Goldman Investors Hit Sell Button
NEW YORK (
) --
Goldman Sachs
(GS) - Get Report
gave generously to President Obama during his campaign, and his Justice Department knocked about $7 billion off the blue-chip firm's market cap Friday.
Goldman's shares fell 9.39% to close the day at $145.20 following a report in
The Wall Street Journal
that federal investigators have opened a criminal inquiry into the industry-leading investment bank.
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The report spurred downgrades from Bank of America and Standard & Poor's and sent Goldman's shares to a midsession low of $144.44, their lowest level in more than nine months. That price is well below the $155.55 Goldman's shares touched on April 16, when the
Securities and Exchange Commission
unveiled its bombshell
civil fraud
charges against the firm, or the $150.15 price the shares reached during Tuesday's marathon Senate grilling of top current and former Goldman executives, including Chairman and CEO Lloyd Blankfein.
"Given the recent focus on the firm, we are not surprised by the report of an inquiry. We would fully cooperate with any requests for information," wrote Goldman spokesman Michael DuVally in an email to
TheStreet.com
.
No major U.S. financial firm has ever survived a criminal indictment, according to
The Wall Street Journal
. As a result, it is highly doubtful Goldman will be charged.
"No publicly held U.S. company has been indicted since the Andersen fiasco. The only possible outcome if this goes forward is a deferred prosecution agreement, and it is way too soon to predict that," wrote Columbia University securities law expert John Coffee, in an email message to
TheStreet.com
.
Deferred prosecution means Goldman would operate under a cloud for a while and face continued negative headlines. Still, it is likely the firm, which counts
Berkshire Hathaway
(BRK.B) - Get Report
chief Warren Buffett among its major shareholders, would eventually recover.
In the short to mid term, however, there is reason for continued bearishness, especially because the regulatory heat on Goldman appears to be helping Democrats in their drive to remove
(and potential profits) from big banks like Goldman,
Morgan Stanley
(MS) - Get Report
,
Citigroup
(C) - Get Report
,
JPMorgan Chase
(JPM) - Get Report
and
Bank of America
(BAC) - Get Report
. Shares of all those banks were down at least 2% Friday, while regional banks' shares were faring far better.
"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," wrote Standard & Poor's equity analyst Matthew Albrecht, who dropped Goldman to sell from hold.
Bank of America Merrill Lynch analyst Guy Moszkowski was less negative in cutting Goldman to hold from sell. "Inexpensive vs. long term earnings, but hard to see progress under this cloud," he wrote.
If the criminal case goes forward, Goldman will receive a "target letter," which it would have to disclose publicly, writes Columbia's Coffee, adding that "that would be real news."
In the meantime, Coffee believes the referral of the case to criminal prosecutors "is an attempt to ratchet up the pressure on Goldman to settle." It also complicates the process, he writes, because Goldman will not want to settle with the SEC unless it knows it also will be free from prosecution by the U.S. Justice Department.
"Companies want global settlements in this setting, not piecemeal ones," Coffee stated.
--
Written by Dan Freed in New York
.
