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

The Department of Justice has announced this morning that 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 their answering questions this past Tuesday knowing full well that a criminal investigation was 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 dramtically 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. Is there a hedge against that risk? Not really other than to sell the stock.

Do not expect the noise surrounding Goldman to abate anytime soon.

I addressed this exact reputational risk on CNBC back on March 2nd, Media Appearance on CNBC. For a treasure trove of material on Goldman and why the firm has the reputation that it deserves, go here.

LD

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy. After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading. In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006. Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s. Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross. Visit: Sense On Cents

Larry has blogged 88 posts here.