UPDATE 3-Goldman shares hit 9-month low on news of US probe

* Stock down 9.4 pct after reports of criminal probe

* BofA, S&P Equity Research downgrade Goldman

* Sell-off in Goldman bonds

* Stock drops to more than 9-month low

* Berkshire’s Munger says SEC should not have filed case

* Munger says derivatives trading should be reined in
(Adds background on legal history, likelihood of charge,
regulators; adds analyst downgrade, BreakingViews link, Kaptur
comment, adds comment from Berkshire Hathaway vice chairman)

By Maria Aspan

NEW YORK, April 30 (BestGrowthStock) – Shares of Goldman Sachs
Group Inc (GS.N: ) slumped 9.4 percent on Friday to a more than
nine-month low, a day after news of a criminal investigation by
U.S. federal prosecutors accelerated the company’s crisis.

The reported criminal investigation also prompted at least
three analysts to downgrade their ratings for Goldman. Bank of
America Merrill Lynch analyst Guy Moszkowski called the reports
“a concern even if no charges ultimately result.”

In addition, the yield spread over Treasuries of Goldman
Sachs’ 5.375 percent notes due in 2020 widened to about 206
basis points in heavy trading volume on Friday, from 184 basis
points late on Thursday, according to MarketAxess.

The criminal investigation came less than two weeks after
Goldman was charged with civil fraud by the U.S. Securities and
Exchange Commission. Earlier this week, Goldman Chief Executive
Officer Lloyd Blankfein and other executives underwent
cross-examination by lawmakers at a U.S. Senate hearing on
their role in trading mortgage-related products in 2007.

Goldman, which is now facing one of the biggest crises in
its 140-year history, is seeing its shares bear the brunt of
the past two weeks’ developments.


For a BreakingViews story about Goldman Sachs, click on:


For other stories about the Goldman Sachs allegations:



Goldman shares plunged $15.04 to close at $145.20, their
lowest level since July 2009. The shares are now down more than
21 percent since the SEC probe was announced, compared with a
3.2 percent decline in the Amex Securities Broker dealer index
(.XBD: ).

“It’s going to keep (Goldman stock) capped in terms of
potential upside,” said Walter Todd, a portfolio manager at
Greenwood Capital. “You started to see it recover and then
something else comes out.

“The door was opened when the SEC announced their fraud
charges,” Todd said. “The criminal investigation obviously
escalates it to the next level … It’s going to be an ongoing
overhang for these guys.”


That overhang on Goldman’s stock may persist despite the
uncertain outcome of the criminal investigation.

Legal experts said it was far too early to predict whether
federal prosecutors will find a basis for bringing a criminal
case during their examination of some of Goldman’s subprime
mortgage-backed deals. Many think it is unlikely, given the
higher burden of proof in a criminal case compared with a civil
prosecution by the SEC.

Federal prosecutors are still licking their wounds from
last November, when they failed to gain a conviction against
two former Bear Stearns hedge fund managers. The managers were
charged with lying to investors about the financial health of
the funds, which invested heavily in subprime debt, including
several Goldman-backed deals.

But the mere prospect of criminal charges is driving the
market away from Goldman, which has seen its market cap lose
almost $23 billion since the day before the SEC announced its
civil charges. Goldman’s market cap was $76.5 billion at the
end of Friday, or down $8.3 billion since the close of last

Moszkowski downgraded the company to “neutral” from “buy,”
as did analysts at Buckingham Research Group. Matthew Albrecht,
a banking and brokerage analyst at S&P Equity Research,
downgraded the company to “sell” from “hold,” and cut his price
target for Goldman to $140 from $180.

Nor will the criminal investigation be the end of Goldman’s
worries, according to Matt McCormick, a portfolio manager and
banking analyst at Bahl & Gaynor Investment Counsel in

“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,” he said. “I do not think all the bad news is baked
into the cake.”


Berkshire Hathaway (BRKa.N: ) Vice Chairman Charles Munger,
whose company acquired a $5 billion stake in Goldman during the
2008 crisis and became its largest shareholder, told CNBC he
does not think the SEC’s case meets the definition of fraud. He
observed the SEC’s commissioners were split 3-2.

“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 prepares for its annual
shareholder meeting this weekend.

Yet while Goldman’s traders may have been abiding by the
rules, those rules need to be strengthened, he said.

“Should the rules of the game have allowed all this
financial derivatives trading? My personal answer would be

Munger, who for decades has railed against the excesses of
Wall Street and corporate America, said he wants tougher
restrictions on derivatives trading than those proposed by
former Federal Reserve Chairman Paul Volcker. Goldman and other
banks have been lobbying hard to fend off changes that would
endanger this lucrative business.

“If I were the benevolent despot of the United States, we’d
have virtually no derivative trading,” he said. “In fact we
would have no derivative trading except in currencies,
commodities and metals.”


McCormick called the timing of the criminal investigation,
close upon the SEC lawsuit, a “catalyst” for lawmakers seeking
to pursue financial reform.

Some lawmakers have already seized the opportunity.
“Federal authorities should leave no rock unturned as they root
out any potential fraud that triggered the crisis,” U.S. Rep.
Marcy Kaptur, who this week sent a letter to the Justice
Department asking for a criminal investigation into Goldman
Sachs, said in a statement on Friday.

In high-profile cases brought by the SEC it is not uncommon
for regulators to confer with prosecutors. But people familiar
with the Goldman matter point out that the SEC did not make any
specific referral to federal prosecutors. Rather, it appears
that prosecutors on their own initiative decided to review some
of the documentary evidence obtained by the SEC to see if a
criminal case could be made.

The cost to insure Goldman’s debt also rose on Friday.
Credit default swaps insuring Goldman’s debt widened 35 basis
points to 165 basis points, or $165,000 per year for five years
to insure $10 million in debt, according to Markit Intraday.


(Reporting by Maria Aspan; additional reporting by Matthew
Goldstein and Joe Giannone; Editing by Lisa Von Ahn and Matthew

UPDATE 3-Goldman shares hit 9-month low on news of US probe