Downgrade hits Goldman, Lehman

Investment banks Goldman Sachs (GS), Merrill Lynch (MER) and Lehman Brothers (LEH) fell in early trading Thursday after analyst Dick Bove at Ladenburg Thalmann cut his ratings on the stocks to sell, citing continuing risk management problems and weakening earnings power.

Bove, who was an analyst at Punk Ziegel before Ladenburg bought the company this spring, said he believes shares of all three companies could fall 15%-20% from current levels. He points to the surge of energy prices and the decline of the dollar as symptoms of an inflation that is eroding the value of the companies’ assets. Bove, who turned bearish on brokerage firms last summer before the credit crunch was fully felt, also said Goldman, Lehman and Merrill have made bad bets against financial indexes in the current quarter. He said he believes they have lost $5 billion to $7 billion on those failed hedges, with Lehman taking the worst hits.

But if Lehman is viewed as the riskiest play, Bove tells Bloomberg television that investors may be underestimating the damage that could occur at Goldman. The firm, he says, “cannot miss what’s going on in the markets,” no matter how savvy it appears to be. “What’s going on in the markets is quite negative,” Bove says.