Economic Review

4/19/2010

Should an SEC claim against Goldman Sachs result in more than a 1% decrease in the major US Equity Indexes?

Last week the news hit the tape that the SEC was accusing Goldman Sachs of committing fraud in some of its mortgage activities. At first glance, this news would obviously result in a significant decline in the share price of Goldman, which actually occurred as the stock suffered nearly a 13% decline. However, the issue that seems to be a bit less clear revolves around the plight of the remainder of the Equity prices of organizations across industry sectors. Why should negative news regarding the status of Goldman’s activities in mortgages result in a more than 1% decline in the Dow, S&P and tech centric NASDAQ?

One could make that case that more government intervention in the private sector, especially with regards to one of the worlds’ leading financial organizations, could send a scare that no one is safe from the scrutiny of government agencies. In this case however, it appears that the SEC is simply doing its job. So the Doc doesn’t buy this argument of agency activities causing a broad market sell-off. Allegations of a problem with a sector of Goldman’s activities should not significantly rock a vast majority of stocks prices. Remember, share prices reflect an organization’s worth and ability to generate profits over time. Why should problems with Goldman Sachs alter the valuations of so many diverse organizations? If the trend continues, perhaps there is more to the story than what the market was informed of last week.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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