Less can be more: Matthew Goldstein

-- Matthew Goldstein is a Reuters columnist. The views expressed are his own --

By Matthew Goldstein

NEW YORK (Reuters) - It's good news when a bank reports a decline in the percentage of problem assets on its balance sheet.

At Goldman Sachs (GS.N), it could even be better news down the line.

The bank's tough-to-value Level 3 assets at the end of the second quarter totaled $54.5 billion, down from $66.2 billion in November 2008 -- the end of the firm's most recent fiscal year.

Better yet, Level 3 assets in June represented 6.1% of Goldman's total assets, compared to 7.5% of the firm's assets at the end of November. That's a positive trend line, especially for those who worry about Goldman's balance sheet being too exposed to potentially toxic assets.

But on close inspection, it appears much of this decline in Level 3 is due to mounting "unrealized losses" stemming from mark-to-market write downs on some $8 billion in commercial real estate-related assets. And this may not be as bad as it seems.

Ideally, it's better if a bank can rid itself of Level 3 assets either through sales, or through improved pricing discovery that enables a bank to move them into a more transparent classification.

The longer these hard-to-value assets sit on Goldman's balance sheet, the more there's a danger of even greater mark-to-market losses in the future. That's especially true if commercial real estate values continue to plummet, as many predict.

But there is a silver lining in all the unrealized Level 3 losses Goldman has accumulated to date.

Goldman has been more aggressive than most banks in writing down commercial mortgages. It's possible, then, that today's unrealized loss could become tomorrow's unrealized gain, when commercial real estate begins to recover.

Goldman can move faster in writing down the value of its ailing Level 3 assets because it can offset those paper losses with the big profit it's generating on the trading front.

That's the kind of luxury many other banks with Level 3 commercial real estate assets on their balance sheets can't afford to take. And it's one reason why Level 3 assets may remain stubbornly high at other banks, even as they seemingly wither away at Goldman.

(Editing by Martin Langfield)