Trading The Goldman Impact

Financials plunged on Friday, ending Wall Street's six-day winning streak as fraud charges against Goldman Sachs sent investors scrambling.

According to the lawsuit, Goldman did not tell investors "vital information" about a financial instrument made up of subprime mortgages -- including the fact that the hedge fund run by John Paulson was involved in choosing which securities would be part of the portfolio.

Goldman responded to the charges, saying they were "completely unfounded in law and fact."

Nonetheless, by the close Goldman shed $12 billion in market cap as investors decided to sell first and ask questions later.

Is this the price of unchecked greed on Wall Street or is it a buying opportunity on fear?

How should you trade the Goldman impact? What must you know?

Strategy Session with the Fast Money traders

With Goldman stock down $25 I bought shares because I thought the move was overdone but then I sold out of my position, says Karen Finerman. It can't be coincidence that this is coming out on the eve of financial reform. That suggests to me reform has real teeth. Things will probably get worse for financials before they get better.

I agree that there's an agenda in Washington, speculates Joe Terranova. First I look at health care, now I think Wall Street reform gets done. Cap & trade could be next. This says to me growth opportunities may be limited. I even sold out of Google on this thesis.

I was a buyer of dips, counters Tim Seymour. This was a 93% down day on the S&P . Stocks that I like such as Googlewere punished and I used the sell-off as an opportunity.

And I don't think this is a one day event. Remember Asia hasn’t felt this yet, so Sunday night could be a difficult night, adds Terranova. If you're looking for a long trade I’m a buyer of the FXY for exposure to the Japanese yen as a bet that the carry trade undwinds as Asia takes risk off the table.

That's a good point. I'd be careful of follow through in Europe, adds Tim Seymour. Watch Deutsche.

I've been waiting for some kind of 'shoe to drop' says Guy Adami and I think this may be it. Financials are at their October highs. I can't be long this market in this environment.

This will give financial regulation tremendous momentum, says Gary Kaminksy, no matter what side of the aisle you sit on. However, I don't think this news has any impact on Goldman's business. Quite frankly I think they must have a great case against the charges or they would have settled it.

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FINANCIALS

There’s concern in the market that investors will punish other top CDO underwriters, explains Fast Money host Melissa Lee on the Halftime Report. Exactly who are we talking about? A list follows:

Top CDO Underwriters 2002-2007
Total
Merril Lynch 107
Citigroup 80
Credit Suisse 64
Goldman Sachs 62
Bear Stearns 52
Source: S&P CDO Interface

There’s speculation that the banks mentioned above may be the next to be hit with charges, add Joe Terranova, but that's a very speculative trade. Personally it's a bet I'm not willing to make – but with that said, I’d prepare for further downside in the space. My advice is that if you're long financials buy puts in the XLF for protection.

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RATINGS AGENCIES

Investors are also punishing Moody’s and other ratings agencies on the potential that these firms may be somewhat culpable – if they improperly rated the securities in question. However, this is purely speculative.

What's the trade?

I think there's more here and I'm short Moody's, says Brian Kelly.

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GOLD

Gold might seem like an unusual play but Wall Street whale John Paulson’s hedge fund is named in the lawsuit. And as you may know Paulson holds a large position in gold. Take a look:

Paulson & Co Gold Holdings

SHARES

SPDR Gold ETF (GLD) 31.5MLN
Anglo Gold (AU) 43MLN
Kinross Gold (KGC) 31.5MLN
Gold Fields (GFI) 23.5MLN
NovaGold (NG) 5MLN
Source: Streetinsider.Com

John Paulson's Gold Fund
Launched Jan. 1
$350 MILLION In Assets
$250 MILLION Personal Stake
Source: Streetinsider.Com

What must you know?

Paulson is the largest holder of the GLD, sys Guy Adami. It makes me wonder what will happen with that ETF if in fact Paulson starts selling.

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QUANTIFYING GOLDMAN'S 'REPUTATIONAL' RISK

How do you quantify Goldman's damaged reputation?

Sanford Bernstein analyst Brad Hintz tells us "I see it as a $1.20 / share pay down in 2011 to 2013. That's if they lose everything; that's based on them having to disgorge their fees, that they get a $50 million fine, they pay $1 billion on the loss and they pick up the loss on the credit default swap."

But he adds that although Goldman's discretionary business may go elsewhere their M&A business will remain. "Goldman is the leader in the M&A and that business isn't going anywhere,".

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Nuts & Bolts Info on Goldman Lawsuit

* Here’s what you must know about the civil charges facing Goldman Sachs as reported by our news partner Reuters

According to the SEC lawsuit two Wall Street giants are involved in these events – Goldman Sachs and Paulson & Co - the major hedge fund run by Wall Street Whale John Paulson that we talk about all the time on Fast Money.

Regulators say Paulson & Co. worked with Goldman in creating a collateralized debt obligation or CDO in which “Paulson heavily influenced the selection of the portfolio to suit its economic interests.”

In turn, Paulson took a short position against the CDO – therefore standing to benefit as its value fell - again that’s according to allegations.

What may be implied here is that the security was made up of particularly weak mortgages – deliberately.

Now, here’s the really bad part for Goldman.

According to the lawsuit, Goldman did not tell investors "vital information" about the security including the fact that Paulson & Co was involved in choosing which securities would be part of the portfolio.

Fabrice Tourre, a Goldman vice president who the SEC said was principally responsible for creating the product, was charged with fraud. Paulson has not been charged.

Goldman responded to the charges, saying they were "completely unfounded in law and fact."

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Trader disclosure: On April 16, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Finerman's Firm Is Short (IYR), (IJR), (MDY), (IWM); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman Owns (BAC), (BAC) Preferred; Finerman's Firm Owns (JPM); Finerman's Firm And Finerman Own (WFC) Preferred; Kelly Owns (FRE); Kelly Owns (FXE) Puts; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Terranova Owns (SWN), (XCO); Terranova Owns (FXY) May Calls; Terranova Owns (C) May Calls; Terranova Is Short (BRE); Terranova Is Long (SONC) May Calls; Seymour Owns (AAPL), (BAC), (EEM), (FXY), (GOOG)

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For Joe Terranova
Terranova Works For (VRTS)
Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLI)

For Brian Kelly
Kanundrum Capital Owns (FNM)
Kanundrum Capital Owns (FRE)
Kanundrum Capital Owns (DHI)
Kanundrum Capital Owns (MORN)
Kanundrum Capital Owns (AWI)
Kanundrum Capital Owns (TLT)
Kanundrum Capital Owns (GFI)
Kanundrum Capital Owns (AUY)
Kanundrum Capital Is Long U.S. Dollar
Kanundrum Capital Is Short Yen
Kanundrum Capital Is Short Pound
Kanundrum Capital Is Short Euro
Kanundrum Capital Is Short (MCO)

For Brad Hintz

*Disclosures as of 3/10/10:
Hintz Owns Morgan Stanley And Discover

Hintz Owns (CME)
Accounts Over Which Bernstein And/Or Affiliates Exercise Investment Discretion Own More Than 1% Of Barclays PLC, Credit Suisse Group, (C), (GS), (JPM), (MS), (BAC)
Barclays PLC, (C), Credit Suisse Group, (GS), (JPM), (MS), (BAC) UBS AG Are Or In Past 12 Months Were Clients Of Bernstein (Non-Investment Banking-Securities Related Services), Bernstein Received Compensation
An Affiliate Of Bernstein Received Compensation From Barclays PLC, (C), Credit Suisse Group, (JPM), (GS), (MS), UBS AG (Non-Investment Banking-Securities-Related Services)
Bernstein Or Affiliate Received Investment Banking Compensation From (C) In Past 12 Months
Bernstein Or Affiliate Expects To Receive/Seek Investment Banking Compensation From Barclays PLC, (C), Credit Suisse Group, (GS), (JPM), (MS), (BAC) UBS AG In Next 3 Months




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