Good time to buy Goldamn Sachs

On Wednesday I commented on how I thought Goldman was going to post a huge quarter on trading revenues and thought the stock could go to $200.  Well today, the SEC sent Goldman a Wells notice which indicates that Goldman is likely to face a civil suit over one of their CDO products backed by mortgage backed securities.  The essence of the lawsuit appears to be that Goldman advertised to clients that the bonds put into the CDO were chosen by an independent asset manager, while the SEC contends that in fact they were picked by John Paulson, who was looking to short the housing market, and therefore picked bonds which he expected to be downgraded/lose value.  For those unfamiliar with the structuring of a CDO transaction, a relatively accurate simplification is that it tracks the value of the bonds "put into" the CDO.  If these bonds fall in value, so does the CDO.  If I understand correctly, Paulson was short this CDO via CDS contracts on it purchased from AIG as a part of the deal.

Whether or not Goldman ends up paying a fine, they are still going to post a huge quarter and the 10% drop in the stock in my opinion represents an excellent buying opportunity if you share this expectation.  Also, this news has wiped out over $10B in market cap, when the total value of the CDO was $2B.  I find it hard to believe that if Goldman loses the case (or settles), they will make a payout anywhere near this size.  It would be totally unprecedented.  This aside, it will be interesting to see whether Goldman includes a contingent liability for this lawsuit in their quarterly figures.