What Happened to "Love Thy Neighbor," Goldman?
By
Morgan Housel
June 27, 2008
|
Remember that kid in sixth grade who was smarter than you, could run faster than you, wore cooler clothes than you, and, to top it off, couldn't help pointing out all of your weaknesses?
Goldman Sachs (NYSE: GS) is becoming that kid.
Goldman downgraded rival bank Citigroup (NYSE: C) on Thursday and went as far as urging clients to short-sell Citi's stock. Shares fell to their lowest level in nearly a decade, after a Goldman analyst lowered his price target on Citigroup to a measly $16 per share -- it was trading at more than $50 as early as last summer -- citing the possibility of further writedowns totaling nearly $9 billion this quarter and the prospect of another dividend cut. "Given the firm's current level of earnings power," he says, "we do not believe the dividend is safe." Adding to the downgrade parade, Goldman also cut its ratings on troubled automaker GM (NYSE: GM), sending shares to their lowest levels since the '70s. Checkmate.
Speak for yourself
Yes, Goldman has held up remarkably well amid financial-market mayhem, but downgrading its fellow banking pals could be risky business. Let's ignore that it's less than two months since Goldman upped its rating on financial stocks for nearly the exact opposite reason it downgraded Citi -- recapitalizations -- and recognize that, even if it's right, spreading fear in the financial market could come back to bite Goldman in more ways than one.
If the banking sector exited its boneheaded debt positions in an orderly fashion, the results would undoubtedly be much more subdued than we've seen thus far. But since nobody wants to be the last one holding the bag, whispers of trouble reverberate throughout the market and can pummel even those -- like Goldman -- that aren't in much trouble by any normal standards. Even though some banks, such as Citi, Wachovia (NYSE: WB), and Bank of America (NYSE: BAC) got in over their heads in ways it can only snicker at, Goldman operates in the same market. It relies on the same economy and counts on the same fundamental forces to pull through the pain we're now in.
Is Citi in trouble? Good chance. But come on, Goldman, be careful what you wish for -- you just might get it.
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