Goldman's accounting still hazy, investors say

Goldman Sachs Group Inc is partially pulling back the curtain on a balance sheet some have criticized as opaque, but the change is unlikely to provide all the answers some investors want.

On Tuesday, the investment bank after a review initiated by Chief Executive Lloyd Blankfein at the company's 2010 annual meeting, released a 63-page report with 39 recommendations from its business committee for improving transparency for investors.

As part of the suggested overhaul, Goldman will expand the number of business units in its earnings releases to four from three, reshuffling where some revenues are recorded and showing which revenues are coming from trades for clients' accounts.

Also, the bank will now use two balance sheets to report the company's condition, one that is simplified and does not conform to GAAP, or generally accepted accounting principles, and a traditional balance sheet.

Analysts said more disclosure is better, but it may still be difficult to determine exactly how the company makes money.

"Investors will see how the secret sauce is made, but they won't be shown all the secret ingredients," said Matt McCormick, Cincinnati-based portfolio manager at Bahl Gaynor Investment Counsel.

Analysts said it might be helpful for Goldman to provide more specific details on its investing strategy or exposures, such as whether the bank bought large chunks of energy stocks or bet against mortgage-backed securities.

Sean Egan, managing director at Egan-Jones Ratings Co, based in Haverford, Pennsylvania, said he expects that in the long-term, banks may be required to disclose general exposures and large trading positions in a more real-time fashion in some central repository to give investors more insight into what market bets traders are making.

"It doesn't have to be the specific securities but if you have a better idea, for example, of what Goldman's net exposure is to the regional banks, that would be very helpful," Egan said."

Clearer picture?

Goldman's changes, analysts said, are indicative of a push by investors to get companies to disclose more details on how they earn their quarterly profits.

"For years, Goldman has been criticized for being one big secretive hedge fund, where no one understood how they make their money," said Peter Andersen, a senior equity portfolio manager at Congress Asset Management.

Initially, experts said, Goldman's changes will allow investors to more easily track which business segments are generating profits for the broader company, and measure whether one quarter's results are an aberration.

"What investors are trying to do is measure how sustainable, how ongoing these revenue streams are," said Charles Mulford, accounting professor at the Georgia Institute of Technology in Atlanta.

Under the new reporting structure, Goldman will split its three current segments of investment banking, trading and principal investments and asset management/securities services into four new segments: investment banking, institutional client services, investing and lending, and investment management.

The company will also provide a non-GAAP balance sheet for some of its business units, similar to other large rivals like JPMorgan Chase & Co that break out performance of smaller business units.

"Most major investment banks offer some sort of breakdown. JPMorgan splits off its consumer and commercial balance sheets... It shows your investor base where you're making your money," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott in Philadelphia.