The SEC is alleging fraud on the part of Goldman Sachs, in relation to their actions surrounding subprime mortgages and Collateralized Debt Obligations. Here's an analogy of how the SEC sees Goldman's actions: Imagine that you asked a builder to construct a house with materials that you know will eventually cause the house to light on fire and burn to the ground. In the meantime, you place a bet that the house will burn down, and also take out fire insurance on the house for when it does burn down. The house is built - which you then sell to an unsuspecting buyer. Sooner or later, sure enough, the house burns down. You make multiple profits...but it's just not right.
The SEC is saying that Goldman acted similarly with subprime mortgages and other risky debts, profiting enormously from the failure of financial instruments that they knew were designed and destined to fail. How the story will play out remains to be seen - but the stunning allegations caused Stocks in the US and abroad to plunge lower. Stocks had been on a nice run higher based on a reasonably good kick off to earnings season, but as money flowed out of Stocks on the news, it was parked in Bonds - helping home loan rates improve.
In other news, the National Bureau of Economic Research (NBER) said that it would be "premature" to give an end date to the recession based on the economic data seen so far. And while some of the statistics may show that the economy has improved in many areas - the labor market continues to be very weak. It also remains to be seen how housing will fare without stimulus, and additionally, while corporate earnings seem to be on the rise, it is not yet known whether that is from improving business and higher revenues, or rather due to cost-cutting measures.
There was some good news last week on the housing front, as you can see in the chart below. Housing Starts for March came in higher than estimated and at the highest level since November 2008. Building Permits - an indication of future construction - also came in higher.
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Chart: Housing Starts
Keep in mind, however, that Housing Starts can be a double edged sword...as seeing more new construction of homes could be representative of builders' sentiment and speculation rather than actual purchases. Hopefully the new construction happening will be bought up, and not eventually become a drag on housing by adding to the already heavy load of inventory.
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