In a shocking development this week, investment bank Goldman Sachs has revealed additional losses of $5 billion in investments it suffered during the subprime crisis. The latest revelation will certainly turn the spotlight on over the debate surrounding companies’ financial control and disclosure norms.
The bank had suffered a loss of $13.5 billion of its own fund in 2008 in its ‘investing and lending’ businesses. The disclosure is seen as an effort by the bank to silence its critics over its internal reforms and that it puts its own interests ahead of its clients.
However, during the height of the financial crisis – Goldman’s executives’ comments to analysts and investors along with regulatory filings show that the bank had understated their losses from debt and equity investing at $8.5 billion.
Since Goldman did not give a complete break-down of the investments of its own funds along with the resultant profits and losses – which unsurprisingly is followed by many of its competitors as well; hence the latest disclosures are unlikely to change its overall earning figure in 2008. Thankfully, Goldman decided to break away with its past practices this week.
This also supports Goldman’s previous claims that it did not profit from the financial crisis.
However, the development will certainly spark a debate about reliability of disclosures made by companies and financial institutions. Lynn Turner – a former chief accountant with the US Securities and Exchanges Commission (SEC), urged the regulator to look into Goldman’s past financial statements while praising the bank for the delayed disclosure.
“This sets a good example that others should follow,” said Mr. Turner. “But it does raise the question as to why the management did not provide this view back then and whether the SEC are going to do something about this discrepancy”.
Stating that SEC rules require the management to disclose the status of investments, as seen through “the eyes of management”, he ridiculed “For such a discrepancy to have arisen, management must have lost an eye”.
The disclosure will certainly set the cat among the pigeons and many of Goldman’s rivals will be forced to disclose details of their so-called “proprietary activities”, lifting the much needed veil of secrecy surrounding the banking sector’s trading activities. It will also surely strengthen the case for the new US legislation – the ‘Volcker Rule’ – which seeks to curb banks’ independence and regulate them rigorously.