Market Talk

- It’s getting scary across the pond. “The question now is how far this will spread,” Paul Krugman writes. “I’m looking at the spread between Italian and German bonds. It’s getting a bit scary out there.”

- “The US Treasury market is in an interesting place where we have seen a flight to safety this week and a Fed that may keep rates low forever on one hand and an improving economy, rising commodity prices and a financial situation in the US that doesn’t look much different than Greece on the other,” Peter Boockvar says.

- Most troubling aspect of S&P’s downgrade of Greece isn’t that the country’s debt has been slashed to junk. “The real problem is that the losses on default are likely to be far steeper than is typical for sovereign borrowers,” Yves Smith writes at naked capitalism.

- Maybe there’s no need to overreact regarding European’s increasing debt woes, The Economist’s Free Exchange blog says. “The situation is salvageable, and for now the right outlook is one of concern rather than panic.”

- Do CDOs have social value? James Kwak, Arnold Kling and Frank Partnoy discuss at NYT’s Room for Debate blog.

- At yesterday’s Senate hearing, Goldman Sachs (GS) CEO Lloyd Blankfein “trod the fine line between not being apologetic and actually saying ‘it’s capitalism, stupid’ and the more junior executives interrogated did not say anything blatantly incriminating,” former IMF chief economist Simon Johnson observes.

- Peter Kafka live blogs H-P’s conference call in which the company explains why it’s buying Palm.

- “The Nexus One may not be a bestseller, but perhaps that’s beside the point,” PCWorld’s Jeff Bertolucci says. “The phone has served as an Android demo unit, one that shows handset and app developers what the Android platform is capable of. Indeed, more manufacturers are introducing Android devices — a development that will certainly boost Google’s mobile market share.”

- NYT’s Bits blog wonders whether Gizmodo has any chance of winning the iPhone battle.

- AOL’s turnaround still isn’t here, evidenced by 1Q revenue falling 23% and ad sales dropping 19%. Not a good sign, especially since both Google (GOOG) and Yahoo (YHOO) posted significant revenue growth. But, as Kafka points out, AOL CEO Tim Armstrong still has a grace period to rebuild the company before investors expect to see tangible results.

There’s one thing I know for sure about the SEC’s fraud charges against Goldman Sachs. I know I don’t know what really happened. I wasn’t in the shop in 2007 when the Abacus CDO in question was hatched, so until this thing gets settled, I don’t know for sure whether or not Goldman committed fraud.

But there’s one thing I do know. This is going to create a feeding frenzy.

Of all the people employed on Wall Street, the PR flaks are the ones that are definitely going to earn their bonuses this year. The fact of the matter is, people have been looking for two years for somebody to pin the blame on for the meltdown in the economy, and since Alan Greenspan apparently can’t be tagged, Wall Street’s as likely a perp as anybody. The SEC just painted a big red target on their expensive Italian suits.

And they just may be guilty to boot.

To be sure, there are so many culpable – from the home-owner who lied about his salary to get a loan to the bank that didn’t check the salary and gave him the loan to the Wall Street firm that packaged the loan in with other loans and resold it as a CDO to the ratings agencies that gave the CDO a triple-A rating to the regulators that turned a blind eye to it all to the central bank that blew out interest rates to spur it all along - it’s hard to pin the blame in any one place. So the mob looks to see who profited the most from the deception, and that’s who you blame. And nobody profited like the Street (even if in this case the Street metaphorically extends through Greenwich, Conn.)

In any case, it’s going to be hard for Lloyd Blankfein to claim he’s doing God’s work anymore. The Street’s built up quite a record for themselves over the years, and you wonder how close they are to the tipping point. From the Michael Milken/Ivan Boesky days, through the Frank Quattrone/Henry Blodget era, from analysts who never met a company that wasn’t a buy, to the earnings expectations game, to Lehman Brothers and Repo 105, to the insider’s joke that an NYSE seat is a license to steal.

I don’t know where they’d have to have the trial to find an untainted jury pool. Mars, maybe.

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- The SEC fraud charges against Goldman Sachs (GS) aren’t likely to hurt the firm much financially, but clients will likely have more questions about conflicts of interests surrounding the firm;s dealings, Chad Brand writes.

- The big question now “is whether this is just the tip of the iceberg,” James Kostohryz writes at Minyanville. “Given the details of the transaction, it seems highly unlikely to me that this was the only transaction of this nature.” And lawyers “will be chomping at the bit and contacting investors that lost money in mortgage, CDS, etc., transactions to see if there were similar patterns that can be exploited in lawsuits.”

- In the fallout from SEC fraud charges, Goldman CEO Lloyd Blankfein needs to step down, Stephen Gandel notes at Time’s Curious Capitalist blog.

- Goldman Sachs “can go long markets and it can go short markets. But it can’t lie to its clients,” Felix Salmon says. “That’s well beyond the pale.”

- “The only sure way to ensure that no bank becomes too big to fail is to make sure no bank is too big,” Robert Reich says.

- Barry Ritholtz strongly disagrees with the “strategic default” thesis – which states people are defaulting on mortgages and instead using that money for consumer discretionary items.

- Economy’s in early stages of healing process. “If it continues, and the labor market shows sustainable growth, and inflation stays moderate, and the eventual increase in interest rates doesn’t derail the still-fragile state of consumer sentiment, the future looks encouraging,” James Picerno says. “There’s a lot of ‘ifs’ to step over.”

- “Curb your enthusiasm” about the economic rebound,” Economist’s Free Exchange blog says. “Yes, the economy is recovering, as everyone save the nihilists expected. However, the debate ought to be about the strength, not the fact, of the recovery.”

- Within weeks though we’ll be able to see the natural forces of supply and demand at work in the housing market” without major government incentives, says Miller Tabak’s Peter Boockvar. Economy’s definitely improving, but “the steroid juice of cheap money is again having its influence,” he says. “We can only hope that we can make the transition without it over the next few years better than we did last time.”

- Boomtown blogger Kara Swisher reports Yahoo’s (YHOO) M&A chief is hard at work trying to buy Foursquare, the hot mobile startup of the moment.

The Squid uncovered.

Goldman Sachs (GS) shares are tanking and the broader stock market’s falling as the SEC announces fraud charges against the investment banking and securities firm. But the selloff could be an overreaction as the  fallout from this case may actually be limited when its all said and done.

That’s the reaction filtering through the blogosphere immediately after the charges hit the wire. Business Insider blogger Henry Blodget says there aren’t any “screaming smoking guns” in the complaint. Goldman will probably have to defend itself from civil lawsuits that will ultimately dismissed or settled. “This will cost Goldman some money, but not enough to matter to investors,” he predicts.

Michael Roston’s preaching the same tune on his True Slant blog, playing off the infamous “vampire squid” reference coined by Matt Taibbi last year.

If Goldman Sachs is only going to lose the $15 million it earned from Paulson & Co., along with the interest and penalties, this SEC action will amount to catching the edge of a single tentacle on a squid that swims away to safely feed in vast quantities again.

To its credit, Goldman issued a statement responding to the complaint.

“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman says.

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