Bloomberg News

Goldman, Morgan Stanley Said to Consider Shift From Fair Value

November 13, 2011

Nov. 11 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley are considering whether to abandon fair-value accounting for some loan promises after losses this year, according to two people familiar with the discussions.

The change to accounting at original cost would only affect some investment-grade commitments, said the people, who spoke on condition of anonymity because decisions haven’t been made. Morgan Stanley had $55.1 billion of investment-grade commitments as of Sept. 30, while Goldman Sachs had about $51.6 billion.

A move from so-called mark-to-market, or fair-value, accounting would be a reversal for the investment banks, particularly Goldman Sachs, which has lauded the approach for its ability to assist in risk management. Fair-value accounting often requires firms to book losses on the commitments, even if they aren’t tapped by the borrowers, while commercial bank competitors avoid mark-to-market declines by holding the commitments at historical cost.

“This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions,” Goldman Sachs Chief Executive Officer Lloyd Blankfein wrote in an op-ed in the Financial Times in February 2009. “If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures.’

Morgan Stanley had about $400 million of losses in the third quarter from corporate lending, the majority of which is unfunded commitments. Goldman Sachs had $659 million of losses in the first nine months of this year related to credit spreads on lending commitments and loans, which are “substantially all” floating-rate, according to its quarterly filing this month.

Commercial Banks

If the banks move forward with the change, they would still carry non-investment grade lending commitments and all funded loans at fair value, the people said. The move would bring the New York-based firms closer in line to commercial banks such as JPMorgan Chase & Co. and Citigroup Inc., both based in New York. The Wall Street Journal reported on the discussions yesterday.

Commercial banks earlier this year helped fight off a proposal from the Financial Accounting Standards Board that sought to make them mark loans on their books to market. The panel sets U.S. accounting standards.

Goldman Sachs told Norwalk, Connecticut-based FASB during the comment period for that proposal that banks hide losses on loans used to generate investment-banking fees and should be required to report the loans at fair value.

“Those commitments are done purely because clients demand them,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in a phone interview. “The corporate treasurer says, ‘If I’m going to give you my underwriting, you have to be in my revolver.’”

Morgan Stanley aims to increase lending as it gains more deposits through buying Citigroup’s remaining stake in the Morgan Stanley Smith Barney brokerage, which had $109 billion in deposits as of Sept. 30.

--Editors: William Ahearn, Peter Eichenbaum

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net


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