Goldman Sachs Swaps the Morgans

upgraded J.P. Morgan

from Buy to Conviction List-Buy on Tuesday and simultaneously downgraded Morgan Stanley

from Conviction List-Buy to Neutral. Goldman Sachs said that shares of both J.P. Morgan and Morgan Stanley have "significantly underperformed". Morgan Stanley has been the subject of intense scrutiny as of late due to its role in the botched Facebook

IPO. Morgan Stanley CEO James Gorman has been unapologetic, saying that, "There was confusion and disarray. Some people who thought they sold at $42 sold at $41. That confusion, in a deal of almost unprecedented size against a [difficult] macroeconomic backdrop ... created a potent elixir that set this aflame." The group of people who bought the stock ... so they'd get an enormous pop were naïve," Gorman added. Goldman Sachs said that it is downgrading Morgan Stanley to Neutral and lowering the price target to $16, stating, "Near term, we expect muted capital markets activity to continue to weigh on sentiment and lead to negative EPS revisions. Longer term, while too soon to tell how counterparties will react to a new capital market ratings distribution post-Moody's, this cycle has proven that banks with the largest increase in funding spreads have lost trading market share." Meanwhile, Goldman is looking at J.P. Morgan in a more positive light largely because of CEO James Dimon's handling of his Chief Investment Office. The CIO unit had managed to make huge losses as it had made trades intended to reduce risk-weighted assets in anticipation of the new Basel 3 requirements. Dimon immediately got rid of those responsible, replacing them with new leaders who revamped risk governance. Dimon earned plaudits from the press and analysts alike in the process. Goldman Sachs reported, "while details around CIO losses and exposures were light, we believe Jamie Dimon's testimonies were an important first step in removing some of the worst-case scenarios priced into shares. We expect further clarity with 2Q earnings to be the next major catalyst, with comments that 2Q has remained “solidly profitable” and that CIO losses were an “isolated incident” as important signs." In other words, by acting fast, Dimon stopped the rot before it set in and that has to be commended. On Tuesday, J.P. Morgan Chase was trading at about $35.70, up roughly 0.9%. Morgan Stanley was trading at about $13.65, up roughly 1.1%.