Goldman's Level 3 holdings questioned

Level 3 assets, which include mortgage-backed securities, make up 6.9% of Goldman's assets under management.
NOV 12, 2007
Goldman Sachs Group Inc. had a successful third quarter, while Merrill Lynch and Citigroup languished, but its profits may have come from questionable accounting maneuvers, Bloomberg said. Level 3 assets, which include mortgage-backed securities, made up 6.9% of the New York-based firm’s total $1.05 trillion in assets under management. The problem with Level 3 assets is that firms have to use in-house models to determine their value, rather than compare them to other similar assets in the market. As of the end of August, Goldman Sachs had $72 billion in Level 3 holdings, Bloomberg said. Investors have become skeptical of these massive holdings, having seen the losses at other Wall Street firms and are even more wary because of their valuation, according to Bloomberg. But Goldman’s chief accounting officer Sarah Smith told Bloomberg that their valuations were accurate. “Just because they’re in Level 3 doesn’t mean we’re not pricing them correctly,” she said. Goldman Sachs’ third-quarter numbers looked strong on the surface, as the firm saw a 79% gain in profits: Strong performance in its investment banking and trading departments buffered a $1.48 billion dent from credit losses. Citigroup and Merrill have already seen the fallout from their Level 3 assets, as both New York-based firms took major write-downs during the third quarter. Citigroup said that 5.7% of its assets were Level 3, while Merrill said that 2.5% came from this group, Bloomberg reported. All the firms have adopted a Financial Accounting Standards Board rule, known as FAS 157, which requires public companies to disclose a breakdown of their asset valuations, said Bloomberg.

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