrasting with strong investment-banking results reported last week at J.P. Morgan Chase and Bank of America.
Villalon said he doesn't expect the remaining banks that have yet to report to see their shares weighed down by the Goldman news and the risks of financial reform if they post strong results. The market is looking for continued credit improvement from Wells Fargo, Morgan Stanley and the regional banks, which are set to report later in the week, and also to see what banks' plans are for repaying funds from the Troubled Asset Relief Program.