Goldman Sachs (GS) reported yesterday (4/13) a profit of $1.8 billion in the first quarter. Considering the state of our capital markets – these good numbers came in just at the right time in terms of lifting the overall market’s moral. However, the question is: are these numbers luck, coincidence or part of a smart strategy applied by Goldman to its operations which, as Q1 results suggest, significantly outmaneuvered the financial markets? Well, you’ll be surprised to know, none of the above. It appears they tricked the books a bit.
The Q1 results, says top economist and Nobel Laureate Paul Krugman citing Flloyd Norris via Barry Ritholtz, had a lot to do with a magic trick. Goldie made December disappear! It’s an “orphan” month!.”
Goldman Sachs took a significant amount of write-offs in the month of December – more than the reported profit. As Floyd Norris points out in his blog, most of the AIG effect was in December. “For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.”
How did it do that? One way was to hide a lot of losses in not-so-plain sight.
Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.
The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.
Would the firm have had a profit if it had stuck to its old calendar, and had to include December and exclude March?
emphasis added
A question begging now an answer is: is this a magic trick or plain accounting fraud?
