Goldman shares hit 9-month low on news of probe

NEW YORK (Reuters) - Shares of Goldman Sachs Group Inc fell as much as 9.9 percent on Friday to a more than nine-month low, a day after news that U.S. federal prosecutors in New York have begun investigating the company.

The reported criminal investigation also prompted at least two analysts to downgrade their ratings for Goldman. Bank of America Merrill Lynch analyst Guy Moszkowski called the reports "a concern even if no charges ultimately result."

In addition, the yield spread over Treasuries of Goldman Sachs' 5.375 percent notes due in 2020 widened to about 201 basis points in heavy volume, from 184 basis points late on Thursday, according to MarketAxess.

The criminal investigation came less than two weeks after Goldman was charged with civil fraud by the U.S. Securities and Exchange Commission. Earlier this week, Goldman Chief Executive Officer Lloyd Blankfein and other executives underwent cross-examination by lawmakers at a U.S. Senate hearing on their role in trading mortgage-related products in 2007.

Goldman, which is now facing one of the biggest crises in its 140-year history, is seeing its shares bear the brunt of the past two weeks' developments.

Goldman shares were down 9.6 percent at $144.88 in midday trading on the New York Stock Exchange. The shares are now down more than 21 percent since the SEC probe was announced, compared with a 2.8 percent decline in the Amex Securities Broker dealer index .

"It's going to keep (Goldman stock) capped in terms of potential upside," said Walter Todd, a portfolio manager at Greenwood Capital. "You started to see it recover and then something else comes out.

"The door was opened when the SEC announced their fraud charges," Todd said. "I think you're going to have things of this nature popping up for the foreseeable future for Goldman, but the criminal investigation obviously escalates it to the next level. ... It's going to be an ongoing overhang for these guys."

Moszkowski downgraded Goldman to "neutral" from "buy" and lowered his price target for Goldman to $160, from $220. Analysts at S&P Equity Research downgraded the company to "sell" from "hold," and cut their price target for Goldman to $140 from $180.

"It is very difficult to see the shares making further progress until the matter has been resolved," Moszkowski wrote in a research note.

Nor will the criminal investigation be the end of Goldman's worries, according to Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati.

"I don't think that what happened here is enough to put Goldman out, but I think the headline risk is going to be there. ... It further behooves investors who have outsize gains in these shares to take some profits and rotate elsewhere," he said. "I do not think all the bad news is baked into the cake."

The cost to insure Goldman's debt also rose on Friday. Credit default swaps insuring Goldman's debt widened 32 basis points to 162.5 basis points, or $162,500 per year for five years to insure $10 million in debt, according to Markit Intraday. (Reporting by Maria Aspan; Editing by Lisa Von Ahn and Matthew Lewis)