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Goldman Sachs Stock: Buy, Sell or Hold?

Is it time to sell Goldman Sachs shares, or do the fraud charges filed against Goldman by the SEC simply provide a better price at which to buy into shares of the famed investment bank?

(Goldman Sachs story updated April 20 for Goldman earnings, U.K. probe, and breaking Goldman Sachs news.)



) -- Charges of fraud may be a bad thing for a firm's reputation, but there are already arguments being made that in the case of

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. Report

fraud is just an opportunity to buy into its stock at a good price.

The arguments for and against Goldman Sachs shares received yet more substantial noise on Tuesday morning. Goldman Sachs reported earnings that blew past Street estimates.

Yet at the same time, the U.K. counterpart to the Securities and Exchange Commission, the Financial Services Authority, announced that it was doubling up on the Goldman regulatory scrutiny. The FSA launched its own investigation into actions of Goldman Sachs International and said it would be coordinating closely with the SEC.

The FSA's move followed indications from banks in Germany and Scotland that they might also sue Goldman for losses they suffered in subprime mortgage investments.

Goldman's earnings outperformance did not give its shares a bounce, either. Goldman shares were down more than 1% on Tuesday at midday.

Goldman Sachs' shares fell 13% on Friday after the SEC filed a civil complaint against Goldman alleging fraud in its marketing of a subprime mortgage product.

The one-day loss in Goldman's market cap was approximately $13 billion.

Some market commentators were immediately out highlighting a disconnect between the market cap punishment exacted on Goldman Sachs shares on Friday and the total value of $1 billion in the civil complaint filed by the SEC.

Deutsche Bank

, which had suffered the second largest losses on Friday in the banking sector, down 9%, was back in positive territory on Tuesday, up close to 2% at midday.

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There were worries last week that the Goldman fraud case would kill the bank sector rally. Yet Goldman's earnings report was the second-consecutive day of positive news from the big banks.


reported on Monday morning profits that sent Citi shares back up, and by midday Tuesday, Citi shares were back on the verge of the $5 threshold that has proved elusive.

Only Goldman,

Credit Suisse

(CS) - Get Credit Suisse Group AG Report



(UBS) - Get UBS Group AG Report

were trading in negative territory on Tuesday among the big banks, and with losses of 1% or less at the midday mark.

Regulatory pressure on Goldman Sachs could still get worse, yet, as Germany's financial regulator has also hinted it might pursue an investigation.

The Street is still trying to make sense of all the noise and separate the regulatory risk from Goldman's ability to deliver an impressive bottom line.

Brad Hintz, a Sanford Bernstein analyst told


last week that even if Goldman pays $1 billion in the complaint, as well as a securities fine of $50 million, markets in which Goldman is a leader, including M&A and prime brokerage, are not going away.

The SEC only charged Goldman over the marketing of one subprime mortgage product from its


lineup of synthetic CDOS with $1 billion in investor assets, but in all, there were more than $12 billion in funds raised by similar Abacus products.

When asked on the Goldman Tuesday morning earnings conference call by a Barclays analyst how many of the 60 to 70 synthetic CDOs that Goldman marketed in 2006-2007 have been reviewed by the SEC, Goldman co-general counsel Greg Palm would only reiterate that a case has only been brought by the SEC based on one CDO.

The Goldman co-general counsel reiterated Goldman's position, saying, "We are very disappointed that the SEC would bring this action, which relates to a single synthetic CDO transaction involving two professional institutional investors in the face of an extensive record which we believe that the establishes the allegations are unfounded."

Palm also declined to answer a question from a Street analyst about whether Goldman had received any more Wells notices -- indications of possible charges -- from the SEC.

The bigger issue for the Bernstein analyst was the overall impact of the Goldman fraud suit on the political battle over derivatives regulation.

Indeed, Senate Agriculture Committee Blanche Lincoln unveiled her draft bill to regulate the $450 trillion over-the-counter derivatives market on the same day as the SEC suit against Goldman. Some read Lincoln's use of the term "regulate" to mean no more than taking away the $450 trillion market from the big banks.

Senator Lincoln gave a quote to the press linking the issues. "This is another example of how risky Wall Street behavior puts our nation's financial system in peril and further illustrates the need for the strong reform that my legislation provides. My legislation reigns in this risky behavior by ending the days of backroom deals, providing 100% transparency to the derivatives market."

President Obama got in on the action, too, saying right after the Goldman charges last week, "I will veto legislation that does not bring the derivatives market under control." The SEC suit against Goldman, regardless of the merits of the case,

can not be separated from the current political battle over financial reform.

Bernstein's Hintz said it looks like the Street will lose the derivatives fight. If so, the No. 1 question for Goldman Sachs' financial outlook is: how would the loss of derivatives business impact the bottom line?

Other analysts were out with a Goldman Sachs downgrade within hours of the SEC complaint being filed. There are also fears that Goldman is just the first among a group of banks, including

Deutsche Bank

(DB) - Get Deutsche Bank AG Report

, likely

to face similar fraud charges from the SEC.

Oppenheimer & Co. downgraded Goldman from outperform to market perform, and suspended its $228 price target on Goldman shares, which fell by $23.57 on Friday to $160.70. The Oppenheimer analyst said that Goldman will continue to post strong earnings in the short-term, but described the SEC charges as being driven by public sentiment and, as such, atypical in terms of the pressure on regulators to make an example of Goldman.

Standard & Poor's also downgraded Goldman from a strong buy to a hold rating, citing the overhang on the stock from additional litigation. There was a total of approximately $12 billion in deals marketed by Goldman under the Abacus brand, the subprime mortgage synthetic CDO structure for which the SEC charged Goldman with fraud.

The S&P analyst said there was also an unquantifiable risk to Goldman's earnings outlook that could result from the boost the SEC suit might provide to the current financial reform effort in Washington D.C.

Citigroup analyst Keith Horowitz said the worst-case scenario was a large monetary fine. Since Goldman did not face criminal charges, the SEC case should not be "life threatening" for Goldman. "Based on our understanding, this implies the government did not find sufficient evidence to justify a criminal action, although that cannot be ruled out in the future," the Citi analyst wrote.

Potential litigation. Share price deterioration linked to risk of reputation. Earnings deterioration based on potential changes in the financial reform package that President Obama is hoping to push through Congress.

It might take a strong stomach, not to mention ethical blinders, to read the SEC allegations of fraud against Goldman Sachs as a signal to buy Goldman Shares, especially when other regulators and investors are expected to pursue legal action. Nevertheless, there's always a long for every short, and that's not just the case for those investors going long subprime mortgages while Goldman allegedly set them up for a fall.

Indeed, after last week's fraud charges against Goldman and Tuesday's earnings outperformance by the embattled bank, is it time to buy, hold or sell shares of Goldman Sachs? Take our poll below to learn what


thinks -- and don't forget to leave a comment.

-- Reported by Eric Rosenbaum in New York.


>>Is Goldman Case Merely SEC's Opening Shot?

>>Obama Delivers Goldman's Head on a Platter

>>Goldman Charged with Fraud by the SEC

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