Tickers in this Article: WFC, GS, AXP, JPM
Last week in the midst of an SEC investigation, shares in Goldman Sachs (NYSE:GS) declined by over 10% as the company was downgraded by analysts. This past weekend at his annual meeting of shareholders, investing sage Warren Buffett was supportive of Goldman and defended the company's actions. While this seal of approval from Buffett lends enormous credibility, Goldman may still find itself having to defend itself for months to come.

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The Real Issue
The SEC investigation centers around $1 billion or so of pooled mortgages. With over $70 billion in equity, the balance sheet risk to Goldman is minimal at best. However, that risk is clearly not the concern of Goldman management. If it were, they would likely find a way to settle very quickly and incur the financial penalty. Instead, what is important is reputation, and Goldman guards its reputation very closely. According to Mr. Buffett, Goldman was dealing with sophisticated individuals on all sides of the trade, so the idea that Goldman was being misleading is not accurate. And because ACA was essentially acting like a bond insurer, it didn't really matter how the other investors were betting.

Time is Money
Even if Buffett's theory is correct, Goldman continues to suffer from the investigation. While the firm has maintained one of the strongest reputations in the financial industry, a continued push by the SEC is not good for Goldman or its business. Yet if you believe that Goldman will weather the storm, shares may provide another opportunity if the negative publicity continues to have a downward effect on the stock price. Goldman shares now trade at 1.3 times book value and the closer they get to book, the more appealing this company becomes as a long-term investment. (For more, see Digging Into Book Value.)

Currently top-tier financial institutions like Wells Fargo (NYSE:WFC) trade for 1.6 times book value. American Express (NYSE:AXP), which is not laden with real estate loans, trades over 4 times book value. While an excellent name like JP Morgan (NYSE:JPM) currently trades for 1.2 times book value, and its not nearly as profitable as Goldman.

Bottom Line
Buffett's defense of Goldman is no guarantee that the company won't be affected by the SEC investigation. But Goldman has a better chance than most to emerge with its armor intact. If so, shares may soon provide investors with another compelling opportunity. (For more on the Goldman scandal, check out The Goldman Sachs Fraud Explained.)

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