NEW YORK/BANGALORE - Goldman Sachs Group Inc shares fell 3.5 percent on Thursday on concerns that the company may face prosecution over its crisis-era mortgage trades, which left some clients with big losses.
A report in Rolling Stone published late Wednesday described findings from a recent Senate investigation, and said that prosecutions could follow. Earlier this week, Goldman said in a filing that the Justice Department is investigating issues raised in the report from the Senate's permanent subcommittee on investigations.
Veteran bank analyst Richard Bove downgraded Goldman's shares to "sell" from "neutral" on Thursday. In a note, the analyst said that "it now appears that the pressure on the Justice Department to bring a criminal lawsuit against Goldman is building to a high pitch." A Standard & Poor's analyst also downgraded the company's shares.
Goldman's shares fell to as low as $140.66 in intraday trading before recouping some of their losses to close down 3.5 percent, at $142.75.
"They can't get out of the crosshairs," said Jason Ware, a senior research analyst with Albion Financial Group, a fund manager that does not own Goldman and has a negative view of the stock. "There are some pretty large uncertainties, given the potential for civil action, for criminal action, for the brand itself."
The report from the subcommittee, chaired by Senator Carl Levin, criticized Goldman for profiting at the expense of clients at the height of the credit crisis. It also offered new details about executives' actions that were first highlighted in a lawsuit by the U.S. Securities and Exchange Commission last year.
In the Rolling Stone article, journalist Matt Taibbi focused on Levin's findings.
"The Levin report catalogs dozens of instances of business practices that are objectively shocking, no matter how any high-priced lawyer chooses to interpret them," Taibbi wrote, saying that the firm bet against its clients and kept customers"trapped in bad investments."
Taibbi has written extensively about Goldman Sachs, and famously described the bank as a "vampire squid wrapped around the face of humanity."
In addition to Bove's downgrading the stock, Standard & Poor's equity analyst Chris Maimone lowered his rating on the stock, to "hold" from "buy." He reduced his target price to $156 from $176.
Of the 26 analysts who cover Goldman's shares that are tracked by Thomson Reuters, 19 recommend buying the stock. As of Wednesday, none recommended selling.
Goldman Sachs spokesman Stephen Cohen declined to comment.
A raft of inquiries
Beyond the Levin report, Goldman disclosed multiple investigations and regulatory issues, which many banks deal with continually. Goldman said it may face separate charges from the Commodity Futures Trading Commission, which is examining Goldman's clearing business, as well as Massachusetts state regulators.
"It is clear to outsiders that there must be a major restructuring of the company at the Board and executive suite levels or Congress will not be satisfied," said Rochdale Securities analyst Richard Bove, who downgraded Goldman shares to "sell" with a $120 price target. "The company continues to fight such a change."
Following the downgrades, Goldman shares were selling off in heavy volume. Just under 19.5 million shares traded hands on Thursday, more than four times the average daily volume.
A Bloomberg poll released just after midnight on Wednesday showed that 54 percent of 1,263 traders, investors and analysts now hold a negative opinion of the company, although 78 percent said the accusations will have no impact on the bank's customer business.
"Fifty-four percent of the world wants to tar and feather Goldman Sachs," says Peter Sorrentino, portfolio manager at Huntington Funds, which has $14.8 billion under management and owns $19.5 million worth of Goldman stock.
Huntington exited some of its Goldman position last year for two reasons, Sorrentino said.
The bank not only faced business challenges, but had a perception and reputation issue too. Until Goldman can overcome that negative sentiment, Huntington is not going to be an active buyer of the shares, Sorrentino said.
"We kept feeling like we're probably one headline away from a disaster on the name," said Sorrentino. "There is this built-up animosity that somehow they played everybody in the room and walked away with all the chips. As a shareholder, you have to be cognizant of the fact that there are some people out there who would like to even the score up."