Is the Chinese wall inside Goldman Sachs still in tact or do its research analysts know something the rest of us don't?

In a highly unusual move, Goldman equity analyst James Fotheringham recommended this morning that investors not only sell their Washington Mutual shares, but sell them short. It's not enough just to unload your shares, the analyst seems to say, but there's opportunity to make money by betting they will actually fall.

Even more curious, this comes just a few days after Goldman bankers acted as placement agents for WaMu in its sale of $7 billion to a group of investors led by TPG Capital.

Fotheringham put a 12-month price target of $10 on WaMu stock. That doesn't seem so unreasonable: its shares tumbled slightly this morning, to $11.38.

Of course, if it falls much below that level, it's surely going to ruffle TPG's feathers. The investor group paid $8.75 per share for the WaMu offering, which is a figure that Goldman bankers certainly had a strong hand in determining.

The analyst also reduced his earnings estimate for 2008 to a loss of $3.30 per share, from a loss of $1.00 per share. He expects that WaMu will not return to profitability until 2010 and he predicts the bank will need to set aside $14 billion this year to cover losses from mortgages.

A Goldman spokesperson says Fotheringham's report is an example of a "pair trade" recommendation, which he says is not uncommon. An equity analyst, Fotheringham references Goldman Sachs fixed income analyst Louise Pitts' view on WaMu debt to recommend that investors go long WaMu bonds, and short WaMu stock.

But it's not clear just how common a short sell recommendation is in the world of equity research. Thomson Financial, which tracks Wall Street analyst ratings, says it only has data on buy, sell, and hold rating information. Fotheringham still has a "sell" rating on WaMu shares.

Perhaps this is just one more sign of the troubled times in the financial sector. Equity analysts are rewarded for helping their clients make money on their investments. It's not enough just to keep telling investors to sell as WaMu shares tumble: if they can make money instead by riding the stock on the way down, then shorting the shares is the best advice possible.

by Megan Barnett