The way Goldman Sachs accounts for stock awards to employees wiped out about a billion in book value last quarter. Ironically, this loss came because Goldman was delivering stock to employees that was substantially cheaper than when it was originally awarded.
The fact that delivering less costly stock can drain book value is an example of how complicated book keeping at investment banks can be. Often what looks like a bad thing for a bank, turns out to be a boost to the books. While what looks like a good thing can sometimes be a sap book value.
One more familiar example of this is the way banks can actually reduce their liabilities when their bond investors lose confidence in the bank. The banks account for the cost of their loans based on how much they would have to spend to buy back the loans on the market, so when investors lose confidence and send bond prices lower, the banks write-down the cost of their own debt. So a loss of confidence adds to the bottom line by reducing the liabilities.
In the first quarter of this year, Goldman lost book value because of the way it accounts for the tax deduction it gets for awarding stocks to employees. It accounts for the cost of those awards and the tax write off at the time it makes the awards. When the stock price declined, those awards were less costly because they were made with cheaper stocks. This, in turn, reduces the value of the tax write-off. In the last quarter, the decline in Goldman’s share reduced the value of the tax write-off for the stock awards by about $1 billion.