Goldman’s commercial junk pile

August 5, 2009

Goldman Sachs, as I’ve pointed out before, has done a good job reducing its exposure to commerical mortgages by selling off potentially troublesome loans well ahead of the curve.

But it appears what’s left in Goldman’s commercial mortgage bin is all but untradeable, if not potenially toxic.

The Wall Street firm has pushed just about all of its remaining commercial real estate loans and securities backed by those kind of loans into its Level 3 trash pile. For Wall Street firms, Level 3 is a category of assets that difficult if not impossible to value because there is not ready market for them.

In its latest quarterly report, Goldman reports having $6.84 billion in commerical real estate related assets in Level 3. The remaining $1.17 billion in such loans and securities is listed as being Level 2–a category were outside market prices are more obtainable.

In many ways it shouldn’t come as a surprise that what’s left of Goldman’s commercial real estate loan book would be classified as impossible to value and trade. In the firm’s second-quarter earnings conference call, CFO David Viniar said the firm had marked down its commercial loan portfolio to about half of its par value. That’s an indication the firm expects many of those commercial loans to default.

Overall, Goldman reports having $54 billion in Level 3 assets, or 8.7% of its $614 billion in financial assets. Commercial mortgage and related securites account for about 13% of all Level 3 assets. Only two other kinds of assets–convertible bonds and bridge loans–constitute a bigger portion of Goldman’s trash.

So if the commercial real estate market totally falls into the toliet as many predict, keep a close eye on what’s left of Goldman’s commercial real estate book.

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[...] like how Madoff made up his returns by printing fake trade receipts, GS gets to decide the value of $54B of 8.7% of its total assets. Also, just as Madoff’s investors had no way of learning more about his strategy, GS is [...]