Monday, May 24, 2010

"Goldman Now Shorting Citi As It Upgrades Vikram's Insolvent Ward Of State To Buy, Puts Jefferies On Conviction Sell" (C; GS)

UPDATE: "Why Goldman Slapped ‘Buy’ on Citi" (C).
Original post:
Someone at ZeroHedge is crabby:

Goldman is now adding to its clients' future woes by upgrading bankrupt bank Citi even as it sells Citi shares to clients who follow its advice. The reason: "There are two themes that keep us positive on universal banks – the turn in consumer credit, and prospects for a good capital markets quarter." Oddly enough, there is no mention of the fact that the primary means by which banks have generated (near) flawless recent quarters has been due to the extremely steep yield curve and that this steepness has been reduced by almost 20% in the past week, thus taking away a massive chunk of Bank P&L. As for the turn in consumer credit, should some administration be voted in that actually tells homeowners to pay their mortgages for a change, the bloodbath in bank balance sheets will be unprecedented. Now that Goldman has put Jefferies on the Conviction Sell list it is time to load up. Here is the full rating change summary from this morning's Goldman report on financial firms.

We are adding BLK, ACE, CME and NTRS to the Conviction Buy List and removing BEN, BX, STI and EVR. We are adding JEF and AMB to the Conviction Sell List and removing FII. We are downgrading the Asset Management coverage view to Neutral from Attractive, and are downgrading JNS and CLMS to Sell from Neutral. Within banks, we are upgrading C to Buy from Neutral and downgrading WFC and CMA to Neutral from Buy. Within Insurance, we are downgrading ACGL and VR to Neutral from Buy.

When will Goldman introduce the dodecatuple conviction client guaranteed to lose money list?

Specifically, here is why Goldman is feeling so bullish on Citi and BofA:

An issue that remains on the table for the large-cap banks is resolution authority and the resulting risk of rating agency downgrades. The ratings methodology of S&P and Moody's includes an uplift to ratings due to assumed support from governments in a stress scenario. Resolution authority gives the FDIC power to unwind failing financial firms and explicitly bars the use of taxpayer funds to rescue them. Thus the ratings agencies have said lower ratings could result given increased risk of bondholder losses in a stress scenario.

Specifically, if we focus just on bank-level ratings, BAC, C and MS are all rated as A+ companies by S&P, with three notches of uplift from government support. S&P has not clarified whether, when government support is removed via the passage of resolution authority, ratings will fall three notches, or whether mitigating factors will offset this....MORE