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When Goldman Sachs (NYSE:GS) was deep in negotiations with the SEC last year over its CDO sales practices, I was a big bargain hunter in the stock. After bottoming in the 130's the settlement set the stage for a huge rally up towards the 170 area. Today investors are getting another chance to buy Goldman cheap, as other divisions are now investigating the same issue and may file suit in the future, but what is even more striking is the discount investors are giving shares of fellow competitor Morgan Stanley (NYSE:MS), an investment bank with far less legal risk.

Under CEO James Gorman, MS is focusing on its roots in traditional investment banking and asset management. Despite staying clear of the CDO mess for the most part in recent quarters, the stock now trades for around $22.50 per share, a stunning 25% discount to tangible book value. Goldman, by contrast, with all of its legal woes trades just above tangible book value. This disconnect seems strange and is not likely to be maintained longer term. It appears that MS is being dragged down by the negative Goldman press coverage as well as a poor trading tape for all things bank-related. However, M&A and IPO activity is perking up, which should help MS, and there appears to be far less legal risk.

Given that, and a renewed focus by Morgan Stankley to get back to its investment banking and wealth management roots, I would expect the stock would get back to tangible book value over time, with far less headline risk than a GS or BofA (NYSE:BAC). That would put this $22 stock back near $30 over then next, say, year or two, with limited downside. That's not too shabby on a percentage basis.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Morgan Stanley: Cheaper Than Goldman Sachs With Less Legal Risk