Goldman Sachs said the value of its Level 3 assets — those determined by “unobservable inputs” — fell 13 percent in its August third quarter, to $67.9 billion from $78.1 billion at the end of May.
These illiquid, hardest-to-value assets were rated as worth $69.2 last November, according to the bank’s latest quarterly filing. Total Level 3 assets accounted for 6 percent of total assets at the end of August, compared with 7 percent in May.
Level 3 assets for which the firm bears economic exposure were valued at $58.3 million at the end of the August quarter, compared with $67.3 million the prior three-month period. Goldman explains that this classification excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
Under fair value, a company values its assets and liabilities based on what they would fetch today, rather than what they originally cost.
Fair value’s tipping point lies in the innocuously titled Fair Value Measurements, a standard issued in September 2006 by the Financial Accounting Standards Board. Better known as FAS 157 and effective for fiscal years beginning after November 15, 2007, the standard spells out how companies should determine the valuations of the assets and liabilities they mark to market.
The ultimate intent of fair value is to give investors better visibility into how companies value their assets, and few deny that it achieves that aim.
The initial challenge in meeting the requirements of FAS 157 entails sorting each fair-value estimate into one of three levels, or “buckets.”
In Level1, the value of an asset or liability stems from a quoted price in an active market; in Level 2, it is based on “observable market data” other than a quoted market price; and in Level 3, fair value can be determined only through “unobservable inputs” and prices that could be based on internal models or estimates. It’s that third bucket that critics say has some serious holes.