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Goldman Sachs, Once Darling Of Investors, Takes Its Lumps

In the space of just a few weeks, Goldman Sachs has gone from Wall Street darling to favorite punching bag.

Goldman Sachs
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Goldman Sachs

The investment bank's sharesled a sharp selloff in stocks Friday as market pros grew fearful over the massive target Washington has painted on Goldman's back.

Federal prosecutors have openedan investigation into trading at the Wall Street giant, raising the possibility of criminal charges, according to people familiar with the matter. More than 60 House members sent a letter requesting that US Attorney General Eric Holder launch a full investigation into the company.

The probe follows a widely watched Senate hearing this week, where Goldman executives faced blistering questions from senators seeking to blame the company for the financial crisis.

While analysts piled on Goldman Friday and reduced their price targets for the stock, some traders wondered if billionaire investor Warren Buffett was beginning to sour on the firm. Buffett, who has invested billions in Goldman, has promised to discuss his views on the firm at Berkshire Hathaway's shareholder meeting this weekend.

"People are trying to make the case that where there’s smoke there’s fire," said Justin Wiggs, vice president of trading for Stifel Nicolaus in Baltimore. "The Senate wants to have somebody to crucify for this."

The number of Goldman shares being shorted—known as short interest—had actually been declining before the government filed civil fraud charges against Goldman on April 16. But short interest has rebounded since then and the stock is now down 14 percent for April and traded Friday at a nine-month low.

Banking analyst Meredith Whitney told CNBC earlier this week that Goldman's proper share price should be equal to book value, which would take the stock down to about $120 a share. Goldman currently trades at 1.28 times book value, according to Thomson Reuters.

Standard & Poor's on Friday cut its price target on Goldman to $140, while Bank of America-Merrill Lynch cut its view on Goldman to "neutral" from "buy" and slashed its target from $220 to $160.

Despite the avalanche of pessimism, there was still sentiment that the troubles were temporary and the company would rebound.

"If you make money for people they're going to continue to do business with you," Wiggs said.

But there is likely to be more trouble at least in the short term as Congress continues to sharpen the knives regarding big Wall Street firms through its financial reform measures being considered.

"A lot of people think they can go to book value. That certainly is possible," said Yousef Abbasi, financial desk analyst at Execution Noble in New York. "I think it's still a premier franchise. All sorts of individuals will continue to do business with this firm."

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