The number of assets marked to “level-three” has soared at Goldman - up 39 per cent at $96.4bn at the end of February from $69.2bn in November.
Details here, in Goldman’s 10-Q, filed with the SEC on Wednesday. Two tables in particular make for interesting comparison - one on page 20, the other on page 22: a breakdown by asset class of fair value accounting “levels”.
Although Goldman has said that the majority of its level-three increase is in derivatives contracts (true - around $10bn extra now at level three), there’s also a significant number of mortgage backed securities (MBS) now falling into the “illiquid” category.
In Nov 2006, $38bn of MBS and ABS were marked at level two and $16bn worth were marked at level three. By February 2008, however, and only around $27bn were still held at level two, compared to $25bn now at level three. At around a $9bn jump, that’s not far short of the headline “derivatives contract” increase at level three flagged by Bloomberg.
All said, there’s not necessarily anything spooky about level-three accounting. It’s more a reflection of the market’s liquidity (and therefore valuation) crisis than it is of Goldman guilt. Marking MBS at level three isn’t a dodge either, since it typically requires some kind of model-based valuation for which the bearish ABX indices are typically used. Not an ideal metric by a long shot, and certainly not one any bank would willfully choose to finesse their valuations.
Far more curious than all this level-three smoke, to our minds at least, is this:
What we wonder, caused that sharp spike mid-January?
Related links
Goldman’s illiquid assets increase - WSJ
VaR Q1 08 - Alea
