January 19, 2008 – 6:35 pm

So the big bankers had a conference about their impending write downs…

Goldman Sachs assured everyone things are not great but their balance sheets are great. Jamie Dimon touts his confidence in Chuck Prince’s absence… Undoubtedly, its a questionable event with questionable statements… Over 6 Billion in writedowns and Jamie Dimon thinks “I think we’re fine..” Incredible, he must be having a great time partying with Jimmy Cayne.

The trouble with the impending writedowns will lay in the hands of auditors and how they scrutinize these instruments. Understandably, Goldman Sachs has real estate declared as a Level 3 asset using the discount cash flow model, but should that be the model? Why shouldn’t Goldman Sachs mark to market their real estate holdings to a real estate ETF or some other real estate index. Commercial real estate holdings within a public firm engaged in trading has a distinct set of risks and advantages unlike real estate holdings insurance and pension companies own. One firm has a short term profits in mind, while insurance companies and pensions plan on holding real estate until their mortgages matures. The possibility of securitization, the long term ownership, and tradeability affects the viability of these instruments differently depending on the ownership structure.

As the quarters come and go, please ask your investor relations department, what models are you using for level 3 assets. I fear the models and differentiation may prove to be too difficult for the audit firms. I also fear they will be bullied into classifying level 3 assets as level 2 assets because their long term business depends on this continued deception.

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