Goldman shows a little leg

February 2, 2011

By Rob Cox

When Goldman Sachs released the findings of its Business Standards Committee and some new numbers on Jan. 11, investors focused on the bank’s heightened disclosure of its proprietary trading activity and profit. But regulators entrusted with a bigger responsibility — the safety of the financial system — are more excited about what Goldman has yet to reveal.

In its new disclosure, and again in its fourth-quarter earnings report on Jan. 19, Goldman added a fourth business segment, known as “Investing & Lending,” to its income statement, enabling analysts to see a bit more of the firm’s money-making machine. Yet Goldman’s business standards manifesto also promised expanded balance sheet disclosures. These are expected this month in the annual report.

It’s in the balance sheet details that the devils of the financial system lurk. That’s what has senior officials at the Federal Reserve on the edge of their seats. Under last year’s Dodd-Frank financial reforms, they are charged with protecting against further crises. By contrast, some of Goldman’s Wall Street rivals are apprehensive.

Goldman promised to modify and simplify the reporting of items like excess liquidity. More importantly, the firm said it would “enhance disclosure with respect to liquidity stress tests by including details on both scenario assumptions and modeling parameters” for the assets on its $911 billion balance sheet.

It’s not entirely clear how far this means Goldman will go. It surely isn’t as big a step as voluntarily reporting a version of the industry-wide stress tests conducted by the Fed in 2009, which helped draw a line under the darkest phase of the crisis. But it does sound a lot closer than Goldman or its peers have gone before.

Goldman is characteristically starting from a position of strength. With its ratio of Tier 1 capital to assets at a robust 16 percent, the extra bit of leg it plans to show will probably look more appealing than anyone else’s. That means the new information could help Goldman’s shares take on an even brighter sheen relative to peers, as well as force them to consider similar extra disclosure. For regulators who believe in transparency, that would be a virtuous outcome.

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