Wednesday, September 17, 2008

More on Goldman's lack of transparency

Don't say the emperor has no clothes!

Goldman's $845 million net profit looked low quality. It benefited from a sharply lower tax rate -- 12% versus 26% in the second quarter -- and only limited losses on its mortgage holdings. A $581 million fall within principal investment revenue showed that even Goldman's traders are mortal.

And there is an extra reason to be wary of Goldman: Its disclosures lack numbers that other brokers supply, especially on asset valuations, which investors are watching like hawks.

In its earnings release, Goldman didn't disclose write-downs before hedging -- important when trying to gauge what future marks could be, because hedges don't always work perfectly.

Limited disclosure becomes especially important when a bank's write-downs look small. In the third quarter, Goldman took roughly $325 million of write-downs, after hedging, on commercial mortgages. That is 2% of the $16.6 billion the bank had on its books at the end of the second quarter.

Goldman's chief financial officer, David Viniar, said the commercial mortgage line benefited from successful hedging. That means the underlying mark could be considerably larger than 2%.

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