Goldman Sachs (GS) shares are down about 7% today to 147.8, down about 8% from where I recommended buying them. The SEC's case has been handed off to the Justice Department, which may bring criminal charges against the firm.
Bank of America downgraded the stock to Neutral from Buy, and took their target to $160 from $220.
While the reports have not been confirmed, their publication by the WSJ and other media could lend them perceived credibility. Most such probes end inconclusively, with no charges filed; and we continue to believe that GS has long-term earnings power beyond what is discounted in the share price. However, it is very difficult to see the shares making further progress until the matter has been resolved.GS was also downgraded by Standard & Poor's, the firm that once said they would be glad to rate securities packaged by cows.
S&P said this:
"Though traditionally difficult to prove, we think the risk of a formal securities fraud charge, on top of the SEC fraud charge and pending legislation to reshape the financial industry, further muddies Goldman's outlook."And for perspective, here's what S&P once said about their ratings standards. From an internal text message:
S&P Official #1: Btw (by the way) that deal is ridiculous.
S&P Official #2: I know right...model def (definitely) does not capture half the risk.
S&P Official #1: We should not be rating it.
S&P Official #2: We rate every deal. It could be structured by cows and we would rate it:
It will be interesting to hear what Warren Buffet has to say about Goldman this weekend at his annual shareholders meeting. It would be refreshing for him to be candid about the role of an investment bank...which is to "pass the cake while taking a crumb"....just like every other middle-man on the face of the earth. As for mis-representing itself to clients, it's a pretty gray area. I know I've been pushed service plans on electronics without being told how massively profitable they are when they go unused. Is the justice department going to go and bring criminal charges about every residential Realtor who lied their faces off about people's ability to afford a home? Maybe Justice should investigate the senators who berated Goldman's dealing as gambling, while those same senators prey on the poorest of their constituents for lottery revenue and sin taxes on alcohol and cigarettes.
One thing is for sure - one of the bigger victims here will be the city of New York, which is heavily funded by Wall Street's largess. Goldman paid $16billion in compensation expenses last year, and those employees are taxed at a rather high rate.
Copyright 2010 TheAlphaNinja