UPDATE 1-Merrill analyst sees Goldman bank buy more likely

Mon Jul 28, 2008 5:23pm BST

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(Adds NEW YORK dateline; details from Merrill note; Goldman response; Adds background)

By Joseph A. Giannone

NEW YORK, July 28 (Reuters) - Wall Street giant Goldman Sachs Group Inc (GS.N) has considered buying a deposit-taking bank, a move that would help it fund its businesses during times of market turmoil, Merrill Lynch analyst Guy Moszkowski wrote on Monday.

The credit crunch has prompted analysts and investors to speculate that Goldman, eager to establish a new and more stable source of funds, would snap up a bank. The market talk has gained strength in recent weeks as rising loan losses and worries about the U.S. economy has made bank stocks cheap.

Moszkowski, one of the most influential analysts following the banking industry, adds to the growing speculation that Goldman, which has largely avoided the credit losses hobbling its rivals, is looking to acquire a bank.

"We still would not ascribe very high probability, but if a bank with excess deposits were available at the right price, with no need for Goldman to exit existing businesses, we'd no longer rule it out," Moszkowski wrote in a client note after meeting with four senior Goldman executives last week. "These are strange times indeed."

Goldman spokesman Ed Canaday declined to comment.

Moszkowski, who met with Chief Financial Officer David Viniar, said the firm has been "obsessed" with liquidity as it watched how cash flow fears brought down Bear Stearns and now threatens Lehman Brothers LEH.N.

Viniar "noted that the firm had done extensive analysis on the degree to which it might be able to deploy excess deposits to fund core businesses," Moszkowski said. "Based on the willingness to even consider a transaction, it would seem Goldman has satisfied itself that core activities could conceivably be funded this way."

Goldman, for example, has been linked to National City Corp NCC.N and Wachovia Corp WB.N, both of which it has served as a financial adviser.

Goldman has clearly considered such a transaction, he wrote, though such a deal is not very likely right now.

NOT LIKELY

Goldman has long been reluctant to enter mass-market businesses, steering clear of mutual funds and retail brokerage, for example, amid worries about potential risks to its reputation.

Accounting rules, meanwhile, would make it expensive for Goldman to acquire a bank whose assets must then be marked down to reflect slumping market conditions.

Another roadblock would be if regulators balked at letting Goldman keep certain volatile businesses, such as commodities trading, while also holding consumer deposits. Regulators looked past this issue when it approved JPMorgan Chase & Co's (JPM.N) purchase of Bear Stearns and its energy unit, he said.

Analysts and investors in recent weeks have suggested Goldman could pursue its usual strategy of buying something small and building it up.

That means investors should not count on Goldman to snap up one of the larger U.S. banks currently struggling through mortgage and other losses.

"On the whole, we would not ascribe a very high probability to Goldman acquiring a bank of any particularly large size.

He has a "buy" rating and a price target of $212 on the stock, which currently trades at $178.06 a share. (Additional reporting by Neha Singh in Bangalore; Editing by Maureen Bavdek)

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