Saturday, April 17, 2010

SEC Actions

The SEC filed charges of fraud against Goldman-Sachs yesterday, which immediately dropped GS shares fueling a 'flight to quality' in the stock market. After the dust cleared the Dow had fallen 100+ points.

The SEC is under enormous political pressure to find evidence of wrongdoing in the financial services sector. The charges filed against GS Are the first of many, I suspect, but will ultimately backfire.

While the SEC and GS battle it out, a massive destruction of wealth is getting little attention. Most unsophisticated investors rely on mutual funds as their primary investing tool. Many mutual funds are well-diversified and have interest in many stocks. As a result, their returns typically mimic the return on the Dow. When the SEC responded to political pressure and filed charges against what many see as the flagship company of our financial services sector, they induced a panicked sell-off, knocking the Dow down and wiping out enormous amounts of wealth. And this, just after the deadline to file taxe returns.

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