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Stocks Log Biggest Drop Since February

Stocks posted their biggest loss since February on Friday after the SEC charged Goldman Sachs with securities fraud for its handling of subprime-mortgage products.

Major indexes took a hit but finished off their lows for the day: The Dow lost 125.91, or 1.1 percent, to close at 11,018.66, after being down as much as 170 points earlier. The S&P 500lost 1.5 percent, ending the week below the 1,200 mark. And the CBOE volatility index, widely considered the best gauge of fear in the market, surged, topping 18, though it was up near 20 earlier.

This is the biggest one-day drop for stocks since February, but the Dow still managed to finish higher for the week, marking the seventh straight week of gains — the blue-chip index's longest streak in nearly three years.

The Nasdaq also logged a seventh straight up week but the S&P 500 finished the week down about 2 points, snapping a six-week winning streak.

For the week, technology and industrial stocks were the best performers as traders increasingly bet on the business recovery. But today, consumer staples and health care were the strongest as investors played it safe.

Goldman Sachs shares dropped $23.57, or 13 percent, to close at $160.70 today after the SEC charged the firm with securities fraud. It was the stock's biggest dollar drop ever. More than 101 million Goldman shares changed hands today, more than 10 times the 10-day average volume of 8.6 million shares.

The overall market volume was heavy as well: About 13.7 billion shares changed hands on the three major exchanges, the highest since last May. Declienrs outpaced advancers, roughly 5 to 1.

Regulators allege that Goldman, which had been the golden child of Wall Street while other firms around it tarnished during the financial crisis, failed to disclose conflicts of interest in subprime mortgage securities it sold to investors, who ultimately lost more than $1 billion.

Goldman vowed to defend itself.

"The SEC's charges are completely unfounded in law and fact," the company said. "We will vigorously contest them and defend the firm and its reputation."

Oppenheimer downgraded its rating on Goldman to "perform" from "outperform" and dropped its $228 price target, saying it thinks the company will still post strong earnings (which are due out next Tuesday) but will be vulnerable to more charges and fines.

The news rippled through the whole financial sector: Bank of America, JPMorgan, Morgan Stanley and Citigroup were all down about 4 to 5 percent.

The banking sector had already gotten off to a weak start after First Horizon, the largest bank in Tennessee, reported its eighth straight quarterly loss and said it expects margins to remain flat throughout the rest of the year unless the Fed raises rates.

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"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."

Still, traders wondered if these new Goldman charges will have an impact on financial reform, which is currently being kicked around in Congress and could be put to a vote next week.

"I think this is going to be an excuse for investors over the next couple of weeks to de-risk," Tom Lee, chief U.S. equity strategist at JPMorgan said on CNBC. "The market has had such a big move since February, I think from a tactical perspective, I don't think I'd be buying the dips right now. I'd be making a shopping list knowing that the economy is strong — there's a lot of pent-up demand."

AIG shares initially popped higher amid speculation that, since Goldman was a counterparty to a lot of AIG CDO deals, it may get a piece of any punitive damages from Goldman. But shares ended down 2.1 percent.

Even before the Goldman news, the market had 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.

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.)

But both stocks were among the biggest decliners on the Dow, along with JPMorgan, American Express and Alcoa.

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."

There were only two Dow gainers — Coca-Cola and Verizon — as consumer staples enjoyed a resurgence with jittery investors.

Google shares fell 7.6 percent, the stock's biggest drop since December 2008, 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 5.2 percent to $4.56 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.

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. Its shares fell 3.4 percent.

Mattel and Gannett also delivered positive earnings.

There weren't many gainers today but Palm shares rose more than 3 percent despite a damaging report that a securities expert was "shocked" by securities vulnerabilitieswith Palm's Web operating system.

More M&A news: Shares of Phase Forward , which makes drug data-management software, surged 28 percent, the stock's biggest gain ever, after Oracleagreed to buy the company for $17 a share, or about $685 million.

On Tap for Next Week:

MONDAY: Leading indicators; Earnings from Citigroup, Eli Lily & IBM
TUESDAY: Citigroup shareholders meeting; Earnings from Coke, Goldman Sachs, J&J, Regions Financial, Apple & Yahoo
WEDNESDAY: Weekly mortgage apps; weekly crude inventories; Earnings from AT&T, Boeing, McDonald's, Morgan Stanley, United Technologies, Wells Fargo, Altria, eBay, Starbucks, Qualcomm & Sandisks
THURSDAY: PPI; weekly jobless claims; existing-home sales; Earnings from Pepsi, Verizon, Fifth Third, PNC Bank, American Express, Microsoft & Capital One
FRIDAY: Durable-goods orders; new-home sales; Earnings from Travelers, Honewell, Schlumberger & Xerox

Send comments to cindy.perman@nbcuni.com.

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