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Wednesday, April 16, 2008

Something To Think About: Goldman Sachs, Level 3

No time.
Short post.

Just something to think about…

“Consequently, in their view, there is no true market; consequently the assets are Level 3. It is notable for example that Goldman Sachs' Level 3 assets increased in the last quarter to $82.3 billion from $54.7 billion. Since it seems most unlikely that Goldman, a smart operator if ever there was one, has been deliberately loading up on $26.6 billion worth of illiquid rubbish, the change must result largely from strategic reclassification from Level 2 to Level 3. Indeed, Goldman's Level 3 asset-backed securities doubled during the quarter to $25 billion, presumably for precisely the reason that Goldman found unattractive the market prices prevailing for those securities. At $82.3 billion, Goldman Sachs Level 3 assets are more than twice its capital. This is not therefore a peripheral problem, which can be allowed to remain hidden within the arcana of accounting conferences. The reality is that, as was demonstrated in the true recessions of 1973-74 and 1980-82 but not in the mere dips of 1990-92 and 2001-02, the value of highly illiquid Level 3 assets taken on at the peak of a bull market is pretty well a big fat zero.”

Read the full article here.


scott said...

ive been reading about this 'strategic' reclassification of level 3 assets on some other blogs. it seems to me that by moving assets to a different class requiring different valuation methods (FAS 157) the bank is speculating on level 2 asset valuations. its almost as if the banks have been granted an option on these assets they are apparently allowed to reclassify. Ben Graham would probably argue that reclassifying assets in this manner doesn't really matter.

Beach Bums said...

i heard that the assets being reclassified as level 3 are simply CDOs and CDSs that are worthless. Maybe I'm totally wrong.

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This cannot have effect as a matter of fact, that is what I suppose.