Gene Marcial's Inside Wall StreetHow desperate is Goldman Sachs (GS) to reach a deal with the Securities and Exchange Commission? A rising number of investment pros now predict that the investment bank will push hard to settle the securities fraud case with the SEC -- with the ouster of Chairman and CEO Lloyd Blankfein possibly thrown into the deal.

Some analysts figure Goldman may have to ante up as to much as $1 billion, plus Blankfein's head, to bring the incendiary lawsuit to an end. They argue that the high-profile firm bank may go that route to end the agony that could seriously add to the damage already done to Goldman's prized reputation.

A Goldman spokesperson declined to comment beyond saying "we can't provide any guidance" on speculation that Goldman is pursuing a settlement.

"Heads Will Have to Roll"

When Blankfein was asked about his plans at Goldman's annual shareholder meeting on May 7, he said he wasn't thinking of resigning, even in light of The Wall Street Journal's recent report that the bank's top lawyers had met with the SEC to work out a settlement. But a number of Wall Street pros believe it won't be that easy, contending that "heads will have to roll" for the SEC to accede to dropping its lawsuit accusing Goldman of defrauding some of its customers.

"Blankfein is gone," asserts Alan Lancz, president of investment firm Alan B. Lancz & Associates, who unloaded his Goldman holdings last week. "We have owned Goldman shares since 2008, when they had plunged to around $52 a share. We sold last week as they hit $185 -- and we're lucky we did," says Lancz. The stock closed on Friday, May 7, at $142.99.

"I believe Goldman will opt for a settlement even if they believe they did no wrong" because the alternative could be worse, says Mark Boyar, president of Boyar Asset Management (it doesn't own shares). If Goldman doesn't settle now, the case could drag on for a very long time and ultimately ruin the company's golden standing on Wall Street, says Boyar.

Risks to Banks Are Mounting

A fine of $1 billion to settle the case would hardly break the bank, he argues, and Goldman could also afford to lose Blankfein because it has a deep bench, with many outstanding executives lined up who can take the helm. Boyar believes Blankfein will have to go.

"The SEC has Goldman over a barrel," contends Lancz, who thinks the firm is desperate enough to sacrifice Blankfein if necessary. "Ordinarily, we would be thinking of buying back Goldman shares at its currently depressed pr?ice," says Lancz. But now, because of the discomforting fix the banks are in, "we think the stock can go even lower." So, the best strategy at this point is to avoid the stock, says Lancz.

"We have gone from overweight to underweight the banks because of the inherent risks we see," he says. "If you look at their earnings and the progress they've made, most of them come from proprietary trading and derivatives," he notes. And with the regulatory reform being proposed in Congress, "a lot of the lucrative areas might be restricted, and its great sources of profits reduced," adds Lancz.

At the shareholders' meeting, Blankfein promised to reexamine Goldman's practices to make sure the company serves the interests of its customers and the public. He said an internal committee will be formed to conduct a self-examination of Goldman's ways.

Uphill Battle

So far, only one of the 30 major analysts who follow Goldman has downgraded the stock to a sell from a buy. The sole analyst with that rating is Matthew Albrecht of Standard & Poor's, who says in a new note to clients on May 7 that only a settlement will help the bank

"It's the first step toward renewing confidence in the company," he says. Goldman faces an uphill battle to preserve its reputation, he adds. Moreover, Albrecht points out, Goldman has also attracted a number of other lawsuits from various parties about its practices, not to mention the regulatory headwinds ahead.

Since Albrecht downgraded the stock, a couple of other analysts with a buy rating have scaled back their recommendations to neutral. Guy Moszkowski of Bank of America Merrill Lynch lowered his 12-month price target to $160 a share from $220, explaining that he's concerned over reports of a possible federal criminal probe into Goldman's trading activities. That, he says, raises the possibility of more serious charges. Moszkowski acknowledges that Goldman has long-term earnings power beyond what's already discounted in the stock's price. However, he warns that "it is very difficult to see the shares making further progress until the matter has been resolved."

If a Settlement, Then a Snapback

Robert Lee, analyst at investment firm Keefe, Bruyette & Woods, downgraded the stock on May 3 to market-perform (or neutral) from outperform and expressed similar concerns.

"As long as the SEC's civil lawsuit lingers, a Justice department criminal probe is under way and Goldman remains the lightning rod for populist and congressional anger against Wall Street, it will be difficult for Goldman's stock to come close to recognizing its inherent value," says Lee. He reduced his 12-month target to $165 a share from $195 on Apr. 21.

Most investors agree that a settlement with the SEC to head off a prolonged legal battle would almost surely prompt a sharp snapback in Goldman's stock. However, it takes two to make a settlement, and how willing the SEC might be to lift Goldman's burden is still a major unknown.

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