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Last month, Goldman Sachs (GS) reported amazing earnings. Maybe too amazing:

Much of the focus is on Goldman's trading revenue, which totaled a spectacular $8.23 billion, up 70% on the year-earlier quarter. Part of that increase was due to a bold bet that made money if mortgage-backed bonds and financial instruments tied to mortgage values fell in price. Of course, because of the credit crunch, they did plunge in value, netting gains for Goldman that the banks said "more than offset" the losses it saw on the mortgages it was holding.

It's impossible to trace exactly how that bet against mortgages was made, but the financial filing does describe some very telling details about what made up the enormous $8.23 billion of trading revenue.

The interesting data comes from disclosures in the filing about 'level 3' assets and liabilities, which are securities and derivatives that can't be valued according to observable prices in liquid public markets. Because of their illiquidity, Goldman has to attach values to them chiefly according to in-house models and estimates.

Posted by edelfenbein at October 16, 2007 2:19 PM