ItsJustMe

How Much Are Goldman's Level 3 Assets Worth?

miniMe, if GS goes bankrupt, then you are correct that we the people will end up eating some losses (although if that happens, we had ALL better demand that Congress go after all of the excessive bonuses that were paid out by the executives profiting from these risky loans. If not, a class action lawsuit would do the trick but then the lawyers would profit by hundreds of millions).

However, the Fed IS taking steps to prevent GS and the other banks it's lending to from going under. drmalaka is correct that the Fed is buying time for these banks to write down the loans gradually against future profits and also to raise new capital.

That is why I have long-term puts against them. The Fed will keep them from collapsing which could send the financial markets into a tailspin, but the Fed CANNOT keep their stock from gradually dropping to a price more reflective of their true market value in a changed world...

How Much Are Goldman's Level 3 Assets Worth?

Okay, I'll fall somewhere in the middle on this. The comparison of Goldman's level 3 assets to your home value is not a good example. There is ALWAYS a ready market for homes so if you can't sell your home, it means the market simply won't pay what you're asking and an immediate writedown is needed.

There is not a ready market for mortgages right now because none of the banks trust each other's valuation. In other words, Goldman's mortgage valuations could be just fine, but the market is "frozen" from mistrust. That doesn't happen in real estate markets.

Goldman also is not "giving" level 3 assets to the Fed. The Fed is allowing financial firms to use them as collateral in order to help "unfreeze" the market and rebuild trust. The level 3 assets are still on Goldman's books and any ultimate writedown will have to be absorbed by Goldman's capital.

In the interest of full disclosure, I have long-term puts on Goldman and the other investment banks, but it is not a big part of my portfolio. The Fed is buying time for the banks to raise capital and get their affairs in order so I think you'll see a gradual deterioration in their stock prices as they slowly come to grips with the real value of their level 3 assets and with the reality that they'll no longer be allowed to operate at a very profitable - but exceedingly risky - 30 and 40 to 1 leverage ratio going forward.

Combine those 2 factors with a recession their risky loan behavior has helped to create and you have a recipe for future stock declines...

Accounting Antics Lift I-Bank Earnings - Barron's

The quarterly financials are not audited so therefore you don't have pesky auditors asking uncomfortable questions about the likelihood of your mark-to-market assumptions. I suspect the analysts didn't anticipate the brazenness of the IB's since they were desperate to show positive earnings in the wake of the Bear Stearns bankruptcy.

Also, the likelihood of the IB's staying solvent (at least now with help from the Fed) is much greater than all the underwater homeowners eventually paying everything off. As a CPA and former auditor, I can tell you that writing down your own debt would not pass the smell test with me unless it came with a going-concern opinion.

I suspect their own CPAs will tell them the same thing come year-end unless they want to go the way of Arthur Andersen...

3 Reasons To Be Bullish on the Investment Banks

Before his investment in Wells Fargo, Warren Buffet always advised investors to stay away from banks because it was too easy for them to hide their true liabilities. As a CPA, I can tell you that is especially true of the non-regulated investment banks.

I would hope that people finding out that 80 billion dollars in "pretend" book value didn't actually exist last weekend would have taught some lessons, but apparently not. When the Chase auditors spent the weekend looking over BSC's books, they found more scary liabilities than assets.

Not only did the other 2 institutions looking at their books that weekend not bid on BSC, but Chase finally had to be bribed by the Fed to buy the firm for a fraction of the worth of their valid REAL ESTATE assets.

Quite frankly, I suspect that all the investment banks and quite a few commercial banks are just as insolvent. That doesn't mean they'll all go under however. If the Fed continues to keep them liquid as they are apparently trying to do, then it is possible that over the next several years, the large investment banks (those that are too big to fail) can slowly deleverage and get solvent again.

However, Chase established their true market value last weekend. When their stock prices begin to get closer to that level - and I suspect they will over the coming year as reality sinks in - I'll consider catching them on the bounce since they'll be under new banking regulations by that point...

Goldman Sachs: Earnings Bad News for Doomsayers

Have to agree with jayzee on this. As a CPA, I can tell you that financials are very easily manipulated when you have "mark-to-market" on your assets and no one really knows what "market" is.

That is the primary reason that Bernanke was desperate to keep BSC from going belly-up. If BSC sold their assets in a bankruptcy auction, the resulting markdowns would have had devastating consequences for the "mark-to-market" values of all the other banks.

Take it from a CPA - the income from continuing operations of the investment banks is insignificant compared to the potential losses that are sitting on their balance sheets and they don't know - or even want to know - what that amount is.

The only thing they do know is that it's growing worse as the country falls into recession and real estate values continue to decline...