Oct. 16 (Bloomberg) -- Every quarter, the same question bedevils Wall Street: What’s in the secret sauce that Goldman Sachs Group Inc. uses to make so much money?

Yesterday was no different as Goldman reported third- quarter net income of $3.19 billion and more eye-popping bonus figures. Purported reasons for Goldman’s success range from the conspiratorial -- its supposed grip on government and ability to trade ahead of clients -- to the admirable, its top talent and a culture reminiscent of the old Wall Street partnerships.

Usually missing from any list is an issue cited by Chief Executive Officer Lloyd Blankfein in an opinion piece this week: Goldman’s reliance on market discipline and its embrace of market-value accounting.

This approach creates what Blankfein called an “essential early warning system” that allows the firm to better manage risk -- and ultimately rack up outsized profits.

Clearly there is more to it than that. Goldman has benefited tremendously from a winnowing of the competition with the fall of Lehman Brothers Holdings Inc. and others, along with a low-interest-rate environment that has helped it reap huge trading gains. And along with other big banks, it got a government lifeline that prevented a run on it and the financial system.

Yet Goldman’s emphasis on market discipline played a big, and often unacknowledged, part in helping the firm sidestep the worst of the credit crunch.

Odd Man Out

Blankfein’s defense of market-value accounting is also notable because he and Goldman increasingly look like the odd man out on this issue.

It is taken as a matter of faith among many bankers, regulators and legislators that the use of market-value accounting that relied on daily changes in asset prices exacerbated the financial crisis. They now are engaged in a campaign to roll back the use of market values wherever possible, or at least block moves to expand its use.

“I see it differently,” Blankfein wrote in the Financial Times. “If institutions had been required to recognize their exposures promptly and value them appropriately, they would have been likely to curtail the worst risks.”

“Instead, positions were not monitored, so changes in value were often ignored until losses grew to a point when solvency became an issue.”

Blankfein also backed a project at the Financial Accounting Standards Board that may call on banks to eventually use market prices for things like loans.

Keeping Mum

If anything, you would expect Blankfein to keep mum on this issue since he and Goldman are trying to deflect criticism of big bonuses that come on the back of the taxpayer bailout. The fact that Goldman has set aside in 2009 almost $17 billion for bonuses and compensation fuels such resentment.

Yet Blankfein publicly took a stance that in many ways puts him at odds with folks like the American Bankers Association, Federal Deposit Insurance Corp. Chairman Sheila Bair, Federal Reserve Governor Elizabeth Duke and the European Union.

In doing so, he showed Goldman isn’t willing to back down from a long-held conviction. For that he deserves credit. Then again, he and Goldman have already profited from their stance.

Goldman’s commitment to market discipline helped it move more quickly than others when the crisis began to unfold. It also is part of what pushes Goldman to protect, or hedge, its exposure to various markets and firms.

That has led to charges that Goldman only survived the crisis because the government bailed out those on the other side of its trades, notably American International Group Inc.

Going Down

There’s an element of truth to that -- every big financial firm may have gone down if AIG had failed just days after Lehman. Yet this ignores that Goldman rightly tried to protect itself in the first place.

Goldman’s reliance on market values caused it to hit up AIG for collateral well before the firm had to be bailed out. That isn’t nefarious; it’s what Goldman should have been doing.

AIG, on the other hand, stuck for too long to a mistaken belief that its own models, not market prices, were correct. If it had faced up sooner to the trouble the market was forecasting, the company might have tried to address its difficulties before it was too late.

That wouldn’t have necessarily prevented its collapse, but the financial hole facing the government may have been smaller.

Of course, just saying you use market prices isn’t enough. You have to do it.

Telling Difference

That is where Lehman and Goldman differed. While both said they adjusted their books to market values, Lehman seems to have carried hard-hit real-estate holdings at vastly inflated prices. That helped bring about its demise.

That’s not to say Blankfein always walks his talk. While his article lauded transparency, Goldman continues to give investors just a bare-bones earnings release, omitting a full balance sheet or the detailed financial data banks usually provide.

If JPMorgan Chase & Co. can give that kind of information, Goldman should be able to as well.

Then there was yesterday’s comment by Goldman Chief Financial Officer David Viniar that the firm doesn’t have a too- big-to-fail guarantee from the government. That is ludicrous. Goldman is first among equals in the too-big-to-fail club.

That said, Blankfein and Goldman, so widely reviled, merit some praise for preaching what they practice when it comes to market values.

(David Reilly is a Bloomberg News columnist. The opinions expressed are his own.)

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To contact the writer of this column: David Reilly at dreilly14@bloomberg.net

Last Updated: October 15, 2009 21:00 EDT