Sense on Cents

Goldman Sachs stock is down approximately 8% this morning. What is going on?

The Department of Justice has announced it is launching a criminal investigation of Goldman Sachs. ABC reports, Justice Department Reviewing SEC Case Against Goldman Sachs:

Officials at the U.S. Department of Justice are reviewing whether the Securities and Exchange Commission’s recent fraud charges against Wall Street giant Goldman Sachs warrant a full-scale criminal investigation, two government sources told ABC News.

It’s unclear what specific deals or which Goldman Sachs employees are part of the Justice Department’s review and whether criminal charges will ever be filed. The Wall Street Journal reported today that the federal prosecutors were investigating whether Goldman employees committed securities fraud in connection to the firm’s mortgage trading.

A few comments:

1. Little doubt as to why the Goldman Sachs execs were reticent in answering questions this past Tuesday, knowing full well that a criminal investigation was potentially close to being launched.

2. Goldman Sachs stock has been downgraded by two analysts this morning. Price projections for Goldman’s stock by these analysts have been dramatically reduced.

3. If this criminal investigation actually leads to criminal charges and the charges lead to convictions, what does it mean? A l0t of things, but the biggest impact is that a number of customers, most importantly state pension funds, would not be allowed to deal with Goldman Sachs. The demise and ultimate death sentence meted out to Drexel Burnham Lambert was directly linked to this exact reality.

Add it all up and the risk surrounding Goldman Sachs has dramatically increased.  What is at the core of this risk? Goldman’s willingness to jeopardize its reputation in a number of deals for the benefit of short term profits. Do you think Goldman now wishes that it had not brought some of these deals to market?

Is there a hedge against reputational risk? Not really, other than to sell the stock. Do not expect the noise surrounding Goldman to abate anytime soon. I addressed the topic of reputational risk in regard to Goldman Sachs when I appeared on CNBC’s Street Signs on March 2nd.

For a treasure trove of material on Goldman and why the firm has the reputation that it deserves, go here.

LD

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This entry was posted on Friday, April 30th, 2010 at 10:47 AM and is filed under General, Goldman Sachs. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.