Stocks skidded Friday, snapping a six-day winning streak, after the SEC shocked the market, charging Goldman Sachs with fraud over its handling of subprime mortgages.
The market had already started in a sour mood as the latest batch of earnings were solid but fell short of the market's lofty expectations and consumer sentiment unexpectedly fell.
"The market was going along pretty good. We were a little weak, that's for sure, but we had good news the other day from JPMorgan, great earnings today from Bank of America, and then for this to come out, really put a damper on the whole sector," Alan Valdez, vice president of Hilliard and Lyons, said on CNBC.
The Dow tumbled more than 100 points, or 1 percent, letting go of 11,000. The S&P 500lost nearly 2 percent, falling below 1,200. And the CBOE volatility index, widely considered the best gauge of fear in the market, shot up to nearly 20.
Goldman Sachs shares dropped more than 10 percent after the SEC charged the firm with fraudover its handling of subprime mortgages.
Goldman, which had been the golden child of Wall Street while other firms around it tarnished, was accused of securities fraud — that it created and sold a mortgage investment that was secretly designed to fail, the New York Times reported.
The news rippled through the whole financial sector: Bank of America, JPMorgan, Morgan Stanley and Citigroup were all down about 4 to 5 percent.
"This could be a one, two or three-day or could be a three-month process," Steve Grasso of Stuart Frankel said of the selloff. "But I think that you're seeing marquis names really being cut into today to an extreme level. I think the sell side was looking for a reason to lock in profits and we are on a Friday and this is a major headline."
Many traders focused on the short-term impact on the market.
"Everything we're dealing with happened a couple of years ago," said Dave Lutz, managing director of trading for Stifel Nicolaus in Baltimore. "Ultimately, once this noise has washed out, it's going to translate into one heck of a buying opportunity."
The SEC is also examining statements by GE about its debt program that may have been misleading to investors. This came after former Treasury Secretary Henry Paulson said in his book, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System," that GE Chief Executive Jeff Immelt had told him the company was having difficulty raising funds in its commercial-paper unit. Meanwhile, GE told investors the programs "remain robust."
Bank of America and GE were the biggest percentage decliners on the Dow, despite decent earnings reports from both.
Bank of America reported earnings that were three times expectations and it set aside more money to cover bad loans.
General Electric also topped earnings forecasts, and said it expects earnings to rise through the rest of the year, as its energy and aviation divisions picked up. CEO Jeff Immelt said he saw "encouraging signs" in the economy. But revenue fell short of expectations. (GE is the parent company of CNBC.com.)
Google shares fell 5 percent after the Internet giant delivered quarterly results that beat by a wide margin but fell short of the sky-high whisper numbers and investors worried about surging costs at the company.
Citigroup pulled back about 3 percent, after soaring more than 25 percent in the past month as investors have increasingly bet on the stock's potential after the government said it plans to start selling its stake in the company.
Some pros said if Citi's stock breaches $5, then investors will start to pile into the stock even more.
A gauge of consumer sentiment fell to 69.5 in early April, the lowest in five months, from 73.6 at the end of march and expectations of a 75 reading. The survey was conducted by Reuters and the University of Michigan.
Earlier, a report showed housing starts soared to their highest level since November 2008and permits to build new homes scaled a 17- month high.
Consumer staples enjoyed a resurgence with jittery investors. Coke and Walmart were among the Dow gainers.
Investors also scooped up some select tech stocks, including IBM and Cisco.
Meanwhile, back on the earnings front, AdvancedMicro Devices beat Wall Street estimates but shares fell after the chipmaker said sales likely will be flat to down 5 percent in the second quarter.
Mattel and Gannett also joined the positive earnings parade.
More M&A news today: Shares of Phase Forward , which makes drug data-management software, surged after Oracleagreed to buy the company for $17 a share, or about $685 million.
Boston Scientific is resuming sales of defibrillators that had been temporarily taken off the market. The FDA has now approved the company's manufacturing changes related to the devices.
The week's heavy schedule of Federal Reserve speakers continues Friday, with Fed Governor Kevin Warsh and Kansas City Fed President Thomas Hoenig both appearing at a conference in New York.
In the news: President Barack Obama has signed an extension of jobless benefits that was passed by Congress late Thursday.
And in Europe, 17,000 flights are expected to be canceled today as an Icelandic volcano continues to spew ash into the air.
European shares were higher, but fairly subdued as mining stocks gave back recent gains on falling gold prices. Asian stocks ended in the red despite a positive close in the U.S.
Still to Come:
FRIDAY: State unemployment rates; Fed's Warsh speaks; consumer sentiment
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