Goldman Sachs Group Inc. has already taken a beating in the press and more blows are on the way.
Some of the punishment follows the less than impressive testimony on Wednesday by U.S. Treasury Secretary Tim Geithner about his role in rescuing AIG Inc., the failing insurer. The rescue resulted in a multi-billion-dollar payout to Goldman, which held credit default swaps with AIG.
Simon Johnson, an MIT economics professor and former chief economist at the International Monetary Fund, has five questions about the bailout. Among other things, Johnson would like to know is why Goldman was paid in full for its AIG swaps although it was presumably carrying them on its books for considerably less.
While that issue will probably be probed in detail over the months ahead, other aspects of Goldman’s operations are also receiving attention. Jeff Matthews, a hedge fund manager, has posted an interesting story about Goldman’s role in advising and covering Bare Escentuals Inc., a cosmetics company. It’s a story that illustrates perfectly how seriously an investor should take Wall Street’s buy and sell recommendations.
Matthews relates how Goldman brought Bare Escentuals public at US$22 a share in 2006. Following a couple of secondary offerings at even higher prices, Goldman slapped a “buy” rating on Bare Escentuals stock and predicted it would go to US$44 a share.
The stock instead proceeded to lose ground. Goldman changed its rating of Bare Escentuals to “neutral” and watched as the stock sank to US$2.45 a share, then gradually recover to US$13 late last year. At that point, in December 2009, Goldman labeled it a “sell.”
Just last week, Bare Escentuals was acquired by Shiseido Co. for US$18.20 a share. The adviser on the deal? Goldman, of course.
Freelance business journalist Ian McGugan blogs for the Financial Post.