Which bank is telling the truth?

November 5, 2007

peabody.jpgIndependent analyst Charles Peabody of Portales Partners freely admits he looks at the financial services industry from a decidedly pessimistic viewpoint. It’s no big surprise, then, that he’s a big skeptic when it comes to Goldman Sachs Group Inc., which has so far wowed investors with its ability to weather a subprime crisis that has forced multibillion-dollar writeoffs at rivals such as Citigroup and Merrill Lynch & Co.

What raised his eyebrows in this regard was Citigroup’s contention today that it was having trouble hedging its collateralized debt obligation exposure. He says that bolsters his suspicions that Goldman may not be quite as well hedged as its rosy third-quarter results made it appear.

He said that either Citi just missed the opportunity to hedge and then made other excuses for its oversight “or there’s something not right about Goldman’s reporting/accounting,” Peabody said, making clear which possibility he sees as most likely.

After Lehman Brothers came out with its better-than-forecast third-quarter results, Peabody says he described those earnings as “a quarter not to be believed.”  But that description, he now believes, could apply just as easily to Goldman’s most recent quarter.

“I really don’t believe those two organizations have come clean with their mortgage exposures,” he says.



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