SEC looks for bad numbers at Wall Street banks

The SEC is checking the books of major investment banks including Goldman Sachs (NYSE: GS) and Merrill Lynch (NYSE: MER). The agency is concerned that the companies may be concealing losses from the sharp drop in mortgage related securities.

According to The Wall Street Journal: "Some analysts and investors have raised questions about whether firms have experienced as-yet-unreported losses."

The new practice raises several critical questions. If the SEC finds irregularities in numbers at the big financial houses, who will disclose them? What if the accounting methods used by a company like Goldman differ from the valuation models that the government wants to apply?

Another issue is a legal one. If a firm has not reported large loses in part of its portfolio is it due to a planned "cover up" which would expose the firm to government charges? Or is it because, as The Wall Street Journal reports "it is hard to establish an accurate price for" for some thinly traded mortgage securities?

In other words, what the SEC wants reported about a large investment bank's financial position may differ sharply from the firm's view.