Goldman Sachs Criminal Investigation Crashes Goldman Shares

Goldman Sachs criminal investigation cashes Goldman shares to a more than nine-month low. Goldman Sachs has been blamed for everything, including the Iceland volcano lately. The evil empire as been hauled before the US congress and on Thursday U.S. federal prosecutors announced a criminal investigation after the SEC charged Goldman Sachs with fraud.

On Friday the stockmarket reacted by slicing 9.4 percent of the stock price. Perhaps in a feeling of ‘screw you buddy, three analysts downgraded Goldman Sachs ratings. Major shareholder Berkshire Hathaway also has its Shareholder meeting this weekend. Those familiar with Greece, Spain and Portugal’s downgrades would be interested to know Goldman Sachs Notes blew out Friday also.

Goldman Sachs has been around for 140 years and has weathered its fair share of crisis. They have survived through two world wars, the panic of 1929 and the great depression. They survived the 1987 stockmarket crash and so far the global financial crisis. However this crisis is shaping up as being right up there with those. 

Two weeks ago the seemingly unflappable ‘Giant Vampire Squid”, as Goldman Sachs is now referred to by many because of it’s role in the multiple financial bubbles of the last decade or so, has become besieged. We saw the rumbling when the U.S. Securities and Exchange Commission charged them with fraud alongside its vice President Fabrice Tourre. This has now been elevated to possible criminal charges with the announcement of a criminal investigation. 

Goldman Chief Executive Officer Lloyd Blankfein, who is lovingly refereed to as the squid master amongst other things was hauled before the U.S. Senate this week. The hearing did nothing to remove their image of aloofness. The executives underwent an intense cross-examination on Goldman Sachs role in trading mortgage-related products in 2007. The world would love a scapegoat, at first it seemed Fabrice Tourre was going to be the sacrificial lamb, now it appears more may be quivering. One wonders how on earth has no one of consequence from the Lehman bankruptcy been charged?

Goldman Sachs debt credit risk is measured as a spread against the US Treasury equivalent maturity. The ten-year notes due in 2020 yield spread widened to 206 basis points over Treasuries on Friday. This was on Goldman Sachs' 5.375 percent notes. On Thursday the spread was trading at 184 basis points on MarketAxess.

Credit default swaps (CDS) insuring Goldman Sachs debt widened 35 basis points to 165 basis points on Friday. This means the cost for insuring $10 million in debt is $165,000 per year for five years. 

Goldman Sachs shares have taken a pounding in the past few weeks. Two weeks ago Wall Street types spoke of them glowingly. This Saturday Warren Buffet’s Berkshire Hathaway hosted its annual shareholder meeting. Given Berkshire’s exposure Goldman Sachs what a difference two weeks has made. Berkshire paid $5 billion for a Goldman stake during the 2008 financial crisis to become its largest shareholder. Berkshire shareholders and analysts will be most interest to Warren Buffett’s response to the inevitable questions on Goldman Sachs. 

Goldman Sachs shares are down around 21 percent since the SEC charges were announced. In what was a market already rocked by Greece’s request for emergency aid. On Friday Goldman Sachs shares were punked 9.4 percent to slice another $15.04 off. Compare this against a 3.2 percent decline in the Amex Securities Broker dealer index. Goldman shares closed at $145.20 the lowest level since July 2009. Goldman Sachs market cap has lost nearly $23 billion in this eventful fortnight. In a week it has lost 8.3 billion to $76.5 billion at the end of Friday. 

Goldman better hope that traders don’t do what there traders has down to many of the Sovereign countries CDS. Their traders are legendary for smelling blood and going for the throat. The next week may be eventful, as Goldman has now fallen into the pool of sharks themselves. 

Walter Todd a portfolio manager at Greenwood Capital sums up the situation succinctly. 'The door was opened when the SEC announced their fraud charges, the criminal investigation obviously escalates it to the next level ... It's going to be an ongoing overhang for these guys.' Todd added in a Reuters interview. 'It's going to keep (Goldman stock) capped in terms of potential upside,' 'You started to see it recover and then something else comes out.

Goldman Sachs knows too well mud sticks and there have been plenty of rumors about them spreading their fair share of malicious rumors. Whether these charges actually get filed, and if so even if they stick the elephant is out of the room. Don’t think for a minute the government officials involved are not aware of that. 

While many legal experts think it is unlikely that a criminal case would stick given the higher burden of proof in a criminal case compared with a civil prosecution the potential damage is out there. Goldman shares have fallen, what of their clients? How many of them will leave? 

Federal prosecutors will, well you would think, only bring charges if they are confident they will stick. An expensive high profile case against two former Bear Stearns hedge fund managers failed to garner a conviction last year. The twp managers were charged with lying to subprime investors, some of the CDOs were also Goldman Sachs backed deals. 

U.S. Rep. Marcy Kaptur sent a letter to the Justice Department asking for a criminal investigation into Goldman Sachs, said.’ Federal authorities should leave no rock unturned as they root out any potential fraud that triggered the crisis,' 

Bank of America Merrill Lynch analyst Guy Moszkowski downgraded the company to 'neutral' from 'buy’ and in a note said it was  'a concern even if no charges ultimately result.' 

S&P Equity Research banking and brokerage analyst Matthew Albrecht downgraded the company to 'sell' from 'hold,' and cut his price target for Goldman to $140 from $180. 

Bahl & Gaynor Investment Counsel in Cincinnati portfolio manager Matt McCormick warned of more trouble, 'I do not think all the bad news is baked into the cake.' He opined,  'I don't think that what happened here is enough to put Goldman out, but ... it further behooves investors who have outsize gains in these shares to take some profits and rotate elsewhere.' 

Berkshire Hathaway Vice Chairman Charles Munger, told CNBC 'I suspect if I had been an SEC commissioner and had been the swing vote, this would not have been filed,' said Munger, in Omaha, Nebraska, as Berkshire Hathaway readied itself for a slew of Goldman related question at its annual shareholder meeting this weekend.

Munger commented that SEC's commissioners were split 3-2 on the SEC charges. In saying so he doesn’t feel the SEC's case meets the definition of fraud. He did say though “Should the rules of the game have allowed all this financial derivatives trading? My personal answer would be no.' 

Munger in response to reforming derivative regulations said, 'If I were the benevolent despot of the United States, we'd have virtually no derivative trading.' 'In fact we would have no derivative trading except in currencies, commodities and metals.' (That is fair exposure by the way Mr. Munger). 

Goldman Sachs criminal investigation crashes Goldman shares another 9 percent. Munger and Buffett hope that is the end of it. It will be continue to be a difficult time for Goldman with the political arena hot on there heals and the financial market being for blood.

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• This squids for you, Goldman Sachs jokes If you need to laugh about the Giant Squid and the evil empire - Letterman, Leno, Colbert and Stewart are all here.
• Shareholders looking to sue Goldman Sachs There are plenty of irate Goldman shareholders. What are their chances?
• Full Lawsuit Filed by SEC Here is the complete lawsuit filed. Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre
• Why Paulson was not charged in Goldman Sachs fraud SEC’s head of enforcement, Robert Khuzami. Khuzam answered this question and more.

• Financial Reform, Goldman Sachs and 400 Amendments Does this explain the timing of the lawsuit? Two weeks ago we asked "was the GFC not the best thing that could ever happen to Goldman Sachs?"
• Lehman bankruptcy disgrace, liquidators take $730 million off the biggest bankruptcy in American history. Their charge meter is still ticking over.
• Warren Buffett investing  Goldman's biggest shareholder buying up chunks of Goldman Sachs right after the Bear Stearns and Lehman collapses. While he doesn’t get it always right he has a pretty incredible record.
• The housing bubble conflict of interest, for a fee Morgan Stanley loses $5.4B is a stunning testament of what went on. I am still amazed at how the greedy bastards at the Investment banks managed