All bulge bracket firms and most major banking and brokerage firms cover each other in traditional analyst calls.  Usually there is a coverage that involves trends in the sectors and the picks of which of the peer groups do better and worse among each other.  Then there is the rare instance, where a firm turns on its rival:  Bank of America/Merrill Lynch this morning downgraded Goldman Sachs Group Inc. (NYSE: GS) down to a Neutral rating with a $160 price target.  The prior rating was “Buy” with a $220 target.

The note states, “Our downgrade is prompted by news reports filed Thursday evening by the media including the Wall St. Journal indicating that federal prosecutors have opened an investigation of GS in connection with its trading activities, raising the possibility of criminal charges.”   Frankly this should not have come as a surprise.  But that is what makes a ballgame.

BofA’ Guy Moszkowski and Sandra Goldschneider did note a positive, with caveats, “GS has long-term earnings power beyond what is discounted in the share price. However, it is very difficult to see the shares making further progress until the matter has been resolved… Our new $160 price objective discounts an ROE of 12%, by valuing the shares at 1.2x our estimate for year-end BVPS of $133. Though the firm’s long term earnings power is likely much higher, we expect the market to value the shares at a discount for now.”

While this is a call on Goldman Sachs, this heeds a warning against other non-bank investment banking firms… “investment banks and their leverage ratios will likely face greater government scrutiny that could hinder returns. Given GS’s significant principal exposure, retracement of equity and debt market gains could result in losses.”

The estimates for earnings ahead are $20.37 EPS for 2010 and $24.02 EPS for 2011. Shares are down 5.4% at $151.61 and shares have a low print this morning of $151.00.  The intra-day lows since the SEC issue first hit was $150.15 on April 27. More importantly, the two lowest closing bell prices since this SEC mess are $152.03 and then $153.04.

One might even be able to argue that today’s cut is a revenge cut or at least a bittersweet cheer… It was Goldman Sachs which was able to cherry-pick teams out of the more troubled TARP firms (including BofA) where compensation was being forcefully regulated for producers and where a merger of brokerage forces created bad blood inside of firms.

JON C. OGG

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