Goldman should disclose more

July 10, 2009

Goldman Sachs doesn’t report second-quarter earnings until Tuesday, but some Wall Street analysts aren’t waiting to sing the giant investment firm’s praises.

What’s impressing the analysts the most is Goldman’s ability to again print money like no one else — especially when it comes to trading stocks, bonds, commodities and currencies. Bank of America analyst Guy Moszkowski sounded almost giddy the other day in predicting blowout trading revenues for Goldman, describing the firm as “arguably the most well-respected investment bank.” Moszkowski now expects net trading revenues to top the record $25 billion raked in by Goldman in 2007.

It makes one fear that analysts will again start prefacing their questions during the firm’s scheduled conference call with comments like “Great quarter, guys.”

Please don’t.

Before everyone starts crowning Goldman the king of trading, is it too much to ask that analysts ask more probing questions of the firm’s executives? Investors deserve more disclosure about where all those dollars are coming from.

A question or two about how much of the trading revenues was related to client trades versus proprietary trades for the firm’s own account would be a good place to start. Don’t let Goldman executives get away with the firm’s standard answer about how most of its risk-taking is for clients, without ever quantifying that risk.

Now given Goldman’s general animus to the notion of fuller disclosure, I wouldn’t expect its executives to say much if pressed by analysts. So it probably will require the power of the Federal Reserve — Goldman’s new overseer — to lean on the investment bank to force it to provide more detail about the firm’s trading prowess.

To be clear, there’s no suggestion here that Goldman should turn over the recipe for its secret sauce — the fancy computer code — that drives its trading operation. We’ve all seen how hard Goldman fights to protect its trading secrets, with the July 3 arrest of Sergey Aleynikov, the former Goldman programmer accused of stealing some of the firm’s proprietary trading code.

But it’s not too much to ask that Goldman, and other Wall Street banks, be required to provide a detailed breakout of how much trading revenue comes specifically from stocks, bonds and commodities.

Goldman does separately report trading revenues for equities. But like most banks, it lumps together net revenues from trading from bonds, currency and commodities. With all the fancy computer programs Goldman and other banks have, it can’t be too hard to report separately trading revenues for each of these asset classes.

There may be some logic behind reporting bonds and currencies together because both are interest-rate sensitive assets. But a commodity is more like a stock, and figures for trading of oil, gas, or wheat can and should stand on their own.

Multi-strategy hedge funds often break out for their investors the performance statistics for different investment styles. Big publicly traded Wall Street banks that trade like hedge funds should have to do the same for their shareholders. The Fed could require banks to provide an assessment of which trading strategy was most successful in a given quarter and break out a dollar figure for each strategy’s contribution to net revenues.

Sure, the Fed could even allow room for a miscellaneous line item for those super-secret trades Goldman can’t reveal.

But the truth is it’s often easier to get information about a hedge fund’s trading strategies than any of Goldman’s. And that’s crazy — especially since the Obama administration has all but anointed the firm as an institution that’s too big to fail.


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