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Goldman Sachs Downgraded by CLSA's Mike Mayo

Widely-followed banking analyst Mike Mayo at CLSA stripped his buy rating from Goldman Sachs Wednesday, citing a tough investment banking environment and an ongoing Justice Department investigation.

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Goldman Sachs Tuesday reported its second quarterly loss since going public, losing $393 million on net revenues of $3.59 billion according to the company's press release. Continued declines in its investment banking revenues including, equity underwriting were cited.

Mayo downgraded the stock to an "outperform" from a "buy" rating, citing a "challenging revenue environment" and higher costs associated with regulatory changes.

Mayo also cut earnings estimates for the bank through 2013 and reduced his price target on its shares to $130 from $145 or, about a 30-percent higher target than Wednesday's closing price.

In his note, Mayo raises concerns about an outstanding Justice Department investigation related to the financial crisis and a United States subcommittee report issued this year by Senators Carl Levin, D-Mich. and Tom Coburn M.D., R-Okla. Because of the unresolved investigation, Mayo cut his valuation multiple on the stock to 1 times the estimated 2012 year end tangible book value, versus 1.1 times.

"We will readdress our valuation multiple when Goldman resolves the outstanding DOJ investigation that, in our view, continues to hold incremental buyers at bay," Mayo wrote in his research note.

Mayo also notes that Goldman Sachs has a "strong capital position" with "core excess liquidity" near "historic highs at $164 billion."

Mayo favors State Street, calling it a "better event-driven stock" for investors. His note points out that State Street has been under pressure from activist investor Trian Fund Management LP to improve returns.

"We assume that State Street will trade at 1.6x tangible book, a 50 percent to 100 percent premium to traditional banks, and reflective of a higher return and faster growth business model," he wrote.

Mayo rates State Street an "outperform" with a price target of $36 per share.

Mayo has had a "buy" rating on Goldman Sachs since April 15, 2010.

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