Markets Shrug Off Massachusetts Lawsuit Against Big Banks

While the story will be good for at least one cable news cycle, the U.S. equity markets all but shrugged off the announcement by Massachusetts' top lawyer that she would be suing four of the nation's largest banks.

In a statement released shortly after 11 a.m., state attorney general Martha Coaxley said she had filed suit against five banks: Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), JP Morgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Ally Financial, which was formerly owned by General Motors (NYSE:GM).

The complaint alleged that deceptive practices, improper legal procedures, fraudulent documentation and other fraudulent actions were a widespread part of many a foreclosure and loan modification proceeding undertaken by the banks.

The bombshell aspect was not in the allegations themselves -- which have been bandied about against the same banks before -- but in the fact that the lawsuit was even filed. The financial institutions had been negotiating a settlement with all 50 state attorneys-general, which was meant to shield the banks from flurry of lawsuits by individual states, precisely the kind of complaint filed by Massachusetts today.

Yet the markets did not flinch.

From the time when Coaxley's statement began appearing on the newswires, shortly after 11:00 a.m., to the close of the market, shares of the financial institutions being sued actually went up slightly.

At 11:20, just a few minutes after the news broke, the KBW Bank Index, a weighted index of 24 major American banks, was valued at 37.35, close to the day's nadir of 37.31 and 2.33 percent lower than the previous day's close. The index closed Thursday at 37.88, meaning it went up 1.53 percent from mid-day to 4 p.m., when American equity markets close.

All four of the publicly-traded individual banks named in the lawsuit also rose in trading after the announcement was made.

Citigroup, which traded at $26.69 at 11:20 a.m., closed the day's session at $26.99, up 1.12 percent in that time frame. Shares of JPMorgan Chase went from $30.10 to $30.46, up 1.20 percent for the same period.

In a statement, Citigroup denied wrongdoing, noting, "we believe we have operated appropriately, in compliance with existing laws, and will defend our actions vigorously."

JPMorgan referred to the existing legal framework in its statement, saying the company was "disappointed" Coaxley had strayed from the 50-state settlement structure, as resolution there "could bring immediate relief to Massachusetts borrowers rather than years of contested legal proceedings."

Paradoxically, two of the banks named in the lawsuit outperformed the wider market of financial companies.

Wells Fargo, which hit $25.39 at 11:20, closed at $25.64, up 0.98 percent for the period. While that is less than the percentage pop from the other companies, Wells Fargo's stock is considerably less volatile than that of its peers and did not sink as harshly during early morning trading Thursday.

Perhaps the biggest surprise of all, Bank of America's beleaguered stock actually surged during the afternoon trading session. From $5.30 at 11:20, shares closed at $5.53, a solid gain of 4.34 percent for the period.

"While we will vigorously defend ourselves in the Massachusetts case, Wells Fargo will continue our work with state and federal authorities to develop housing remedies across the country,'' that bank said in a statement, perhaps in an oblique reference to affordable housing projects the institution has announced it is bankrolling in recent days.

"We continue to believe that the collaborative resolution rather than continued litigation will most quickly heal the housing market and help drive economic recovery,'' a Bank of America spokesperson said in a statement.

It is not to say the financial sector of the U.S. equity market did well today by any stretch. After surging Wednesday on news of coordinated action by various central banks meant to flood liquidity into the banking system, shares were suffering from what is commonly referred to as a "hangover". The finance sector was, indeed, the worst-performing industry within the S&P 500 for the day.

But even hungover, the bank stocks seemed to have responded to the noise from Massachusetts with a resounding "meh."