According to documents released today, the Securities and Exchange Commission staff pressured Goldman Sachs Group, Inc. (NYSE:GS) to disclose more information about how it values illiquid assets. The fifth largest U.S. bank and SEC staff discussed for five months on how the Wall Street bank treats its illiquid or “Level 3” assets. Level 3 assets are holdings that change hands so infrequently that they don’t have a reliable price. So their values are determined using the bank’s own internal models.
SEC asked the bank to reveal information on cash collateral, a weighted average of Goldman’s “unobservable inputs” and other “qualitative information”. Goldman Sachs Group, Inc. (NYSE:GS) was also required to disclose the effects of the way it accounted for offsetting trades with counterparty netting.
Eventually, Goldman Sachs Group, Inc. (NYSE:GS) revised its reporting to disclose the inputs it uses in valuation models for Level 3 assets – such as loss rates, duration of securities and bond yields – to satisfy the regulator’s requests. The letters about Level 3 assets were exchanged between the bank and the regulator from October last year through February, but were disclosed today. The Securities and Exchange Commission also made public the other correspondence where it requested the bank to provide more information on the way it calculates exposure to risky European countries.
A Goldman Sachs Group, Inc. (NYSE:GS) spokesperson said that illiquid assets don’t necessarily reflect increased risk. He told that private equity investments can’t be marked to market, and other illiquid assets are hedged with inputs from Level 2 securities.
In January this year, regulators encouraged banks to increase liquidity with Level 3 assets that were tough to sell during the 2008 credit crunch. These lowest-rated investment grade corporate bonds, which the regulators have asked banks to accept as liquid assets, had swollen to 7.3 percent during the crisis.
Goldman Sachs Group, Inc. (NYSE:GS) shares were down 1 percent to $151.81 at 4:20 PM EDT in New York trading.