Madoff Meltdown Adds to Wall Street's Anxieties

Monday, Dec 15, 2008  |  Updated 4:44 PM EDT
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Bernard Madoff & His Victims

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Bernard Madoff's $50 billion Ponzi scheme has not helped soothe the fragile psyches of investors.

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NEW YORK — Investors sent stocks slightly lower Monday as anxiety over the growing list of firms affected by investment manager Bernard Madoff and the potential losses to the financial sector took center stage on Wall Street.

Investors also were nervous ahead of earnings reports later this week from the country's two largest investment banks, Goldman Sachs Group Inc. and Morgan Stanley.

Stocks had traded mixed early on as investors were relieved to hear that President George W. Bush was working on providing short-term government help for the auto industry. The Senate's rejection of a $14 billion bailout for automakers last week had raised the possibility of a major bankruptcy, which some analysts say would result in as many as 3 million U.S. job losses next year.

But as that fear eased somewhat, it gave way to concerns about companies' exposure to Madoff's fund. Well respected in the investment community after serving as chairman of the Nasdaq Stock Market, Madoff was arrested Thursday for orchestrating what prosecutors say was a $50 billion Ponzi scheme to defraud investors.

Firms with exposure include HSBC Holdings PLC, Banco Santander, BNP Paribas, Royal Bank of Scotland Group PLC and hedge fund Man Group PLC.

"The investor psyche is already quite fragile. Scandals like this just add fuel to the fire," said Alan Gayle, senior investment strategist for RidgeWorth Capital Management.

In addition to the potential for hefty writedowns related to the losses, investors also fear redemptions will increase as investors pull money out of funds in order to counter their losses from Madoff-related investments.

"If you start to see those redemptions building, it's going to add more selling pressure on the market," said Quincy Krosby, chief investment strategist at The Hartford Financial Services Group Inc.

Wall Street is also anticipating a bleak report from Goldman Sachs on Tuesday. Analysts are expecting the investment bank to report a loss of $3.50 per share, according to a poll by Thomson Reuters. It would be Goldman's first quarterly loss since it went public in 1999. Morgan Stanley reports results on Wednesday.

The Dow Jones industrial average fell 65.15, or 0.75 percent, to 8,564.53. The Standard & Poor's 500 index lost 11.16, or 1.27 percent, to 868.57, while the Nasdaq composite index fell 32.38, or 2.10 percent, to 1,508.34.

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