Financial and bank exchange traded funds rose Tuesday morning despite a report that New York Attorney General Eric Schneiderman is investigating mortgage securities packaged by big banks such as Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS).

Schneiderman will hold meetings with executives at several large banks in the coming week, The Wall Street Journal reported.

Yet ETFs that invest in financial and bank stocks traded higher in early action Tuesday as the report made the rounds in the media.

“The SEC also is continuing to engage in settlement talks with investment banks over alleged fraud in the issuance of subprime-mortgage-backed CDOs,” said analysts at Miller Tabak, referring to collateralized debt obligations.

Investors suffered huge losses in the credit crunch when toxic mortgage-backed securities tumbled in value.

“It is difficult to tell whether these investigations and potential settlements may prove to be a positive or a negative for the leading mortgage securitizers still in business. The authorities may, in fact, end up limiting the investment banks’ liabilities to a fraction of the potential investor losses the banks could be on the hook for in court proceedings,” Miller Tabak analysts said in a note.

“Still, at the moment, we think the ‘headline risk’ for investment banks remains high,” they added.

SPDR KBW Bank ETF (NYSEArca: KBE) was up 0.6% on Tuesday. Some options traders are positioning for a bounce in beaten-down ETFs tracking banks and financial stocks. [ETF Options Traders Look for Rebound in Citigroup, Big Banks]


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