Dean Ungar, CFA, analyst, dean.ungar@ubs.

com, +1 212 713 3751, UBS FS

Wealth Management Research 5 May 2010

US Equities Financials
Downgrading Goldman on legal risk
WMR Financials Relative Ratings
■ The recently announced criminal investigation in addition to the civil Outperform List Price
suit creates too much uncertainty, in our view, for us to recommend Company Ticker (USD) Industry Group Analyst
Dime Community Bancsh. DCOM 13.09 Banks Ungar
the stock. Huntington Bancshares HBAN 6.67 Banks Ungar
Signature Bank SBNY 40.00 Banks Ungar
Wells Fargo WFC 32.94 Banks Ungar
■ We believe the criminal investigation could lead to a binary outcome. If Ameriprise Financial AMP 45.92 Diversified Financials Dion
criminal charges are announced there could be significant downside. Bank of America BAC 17.56 Diversified Financials Ungar
IntercontinentalExchange ICE 113.43 Diversified Financials Dion
No charges could mean significant upside. Invesco IVZ 22.51 Diversified Financials Dion
JPMorgan Chase JPM 42.47 Diversified Financials Ungar
State Street STT 42.61 Diversified Financials Ungar
■ We can not assess the likelihood of charges emerging from this Arch Capital Group ACGL 74.47 Insurance Dion
investigation and, therefore, cannot assess the downside risk. Genworth Financial GNW 15.99 Insurance Dion
MetLife MET 44.48 Insurance Dion
Prudential Financial PRU 61.66 Insurance Dion
Travelers Cos TRV 50.00 Insurance Dion
WMR S&P Financials Sector Allocation Boston Properties BXP 81.13 Real Estate Woloshin
Tanger Factory Outlet Ctrs SKT 41.53 Real Estate Woloshin
Moderate Overweight UDR Inc UDR 21.41 Real Estate Woloshin
Vornado Realty Trust VNO 83.50 Real Estate Woloshin

We are downgrading Goldman Sachs from Outperform to Marketperform Underperform List Price
Company Ticker (USD) Industry Group Analyst
given the continuing legal uncertainty. On April 16, the SEC announced a Cullen/Frost Bankers, Inc. CFR 59.22 Banks Ungar
civil suit against Goldman related to a synthetic CDO transaction. The SEC M & T Bank MTB 87.12 Banks Ungar
AllianceBernstein AB 31.13 Diversified Financials Dion
alleges that Goldman mislead its clients who invested in the long-side of American Express AXP 45.86 Diversified Financials Ungar
Nasdaq OMX Group NDAQ 20.40 Diversified Financials Dion
this transaction because it did not disclose that the short-side investor, Northern Trust NTRS 53.92 Diversified Financials Ungar
Paulson & Co, participated in the securities selection process. On the news, Brown & Brown BRO 20.03 Insurance Dion
Progressive PGR 19.99 Insurance Dion
the shares declined 13%. At that time we did not downgrade the stock AMB Property Corp AMB 28.03 Real Estate Woloshin
because we felt the downside was already reflected. Furthermore, we AvalonBay Communities AVB 107.77 Real Estate Woloshin
CBL & Associates Properties CBL 14.97 Real Estate Woloshin
thought that any resolution, whether it was a settlement, fine or dismissal, Essex Property Trust ESS 110.94 Real Estate Woloshin
would be a positive for the stock. Post Properties PPS 27.56 Real Estate Woloshin
Marketperform List* Price
Company Ticker (USD) Industry Group Analyst
However, the announcement last Friday (April 30) of a criminal Citigroup C 4.26 Diversified Financials Ungar
Franklin Resources BEN 113.33 Diversified Financials Dion
investigation, changes our calculation. We could at this time, maintain our Goldman Sachs Group GS 149.45 Diversified Financials Ungar
Outperform rating and comfort ourselves with solid justifications. For Morgan Stanley MS 29.49 Diversified Financials Ungar
Allstate ALL 32.08 Insurance Dion
example, the bar for proving criminal charges is high. Or argue that many Chubb CB 51.72 Insurance Dion
investigations never lead to charges at all. We could also speculate that the
*These are sector bellwethers that we believe will neither outperform nor
government would not do something that could possibly destroy Goldman underperform the benchmark.
and disrupt the capital markets. Would the government really go down that Source: UBS WMR, FactSet, prices as of the 4 May 2010 close

path?

This report has been prepared by UBS Financial Services Inc.

Please see important disclaimers and disclosures that begin on page 3.
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision.
UBS Wealth Management Research 5 May 2010

US Equities Financials

Yes, it seems that there are a number of reasons why charges would not be
brought. However, there is also the possibility that Goldman was involved
in criminal wrongdoing; or that an overzealous prosecutor brings charges
even if the case is not strong. If charges are brought, we would expect
significant downside. Of course, we also don't know when all this will
happen. It could take months.

The shares are down 18% since the SEC civil suit was announced.
However, we do not think this means that an adverse outcome to the
criminal investigation is priced into the stock. We believe that in such an
event, downside to at least the tangible book value per share of USD 111 is
a reasonable assumption, which mean downside risk of 26%. Alternatively,
if the legal issues are resolved, we could see upside of 25%-35% over time.

We note that the negative publicity surrounding these lawsuits, even if in

the end nothing happens, could adversely impact the company's client
relationships and hurt earnings. If charges are brought however, the
damage could be significant.

Given the uncertainty regarding the downside risk, we are moving to the
sidelines. Current owners of the stock should assess their comfort level
bearing this significant legal risk.

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UBS Wealth Management Research 5 May 2010

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Appendix

For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a request to UBS
Wealth Management Research Business Management, 1285 Avenue of the Americas, 13th Floor, Avenue of the Americas, New
York, NY 10019.
Analyst certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to
each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views
about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by that research analyst in the research report.
Disclosures (5 May 2010)
AllianceBernstein 5, 8, 9, 10, Arch Capital Group 4, 10, 11, Allstate 4, 6, 7, 8, 9, 10, 11, AMB Property Corp 10, Ameriprise Financial
3, 4, 5, 6, 7, 10, 11, 13, Avalon Bay Commun. 10, American Express 3, 4, 5, 6, 8, 9, 10, 11, 13, Bank of America 3, 4, 5, 6, 8, 9, 10,
11, 13, Franklin Resources Inc 3, 4, 5, 6, 7, 8, 9, 10, 11, Brown & Brown 10, Boston Properties 10, Citigroup 3, 4, 5, 6, 7, 8, 9, 10,
11, 13, Chubb Corp. 4, 10, 11, CBL & Associates 10, Cullen/Frost Bankers 10, Dime Community Bancsh. 8, 9, 10, Essex Property
Trust 7, 10, genworth financial 3, 4, 5, 6, 7, 10, 11, 13, Goldman Sachs 1, 2, 4, 6, 7, 8, 9, 10, 11, Huntington Bancshares 8, 9, 10,
IntercontinentalExchange 3, 5, 10, Invesco 4, 6, 7, 8, 9, 10, 11, JP Morgan Chase & Co 1, 3, 4, 5, 6, 7, 8, 9, 10, 11, 13, Metlife 2, 3,
4, 5, 6, 7, 8, 9, 10, 11, 13, Morgan Stanley 1, 4, 6, 8, 9, 10, 11, M&T Bank Corporation 4, 8, 9, 10, 11, NASDAQ OMX Group 4, 8,
9, 10, 11, Northern Trust 3, 4, 5, 6, 10, 11, Progressive 10, Post Properties 10, Prudential Financial 3, 4, 5, 6, 7, 8, 9, 10, 11, 13,
Signature Bank 4, 6, 8, 9, 10, 11, Tanger Factory Outlets Centers 10, State Str. Corp. 3, 4, 5, 10, 11, 13, Travelers 4, 7, 8, 9, 10, 11,
UDR Inc 10, Vornado Realty Trust 3, 5, 7, 10, 13, Wells Fargo & Co. 3, 4, 5, 6, 8, 9, 10, 11, 12, 13,
1. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month''s end (or the
prior month''s end if this report is dated less than 10 working days after the most recent month''s end).
2. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company''s common equity securities as of
last month''s end (or the prior month''s end if this report is dated less than 10 days after the most recent month''s end).
3. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are
being, or have been, provided.
4. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking
securities-related services are being, or have been, provided.
5. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from
this company/entity.
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or have been, provided.
7. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this
company/entity within the next three months.
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securities-related services are being, or have been, provided.
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banking services from this company.
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company/entity or one of its affiliates within the past 12 months.

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Appendix

Stock recommendation system

Analysts provide a relative rating, which is based on the stock’s total return potential against the total estimated return of the
appropriate sector benchmark over the next 12 months.
Industry sector relative stock view system
Outperform (OUT) Expected to outperform the sector benchmark over the next 12 months.
Marketperform (MKT) Expected to perform in line with the sector benchmark over the next 12 months.
Underperform (UND) Expected to underperform the sector benchmark over the next 12 months.
Under review
Upon special events that require further analysis, the stock rating may be flagged as “Under review” by the analyst.
Restricted
Issuing of research on a company by WMR can be restricted due to legal, regulatory, contractual or best business practice obligations
which are normally caused by UBS Investment Bank’s involvement in an investment banking transaction in regard to the concerned
company.
Sector bellwethers, or stocks that are of high importance or relevance to the sector, that are not placed on either the outperform or
underperform list (i.e., are not expected to either outperform or underperform the sector benchmark) will be classified as
marketperform. Additionally, when stocks that are not deemed to be of high importance or relevance to the sector are not
expected to outperform or underperform the sector benchmark, they will simply be removed from the lists and will not be assigned a
WMR rating.

Terms and Abbreviations

Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition
1H, 2H, etc. or 1H07, First half, second half, etc. or first half 2007, 1Q, 2Q, etc. or 1Q07, First quarter, second quarter, etc. or first quarter
2H07, etc. second half 2007, etc. 2Q07, etc. 2007, second quarter 2007, etc.
2007E, 2008E, etc. 2007 estimate, 2008 estimate, etc. ADR American depositary receipt
AUM Assets under management = total value of own bn Billion
and third-party assets managed
bp or bps Basis point or basis points (100 bps = 1 BVPS Book value per share = shareholders' equity
percentage point) divided by the number of shares
CAGR Compound annual growth rate Cant Inc/Capita Cantonal income per capita (Switzerland only)
Capex Capital expenditures CFO 1) Cash flow from operations, 2) Chief financial
officer
Cost/Inc Ratio (%) Costs as a percentage of income CPI Consumer price index
CR Combined ratio = ratio of claims and expenses as CY Calendar year
a percentage of premiums (for insurance
companies)
DCF Discounted cash flow DDM Dividend discount model
Dividend Yield (%) Dividend per share divided by price per share DPS Dividend per share
EBIT Earnings before interest and taxes EBIT Margin (%) EBIT divided by revenues
EBIT (D)A Earnings before interest, taxes, (depreciation) EBITDA Margin (%) EBITDA divided by revenues
and amortization
EBITDA/Net Interest EBITDA divided by net interest expense EBITDAR Earnings before interest, taxes, depreciation,
amortization and rental expense
EFVR Estimated fair value range EmV Embedded value = net asset value + present value
of forecasted future profits (for life insurers)
EPS Earnings per share Equity Ratio (%) Shareholders' equity divided by total assets
EV Enterprise value = market value of equity, FCF Free cash flow = cash a company generates
preferred equity, outstanding net debt and above outlays required to maintain/expand its
minorities asset base
FCF Yield (%) Free cash flow divided by market capitalization FFO Funds from operations
FY Fiscal year / financial year GDP Gross domestic product
Gross Margin (%) Gross profit divided by revenues h/h Half-year over half-year; half on half
Interbank Ratio Interbank deposits due from banks divided by Interest Coverage Ratio that expresses the number of times interest
interbank deposits due to banks expenses are covered by earnings
Interest exp Interest expense ISIN International securities identification number
LLP/Net Int Inc (%) Loan loss provisions divided by net interest LLR/Gross Loans (%) Loan loss reserves divided by gross loans
income

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Appendix
Term / Abbreviation Description / Definition Term / Abbreviation Description / Definition
Market cap Number of all shares of a company (at the end of m/m Month-over-month; month on month
the quarter) times closing price
mn Million n.a. Not available or not applicable
NAV Net asset value Net Debt Short- and long-term interest-bearing debt minus
cash and cash equivalents
Net Int Margin (%) Net interest income divided by average Net Margin (%) Net income divided by revenues
interest-bearing assets
n.m. or NM Not meaningful NPL Non-performing loans
Op Margin (%) Operating income divided by revenues p.a. Per annum (per year)
P/BV Price to book value P/E Price to earnings
P/E Relative P/E relative to the market P/EmV Price to embedded value
PEG Ratio P/E ratio divided by earnings growth PPI Producer price index
Prim Bal/Cur Rev (%) Primary balance divided by current revenue (total Profit Margin (%) Net income divided by revenues
revenue minus capital revenue)
ROA (%) Return on assets ROCE (%) Return on capital employed = EBIT divided by
difference between total assets & current
liabilities
ROE (%) Return on equity ROAE (%) Return on average equity
ROIC (%) Return on invested capital Solvency Ratio (%) Ratio of shareholders' equity to net premiums
written (for insurance companies)
Tax Burden Index Swiss tax index; 100 = average tax burden of all Tier 1 Ratio (%) Tier 1 capital divided by risk-weighted assets;
cantons describes a bank's capital adequacy
tn Trillion Valor Swiss company identifier
WACC Weighted average cost of capital UBS WMR UBS Wealth Management Research
y/y Year-over-year; year on year YTD Year-to-date

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Appendix
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