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The intensity of Main Street's animosity for Goldman Sachs (ticker: GS) is chilling, while Wall Street's mild reaction to the latest legal attack on the bank shows how divided the country has become.
"Kill Goldman to send a message to the rest of Wall St.," was the comment posted by someone calling himself Gaius Baltar on a Wall Street Journal story. The article detailed how Manhattan's district attorney, Cyrus Vance Jr., son of a former secretary of state, subpoenaed the powerful bank in response to a Senate report, "Wall Street and the Financial Crisis: Anatomy of a Financial Collapse."
It's unclear what Vance wants, but Baltar, and others like him, know what they want. "There's an old Chinese saying, 'kill the chicken to scare the monkeys.' China every so often executes corrupt officials or businessmen as an example to anyone else thinking of violating the law," Baltar continued. "DOJ should indict Goldman if at all possible. Make Goldman the chicken to scare all the monkeys on the Street."
Goldman Sachs hasn't been charged with any criminality. All that's certain is that the bank was incredibly successful during the 2007-2009 credit crisis, when nearly everyone else got soaked. Bear Stearns and Lehman Brothers, two former competitors, exist no more. Thousands of American neighborhoods are filled with vacant and unsold homes—yet Goldman moved to a new $2.1 billion building in lower Manhattan. Many Goldman employees made lots of money.
Yet, in the options market, where the most sophisticated investors express their views, Goldman Sachs trades as if it were coated in Teflon and beyond the reach of pandering politicians and angry people.
Given the nonstop attacks on Goldman, the implied volatility of bearish put options should be sharply higher than other banks. That would reflect a belief that the bank might face some trouble for its role in the credit crisis. Investors buying puts in anticipation that Goldman's stock would decline could cause the volatility spike. At minimum, volatility could be expected to increase because dealers regularly change their pricing models to reflect additional legal risks hanging over stocks.
Yet the implied volatility of Goldman's bearish puts and bullish calls is essentially the same. This means the options market is about split on whether the stock will rise or fall. The options market prices the risk of owning Goldman's stock the way it prices the risks of owning Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS).
Even Goldman's options-trading volumes are surprisingly sanguine, revealing little more than normal reactions to news events.
Some investors are positioning for Goldman's stock to bounce higher. They bought June call options that would increase in price if Goldman's stock, recently at $136, pushed above $145 and $150. Others bought bearish put options, looking for the stock to fall below $125.
In essence, the options market is treating the Manhattan DA like some lightweight Congressman playing to the cheap seats. It is hard to imagine that the Manhattan DA's office, or Congress, is financially sophisticated enough to do much more than prosecute Goldman in anything but the court of public opinion—but David did topple Goliath.
To monetize the pitchfork populism, consider selling Goldman's January $160 call that expires in 2012 for $3.20 and buying the January $105 put that expires in 2012 for $2.65. That trade generated a credit of 55 cents when the stock was at $136. If you want more immediate traction if the stock declines, sell the same call, but buy the January $130 put for $8.90. The $130 put will increase in value more quickly than the $105 put, but you will pay more. The more immediate downside trade cost $5.70.
Consider the trades to be rocks for a slingshot.
Comments: steve.sears@barrons.com
http://twitter.com/smsearsBarrons
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