Financial Winners and Losers: Goldman Sachs

(Updated with final price moves throughout)

Financial stocks finished sharply higher Monday ahead of a week full of earnings reports after analyst Meredith Whitney upgraded Goldman Sachs ( GS), offering a bullish outlook for the company.

Whitney, who gained acclaim in late 2007 while at Oppenheimer for foreseeing many of problems in the financial industry, before leaving the firm in February to start her own stock advisory group, raised Goldman to buy, from hold, with a 12-month price target of $186.

Whitney said she expects Goldman Sachs to be the key competitor in some of the unpredictable markets of government, corporate and municipal debt. She expects a "tsunami of debt issuance" from federal/sovereign, state and local governments ramping up debt issuance to fund "woefully underfunded" budget gaps.

"In addition, we expect corporate debt issuance to be at least 60% as strong as peak cycle levels reflecting sizable debt maturity rolls," Whitney's firm said in a research note. "What's more, given fewer players in the market, not only is Goldman Sachs benefiting from market share gains on these products but more widely in the derivatives products."

Goldman shares climbed 5.3% to finish at $149.44. Key rival Morgan Stanley ( MS) was higher by 7.6% to close at $27.91.

In other analyst moves, Barclays Capital analyst Jason Goldberg trimmed earnings estimates for Citigroup ( C) and JPMorgan Chase ( JPM), which he said reflects the inclusion of the Federal Deposit Insurance Corp.'s deposit insurance fund assessment, which amounts to 10 cents a share for Citi and 12 cents a share for JPMorgan.

Citi and JPMorgan are among a handful of financial companies set to report earnings this week, along with Goldman Sachs and Bank of America ( BAC).

Goldberg said that he now expects Citi to report a second-quarter loss of 25 cents a share, compared to his prior estimate for a loss of 15 cents a share. Goldberg said he expects Citicorp, the so-called "good bank" subsidiary consisting of its retail banking operations and other assets it plans to keep, to be profitable, and Citi Holdings, the so-called "bad bank" consisting of soured securitized debt and other assets it plans to unload, to continue to post an operating loss. Results in its retail bank and card will likely remain pressured, he said.

Meanwhile, Goldberg said he expects JPMorgan to report a profit of 10 cents a share, down from his prior estimate of 40 cents a share. In addition to the FDIC assessment charge, his forecast includes a $1.1 billion charge relating to the accelerated amortization of the discount on the Troubled Asset Relief Program preferred shares. Still, Goldberg said core results for JPMorgan should "remain solidly profitable."

Citi shares climbed 7.3% to finish at $2.78, and JPMorgan rose 7.3% to $34.71.

Elsewhere, Goldman Sachs added Discover Financial ( DFS) to its conviction buy list, saying that consumer delinquencies have improved, the capital raise is behind the stock, shares are trading below tangible book value, and that the company should be profitable in the second half of 2009 given moderating reserve builds and loan repricing.

Goldman also removed Bank of New York Mellon ( BK) from its conviction buy list, as the second quarter is likely to be less of a catalyst, the firm said.

Discover closed up 5.5% to $10.14, and Bank of New York Mellon shares added 4.7% to end Monday at $28.53.

In other bank stock news, Bloomberg reported Monday that Bank of America is trying to avoid paying billions of dollars in fees to U.S. taxpayers for guarantees against losses at Merrill Lynch, saying the rescue agreement was never signed and the funding never used.

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, the report said, citing people familiar with the matter. BofA shares jumped 9.3% to $12.99.

Elsewhere, UBS ( UBS) shares closed higher after the Swiss banking giant and the U.S. and Swiss governments agreed to a 15-day suspension of litigation related to the Internal Revenue Service's effort to identify thousands of suspected American tax evaders. UBS gained 6.4% to $12.40.

CIT Group ( CIT) was among few losers Monday as it remains in active discussions with its principal regulators on ways to improve its near-term liquidity position, the company said. The troubled commercial lender said it is discussing its application to participate in the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, as well as liquidity solutions that don't involve access to the program.

CIT said it is in talks for the near-term transfer of assets into CIT Bank through certain waivers and the transfer of its vendor finance and trade finance businesses into CIT Bank. If approved, these transfers would enhance CIT's liquidity position, the company said in a statement late Sunday. CIT shares dropped 11.8% to close at $1.35.