Goldman Held Bigger Share of Level 3 Assets Than Citi, Merrill

Goldman Sachs Group Inc. held a bigger proportion of hard-to-value assets at the end of the third quarter than Citigroup Inc. and Merrill Lynch & Co., two of the firms hardest hit by subprime mortgage losses.

Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an ``extraordinary'' drop in its subprime holdings, investors have remained skeptical, pushing its shares down 15 percent this month in New York Stock Exchange trading.

``It's hard to believe Goldman is perfect,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management and sold his Goldman, Merrill and Morgan Stanley shares in the past 12 months. ``Their losses might be smaller than others, but that doesn't mean they don't have a problem.''

Goldman posted a 79 percent increase in third-quarter profit, the biggest on Wall Street, even after shaving $1.48 billion from the value of high-yield loans. Morgan Stanley, Lehman Brothers Holdings Inc. and Bear Stearns Cos. reported declines, and Merrill Lynch & Co. said $8.4 billion of writedowns led to a $2.2 billion loss, the biggest in the firm's history. All the companies are based in New York.

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``Just because they're in Level 3 doesn't mean we're not pricing them correctly,'' Goldman Chief Accounting Officer Sarah Smith said in a Nov. 9 interview. ``We mark our positions to the point where we could exit at that moment.''

The 33 percent increase in Level 3 assets in the third quarter was mostly due to the freeze in the leveraged buyout market, which left firms including Goldman stuck with loans, Smith said. Goldman wrote down the value of those commitments when the debt was moved to Level 3. As the buyout market recovers, the loans may be upgraded to Level 2, she said.

Goldman's Level 3 holdings totaled about $72 billion at the end of August. Stripping out stakes owned by others, Goldman's ``exposure'' was $50.9 billion, or 4.9 percent of the firm's total assets. A ``substantial percentage'' are private equity and real estate investments, said Goldman spokesman Lucas van Praag.
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