Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarterly period ended March 27, 2009 | ||
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the transition period from to | ||
Commission File Number:
001-14965
The Goldman Sachs Group,
Inc.
(Exact name of registrant as
specified in its charter)
| Delaware | 13-4019460 | |
|
(State or other jurisdiction
of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 85 Broad Street, New York, NY | 10004 | |
| (Address of principal executive offices) | (Zip Code) |
(212) 902-1000
(Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. x Yes o No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). o Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer x Accelerated
filer o
Non-accelerated
filer o (Do
not check if a smaller reporting company) Smaller
reporting
company o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes x No
APPLICABLE ONLY
TO CORPORATE ISSUERS
As of
April 24, 2009, there were 503,420,969 shares of the
registrant’s common stock outstanding.
THE GOLDMAN SACHS
GROUP, INC.
QUARTERLY REPORT ON
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 27, 2009
INDEX
|
Page |
||||||||
|
Form 10-Q
Item Number:
|
No.
|
|||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| 77 | ||||||||
| 78 | ||||||||
| 81 | ||||||||
| 143 | ||||||||
| 143 | ||||||||
| 144 | ||||||||
| 146 | ||||||||
| 147 | ||||||||
| 148 | ||||||||
| EX-12.1: STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS | ||||||||
| EX-15.1: LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION | ||||||||
| EX-31.1: RULE 13A-14(A) CERTIFICATIONS | ||||||||
| EX-32.1: SECTION 1350 CERTIFICATIONS | ||||||||
1
Table of Contents
PART I:
FINANCIAL INFORMATION
| Item 1: | Financial Statements (Unaudited) |
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions, except per share amounts) | ||||||||||||
|
Revenues
|
||||||||||||
|
Investment banking
|
$ | 823 | $ | 1,166 | $ | 135 | ||||||
|
Trading and principal investments
|
5,706 | 4,877 | (964 | ) | ||||||||
|
Asset management and securities services
|
989 | 1,341 | 327 | |||||||||
|
Total
non-interest
revenues
|
7,518 | 7,384 | (502 | ) | ||||||||
|
Interest income
|
4,362 | 11,245 | 1,687 | |||||||||
|
Interest expense
|
2,455 | 10,294 | 1,002 | |||||||||
|
Net interest income
|
1,907 | 951 | 685 | |||||||||
|
Net revenues, including net interest income
|
9,425 | 8,335 | 183 | |||||||||
|
Operating expenses
|
||||||||||||
|
Compensation and benefits
|
4,712 | 4,001 | 744 | |||||||||
|
Brokerage, clearing, exchange and distribution fees
|
536 | 790 | 165 | |||||||||
|
Market development
|
68 | 144 | 16 | |||||||||
|
Communications and technology
|
173 | 187 | 62 | |||||||||
|
Depreciation and amortization
|
511 | 170 | 72 | |||||||||
|
Amortization of identifiable intangible assets
|
38 | 84 | 39 | |||||||||
|
Occupancy
|
241 | 236 | 82 | |||||||||
|
Professional fees
|
135 | 178 | 58 | |||||||||
|
Other expenses
|
382 | 402 | 203 | |||||||||
|
Total
non-compensation
expenses
|
2,084 | 2,191 | 697 | |||||||||
|
Total operating expenses
|
6,796 | 6,192 | 1,441 | |||||||||
|
Pre-tax
earnings/(loss)
|
2,629 | 2,143 | (1,258 | ) | ||||||||
|
Provision/(benefit) for taxes
|
815 | 632 | (478 | ) | ||||||||
|
Net earnings/(loss)
|
1,814 | 1,511 | (780 | ) | ||||||||
|
Preferred stock dividends
|
155 | 44 | 248 | |||||||||
|
Net earnings/(loss) applicable to common shareholders
|
$ | 1,659 | $ | 1,467 | $ | (1,028 | ) | |||||
|
Earnings/(loss) per common share
|
||||||||||||
|
Basic
|
$ | 3.48 | $ | 3.39 | $ | (2.15 | ) | |||||
|
Diluted
|
3.39 | 3.23 | (2.15 | ) | ||||||||
|
Dividends declared per common share
|
$ | — | $ | 0.35 | $ | 0.47 | (1) | |||||
|
Average common shares outstanding
|
||||||||||||
|
Basic
|
477.4 | 432.8 | 485.5 | |||||||||
|
Diluted
|
489.2 | 453.5 | 485.5 | |||||||||
| (1) | Rounded to the nearest penny. Exact dividend amount was $0.4666666 per common share and was reflective of a four-month period (December 2008 through March 2009), due to the change in the firm’s fiscal year-end. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
(in millions, except share |
||||||||||||
| and per share amounts) | ||||||||||||
|
Assets
|
||||||||||||
|
Cash and cash equivalents
|
$ | 35,417 | $ | 15,740 | $ | 13,805 | ||||||
|
Cash and securities segregated for regulatory and other purposes
(includes $45,539, $78,830 and $69,549 at fair value as of
March 2009, November 2008 and December 2008,
respectively)
|
69,586 | 106,664 | 112,499 | |||||||||
|
Collateralized agreements:
|
||||||||||||
|
Securities purchased under agreements to resell, at fair value,
and federal funds sold (includes $142,655, $116,671 and $127,032
at fair value as of March 2009, November 2008 and
December 2008, respectively)
|
143,155 | 122,021 | 129,532 | |||||||||
|
Securities borrowed (includes $88,818, $59,810 and $86,057 at
fair value as of March 2009, November 2008 and
December 2008, respectively)
|
228,245 | 180,795 | 203,341 | |||||||||
|
Receivables from brokers, dealers and clearing organizations
|
20,421 | 25,899 | 28,038 | |||||||||
|
Receivables from customers and counterparties (includes $2,036,
$1,598 and $2,474 at fair value as of March 2009,
November 2008 and December 2008, respectively)
|
50,065 | 64,665 | 58,339 | |||||||||
|
Trading assets, at fair value (includes $26,599, $26,313 and
$42,004 pledged as collateral as of March 2009,
November 2008 and December 2008, respectively)
|
349,591 | 338,325 | 534,964 | |||||||||
|
Other assets
|
28,810 | 30,438 | 31,707 | |||||||||
|
Total assets
|
$ | 925,290 | $ | 884,547 | $ | 1,112,225 | ||||||
|
Liabilities and shareholders’ equity
|
||||||||||||
|
Deposits (includes $6,781, $4,224 and $5,792 at fair value as of
March 2009, November 2008 and December 2008,
respectively)
|
$ | 44,504 | $ | 27,643 | $ | 32,130 | ||||||
|
Collateralized financings:
|
||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
133,395 | 62,883 | 260,421 | |||||||||
|
Securities loaned (includes $9,932, $7,872 and $11,276 at fair
value as of March 2009, November 2008 and
December 2008, respectively)
|
18,928 | 17,060 | 21,576 | |||||||||
|
Other secured financings (includes $19,812, $20,249 and $20,172
at fair value as of March 2009, November 2008 and
December 2008, respectively)
|
39,793 | 38,683 | 39,045 | |||||||||
|
Payables to brokers, dealers and clearing organizations
|
14,940 | 8,585 | 14,417 | |||||||||
|
Payables to customers and counterparties
|
205,077 | 245,258 | 231,308 | |||||||||
|
Trading liabilities, at fair value
|
147,221 | 175,972 | 186,031 | |||||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings (includes $19,923, $23,075 and $25,600 at fair value
as of March 2009, November 2008 and
December 2008, respectively)
|
44,596 | 52,658 | 54,093 | |||||||||
|
Unsecured
long-term
borrowings (includes $17,689, $17,446 and $18,146 at fair value
as of March 2009, November 2008 and
December 2008, respectively)
|
188,534 | 168,220 | 185,564 | |||||||||
|
Other liabilities and accrued expenses (includes $1,922, $978
and $1,400 at fair value as of March 2009,
November 2008 and December 2008, respectively)
|
24,749 | 23,216 | 24,586 | |||||||||
|
Total liabilities
|
861,737 | 820,178 | 1,049,171 | |||||||||
|
Commitments, contingencies and guarantees
|
||||||||||||
|
Shareholders’ equity
|
||||||||||||
|
Preferred stock, par value $0.01 per share; aggregate
liquidation preference of $18,100 as of March 2009,
November 2008 and December 2008
|
16,507 | 16,471 | 16,483 | |||||||||
|
Common stock, par value $0.01 per share;
4,000,000,000 shares authorized, 700,596,595, 680,953,836
and 680,986,058 shares issued as of March 2009,
November 2008 and December 2008, respectively, and
462,273,124, 442,537,317 and 442,553,372 shares outstanding
as of March 2009, November 2008 and
December 2008, respectively
|
7 | 7 | 7 | |||||||||
|
Restricted stock units and employee stock options
|
4,761 | 9,284 | 9,463 | |||||||||
|
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, no shares issued and
outstanding
|
— | — | — | |||||||||
|
Additional
paid-in
capital
|
34,429 | 31,071 | 31,070 | |||||||||
|
Retained earnings
|
40,366 | 39,913 | 38,579 | |||||||||
|
Accumulated other comprehensive income/(loss)
|
(357 | ) | (202 | ) | (372 | ) | ||||||
|
Common stock held in treasury, at cost, par value $0.01 per
share; 238,323,471, 238,416,519 and 238,432,686 shares as
of March 2009, November 2008 and December 2008,
respectively
|
(32,160 | ) | (32,175 | ) | (32,176 | ) | ||||||
|
Total shareholders’ equity
|
63,553 | 64,369 | 63,054 | |||||||||
|
Total liabilities and shareholders’ equity
|
$ | 925,290 | $ | 884,547 | $ | 1,112,225 | ||||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months |
Year Ended |
One Month |
||||||||||
| Ended March | November | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Preferred stock
|
||||||||||||
|
Balance, beginning of period
|
$ | 16,483 | $ | 3,100 | $ | 16,471 | ||||||
|
Issued
|
— | 13,367 | — | |||||||||
|
Preferred stock accretion
|
24 | 4 | 12 | |||||||||
|
Balance, end of period
|
16,507 | 16,471 | 16,483 | |||||||||
|
Common stock
|
||||||||||||
|
Balance, beginning of period
|
7 | 6 | 7 | |||||||||
|
Issued
|
— | 1 | — | |||||||||
|
Balance, end of period
|
7 | 7 | 7 | |||||||||
|
Restricted stock units and employee stock options
|
||||||||||||
|
Balance, beginning of period
|
9,463 | 9,302 | 9,284 | |||||||||
|
Issuance and amortization of restricted stock units and employee
stock options
|
498 | 2,254 | 192 | |||||||||
|
Delivery of common stock underlying restricted stock units
|
(5,164 | ) | (1,995 | ) | — | |||||||
|
Forfeiture of restricted stock units and employee stock options
|
(36 | ) | (274 | ) | (13 | ) | ||||||
|
Exercise of employee stock options
|
— | (3 | ) | — | ||||||||
|
Balance, end of period
|
4,761 | 9,284 | 9,463 | |||||||||
|
Additional
paid-in
capital
|
||||||||||||
|
Balance, beginning of period
|
31,070 | 22,027 | 31,071 | |||||||||
|
Issuance of common stock warrants
|
— | 1,633 | — | |||||||||
|
Issuance of common stock, including the delivery of common stock
underlying restricted stock units and proceeds from the exercise
of employee stock options
|
5,174 | 8,081 | (1 | ) | ||||||||
|
Cancellation of restricted stock units in satisfaction of
withholding tax requirements
|
(847 | ) | (1,314 | ) | — | |||||||
|
Preferred and common stock issuance costs
|
— | (1 | ) | — | ||||||||
|
Excess net tax benefit/(provision) related to
share-based
compensation
|
(968 | ) | 645 | — | ||||||||
|
Balance, end of period
|
34,429 | 31,071 | 31,070 | |||||||||
|
Retained earnings
|
||||||||||||
|
Balance, beginning of period
|
38,579 | 38,642 | 39,913 | |||||||||
|
Cumulative effect of adjustment from adoption of FIN 48
|
— | (201 | ) | — | ||||||||
|
Balance, beginning of period, after cumulative effect of
adjustments
|
38,579 | 38,441 | 39,913 | |||||||||
|
Net earnings/(loss)
|
1,814 | 2,322 | (780 | ) | ||||||||
|
Dividends and dividend equivalents declared on common stock and
restricted stock units
|
(3 | ) | (642 | ) | (233 | ) | ||||||
|
Dividends declared on preferred stock
|
— | (204 | ) | (309 | ) | |||||||
|
Preferred stock accretion
|
(24 | ) | (4 | ) | (12 | ) | ||||||
|
Balance, end of period
|
40,366 | 39,913 | 38,579 | |||||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||||||
|
Balance, beginning of period
|
(372 | ) | (118 | ) | (202 | ) | ||||||
|
Currency translation adjustment, net of tax
|
25 | (98 | ) | (32 | ) | |||||||
|
Pension and postretirement liability adjustment, net of tax
|
9 | 69 | (175 | ) | ||||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities,
net of tax |
(19 | ) | (55 | ) | 37 | |||||||
|
Balance, end of period
|
(357 | ) | (202 | ) | (372 | ) | ||||||
|
Common stock held in treasury, at cost
|
||||||||||||
|
Balance, beginning of period
|
(32,176 | ) | (30,159 | ) | (32,175 | ) | ||||||
|
Repurchased
|
(2 | ) (1) | (2,037 | ) | (1 | ) (1) | ||||||
|
Reissued
|
18 | 21 | — | |||||||||
|
Balance, end of period
|
(32,160 | ) | (32,175 | ) | (32,176 | ) | ||||||
|
Total shareholders’ equity
|
$ | 63,553 | $ | 64,369 | $ | 63,054 | ||||||
| (1) | Relates to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business and shares withheld to satisfy withholding tax requirements. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net earnings/(loss)
|
$ | 1,814 | $ | 1,511 | $ | (780 | ) | |||||
|
Non-cash
items included in net earnings
|
||||||||||||
|
Depreciation and amortization
|
611 | 259 | 104 | |||||||||
|
Amortization of identifiable intangible assets
|
38 | 84 | 39 | |||||||||
|
Share-based
compensation
|
468 | 480 | 180 | |||||||||
|
Changes in operating assets and liabilities
|
||||||||||||
|
Cash and securities segregated for regulatory and other purposes
|
43,126 | 15,650 | (5,835 | ) | ||||||||
|
Net receivables from brokers, dealers and clearing organizations
|
8,140 | (7,234 | ) | 3,693 | ||||||||
|
Net payables to customers and counterparties
|
(17,879 | ) | 42,226 | (7,635 | ) | |||||||
|
Securities borrowed, net of securities loaned
|
(27,552 | ) | (19,127 | ) | (18,030 | ) | ||||||
|
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell and federal
funds sold
|
(140,648 | ) | (20,263 | ) | 190,027 | |||||||
|
Trading assets, at fair value
|
180,563 | (46,347 | ) | (192,883 | ) | |||||||
|
Trading liabilities, at fair value
|
(38,810 | ) | 15,037 | 10,059 | ||||||||
|
Other, net
|
(6,674 | ) | (5,425 | ) | 7,156 | |||||||
|
Net cash provided by/(used for) operating activities
|
3,197 | (23,149 | ) | (13,905 | ) | |||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchase of property, leasehold improvements and equipment
|
(278 | ) | (403 | ) | (61 | ) | ||||||
|
Proceeds from sales of property, leasehold improvements and
equipment
|
28 | 42 | 4 | |||||||||
|
Business acquisitions, net of cash acquired
|
(190 | ) | (2,156 | ) | (59 | ) | ||||||
|
Proceeds from sales of investments
|
75 | 26 | 141 | |||||||||
|
Purchase of
available-for-sale
securities
|
(1,440 | ) | (1,109 | ) | (95 | ) | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
892 | 647 | 26 | |||||||||
|
Net cash used for investing activities
|
(913 | ) | (2,953 | ) | (44 | ) | ||||||
|
Cash flows from financing activities
|
||||||||||||
|
Unsecured
short-term
borrowings, net
|
(4,680 | ) | 879 | 2,816 | ||||||||
|
Other secured financings
(short-term),
net
|
5,222 | 2,384 | (1,068 | ) | ||||||||
|
Proceeds from issuance of other secured financings
(long-term)
|
2,322 | 4,107 | 437 | |||||||||
|
Repayment of other secured financings
(long-term),
including the current portion
|
(2,435 | ) | (2,373 | ) | (349 | ) | ||||||
|
Proceeds from issuance of unsecured
long-term
borrowings
|
14,689 | 19,874 | 9,310 | |||||||||
|
Repayment of unsecured
long-term
borrowings, including the current portion
|
(8,325 | ) | (8,461 | ) | (3,686 | ) | ||||||
|
Derivative contracts with a financing element, net
|
670 | (420 | ) | 66 | ||||||||
|
Deposits, net
|
12,374 | 11,591 | 4,487 | |||||||||
|
Common stock repurchased
|
(2 | ) | (1,561 | ) | (1 | ) | ||||||
|
Dividends and dividend equivalents paid on common stock,
preferred stock and restricted stock units
|
(545 | ) | (201 | ) | — | |||||||
|
Proceeds from issuance of common stock
|
27 | 64 | 2 | |||||||||
|
Excess tax benefit related to
share-based
compensation
|
11 | 552 | — | |||||||||
|
Net cash provided by financing activities
|
19,328 | 26,435 | 12,014 | |||||||||
|
Net increase/(decrease) in cash and cash equivalents
|
21,612 | 333 | (1,935 | ) | ||||||||
|
Cash and cash equivalents, beginning of period
|
13,805 | 10,282 | 15,740 | |||||||||
|
Cash and cash equivalents, end of period
|
$ | 35,417 | $ | 10,615 | $ | 13,805 | ||||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of capitalized interest, were
$3.42 billion, $10.64 billion and $459 million
during the three months ended March 2009 and
February 2008 and one month ended December 2008,
respectively.
Cash payments for income taxes, net of refunds, were
$256 million, $670 million and $171 million
during the three months ended March 2009 and
February 2008 and one month ended December 2008,
respectively.
Non-cash
activities:
The firm assumed $16 million, $534 million and $0 of
debt in connection with business acquisitions during the three
months ended March 2009 and February 2008 and one
month ended December 2008, respectively. The firm did not
issue any common stock in connection with business acquisitions
for the three months ended March 2009 and
February 2008 and one month ended December 2008.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Net earnings/(loss)
|
$ | 1,814 | $ | 1,511 | $ | (780 | ) | |||||
|
Currency translation adjustment, net of tax
|
25 | 9 | (32 | ) | ||||||||
|
Pension and postretirement liability adjustment,
net of tax
|
9 | — | (175 | ) | ||||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
(19 | ) | (35 | ) | 37 | |||||||
|
Comprehensive income/(loss)
|
$ | 1,829 | $ | 1,485 | $ | (950 | ) | |||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
| Note 1. | Description of Business |
The Goldman Sachs Group, Inc. (Group Inc.), a Delaware
corporation, together with its consolidated subsidiaries
(collectively, the firm), is a leading global financial services
firm providing investment banking, securities and investment
management services to a substantial and diversified client base
that includes corporations, financial institutions, governments
and
high-net-worth
individuals. Founded in 1869, the firm is headquartered in New
York and maintains offices in London, Frankfurt, Tokyo, Hong
Kong and other major financial centers around the world.
The firm’s activities are divided into three segments:
| • | Investment Banking. The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals. | |
| • | Trading and Principal Investments. The firm facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and takes proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. In addition, the firm engages in market-making and specialist activities on equities and options exchanges, and the firm clears client transactions on major stock, options and futures exchanges worldwide. In connection with the firm’s merchant banking and other investing activities, the firm makes principal investments directly and through funds that the firm raises and manages. | |
| • | Asset Management and Securities Services. The firm provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. |
| Note 2. | Significant Accounting Policies |
Basis of
Presentation
These condensed consolidated financial statements include the
accounts of Group Inc. and all other entities in which the firm
has a controlling financial interest. All material intercompany
transactions and balances have been eliminated.
The firm determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is
a voting interest entity, a variable interest entity (VIE) or a
qualifying
special-purpose
entity (QSPE) under generally accepted accounting principles.
| • | Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Voting interest entities are consolidated in accordance with Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” as amended. The usual condition for a controlling financial interest in an entity is ownership of a majority voting interest. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| • | Variable Interest Entities. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. In accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN) 46-R, “Consolidation of Variable Interest Entities,” the firm consolidates VIEs for which it is the primary beneficiary. The firm determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE’s expected losses and expected residual returns. This analysis includes a review of, among other factors, the VIE’s capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE. Where qualitative analysis is not conclusive, the firm performs a quantitative analysis. For purposes of allocating a VIE’s expected losses and expected residual returns to its variable interest holders, the firm utilizes the “top down” method. Under this method, the firm calculates its share of the VIE’s expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual arrangements and/or the firm’s position in the capital structure of the VIE, under various probability-weighted scenarios. The firm reassesses its initial evaluation of an entity as a VIE and its initial determination of whether the firm is the primary beneficiary of a VIE upon the occurrence of certain reconsideration events as defined in FIN 46-R. | |
| • | QSPEs. QSPEs are passive entities that are commonly used in mortgage and other securitization transactions. Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” sets forth the criteria an entity must satisfy to be a QSPE. These criteria include the types of assets a QSPE may hold, limits on asset sales, the use of derivatives and financial guarantees, and the level of discretion a servicer may exercise in attempting to collect receivables. These criteria may require management to make judgments about complex matters, such as whether a derivative is considered passive and the level of discretion a servicer may exercise, including, for example, determining when default is reasonably foreseeable. In accordance with SFAS No. 140 and FIN 46-R, the firm does not consolidate QSPEs. | |
| • | Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting interest of 20% to 50%) and has an investment in common stock or in-substance common stock, the firm accounts for its investment either in accordance with Accounting Principles Board Opinion (APB) No. 18, “The Equity Method of Accounting for Investments in Common Stock” or at fair value in accordance with SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” In general, the firm accounts for investments acquired subsequent to the adoption of SFAS No. 159 at fair value. In certain cases, the firm may apply the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, where the firm has a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. See “— Revenue Recognition — Other Financial Assets and Financial Liabilities at Fair Value” below for a discussion of the firm’s application of SFAS No. 159. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| • | Other. If the firm does not consolidate an entity or apply the equity method of accounting, the firm accounts for its investment at fair value. The firm also has formed numerous nonconsolidated investment funds with third-party investors that are typically organized as limited partnerships. The firm acts as general partner for these funds and generally does not hold a majority of the economic interests in these funds. The firm has generally provided the third-party investors with rights to terminate the funds or to remove the firm as the general partner. As a result, the firm does not consolidate these funds. These fund investments are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition. |
These condensed consolidated financial statements are unaudited
and should be read in conjunction with the audited consolidated
financial statements included in the firm’s Annual Report
on
Form 10-K
for the fiscal year ended November 28, 2008. The
condensed consolidated financial information as of
November 28, 2008 has been derived from audited
consolidated financial statements not included herein.
These unaudited condensed consolidated financial statements
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the interim
periods presented. These adjustments are of a normal, recurring
nature. Interim period operating results may not be indicative
of the operating results for a full year.
In connection with becoming a bank holding company, the firm was
required to change its fiscal year-end from November to
December. This change in the firm’s fiscal year-end
resulted in a
one-month
transition period that began on November 29, 2008 and
ended on December 26, 2008. Financial information for
this fiscal transition period is included in these condensed
consolidated financial statements. On April 13, 2009,
the Board of Directors of Group Inc. (the Board) approved a
change in the firm’s fiscal year-end from the last Friday
of December to December 31, beginning with fiscal 2009.
Fiscal 2009 began on December 27, 2008 and will end on
December 31, 2009. The firm’s second and third
fiscal quarters in 2009 will end on the last Friday of June and
September, respectively. Beginning in the fourth quarter of
2009, the firm’s fiscal year will end on December 31.
In the condensed consolidated statements of earnings, cash flows
and comprehensive income, the firm compares the
three-month
period ended March 27, 2009 with the previously
reported
three-month
period ended February 29, 2008. Financial information
for the three months ended March 28, 2008 has not been
included in this
Form 10-Q
for the following reasons: (i) the three months ended
February 29, 2008 provide a meaningful comparison for
the three months ended March 27, 2009; (ii) there
are no significant factors, seasonal or other, that would impact
the comparability of information if the results for the three
months ended March 28, 2008 were presented in lieu of
results for the three months ended February 29, 2008;
and (iii) it was not practicable or cost justified to
prepare this information.
All references to March 2009 and February 2008, unless
specifically stated otherwise, refer to the firm’s
three-month
fiscal periods ended, or the dates, as the context requires,
March 27, 2009 and February 29, 2008,
respectively. All references to December 2008, unless
specifically stated otherwise, refer to the firm’s fiscal
one-month
transition period ended, or the date, as the context requires,
December 26, 2008. All references to
November 2008, unless specifically stated otherwise, refer
to the firm’s fiscal year ended, or the date, as the
context requires, November 28, 2008. All references to
2009, unless specifically stated otherwise, refer to the
firm’s fiscal year ending, or the date, as the context
requires, December 31, 2009. Certain reclassifications
have been made to previously reported amounts to conform to the
current presentation.
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Use of
Estimates
These condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles that require management to make certain estimates and
assumptions. The most important of these estimates and
assumptions relate to fair value measurements, the accounting
for goodwill and identifiable intangible assets and the
provision for potential losses that may arise from litigation
and regulatory proceedings and tax audits. Although these and
other estimates and assumptions are based on the best available
information, actual results could be materially different from
these estimates.
Revenue
Recognition
Investment Banking. Underwriting revenues and
fees from mergers and acquisitions and other financial advisory
assignments are recognized in the condensed consolidated
statements of earnings when the services related to the
underlying transaction are completed under the terms of the
engagement. Expenses associated with such transactions are
deferred until the related revenue is recognized or the
engagement is otherwise concluded. Underwriting revenues are
presented net of related expenses. Expenses associated with
financial advisory transactions are recorded as
non-compensation
expenses, net of client reimbursements.
Trading Assets and Trading
Liabilities. Substantially all trading assets and
trading liabilities are reflected in the condensed consolidated
statements of financial condition at fair value, pursuant
principally to:
| • | SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities;” | |
| • | specialized industry accounting for broker-dealers and investment companies; | |
| • | SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” or | |
| • | the fair value option under either SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140,” or SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (i.e., the fair value option). |
Related unrealized gains or losses are generally recognized in
“Trading and principal investments” in the condensed
consolidated statements of earnings.
Other Financial Assets and Financial Liabilities at Fair
Value. In addition to “Trading assets, at
fair value” and “Trading liabilities, at fair
value,” the firm has elected to account for certain of its
other financial assets and financial liabilities at fair value
under the fair value option. The primary reasons for electing
the fair value option are to reflect economic events in earnings
on a timely basis, to mitigate volatility in earnings from using
different measurement attributes and to address simplification
and
cost-benefit
considerations.
Such financial assets and financial liabilities accounted for at
fair value include:
| • | certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; | |
| • | certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings; | |
| • | certain unsecured long-term borrowings, including prepaid physical commodity transactions; |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| • | resale and repurchase agreements; | |
| • | securities borrowed and loaned within Trading and Principal Investments, consisting of the firm’s matched book and certain firm financing activities; | |
| • | certain certificates of deposit issued by Goldman Sachs Bank USA (GS Bank USA), as well as securities held by GS Bank USA; | |
| • | certain receivables from customers and counterparties, including transfers accounted for as secured loans rather than purchases under SFAS No. 140; | |
| • | certain insurance and reinsurance contracts; and | |
| • | in general, investments acquired after the adoption of SFAS No. 159 where the firm has significant influence over the investee and would otherwise apply the equity method of accounting. |
Fair Value Measurements. The fair value of a
financial instrument is the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., the exit price). Financial assets are marked to bid
prices and financial liabilities are marked to offer prices.
Fair value measurements do not include transaction costs.
SFAS No. 157, “Fair Value Measurements,”
establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities
(level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy under SFAS No. 157
are described below:
Basis of Fair Value
Measurement
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | |
| Level 2 | Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; | |
| Level 3 | Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
A financial instrument’s level within the fair value
hierarchy is based on the lowest level of any input that is
significant to the fair value measurement.
The firm defines active markets for equity instruments based on
the average daily trading volume both in absolute terms and
relative to the market capitalization for the instrument. The
firm defines active markets for debt instruments based on both
the average daily trading volume and the number of days with
trading activity.
During the fourth quarter of 2008, both the FASB and the staff
of the SEC re-emphasized the importance of sound fair value
measurement in financial reporting. In October 2008, the
FASB issued FASB Staff Position (FSP)
No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active.” This statement
clarifies that determining fair value in an inactive or
dislocated market depends on facts and circumstances and
requires significant management judgment. This statement
specifies that it is acceptable to use inputs based on
management estimates or assumptions, or for management to make
adjustments to observable inputs to determine
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
fair value when markets are not active and relevant observable
inputs are not available. The firm’s fair value measurement
policies are consistent with the guidance in FSP
No. FAS 157-3.
Credit risk is an essential component of fair value. Cash
products (e.g., bonds and loans) and derivative instruments
(particularly those with significant future projected cash
flows) trade in the market at levels which reflect credit
considerations. The firm calculates the fair value of derivative
assets by discounting future cash flows at a rate which
incorporates counterparty credit spreads and the fair value of
derivative liabilities by discounting future cash flows at a
rate which incorporates the firm’s own credit spreads. In
doing so, credit exposures are adjusted to reflect mitigants,
namely collateral agreements which reduce exposures based on
triggers and contractual posting requirements. The firm manages
its exposure to credit risk as it does other market risks and
will price, economically hedge, facilitate and intermediate
trades which involve credit risk. The firm records liquidity
valuation adjustments to reflect the cost of exiting
concentrated risk positions, including exposure to the
firm’s own credit spreads.
In determining fair value, the firm separates its “Trading
assets, at fair value” and its “Trading liabilities,
at fair value” into two categories: cash instruments and
derivative contracts.
| • | Cash Instruments. The firm’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and sovereign obligations, active listed equities and certain money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. In accordance with SFAS No. 157, the firm does not adjust the quoted price for such instruments, even in situations where the firm holds a large position and a sale could reasonably impact the quoted price. |
The types of instruments that trade in markets that are not
considered to be active, but are valued based on quoted market
prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
most government agency securities,
investment-grade
corporate bonds, certain mortgage products, certain bank loans
and bridge loans, less liquid listed equities, state, municipal
and provincial obligations and certain money market securities
and loan commitments. Such instruments are generally classified
within level 2 of the fair value hierarchy.
Certain cash instruments are classified within level 3 of
the fair value hierarchy because they trade infrequently and
therefore have little or no price transparency. Such instruments
include private equity and real estate fund investments, certain
bank loans and bridge loans (including certain mezzanine
financing, leveraged loans arising from capital market
transactions and other corporate bank debt), less liquid
corporate debt securities and other debt obligations (including
less liquid
high-yield
corporate bonds, distressed debt instruments and collateralized
debt obligations (CDOs) backed by corporate obligations), less
liquid mortgage whole loans and securities (backed by either
commercial or residential real estate), and acquired portfolios
of distressed loans. The transaction price is initially used as
the best estimate of fair value. Accordingly, when a pricing
model is used to value such an instrument, the model is adjusted
so that the model value at inception equals the transaction
price. This valuation is adjusted only when changes to inputs
and assumptions are corroborated by evidence such as
transactions in similar instruments, completed or pending
third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
and other transactions across the capital structure, offerings
in the equity or debt capital markets, and changes in financial
ratios or cash flows.
For positions that are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to
reflect illiquidity
and/or
non-transferability.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
Recent market conditions, characterized by dislocations between
asset classes, elevated levels of volatility, and reduced price
transparency, have increased the level of management judgment
required to value cash trading instruments classified within
level 3 of the fair value hierarchy. In particular,
management’s judgment is required to determine the
appropriate
risk-adjusted
discount rate for cash trading instruments with little or no
price transparency as a result of decreased volumes and lower
levels of trading activity. In such situations, the firm’s
valuation is adjusted to approximate rates which market
participants would likely consider appropriate for relevant
credit and liquidity risks.
| • | Derivative Contracts. Derivative contracts can be exchange-traded or over-the-counter (OTC). Exchange-traded derivatives typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The firm generally values exchange-traded derivatives using models which calibrate to market-clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy. |
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including
market-based
inputs to models, model calibration to
market-clearing
transactions, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency.
Where models are used, the selection of a particular model to
value an OTC derivative depends upon the contractual terms of,
and specific risks inherent in, the instrument, as well as the
availability of pricing information in the market. The firm
generally uses similar models to value similar instruments.
Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit curves,
measures of volatility, prepayment rates and correlations of
such inputs. For OTC derivatives that trade in liquid markets,
such as generic forwards, swaps and options, model inputs can
generally be verified and model selection does not involve
significant management judgment. OTC derivatives are classified
within level 2 of the fair value hierarchy when all of the
significant inputs can be corroborated to market evidence.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. Such
instruments are classified within level 3 of the fair value
hierarchy. Where the firm does not have corroborating market
evidence to support significant model inputs and cannot verify
the model to market transactions, the transaction price is
initially used as the best estimate of fair value. Accordingly,
when a pricing model is used to value such an instrument, the
model is adjusted so that the model value at inception equals
the transaction price. The valuations of these less liquid OTC
derivatives are typically based on level 1
and/or
level 2 inputs that can be observed in the market, as well
as unobservable level 3 inputs. Subsequent to initial
recognition, the firm updates the level 1 and level 2
inputs to reflect observable market changes, with resulting
gains and losses reflected within level 3. Level 3
inputs are only changed when corroborated by evidence such as
similar market transactions,
third-party
pricing services
and/or
broker or
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
dealer quotations, or other empirical market data. In
circumstances where the firm cannot verify the model value to
market transactions, it is possible that a different valuation
model could produce a materially different estimate of fair
value.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
Collateralized Agreements and
Financings. Collateralized agreements consist of
resale agreements and securities borrowed. Collateralized
financings consist of repurchase agreements, securities loaned
and other secured financings. Interest on collateralized
agreements and collateralized financings is recognized in
“Interest income” and “Interest expense,”
respectively, over the life of the transaction.
| • | Resale and Repurchase Agreements. Securities purchased under agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade sovereign obligations, represent collateralized financing transactions. The firm receives securities purchased under agreements to resell, makes delivery of securities sold under agreements to repurchase, monitors the market value of these securities on a daily basis and delivers or obtains additional collateral as appropriate. As noted above, resale and repurchase agreements are carried in the condensed consolidated statements of financial condition at fair value under SFAS No. 159. Resale and repurchase agreements are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy. Resale and repurchase agreements are presented on a net-by-counterparty basis when the requirements of FIN 41, “Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements,” or FIN 39, “Offsetting of Amounts Related to Certain Contracts,” are satisfied. | |
| • | Securities Borrowed and Loaned. Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Securities borrowed and loaned within Securities Services, relating to both customer activities and, to a lesser extent, certain firm financing activities, are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminated on demand, they exhibit little, if any, sensitivity to changes in interest rates. As noted above, securities borrowed and loaned within Trading and Principal Investments, which are related to the firm’s matched book and certain firm financing activities, are recorded at fair value under SFAS No. 159. These securities borrowed and loaned transactions are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy. | |
| • | Other Secured Financings. In addition to repurchase agreements and securities loaned, the firm funds assets through the use of other secured financing arrangements and pledges financial instruments and other assets as collateral in these transactions. As noted above, the firm has elected to apply SFAS No. 159 to transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings, for which the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. These other secured financing transactions are generally valued based on inputs with reasonable levels of price transparency and are generally classified within level 2 of the fair value hierarchy. Other |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest. See Note 3 for further information regarding other secured financings. |
Hybrid Financial Instruments. Hybrid financial
instruments are instruments that contain bifurcatable embedded
derivatives under SFAS No. 133 and do not require
settlement by physical delivery of
non-financial
assets (e.g., physical commodities). If the firm elects to
bifurcate the embedded derivative, it is accounted for at fair
value and the host contract is accounted for at amortized cost,
adjusted for the effective portion of any fair value hedge
accounting relationships. If the firm does not elect to
bifurcate, the entire hybrid financial instrument is accounted
for at fair value under SFAS No. 155. See Notes 3
and 6 for further information regarding hybrid financial
instruments.
Transfers of Financial Assets. In general,
transfers of financial assets are accounted for as sales under
SFAS No. 140 when the firm has relinquished control
over the transferred assets. For transfers accounted for as
sales, any related gains or losses are recognized in net
revenues. Transfers that are not accounted for as sales are
accounted for as collateralized financings, with the related
interest expense recognized in net revenues over the life of the
transaction.
Commissions. Commission revenues from
executing and clearing client transactions on stock, options and
futures markets are recognized in “Trading and principal
investments” in the condensed consolidated statements of
earnings on a
trade-date
basis.
Insurance Activities. Certain of the
firm’s insurance and reinsurance contracts are accounted
for at fair value under SFAS No. 159, with changes in
fair value included in “Trading and principal
investments” in the condensed consolidated statements of
earnings.
Revenues from variable annuity and life insurance and
reinsurance contracts not accounted for at fair value under
SFAS No. 159 generally consist of fees assessed on
contract holder account balances for mortality charges, policy
administration fees and surrender charges, and are recognized
within “Trading and principal investments” in the
condensed consolidated statements of earnings in the period that
services are provided.
Interest credited to variable annuity and life insurance and
reinsurance contract account balances and changes in reserves
are recognized in “Other expenses” in the condensed
consolidated statements of earnings.
Premiums earned for underwriting property catastrophe
reinsurance are recognized within “Trading and principal
investments” in the condensed consolidated statements of
earnings over the coverage period, net of premiums ceded for the
cost of reinsurance. Expenses for liabilities related to
property catastrophe reinsurance claims, including estimates of
losses that have been incurred but not reported, are recognized
within “Other expenses” in the condensed consolidated
statements of earnings.
Merchant Banking Overrides. The firm is
entitled to receive merchant banking overrides (i.e., an
increased share of a fund’s income and gains) when the
return on the funds’ investments exceeds certain threshold
returns. Overrides are based on investment performance over the
life of each merchant banking fund, and future investment
underperformance may require amounts of override previously
distributed to the firm to be returned to the funds.
Accordingly, overrides are recognized in the condensed
consolidated statements of earnings only when all material
contingencies have been resolved. Overrides are included in
“Trading and principal investments” in the condensed
consolidated statements of earnings.
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Asset Management. Management fees are
recognized over the period that the related service is provided
based upon average net asset values. In certain circumstances,
the firm is also entitled to receive incentive fees based on a
percentage of a fund’s return or when the return on assets
under management exceeds specified benchmark returns or other
performance targets. Incentive fees are generally based on
investment performance over a
12-month
period and are subject to adjustment prior to the end of the
measurement period. Accordingly, incentive fees are recognized
in the condensed consolidated statements of earnings when the
measurement period ends. Asset management fees and incentive
fees are included in “Asset management and securities
services” in the condensed consolidated statements of
earnings.
Share-Based
Compensation
The firm accounts for
share-based
compensation in accordance with
SFAS No. 123-R,
“Share-Based
Payment.” The cost of employee services received in
exchange for a
share-based
award is generally measured based on the grant-date fair value
of the award.
Share-based
awards that do not require future service (i.e., vested
awards, including awards granted to retirement-eligible
employees) are expensed immediately.
Share-based
employee awards that require future service are amortized over
the relevant service period. Expected forfeitures are included
in determining
share-based
employee compensation expense. In the first quarter of 2006, the
firm adopted
SFAS No. 123-R
under the modified prospective adoption method. Under this
method of adoption, the provisions of
SFAS No. 123-R
are generally applied only to
share-based
awards granted subsequent to adoption.
Share-based
awards held by employees that were retirement-eligible on the
date of adoption of
SFAS No. 123-R
continue to be amortized over the stated service period of the
award.
The firm pays cash dividend equivalents on outstanding
restricted stock units. Dividend equivalents paid on restricted
stock units are generally charged to retained earnings. Dividend
equivalents paid on restricted stock units expected to be
forfeited are included in compensation expense. The firm adopted
Emerging Issues Task Force (EITF) Issue
No. 06-11,
“Accounting for Income Tax Benefits of Dividends on
Share-Based
Payment Awards” in the first quarter of fiscal 2009.
Accordingly, the tax benefit related to dividend equivalents
paid on restricted stock units is accounted for as an increase
to additional
paid-in
capital. Prior to the adoption of EITF Issue
No. 06-11,
the firm accounted for this tax benefit as a reduction to income
tax expense. See “— Recent Accounting
Developments” for further information on EITF Issue
No. 06-11.
In certain cases, primarily related to the death of an employee
or conflicted employment (as outlined in the applicable award
agreements), the firm may cash settle
share-based
compensation awards. For awards accounted for as equity
instruments, “Additional
paid-in
capital” is adjusted to the extent of the difference
between the current value of the award and the grant-date value
of the award.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair
value of identifiable net assets at acquisition date. In
accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” goodwill is tested at least annually
for impairment. An impairment loss is recognized if the
estimated fair value of an operating segment, which is a
component one level below the firm’s three business
segments, is less than its estimated net book value. Such loss
is calculated as the difference between the estimated fair value
of goodwill and its carrying value.
16
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Identifiable
Intangible Assets
Identifiable intangible assets, which consist primarily of
customer lists, Designated Market Maker (DMM) rights and
the value of business acquired (VOBA) and deferred acquisition
costs (DAC) in the firm’s insurance subsidiaries, are
amortized over their estimated lives in accordance with
SFAS No. 142 or, in the case of insurance contracts,
in accordance with SFAS No. 60, “Accounting and
Reporting by Insurance Enterprises,” and
SFAS No. 97, “Accounting and Reporting by
Insurance Enterprises for Certain
Long-Duration
Contracts and for Realized Gains and Losses from the Sale of
Investments.” Identifiable intangible assets are tested for
impairment whenever events or changes in circumstances suggest
that an asset’s or asset group’s carrying value may
not be fully recoverable in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of
Long-Lived
Assets,” or SFAS No. 60 and
SFAS No. 97. An impairment loss, generally calculated
as the difference between the estimated fair value and the
carrying value of an asset or asset group, is recognized if the
sum of the estimated undiscounted cash flows relating to the
asset or asset group is less than the corresponding carrying
value.
Property,
Leasehold Improvements and Equipment
Property, leasehold improvements and equipment, net of
accumulated depreciation and amortization, are recorded at cost
and included in “Other assets” in the condensed
consolidated statements of financial condition.
Substantially all property and equipment are depreciated on a
straight-line basis over the useful life of the asset. Leasehold
improvements are amortized on a straight-line basis over the
useful life of the improvement or the term of the lease,
whichever is shorter. Certain costs of software developed or
obtained for internal use are capitalized and amortized on a
straight-line basis over the useful life of the software.
Property, leasehold improvements and equipment are tested for
impairment whenever events or changes in circumstances suggest
that an asset’s or asset group’s carrying value may
not be fully recoverable in accordance with
SFAS No. 144. An impairment loss, calculated as the
difference between the estimated fair value and the carrying
value of an asset or asset group, is recognized if the sum of
the expected undiscounted cash flows relating to the asset or
asset group is less than the corresponding carrying value.
The firm’s operating leases include office space held in
excess of current requirements. Rent expense relating to space
held for growth is included in “Occupancy” in the
condensed consolidated statements of earnings. In accordance
with SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities,” the firm
records a liability, based on the fair value of the remaining
lease rentals reduced by any potential or existing sublease
rentals, for leases where the firm has ceased using the space
and management has concluded that the firm will not derive any
future economic benefits. Costs to terminate a lease before the
end of its term are recognized and measured at fair value upon
termination.
Foreign
Currency Translation
Assets and liabilities denominated in
non-U.S. currencies
are translated at rates of exchange prevailing on the date of
the condensed consolidated statements of financial condition,
and revenues and expenses are translated at average rates of
exchange for the period. Gains or losses on translation of the
financial statements of a
non-U.S. operation,
when the functional currency is other than the U.S. dollar,
are included, net of hedges and taxes, in the condensed
consolidated statements
17
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
of comprehensive income. The firm seeks to reduce its net
investment exposure to fluctuations in foreign exchange rates
through the use of foreign currency forward contracts and
foreign
currency-denominated
debt. For foreign currency forward contracts, hedge
effectiveness is assessed based on changes in forward exchange
rates; accordingly, forward points are reflected as a component
of the currency translation adjustment in the condensed
consolidated statements of comprehensive income. For foreign
currency-denominated
debt, hedge effectiveness is assessed based on changes in spot
rates. Foreign currency remeasurement gains or losses on
transactions in nonfunctional currencies are included in the
condensed consolidated statements of earnings.
Income
Taxes
Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting and tax bases of the
firm’s assets and liabilities. Valuation allowances are
established to reduce deferred tax assets to the amount that
more likely than not will be realized. The firm’s tax
assets and liabilities are presented as a component of
“Other assets” and “Other liabilities and accrued
expenses,” respectively, in the condensed consolidated
statements of financial condition. Tax provisions are computed
in accordance with SFAS No. 109, “Accounting for
Income Taxes.” The firm adopted the provisions of
FIN 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement
No. 109,” as of December 1, 2007, and
recorded a transition adjustment resulting in a reduction of
$201 million to beginning retained earnings in the first
fiscal quarter of 2008. Under FIN 48, a tax position can be
recognized in the financial statements only when it is more
likely than not that the position will be sustained upon
examination by the relevant taxing authority based on the
technical merits of the position. A position that meets this
standard is measured at the largest amount of benefit that will
more likely than not be realized upon settlement. A liability is
established for differences between positions taken in a tax
return and amounts recognized in the financial statements. The
firm reports interest expense related to income tax matters in
“Provision/(benefit) for taxes” in the condensed
consolidated statements of earnings and income tax penalties in
“Other expenses” in the condensed consolidated
statements of earnings.
Earnings Per
Common Share (EPS)
Basic EPS is calculated by dividing net earnings applicable to
common shareholders by the weighted average number of common
shares outstanding. Common shares outstanding includes common
stock and restricted stock units for which no future service is
required as a condition to the delivery of the underlying common
stock. Diluted EPS includes the determinants of basic EPS and,
in addition, reflects the dilutive effect of the common stock
deliverable pursuant to stock warrants and options and to
restricted stock units for which future service is required as a
condition to the delivery of the underlying common stock. The
firm adopted FSP No. EITF
03-6-1,
“Determining Whether Instruments Granted in
Share-Based
Payment Transactions Are Participating Securities,” in the
first quarter of fiscal 2009. Accordingly, the firm treats
unvested
share-based
payment awards that have
non-forfeitable
rights to dividend or dividend equivalents as a separate class
of securities in calculating earnings per share. See
“— Recent
Accounting Developments” for further information on FSP
No. EITF
03-6-1.
Cash and Cash
Equivalents
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business. As of
March 2009, November 2008 and December 2008,
“Cash and cash equivalents” on the condensed
consolidated statements of financial condition included
$4.03 billion, $5.60 billion and $1.39 billion,
respectively, of cash and due from banks and
$31.39 billion, $10.14 billion and
$12.41 billion, respectively, of interest-bearing deposits
with banks.
18
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Recent
Accounting Developments
EITF Issue
No. 06-11. In
June 2007, the EITF reached consensus on Issue
No. 06-11,
“Accounting for Income Tax Benefits of Dividends on
Share-Based
Payment Awards.” EITF Issue
No. 06-11
requires that the tax benefit related to dividend equivalents
paid on restricted stock units, which are expected to vest, be
recorded as an increase to additional
paid-in
capital. The firm previously accounted for this tax benefit as a
reduction to income tax expense. EITF Issue
No. 06-11
was applied prospectively for tax benefits on dividends declared
beginning in the first quarter of fiscal 2009. The adoption of
EITF Issue
No. 06-11
did not have a material effect on the firm’s financial
condition, results of operations or cash flows.
FASB Staff Position
No. FAS 140-3. In
February 2008, the FASB issued FASB Staff Position
No. FAS 140-3,
“Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions.” FSP
No. FAS 140-3
requires an initial transfer of a financial asset and a
repurchase financing that was entered into contemporaneously or
in contemplation of the initial transfer to be evaluated as a
linked transaction under SFAS No. 140 unless certain
criteria are met, including that the transferred asset must be
readily obtainable in the marketplace. The firm adopted FSP
No. FAS 140-3
for new transactions entered into after November 2008. The
adoption of FSP
No. FAS 140-3
did not have a material effect on the firm’s financial
condition, results of operations or cash flows.
SFAS No. 161. In March 2008,
the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities — an
amendment of FASB Statement No. 133.”
SFAS No. 161 requires enhanced disclosures about an
entity’s derivative and hedging activities, and was
effective for the firm beginning in the
one-month
transition period ended December 2008. Since
SFAS No. 161 requires only additional disclosures
concerning derivatives and hedging activities, adoption of
SFAS No. 161 did not affect the firm’s financial
condition, results of operations or cash flows.
FASB Staff Position No. EITF
03-6-1. In
June 2008, the FASB issued FSP No. EITF
03-6-1,
“Determining Whether Instruments Granted in
Share-Based
Payment Transactions Are Participating Securities.” The FSP
addresses whether instruments granted in
share-based
payment transactions are participating securities prior to
vesting and therefore need to be included in the earnings
allocation in calculating earnings per share under the two-class
method described in SFAS No. 128, “Earnings per
Share.” The FSP requires companies to treat unvested
share-based
payment awards that have
non-forfeitable
rights to dividend or dividend equivalents as a separate class
of securities in calculating earnings per share. The firm
adopted the FSP in the first quarter of fiscal 2009. There was
no impact from the adoption of FSP No. EITF
03-6-1 to
earnings per common share for the three months ended
March 2009. The loss per common share for the one month
ended December 2008 was computed in accordance with the FSP
and the impact was a loss per common share of $0.03. Prior
periods have not been restated due to immateriality.
SFAS No. 141(R). In
December 2007, the FASB issued a revision to
SFAS No. 141, “Business Combinations.”
SFAS No. 141(R) requires changes to the accounting for
transaction costs, certain contingent assets and liabilities,
and other balances in a business combination. In addition, in
partial acquisitions, when control is obtained, the acquiring
company must measure and record all of the target’s assets
and liabilities, including goodwill, at fair value as if the
entire target company had been acquired. The provisions of
SFAS No. 141(R) apply to business combinations
beginning in the first quarter of fiscal 2009. Adoption of
SFAS No. 141(R) did not affect the firm’s
financial condition, results of operations or cash flows, but
may have an effect on accounting for future business
combinations.
19
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
SFAS No. 160. In December 2007,
the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements — an
amendment of ARB No. 51.” SFAS No. 160
requires that ownership interests in consolidated subsidiaries
held by parties other than the parent (i.e., noncontrolling
interests) be accounted for and presented as equity, rather than
as a liability or mezzanine equity. SFAS No. 160 was
effective for the firm beginning in the first quarter of fiscal
2009. SFAS No. 160 did not have a material effect on
the firm’s financial condition, results of operations or
cash flows.
FASB Staff Position
No. FAS 140-4
and FIN 46(R)-8. In December 2008, the
FASB issued FSP
No. FAS 140-4
and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities.” FSP
No. FAS 140-4
and FIN 46(R)-8 requires enhanced disclosures about
transfers of financial assets and interests in variable interest
entities, and was effective for the firm beginning in the
one-month
transition period ended December 2008. Since the FSP
requires only additional disclosures concerning transfers of
financial assets and interests in variable interest entities,
adoption of the FSP did not affect the firm’s financial
condition, results of operations or cash flows.
EITF Issue
No. 07-5. In
June 2008, the EITF reached consensus on Issue
No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock.” EITF Issue
No. 07-5
provides guidance about whether an instrument (such as the
firm’s outstanding common stock warrants) should be
classified as equity and not
marked-to-market
for accounting purposes. The firm adopted EITF Issue
No. 07-5
in the first quarter of fiscal 2009. Adoption of EITF Issue
No. 07-5
did not affect the firm’s financial condition, results of
operations or cash flows.
FASB Staff Position
No. FAS 157-4. In
April 2009, the FASB issued FSP
No. FAS 157-4,
“Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly.” The FSP
provides guidance for estimating fair value when the volume and
level of activity for an asset or liability have decreased
significantly. Specifically, the FSP lists factors which should
be evaluated to determine whether a transaction is orderly,
clarifies that adjustments to transactions or quoted prices may
be necessary when the volume and level of activity for an asset
or liability have decreased significantly, and provides guidance
for determining the concurrent weighting of the transaction
price relative to fair value indications from other valuation
techniques when estimating fair value. The FSP is effective for
periods ending after June 15, 2009. Because the
firm’s current fair value methodology is consistent with
FSP
No. FAS 157-4,
adoption of the FSP will not affect the firm’s financial
condition, results of operations or cash flows. The firm will
adopt the FSP in the second quarter of fiscal 2009 to comply
with the FSP’s disclosure requirements.
FASB Staff Position
No. FAS 115-2
and
FAS 124-2. In
April 2009, the FASB issued FSP
No. FAS 115-2
and
FAS 124-2,
“Recognition and Presentation of
Other-Than-Temporary
Impairments.” Under the FSP, only the portion of an
other-than-temporary
impairment on a debt security related to credit loss is
recognized in current period earnings, with the remainder
recognized in other comprehensive income, if the holder does not
intend to sell the security and it is more likely than not that
the holder will not be required to sell the security prior to
recovery. Currently, the entire
other-than-temporary
impairment is recognized in current period earnings. The FSP is
effective for periods ending after June 15, 2009. The
firm will adopt the FSP in the second quarter of fiscal 2009.
Adoption of the FSP will not have a material effect on the
firm’s financial condition, results of operations or cash
flows.
20
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
FASB Staff Position
No. FAS 107-1
and APB
28-1. In
April 2009, the FASB issued FSP
No. FAS 107-1
and APB
28-1,
“Interim Disclosures about Fair Value of Financial
Instruments.” The FSP requires that the fair value
disclosures prescribed by FASB Statement No. 107,
“Disclosures about Fair Value of Financial
Instruments” be included in financial statements prepared
for interim periods. The FSP is effective for periods ending
after June 15, 2009. The firm will adopt the FSP in
the second quarter of fiscal 2009. Since the FSP involves only
additional disclosures regarding the fair value of financial
instruments, adoption of the FSP will not affect the firm’s
financial condition, results of operations or cash flows.
| Note 3. | Financial Instruments |
Fair Value of
Financial Instruments
The following table sets forth the firm’s trading assets,
at fair value, including those pledged as collateral, and
trading liabilities, at fair value. At any point in time, the
firm may use cash instruments as well as derivatives to manage a
long or short risk position.
| As of | ||||||||||||||||||||||||
| March 2009 | November 2008 | December 2008 | ||||||||||||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
|||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 13,983 | (1) | $ | — | $ | 8,662 | (1) | $ | — | $ | 18,605 | (1) | $ | — | |||||||||
|
U.S. government, federal agency and sovereign obligations
|
125,481 | 33,215 | 69,653 | 37,000 | 263,631 | 46,185 | ||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
15,446 | 141 | 22,393 | 340 | 20,094 | 176 | ||||||||||||||||||
|
Bank loans and bridge loans
|
21,211 | 2,638 | (4) | 21,839 | 3,108 | (4) | 20,516 | 3,129 | (4) | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
24,829 | 6,360 | 27,879 | 5,711 | 25,829 | 6,958 | ||||||||||||||||||
|
Equities and convertible debentures
|
43,134 | 14,247 | 57,049 | 12,116 | 57,887 | 7,961 | ||||||||||||||||||
|
Physical commodities
|
1,182 | — | 513 | 2 | 916 | — | ||||||||||||||||||
|
Derivative contracts
|
104,325 | (2) | 90,620 | (5) | 130,337 | (2) | 117,695 | (5) | 127,486 | (2) | 121,622 | (5) | ||||||||||||
|
Total
|
$ | 349,591 | (3) | $ | 147,221 | $ | 338,325 | (3) | $ | 175,972 | $ | 534,964 | (3) | $ | 186,031 | |||||||||
| (1) | Includes $4.44 billion, $4.40 billion and $4.46 billion as of March 2009, November 2008 and December 2008, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 8 for further information regarding the William Street program. | |
| (2) | Net of cash received pursuant to credit support agreements of $149.08 billion, $137.16 billion and $154.69 billion as of March 2009, November 2008 and December 2008, respectively. | |
| (3) | Includes $2.34 billion, $1.68 billion and $1.71 billion as of March 2009, November 2008 and December 2008, respectively, of securities held within the firm’s insurance subsidiaries which are accounted for as available-for-sale under SFAS No. 115. | |
| (4) | Consists of the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets. | |
| (5) | Net of cash paid pursuant to credit support agreements of $27.07 billion, $34.01 billion and $32.91 billion as of March 2009, November 2008 and December 2008, respectively. |
21
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Fair Value
Hierarchy
The firm’s financial assets at fair value classified within
level 3 of the fair value hierarchy are summarized below:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| ($ in millions) | ||||||||||||
|
Total level 3 assets
|
$ | 59,062 | $ | 66,190 | $ | 64,167 | ||||||
|
Level 3 assets for which the firm bears economic
exposure (1)
|
54,660 | 59,574 | 58,000 | |||||||||
|
Total assets
|
925,290 | 884,547 | 1,112,225 | |||||||||
|
Total financial assets at fair value
|
628,639 | 595,234 | 820,076 | |||||||||
|
Total level 3 assets as a percentage of Total assets
|
6.4 | % | 7.5 | % | 5.8 | % | ||||||
|
Level 3 assets for which the firm bears economic exposure
as a percentage of Total assets
|
5.9 | 6.7 | 5.2 | |||||||||
|
Total level 3 assets as a percentage of Total financial
assets at fair value
|
9.4 | 11.1 | 7.8 | |||||||||
|
Level 3 assets for which the firm bears economic exposure
as a percentage of Total financial assets at fair value
|
8.7 | 10.0 | 7.1 | |||||||||
| (1) | Excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
The following tables set forth by level within the fair value
hierarchy “Trading assets, at fair value,”
“Trading liabilities, at fair value,” and other
financial assets and financial liabilities accounted for at fair
value under SFAS No. 155 and SFAS No. 159 as
of March 2009, November 2008 and December 2008.
See Note 2 for further information on the fair value
hierarchy. As required by SFAS No. 157, assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
22
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Assets at Fair Value as of March 2009 | ||||||||||||||||||||
|
Netting and |
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Collateral
|
Total
|
||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 7,680 | $ | 6,303 | $ | — | $ | — | $ | 13,983 | ||||||||||
|
U.S. government, federal agency and sovereign
obligations
|
67,839 | 57,642 | — | — | 125,481 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | 3,802 | 11,644 | — | 15,446 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 11,345 | 9,866 | — | 21,211 | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
223 | 17,052 | 7,554 | — | 24,829 | |||||||||||||||
|
Equities and convertible debentures
|
15,340 | 14,174 | 13,620 | (6) | — | 43,134 | ||||||||||||||
|
Physical commodities
|
— | 1,182 | — | — | 1,182 | |||||||||||||||
|
Cash instruments
|
91,082 | 111,500 | 42,684 | — | 245,266 | |||||||||||||||
|
Derivative contracts
|
211 | 240,837 | 16,378 | (153,101 | ) (7) | 104,325 | ||||||||||||||
|
Trading assets, at fair value
|
91,293 | 352,337 | 59,062 | (153,101 | ) | 349,591 | ||||||||||||||
|
Securities segregated for regulatory and other purposes
|
22,077 | (4) | 23,462 | (5) | — | — | 45,539 | |||||||||||||
|
Receivables from customers and
counterparties (1)
|
316 | 1,720 | — | — | 2,036 | |||||||||||||||
|
Securities
borrowed (2)
|
— | 88,818 | — | — | 88,818 | |||||||||||||||
|
Securities purchased under agreements to resell, at fair value
|
— | 142,655 | — | — | 142,655 | |||||||||||||||
|
Total financial assets at fair value
|
$ | 113,686 | $ | 608,992 | $ | 59,062 | $ | (153,101 | ) | $ | 628,639 | |||||||||
|
Level 3 assets for which the firm does not bear economic
exposure (3)
|
(4,402 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm
bears economic exposure |
$ | 54,660 | ||||||||||||||||||
| (1) | Principally consists of certain margin loans, transfers accounted for as secured loans rather than purchases under SFAS No. 140 and prepaid variable share forwards. |
| (2) | Consists of securities borrowed within Trading and Principal Investments. Excludes securities borrowed within Securities Services, which are accounted for based on the amount of cash collateral advanced plus accrued interest. |
| (3) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
| (4) | Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value under American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.” |
| (5) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| (6) | Consists of private equity and real estate fund investments. |
| (7) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
23
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Liabilities at Fair Value as of March 2009 | ||||||||||||||||||||
|
Netting and |
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Collateral
|
Total
|
||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. government, federal agency and sovereign
obligations
|
$ | 32,292 | $ | 923 | $ | — | $ | — | $ | 33,215 | ||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | 137 | 4 | — | 141 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 1,826 | 812 | — | 2,638 | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
— | 5,886 | 474 | — | 6,360 | |||||||||||||||
|
Equities and convertible debentures
|
14,233 | — | 14 | — | 14,247 | |||||||||||||||
|
Cash instruments
|
46,525 | 8,772 | 1,304 | — | 56,601 | |||||||||||||||
|
Derivative contracts
|
731 | 108,710 | 12,262 | (31,083 | ) (8) | 90,620 | ||||||||||||||
|
Trading liabilities, at fair value
|
47,256 | 117,482 | 13,566 | (31,083 | ) | 147,221 | ||||||||||||||
|
Unsecured
short-term
borrowings (1)
|
— | 16,780 | 3,143 | — | 19,923 | |||||||||||||||
|
Deposits (2)
|
— | 6,781 | — | — | 6,781 | |||||||||||||||
|
Securities
loaned (3)
|
— | 9,932 | — | — | 9,932 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | 133,395 | — | — | 133,395 | |||||||||||||||
|
Other secured
financings (4)
|
167 | 12,368 | 7,277 | — | 19,812 | |||||||||||||||
|
Other
liabilities (5)
|
— | 412 | 1,510 | — | 1,922 | |||||||||||||||
|
Unsecured
long-term
borrowings (6)
|
— | 15,773 | 1,916 | — | 17,689 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 47,423 | $ | 312,923 | $ | 27,412 | (7) | $ | (31,083 | ) | $ | 356,675 | ||||||||
| (1) | Consists of promissory notes, commercial paper and hybrid financial instruments. |
| (2) | Primarily includes certain certificates of deposit issued by GS Bank USA. |
| (3) | Consists of securities loaned within Trading and Principal Investments. Excludes securities loaned within Securities Services, which are accounted for based on the amount of cash collateral received plus accrued interest. |
| (4) | Primarily includes transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings. |
| (5) | Consists of liabilities related to insurance contracts. |
| (6) | Primarily includes hybrid financial instruments and prepaid physical commodity transactions. |
| (7) | Level 3 liabilities were 7.7% of Total liabilities at fair value. |
| (8) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
24
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Assets at Fair Value as of November 2008 | ||||||||||||||||||||
|
Netting and |
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Collateral
|
Total
|
||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 5,205 | $ | 3,457 | $ | — | $ | — | $ | 8,662 | ||||||||||
|
U.S. government, federal agency and sovereign
obligations
|
35,069 | 34,584 | — | — | 69,653 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | 6,886 | 15,507 | — | 22,393 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 9,882 | 11,957 | — | 21,839 | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
14 | 20,269 | 7,596 | — | 27,879 | |||||||||||||||
|
Equities and convertible debentures
|
25,068 | 15,975 | 16,006 | (6) | — | 57,049 | ||||||||||||||
|
Physical commodities
|
— | 513 | — | — | 513 | |||||||||||||||
|
Cash instruments
|
65,356 | 91,566 | 51,066 | — | 207,988 | |||||||||||||||
|
Derivative contracts
|
24 | 256,412 | 15,124 | (141,223 | ) (7) | 130,337 | ||||||||||||||
|
Trading assets, at fair value
|
65,380 | 347,978 | 66,190 | (141,223 | ) | 338,325 | ||||||||||||||
|
Securities segregated for regulatory and other purposes
|
20,030 | (4) | 58,800 | (5) | — | — | 78,830 | |||||||||||||
|
Receivables from customers and
counterparties (1)
|
— | 1,598 | — | — | 1,598 | |||||||||||||||
|
Securities
borrowed (2)
|
— | 59,810 | — | — | 59,810 | |||||||||||||||
|
Securities purchased under agreements to resell, at fair value
|
— | 116,671 | — | — | 116,671 | |||||||||||||||
|
Total financial assets at fair value
|
$ | 85,410 | $ | 584,857 | $ | 66,190 | $ | (141,223 | ) | $ | 595,234 | |||||||||
|
Level 3 assets for which the firm does not bear economic
exposure (3)
|
(6,616 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm
bears economic exposure |
$ | 59,574 | ||||||||||||||||||
| (1) | Principally consists of transfers accounted for as secured loans rather than purchases under SFAS No. 140 and prepaid variable share forwards. |
| (2) | Consists of securities borrowed within Trading and Principal Investments. Excludes securities borrowed within Securities Services, which are accounted for based on the amount of cash collateral advanced plus accrued interest. |
| (3) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
| (4) | Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value under AICPA SOP 03-1. |
| (5) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| (6) | Consists of private equity and real estate fund investments. |
| (7) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
25
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Liabilities at Fair Value as of November 2008 | ||||||||||||||||||||
|
Netting and |
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Collateral
|
Total
|
||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. government, federal agency and sovereign
obligations
|
$ | 36,385 | $ | 615 | $ | — | $ | — | $ | 37,000 | ||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | 320 | 20 | — | 340 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 2,278 | 830 | — | 3,108 | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
11 | 5,185 | 515 | — | 5,711 | |||||||||||||||
|
Equities and convertible debentures
|
11,928 | 174 | 14 | — | 12,116 | |||||||||||||||
|
Physical commodities
|
2 | — | — | — | 2 | |||||||||||||||
|
Cash instruments
|
48,326 | 8,572 | 1,379 | — | 58,277 | |||||||||||||||
|
Derivative contracts
|
21 | 145,777 | 9,968 | (38,071 | ) (8) | 117,695 | ||||||||||||||
|
Trading liabilities, at fair value
|
48,347 | 154,349 | 11,347 | (38,071 | ) | 175,972 | ||||||||||||||
|
Unsecured
short-term
borrowings (1)
|
— | 17,916 | 5,159 | — | 23,075 | |||||||||||||||
|
Deposits (2)
|
— | 4,224 | — | — | 4,224 | |||||||||||||||
|
Securities
loaned (3)
|
— | 7,872 | — | — | 7,872 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | 62,883 | — | — | 62,883 | |||||||||||||||
|
Other secured
financings (4)
|
— | 16,429 | 3,820 | — | 20,249 | |||||||||||||||
|
Other
liabilities (5)
|
— | 978 | — | — | 978 | |||||||||||||||
|
Unsecured
long-term
borrowings (6)
|
— | 15,886 | 1,560 | — | 17,446 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 48,347 | $ | 280,537 | $ | 21,886 | (7) | $ | (38,071 | ) | $ | 312,699 | ||||||||
| (1) | Consists of promissory notes, commercial paper and hybrid financial instruments. |
| (2) | Consists of certain certificates of deposit issued by GS Bank USA. |
| (3) | Consists of securities loaned within Trading and Principal Investments. Excludes securities loaned within Securities Services, which are accounted for based on the amount of cash collateral received plus accrued interest. |
| (4) | Primarily includes transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings. |
| (5) | Consists of liabilities related to insurance contracts. |
| (6) | Primarily includes hybrid financial instruments and prepaid physical commodity transactions. |
| (7) | Level 3 liabilities were 7.0% of Total liabilities at fair value. |
| (8) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
26
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Assets at Fair Value as of December 2008 | ||||||||||||||||||||
|
Netting and |
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Collateral
|
Total
|
||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 7,170 | $ | 11,435 | $ | — | $ | — | $ | 18,605 | ||||||||||
|
U.S. government, federal agency and sovereign obligations
|
48,904 | 214,727 | — | — | 263,631 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | 4,731 | 15,363 | — | 20,094 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 9,347 | 11,169 | — | 20,516 | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
105 | 17,731 | 7,993 | — | 25,829 | |||||||||||||||
|
Equities and convertible debentures
|
27,094 | 15,666 | 15,127 | (6) | — | 57,887 | ||||||||||||||
|
Physical commodities
|
— | 916 | — | — | 916 | |||||||||||||||
|
Cash instruments
|
83,273 | 274,553 | 49,652 | — | 407,478 | |||||||||||||||
|
Derivative contracts
|
13 | 271,031 | 14,515 | (158,073 | ) (7) | 127,486 | ||||||||||||||
|
Trading assets, at fair value
|
83,286 | 545,584 | 64,167 | (158,073 | ) | 534,964 | ||||||||||||||
|
Securities segregated for regulatory and other purposes
|
16,924 | (4) | 52,625 | (5) | — | — | 69,549 | |||||||||||||
|
Receivables from customers and
counterparties (1)
|
— | 2,474 | — | — | 2,474 | |||||||||||||||
|
Securities
borrowed (2)
|
— | 86,057 | — | — | 86,057 | |||||||||||||||
|
Securities purchased under agreements to resell, at fair value
|
— | 127,032 | — | — | 127,032 | |||||||||||||||
|
Total financial assets at fair value
|
$ | 100,210 | $ | 813,772 | $ | 64,167 | $ | (158,073 | ) | $ | 820,076 | |||||||||
|
Level 3 assets for which the firm does not bear economic
exposure (3)
|
(6,167 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm
bears economic exposure |
$ | 58,000 | ||||||||||||||||||
| (1) | Principally consists of certain margin loans, transfers accounted for as secured loans rather than purchases under SFAS No. 140 and prepaid variable share forwards. |
| (2) | Consists of securities borrowed within Trading and Principal Investments. Excludes securities borrowed within Securities Services, which are accounted for based on the amount of cash collateral advanced plus accrued interest. |
| (3) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
| (4) | Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value under AICPA SOP 03-1. |
| (5) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| (6) | Consists of private equity and real estate fund investments. |
| (7) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
27
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Liabilities at Fair Value as of December 2008 | ||||||||||||||||||||
|
Netting and |
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Collateral
|
Total
|
||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. government, federal agency and sovereign obligations
|
$ | 44,728 | $ | 1,457 | $ | — | $ | — | $ | 46,185 | ||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | 97 | 79 | — | 176 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 2,167 | 962 | — | 3,129 | |||||||||||||||
|
Corporate debt securities and other debt obligations
|
— | 6,307 | 651 | — | 6,958 | |||||||||||||||
|
Equities and convertible debentures
|
7,926 | — | 35 | — | 7,961 | |||||||||||||||
|
Cash instruments
|
52,654 | 10,028 | 1,727 | — | 64,409 | |||||||||||||||
|
Derivative contracts
|
15 | 146,706 | 11,200 | (36,299 | ) (8) | 121,622 | ||||||||||||||
|
Trading liabilities, at fair value
|
52,669 | 156,734 | 12,927 | (36,299 | ) | 186,031 | ||||||||||||||
|
Unsecured
short-term
borrowings (1)
|
— | 20,888 | 4,712 | — | 25,600 | |||||||||||||||
|
Deposits (2)
|
— | 5,792 | — | — | 5,792 | |||||||||||||||
|
Securities
loaned (3)
|
— | 11,276 | — | — | 11,276 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | 260,421 | — | — | 260,421 | |||||||||||||||
|
Other secured
financings (4)
|
— | 16,133 | 4,039 | — | 20,172 | |||||||||||||||
|
Other
liabilities (5)
|
— | 1,400 | — | — | 1,400 | |||||||||||||||
|
Unsecured
long-term
borrowings (6)
|
— | 16,457 | 1,689 | — | 18,146 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 52,669 | $ | 489,101 | $ | 23,367 | (7) | $ | (36,299 | ) | $ | 528,838 | ||||||||
| (1) | Consists of promissory notes, commercial paper and hybrid financial instruments. |
| (2) | Consists of certain certificates of deposit issued by GS Bank USA. |
| (3) | Consists of securities loaned within Trading and Principal Investments. Excludes securities loaned within Securities Services, which are accounted for based on the amount of cash collateral received plus accrued interest. |
| (4) | Primarily includes transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings. |
| (5) | Consists of liabilities related to insurance contracts. |
| (6) | Primarily includes hybrid financial instruments and prepaid physical commodity transactions. |
| (7) | Level 3 liabilities were 4.4% of Total liabilities at fair value. |
| (8) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
28
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Level 3
Unrealized Gains/(Losses)
The table below sets forth a summary of unrealized
gains/(losses) on the firm’s level 3 financial assets
and financial liabilities still held at the reporting date for
the three months ended March 2009 and February 2008
and one month ended December 2008:
| Level 3 Unrealized Gains/(Losses) | ||||||||||||
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Cash Instruments — Assets
|
$ | (4,072 | ) | $ | (2,912 | ) | $ | (3,116 | ) | |||
|
Cash Instruments — Liabilities
|
15 | (318 | ) | (78 | ) | |||||||
|
Net unrealized gains/(losses) on level 3 cash instruments
|
(4,057 | ) | (3,230 | ) | (3,194 | ) | ||||||
|
Derivative Contracts — Net
|
975 | 5,087 | (210 | ) | ||||||||
|
Unsecured
Short-Term
Borrowings
|
124 | 95 | (70 | ) | ||||||||
|
Other Secured Financings
|
17 | — | (1 | ) | ||||||||
|
Other Liabilities and Accrued Expenses
|
64 | — | — | |||||||||
|
Unsecured
Long-Term
Borrowings
|
82 | 113 | (127 | ) | ||||||||
|
Total level 3 unrealized gains/(losses)
|
$ | (2,795 | ) | $ | 2,065 | $ | (3,602 | ) | ||||
Cash
Instruments
The net unrealized loss on level 3 cash instruments of
$4.06 billion for the three months ended March 2009
primarily consisted of unrealized losses on private equity and
real estate fund investments, loans and securities backed by
commercial real estate, and bank loans and bridge loans. Losses
during the period reflected the weakness in the global credit
and equity markets. The net unrealized loss on level 3 cash
instruments of $3.23 billion for the three months ended
February 2008 primarily consisted of unrealized losses on
loans and securities backed by commercial and residential real
estate and certain bank loans. The net unrealized loss on level
3 cash instruments of $3.19 billion for the one month ended
December 2008 primarily consisted of unrealized losses on
certain bank loans and bridge loans, private equity and real
estate fund investments, and loans and securities backed by
commercial real estate. Losses during December 2008
reflected the weakness in the global credit and equity markets.
Level 3 cash instruments are frequently economically hedged
with instruments classified within level 1 and
level 2, and accordingly, gains or losses that have been
reported in level 3 can be partially offset by gains or
losses attributable to instruments classified within
level 1 or level 2 or by gains or losses on derivative
contracts classified within level 3 of the fair value
hierarchy.
29
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Derivative
Contracts
The net unrealized gain on level 3 derivative contracts of
$975 million for the three months ended March 2009 was
primarily attributable to increases in commodities prices (which
are level 2 inputs) and changes in credit spreads
corroborated by trading activity during the quarter. The net
unrealized gain on level 3 derivative contracts of
$5.09 billion for the three months ended February 2008
was primarily attributable to changes in observable credit
spreads (which are level 2 inputs) on the underlying
instruments. The net unrealized loss on level 3 derivative
contracts of $210 million for the one month ended
December 2008 was primarily attributable to changes in
observable prices on the underlying instruments (which are
level 2 inputs). Level 3 gains and losses on
derivative contracts should be considered in the context of the
following:
| • | A derivative contract with level 1 and/or level 2 inputs is classified as a level 3 financial instrument in its entirety if it has at least one significant level 3 input. | |
| • | If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2) is still classified as level 3. | |
| • | Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to instruments classified within level 1 or level 2 or by cash instruments reported within level 3 of the fair value hierarchy. |
The tables below set forth a summary of changes in the fair
value of the firm’s level 3 financial assets and
financial liabilities for the three months ended March 2009
and February 2008 and one month ended December 2008.
The tables reflect gains and losses, including gains and losses
on financial assets and financial liabilities that were
transferred to level 3 during the period, for all financial
assets and financial liabilities categorized as level 3 as
of March 2009, February 2008 and December 2008,
respectively.
|
Level 3 Financial Assets and Financial Liabilities |
||||||||||||||||||||||||||||
| Three Months Ended March 2009 | ||||||||||||||||||||||||||||
|
Other |
||||||||||||||||||||||||||||
|
Cash |
Cash |
Derivative |
Unsecured |
Other |
Liabilities |
Unsecured |
||||||||||||||||||||||
|
Instruments |
Instruments |
Contracts |
Short-Term |
Secured |
and Accrued |
Long-Term |
||||||||||||||||||||||
| - Assets | - Liabilities | - Net | Borrowings | Financings | Expenses | Borrowings | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
|
Balance, beginning of period
|
$ | 49,652 | $ | (1,727 | ) | $ | 3,315 | $ | (4,712 | ) | $ | (4,039 | ) | $ | — | $ | (1,689 | ) | ||||||||||
|
Realized gains/(losses)
|
623 | (1) | 14 | (3) | 238 | (3) | 32 | (3) | (6 | ) (3) | (10 | ) (3) | (13 | ) (3) | ||||||||||||||
|
Unrealized gains/(losses) relating to instruments still held at
the reporting date
|
(4,072 | ) (1) | 15 | (3) | 975 | (3)(4) | 124 | (3) | 17 | (3) | 64 | (3) | 82 | (3) | ||||||||||||||
|
Purchases, issuances and settlements
|
(2,462 | ) | 285 | 342 | (868 | ) | (1,144 | ) | (600 | ) | 177 | |||||||||||||||||
|
Transfers in
and/or out
of level 3
|
(1,057 | ) (2) | 109 | (754 | ) (5) | 2,281 | (6) | (2,105 | ) (6) | (964 | ) (7) | (473 | ) (6) | |||||||||||||||
|
Balance, end of period
|
$ | 42,684 | $ | (1,304 | ) | $ | 4,116 | $ | (3,143 | ) | $ | (7,277 | ) | $ | (1,510 | ) | $ | (1,916 | ) | |||||||||
30
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
|
Level 3 Financial Assets and Financial Liabilities |
||||||||||||||||||||||||
| Three Months Ended February 2008 | ||||||||||||||||||||||||
|
Cash |
Cash |
Derivative |
Unsecured |
Other |
Unsecured |
|||||||||||||||||||
|
Instruments |
Instruments |
Contracts |
Short-Term |
Secured |
Long-Term |
|||||||||||||||||||
| - Assets | - Liabilities | - Net | Borrowings | Financings | Borrowings | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Balance, beginning of period
|
$ | 53,451 | $ | (554 | ) | $ | 2,056 | $ | (4,271 | ) | $ | — | $ | (767 | ) | |||||||||
|
Realized gains/(losses)
|
675 | (1) | 5 | (3) | 214 | (3) | (80 | ) (3) | — | (1 | ) (3) | |||||||||||||
|
Unrealized gains/(losses) relating to instruments still held at
the reporting date
|
(2,912 | ) (1) | (318 | ) (3) | 5,087 | (3)(4) | 95 | (3) | — | 113 | (3) | |||||||||||||
|
Purchases, issuances and settlements
|
5,586 | (6 | ) | (360 | ) | 535 | — | (396 | ) | |||||||||||||||
|
Transfers in
and/or out
of level 3
|
14,573 | (8) | (104 | ) | 2,397 | (9) | (118 | ) | — | (196 | ) | |||||||||||||
|
Balance, end of period
|
$ | 71,373 | $ | (977 | ) | $ | 9,394 | $ | (3,839 | ) | $ | — | $ | (1,247 | ) | |||||||||
|
Level 3 Financial Assets and Financial Liabilities |
||||||||||||||||||||||||
| One Month Ended December 2008 | ||||||||||||||||||||||||
|
Cash |
Cash |
Derivative |
Unsecured |
Other |
Unsecured |
|||||||||||||||||||
|
Instruments |
Instruments |
Contracts |
Short-Term |
Secured |
Long-Term |
|||||||||||||||||||
| - Assets | - Liabilities | - Net | Borrowings | Financings | Borrowings | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Balance, beginning of period
|
$ | 51,066 | $ | (1,379 | ) | $ | 5,156 | $ | (5,159 | ) | $ | (3,820 | ) | $ | (1,560 | ) | ||||||||
|
Realized gains/(losses)
|
157 | (1) | 3 | (3) | 15 | (3) | 27 | (3) | (2 | ) (3) | (1 | ) (3) | ||||||||||||
|
Unrealized gains/(losses) relating to instruments still held at
the reporting date
|
(3,116 | ) (1) | (78 | ) (3) | (210 | ) (3)(4) | (70 | ) (3) | (1 | ) (3) | (127 | ) (3) | ||||||||||||
|
Purchases, issuances and settlements
|
921 | (159 | ) | (699 | ) | 482 | (51 | ) | 42 | |||||||||||||||
|
Transfers in
and/or out
of level 3
|
624 | (10) | (114 | ) | (947 | ) (11) | 8 | (165 | ) | (43 | ) | |||||||||||||
|
Balance, end of period
|
$ | 49,652 | $ | (1,727 | ) | $ | 3,315 | $ | (4,712 | ) | $ | (4,039 | ) | $ | (1,689 | ) | ||||||||
| (1) | The aggregate amounts include approximately $(4.07) billion and $620 million, $(3.09) billion and $853 million, and $(3.18) billion and $221 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the three months ended March 2009 and February 2008 and the one month ended December 2008, respectively. | |
| (2) | Principally reflects a decrease in loan portfolios for which the firm did not bear economic exposure. | |
| (3) | Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings. | |
| (4) | Principally resulted from changes in level 2 inputs and for the three months ended March 2009, changes in credit spreads corroborated by trading activity during the period. | |
| (5) | Principally reflects transfers from level 2 within the fair value hierarchy of certain credit derivative liabilities, due to reduced trading activity, and therefore price transparency, on the underlying instruments. | |
| (6) | Principally reflects transfers from level 3 unsecured short-term borrowings to level 3 other secured financings and level 3 unsecured long-term borrowings related to changes in the terms of certain notes. | |
| (7) | Principally reflects transfers from level 2 within the fair value hierarchy of certain insurance contracts, reflecting reduced price transparency for these financial instruments. | |
| (8) | Principally reflects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial and residential real estate, reflecting reduced price transparency for these financial instruments. | |
| (9) | Principally reflects transfers from level 2 within the fair value hierarchy of mortgage-related derivative assets, due to reduced transparency of correlation inputs used to value mortgage instruments. |
| (10) | Principally reflects transfers from level 2 within the fair value hierarchy of certain corporate debt securities and other debt obligations and loans and securities backed by commercial real estate, reflecting reduced price transparency for these financial instruments. |
| (11) | Principally reflects transfers to level 2 within the fair value hierarchy of credit-related derivative assets, due to improved transparency of correlation inputs used to value these financial instruments. |
31
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Impact of
Credit Spreads
On an ongoing basis, the firm realizes gains or losses relating
to changes in credit risk on derivative contracts through
changes in credit mitigants or the sale or unwind of the
contracts. The net gain/(loss) attributable to the impact of
changes in credit exposure and credit spreads on derivative
contracts was $48 million, $16 million and $(188)
million for the three months ended March 2009 and
February 2008 and one month ended December 2008,
respectively.
The following table sets forth the net gains/(losses)
attributable to the impact of changes in the firm’s own
credit spreads on unsecured borrowings for which the fair value
option was elected. The firm calculates the fair value of
unsecured borrowings by discounting future cash flows at a rate
which incorporates the firm’s observable credit spreads.
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Net gains/(losses) including hedges
|
$ | (197 | ) | $ | 333 | $ | (113 | ) | ||||
|
Net gains/(losses) excluding hedges
|
(192 | ) | 518 | (114 | ) | |||||||
The impact of changes in instrument-specific credit spreads on
loans and loan commitments for which the fair value option was
elected was a loss of $1.21 billion for the three months
ended March 2009, not material for the three months ended
February 2008 and a loss of $2.06 billion for the one
month ended December 2008. The firm attributes changes in
the fair value of floating rate loans and loan commitments to
changes in instrument-specific credit spreads. For fixed rate
loans and loan commitments, the firm allocates changes in fair
value between interest rate-related changes and credit
spread-related changes based on changes in interest rates. See
below for additional details regarding the fair value option.
32
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The Fair Value
Option
Gains/(Losses)
The following table sets forth the gains/(losses) included in
earnings for the three months ended March 2009 and
February 2008 and one month ended December 2008 as a
result of the firm electing to apply the fair value option to
certain financial assets and financial liabilities, as described
in Note 2. The table excludes gains and losses related to
trading assets and trading liabilities, as well as gains and
losses that would have been recognized under other generally
accepted accounting principles if the firm had not elected the
fair value option or that are economically hedged with
instruments accounted for at fair value under other generally
accepted accounting principles.
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Unsecured
long-term
borrowings (1)
|
$ | (135 | ) | $ | 506 | $ | (104 | ) | ||||
|
Other secured
financings (2)
|
25 | (1 | ) | (2 | ) | |||||||
|
Unsecured
short-term
borrowings (3)
|
(67 | ) | (50 | ) | (9 | ) | ||||||
|
Other (4)
|
54 | 6 | (94 | ) | ||||||||
|
Total (5)
|
$ | (123 | ) | $ | 461 | $ | (209 | ) | ||||
| (1) | Excludes gains/(losses) of $1.24 billion, $(724) million and $(623) million for the three months ended March 2009 and February 2008 and one month ended December 2008, respectively, related to the derivative component of hybrid financial instruments. Such gains and losses would have been recognized pursuant to SFAS No. 133 if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option. | |
| (2) | Excludes gains of $1.03 billion for the three months ended February 2008, related to financings recorded as a result of securitization-related transactions that were accounted for as secured financings rather than sales under SFAS No. 140. Changes in the fair value of these secured financings are offset by changes in the fair value of the related financial instruments included within the firm’s “Trading assets, at fair value” in the condensed consolidated statements of financial condition. Such gains/(losses) were not material for the three months ended March 2009 and one month ended December 2008. | |
| (3) | Excludes gains/(losses) of $(305) million, $312 million and $92 million for the three months ended March 2009 and February 2008 and one month ended December 2008, respectively, related to the derivative component of hybrid financial instruments. Such gains and losses would have been recognized pursuant to SFAS No. 133 if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option. | |
| (4) | Primarily consists of certain insurance and reinsurance contracts, resale and repurchase agreements and securities borrowed and loaned within Trading and Principal Investments. | |
| (5) | Reported within “Trading and principal investments” within the condensed consolidated statements of earnings. The amounts exclude contractual interest, which is included in “Interest income” and “Interest expense,” for all instruments other than hybrid financial instruments. |
All trading assets and trading liabilities are accounted for at
fair value either under the fair value option or as required by
other accounting pronouncements. Excluding equities commissions
of $974 million, $1.24 billion and $251 million
for the three months ended March 2009 and
February 2008 and one month ended December 2008,
respectively, and the gains and losses on the instruments
accounted for under the fair value option described above, the
firm’s “Trading and principal investments”
revenues in the condensed consolidated statements of earnings
primarily represent gains and losses on “Trading assets, at
fair value” and “Trading liabilities, at fair
value” in the condensed consolidated statements of
financial condition.
33
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Loans and Loan
Commitments
As of March 2009, the aggregate contractual principal
amount of loans and
long-term
receivables for which the fair value option was elected exceeded
the related fair value by $49.41 billion, including a
difference of $37.21 billion related to loans with an
aggregate fair value of $2.78 billion that were on
nonaccrual status (including loans more than 90 days past
due). As of November 2008, the aggregate contractual
principal amount of loans and
long-term
receivables for which the fair value option was elected exceeded
the related fair value by $50.21 billion, including a
difference of $37.46 billion related to loans with an
aggregate fair value of $3.77 billion that were on
nonaccrual status (including loans more than 90 days past
due). As of December 2008, the aggregate contractual
principal amount of loans and
long-term
receivables for which the fair value option was elected exceeded
the related fair value by $55.22 billion, including a
difference of $41.75 billion related to loans with an
aggregate fair value of $4.34 billion that were on
nonaccrual status (including loans more than 90 days past
due). The aggregate contractual principal exceeds the related
fair value primarily because the firm regularly purchases loans,
such as distressed loans, at values significantly below
contractual principal amounts.
As of March 2009, November 2008 and
December 2008, the fair value of unfunded lending
commitments for which the fair value option was elected was a
liability of $2.51 billion, $3.52 billion and
$3.49 billion, respectively, and the related total
contractual amount of these lending commitments was
$36.58 billion, $39.49 billion and
$40.59 billion, respectively.
Long-term
Debt Instruments
The aggregate contractual principal amount of
long-term
debt instruments (principal and
non-principal
protected) for which the fair value option was elected exceeded
the related fair value by $2.03 billion, $2.42 billion
and $2.07 billion as of March 2009, November 2008
and December 2008, respectively.
Derivative
Activities
Derivative contracts are instruments, such as futures, forwards,
swaps or option contracts, that derive their value from
underlying assets, indices, reference rates or a combination of
these factors. Derivative instruments may be privately
negotiated contracts, which are often referred to as OTC
derivatives, or they may be listed and traded on an exchange.
Derivatives may involve future commitments to purchase or sell
financial instruments or commodities, or to exchange currency or
interest payment streams. The amounts exchanged are based on the
specific terms of the contract with reference to specified
rates, securities, commodities, currencies or indices.
Certain cash instruments, such as
mortgage-backed
securities, interest-only and principal-only obligations, and
indexed debt instruments, are not considered derivatives even
though their values or contractually required cash flows are
derived from the price of some other security or index. However,
certain commodity-related contracts are included in the
firm’s derivatives disclosure, as these contracts may be
settled in cash or the assets to be delivered under the contract
are readily convertible into cash.
The firm enters into derivative transactions to facilitate
client transactions, to take proprietary positions and as a
means of risk management. Risk exposures are managed through
diversification, by controlling position sizes and by entering
into offsetting positions. For example, the firm may manage the
risk related to a portfolio of common stock by entering into an
offsetting position in a related
equity-index
futures contract.
34
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm applies hedge accounting under SFAS No. 133
to certain derivative contracts. The firm uses these derivatives
to manage certain interest rate and currency exposures,
including the firm’s net investment in
non-U.S. operations.
The firm designates certain interest rate swap contracts as fair
value hedges. These interest rate swap contracts hedge changes
in the relevant benchmark interest rate (e.g., London
Interbank Offered Rate (LIBOR)), effectively converting a
substantial portion of the firm’s unsecured
long-term
borrowings, certain unsecured
short-term
borrowings and certificates of deposit into floating rate
obligations. See Note 2 for information regarding the
firm’s accounting policy for foreign currency forward
contracts used to hedge its net investment in
non-U.S. operations.
The firm applies a
long-haul
method to all of its hedge accounting relationships to perform
an ongoing assessment of the effectiveness of these
relationships in achieving offsetting changes in fair value or
offsetting cash flows attributable to the risk being hedged. The
firm utilizes a
dollar-offset
method, which compares the change in the fair value of the
hedging instrument to the change in the fair value of the hedged
item, excluding the effect of the passage of time, to
prospectively and retrospectively assess hedge effectiveness.
The firm’s prospective
dollar-offset
assessment utilizes scenario analyses to test hedge
effectiveness via simulations of numerous parallel and slope
shifts of the relevant yield curve. Parallel shifts change the
interest rate of all maturities by identical amounts. Slope
shifts change the curvature of the yield curve. For both the
prospective assessment, in response to each of the simulated
yield curve shifts, and the retrospective assessment, a hedging
relationship is deemed to be effective if the fair value of the
hedging instrument and the hedged item change inversely within a
range of 80% to 125%.
For fair value hedges, gains or losses on derivative
transactions are recognized in “Interest expense” in
the condensed consolidated statements of earnings. The change in
fair value of the hedged item attributable to the risk being
hedged is reported as an adjustment to its carrying value and is
subsequently amortized into interest expense over its remaining
life. Gains or losses related to hedge ineffectiveness for all
hedges are generally included in “Interest expense.”
These gains or losses and the component of gains or losses on
derivative transactions excluded from the assessment of hedge
effectiveness (e.g., the effect of the passage of time on
fair value hedges of the firm’s borrowings) were not
material for the three months ended March 2009 and
February 2008 and one month ended December 2008. Gains
and losses on derivatives used for trading purposes are included
in “Trading and principal investments” in the
condensed consolidated statements of earnings.
The fair value of the firm’s derivative contracts is
reflected net of cash paid or received pursuant to credit
support agreements and is reported on a
net-by-counterparty
basis in the firm’s condensed consolidated statements of
financial condition when management believes a legal right of
setoff exists under an enforceable netting agreement. The
following table sets forth the fair value and the number of
contracts of the firm’s derivative contracts by major risk
type on a gross basis as of March 2009 and
December 2008. Gross fair values in the table below exclude
the effects of both netting under enforceable netting agreements
and netting of cash received or posted pursuant to credit
support agreements, and therefore are not representative of the
firm’s exposure:
35
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| As of | ||||||||||||||||||||||||
| March 2009 | December 2008 | |||||||||||||||||||||||
|
Number |
Number |
|||||||||||||||||||||||
|
Derivative |
Derivative |
of |
Derivative |
Derivative |
of |
|||||||||||||||||||
| Assets | Liabilities | Contracts | Assets | Liabilities | Contracts | |||||||||||||||||||
| (in millions, except number of contracts) | ||||||||||||||||||||||||
| Derivative contracts for trading activities | ||||||||||||||||||||||||
|
Interest rates
|
$ | 1,171,827 | $ | 1,120,430 | 278,266 | $ | 1,293,763 | $ | 1,243,443 | 274,022 | ||||||||||||||
|
Credit
|
469,118 | 427,020 | 532,898 | 507,935 | 469,182 | 558,179 | ||||||||||||||||||
|
Currencies
|
92,846 | 85,612 | 222,928 | 130,636 | 124,993 | 169,756 | ||||||||||||||||||
|
Commodities
|
80,275 | 77,327 | 210,157 | 99,653 | 93,083 | 230,916 | ||||||||||||||||||
|
Equities
|
100,291 | 92,612 | 263,126 | 103,105 | 101,910 | 241,589 | ||||||||||||||||||
|
Subtotal
|
$ | 1,914,357 | $ | 1,803,001 | 1,507,375 | $ | 2,135,092 | $ | 2,032,611 | 1,474,462 | ||||||||||||||
| Derivative contracts accounted for as hedges under SFAS No. 133 (1) | ||||||||||||||||||||||||
|
Interest rates
|
$ | 24,347 | (4) | $ | 1 | (4) | 786 | $ | 25,064 | (4) | $ | 14 | (4) | 677 | ||||||||||
|
Currencies
|
50 | (5) | 31 | (5) | 24 | 128 | (5) | 21 | (5) | 16 | ||||||||||||||
|
Subtotal
|
$ | 24,397 | $ | 32 | 810 | $ | 25,192 | $ | 35 | 693 | ||||||||||||||
|
Gross fair value of derivative contracts
|
$ | 1,938,754 | $ | 1,803,033 | 1,508,185 | $ | 2,160,284 | $ | 2,032,646 | 1,475,155 | ||||||||||||||
|
Counterparty
netting (2)
|
(1,685,348 | ) | (1,685,348 | ) | (1,878,112 | ) | (1,878,112 | ) | ||||||||||||||||
|
Cash collateral
netting (3)
|
(149,081 | ) | (27,065 | ) | (154,686 | ) | (32,912 | ) | ||||||||||||||||
|
Fair value included in “Trading assets, at fair
value”
|
$ | 104,325 | $ | 127,486 | ||||||||||||||||||||
|
Fair value included in “Trading liabilities, at fair
value”
|
$ | 90,620 | $ | 121,622 | ||||||||||||||||||||
| (1) | As of November 2008, the gross fair value of derivative contracts accounted for as hedges under SFAS No. 133 consisted of $20.40 billion in assets and $128 million in liabilities. |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty pursuant to credit support agreements in accordance with FIN 39. |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. |
| (4) | For the three months ended March 2009 and the one month ended December 2008, the gain/(loss) recognized on these derivative contracts was $(2.47) billion and $3.59 billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $2.43 billion and $(3.53) billion, respectively. These gains/(losses) are included in “Interest expense” in the condensed consolidated statements of earnings. |
| (5) | For the three months ended March 2009 and one month ended December 2008, the gain/(loss) on these derivative contracts was $153 million and $(212) million, respectively. Such amounts are included in “Currency translation adjustment, net of tax” in the condensed consolidated statements of comprehensive income. The gain/(loss) related to ineffectiveness and the gain/(loss) reclassified to earnings from accumulated other comprehensive income were not material for the three months ended March 2009 and one month ended December 2008. |
36
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm also has embedded derivatives that have been bifurcated
from related borrowings under SFAS No. 133. Such
derivatives, which are classified in unsecured
short-term
and unsecured
long-term
borrowings in the firm’s condensed consolidated statements
of financial condition, had a net asset carrying value of
$348 million, $774 million and $358 million as of
March 2009, November 2008 and December 2008,
respectively. The net asset as of March 2009, which
represented 348 contracts, included gross assets of
$632 million (primarily comprised of equity and interest
rate derivatives) and gross liabilities of $284 million
(primarily comprised of equity and interest rate derivatives).
The net asset as of December 2008, which represented 364
contracts, included gross assets of $739 million (primarily
comprised of equity and interest rate derivatives) and gross
liabilities of $381 million (primarily comprised of equity
and interest rate derivatives). See Notes 6 and 7 for
further information regarding the firm’s unsecured
borrowings.
As of March 2009, November 2008 and
December 2008, respectively, the firm has designated
$3.27 billion, $3.36 billion and $3.54 billion of
foreign
currency-denominated
debt, included in unsecured
long-term
borrowings in the firm’s condensed consolidated statements
of financial condition, as hedges of net investments in
non-U.S. subsidiaries
under SFAS No. 133. For the three months ended
March 2009 and one month ended December 2008, the
gain/(loss) on these debt instruments was $269 million and
$(186) million, respectively. Such amounts are included in
“Currency translation adjustment, net of tax” in the
condensed consolidated statements of comprehensive income. The
gain/(loss) related to ineffectiveness and the gain/(loss)
reclassified to earnings from accumulated other comprehensive
income were not material for the three months ended
March 2009 and one month ended December 2008.
The following table sets forth by major risk type the
firm’s gains/(losses) related to trading activities,
including both derivative and nonderivative financial
instruments, for the three months ended March 2009 and one
month ended December 2008 in accordance with SFAS
No. 161. These gains/(losses) are not representative of the
firm’s individual business unit results because many of the
firm’s trading strategies utilize financial instruments
across various risk types. Accordingly, gains or losses in one
risk type frequently offset gains or losses in other risk types.
For example, most of the firm’s longer-term derivative
contracts are sensitive to changes in interest rates and may be
hedged with interest rate swaps. Similarly, a significant
portion of the firm’s cash and derivatives trading
inventory has exposure to foreign currencies and may be hedged
with foreign currency contracts. The gains/(losses) set forth
below are included in “Trading and principal
investments” in the condensed consolidated statements of
earnings and exclude related interest income and interest
expense.
|
Three Months |
One Month |
|||||||
| Ended March | Ended December | |||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Interest rates
|
$ | 572 | $ | 2,226 | ||||
|
Credit
|
1,322 | (1,437 | ) | |||||
|
Currencies
|
977 | (2,256 | ) | |||||
|
Commodities
|
1,769 | 887 | ||||||
|
Equities
|
1,366 | 130 | ||||||
|
Total
|
$ | 6,006 | $ | (450 | ) | |||
37
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Certain of the firm’s derivative instruments have been
transacted pursuant to bilateral agreements with certain
counterparties that may require the firm to post collateral or
terminate the transactions based on the firm’s
long-term
credit ratings. As of March 2009, the aggregate fair value
of such derivative contracts that were in a net liability
position was $42.17 billion, and the aggregate fair value
of assets posted by the firm as collateral for these derivative
contracts was $27.36 billion. As of March 2009,
additional collateral or termination payments pursuant to
bilateral agreements with certain counterparties of
approximately $941 million and $2.14 billion could
have been called by counterparties in the event of a
one-notch
reduction and a
two-notch
reduction in the firm’s
long-term
credit ratings, respectively. As of December 2008, the
aggregate fair value of such derivative contracts that were in a
net liability position was $54.87 billion, and the
aggregate fair value of assets posted by the firm as collateral
for these derivative contracts was $37.17 billion. As of
December 2008, additional collateral or termination
payments pursuant to bilateral agreements with certain
counterparties of approximately $972 million and
$2.15 billion could have been called by counterparties in
the event of a
one-notch
reduction and a
two-notch
reduction in the firm’s
long-term
credit ratings, respectively.
The firm enters into various derivative transactions that are
considered credit derivatives under FSP
No. FAS 133-1
and
FIN 45-4.
The firm’s written and purchased credit derivatives include
credit default swaps, credit spread options, credit index
products and total return swaps. Substantially all of the
firm’s purchased credit derivative transactions are with
financial institutions and are subject to stringent collateral
thresholds. As of March 2009, the firm’s written and
purchased credit derivatives had total gross notional amounts of
$3.17 trillion and $3.43 trillion, respectively, for total net
purchased protection of $258.52 billion in notional value.
As of November 2008, the firm’s written and purchased
credit derivatives had total gross notional amounts of $3.78
trillion and $4.03 trillion, respectively, for total net
purchased protection of $255.24 billion in notional value.
As of December 2008, the firm’s written and purchased
credit derivatives had total gross notional amounts of $3.57
trillion and $3.80 trillion, respectively, for total net
purchased protection of $232.29 billion in notional value.
The decrease in notional amounts from November 2008 to
March 2009 reflects compression efforts across the industry.
38
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following tables set forth certain information related to
the firm’s credit derivatives. Fair values in the table
below exclude the effects of both netting under enforceable
netting agreements and netting of cash paid pursuant to credit
support agreements, and therefore are not representative of the
firm’s exposure.
| Maximum Payout/Notional Amount by Period of Expiration | Maximum Payout/Notional Amount | |||||||||||||||||||||||||||
|
Offsetting |
Other |
|||||||||||||||||||||||||||
|
10 Years |
Written |
Purchased |
Purchased |
Written Credit |
||||||||||||||||||||||||
|
0 - 5 |
5 - 10 |
or |
Credit |
Credit |
Credit |
Derivatives at |
||||||||||||||||||||||
| Years | Years | Greater | Derivatives | Derivatives (3) | Derivatives (4) | Fair Value | ||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||
|
As of March 2009
|
||||||||||||||||||||||||||||
| Credit spread on underlying (basis points) (1) | ||||||||||||||||||||||||||||
|
0-250
|
$ | 1,081,191 | $ | 391,197 | $ | 15,859 | $ | 1,488,247 | $ | 1,353,679 | $ | 255,606 | $ | 50,214 | ||||||||||||||
|
251-500
|
491,307 | 108,291 | 9,783 | 609,381 | 561,404 | 90,575 | 44,086 | |||||||||||||||||||||
|
501-1,000
|
367,235 | 115,921 | 3,781 | 486,937 | 417,163 | 90,333 | 67,505 | |||||||||||||||||||||
|
Greater than 1,000
|
460,201 | 91,203 | 35,587 | 586,991 | 544,383 | 116,930 | 230,499 | |||||||||||||||||||||
|
Total
|
$ | 2,399,934 | (2) | $ | 706,612 | $ | 65,010 | $ | 3,171,556 | $ | 2,876,629 | $ | 553,444 | $ | 392,304 | (5) | ||||||||||||
|
As of November 2008
|
||||||||||||||||||||||||||||
| Credit spread on underlying (basis points) (1) | ||||||||||||||||||||||||||||
|
0-250
|
$ | 1,194,228 | $ | 609,056 | $ | 22,866 | $ | 1,826,150 | $ | 1,632,681 | $ | 347,573 | $ | 77,836 | ||||||||||||||
|
251-500
|
591,813 | 184,763 | 12,494 | 789,070 | 784,149 | 26,316 | 94,278 | |||||||||||||||||||||
|
501-1,000
|
430,801 | 140,782 | 15,886 | 587,469 | 538,251 | 67,958 | 75,079 | |||||||||||||||||||||
|
Greater than 1,000
|
383,626 | 120,866 | 71,690 | 576,182 | 533,816 | 103,362 | 222,346 | |||||||||||||||||||||
|
Total
|
$ | 2,600,468 | (2) | $ | 1,055,467 | $ | 122,936 | $ | 3,778,871 | $ | 3,488,897 | $ | 545,209 | $ | 469,539 | (5) | ||||||||||||
|
As of December 2008
|
||||||||||||||||||||||||||||
| Credit spread on underlying (basis points) (1) | ||||||||||||||||||||||||||||
|
0-250
|
$ | 1,282,899 | $ | 467,914 | $ | 17,698 | $ | 1,768,511 | $ | 1,506,414 | $ | 384,475 | $ | 90,980 | ||||||||||||||
|
251-500
|
493,424 | 116,450 | 8,923 | 618,797 | 609,745 | 39,507 | 46,384 | |||||||||||||||||||||
|
501-1,000
|
446,836 | 94,451 | 5,425 | 546,712 | 491,688 | 97,055 | 73,826 | |||||||||||||||||||||
|
Greater than 1,000
|
496,904 | 95,807 | 43,629 | 636,340 | 604,508 | 69,259 | 233,086 | |||||||||||||||||||||
|
Total
|
$ | 2,720,063 | (2) | $ | 774,622 | $ | 75,675 | $ | 3,570,360 | $ | 3,212,355 | $ | 590,296 | $ | 444,276 | (5) | ||||||||||||
| (1) | Credit spread on the underlying, together with the period of expiration, are indicators of payment/performance risk. For example, the firm is least likely to pay or otherwise be required to perform where the credit spread on the underlying is “0-250” basis points and the period of expiration is “0-5 Years.” The likelihood of payment or performance is generally greater as the credit spread on the underlying and period of expiration increase. |
| (2) | Includes a maximum payout/notional amount for written credit derivatives of $243.02 billion, $208.44 billion and $237.43 billion expiring within one year as of March 2009, November 2008 and December 2008, respectively. |
| (3) | Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent they hedge written credit derivatives with identical underlyings. |
| (4) | Comprised of purchased protection in excess of the amount of written protection on identical underlyings and purchased protection on other underlyings on which the firm has not written protection. |
| (5) | This liability excludes the effects of both netting under enforceable netting agreements and netting of cash collateral paid pursuant to credit support agreements. Including the effects of netting receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements, the firm’s net liability related to credit derivatives in the firm’s statement of financial condition as of March 2009, November 2008 and December 2008 was $26.57 billion, $33.76 billion and $31.10 billion, respectively. This net amount excludes the netting of cash collateral paid pursuant to credit support agreements. The decrease in this net liability from November 2008 to March 2009 reflected tightening credit spreads. |
39
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Collateralized
Transactions
The firm receives financial instruments as collateral, primarily
in connection with resale agreements, securities borrowed,
derivative transactions and customer margin loans. Such
financial instruments may include obligations of the
U.S. government, federal agencies, sovereigns and
corporations, as well as equities and convertibles.
In many cases, the firm is permitted to deliver or repledge
these financial instruments in connection with entering into
repurchase agreements, securities lending agreements and other
secured financings, collateralizing derivative transactions and
meeting firm or customer settlement requirements. As of
March 2009, November 2008 and December 2008, the
fair value of financial instruments received as collateral by
the firm that it was permitted to deliver or repledge was
$609.87 billion, $578.72 billion and
$642.98 billion, respectively, of which the firm delivered
or repledged $446.53 billion, $445.11 billion and
$492.82 billion, respectively.
The firm also pledges assets that it owns to counterparties who
may or may not have the right to deliver or repledge them.
Trading assets pledged to counterparties that have the right to
deliver or repledge are included in “Trading assets, at
fair value” in the condensed consolidated statements of
financial condition and were $26.60 billion,
$26.31 billion and $42.00 billion as of
March 2009, November 2008 and December 2008,
respectively. Trading assets, pledged in connection with
repurchase agreements, securities lending agreements and other
secured financings to counterparties that did not have the right
to sell or repledge are included in “Trading assets, at
fair value” in the condensed consolidated statements of
financial condition and were $117.42 billion,
$80.85 billion and $274.94 billion as of
March 2009, November 2008 and December 2008,
respectively. Other assets (primarily real estate and cash)
owned and pledged in connection with other secured financings to
counterparties that did not have the right to sell or repledge
were $7.78 billion, $9.24 billion and
$7.12 billion as of March 2009, November 2008 and
December 2008, respectively.
In addition to repurchase agreements and securities lending
agreements, the firm obtains secured funding through the use of
other arrangements. Other secured financings include
arrangements that are nonrecourse, that is, only the subsidiary
that executed the arrangement or a subsidiary guaranteeing the
arrangement is obligated to repay the financing. Other secured
financings consist of liabilities related to the firm’s
William Street program; consolidated VIEs; collateralized
central bank financings and other transfers of financial assets
that are accounted for as financings rather than sales under
SFAS No. 140 (primarily pledged bank loans and
mortgage whole loans); and other structured financing
arrangements.
40
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other secured financings by maturity are set forth in the table
below:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Other secured financings
(short-term) (1)(2)
|
$ | 24,945 | $ | 21,225 | $ | 20,632 | ||||||
|
Other secured financings
(long-term):
|
||||||||||||
|
2010
|
3,712 | 2,157 | 3,721 | |||||||||
|
2011
|
3,181 | 4,578 | 3,741 | |||||||||
|
2012
|
3,025 | 3,040 | 3,035 | |||||||||
|
2013
|
1,875 | 1,377 | 1,784 | |||||||||
|
2014
|
953 | 1,512 | 1,163 | |||||||||
|
2015-thereafter
|
2,102 | 4,794 | 4,969 | |||||||||
|
Total other secured financings
(long-term) (3)(4)
|
14,848 | 17,458 | 18,413 | |||||||||
|
Total other secured
financings (5)(6)
|
$ | 39,793 | $ | 38,683 | $ | 39,045 | ||||||
| (1) | As of March 2009, November 2008 and December 2008, consists of U.S. dollar-denominated financings of $10.12 billion, $12.53 billion and $11.66 billion, respectively, with a weighted average interest rate of 1.10%, 2.98% and 2.65%, respectively, and non-U.S. dollar-denominated financings of $14.83 billion, $8.70 billion and $8.97 billion, respectively, with a weighted average interest rate of 0.35%, 0.95% and 0.76%, respectively, after giving effect to hedging activities. The weighted average interest rates as of March 2009, November 2008 and December 2008 excluded financial instruments accounted for at fair value under SFAS No. 159. | |
| (2) | Includes other secured financings maturing within one year of the financial statement date and other secured financings that are redeemable within one year of the financial statement date at the option of the holder. | |
| (3) | As of March 2009, November 2008 and December 2008, consists of U.S. dollar-denominated financings of $8.32 billion, $9.55 billion and $9.39 billion, respectively, with a weighted average interest rate of 2.79%, 4.62% and 4.14%, respectively, and non-U.S. dollar-denominated financings of $6.53 billion, $7.91 billion and $9.02 billion, respectively, with a weighted average interest rate of 2.85%, 4.39% and 4.16%, respectively, after giving effect to hedging activities. The weighted average interest rates as of March 2009, November 2008 and December 2008 excluded financial instruments accounted for at fair value under SFAS No. 159. | |
| (4) | Secured long-term financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Secured long-term financings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. | |
| (5) | As of March 2009, November 2008 and December 2008, $33.92 billion, $31.54 billion and $33.04 billion, respectively, of these financings were collateralized by financial instruments and $5.87 billion, $7.14 billion and $6.00 billion, respectively, by other assets (primarily real estate and cash). Other secured financings include $10.74 billion, $13.74 billion and $14.22 billion of nonrecourse obligations as of March 2009, November 2008 and December 2008, respectively. | |
| (6) | As of March 2009 and December 2008, other secured financings includes $26.84 billion and $23.08 billion, respectively, related to transfers of financial assets accounted for as financings rather than sales under SFAS No. 140. Such financings were collateralized by financial assets included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition of $27.76 billion and $25.46 billion as of March 2009 and December 2008, respectively. |
41
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 4. | Securitization Activities and Variable Interest Entities |
Securitization
Activities
The firm securitizes commercial and residential mortgages,
government and corporate bonds and other types of financial
assets. The firm acts as underwriter of the beneficial interests
that are sold to investors. The firm derecognizes financial
assets transferred in securitizations, provided it has
relinquished control over such assets. Transferred assets are
accounted for at fair value prior to securitization. Net
revenues related to these underwriting activities are recognized
in connection with the sales of the underlying beneficial
interests to investors.
The firm may have continuing involvement with transferred
assets, including: retaining interests in securitized financial
assets, primarily in the form of senior or subordinated
securities; retaining servicing rights; and purchasing senior or
subordinated securities in connection with secondary
market-making
activities. Retained interests and other interests related to
the firm’s continuing involvement are accounted for at fair
value and are included in “Trading assets, at fair
value” in the condensed consolidated statements of
financial condition. See Note 2 for additional information
regarding fair value measurement.
The following table sets forth the amount of financial assets
the firm securitized, as well as cash flows received on retained
interests:
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Residential mortgages
|
$ | 3,470 | $ | 1,520 | $ | 557 | ||||||
|
Commercial mortgages
|
— | — | — | |||||||||
|
Other financial assets
|
95 | 1,048 | (1) | 47 | ||||||||
|
Total
|
$ | 3,565 | $ | 2,568 | $ | 604 | ||||||
|
Cash flows received on retained interests
|
$ | 94 | $ | 116 | $ | 26 | ||||||
| (1) | Primarily in connection with collateralized loan obligations (CLOs). |
42
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following tables set forth certain information related to
the firm’s continuing involvement in securitization
entities to which the firm sold assets, as well as the total
outstanding principal amount of transferred assets in which the
firm has continuing involvement, as of March 2009 and
December 2008 in accordance with FSP
No. FAS 140-4
and FIN 46(R)-8. The outstanding principal amount set forth
in the tables below is presented for the purpose of providing
information about the size of the transferred assets in which
the firm has continuing involvement, and is not representative
of the firm’s risk of loss. For retained or purchased
interests, the firm’s risk of loss is limited to the fair
value of these interests.
| As of March 2009 (1) | ||||||||||||
|
Outstanding |
Fair value of |
Fair value of |
||||||||||
|
principal |
retained |
purchased |
||||||||||
| amount | interests | interests (2) | ||||||||||
| (in millions) | ||||||||||||
|
Residential
mortgage-backed
|
$ | 33,161 | $ | 1,176 | (4) | $ | 41 | |||||
|
Commercial
mortgage-backed
|
10,337 | 244 | 45 | |||||||||
|
Other
asset-backed (3)
|
9,301 | 64 | 1 | |||||||||
|
Total
|
$ | 52,799 | $ | 1,484 | $ | 87 | ||||||
| As of December 2008 (1) | ||||||||||||
|
Outstanding |
Fair value of |
Fair value of |
||||||||||
|
principal |
retained |
purchased |
||||||||||
| amount | interests | interests (2) | ||||||||||
| (in millions) | ||||||||||||
|
Residential
mortgage-backed
|
$ | 34,189 | $ | 927 | (4) | $ | 53 | |||||
|
Commercial
mortgage-backed
|
11,353 | 408 | 63 | |||||||||
|
Other
asset-backed (3)
|
11,599 | 209 | 10 | |||||||||
|
Total
|
$ | 57,141 | $ | 1,544 | $ | 126 | ||||||
| (1) | As of March 2009 and December 2008, fair value of other continuing involvement excludes $494 million and $526 million, respectively, of purchased interests in securitization entities where the firm’s involvement was related to secondary market-making activities. Continuing involvement also excludes derivative contracts that are used by securitization entities to manage credit, interest rate or foreign exchange risk. | |
| (2) | Comprised of senior and subordinated interests purchased in connection with secondary market-making activities in VIEs and QSPEs in which the firm also holds retained interests. In addition to these interests, the firm had other continuing involvement in the form of derivative transactions and guarantees with certain VIEs for which the carrying value was a net liability of $71 million and $72 million as of March 2009 and December 2008, respectively. The notional amounts of these transactions are included in maximum exposure to loss in the nonconsolidated VIE table below. | |
| (3) | Primarily consists of CDOs backed by corporate and mortgage obligations and CLOs. Outstanding principal amount and fair value of retained interests include $8.08 billion and $28 million, respectively, as of March 2009 and $10.21 billion and $57 million, respectively, as of December 2008 related to VIEs which are also included in the nonconsolidated VIE table below. | |
| (4) | Primarily consists of retained interests in government agency QSPEs. |
43
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth the weighted average key economic
assumptions used in measuring the fair value of the firm’s
retained interests and the sensitivity of this fair value to
immediate adverse changes of 10% and 20% in those assumptions:
| As of March 2009 | As of November 2008 | As of December 2008 | ||||||||||||||||||||||
| Type of Retained Interests (1) | Type of Retained Interests (1) | Type of Retained Interests (1) | ||||||||||||||||||||||
|
Other |
Other |
Other |
||||||||||||||||||||||
|
Mortgage- |
Asset- |
Mortgage- |
Asset- |
Mortgage- |
Asset- |
|||||||||||||||||||
| Backed | Backed (2) | Backed | Backed | Backed | Backed | |||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||
|
Fair value of retained interests
|
$ | 1,420 | $ | 64 | $ | 1,415 | $ | 367 | (5) | $ | 1,335 | $ | 209 | |||||||||||
|
Weighted average life (years)
|
4.6 | 3.6 | 6.0 | 5.1 | 5.2 | 4.5 | ||||||||||||||||||
|
Constant prepayment
rate (3)
|
18.0 | % | N.M. | 15.5 | % | 4.5 | % | 14.1 | % | 3.9 | % | |||||||||||||
|
Impact of 10% adverse
change (3)
|
$ | (8 | ) | N.M. | $ | (14 | ) | $ | (6 | ) | $ | (12 | ) | $ | — | |||||||||
|
Impact of 20% adverse
change (3)
|
(18 | ) | N.M. | (27 | ) | (12 | ) | (24 | ) | (1 | ) | |||||||||||||
|
Discount
rate (4)
|
17.0 | % | N.M. | 21.1 | % | 29.2 | % | 21.2 | % | 24.3 | % | |||||||||||||
|
Impact of 10% adverse change
|
$ | (43 | ) | N.M. | $ | (46 | ) | $ | (25 | ) | $ | (46 | ) | $ | (18 | ) | ||||||||
|
Impact of 20% adverse change
|
(82 | ) | N.M. | (89 | ) | (45 | ) | (87 | ) | (33 | ) | |||||||||||||
| (1) | Includes $1.46 billion, $1.53 billion and $1.49 billion as of March 2009, November 2008 and December 2008, respectively, held in QSPEs. | |
| (2) | Due to the nature and current fair value of certain of these retained interests, the weighted average assumptions for constant prepayment and discount rates and the related sensitivity to adverse changes are not meaningful as of March 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the firm’s carrying value of $64 million. | |
| (3) | Constant prepayment rate is included only for positions for which constant prepayment rate is a key assumption in the determination of fair value. | |
| (4) | The majority of the firm’s mortgage-backed retained interests are U.S. government agency-issued collateralized mortgage obligations, for which there is no anticipated credit loss. For the remainder of the firm’s retained interests, the expected credit loss assumptions are reflected within the discount rate. | |
| (5) | Includes $192 million of retained interests related to transfers of securitized assets that were accounted for as secured financings rather than as sales under SFAS No. 140. |
The preceding table does not give effect to the offsetting
benefit of other financial instruments that are held to mitigate
risks inherent in these retained interests. Changes in fair
value based on an adverse variation in assumptions generally
cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value is not usually linear.
In addition, the impact of a change in a particular assumption
is calculated independently of changes in any other assumption.
In practice, simultaneous changes in assumptions might magnify
or counteract the sensitivities disclosed above.
44
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
As of March 2009, November 2008 and
December 2008, the firm held mortgage servicing rights with
a fair value of $139 million, $147 million and
$153 million, respectively. These servicing assets
represent the firm’s right to receive a future stream of
cash flows, such as servicing fees, in excess of the firm’s
obligation to service residential mortgages. The fair value of
mortgage servicing rights will fluctuate in response to changes
in certain economic variables, such as discount rates and loan
prepayment rates. The firm estimates the fair value of mortgage
servicing rights by using valuation models that incorporate
these variables in quantifying anticipated cash flows related to
servicing activities. Mortgage servicing rights are included in
“Trading assets, at fair value” in the condensed
consolidated statements of financial condition and are
classified within level 3 of the fair value hierarchy. The
following table sets forth changes in the firm’s mortgage
servicing rights, as well as servicing fees earned:
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Balance, beginning of period
|
$ | 153 | $ | 93 | $ | 147 | ||||||
|
Purchases
|
— | 212 | (1) | — | ||||||||
|
Servicing assets that resulted from transfers of financial assets
|
— | 3 | — | |||||||||
|
Changes in fair value due to changes in valuation inputs and
assumptions
|
(14 | ) | (25 | ) | 6 | |||||||
|
Balance, end of
period (2)
|
$ | 139 | $ | 283 | $ | 153 | ||||||
|
Contractually specified servicing fees
|
$ | 93 | $ | 65 | $ | 25 | ||||||
| (1) | Primarily related to the acquisition of Litton Loan Servicing LP. | |
| (2) | As of March 2009, the fair value was estimated using a weighted average discount rate of approximately 16% and a weighted average prepayment rate of approximately 28%. As of February 2008, the fair value was estimated using a weighted average discount rate of approximately 16% and a weighted average prepayment rate of approximately 27%. As of December 2008, the fair value was estimated using a weighted average discount rate of approximately 16% and a weighted average prepayment rate of approximately 21%. |
Variable
Interest Entities (VIEs)
The firm, in the ordinary course of business, retains interests
in VIEs in connection with its securitization activities. The
firm also purchases and sells variable interests in VIEs, which
primarily issue
mortgage-backed
and other
asset-backed
securities, CDOs and CLOs, in connection with its
market-making
activities and makes investments in and loans to VIEs that hold
performing and nonperforming debt, equity, real estate,
power-related and other assets. In addition, the firm utilizes
VIEs to provide investors with principal-protected notes,
credit-linked
notes and
asset-repackaged
notes designed to meet their objectives. VIEs generally purchase
assets by issuing debt and equity instruments.
45
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm’s significant variable interests in VIEs include
senior and subordinated debt interests in
mortgage-backed
and
asset-backed
securitization vehicles, CDOs and CLOs; loan commitments;
limited and general partnership interests; preferred and common
stock; interest rate, foreign currency, equity, commodity and
credit derivatives; and guarantees. Subsequent to the adoption
of FSP
No. FAS 140-4
and FIN 46(R)-8 in December 2008, any variable
interests in VIEs for which the firm acted as sponsor are
included in the disclosures below, regardless of significance.
As a result of this change, “Assets in VIE” in the
below tables include approximately $30 billion as of both
March 2009 and December 2008, related to retained and
purchased interests which were previously considered
insignificant because the firm’s exposure to these
interests is de minimis. The increase in “Assets in
VIE” from November 2008 due to this change in
disclosure requirements had no impact on the firm’s risk of
loss or exposure related to these instruments. The firm’s
exposure to these VIEs is limited to the carrying values of
these retained and purchased interests, which totaled
approximately $68 million and $90 million as of
March 2009 and December 2008, respectively.
The firm’s exposure to the obligations of VIEs is generally
limited to its interests in these entities. In the tables set
forth below, the maximum exposure to loss for purchased and
retained interests and loans and investments is the carrying
value of these interests. In certain instances, the firm
provides guarantees, including derivative guarantees, to VIEs or
holders of variable interests in VIEs. For these contracts,
maximum exposure to loss set forth in the tables below is the
notional amount of such guarantees, which does not represent
anticipated losses and also has not been reduced by unrealized
losses already recorded by the firm in connection with these
guarantees. As a result, the maximum exposure to loss exceeds
the firm’s liabilities related to VIEs.
The following tables set forth total assets in firm-sponsored
nonconsolidated VIEs in which the firm holds variable interests
and other nonconsolidated VIEs in which the firm holds
significant variable interests, and the firm’s maximum
exposure to loss excluding the benefit of offsetting financial
instruments that are held to mitigate the risks associated with
these variable interests. For March 2009 and
December 2008, in accordance with FSP
No. FAS 140-4
and FIN 46(R)-8, the following tables also set forth the
total assets and total liabilities included in the condensed
consolidated statements of financial condition related to the
firm’s significant interests in nonconsolidated VIEs. The
firm has aggregated nonconsolidated VIEs based on principal
business activity, as reflected in the first column. The nature
of the firm’s variable interests can take different forms,
as described in the columns under maximum exposure to loss.
| As of March 2009 | |||||||||||||||||||||||||||||||||
|
Carrying Value of |
|||||||||||||||||||||||||||||||||
|
the Firm’s |
|||||||||||||||||||||||||||||||||
| Variable Interests | Maximum Exposure to Loss in Nonconsolidated VIEs (1) | ||||||||||||||||||||||||||||||||
|
Purchased |
Commitments |
||||||||||||||||||||||||||||||||
|
Assets |
and Retained |
and |
Loans and |
||||||||||||||||||||||||||||||
| in VIE | Assets | Liabilities | Interests | Guarantees | Derivatives | Investments | Total | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||
|
Mortgage
CDOs (2)
|
$ | 35,003 | $ | 95 | $ | 35 | $ | 95 | $ | — | $ | 4,655 | (7) | $ | — | $ | 4,750 | ||||||||||||||||
|
Corporate CDOs and
CLOs (2)
|
21,842 | 196 | 769 | 196 | — | 3,140 | (8) | — | 3,336 | ||||||||||||||||||||||||
|
Real estate,
credit-related
and other investing (3) |
26,679 | 3,104 | 153 | — | 367 | — | 2,970 | 3,337 | |||||||||||||||||||||||||
|
Other
asset-backed (2)
|
307 | 4 | 45 | — | — | 307 | — | 307 | |||||||||||||||||||||||||
|
Power-related (4)
|
647 | 224 | 3 | — | 37 | — | 224 | 261 | |||||||||||||||||||||||||
|
Principal-protected
notes (5)
|
2,532 | 33 | 1,413 | — | — | 2,749 | — | 2,749 | |||||||||||||||||||||||||
|
Total
|
$ | 87,010 | $ | 3,656 | $ | 2,418 | $ | 291 | $ | 404 | (6) | $ | 10,851 | (6) | $ | 3,194 | $ | 14,740 | |||||||||||||||
46
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| As of November 2008 | |||||||||||||||||||||||||
| Maximum Exposure to Loss in Nonconsolidated VIEs (1) | |||||||||||||||||||||||||
|
Purchased |
Commitments |
||||||||||||||||||||||||
|
Assets |
and Retained |
and |
Loans and |
||||||||||||||||||||||
| in VIE | Interests | Guarantees | Derivatives | Investments | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
|
Mortgage CDOs
|
$ | 13,061 | $ | 242 | $ | — | $ | 5,616 | (7) | $ | — | $ | 5,858 | ||||||||||||
|
Corporate CDOs and CLOs
|
8,584 | 161 | — | 918 | (8) | — | 1,079 | ||||||||||||||||||
|
Real estate,
credit-related
and other
investing (3)
|
26,898 | — | 143 | — | 3,223 | 3,366 | |||||||||||||||||||
|
Municipal bond securitizations
|
111 | — | 111 | — | — | 111 | |||||||||||||||||||
|
Other
asset-backed
|
4,355 | — | — | 1,084 | — | 1,084 | |||||||||||||||||||
|
Power-related
|
844 | — | 37 | — | 213 | 250 | |||||||||||||||||||
|
Principal-protected
notes (5)
|
4,516 | — | — | 4,353 | — | 4,353 | |||||||||||||||||||
|
Total
|
$ | 58,369 | $ | 403 | $ | 291 | $ | 11,971 | $ | 3,436 | $ | 16,101 | |||||||||||||
| As of December 2008 | |||||||||||||||||||||||||||||||||
|
Carrying Value of |
|||||||||||||||||||||||||||||||||
|
the Firm’s |
|||||||||||||||||||||||||||||||||
| Variable Interests | Maximum Exposure to Loss in Nonconsolidated VIEs (1) | ||||||||||||||||||||||||||||||||
|
Purchased |
Commitments |
||||||||||||||||||||||||||||||||
|
Assets |
and Retained |
and |
Loans and |
||||||||||||||||||||||||||||||
| in VIE | Assets | Liabilities | Interests | Guarantees | Derivatives | Investments | Total | ||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||
|
Mortgage
CDOs (2)
|
$ | 37,266 | $ | 98 | $ | 78 | $ | 98 | $ | — | $ | 5,022 | (7) | $ | — | $ | 5,120 | ||||||||||||||||
|
Corporate CDOs and
CLOs (2)
|
20,987 | 270 | 928 | 270 | — | 2,365 | (8) | — | 2,635 | ||||||||||||||||||||||||
|
Real estate,
credit-related
and other
investing (3)
|
27,946 | 3,139 | 186 | — | 300 | — | 3,075 | 3,375 | |||||||||||||||||||||||||
|
Municipal bond securitizations
|
69 | — | — | — | 69 | — | — | 69 | |||||||||||||||||||||||||
|
Other
asset-backed (2)
|
325 | 4 | 58 | — | — | 325 | — | 325 | |||||||||||||||||||||||||
|
Power-related (4)
|
663 | 211 | 3 | — | 37 | — | 211 | 248 | |||||||||||||||||||||||||
|
Principal-protected
notes (5)
|
3,993 | 95 | 1,047 | — | — | 4,689 | — | 4,689 | |||||||||||||||||||||||||
|
Total
|
$ | 91,249 | $ | 3,817 | $ | 2,300 | $ | 368 | $ | 406 | (6) | $ | 12,401 | (6) | $ | 3,286 | $ | 16,461 | |||||||||||||||
| (1) | Such amounts do not represent the anticipated losses in connection with these transactions as they exclude the effect of offsetting financial instruments that are held to mitigate these risks. |
| (2) | These VIEs are generally financed through the issuance of debt instruments collateralized by assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Trading liabilities, at fair value,” respectively, in the condensed consolidated statements of financial condition. |
| (3) | The firm obtains interests in these VIEs in connection with making investments in real estate, distressed loans and other types of debt, mezzanine instruments and equities. These VIEs are generally financed through the issuance of debt and equity instruments which are either collateralized by or indexed to assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. |
| (4) | Assets and liabilities held by the firm related to these VIEs are included in “Other assets” and “Trading liabilities, at fair value” in the condensed consolidated statements of financial condition. |
| (5) | Consists of out-of-the-money written put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing. Assets related to these VIEs are included in “Trading assets, at fair value” and liabilities related to these VIEs are included in “Other secured financings,” “Unsecured short-term borrowings” or “Unsecured long-term borrowings” in the condensed consolidated statements of financial condition. Assets in VIE, carrying value of liabilities and maximum exposure to loss exclude $3.55 billion and $3.17 billion as of March 2009 and December 2008, respectively, associated with guarantees related to the firm’s performance under borrowings from the VIE, which are recorded as liabilities in the condensed consolidated statements of financial condition. Substantially all of the liabilities included in the table above relate to additional borrowings from the VIE associated with principal protected notes guaranteed by the firm. |
| (6) | The aggregate amounts include $4.84 billion and $5.13 billion as of March 2009 and December 2008, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets. |
| (7) | Primarily consists of written protection on investment-grade, short-term collateral held by VIEs that have issued CDOs. |
| (8) | Primarily consists of total return swaps on CDOs and CLOs. The firm has generally transferred the risks related to the underlying securities through derivatives with non-VIEs. |
47
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth the firm’s total assets
excluding the benefit of offsetting financial instruments that
are held to mitigate the risks associated with its variable
interests in consolidated VIEs. The following table excludes
VIEs in which the firm holds a majority voting interest unless
the activities of the VIE are primarily related to
securitization,
asset-backed
financings or single-lessee leasing arrangements. For
March 2009 and December 2008, in accordance with FSP
No. FAS 140-4
and FIN 46(R)-8, the following table also sets forth the
total liabilities included in the condensed consolidated
statements of financial condition related to the firm’s
consolidated VIEs. The firm has aggregated consolidated VIEs
based on principal business activity, as reflected in the first
column.
| As of | ||||||||||||||||||||
| March 2009 | November 2008 | December 2008 | ||||||||||||||||||
|
VIE |
VIE |
VIE |
VIE |
VIE |
||||||||||||||||
| Assets (1) | Liabilities (1) | Assets (1) | Assets (1) | Liabilities (1) | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Real estate,
credit-related
and other investing
|
$ | 1,362 | $ | 1,141 | (2) | $ | 1,560 | $ | 1,531 | $ | 1,261 | (2) | ||||||||
|
Municipal bond securitizations
|
847 | 1,127 | (3) | 985 | 928 | 1,285 | (3) | |||||||||||||
|
CDOs,
mortgage-backed
and other
asset-backed
|
120 | 41 | (4) | 32 | 121 | 59 | (4) | |||||||||||||
|
Foreign exchange and commodities
|
435 | 440 | (5) | 652 | 559 | 514 | (5) | |||||||||||||
|
Principal-protected notes
|
203 | 203 | (6) | 215 | 235 | 235 | (6) | |||||||||||||
|
Total
|
$ | 2,967 | $ | 2,952 | $ | 3,444 | $ | 3,374 | $ | 3,354 | ||||||||||
| (1) | Consolidated VIE assets and liabilities are presented after intercompany eliminations and include assets financed on a nonrecourse basis. Substantially all VIE assets are included in “Trading assets, at fair value” and “Cash and cash equivalents” in the condensed consolidated statements of financial condition. | |
| (2) | These VIE liabilities, which are collateralized by the related VIE assets, are included in “Other secured financings” in the condensed consolidated statements of financial condition and generally do not provide for recourse to the general credit of the firm. | |
| (3) | These VIE liabilities, which are collateralized by the related VIE assets, are included in “Other secured financings” in the condensed consolidated statements of financial condition. | |
| (4) | These VIE liabilities are included in “Other liabilities and accrued expenses” in the condensed consolidated statements of financial condition and generally do not provide for recourse to the general credit of the firm. | |
| (5) | These VIE liabilities are primarily included in “Trading liabilities, at fair value” on the condensed consolidated statements of financial condition. | |
| (6) | These VIE liabilities are included in “Unsecured short-term borrowings” on the condensed consolidated statements of financial condition. |
The firm did not have
off-balance-sheet
commitments to purchase or finance any CDOs held by structured
investment vehicles as of March 2009, November 2008 or
December 2008.
48
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 5. | Deposits |
The following table sets forth deposits as of March 2009,
November 2008 and December 2008:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
U.S. offices (1)
|
$ | 38,892 | $ | 23,018 | $ | 27,430 | ||||||
|
Non-U.S. offices (2)
|
5,612 | 4,625 | 4,700 | |||||||||
|
Total
|
$ | 44,504 | $ | 27,643 | $ | 32,130 | ||||||
| (1) | Substantially all U.S. deposits were interest-bearing and were held at GS Bank USA. | |
| (2) | Substantially all non-U.S. deposits were interest-bearing and held at Goldman Sachs Bank (Europe) PLC (GS Bank Europe). |
Included in the above table are time deposits of
$14.50 billion, $8.49 billion and $11.41 billion
as of March 2009, November 2008 and
December 2008, respectively. The following table sets forth
the maturities of time deposits as of March 2009:
| As of March 2009 | ||||||||||||
| U.S. | Non-U.S. | Total | ||||||||||
| (in millions) | ||||||||||||
|
2009
|
$ | 5,567 | $ | 591 | $ | 6,158 | ||||||
|
2010
|
1,490 | 3 | 1,493 | |||||||||
|
2011
|
1,523 | — | 1,523 | |||||||||
|
2012
|
818 | — | 818 | |||||||||
|
2013
|
1,827 | 37 | 1,864 | |||||||||
|
2014-thereafter
|
2,640 | — | 2,640 | |||||||||
|
Total
|
$ | 13,865 | $ | 631 | $ | 14,496 | ||||||
49
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 6. | Short-Term Borrowings |
As of March 2009, November 2008 and
December 2008,
short-term
borrowings were $69.55 billion, $73.89 billion and
$74.72 billion, respectively, comprised of
$24.95 billion, $21.23 billion and
$20.63 billion, respectively, included in “Other
secured financings” in the condensed consolidated
statements of financial condition and $44.60 billion,
$52.66 billion and $54.09 billion, respectively, of
unsecured
short-term
borrowings. See Note 3 for information on other secured
financings.
Unsecured
short-term
borrowings include the portion of unsecured
long-term
borrowings maturing within one year of the financial statement
date and unsecured
long-term
borrowings that are redeemable within one year of the financial
statement date at the option of the holder. The firm accounts
for promissory notes, commercial paper and certain hybrid
financial instruments at fair value under SFAS No. 155
or SFAS No. 159.
Short-term
borrowings that are not recorded at fair value are recorded
based on the amount of cash received plus accrued interest, and
such amounts approximate fair value due to the
short-term
nature of the obligations.
Unsecured
short-term
borrowings are set forth below:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Current portion of unsecured
long-term
borrowings
|
$ | 20,479 | $ | 26,281 | $ | 24,274 | ||||||
|
Hybrid financial instruments
|
9,329 | 12,086 | 11,133 | |||||||||
|
Promissory
notes (1)
|
8,006 | 6,944 | 10,290 | |||||||||
|
Commercial
paper (2)
|
320 | 1,125 | 1,069 | |||||||||
|
Other
short-term
borrowings (3)
|
6,462 | 6,222 | 7,327 | |||||||||
|
Total (4)
|
$ | 44,596 | $ | 52,658 | $ | 54,093 | ||||||
| (1) | Includes $7.99 billion, $3.42 billion and $8.41 billion as of March 2009, November 2008 and December 2008, respectively, guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). | |
| (2) | Includes $0, $751 million and $540 million as of March 2009, November 2008 and December 2008, respectively, guaranteed by the FDIC under the TLGP. | |
| (3) | Includes $1.11 billion as of both March 2009 and December 2008 and $0 as of November 2008 guaranteed by the FDIC under the TLGP. | |
| (4) | The weighted average interest rates for these borrowings, after giving effect to hedging activities, were 2.14%, 3.37% and 2.75% as of March 2009, November 2008 and December 2008, respectively, and excluded financial instruments accounted for at fair value under SFAS No. 155 or SFAS No. 159. |
50
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 7. | Long-Term Borrowings |
As of March 2009, November 2008 and
December 2008,
long-term
borrowings were $203.38 billion, $185.68 billion and
$203.97 billion, respectively, comprised of
$14.85 billion, $17.46 billion and
$18.41 billion, respectively, included in “Other
secured financings” in the condensed consolidated
statements of financial condition and $188.53 billion,
$168.22 billion and $185.56 billion, respectively, of
unsecured
long-term
borrowings. See Note 3 for information regarding other
secured financings.
The firm’s unsecured
long-term
borrowings extend through 2043 and consist principally of senior
borrowings.
Unsecured
long-term
borrowings are set forth below:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Fixed rate
obligations (1)
|
$ | 118,664 | $ | 103,825 | $ | 117,335 | ||||||
|
Floating rate
obligations (2)
|
69,870 | 64,395 | 68,229 | |||||||||
|
Total (3)
|
$ | 188,534 | $ | 168,220 | $ | 185,564 | ||||||
| (1) | As of March 2009, November 2008 and December 2008, $82.25 billion, $70.08 billion and $78.45 billion, respectively, of the firm’s fixed rate debt obligations were denominated in U.S. dollars and interest rates ranged from 1.63% to 10.04%, from 3.87% to 10.04% and from 3.25% to 10.04%, respectively. As of March 2009, November 2008 and December 2008, $36.41 billion, $33.75 billion and $38.89 billion, respectively, of the firm’s fixed rate debt obligations were denominated in non-U.S. dollars and interest rates ranged from 0.67% to 7.45%, from 0.67% to 8.88% and from 0.67% to 8.88%, respectively. | |
| (2) | As of March 2009, November 2008 and December 2008, $37.10 billion, $32.41 billion and $33.11 billion, respectively, of the firm’s floating rate debt obligations were denominated in U.S. dollars. As of March 2009, November 2008 and December 2008, $32.77 billion, $31.99 billion and $35.12 billion, respectively, of the firm’s floating rate debt obligations were denominated in non-U.S. dollars. Floating interest rates generally are based on LIBOR or the federal funds target rate. Equity-linked and indexed instruments are included in floating rate obligations. | |
| (3) | Includes $20.74 billion, $0 and $9.19 billion as of March 2009, November 2008 and December 2008, respectively, guaranteed by the FDIC under the TLGP. |
51
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Unsecured
long-term
borrowings by maturity date are set forth below (in millions):
|
As of |
||||
| March 2009 | ||||
|
2010
|
$ | 11,776 | ||
|
2011
|
22,427 | |||
|
2012
|
25,071 | |||
|
2013
|
22,481 | |||
|
2014
|
15,480 | |||
|
2015-thereafter
|
91,299 | |||
|
Total (1)(2)
|
$ | 188,534 | ||
| (1) | Unsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder are included as unsecured short-term borrowings in the condensed consolidated statements of financial condition. | |
| (2) | Unsecured long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Unsecured long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. |
The firm enters into derivative contracts to effectively convert
a substantial portion of its unsecured
long-term
borrowings which are not accounted for at fair value into
floating rate obligations. Accordingly, excluding the cumulative
impact of changes in the firm’s credit spreads, the
carrying value of unsecured
long-term
borrowings approximated fair value as of March 2009,
November 2008 and December 2008. For unsecured
long-term
borrowings for which the firm did not elect the fair value
option, the cumulative impact due to the widening of the
firm’s own credit spreads was a reduction in the fair value
of total unsecured
long-term
borrowings of approximately 6%, 9% and 8% as of March 2009,
November 2008 and December 2008, respectively.
The effective weighted average interest rates for unsecured
long-term
borrowings are set forth below:
| As of | ||||||||||||||||||||||||
| March 2009 | November 2008 | December 2008 | ||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||
|
Fixed rate obligations
|
$ | 3,866 | 5.17 | % | $ | 4,015 | 4.97 | % | $ | 4,044 | 4.97 | % | ||||||||||||
|
Floating rate
obligations (1)
|
184,668 | 1.41 | 164,205 | 2.66 | 181,520 | 2.64 | ||||||||||||||||||
|
Total (2)
|
$ | 188,534 | 1.50 | $ | 168,220 | 2.73 | $ | 185,564 | 2.70 | |||||||||||||||
| (1) | Includes fixed rate obligations that have been converted into floating rate obligations through derivative contracts. | |
| (2) | The weighted average interest rates as of March 2009, November 2008 and December 2008 excluded financial instruments accounted for at fair value under SFAS No. 155 or SFAS No. 159. |
52
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Subordinated
Borrowings
Unsecured
long-term
borrowings included subordinated borrowings with outstanding
principal amounts of $18.77 billion, $19.26 billion
and $19.21 billion as of March 2009,
November 2008 and December 2008, respectively, as set
forth below.
Junior Subordinated Debt Issued to Trusts in Connection with
Fixed-to-Floating
and Floating Rate Normal Automatic Preferred Enhanced Capital
Securities. In 2007, Group Inc. issued a
total of $2.25 billion of remarketable junior subordinated
debt to Goldman Sachs Capital II and Goldman Sachs Capital III
(APEX Trusts), Delaware statutory trusts that, in turn, issued
$2.25 billion of guaranteed perpetual Automatic Preferred
Enhanced Capital Securities (APEX) to third parties and a de
minimis amount of common securities to Group Inc.
Group Inc. also entered into contracts with the APEX Trusts
to sell $2.25 billion of perpetual
non-cumulative
preferred stock to be issued by Group Inc. (the stock
purchase contracts). The APEX Trusts are wholly owned finance
subsidiaries of the firm for regulatory and legal purposes but
are not consolidated for accounting purposes.
The firm pays interest
semi-annually
on $1.75 billion of junior subordinated debt issued to
Goldman Sachs Capital II at a fixed annual rate of 5.59% and the
debt matures on June 1, 2043. The firm pays interest
quarterly on $500 million of junior subordinated debt
issued to Goldman Sachs Capital III at a rate per annum equal to
three-month
LIBOR plus 0.57% and the debt matures on
September 1, 2043. In addition, the firm makes
contract payments at a rate of 0.20% per annum on the stock
purchase contracts held by the APEX Trusts. The firm has the
right to defer payments on the junior subordinated debt and the
stock purchase contracts, subject to limitations, and therefore
cause payment on the APEX to be deferred. During any such
extension period, the firm will not be permitted to, among other
things, pay dividends on or make certain repurchases of its
common or preferred stock. The junior subordinated debt is
junior in right of payment to all of Group Inc.’s
senior indebtedness and all of Group Inc.’s other
subordinated borrowings.
In connection with the APEX issuance, the firm covenanted in
favor of certain of its debtholders, who are initially the
holders of Group Inc.’s 6.345% Junior Subordinated
Debentures due February 15, 2034, that, subject to
certain exceptions, the firm would not redeem or purchase
(i) Group Inc.’s junior subordinated debt issued
to the APEX Trusts prior to the applicable stock purchase date
or (ii) APEX or shares of Group Inc.’s
Series E or Series F Preferred Stock prior to the date
that is ten years after the applicable stock purchase date,
unless the applicable redemption or purchase price does not
exceed a maximum amount determined by reference to the aggregate
amount of net cash proceeds that the firm has received from the
sale of qualifying equity securities during the
180-day
period preceding the redemption or purchase.
The firm has accounted for the stock purchase contracts as
equity instruments under EITF Issue
No. 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own
Stock,” and, accordingly, recorded the cost of the stock
purchase contracts as a reduction to additional
paid-in
capital. See Note 9 for information on the preferred stock
that Group Inc. will issue in connection with the stock
purchase contracts.
53
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Junior Subordinated Debt Issued to a Trust in Connection with
Trust Preferred Securities. Group Inc.
issued $2.84 billion of junior subordinated debentures in
2004 to Goldman Sachs Capital I (Trust), a Delaware statutory
trust that, in turn, issued $2.75 billion of guaranteed
preferred beneficial interests to third parties and
$85 million of common beneficial interests to
Group Inc. and invested the proceeds from the sale in
junior subordinated debentures issued by Group Inc. The
Trust is a wholly owned finance subsidiary of the firm for
regulatory and legal purposes but is not consolidated for
accounting purposes.
The firm pays interest
semi-annually
on these debentures at an annual rate of 6.345% and the
debentures mature on February 15, 2034. The coupon
rate and the payment dates applicable to the beneficial
interests are the same as the interest rate and payment dates
applicable to the debentures. The firm has the right, from time
to time, to defer payment of interest on the debentures, and,
therefore, cause payment on the Trust’s preferred
beneficial interests to be deferred, in each case up to ten
consecutive
semi-annual
periods. During any such extension period, the firm will not be
permitted to, among other things, pay dividends on or make
certain repurchases of its common stock. The Trust is not
permitted to pay any distributions on the common beneficial
interests held by Group Inc. unless all dividends payable
on the preferred beneficial interests have been paid in full.
These debentures are junior in right of payment to all of
Group Inc.’s senior indebtedness and all of
Group Inc.’s subordinated borrowings, other than the
junior subordinated debt issued in connection with the Normal
Automatic Preferred Enhanced Capital Securities.
Subordinated Debt. As of March 2009, the
firm had $13.68 billion of other subordinated debt
outstanding with maturities ranging from fiscal 2010 to 2038.
The effective weighted average interest rate on this debt was
0.88%, after giving effect to derivative contracts used to
convert fixed rate obligations into floating rate obligations.
As of November 2008, the firm had $14.17 billion of
other subordinated debt outstanding with maturities ranging from
fiscal 2009 to 2038. The effective weighted average interest
rate on this debt was 1.99%, after giving effect to derivative
contracts used to convert fixed rate obligations into floating
rate obligations. As of December 2008, the firm had
$14.12 billion of other subordinated debt outstanding with
maturities ranging from fiscal 2010 to 2038. The effective
weighted average interest rate on this debt was 1.72%, after
giving effect to derivative contracts used to convert fixed rate
obligations into floating rate obligations. This debt is junior
in right of payment to all of the firm’s senior
indebtedness.
54
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 8. | Commitments, Contingencies and Guarantees |
Commitments
The following table summarizes the firm’s commitments as of
March 2009, November 2008 and December 2008:
|
Commitment Amount by Fiscal Period |
||||||||||||||||||||||||||||
| of Expiration as of March 2009 | Total Commitments as of | |||||||||||||||||||||||||||
|
Remainder |
2010- |
2012- |
2014- |
March |
November |
December |
||||||||||||||||||||||
| of 2009 | 2011 | 2013 | Thereafter | 2009 | 2008 | 2008 | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
|
Commitments to extend
credit (1)
|
||||||||||||||||||||||||||||
|
Commercial lending:
|
||||||||||||||||||||||||||||
|
Investment-grade
|
$ | 1,205 | $ | 4,647 | $ | 1,483 | $ | 75 | $ | 7,410 | $ | 8,007 | $ | 9,481 | ||||||||||||||
|
Non-investment-grade (2)
|
1,212 | 1,833 | 4,090 | 368 | 7,503 | 9,318 | 9,144 | |||||||||||||||||||||
|
William Street program
|
3,185 | 8,151 | 11,278 | 415 | 23,029 | 22,610 | 23,028 | |||||||||||||||||||||
|
Warehouse financing
|
254 | 129 | — | — | 383 | 1,101 | 702 | |||||||||||||||||||||
|
Total commitments to extend credit
|
5,856 | 14,760 | 16,851 | 858 | 38,325 | 41,036 | 42,355 | |||||||||||||||||||||
|
Forward starting resale and securities borrowing agreements
|
35,154 | 138 | — | — | 35,292 | 61,455 | 50,450 | |||||||||||||||||||||
|
Forward starting repurchase and securities lending agreements
|
5,248 | — | — | — | 5,248 | 6,948 | 10,671 | |||||||||||||||||||||
|
Underwriting commitments
|
4,460 | — | — | — | 4,460 | 241 | 446 | |||||||||||||||||||||
|
Letters of
credit (3)
|
3,854 | 285 | 177 | 1 | 4,317 | 7,251 | 6,446 | |||||||||||||||||||||
|
Investment
commitments (4)
|
4,181 | 9,235 | 109 | 942 | 14,467 | 14,266 | 14,637 | |||||||||||||||||||||
|
Construction-related
commitments (5)
|
419 | 37 | — | — | 456 | 483 | 570 | |||||||||||||||||||||
|
Other
|
168 | 85 | 24 | 24 | 301 | 260 | 297 | |||||||||||||||||||||
|
Total commitments
|
$ | 59,340 | $ | 24,540 | $ | 17,161 | $ | 1,825 | $ | 102,866 | $ | 131,940 | $ | 125,872 | ||||||||||||||
| (1) | Commitments to extend credit are presented net of amounts syndicated to third parties. |
| (2) | Included within non-investment-grade commitments as of March 2009, November 2008 and December 2008 were $1.45 billion, $2.07 billion and $2.17 billion, respectively, of exposure to leveraged lending capital market transactions; $135 million, $164 million and $126 million, respectively, related to commercial real estate transactions; and $5.91 billion, $7.09 billion and $6.84 billion, respectively, arising from other unfunded credit facilities. Including funded loans, the firm’s total exposure to leveraged lending capital market transactions was $6.26 billion, $7.97 billion and $7.98 billion as of March 2009, November 2008 and December 2008, respectively. |
| (3) | Consists of commitments under letters of credit issued by various banks which the firm provides to counterparties in lieu of securities or cash to satisfy various collateral and margin deposit requirements. |
| (4) | Consists of the firm’s commitments to invest in private equity, real estate and other assets directly and through funds that the firm raises and manages in connection with its merchant banking and other investing activities, including $12.62 billion, $12.25 billion and $12.68 billion as of March 2009, November 2008 and December 2008, respectively, of commitments to invest in funds managed by the firm. |
| (5) | Includes commitments of $404 million, $388 million and $490 million as of March 2009, November 2008 and December 2008, respectively, related to the firm’s new headquarters in New York City, which is expected to cost between $2.1 billion and $2.3 billion. The firm has partially financed this construction project with $1.65 billion of tax-exempt Liberty Bonds. |
55
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Commitments to Extend Credit. The firm’s
commitments to extend credit are agreements to lend to
counterparties that have fixed termination dates and are
contingent on the satisfaction of all conditions to borrowing
set forth in the contract. Since these commitments may expire
unused or be reduced or cancelled at the counterparty’s
request, the total commitment amount does not necessarily
reflect the actual future cash flow requirements. The firm
accounts for these commitments at fair value. To the extent that
the firm recognizes losses on these commitments, such losses are
recorded within the firm’s Trading and Principal
Investments segment net of any related underwriting fees.
| • | Commercial lending commitments. The firm’s commercial lending commitments are generally extended in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. The total commitment amount does not necessarily reflect the actual future cash flow requirements, as the firm may syndicate all or substantial portions of these commitments in the future, the commitments may expire unused, or the commitments may be cancelled or reduced at the request of the counterparty. In addition, commitments that are extended for contingent acquisition financing are often intended to be short-term in nature, as borrowers often seek to replace them with other funding sources. | |
| • | William Street program. Substantially all of the commitments provided under the William Street credit extension program are to investment-grade corporate borrowers. Commitments under the program are principally extended by William Street Commitment Corporation (Commitment Corp.), a consolidated wholly owned subsidiary of GS Bank USA, and also by William Street Credit Corporation, GS Bank USA or Goldman Sachs Credit Partners L.P. The commitments extended by Commitment Corp. are supported, in part, by funding raised by William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of GS Bank USA. The assets and liabilities of Commitment Corp. and Funding Corp. are legally separated from other assets and liabilities of the firm. The assets of Commitment Corp. and of Funding Corp. will not be available to their respective shareholders until the claims of their respective creditors have been paid. In addition, no affiliate of either Commitment Corp. or Funding Corp., except in limited cases as expressly agreed in writing, is responsible for any obligation of either entity. With respect to most of the William Street commitments, Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection that is generally limited to 95% of the first loss the firm realizes on approved loan commitments, up to a maximum of $1.00 billion. In addition, subject to the satisfaction of certain conditions, upon the firm’s request, SMFG will provide protection for 70% of additional losses on such commitments, up to a maximum of $1.13 billion, of which $375 million of protection has been provided as of March 2009, November 2008 and December 2008. The firm also uses other financial instruments to mitigate credit risks related to certain William Street commitments not covered by SMFG. | |
| • | Warehouse financing. The firm provides financing for the warehousing of financial assets. These arrangements are secured by the warehoused assets, primarily consisting of commercial mortgages as of March 2009, November 2008 and December 2008. |
56
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Leases. The firm has contractual obligations
under
long-term
noncancelable lease agreements, principally for office space,
expiring on various dates through 2069. Certain agreements are
subject to periodic escalation provisions for increases in real
estate taxes and other charges. Future minimum rental payments,
net of minimum sublease rentals are set forth below (in
millions):
|
Minimum rental payments
|
||||
|
Remainder of 2009
|
$ | 374 | ||
|
2010
|
449 | |||
|
2011
|
332 | |||
|
2012
|
269 | |||
|
2013
|
249 | |||
|
2014-thereafter
|
1,637 | |||
|
Total
|
$ | 3,310 | ||
Contingencies
The firm is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection
with the conduct of its businesses. Management believes, based
on currently available information, that the results of such
proceedings, in the aggregate, will not have a material adverse
effect on the firm’s financial condition, but may be
material to the firm’s operating results for any particular
period, depending, in part, upon the operating results for such
period. Given the inherent difficulty of predicting the outcome
of the firm’s litigation and regulatory matters,
particularly in cases or proceedings in which substantial or
indeterminate damages or fines are sought, the firm cannot
estimate losses or ranges of losses for cases or proceedings
where there is only a reasonable possibility that a loss may be
incurred.
In connection with its insurance business, the firm is
contingently liable to provide guaranteed minimum death and
income benefits to certain contract holders and has established
a reserve related to $5.54 billion, $6.13 billion and
$6.16 billion of contract holder account balances as of
March 2009, November 2008 and December 2008,
respectively, for such benefits. The weighted average attained
age of these contract holders was 68 years, 68 years
and 68 years as of March 2009, November 2008 and
December 2008, respectively. The net amount at risk,
representing guaranteed minimum death and income benefits in
excess of contract holder account balances, was
$3.22 billion, $2.96 billion and $2.83 billion as
of March 2009, November 2008 and December 2008,
respectively. See Note 12 for more information on the
firm’s insurance liabilities.
57
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Guarantees
The firm enters into various derivative contracts that meet the
definition of a guarantee under FIN 45,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,” as amended by FSP
No. FAS 133-1
and
FIN 45-4.
FIN 45 does not require disclosures about derivative
contracts if such contracts may be cash settled and the firm has
no basis to conclude it is probable that the counterparties
held, at inception, the underlying instruments related to the
derivative contracts. The firm has concluded that these
conditions have been met for certain large, internationally
active commercial and investment bank counterparties and certain
other counterparties. Accordingly, the firm has not included
such contracts in the tables below.
The firm, in its capacity as an agency lender, indemnifies most
of its securities lending customers against losses incurred in
the event that borrowers do not return securities and the
collateral held is insufficient to cover the market value of the
securities borrowed.
In the ordinary course of business, the firm provides other
financial guarantees of the obligations of third parties
(e.g., performance bonds, standby letters of credit and
other guarantees to enable clients to complete transactions and
merchant banking fund-related guarantees). These guarantees
represent obligations to make payments to beneficiaries if the
guaranteed party fails to fulfill its obligation under a
contractual arrangement with that beneficiary.
58
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth certain information about the
firm’s derivative contracts that meet the definition of a
guarantee and certain other guarantees as of March 2009,
November 2008 and December 2008. Derivative contracts
set forth below include written equity and commodity put
options, written currency contracts and interest rate caps,
floors and swaptions. See Note 3 for information regarding
credit derivative contracts that meet the definition of a
guarantee, which are not included below.
|
Maximum Payout/ |
||||||||||||||||||||||||
| Notional Amount by Period of Expiration (1) | ||||||||||||||||||||||||
|
Carrying |
2010- |
2012- |
2014- |
|||||||||||||||||||||
| Value | 2009 | 2011 | 2013 | Thereafter | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
As of March 2009
|
||||||||||||||||||||||||
|
Derivatives (2)
|
$ | 9,893 | $ | 70,132 | $ | 78,393 | $ | 43,528 | $ | 76,467 | $ | 268,520 | ||||||||||||
|
Securities lending
indemnifications (3)
|
— | 17,081 | — | — | — | 17,081 | ||||||||||||||||||
|
Other financial guarantees
|
225 | 235 | 345 | 474 | 436 | 1,490 | ||||||||||||||||||
|
As of November 2008
|
||||||||||||||||||||||||
|
Derivatives (2)
|
$ | 17,462 | $ | 114,863 | $ | 73,224 | $ | 30,312 | $ | 90,643 | $ | 309,042 | ||||||||||||
|
Securities lending
indemnifications (3)
|
— | 19,306 | — | — | — | 19,306 | ||||||||||||||||||
|
Other financial guarantees
|
235 | 203 | 477 | 458 | 238 | 1,376 | ||||||||||||||||||
|
As of December 2008
|
||||||||||||||||||||||||
|
Derivatives (2)
|
$ | 16,864 | $ | 103,572 | $ | 79,724 | $ | 33,400 | $ | 89,224 | $ | 305,920 | ||||||||||||
|
Securities lending
indemnifications (3)
|
— | 17,269 | — | — | — | 17,269 | ||||||||||||||||||
|
Other financial guarantees
|
246 | 169 | 508 | 495 | 248 | 1,420 | ||||||||||||||||||
| (1) | Such amounts do not represent the anticipated losses in connection with these contracts. | |
| (2) | Because derivative contracts are accounted for at fair value, carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying value excludes the effect of a legal right of setoff that may exist under an enforceable netting agreement and the effect of netting of cash paid pursuant to credit support agreements. These derivative contracts are risk managed together with derivative contracts that are not considered guarantees under FIN 45 and, therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities. | |
| (3) | Collateral held by the lenders in connection with securities lending indemnifications was $17.64 billion, $19.95 billion and $17.79 billion as of March 2009, November 2008 and December 2008, respectively. Because the contractual nature of these arrangements requires the firm to obtain collateral with a market value that exceeds the value of the securities on loan from the borrower, there is minimal performance risk associated with these guarantees. |
The firm has established trusts, including Goldman Sachs Capital
I, II and III, and other entities for the limited purpose of
issuing securities to third parties, lending the proceeds to the
firm and entering into contractual arrangements with the firm
and third parties related to this purpose. See Note 7 for
information regarding the transactions involving Goldman Sachs
Capital I, II and III. The firm effectively provides for the
full and unconditional guarantee of the securities issued by
these entities, which are not consolidated for accounting
purposes. Timely payment by the firm of amounts due to these
entities under the borrowing, preferred stock and related
contractual arrangements will be sufficient to cover payments
due on the securities issued by these entities. Management
believes that it is unlikely that any circumstances will occur,
such as nonperformance on the part of paying agents or other
service providers, that would make it necessary for the firm to
make payments related to these entities other than those
required under the terms of the borrowing, preferred stock and
related contractual arrangements and in connection with certain
expenses incurred by these entities.
59
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
In the ordinary course of business, the firm indemnifies and
guarantees certain service providers, such as clearing and
custody agents, trustees and administrators, against specified
potential losses in connection with their acting as an agent of,
or providing services to, the firm or its affiliates. The firm
also indemnifies some clients against potential losses incurred
in the event specified
third-party
service providers, including
sub-custodians
and
third-party
brokers, improperly execute transactions. In addition, the firm
is a member of payment, clearing and settlement networks as well
as securities exchanges around the world that may require the
firm to meet the obligations of such networks and exchanges in
the event of member defaults. In connection with its prime
brokerage and clearing businesses, the firm agrees to clear and
settle on behalf of its clients the transactions entered into by
them with other brokerage firms. The firm’s obligations in
respect of such transactions are secured by the assets in the
client’s account as well as any proceeds received from the
transactions cleared and settled by the firm on behalf of the
client. In connection with joint venture investments, the firm
may issue loan guarantees under which it may be liable in the
event of fraud, misappropriation, environmental liabilities and
certain other matters involving the borrower. The firm is unable
to develop an estimate of the maximum payout under these
guarantees and indemnifications. However, management believes
that it is unlikely the firm will have to make any material
payments under these arrangements, and no liabilities related to
these guarantees and indemnifications have been recognized in
the condensed consolidated statements of financial condition as
of March 2009, November 2008 and December 2008.
The firm provides representations and warranties to
counterparties in connection with a variety of commercial
transactions and occasionally indemnifies them against potential
losses caused by the breach of those representations and
warranties. The firm may also provide indemnifications
protecting against changes in or adverse application of certain
U.S. tax laws in connection with ordinary-course
transactions such as securities issuances, borrowings or
derivatives. In addition, the firm may provide indemnifications
to some counterparties to protect them in the event additional
taxes are owed or payments are withheld, due either to a change
in or an adverse application of certain
non-U.S. tax
laws. These indemnifications generally are standard contractual
terms and are entered into in the ordinary course of business.
Generally, there are no stated or notional amounts included in
these indemnifications, and the contingencies triggering the
obligation to indemnify are not expected to occur. The firm is
unable to develop an estimate of the maximum payout under these
guarantees and indemnifications. However, management believes
that it is unlikely the firm will have to make any material
payments under these arrangements, and no liabilities related to
these arrangements have been recognized in the condensed
consolidated statements of financial condition as of
March 2009, November 2008 and December 2008.
Group Inc. has guaranteed the payment obligations of Goldman,
Sachs & Co. (GS&Co.), GS Bank USA and GS
Bank Europe, subject to certain exceptions. In
November 2008, the firm contributed subsidiaries into GS
Bank USA, and Group Inc. agreed to guarantee certain losses,
including
credit-related
losses, relating to assets held by the contributed entities. In
connection with this guarantee, Group Inc. also agreed to pledge
to GS Bank USA certain collateral, including interests in
subsidiaries and other illiquid assets. In addition, Group Inc.
guarantees many of the obligations of its other consolidated
subsidiaries on a
transaction-by-transaction
basis, as negotiated with counterparties. Group Inc. is unable
to develop an estimate of the maximum payout under its
subsidiary guarantees; however, because these guaranteed
obligations are also obligations of consolidated subsidiaries
included in the tables above, Group Inc.’s liabilities as
guarantor are not separately disclosed.
60
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 9. | Shareholders’ Equity |
Common and
Preferred Equity
On April 13, 2009, the Board declared a dividend of
$0.35 per common share to be paid on June 25, 2009 to
common shareholders of record on May 26, 2009. On
December 15, 2008, the Board declared a dividend of
$0.4666666 per common share to be paid on
March 26, 2009 to common shareholders of record on
February 24, 2009. The dividend of $0.4666666 per
common share is reflective of a four-month period
(December 2008 through March 2009), due to the change
in the firm’s fiscal year-end.
To satisfy minimum statutory employee tax withholding
requirements related to the delivery of common stock underlying
restricted stock units, the firm cancelled 11.1 million of
restricted stock units with a total value of $847 million
in the three months ended March 2009. There were no
restricted stock unit cancellations for the one month ended
December 2008.
The firm’s share repurchase program is intended to help
maintain the appropriate level of common equity and to
substantially offset increases in share count over time
resulting from employee
share-based
compensation. The repurchase program is effected primarily
through regular
open-market
purchases, the amounts and timing of which are determined
primarily by the firm’s current and projected capital
positions (i.e., comparisons of the firm’s desired
level of capital to its actual level of capital) but which may
also be influenced by general market conditions and the
prevailing price and trading volumes of the firm’s common
stock, in each case subject to the limit imposed under the
U.S. Department of the Treasury’s (U.S. Treasury)
TARP Capital Purchase Program. See below for information
regarding current restrictions on the firm’s ability to
repurchase common stock.
As of March 2009, the firm had 10.2 million shares of
perpetual preferred stock issued and outstanding as set forth in
the following table:
|
Redemption |
||||||||||||||||||
|
Dividend |
Shares |
Shares |
Earliest |
Value |
||||||||||||||
| Series | Preference | Issued | Authorized | Dividend Rate | Redemption Date | (in millions) | ||||||||||||
|
A
|
Non-cumulative | 30,000 | 50,000 |
3 month LIBOR + 0.75%, with floor of 3.75% per annum |
April 25, 2010 | $ | 750 | |||||||||||
|
B
|
Non-cumulative | 32,000 | 50,000 | 6.20% per annum | October 31, 2010 | 800 | ||||||||||||
|
C
|
Non-cumulative | 8,000 | 25,000 |
3 month LIBOR + 0.75%, with floor of 4.00% per annum |
October 31, 2010 | 200 | ||||||||||||
|
D
|
Non-cumulative | 54,000 | 60,000 |
3 month LIBOR + 0.67%, with floor of 4.00% per annum |
May 24, 2011 | 1,350 | ||||||||||||
|
G
|
Cumulative | 50,000 | 50,000 | 10.00% per annum | Date of issuance | 5,500 | ||||||||||||
|
H
|
Cumulative | 10,000,000 | 10,000,000 |
5.00% per annum through November 14, 2013 and 9.00% per annum thereafter |
Date of issuance | 10,000 | ||||||||||||
| 10,174,000 | 10,235,000 | $ | 18,600 | |||||||||||||||
Each share of
non-cumulative
preferred stock issued and outstanding has a par value of $0.01,
has a liquidation preference of $25,000, is represented by 1,000
depositary shares and is redeemable at the firm’s option,
subject to the approval of the Board of Governors of the Federal
Reserve System (Federal Reserve Board), at a redemption price
equal to $25,000 plus declared and unpaid dividends.
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Each share of Series G Preferred Stock issued and
outstanding has a par value of $0.01, has a liquidation
preference of $100,000 and is redeemable at the firm’s
option, subject to the approval of the Federal Reserve Board, at
a redemption price equal to $110,000 plus accrued and unpaid
dividends. In connection with the issuance of the Series G
Preferred Stock, the firm issued a five-year warrant to purchase
up to 43.5 million shares of common stock at an exercise
price of $115.00 per share. The warrant is exercisable at any
time until October 1, 2013 and the number of shares of
common stock underlying the warrant and the exercise price are
subject to adjustment for certain dilutive events.
Each share of Series H Preferred Stock, which was issued
and is outstanding under the U.S. Treasury’s TARP
Capital Purchase Program, has a par value of $0.01, has a
liquidation preference of $1,000 and is redeemable at the
firm’s option, subject to the approval of the Federal
Reserve Board, at a redemption price equal to $1,000 plus
accrued and unpaid dividends, provided that through
November 14, 2011 the Series H Preferred Stock is
redeemable only in an amount up to the aggregate net cash
proceeds received from sales of Tier 1 qualifying perpetual
preferred stock or common stock, and only once such sales have
resulted in aggregate gross proceeds of at least
$2.5 billion. Pursuant to the American Recovery and
Reinvestment Act of 2009, enacted in February 2009, the
U.S. Treasury, after consultation with the Federal Reserve
Board, may permit the firm to repurchase some or all of the
Series H Preferred Stock at a repurchase price per share
equal to $1,000 per share plus accrued and unpaid dividends,
even if the conditions for redemption have not been met. In
connection with the issuance of the Series H Preferred
Stock, the firm issued a
10-year
warrant to the U.S. Treasury to purchase up to
12.2 million shares of common stock at an exercise price of
$122.90 per share. The warrant is exercisable at any time until
October 28, 2018 and the number of shares of common
stock underlying the warrant and the exercise price are subject
to adjustment for certain dilutive events.
All series of preferred stock are pari passu and have a
preference over the firm’s common stock upon liquidation.
Dividends on each series of preferred stock, if declared, are
payable quarterly in arrears. The firm’s ability to declare
or pay dividends on, or purchase, redeem or otherwise acquire,
its common stock is subject to certain restrictions in the event
that the firm fails to pay or set aside full dividends on the
preferred stock for the latest completed dividend period. In
addition, pursuant to the U.S. Treasury’s TARP Capital
Purchase Program, until the earliest of
October 28, 2011, the redemption or repurchase of all
of the Series H Preferred Stock or transfer by the
U.S. Treasury of all of the Series H Preferred Stock
to third parties, the firm must obtain the consent of the
U.S. Treasury to raise the firm’s common stock
dividend or to repurchase any shares of common stock or other
preferred stock, with certain exceptions (including repurchases
of shares of common stock under the firm’s share repurchase
program to offset dilution from
equity-based
compensation). For as long as the Series H Preferred Stock
remains outstanding, due to the limitations pursuant to the
U.S. Treasury’s TARP Capital Purchase Program, the
firm expects to repurchase shares of common stock through its
share repurchase program only for the purpose of offsetting
dilution from
equity-based
compensation, to the extent permitted, or to facilitate customer
transactions in the ordinary course of business.
In 2007, the Board authorized 17,500.1 shares of perpetual
Non-Cumulative
Preferred Stock, Series E, and 5,000.1 shares of
perpetual
Non-Cumulative
Preferred Stock, Series F, in connection with the APEX
issuance. See Note 7 for further information on the APEX
issuance. Under the stock purchase contracts, Group Inc. will
issue on the relevant stock purchase dates (on or before
June 1, 2013 and September 1, 2013 for
Series E and Series F preferred stock, respectively)
one share of Series E and Series F preferred stock to
Goldman Sachs Capital II and III, respectively, for each
$100,000 principal amount of subordinated debt held by these
trusts. When issued, each share
62
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
of Series E and Series F preferred stock will have a
par value of $0.01 and a liquidation preference of $100,000 per
share. Dividends on Series E preferred stock, if declared,
will be payable
semi-annually
at a fixed annual rate of 5.79% if the stock is issued prior to
June 1, 2012 and quarterly thereafter, at a rate per
annum equal to the greater of
(i) three-month
LIBOR plus 0.77% and (ii) 4.00%. Dividends on Series F
preferred stock, if declared, will be payable quarterly at a
rate per annum equal to
three-month
LIBOR plus 0.77% if the stock is issued prior to
September 1, 2012 and quarterly thereafter, at a rate
per annum equal to the greater of
(i) three-month
LIBOR plus 0.77% and (ii) 4.00%. The preferred stock may be
redeemed at the option of the firm on the stock purchase dates
or any day thereafter, subject to regulatory approval and
certain covenant restrictions governing the firm’s ability
to redeem or purchase the preferred stock without issuing common
stock or other instruments with
equity-like
characteristics.
On April 13, 2009, the Board declared dividends of
$234.38, $387.50, $250.00 and $250.00 per share of Series A
Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, respectively,
to be paid on May 11, 2009 to preferred shareholders
of record on April 26, 2009. In addition, the Board
declared dividends of $2,500 per share of Series G
Preferred Stock to be paid on May 11, 2009 to
preferred shareholders of record on April 25, 2009 and
dividends of $12.50 per share of Series H Preferred Stock
to be paid on May 15, 2009 to preferred shareholders
of record on April 30, 2009.
On December 17, 2008, the firm granted
20.6 million restricted stock units and 36.0 million
stock options to its employees. The restricted stock units and
options require future service and are subject to additional
vesting conditions as outlined in the award agreements.
Generally shares underlying RSUs are delivered and stock options
become exercisable shortly after vesting, but are subject to
certain transfer restrictions.
Other
Comprehensive Income
The following table sets forth the firm’s accumulated other
comprehensive income/(loss) by type:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Adjustment from adoption of SFAS No. 158, net of tax
|
$ | (194 | ) | $ | (194 | ) | $ | (194 | ) | |||
|
Currency translation adjustment, net of tax
|
(37 | ) | (30 | ) | (62 | ) | ||||||
|
Pension and postretirement liability adjustment, net of tax
|
(97 | ) | 69 | (106 | ) | |||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities,
net of tax (1)
|
(29 | ) | (47 | ) | (10 | ) | ||||||
|
Total accumulated other comprehensive income/(loss), net of tax
|
$ | (357 | ) | $ | (202 | ) | $ | (372 | ) | |||
| (1) | Consists of net unrealized losses of $36 million, $55 million and $19 million on available-for-sale securities held by the firm’s insurance subsidiaries as of March 2009, November 2008 and December 2008, respectively and net unrealized gains of $7 million, $8 million and $9 million on available-for-sale securities held by investees accounted for under the equity method as of March 2009, November 2008 and December 2008, respectively. |
63
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 10. | Earnings Per Common Share |
The computations of basic and diluted earnings per common share
are set forth below:
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions, except per share amounts) | ||||||||||||
|
Numerator for basic and diluted EPS — net
earnings/(loss) applicable to common shareholders
|
$ | 1,659 | $ | 1,467 | $ | (1,028 | ) | |||||
|
Denominator for basic EPS — weighted average number of
common shares
|
477.4 | 432.8 | 485.5 | |||||||||
|
Effect of dilutive
securities (1)
|
||||||||||||
|
Restricted stock units
|
9.3 | 8.6 | — | |||||||||
|
Stock options
|
2.5 | 12.1 | — | |||||||||
|
Dilutive potential common shares
|
11.8 | 20.7 | — | |||||||||
|
Denominator for diluted EPS — weighted average number
of common shares and dilutive potential common shares
|
489.2 | 453.5 | 485.5 | |||||||||
|
Basic EPS
|
$ | 3.48 | $ | 3.39 | $ | (2.15 | ) (2) | |||||
|
Diluted EPS
|
3.39 | 3.23 | (2.15 | ) (2) | ||||||||
| (1) | The diluted EPS computations do not include the antidilutive effect of restricted stock units (RSUs), stock options and warrants as follows: |
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Number of antidilutive RSUs and common shares underlying
antidilutive stock options and warrants
|
92.7 | 7.5 | 157.2 | |||||||||
| (2) | In June 2008, the FASB issued FSP No. EITF 03-6-1, effective for fiscal years beginning after December 15, 2008. The FSP required unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents to be treated as a separate class of securities in calculating earnings per share. There was no impact of adoption of FSP No. EITF 03-6-1 to earnings per common share for the three months ended March 2009. The impact for the one month ended December 2008 was a loss per common share of $0.03. Prior periods have not been restated due to immateriality. |
64
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 11. | Goodwill and Identifiable Intangible Assets |
Goodwill
The following table sets forth the carrying value of the
firm’s goodwill by operating segment, which is included in
“Other assets” in the condensed consolidated
statements of financial condition:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Investment Banking
|
||||||||||||
|
Underwriting
|
$ | 125 | $ | 125 | $ | 125 | ||||||
|
Trading and Principal Investments
|
||||||||||||
|
FICC
|
248 | 247 | 250 | |||||||||
|
Equities (1)
|
2,389 | 2,389 | 2,389 | |||||||||
|
Principal Investments
|
84 | 80 | 80 | |||||||||
|
Asset Management and Securities Services
|
||||||||||||
|
Asset
Management (2)
|
565 | 565 | 565 | |||||||||
|
Securities Services
|
117 | 117 | 117 | |||||||||
|
Total
|
$ | 3,528 | $ | 3,523 | $ | 3,526 | ||||||
| (1) | Primarily related to SLK LLC (SLK). | |
| (2) | Primarily related to The Ayco Company, L.P. (Ayco). |
65
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Identifiable
Intangible Assets
The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the
firm’s identifiable intangible assets:
| As of | ||||||||||||||
|
March |
November |
December |
||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||
| (in millions) | ||||||||||||||
|
Customer
lists (1)
|
Gross carrying amount | $ | 1,116 | $ | 1,160 | $ | 1,138 | |||||||
| Accumulated amortization | (421 | ) | (436 | ) | (426 | ) | ||||||||
| Net carrying amount | $ | 695 | $ | 724 | $ | 712 | ||||||||
|
New York Stock
|
Gross carrying amount | $ | 714 | $ | 714 | $ | 714 | |||||||
|
Exchange (NYSE)
|
Accumulated amortization | (265 | ) | (252 | ) | (255 | ) | |||||||
|
DMM rights
|
Net carrying amount | $ | 449 | $ | 462 | $ | 459 | |||||||
|
Insurance-related
|
Gross carrying amount | $ | 459 | $ | 448 | $ | 451 | |||||||
|
assets (2)
|
Accumulated amortization | (188 | ) | (145 | ) | (180 | ) | |||||||
| Net carrying amount | $ | 271 | $ | 303 | $ | 271 | ||||||||
|
Exchange-traded
|
Gross carrying amount | $ | 138 | $ | 138 | $ | 138 | |||||||
|
fund (ETF) lead
|
Accumulated amortization | (45 | ) | (43 | ) | (43 | ) | |||||||
|
market maker rights
|
Net carrying amount | $ | 93 | $ | 95 | $ | 95 | |||||||
|
Other (3)
|
Gross carrying amount | $ | 191 | $ | 178 | $ | 169 | |||||||
| Accumulated amortization | (89 | ) | (85 | ) | (86 | ) | ||||||||
| Net carrying amount | $ | 102 | $ | 93 | $ | 83 | ||||||||
|
Total
|
Gross carrying amount | $ | 2,618 | $ | 2,638 | $ | 2,610 | |||||||
| Accumulated amortization | (1,008 | ) | (961 | ) | (990 | ) | ||||||||
| Net carrying amount | $ | 1,610 | $ | 1,677 | $ | 1,620 | ||||||||
| (1) | Primarily includes the firm’s clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco. | |
| (2) | Consists of VOBA and DAC. VOBA represents the present value of estimated future gross profits of acquired variable annuity and life insurance businesses. DAC results from commissions paid by the firm to the primary insurer (ceding company) on life and annuity reinsurance agreements as compensation to place the business with the firm and to cover the ceding company’s acquisition expenses. VOBA and DAC are amortized over the estimated life of the underlying contracts based on estimated gross profits, and amortization is adjusted based on actual experience. The weighted average remaining amortization period for VOBA and DAC is seven years as of March 2009. | |
| (3) | Primarily includes marketing-related assets and other contractual rights. |
Substantially all of the firm’s identifiable intangible
assets are considered to have finite lives and are amortized
over their estimated lives. The weighted average remaining life
of the firm’s identifiable intangibles is approximately
11 years.
66
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The estimated future amortization for existing identifiable
intangible assets through 2014 is set forth below (in millions):
|
Remainder of 2009
|
$ | 126 | ||
|
2010
|
153 | |||
|
2011
|
150 | |||
|
2012
|
142 | |||
|
2013
|
131 | |||
|
2014
|
127 |
| Note 12. | Other Assets and Other Liabilities |
Other
Assets
Other assets are generally less liquid,
non-financial
assets. The following table sets forth the firm’s other
assets by type:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Property, leasehold improvements and
equipment (1)
|
$ | 10,895 | $ | 10,793 | $ | 12,589 | ||||||
|
Goodwill and identifiable intangible
assets (2)
|
5,138 | 5,200 | 5,146 | |||||||||
|
Income tax-related assets
|
7,784 | 8,359 | 9,391 | |||||||||
|
Equity-method
investments (3)
|
1,346 | 1,454 | 1,442 | |||||||||
|
Miscellaneous receivables and other
|
3,647 | 4,632 | 3,139 | |||||||||
|
Total
|
$ | 28,810 | $ | 30,438 | $ | 31,707 | ||||||
| (1) | Net of accumulated depreciation and amortization of $6.84 billion, $6.55 billion and $6.62 billion as of March 2009, November 2008 and December 2008, respectively. | |
| (2) | See Note 11 for further information regarding the firm’s goodwill and identifiable intangible assets. | |
| (3) | Excludes investments of $3.16 billion, $3.45 billion and $3.45 billion accounted for at fair value under SFAS No. 159 as of March 2009, November 2008 and December 2008, respectively, which are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition. |
67
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other
Liabilities
The following table sets forth the firm’s other liabilities
and accrued expenses by type:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Compensation and benefits
|
$ | 5,369 | $ | 4,646 | $ | 4,968 | ||||||
|
Insurance-related
liabilities (1)
|
10,020 | 9,673 | 9,006 | |||||||||
|
Noncontrolling
interests (2)
|
1,074 | 1,127 | 1,102 | |||||||||
|
Income tax-related liabilities
|
3,045 | 2,865 | 3,119 | |||||||||
|
Employee interests in consolidated funds
|
525 | 517 | 514 | |||||||||
|
Accrued expenses and other payables
|
4,716 | 4,388 | 5,877 | |||||||||
|
Total
|
$ | 24,749 | $ | 23,216 | $ | 24,586 | ||||||
| (1) | Insurance-related liabilities are set forth in the table below: |
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Separate account liabilities
|
$ | 3,527 | $ | 3,628 | $ | 3,563 | ||||||
|
Liabilities for future benefits and unpaid claims
|
5,241 | 4,778 | 4,163 | |||||||||
|
Contract holder account balances
|
872 | 899 | 908 | |||||||||
|
Reserves for guaranteed minimum death and income benefits
|
380 | 368 | 372 | |||||||||
|
Total insurance-related liabilities
|
$ | 10,020 | $ | 9,673 | $ | 9,006 | ||||||
Separate account liabilities are supported by separate account
assets, representing segregated contract holder funds under
variable annuity and life insurance contracts. Separate account
assets are included in “Cash and securities segregated for
regulatory and other purposes” in the condensed
consolidated statements of financial condition.
Liabilities for future benefits and unpaid claims include
liabilities arising from reinsurance provided by the firm to
other insurers. The firm had a receivable for
$1.37 billion, $1.30 billion and $1.30 billion as
of March 2009, November 2008 and December 2008,
respectively, related to such reinsurance contracts, which is
reported in “Receivables from customers and
counterparties” in the condensed consolidated statements of
financial condition. In addition, the firm has ceded risks to
reinsurers related to certain of its liabilities for future
benefits and unpaid claims and had a receivable of
$1.29 billion, $1.20 billion and $1.20 billion as
of March 2009, November 2008 and December 2008,
respectively, related to such reinsurance contracts, which is
reported in “Receivables from customers and
counterparties” in the condensed consolidated statements of
financial condition. Contracts to cede risks to reinsurers do
not relieve the firm from its obligations to contract holders.
Liabilities for future benefits and unpaid claims include
$1.92 billion, $978 million and $1.40 billion
carried at fair value under SFAS No. 159 as of
March 2009, November 2008 and December 2008,
respectively.
Reserves for guaranteed minimum death and income benefits
represent a liability for the expected value of guaranteed
benefits in excess of projected annuity account balances. These
reserves are computed in accordance with AICPA
SOP 03-1
and are based on total payments expected to be made less total
fees expected to be assessed over the life of the contract.
| (2) | Includes $733 million, $784 million and $784 million related to consolidated investment funds as of March 2009, November 2008 and December 2008, respectively. |
68
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 13. | Transactions with Affiliated Funds |
The firm has formed numerous nonconsolidated investment funds
with
third-party
investors. The firm generally acts as the investment manager for
these funds and, as such, is entitled to receive management fees
and, in certain cases, advisory fees, incentive fees or
overrides from these funds. These fees amounted to
$593 million, $990 million and $206 million for
the three months ended March 2009 and February 2008
and one month ended December 2008, respectively. As of
March 2009, November 2008 and December 2008, the
fees receivable from these funds were $963 million,
$861 million and $908 million, respectively.
Additionally, the firm may invest alongside the
third-party
investors in certain funds. The aggregate carrying value of the
firm’s interests in these funds was $12.01 billion,
$14.45 billion and $13.57 billion as of
March 2009, November 2008 and December 2008,
respectively. In the ordinary course of business, the firm may
also engage in other activities with these funds, including,
among others, securities lending, trade execution, trading,
custody, and acquisition and bridge financing. See Note 8
for the firm’s commitments related to these funds.
| Note 14. | Income Taxes |
The firm is subject to examination by the U.S. Internal
Revenue Service (IRS) and other taxing authorities in
jurisdictions where the firm has significant business
operations, such as the United Kingdom, Japan, Hong Kong, Korea
and various states, such as New York. The tax years under
examination vary by jurisdiction. The firm does not expect
unrecognized tax benefits to change significantly during the
twelve months subsequent to March 2009.
Below is a table of the earliest tax years that remain subject
to examination by major jurisdiction:
|
Earliest |
||||
|
Tax Year |
||||
|
Subject to |
||||
|
Jurisdiction
|
Examination
|
|||
|
U.S. Federal
|
2005 | (1) | ||
|
New York State and City
|
2004 | (2) | ||
|
United Kingdom
|
2005 | |||
|
Japan
|
2005 | |||
|
Hong Kong
|
2003 | |||
|
Korea
|
2003 | |||
| (1) | IRS examination of fiscal 2005, 2006 and 2007 began during 2008. | |
| (2) | New York State and City examination of fiscal 2004, 2005 and 2006 began in 2008. |
All years subsequent to the above years remain open to
examination by the taxing authorities. The firm believes that
the liability for unrecognized tax benefits it has established
is adequate in relation to the potential for additional
assessments. The resolution of tax matters is not expected to
have a material effect on the firm’s financial condition
but may be material to the firm’s operating results for a
particular period, depending, in part, upon the operating
results for that period.
69
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 15. | Regulation and Capital Adequacy |
The Federal Reserve Board is the primary U.S. regulator of
Group Inc. As a bank holding company, the firm is subject to
consolidated regulatory capital requirements administered by the
Federal Reserve Board. The firm’s bank depository
institution subsidiaries, including GS Bank USA, are subject to
similar capital requirements. Under the Federal Reserve
Board’s capital adequacy requirements and the regulatory
framework for prompt corrective action (PCA) that is applicable
to GS Bank USA, the firm and its bank depository
institution subsidiaries must meet specific capital requirements
that involve quantitative measures of assets, liabilities and
certain
off-balance-sheet
items as calculated under regulatory reporting practices. The
firm and its bank depository institution subsidiaries’
capital levels, as well as GS Bank USA’s PCA
classification, are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Many of the firm’s subsidiaries, including GS&Co. and
the firm’s other
broker-dealer
subsidiaries, are subject to separate regulation and capital
requirements as described below.
The firm continues to disclose its capital ratios in accordance
with the capital guidelines applicable to it before it became a
bank holding company in September 2008, when the firm was
regulated by the SEC as a Consolidated Supervised Entity (CSE).
These guidelines were generally consistent with those set out in
the Revised Framework for the International Convergence of
Capital Measurement and Capital Standards issued by the Basel
Committee on Banking Supervision (Basel II). Subsequent to
becoming a bank holding company, the firm no longer reports the
CSE capital ratios to the SEC and the CSE program has been
discontinued.
Beginning with the first quarter of 2009, the firm is also
reporting its estimated capital ratios in accordance with the
regulatory capital requirements currently applicable to bank
holding companies, which are based on the Capital Accord of the
Basel Committee on Banking Supervision (Basel I). These ratios
are used by the Federal Reserve Board and other
U.S. Federal banking agencies in the supervisory review
process, including the assessment of the firm’s capital
adequacy.
The following table sets forth information regarding Group
Inc.’s capital ratios as of March 2009,
November 2008 and December 2008 calculated in the same
manner (generally consistent with Basel II) as when the
firm was regulated by the SEC as a CSE:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| ($ in millions) | ||||||||||||
|
Tier 1 Capital
|
$ | 61,632 | $ | 62,637 | $ | 61,630 | ||||||
|
Total Allowable Capital
|
75,054 | 75,650 | 75,246 | |||||||||
|
Risk-Weighted
Assets
|
384,652 | 400,376 | 423,170 | |||||||||
|
Tier 1 Capital Ratio
|
16.0 | % | 15.6 | % | 14.6 | % | ||||||
|
Total Capital Ratio
|
19.5 | % | 18.9 | % | 17.8 | % | ||||||
The firm is currently working to implement the Basel II
framework as applicable to it as a bank holding company (as
opposed to as a CSE). U.S. banking regulators have
incorporated the Basel II framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as Group Inc., transition to Basel
II over the next several years.
70
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth information regarding Group
Inc.’s estimated capital ratios as of March 2009
calculated in accordance with the Federal Reserve Board’s
regulatory capital requirements currently applicable to bank
holding companies, which are based on Basel I. The calculation
of these estimated ratios includes certain market risk measures
that are under review by the Federal Reserve Board, as part of
Group Inc.’s transition to bank holding company status. The
calculation of these estimated ratios has not been reviewed with
the Federal Reserve Board and, accordingly, these ratios may be
revised in subsequent filings.
|
As of |
||||
| March 2009 | ||||
| ($ in millions) | ||||
|
Tier 1 Capital
|
$ | 56,682 | ||
|
Tier 2 Capital
|
13,422 | |||
|
Total Capital
|
70,104 | |||
|
Risk-Weighted
Assets
|
415,112 | |||
|
Tier 1 Capital Ratio
|
13.7 | % | ||
|
Total Capital Ratio
|
16.9 | % | ||
|
Tier 1 Leverage Ratio
|
5.9 | % | ||
The firm’s estimated Tier 1 leverage ratio is defined
as Tier 1 capital under Basel I divided by adjusted average
total assets (which includes adjustments for disallowed goodwill
and certain intangible assets).
Federal Reserve Board regulations require bank holding companies
to maintain a minimum Tier 1 capital ratio of 4% and a
minimum total capital ratio of 8%. The required minimum
Tier 1 capital ratio and total capital ratio in order to be
considered a “well capitalized” bank holding company
under the Federal Reserve Board guidelines are 6% and 10%,
respectively. Bank holding companies may be expected to maintain
ratios well above the minimum levels, depending upon their
particular condition, risk profile and growth plans. The minimum
Tier 1 leverage ratio is 3% for bank holding companies that
have received the highest supervisory rating under Federal
Reserve Board guidelines or that have implemented the Federal
Reserve Board’s capital measure for market risk. Other bank
holding companies must have a minimum Tier 1 leverage ratio
of 4%.
GS Bank USA, a New York State-chartered bank and a member of the
Federal Reserve System and the FDIC, is regulated by the Federal
Reserve Board and the New York State Banking Department (NYSBD)
and is subject to minimum capital requirements that (subject to
certain exceptions) are similar to those applicable to bank
holding companies. GS Bank USA computes its capital ratios in
accordance with the regulatory capital guidelines currently
applicable to state member banks, which are based on Basel I, as
implemented by the Federal Reserve Board, for purposes of
assessing the adequacy of its capital. In order to be considered
a “well capitalized” depository institution under the
Federal Reserve Board guidelines, GS Bank USA must maintain a
Tier 1 capital ratio of at least 6%, a total capital ratio
of at least 10% and a Tier 1 leverage ratio of at least 5%.
In November 2008, the firm contributed subsidiaries into GS
Bank USA. In connection with this contribution, GS Bank USA
agreed with the Federal Reserve Board to minimum capital ratios
in excess of these “well capitalized” levels.
Accordingly, for a period of time, GS Bank USA is expected to
maintain a Tier 1 capital ratio of at least 8%, a total
capital ratio of at least 11% and a Tier 1 leverage ratio
of at least 6%.
71
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth information regarding GS Bank
USA’s capital ratios under Basel I, as implemented by the
Federal Reserve Board, as of March 2009 and
December 2008.
| As of | ||||||||
|
March |
December |
|||||||
| 2009 | 2008 | |||||||
|
Tier 1 Capital Ratio
|
10.8 | % | 8.7 | % | ||||
|
Total Capital Ratio
|
14.5 | % | 12.0 | % | ||||
|
Tier 1 Leverage Ratio
|
9.1 | % | 8.0 | % (1) | ||||
| (1) | Calculated using adjusted average total assets for the one-month period ended December 2008. |
As agreed with the Federal Reserve Board in February 2009,
GS Bank USA amended the methodology for calculating aspects of
its Tier 1 capital and total capital ratios. This
methodology change has been incorporated into the calculation of
GS Bank USA’s March 2009 and December 2008
Tier 1 capital and total capital ratios.
GS Bank USA is currently working to implement the Basel II
framework. Similar to the firm’s requirement as a bank
holding company, GS Bank USA is required to transition to
Basel II over the next several years.
The deposits of GS Bank USA are insured by the FDIC to the
extent provided by law. The Federal Reserve Board requires
depository institutions to maintain cash reserves with a Federal
Reserve Bank. The amount deposited by the firm’s depository
institution subsidiaries held at the Federal Reserve Bank was
approximately $24.13 billion, $94 million and
$10.16 billion as of March 2009, November 2008
and December 2008, respectively, which exceeded required
reserve amounts by $23.87 billion, $6 million and
$10.10 billion as of March 2009, November 2008
and December 2008, respectively. GS Bank Europe, a wholly
owned credit institution, is regulated by the Irish Financial
Services Regulatory Authority and is subject to minimum capital
requirements. As of March 2009, November 2008 and
December 2008, GS Bank USA and GS Bank Europe were both in
compliance with all regulatory capital requirements.
Transactions between GS Bank USA and its subsidiaries and Group
Inc. and its subsidiaries and affiliates (other than, generally,
subsidiaries of GS Bank USA) are regulated by the Federal
Reserve Board. These regulations generally limit the types and
amounts of transactions (including loans to and borrowings from
GS Bank USA) that may take place and generally require those
transactions to be on an arms-length basis.
The firm’s U.S. regulated
broker-dealer
subsidiaries include GS&Co. and Goldman Sachs
Execution & Clearing, L.P. (GSEC). GS&Co. and
GSEC are registered
U.S. broker-dealers
and futures commission merchants subject to
Rule 15c3-1
of the SEC and Rule 1.17 of the Commodity Futures Trading
Commission, which specify uniform minimum net capital
requirements, as defined, for their registrants, and also
effectively require that a significant part of the
registrants’ assets be kept in relatively liquid form.
GS&Co. and GSEC have elected to compute their minimum
capital requirements in accordance with the “Alternative
Net Capital Requirement” as permitted by
Rule 15c3-1.
As of March 2009, GS&Co. had regulatory net capital,
as defined by
Rule 15c3-1,
of $14.46 billion, which exceeded the amount required by
$12.48 billion. As of March 2009, GSEC had regulatory
net capital, as defined by
Rule 15c3-1,
of $2.01 billion, which exceeded the amount required by
$1.94 billion. In addition to its alternative minimum net
capital requirements, GS&Co. is also required to hold
tentative net capital in excess of $1 billion and net
capital in excess of $500 million in accordance with the
market and credit risk standards of Appendix E of
Rule 15c3-1.
GS&Co. is also required to notify the SEC in the event that
its tentative net capital is less than $5 billion. As of
March 2009, November 2008 and December 2008,
GS&Co. had tentative net capital and net capital in excess
of both the minimum and the notification requirements.
72
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm has U.S. insurance subsidiaries that are subject
to state insurance regulation and oversight in the states in
which they are domiciled and in the other states in which they
are licensed. In addition, certain of the firm’s insurance
subsidiaries outside of the U.S. are regulated by the
Bermuda Monetary Authority and by Lloyd’s (which is, in
turn, regulated by the U.K.’s Financial Services Authority
(FSA)). The firm’s insurance subsidiaries were in
compliance with all regulatory capital requirements as of
March 2009, November 2008 and December 2008.
The firm’s principal
non-U.S. regulated
subsidiaries include Goldman Sachs International (GSI) and
Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firm’s
regulated U.K.
broker-dealer,
is subject to the capital requirements of the FSA. GSJCL, the
firm’s regulated Japanese
broker-dealer,
is subject to the capital requirements imposed by Japan’s
Financial Services Agency. As of March 2009,
November 2008 and December 2008, GSI and GSJCL were in
compliance with their local capital adequacy requirements.
Certain other
non-U.S. subsidiaries
of the firm are also subject to capital adequacy requirements
promulgated by authorities of the countries in which they
operate. As of March 2009, November 2008 and
December 2008, these subsidiaries were in compliance with
their local capital adequacy requirements.
The regulatory requirements referred to above restrict Group
Inc.’s ability to withdraw capital from its regulated
subsidiaries. In addition to limitations on the payment of
dividends imposed by federal and state laws, the Federal Reserve
Board, the FDIC and the NYSBD have authority to prohibit or to
limit the payment of dividends by the banking organizations they
supervise (including GS Bank USA) if, in the relevant
regulator’s opinion, payment of a dividend would constitute
an unsafe or unsound practice in the light of the financial
condition of the banking organization. As of March 2009,
GS Bank USA could have declared dividends of
$833 million to Group Inc. without regulatory approval. As
of November 2008 and December 2008, GS Bank USA
would not have been able to declare dividends to Group Inc.
without regulatory approval.
| Note 16. | Business Segments |
In reporting to management, the firm’s operating results
are categorized into the following three business segments:
Investment Banking, Trading and Principal Investments, and Asset
Management and Securities Services. See Note 18 to the
consolidated financial statements in Part II, Item 8
of the firm’s Annual Report on
Form 10-K
for the fiscal year ended November 2008 for a discussion of
the basis of presentation for the firm’s business segments.
73
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Segment
Operating Results
Management believes that the following information provides a
reasonable representation of each segment’s contribution to
consolidated
pre-tax
earnings and total assets:
| As of or for the | ||||||||||||||
|
Three Months |
Three Months |
One Month |
||||||||||||
| Ended March | Ended February | Ended December | ||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||
| (in millions) | ||||||||||||||
|
Investment
|
Net revenues | $ | 823 | $ | 1,172 | $ | 135 | |||||||
|
Banking
|
Operating expenses | 705 | 940 | 169 | ||||||||||
| Pre-tax earnings/(loss) | $ | 118 | $ | 232 | $ | (34 | ) | |||||||
| Segment assets | $ | 1,479 | $ | 7,466 | $ | 1,491 | ||||||||
|
Trading and
|
Net revenues | $ | 7,150 | $ | 5,124 | $ | (507 | ) | ||||||
|
Principal
|
Operating expenses | 4,873 | 3,743 | 875 | ||||||||||
|
Investments
|
Pre-tax earnings/(loss) | $ | 2,277 | $ | 1,381 | $ | (1,382 | ) | ||||||
| Segment assets | $ | 706,647 | $ | 809,059 | $ | 871,323 | ||||||||
|
Asset Management
|
Net revenues | $ | 1,452 | $ | 2,039 | $ | 555 | |||||||
|
and Securities
|
Operating expenses | 1,205 | 1,493 | 329 | ||||||||||
|
Services
|
Pre-tax earnings | $ | 247 | $ | 546 | $ | 226 | |||||||
| Segment assets | $ | 217,164 | $ | 372,481 | $ | 239,411 | ||||||||
|
Total
|
Net revenues (1)(2) | $ | 9,425 | $ | 8,335 | $ | 183 | |||||||
| Operating expenses (3) | 6,796 | 6,192 | 1,441 | |||||||||||
| Pre-tax earnings/(loss) (4) | $ | 2,629 | $ | 2,143 | $ | (1,258 | ) | |||||||
| Total assets | $ | 925,290 | $ | 1,189,006 | $ | 1,112,225 | ||||||||
| (1) | Net revenues include net interest income as set forth in the table below: |
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Investment Banking
|
$ | — | $ | 6 | $ | — | ||||||
|
Trading and Principal Investments
|
1,444 | 247 | 457 | |||||||||
|
Asset Management and Securities Services
|
463 | 698 | 228 | |||||||||
|
Total net interest
|
$ | 1,907 | $ | 951 | $ | 685 | ||||||
| (2) | Net revenues include non-interest revenues as set forth in the table below: |
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Investment banking fees
|
$ | 823 | $ | 1,166 | $ | 135 | ||||||
|
Equities commissions
|
974 | 1,238 | 251 | |||||||||
|
Asset management and other fees
|
989 | 1,341 | 327 | |||||||||
|
Trading and principal investments revenues
|
4,732 | 3,639 | (1,215 | ) | ||||||||
|
Total
non-interest
revenues
|
$ | 7,518 | $ | 7,384 | $ | (502 | ) | |||||
74
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Trading and principal investments revenues include
$6 million, $1 million and $(2) million for the
three months ended March 2009 and February 2008 and
one month ended December 2008, respectively, of realized
gains/(losses) on securities held within the firm’s
insurance subsidiaries which are accounted for as
available-for-sale
under SFAS No. 115.
| (3) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $13 million, $16 million and $68 million for the three months ended March 2009 and February 2008 and one month ended December 2008, respectively, that have not been allocated to the firm’s segments. | |
| (4) | Pre-tax earnings include total depreciation and amortization as set forth in the table below: |
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Investment Banking
|
$ | 37 | $ | 38 | $ | 14 | ||||||
|
Trading and Principal Investments
|
523 | 246 | 101 | |||||||||
|
Asset Management and Securities Services
|
89 | 59 | 28 | |||||||||
|
Total depreciation and amortization
|
$ | 649 | $ | 343 | $ | 143 | ||||||
Geographic
Information
Due to the highly integrated nature of international financial
markets, the firm manages its businesses based on the
profitability of the enterprise as a whole. Since a significant
portion of the firm’s activities require cross-border
coordination in order to facilitate the needs of the firm’s
clients, the methodology for allocating the firm’s
profitability to geographic regions is dependent on estimates
and management judgment. Specifically, in interim quarters, the
firm allocates compensation and benefits to geographic regions
based upon the firmwide compensation to net revenues ratio,
which was 50% and 48% for the three months ended March 2009
and February 2008, respectively. In the fourth quarter when
compensation by employee is finalized, compensation and benefits
are allocated to the geographic regions based upon total actual
compensation during the fiscal year. For the one month ended
December 2008, compensation was based on the actual
compensation during the period. See Note 18 to the
consolidated financial statements in Part II, Item 8
of the firm’s Annual Report on
Form 10-K
for the fiscal year ended November 2008 for a discussion of
the method of allocating by geographic region.
The following table sets forth the total net revenues and
pre-tax
earnings of the firm and its consolidated subsidiaries by
geographic region allocated on the methodology referred to
above, as well as the percentage of total net revenues and
pre-tax
earnings for each geographic region:
|
Three Months |
Three Months |
One Month |
||||||||||||||||||||||
| Ended March | Ended February | Ended December | ||||||||||||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||
|
Net revenues
|
||||||||||||||||||||||||
|
Americas (1)
|
$ | 6,473 | 69 | % | $ | 4,207 | 51 | % | $ | 197 | N.M. | % | ||||||||||||
|
EMEA (2)
|
1,886 | 20 | 2,674 | 32 | (440 | ) | N.M. | |||||||||||||||||
|
Asia
|
1,066 | 11 | 1,454 | 17 | 426 | N.M. | ||||||||||||||||||
|
Total net revenues
|
$ | 9,425 | 100 | % | $ | 8,335 | 100 | % | $ | 183 | 100 | % | ||||||||||||
|
Pre-tax
earnings
|
||||||||||||||||||||||||
|
Americas (1)
|
$ | 2,145 | N.M. | % | $ | 999 | 46 | % | $ | (555 | ) | N.M. | % | |||||||||||
|
EMEA (2)
|
579 | N.M. | 787 | 37 | (806 | ) | N.M. | |||||||||||||||||
|
Asia
|
(82 | ) | N.M. | 373 | 17 | 171 | N.M. | |||||||||||||||||
|
Corporate (3)
|
(13 | ) | N.M. | (16 | ) | N.M. | (68 | ) | N.M. | |||||||||||||||
|
Total
pre-tax
earnings
|
$ | 2,629 | 100 | % | $ | 2,143 | 100 | % | $ | (1,258 | ) | 100 | % | |||||||||||
| (1) | Substantially all relates to the U.S. | |
| (2) | EMEA (Europe, Middle East and Africa). | |
| (3) | Consists of net provisions for a number of litigation and regulatory proceedings. |
75
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Note 17. Interest
Income and Interest Expense
The following table sets forth the details of the firm’s
interest income and interest expense:
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Interest
income (1)
|
||||||||||||
|
Deposits with banks
|
$ | 22 | $ | 49 | $ | 2 | ||||||
|
Securities borrowed, securities purchased under agreements to
resell, at fair value, and federal funds sold
|
551 | 4,130 | 301 | |||||||||
|
Trading assets, at fair value
|
3,158 | 3,717 | 1,172 | |||||||||
|
Other
interest (2)
|
631 | 3,349 | 212 | |||||||||
|
Total interest income
|
$ | 4,362 | $ | 11,245 | $ | 1,687 | ||||||
|
Interest expense
|
||||||||||||
|
Deposits
|
$ | 150 | $ | 200 | $ | 51 | ||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
545 | 2,611 | 229 | |||||||||
|
Trading liabilities, at fair value
|
463 | 697 | 174 | |||||||||
|
Short-term
borrowings (3)
|
240 | 537 | 107 | |||||||||
|
Long-term
borrowings (4)
|
949 | 2,369 | 297 | |||||||||
|
Other
interest (5)
|
108 | 3,880 | 144 | |||||||||
|
Total interest expense
|
$ | 2,455 | $ | 10,294 | $ | 1,002 | ||||||
|
Net interest income
|
$ | 1,907 | $ | 951 | $ | 685 | ||||||
| (1) | Interest income is recorded on an accrual basis based on contractual interest rates. | |
| (2) | Primarily includes interest income on customer debit balances and other interest-earning assets. | |
| (3) | Includes interest on unsecured short-term borrowings and short-term other secured financings. | |
| (4) | Includes interest on unsecured long-term borrowings and long-term other secured financings. | |
| (5) | Primarily includes interest expense on customer credit balances and other interest-bearing liabilities. |
| Note 18. | Subsequent Event |
Equity
Issuance
During the firm’s second quarter of fiscal 2009, Group Inc.
completed a public offering of 46.7 million shares of
common stock at $123.00 per share for proceeds of
$5.75 billion.
76
Table of Contents
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of
The Goldman Sachs Group, Inc.:
We have reviewed the accompanying condensed consolidated
statements of financial condition of The Goldman Sachs Group,
Inc. and its subsidiaries (the Company) as of
March 27, 2009 and December 26, 2008, the
related condensed consolidated statements of earnings for the
three months ended March 27, 2009 and
February 29, 2008 and one month ended
December 26, 2008, the condensed consolidated
statements of changes in shareholders’ equity for the three
months ended March 27, 2009 and one month ended
December 26, 2008, the condensed consolidated
statements of cash flows for the three months ended
March 27, 2009 and February 29, 2008 and one
month ended December 26, 2008, and the condensed
consolidated statements of comprehensive income for the three
months ended March 27, 2009 and
February 29, 2008 and one month ended
December 26, 2008. These condensed consolidated
interim financial statements are the responsibility of the
Company’s management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statement of financial condition as of
November 28, 2008, and the related consolidated
statements of earnings, changes in shareholders’ equity,
cash flows and comprehensive income for the year then ended (not
presented herein), and in our report dated
January 22, 2009 we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
statement of financial condition as of
November 28, 2008 and the condensed consolidated
statement of changes in shareholders’ equity for the year
ended November 28, 2008, is fairly stated in all
material respects in relation to the consolidated financial
statements from which it has been derived.
/s/
PricewaterhouseCoopers LLP
New York, New York
May 1, 2009
77
Table of Contents
STATISTICAL
DISCLOSURES
Distribution
of Assets, Liabilities and Shareholders’
Equity
The following table sets forth a summary of consolidated average
balances and interest rates for the three months ended
March 2009 and February 2008 and one month ended
December 2008:
| For the Periods Ended | ||||||||||||||||||||||||||||||||||||
| March 2009 | February 2008 | December 2008 | ||||||||||||||||||||||||||||||||||
|
Average |
Average |
Average |
||||||||||||||||||||||||||||||||||
|
Average |
rate |
Average |
rate |
Average |
rate |
|||||||||||||||||||||||||||||||
|
balance
|
Interest
|
(annualized)
|
balance
|
Interest
|
(annualized)
|
balance
|
Interest
|
(annualized)
|
||||||||||||||||||||||||||||
| (in millions, except rates) | ||||||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Deposits with banks
|
$ | 20,880 | $ | 22 | 0.42 | % | $ | 5,417 | $ | 49 | 3.64 | % | $ | 8,834 | $ | 2 | 0.30 | % | ||||||||||||||||||
|
U.S.
|
18,422 | 13 | 0.28 | 1,418 | 10 | 2.84 | 7,480 | — | 0.07 | |||||||||||||||||||||||||||
|
Non-U.S.
|
2,458 | 9 | 1.47 | 3,999 | 39 | 3.92 | 1,354 | 2 | 1.93 | |||||||||||||||||||||||||||
|
Securities borrowed, securities purchased under agreements to
resell, at fair value, and federal funds sold
|
355,278 | 551 | 0.62 | 387,363 | 4,130 | 4.29 | 354,185 | 301 | 1.11 | |||||||||||||||||||||||||||
|
U.S.
|
264,440 | 161 | 0.24 | 307,525 | 3,412 | 4.46 | 231,200 | 120 | 0.68 | |||||||||||||||||||||||||||
|
Non-U.S.
|
90,838 | 390 | 1.72 | 79,838 | 718 | 3.62 | 122,985 | 181 | 1.92 | |||||||||||||||||||||||||||
|
Trading assets, at fair
value (1)(2)
|
295,731 | 3,158 | 4.28 | 382,908 | 3,717 | 3.90 | 331,562 | 1,172 | 4.61 | |||||||||||||||||||||||||||
|
U.S.
|
218,423 | 2,576 | 4.73 | 209,311 | 2,195 | 4.22 | 263,332 | 958 | 4.74 | |||||||||||||||||||||||||||
|
Non-U.S.
|
77,308 | 582 | 3.02 | 173,597 | 1,522 | 3.53 | 68,230 | 214 | 4.09 | |||||||||||||||||||||||||||
|
Other interest-earning
assets (3)
|
159,932 | 631 | 1.58 | 256,752 | 3,349 | 5.25 | 180,865 | 212 | 1.53 | |||||||||||||||||||||||||||
|
U.S.
|
110,069 | 362 | 1.32 | 143,923 | 1,163 | 3.25 | 124,821 | 95 | 0.99 | |||||||||||||||||||||||||||
|
Non-U.S.
|
49,863 | 269 | 2.16 | 112,829 | 2,186 | 7.79 | 56,044 | 117 | 2.72 | |||||||||||||||||||||||||||
|
Total interest-earning assets
|
831,821 | 4,362 | 2.10 | 1,032,440 | 11,245 | 4.38 | 875,446 | 1,687 | 2.51 | |||||||||||||||||||||||||||
|
Cash and due from banks
|
3,259 | 6,849 | 2,666 | |||||||||||||||||||||||||||||||||
|
Other noninterest-earning
assets (2)
|
144,543 | 136,623 | 161,304 | |||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 979,623 | $ | 1,175,912 | $ | 1,039,416 | ||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits
|
$ | 39,525 | $ | 150 | 1.52 | % | $ | 20,896 | $ | 200 | 3.85 | % | $ | 29,803 | $ | 51 | 2.23 | % | ||||||||||||||||||
|
U.S.
|
34,268 | 136 | 1.59 | 19,067 | 189 | 3.99 | 25,117 | 50 | 2.59 | |||||||||||||||||||||||||||
|
Non-U.S.
|
5,257 | 14 | 1.07 | 1,829 | 11 | 2.42 | 4,686 | 1 | 0.28 | |||||||||||||||||||||||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
187,292 | 545 | 1.17 | 222,629 | 2,611 | 4.72 | 215,735 | 229 | 1.38 | |||||||||||||||||||||||||||
|
U.S.
|
136,737 | 149 | 0.44 | 126,371 | 1,520 | 4.84 | 175,612 | 55 | 0.41 | |||||||||||||||||||||||||||
|
Non-U.S.
|
50,555 | 396 | 3.14 | 96,258 | 1,091 | 4.56 | 40,123 | 174 | 5.65 | |||||||||||||||||||||||||||
|
Trading liabilities, at fair
value (1)(2)
|
63,285 | 463 | 2.93 | 113,126 | 697 | 2.48 | 64,196 | 174 | 3.53 | |||||||||||||||||||||||||||
|
U.S.
|
31,008 | 152 | 1.97 | 60,908 | 254 | 1.68 | 33,399 | 59 | 2.30 | |||||||||||||||||||||||||||
|
Non-U.S.
|
32,277 | 311 | 3.86 | 52,218 | 443 | 3.41 | 30,797 | 115 | 4.87 | |||||||||||||||||||||||||||
|
Commercial paper
|
669 | 3 | 1.80 | 8,536 | 74 | 3.49 | 1,204 | 2 | 2.17 | |||||||||||||||||||||||||||
|
U.S.
|
384 | 3 | 3.13 | 7,485 | 67 | 3.60 | 1,190 | 2 | 2.19 | |||||||||||||||||||||||||||
|
Non-U.S.
|
285 | — | 0.27 | 1,051 | 7 | 2.68 | 14 | — | 4.81 | |||||||||||||||||||||||||||
|
Other
borrowings (4)(5)
|
74,227 | 237 | 1.28 | 103,942 | 463 | 1.79 | 75,058 | 105 | 1.82 | |||||||||||||||||||||||||||
|
U.S.
|
49,153 | 207 | 1.69 | 50,817 | 422 | 3.34 | 51,294 | 68 | 1.73 | |||||||||||||||||||||||||||
|
Non-U.S.
|
25,074 | 30 | 0.48 | 53,125 | 41 | 0.31 | 23,764 | 37 | 2.03 | |||||||||||||||||||||||||||
|
Long-term
borrowings (5)(6)
|
200,733 | 949 | 1.90 | 198,295 | 2,369 | 4.80 | 188,604 | 297 | 2.05 | |||||||||||||||||||||||||||
|
U.S.
|
189,497 | 874 | 1.85 | 176,957 | 2,159 | 4.91 | 175,486 | 279 | 2.07 | |||||||||||||||||||||||||||
|
Non-U.S.
|
11,236 | 75 | 2.68 | 21,338 | 210 | 3.96 | 13,118 | 18 | 1.79 | |||||||||||||||||||||||||||
|
Other interest-bearing
liabilities (7)
|
226,534 | 108 | 0.19 | 334,670 | 3,880 | 4.66 | 250,917 | 144 | 0.75 | |||||||||||||||||||||||||||
|
U.S.
|
158,849 | (73 | ) | (0.18 | ) | 202,765 | 2,124 | 4.21 | 179,715 | 27 | 0.20 | |||||||||||||||||||||||||
|
Non-U.S.
|
67,685 | 181 | 1.07 | 131,905 | 1,756 | 5.35 | 71,202 | 117 | 2.14 | |||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
792,265 | 2,455 | 1.24 | 1,002,094 | 10,294 | 4.13 | 825,517 | 1,002 | 1.58 | |||||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
83 | — | 83 | |||||||||||||||||||||||||||||||||
|
Other noninterest-bearing
liabilities (2)
|
124,214 | 131,039 | 150,104 | |||||||||||||||||||||||||||||||||
|
Total liabilities
|
916,562 | 1,133,133 | 975,704 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
||||||||||||||||||||||||||||||||||||
|
Preferred stock
|
16,495 | 3,100 | 16,477 | |||||||||||||||||||||||||||||||||
|
Common stock
|
46,566 | 39,679 | 47,235 | |||||||||||||||||||||||||||||||||
|
Total shareholders’ equity
|
63,061 | 42,779 | 63,712 | |||||||||||||||||||||||||||||||||
|
Total liabilities and shareholders’ equity
|
$ | 979,623 | $ | 1,175,912 | $ | 1,039,416 | ||||||||||||||||||||||||||||||
|
Interest rate spread
|
0.86 | % | 0.25 | % | 0.93 | % | ||||||||||||||||||||||||||||||
|
Net interest income and net yield on interest-earning assets
|
$ | 1,907 | 0.92 | $ | 951 | 0.37 | $ | 685 | 1.02 | |||||||||||||||||||||||||||
|
U.S.
|
1,664 | 1.09 | 45 | 0.03 | 633 | 1.32 | ||||||||||||||||||||||||||||||
|
Non-U.S.
|
243 | 0.44 | 906 | 0.98 | 52 | 0.27 | ||||||||||||||||||||||||||||||
|
Percentage of interest-earning assets and
interest-bearing
liabilities attributable to
non-U.S.
operations (8)
|
||||||||||||||||||||||||||||||||||||
|
Assets
|
26.50 | % | 35.86 | % | 28.40 | % | ||||||||||||||||||||||||||||||
|
Liabilities
|
24.28 | 35.70 | 22.25 | |||||||||||||||||||||||||||||||||
78
Table of Contents
STATISTICAL
DISCLOSURES
| (1) | Consists of cash trading instruments, including equity securities and convertible debentures. |
| (2) | Derivative instruments are included in other noninterest-earning assets and other noninterest-bearing liabilities. |
| (3) | Primarily consists of cash and securities segregated for regulatory and other purposes and receivables from customers and counterparties. |
| (4) | Consists of short-term other secured financings and unsecured short-term borrowings, excluding commercial paper. |
| (5) | Interest rates include the effects of hedging in accordance with SFAS No. 133. |
| (6) | Consists of long-term other secured financings and unsecured long-term borrowings. |
| (7) | Primarily consists of payables to customers and counterparties. |
| (8) | Assets, liabilities and interest are attributed to U.S. and non-U.S. based on the principal place of operations of the legal entity in which the assets and liabilities are held. |
79
Table of Contents
STATISTICAL
DISCLOSURES
Ratios
The following table sets forth selected financial ratios:
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Annualized net earnings/(loss) to average assets
|
0.7 | % | 0.5 | % | (0.9 | )% | ||||||
|
Annualized return on average common shareholders’
equity (1)
|
14.3 | 14.8 | N.M. | |||||||||
|
Annualized return on average total shareholders’
equity (2)
|
11.5 | 14.1 | N.M. | |||||||||
|
Total average equity to average assets
|
6.4 | 3.6 | 6.1 | |||||||||
| (1) | Based on annualized net earnings/(loss) applicable to common shareholders divided by average monthly common shareholders’ equity. | |
| (2) | Based on annualized net earnings/(loss) divided by average monthly total shareholders’ equity. |
Cross-border
Outstandings
Cross-border outstandings are based upon the Federal Financial
Institutions Examination Council’s (FFIEC) regulatory
guidelines for reporting cross-border risk. Claims include cash,
receivables, securities purchased under agreements to resell,
securities borrowed and cash trading instruments, but exclude
derivative instruments and commitments. Securities purchased
under agreements to resell and securities borrowed are presented
based on the domicile of the counterparty, without reduction for
related securities collateral held.
The following table sets forth cross-border outstandings for
each country in which cross-border outstandings exceed 0.75% of
consolidated assets as of March 2009 in accordance with the
FFIEC guidelines:
|
Banks
|
Governments
|
Other
|
Total
|
|||||||||||||
| (in millions) | ||||||||||||||||
|
Country
|
||||||||||||||||
|
United Kingdom
|
$ | 3,625 | $ | 1,682 | $ | 54,906 | $ | 60,213 | ||||||||
|
Cayman Islands
|
18 | 1 | 31,467 | 31,486 | ||||||||||||
|
Germany
|
2,109 | — | 21,366 | 23,475 | ||||||||||||
|
Japan
|
16,699 | — | 3,857 | 20,556 | ||||||||||||
|
France
|
1,762 | 427 | 7,598 | 9,787 | ||||||||||||
|
China
|
7,371 | — | 1,878 | 9,249 | ||||||||||||
|
Italy
|
857 | — | 7,578 | 8,435 | ||||||||||||
|
Switzerland
|
497 | — | 7,346 | 7,843 | ||||||||||||
80
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INDEX
|
Page |
||||
| No. | ||||
| 82 | ||||
| 84 | ||||
| 86 | ||||
| 88 | ||||
| 88 | ||||
| 97 | ||||
| 99 | ||||
| 100 | ||||
| 100 | ||||
| 105 | ||||
| 112 | ||||
| 112 | ||||
| 113 | ||||
| 121 | ||||
| 123 | ||||
| 128 | ||||
| 129 | ||||
| 134 | ||||
| 142 | ||||
| 143 | ||||
81
Table of Contents
Introduction
The Goldman Sachs Group, Inc. (Group Inc.) is a leading global
financial services firm providing investment banking, securities
and investment management services to a substantial and
diversified client base that includes corporations, financial
institutions, governments and
high-net-worth
individuals. Founded in 1869, the firm is headquartered in New
York and maintains offices in London, Frankfurt, Tokyo, Hong
Kong and other major financial centers around the world.
Our activities are divided into three segments:
| • | Investment Banking. We provide a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals. | |
| • | Trading and Principal Investments. We facilitate client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and take proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. In addition, we engage in market-making and specialist activities on equities and options exchanges, and we clear client transactions on major stock, options and futures exchanges worldwide. In connection with our merchant banking and other investing activities, we make principal investments directly and through funds that we raise and manage. | |
| • | Asset Management and Securities Services. We provide investment advisory and financial planning services and offer investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provide prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. |
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008.
References herein to our Annual Report on
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008.
When we use the terms “Goldman Sachs,” “we,”
“us” and “our,” we mean Group Inc., a
Delaware corporation, and its consolidated subsidiaries.
In connection with becoming a bank holding company, we were
required to change our fiscal year-end from November to
December. This change in our fiscal year-end resulted in a
one-month
transition period that began on November 29, 2008 and
ended on December 26, 2008. Financial information for
this fiscal transition period is included in the condensed
consolidated financial statements in Part I, Item 1 of
this Quarterly Report on
Form 10-Q.
On April 13, 2009, the Board of Directors of Group
Inc. (the Board) approved a change in our fiscal year-end from
the last Friday of December to December 31, beginning with
fiscal 2009. Fiscal 2009 began on December 27, 2008
and will end on December 31, 2009. Our second and
third fiscal quarters in 2009 will end on the last Friday of
June and September, respectively. Beginning in the fourth
quarter of 2009, our fiscal year will end on December 31.
In “Results of Operations” below, we compare the
three-month
period ended March 27, 2009 with the previously
reported
three-month
period ended February 29, 2008. Financial information
for the three months ended March 28, 2008 has not been
included in this
Form 10-Q
for the following reasons: (i) the three months ended
February 29, 2008 provide a meaningful comparison for
the three months ended March 27, 2009; (ii) there
are no significant factors, seasonal or other, that would impact
the comparability of information if the results for the three
months ended March 28, 2008 were presented in lieu of
results for the three months ended February 29, 2008;
and (iii) it was not practicable or cost justified to
prepare this information.
82
Table of Contents
All references to March 2009 and February 2008, unless
specifically stated otherwise, refer to our
three-month
fiscal periods ended, or the dates, as the context requires,
March 27, 2009 and February 29, 2008,
respectively. All references to December 2008, unless
specifically stated otherwise, refer to our fiscal
one-month
transition period ended, or the date, as the context requires,
December 26, 2008. All references to
November 2008, unless specifically stated otherwise, refer
to our fiscal year ended, or the date, as the context requires,
November 28, 2008. All references to 2009, unless
specifically stated otherwise, refer to our fiscal year ending,
or the date, as the context requires,
December 31, 2009.
83
Table of Contents
Executive
Overview
Three Months Ended March 2009 versus
February 2008. Our diluted earnings per
common share were $3.39 for the first quarter ended
March 27, 2009 compared with $3.23 for the first
quarter ended February 29, 2008. Annualized return on
average common shareholders’
equity (1)
was 14.3% for the first quarter of 2009. Book value per common
share was $98.82 and tangible book value per common
share (2)
was $88.02, both essentially unchanged from
November 28, 2008. Our Tier 1 capital ratio under
Basel II (3)
was 16.0% at the end of the first quarter of 2009, up from 15.6%
as of November 28, 2008. Our Tier 1 capital ratio
under Basel I
(3) was
13.7% at the end of the first quarter of 2009.
Our results for the first quarter of 2009 reflected
significantly higher net revenues in Trading and Principal
Investments compared with the first quarter of 2008, partially
offset by significantly lower net revenues in Asset Management
and Securities Services, and Investment Banking. The increase in
Trading and Principal Investments reflected particularly strong
results in Fixed Income, Currency and Commodities (FICC), as net
revenues were more than double the amount in the first quarter
of 2008, partially offset by very weak results in Principal
Investments and lower net revenues in Equities. The increase in
FICC reflected particularly strong performance in interest rate
products, commodities and credit products, as FICC operated in a
generally favorable environment characterized by client-driven
activity, particularly in more liquid products, and high levels
of volatility. However, illiquid assets generally continued to
decline in value. Net revenues in currencies were solid, but
lower compared with a particularly strong first quarter of 2008.
Results in mortgages were higher compared with a difficult first
quarter of 2008. During the quarter, credit products included
losses from corporate debt and private equity investments, and
mortgages included a loss of approximately $800 million
(excluding hedges) on commercial mortgage loans and securities.
In the first quarter of 2009, results in Principal Investments
reflected net losses of $640 million from real estate
principal investments and $621 million from corporate
principal investments, as well as a $151 million loss
related to our investment in the ordinary shares of Industrial
and Commercial Bank of China Limited (ICBC). The decline in
Equities reflected lower net revenues in the shares business due
to lower commissions, primarily reflecting lower levels of
activity outside of the U.S. In addition, net revenues in
derivatives were solid, but lower compared with the first
quarter of 2008. Results in principal strategies were also lower
compared with the first quarter of 2008. During the quarter,
Equities operated in an environment generally characterized by
continued weakness in global equity markets and high, but
declining, levels of volatility.
(1) Annualized
return on average common shareholders’ equity (ROE) is
computed by dividing annualized net earnings applicable to
common shareholders by average monthly common shareholders’
equity. See
“— Results
of Operations — Financial Overview” below for
further information regarding our calculation of ROE.
(2) Tangible
common shareholders’ equity equals total shareholders’
equity less preferred stock, goodwill and identifiable
intangible assets. Tangible book value per common share is
computed by dividing tangible common shareholders’ equity
by the number of common shares outstanding, including restricted
stock units granted to employees with no future service
requirements. We believe that tangible common shareholders’
equity is meaningful because it is one of the measures that we
and investors use to assess capital adequacy. See
“— Equity
Capital — Other Capital Ratios and Metrics” below
for further information regarding tangible common
shareholders’ equity.
(3) We
continue to disclose our Tier 1 capital ratio in accordance
with the capital guidelines applicable to us before we became a
bank holding company in September 2008, when we were
regulated by the SEC as a Consolidated Supervised Entity (CSE).
These guidelines were generally consistent with those set out in
the Revised Framework for the International Convergence of
Capital Measurement and Capital Standards issued by the Basel
Committee on Banking Supervision (Basel II). As a bank
holding company, we are subject to consolidated regulatory
capital requirements administered by the Federal Reserve Board.
Beginning with the first quarter of 2009, we are reporting an
estimated Tier 1 capital ratio in accordance with the
regulatory capital requirements currently applicable to bank
holding companies, which are based on the Capital Accord of the
Basel Committee on Banking Supervision (Basel I). The
calculation of our estimated Tier 1 capital ratio under
Basel I includes certain market risk measures that are
under review by the Federal Reserve Board, as part of our
transition to bank holding company status. The calculation of
our estimated Tier 1 capital ratio has not been reviewed
with the Federal Reserve Board and, accordingly, may be revised
in subsequent filings. See “— Equity Capital”
below for a further discussion of our capital ratios.
84
Table of Contents
The decline in Asset Management and Securities Services
reflected significant decreases in both Asset Management and
Securities Services compared with the first quarter of 2008. The
decrease in Asset Management was due to lower management and
other fees, reflecting lower assets under management,
principally due to market depreciation, and lower incentive
fees. The decrease in Securities Services primarily reflected
the impact of lower customer balances.
The decline in Investment Banking reflected significantly lower
net revenues in both Underwriting and Financial Advisory. The
decrease in Underwriting primarily reflected a significant
decline in
industry-wide
equity and
equity-related
offerings, as well as a decrease in leveraged finance activity.
The decrease in Financial Advisory reflected lower levels of
deal activity. Our investment banking transaction backlog
decreased during the
quarter. (1)
One Month Ended December 2008. Our
diluted loss per common share was $2.15 and net revenues were
$183 million for the one month ended
December 26, 2008. Our results for December 2008
reflected a continuation of the difficult operating environment
experienced during our fiscal fourth quarter of 2008,
particularly across global equity and credit markets. Trading
and Principal Investments recorded negative net revenues of
$507 million. Results in Principal Investments reflected
net losses of $529 million from real estate principal
investments and $501 million from corporate principal
investments, partially offset by a gain of $228 million
related to our investment in the ordinary shares of ICBC.
Results in FICC included a loss in credit products of
approximately $1 billion (net of hedges) related to
non-investment-grade
credit origination activities, primarily reflecting a writedown
of approximately $850 million related to the bridge and
bank loan facilities held in LyondellBasell Finance Company. In
addition, results in mortgages included a net loss of
approximately $625 million (excluding hedges) on commercial
mortgage loans and securities. Interest rate products,
currencies and commodities each produced strong results for the
month of December 2008. During the month of December,
although market opportunities were favorable for certain
businesses, FICC operated in an environment generally
characterized by continued weakness in the broader credit
markets. Results in Equities reflected lower commission volumes
and lower net revenues from derivatives compared with average
monthly levels in 2008, as well as weak results in principal
strategies. During the month of December, Equities operated in
an environment characterized by continued weakness in global
equity markets and continued high levels of volatility.
Net revenues in Investment Banking were $135 million for
the month of December and reflected very low levels of activity
in
industry-wide
completed mergers and acquisitions, as well as continued
challenging market conditions across equity and leveraged
finance markets, which adversely affected our Underwriting
business. Our investment banking transaction backlog decreased
during the month of
December. (1)
Net revenues in Asset Management and Securities Services were
$555 million for the month of December, reflecting Asset
Management net revenues of $319 million and Securities
Services net revenues of $236 million. During the month of
December, assets under management increased $19 billion to
$798 billion due to $13 billion of market
appreciation, primarily in fixed income and equity assets, and
$6 billion of net inflows. Net inflows reflected inflows in
money market assets, partially offset by outflows in fixed
income, equity and alternative investment assets. Net revenues
in Securities Services reflected favorable changes in the
composition of securities lending balances, but were negatively
impacted by a decline in total average customer balances.
Our business, by its nature, does not produce predictable
earnings. Our results in any given period can be materially
affected by conditions in global financial markets and economic
conditions generally. For a further discussion of the factors
that may affect our future operating results, see “Risk
Factors” in Part I, Item 1A of our Annual Report
on
Form 10-K.
(1) Our
investment banking transaction backlog represents an estimate of
our future net revenues from investment banking transactions
where we believe that future revenue realization is more likely
than not.
85
Table of Contents
Business
Environment
Three Months Ended March 2009. Global
economic conditions remained very weak during our first quarter
of fiscal 2009, as real gross domestic product (GDP) declined in
most major economies. Growth in emerging markets slowed during
our first quarter, reflecting a reduced flow of capital into
these economies. Fixed income and equity markets continued to
experience high levels of volatility and major global equity
markets generally continued to decline. After a significant
decline in the second half of calendar year 2008, the price of
crude oil increased during our first quarter. The
U.S. dollar appreciated against the Euro, the British pound
and the Japanese yen. Investment banking activity levels
continued to slow during our first quarter, with significant
declines in
industry-wide
announced and completed mergers and acquisitions, and
industry-wide
equity and
equity-related
offerings.
In the U.S., real GDP declined at a rapid pace during our first
quarter. Residential investment continued to contract due to
ongoing weakness in the housing market. Fixed business
investment also declined significantly as corporate profits fell
across many industries. While the rate of unemployment continued
to increase, consumer spending appeared to improve after falling
rapidly in the second half of 2008. The rate of inflation
remained subdued during our first quarter, reflecting rising
excess production capacity and generally lower commodity prices.
The U.S. Federal Reserve maintained its federal funds rate
at a target range of zero to 0.25% during our first quarter. The
10-year
U.S. Treasury note yield ended our first quarter 62 basis
points higher than December 2008 at 2.78%. In equity
markets, the Dow Jones Industrial Average and the S&P 500
Index decreased by 9% and 7%, respectively, and the NASDAQ
Composite Index increased by 1% during our first quarter.
In the Eurozone economies, real GDP declined in our first
quarter, as business investment, exports and consumer spending
remained weak. Labor markets also experienced significant
deterioration during our first quarter, with the rate of
unemployment rising in the major economies. In addition, surveys
of business and consumer confidence remained at very low levels.
In response to a challenging economic outlook and declining
inflation, the European Central Bank further lowered its main
refinancing operations rate by 100 basis points to 1.50%. The
Euro depreciated by 5% against the U.S. dollar. In the
U.K., real GDP also declined, although it appeared to decline at
a slower pace compared with the fourth quarter of 2008. The Bank
of England lowered its official bank rate by 150 basis
points to 0.50% during the quarter. The British pound
depreciated by 2% against the U.S. dollar. Equity markets
in both the U.K. and continental Europe decreased significantly
during our first quarter, while
long-term
government bond yields increased.
In Japan, real GDP growth declined significantly as a result of
a significant decline in exports, weakness in business
investment and a decline in consumer spending. Business
confidence remained near historically low levels and the
unemployment rate continued to increase. Measures of inflation
returned to near-zero levels during the quarter. The Bank of
Japan left its target overnight call rate unchanged at 0.10%,
while the yield on
10-year
Japanese government bonds increased during the quarter. The
Japanese yen depreciated by 8% against the U.S. dollar and
the Nikkei 225 Index decreased 1% during our first quarter.
In China, weak export demand continued to adversely impact real
GDP during the first quarter. However, capital investment
increased due to an increase in availability of credit and
consumer spending remained solid. In addition, measures of
inflation continued to decline during the quarter. During our
first quarter, The People’s Bank of China left its
one-year
benchmark lending rate unchanged at 5.31%. The Chinese yuan
appreciated slightly against the U.S. dollar. The Shanghai
Composite Index increased by 28% during our first quarter, while
equity markets in Hong Kong remained essentially unchanged. In
India, economic growth slowed due to weaker business investment
and lower industrial production; however, consumer spending
remained generally solid. The Indian rupee depreciated by 2%
against the U.S. dollar during our first quarter. Equity
markets in India and Korea increased during our first quarter.
86
Table of Contents
One Month Ended December 2008. Global
economic conditions were also weak during the month of
December 2008. Most key indicators of economic activity,
such as industrial production, employment, international trade
and business and consumer sentiment, continued to decline. The
rate of inflation in most major economies generally declined due
to weak commodity prices and falling aggregate demand. Fixed
income and equity markets continued to experience high levels of
volatility and major global equity markets generally continued
to decline. The U.S. Federal Reserve lowered its federal
funds rate from 1.00% to a target range of zero to 0.25%, and
central banks in the Eurozone, United Kingdom, Japan and China
also lowered interest rates during the month. In addition, a
number of central banks expanded programs to provide liquidity
and credit to the financial sector. During the month, the
U.S. dollar depreciated against the Euro and the Japanese
yen, but appreciated against the British pound. Investment
banking activity remained subdued, reflecting very low levels of
activity in
industry-wide
announced and completed mergers and acquisitions, and
industry-wide
equity and
equity-related
offerings.
87
Table of Contents
Critical
Accounting Policies
Fair
Value
The use of fair value to measure financial instruments, with
related unrealized gains or losses generally recognized in
“Trading and principal investments” in our condensed
consolidated statements of earnings, is fundamental to our
financial statements and our risk management processes and is
our most critical accounting policy. The fair value of a
financial instrument is the amount that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., the exit price) in accordance with SFAS
No. 157, “Fair Value Measurements.” Financial
assets are marked to bid prices and financial liabilities are
marked to offer prices.
During the fourth quarter of 2008, both the Financial Accounting
Standards Board (FASB) and the staff of the SEC re-emphasized
the importance of sound fair value measurement in financial
reporting. In October 2008, the FASB issued FASB Staff
Position (FSP)
No. FAS 157-3,
“Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active.” This statement
clarifies that determining fair value in an inactive or
dislocated market depends on facts and circumstances and
requires significant management judgment. This statement
specifies that it is acceptable to use inputs based on
management estimates or assumptions, or for management to make
adjustments to observable inputs to determine fair value when
markets are not active and relevant observable inputs are not
available. Our fair value measurement policies are consistent
with the guidance in FSP
No. FAS 157-3.
In April 2009, the FASB issued FSP
No. FAS 157-4,
“Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly.” The FSP
provides guidance for estimating fair value when the volume and
level of activity for an asset or liability have decreased
significantly. Specifically, the FSP lists factors which should
be evaluated to determine whether a transaction is orderly,
clarifies that adjustments to transactions or quoted prices may
be necessary when the volume and level of activity for an asset
or liability have decreased significantly, and provides guidance
for determining the concurrent weighting of the transaction
price relative to fair value indications from other valuation
techniques when estimating fair value. The FSP is effective for
periods ending after June 15, 2009. Because our
current fair value methodology is consistent with FSP
No. FAS 157-4,
adoption of the FSP will not affect our financial condition,
results of operations or cash flows. We will adopt the FSP in
the second quarter of fiscal 2009 to comply with the FSP’s
disclosure requirements.
Substantially all trading assets and trading liabilities are
reflected in our condensed consolidated statements of financial
condition at fair value, pursuant principally to:
| • | SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities;” | |
| • | specialized industry accounting for broker-dealers and investment companies; | |
| • | SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities;” or | |
| • | the fair value option under either SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140,” or SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (i.e., the fair value option). |
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In determining fair value, we separate our “Trading assets,
at fair value” and “Trading liabilities, at fair
value” into two categories: cash instruments and derivative
contracts, as set forth in the following table:
Trading
Instruments by Category
(in millions)
(in millions)
| As of March 2009 | As of November 2008 | As of December 2008 | ||||||||||||||||||||||
|
Trading |
Trading |
Trading |
Trading |
Trading |
Trading |
|||||||||||||||||||
|
Assets, at |
Liabilities, at |
Assets, at |
Liabilities, at |
Assets, at |
Liabilities, at |
|||||||||||||||||||
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
|||||||||||||||||||
|
Cash trading instruments
|
$ | 225,820 | $ | 55,370 | $ | 186,231 | $ | 57,143 | $ | 385,871 | $ | 63,104 | ||||||||||||
|
ICBC
|
5,754 | (1) | — | 5,496 | (1) | — | 6,125 | (1) | — | |||||||||||||||
|
SMFG
|
1,231 | 1,231 | (4) | 1,135 | 1,134 | (4) | 1,305 | 1,305 | (4) | |||||||||||||||
|
Other principal investments
|
12,461 | (2) | — | 15,126 | (2) | — | 14,177 | (2) | — | |||||||||||||||
|
Principal investments
|
19,446 | 1,231 | 21,757 | 1,134 | 21,607 | 1,305 | ||||||||||||||||||
|
Cash instruments
|
245,266 | 56,601 | 207,988 | 58,277 | 407,478 | 64,409 | ||||||||||||||||||
|
Exchange-traded
|
6,679 | 8,140 | 6,164 | 8,347 | 4,153 | 8,513 | ||||||||||||||||||
|
Over-the-counter
|
97,646 | 82,480 | 124,173 | 109,348 | 123,333 | 113,109 | ||||||||||||||||||
|
Derivative contracts
|
104,325 | (3) | 90,620 | (5) | 130,337 | (3) | 117,695 | (5) | 127,486 | (3) | 121,622 | (5) | ||||||||||||
|
Total
|
$ | 349,591 | $ | 147,221 | $ | 338,325 | $ | 175,972 | $ | 534,964 | $ | 186,031 | ||||||||||||
| (1) | Includes interests of $3.64 billion, $3.48 billion and $3.87 billion as of March 2009, November 2008 and December 2008, respectively, held by investment funds managed by Goldman Sachs. The fair value of our investment in the ordinary shares of ICBC, which trade on The Stock Exchange of Hong Kong, includes the effect of foreign exchange revaluation for which we maintain an economic currency hedge. | |
| (2) | The following table sets forth the principal investments (in addition to our investments in ICBC and Sumitomo Mitsui Financial Group, Inc. (SMFG)) included within the Principal Investments component of our Trading and Principal Investments segment: |
| As of March 2009 | As of November 2008 | As of December 2008 | ||||||||||||||||||||||||||||||||||
|
Corporate
|
Real Estate
|
Total
|
Corporate
|
Real Estate
|
Total
|
Corporate
|
Real Estate
|
Total
|
||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||
|
Private
|
$ | 8,911 | $ | 1,914 | $ | 10,825 | $ | 10,726 | $ | 2,935 | $ | 13,661 | $ | 10,160 | $ | 2,458 | $ | 12,618 | ||||||||||||||||||
|
Public
|
1,609 | 27 | 1,636 | 1,436 | 29 | 1,465 | 1,534 | 25 | 1,559 | |||||||||||||||||||||||||||
|
Total
|
$ | 10,520 | $ | 1,941 | $ | 12,461 | $ | 12,162 | $ | 2,964 | $ | 15,126 | $ | 11,694 | $ | 2,483 | $ | 14,177 | ||||||||||||||||||
| (3) | Net of cash received pursuant to credit support agreements of $149.08 billion, $137.16 billion and $154.69 billion as of March 2009, November 2008 and December 2008, respectively. | |
| (4) | Represents an economic hedge on the shares of common stock underlying our investment in the convertible preferred stock of SMFG. | |
| (5) | Net of cash paid pursuant to credit support agreements of $27.07 billion, $34.01 billion and $32.91 billion as of March 2009, November 2008 and December 2008, respectively. |
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Table of Contents
Cash Instruments. Cash instruments include
cash trading instruments, public principal investments and
private principal investments.
| • | Cash Trading Instruments. Our cash trading instruments are generally valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and sovereign obligations, active listed equities and certain money market securities. |
The types of instruments that trade in markets that are not
considered to be active, but are valued based on quoted market
prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
most government agency securities,
investment-grade
corporate bonds, certain mortgage products, certain bank loans
and bridge loans, less liquid listed equities, state, municipal
and provincial obligations and certain money market securities
and loan commitments.
Certain cash trading instruments trade infrequently and
therefore have little or no price transparency. Such instruments
include private equity and real estate fund investments, certain
bank loans and bridge loans (including certain mezzanine
financing, leveraged loans arising from capital market
transactions and other corporate bank debt), less liquid
corporate debt securities and other debt obligations (including
less liquid
high-yield
corporate bonds, distressed debt instruments and collateralized
debt obligations (CDOs) backed by corporate obligations), less
liquid mortgage whole loans and securities (backed by either
commercial or residential real estate), and acquired portfolios
of distressed loans. The transaction price is initially used as
the best estimate of fair value. Accordingly, when a pricing
model is used to value such an instrument, the model is adjusted
so that the model value at inception equals the transaction
price. This valuation is adjusted only when changes to inputs
and assumptions are corroborated by evidence such as
transactions in similar instruments, completed or pending
third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity or debt capital markets, and changes in financial
ratios or cash flows.
For positions that are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to
reflect illiquidity
and/or
non-transferability.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
| • | Public Principal Investments. Our public principal investments held within the Principal Investments component of our Trading and Principal Investments segment tend to be large, concentrated holdings resulting from initial public offerings or other corporate transactions, and are valued based on quoted market prices. For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on market evidence where available. In the absence of such evidence, management’s best estimate is used. |
Our most significant public principal investment is our
investment in the ordinary shares of ICBC. Our investment in
ICBC is valued using the quoted market price adjusted for
transfer restrictions. During the quarter ended March 2009,
we committed to supplemental transfer restrictions in relation
to our investment in ICBC. Under the original transfer
restrictions, the ICBC shares we hold would have become free
from transfer restrictions in equal installments on
April 28, 2009 and October 20, 2009. Under
the new supplemental transfer restrictions, 20% of the ICBC
shares that we currently hold became free from transfer
restrictions on April 28, 2009 and 80% of the shares
may not be liquidated at any time prior to
April 28, 2010.
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Table of Contents
We also have an investment in the convertible preferred stock of
SMFG. This investment is valued using a model that is
principally based on SMFG’s common stock price. During
2008, we converted
one-third of
our SMFG preferred stock investment into SMFG common stock, and
delivered the common stock to close out
one-third of
our hedge position. As of March 2009, we remained hedged on
the common stock underlying our remaining investment in SMFG.
| • | Private Principal Investments. Our private principal investments held within the Principal Investments component of our Trading and Principal Investments segment include investments in private equity, debt and real estate, primarily held through investment funds. By their nature, these investments have little or no price transparency. We value such instruments initially at transaction price and adjust valuations when evidence is available to support such adjustments. Such evidence includes transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows. |
Derivative Contracts. Derivative contracts can
be
exchange-traded
or
over-the-counter
(OTC). We generally value
exchange-traded
derivatives using models which calibrate to
market-clearing
levels and eliminate timing differences between the closing
price of the
exchange-traded
derivatives and their underlying instruments.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including
market-based
inputs to models, model calibration to
market-clearing
transactions, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency.
Where models are used, the selection of a particular model to
value an OTC derivative depends upon the contractual terms of,
and specific risks inherent in, the instrument, as well as the
availability of pricing information in the market. We generally
use similar models to value similar instruments. Valuation
models require a variety of inputs, including contractual terms,
market prices, yield curves, credit curves, measures of
volatility, prepayment rates and correlations of such inputs.
For OTC derivatives that trade in liquid markets, such as
generic forwards, swaps and options, model inputs can generally
be verified and model selection does not involve significant
management judgment.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. Where we do
not have corroborating market evidence to support significant
model inputs and cannot verify the model to market transactions,
the transaction price is initially used as the best estimate of
fair value. Accordingly, when a pricing model is used to value
such an instrument, the model is adjusted so that the model
value at inception equals the transaction price. Subsequent to
initial recognition, we only update valuation inputs when
corroborated by evidence such as similar market transactions,
third-party
pricing services
and/or
broker or dealer quotations, or other empirical market data. In
circumstances where we cannot verify the model value to market
transactions, it is possible that a different valuation model
could produce a materially different estimate of fair value. See
“— Derivatives”
below for further information on our OTC derivatives.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
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Table of Contents
Controls Over Valuation of Financial
Instruments. A control infrastructure,
independent of the trading and investing functions, is
fundamental to ensuring that our financial instruments are
appropriately valued at
market-clearing
levels (i.e., exit prices) and that fair value measurements
are reliable and consistently determined.
We employ an oversight structure that includes appropriate
segregation of duties. Senior management, independent of the
trading and investing functions, is responsible for the
oversight of control and valuation policies and for reporting
the results of these policies to our Audit Committee. We seek to
maintain the necessary resources to ensure that control
functions are performed appropriately. We employ procedures for
the approval of new transaction types and markets, price
verification, review of daily profit and loss, and review of
valuation models by personnel with appropriate technical
knowledge of relevant products and markets. These procedures are
performed by personnel independent of the trading and investing
functions. For financial instruments where prices or valuations
that require inputs are less observable, we employ, where
possible, procedures that include comparisons with similar
observable positions, analysis of actual to projected cash
flows, comparisons with subsequent sales, reviews of valuations
used for collateral management purposes and discussions with
senior business leaders. See
“— Market
Risk” and
“— Credit
Risk” below for a further discussion of how we manage the
risks inherent in our trading and principal investing businesses.
Fair Value Hierarchy —
Level 3. SFAS No. 157 establishes
a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The objective of a fair
value measurement is to determine the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date (i.e., the exit price). The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs
(level 3 measurements). Assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
Instruments that trade infrequently and therefore have little or
no price transparency are classified within level 3 of the
fair value hierarchy. We determine which instruments are
classified within level 3 based on the results of our price
verification process. This process is performed by personnel
independent of our trading and investing functions who
corroborate valuations to external market data
(e.g., quoted market prices, broker or dealer quotations,
third-party
pricing vendors, recent trading activity and comparative
analyses to similar instruments). Instruments with valuations
which cannot be corroborated to external market data are
classified within level 3 of the fair value hierarchy.
When broker or dealer quotations or
third-party
pricing vendors are used for valuation or price verification,
greater priority is given to executable quotes. As part of our
price verification process, valuations based on quotes are
corroborated by comparison both to other quotes and to recent
trading activity in the same or similar instruments. The number
of quotes obtained varies by instrument and depends on the
liquidity of the particular instrument. See Notes 2 and 3
to the condensed consolidated financial statements in
Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding SFAS No. 157.
Recent market conditions, characterized by dislocations between
asset classes, elevated levels of volatility, and reduced price
transparency, have increased the level of management judgment
required to value cash trading instruments classified within
level 3 of the fair value hierarchy. In particular,
management’s judgment is required to determine the
appropriate
risk-adjusted
discount rate for cash trading instruments with little or no
price transparency as a result of decreased volumes and lower
levels of trading activity. In such situations, our valuation is
adjusted to approximate rates which market participants would
likely consider appropriate for relevant credit and liquidity
risks.
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Table of Contents
Valuation Methodologies for Level 3
Assets. Instruments classified within
level 3 of the fair value hierarchy are initially valued at
transaction price, which is considered to be the best initial
estimate of fair value. As time passes, transaction price
becomes less reliable as an estimate of fair value and
accordingly, we use other methodologies to determine fair value,
which vary based on the type of instrument, as described below.
Regardless of the methodology, valuation inputs and assumptions
are only changed when corroborated by substantive evidence.
Senior management in control functions, independent of the
trading and investing functions, reviews all significant
unrealized gains/losses, including the primary drivers of the
change in value. Valuations are further corroborated by values
realized upon sales of our level 3 assets. An overview of
methodologies used to value our level 3 assets subsequent
to the transaction date is as follows:
| • | Private equity and real estate fund investments. Investments are generally held at cost for the first year. Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. In the absence of such evidence, valuations are based on third-party independent appraisals, transactions in similar instruments, discounted cash flow techniques, valuation multiples and public comparables. Such evidence includes pending reorganizations (e.g., merger proposals, tender offers or debt restructurings); and significant changes in financial metrics (e.g., operating results as compared to previous projections, industry multiples, credit ratings and balance sheet ratios). | |
| • | Bank loans and bridge loans and Corporate debt securities and other debt obligations. Valuations are generally based on discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows, market yields for such instruments and recovery assumptions. Inputs are generally determined based on relative value analyses, which incorporate comparisons both to credit default swaps that reference the same underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotes are available. | |
| • | Loans and securities backed by commercial real estate. Loans and securities backed by commercial real estate are collateralized by specific assets and are generally tranched into varying levels of subordination. Due to the nature of these instruments, valuation techniques vary by instrument. Methodologies include relative value analyses across different tranches, comparisons to transactions in both the underlying collateral and instruments with the same or substantially the same underlying collateral, market indices (such as the CMBX (1)), and credit default swaps, as well as discounted cash flow techniques. | |
| • | Loans and securities backed by residential real estate. Valuations are based on both proprietary and industry recognized models (including Intex and Bloomberg), discounted cash flow techniques and hypothetical securitization analyses. In the recent market environment, the most significant inputs to the valuation of these instruments are rates of delinquency, default and loss expectations, which are driven in part by housing prices. Inputs are determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices such as the ABX (1). | |
| • | Loan portfolios. Valuations are based on discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows and market yields for such instruments. Inputs are determined based on relative value analyses which incorporate comparisons to recent auction data for other similar loan portfolios. | |
| • | Derivative contracts. Valuation models are calibrated to initial transaction price. Subsequent changes in valuations are based on observable inputs to the valuation models (e.g., interest rates, credit spreads, volatilities, etc.). Inputs are changed only when corroborated by market data. Valuations of less liquid OTC derivatives are typically based on level 1 or level 2 inputs that can be observed in the market, as well as unobservable inputs, such as correlations and volatilities. |
(1) The
CMBX and ABX are indices that track the performance of
commercial mortgage bonds and subprime residential mortgage
bonds, respectively.
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Table of Contents
Total level 3 assets were $59.06 billion,
$66.19 billion and $64.17 billion as of
March 2009, November 2008 and December 2008,
respectively. The decrease in level 3 assets during the
first quarter of 2009 primarily reflected unrealized losses,
principally on private equity and real estate fund investments,
loans and securities backed by commercial real estate and bank
loans and bridge loans. The decrease in level 3 assets
during December 2008 primarily reflected unrealized losses,
principally on bank loans and bridge loans, private equity and
real estate fund investments and loans and securities backed by
commercial real estate.
The following table sets forth the fair values of financial
assets classified within level 3 of the fair value
hierarchy:
Level 3
Financial Assets at Fair Value
(in millions)
(in millions)
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
|
Description
|
2009 | 2008 | 2008 | |||||||||
|
Private equity and real estate fund
investments (1)
|
$ | 13,620 | $ | 16,006 | $ | 15,127 | ||||||
|
Bank loans and bridge
loans (2)
|
9,866 | 11,957 | 11,169 | |||||||||
|
Corporate debt securities and other debt
obligations (3)
|
7,554 | 7,596 | 7,993 | |||||||||
|
Mortgage and other
asset-backed
loans and securities
|
||||||||||||
|
Loans and securities backed by commercial real estate
|
7,705 | 9,340 | 9,170 | |||||||||
|
Loans and securities backed by residential real estate
|
2,088 | 2,049 | 1,927 | |||||||||
|
Loan
portfolios (4)
|
1,851 | 4,118 | 4,266 | |||||||||
|
Cash instruments
|
42,684 | 51,066 | 49,652 | |||||||||
|
Derivative contracts
|
16,378 | 15,124 | 14,515 | |||||||||
|
Total level 3 assets at fair value
|
59,062 | 66,190 | 64,167 | |||||||||
|
Level 3 assets for which we do not bear economic
exposure (5)
|
(4,402 | ) | (6,616 | ) | (6,167 | ) | ||||||
|
Level 3 assets for which we bear economic exposure
|
$ | 54,660 | $ | 59,574 | $ | 58,000 | ||||||
| (1) | Includes $1.82 billion, $2.62 billion and $2.30 billion as of March 2009, November 2008 and December 2008, respectively, of real estate fund investments. | |
| (2) | Includes certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt. | |
| (3) | Includes $739 million, $804 million and $755 million as of March 2009, November 2008 and December 2008, respectively, of CDOs backed by corporate obligations. | |
| (4) | Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. | |
| (5) | We do not bear economic exposure to these level 3 assets as they are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
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Table of Contents
Loans and securities backed by residential real
estate. We securitize, underwrite and make
markets in various types of residential mortgages, including
prime, Alt-A
and subprime. At any point in time, we may use cash instruments
as well as derivatives to manage our long or short risk position
in residential real estate. The following table sets forth the
fair value of our long positions in prime,
Alt-A and
subprime mortgage cash instruments:
Long Positions in
Loans and Securities Backed by Residential Real Estate
(in millions)
(in millions)
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Prime (1)
|
$ | 1,362 | $ | 1,494 | $ | 1,345 | ||||||
|
Alt-A
|
1,252 | 1,845 | 1,534 | |||||||||
|
Subprime (2)
|
1,398 | 1,906 | 1,926 | |||||||||
|
Total (3)
|
$ | 4,012 | $ | 5,245 | $ | 4,805 | ||||||
| (1) | Excludes U.S. government agency-issued collateralized mortgage obligations of $6.16 billion, $4.27 billion and $5.49 billion as of March 2009, November 2008 and December 2008, respectively. Also excludes U.S. government agency-issued mortgage pass-through certificates. | |
| (2) | Includes $331 million, $228 million and $198 million of CDOs backed by subprime mortgages as of March 2009, November 2008 and December 2008, respectively. | |
| (3) | Includes $2.09 billion, $2.05 billion and $1.93 billion of financial instruments (primarily loans and investment-grade securities, the majority of which were issued during 2006 and 2007) classified within level 3 of the fair value hierarchy as of March 2009, November 2008 and December 2008, respectively. |
Loans and securities backed by commercial real
estate. We originate, securitize and syndicate
fixed and floating rate commercial mortgages globally. At any
point in time, we may use cash instruments as well as
derivatives to manage our risk position in the commercial
mortgage market. The following table sets forth the fair value
of our long positions in loans and securities backed by
commercial real estate by geographic region. The decrease in
loans and securities backed by commercial real estate from
November 2008 to March 2009 was primarily due to
writedowns.
Long Positions in
Loans and Securities Backed by
Commercial Real Estate by Geographic Region
(in millions)
Commercial Real Estate by Geographic Region
(in millions)
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Americas (1)
|
$ | 6,556 | $ | 7,433 | $ | 7,265 | ||||||
|
EMEA (2)
|
2,104 | 3,304 | 3,042 | |||||||||
|
Asia
|
103 | 157 | 165 | |||||||||
|
Total (3)
|
$ | 8,763 | (4) | $ | 10,894 | (5) | $ | 10,472 | (6) | |||
| (1) | Substantially all relates to the U.S. | |
| (2) | EMEA (Europe, Middle East and Africa). | |
| (3) | Includes $7.71 billion, $9.34 billion and $9.17 billion of financial instruments classified within level 3 of the fair value hierarchy as of March 2009, November 2008 and December 2008, respectively. | |
| (4) | Comprised of loans of $7.20 billion and commercial mortgage-backed securities of $1.56 billion as of March 2009, of which $8.27 billion was floating rate and $491 million was fixed rate. | |
| (5) | Comprised of loans of $9.23 billion and commercial mortgage-backed securities of $1.66 billion as of November 2008, of which $9.78 billion was floating rate and $1.11 billion was fixed rate. | |
| (6) | Comprised of loans of $8.91 billion and commercial mortgage-backed securities of $1.56 billion as of December 2008, of which $10.07 billion was floating rate and $399 million was fixed rate. |
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Table of Contents
Leveraged Lending
Capital Market Transactions
We arrange, extend and syndicate loans and commitments related
to leveraged lending capital market transactions globally. The
following table sets forth the principal amount of our leveraged
lending capital market transactions by geographic region:
Leveraged Lending
Capital Market Transactions by Geographic Region
(in millions)
(in millions)
| As of March 2009 | As of November 2008 | As of December 2008 | ||||||||||||||||||||||||||||||||||
|
Funded
|
Unfunded
|
Total
|
Funded
|
Unfunded
|
Total
|
Funded
|
Unfunded
|
Total
|
||||||||||||||||||||||||||||
|
Americas (1)
|
$ | 2,328 | $ | 1,305 | $ | 3,633 | $ | 3,036 | $ | 1,735 | $ | 4,771 | $ | 4,921 | $ | 1,887 | $ | 6,808 | ||||||||||||||||||
|
EMEA (2)
|
1,914 | 89 | 2,003 | 2,294 | 259 | 2,553 | 454 | 235 | 689 | |||||||||||||||||||||||||||
|
Asia
|
577 | 51 | 628 | 568 | 73 | 641 | 437 | 50 | 487 | |||||||||||||||||||||||||||
|
Total
|
$ | 4,819 | $ | 1,445 | $ | 6,264 | (3) | $ | 5,898 | $ | 2,067 | $ | 7,965 | $ | 5,812 | $ | 2,172 | $ | 7,984 | |||||||||||||||||
| (1) | Substantially all relates to the U.S. | |
| (2) | EMEA (Europe, Middle East and Africa). | |
| (3) | Represents the principal amount. We account for these transactions at fair value and our exposure was $3.08 billion, $5.53 billion and $4.48 billion as of March 2009, November 2008 and December 2008, respectively. |
Other Financial Assets and Financial Liabilities at Fair
Value. In addition to “Trading assets, at
fair value” and “Trading liabilities, at fair
value,” we have elected to account for certain of our other
financial assets and financial liabilities at fair value under
the fair value option. The primary reasons for electing the fair
value option are to reflect economic events in earnings on a
timely basis, to mitigate volatility in earnings from using
different measurement attributes and to address simplification
and
cost-benefit
considerations.
Such financial assets and financial liabilities accounted for at
fair value include:
| • | certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; | |
| • | certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through our William Street program and certain other nonrecourse financings; | |
| • | certain unsecured long-term borrowings, including prepaid physical commodity transactions; | |
| • | resale and repurchase agreements; | |
| • | securities borrowed and loaned within Trading and Principal Investments, consisting of our matched book and certain firm financing activities; | |
| • | certain certificates of deposit issued by GS Bank USA, as well as securities held by GS Bank USA; | |
| • | certain receivables from customers and counterparties, including transfers accounted for as secured loans rather than purchases under SFAS No. 140; | |
| • | certain insurance and reinsurance contracts; and | |
| • | in general, investments acquired after the adoption of SFAS No. 159 where we have significant influence over the investee and would otherwise apply the equity method of accounting. In certain cases, we may apply the equity method of accounting to new investments that are strategic in nature or closely related to our principal business activities, where we have a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. |
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Goodwill and
Identifiable Intangible Assets
As a result of our acquisitions, principally SLK LLC (SLK) in
2000, The Ayco Company, L.P. (Ayco) in 2003 and our variable
annuity and life insurance business in 2006, we have acquired
goodwill and identifiable intangible assets. Goodwill is the
cost of acquired companies in excess of the fair value of net
assets, including identifiable intangible assets, at the
acquisition date.
Goodwill. We test the goodwill in each of our
operating segments, which are components one level below our
three business segments, for impairment at least annually in
accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets,” by comparing the estimated fair value
of each operating segment with its estimated net book value. We
derive the fair value of each of our operating segments based on
valuation techniques we believe market participants would use
for each segment (observable average
price-to-earnings
multiples of our competitors in these businesses and
price-to-book
multiples). We derive the net book value of our operating
segments by estimating the amount of shareholders’ equity
required to support the activities of each operating segment.
Our last annual impairment test was performed during our 2008
fourth quarter and no impairment was identified.
During 2008 (particularly during the fourth quarter) and the
first quarter of 2009, the financial services industry and the
securities markets generally were materially and adversely
affected by significant declines in the values of nearly all
asset classes and by a serious lack of liquidity. If the current
economic market conditions persist and if there is a prolonged
period of weakness in the business environment and financial
markets, our businesses may be adversely affected, which could
result in an impairment of goodwill in the future.
The following table sets forth the carrying value of our
goodwill by operating segment:
Goodwill by
Operating Segment
(in millions)
(in millions)
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Investment Banking
|
||||||||||||
|
Underwriting
|
$ | 125 | $ | 125 | $ | 125 | ||||||
|
Trading and Principal Investments
|
||||||||||||
|
FICC
|
248 | 247 | 250 | |||||||||
|
Equities (1)
|
2,389 | 2,389 | 2,389 | |||||||||
|
Principal Investments
|
84 | 80 | 80 | |||||||||
|
Asset Management and Securities Services
|
||||||||||||
|
Asset
Management (2)
|
565 | 565 | 565 | |||||||||
|
Securities Services
|
117 | 117 | 117 | |||||||||
|
Total
|
$ | 3,528 | $ | 3,523 | $ | 3,526 | ||||||
| (1) | Primarily related to SLK. | |
| (2) | Primarily related to Ayco. |
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Identifiable Intangible Assets. We amortize
our identifiable intangible assets over their estimated lives in
accordance with SFAS No. 142 or, in the case of
insurance contracts, in accordance with SFAS No. 60,
“Accounting and Reporting by Insurance Enterprises,”
and SFAS No. 97, “Accounting and Reporting by
Insurance Enterprises for Certain
Long-Duration
Contracts and for Realized Gains and Losses from the Sale of
Investments.” Identifiable intangible assets are tested for
impairment whenever events or changes in circumstances suggest
that an asset’s or asset group’s carrying value may
not be fully recoverable in accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of
Long-Lived
Assets,” or SFAS No. 60 and
SFAS No. 97. An impairment loss, generally calculated
as the difference between the estimated fair value and the
carrying value of an asset or asset group, is recognized if the
sum of the estimated undiscounted cash flows relating to the
asset or asset group is less than the corresponding carrying
value.
The following table sets forth the carrying value and range of
remaining lives of our identifiable intangible assets by major
asset class:
Identifiable
Intangible Assets by Asset Class
($ in millions)
($ in millions)
| As of | As of | |||||||||||||||
| March 2009 | November 2008 | December 2008 | ||||||||||||||
|
Range of Estimated |
||||||||||||||||
|
Carrying |
Remaining Lives |
|||||||||||||||
|
Value
|
(in years)
|
Carrying Value | ||||||||||||||
|
Customer
lists (1)
|
$ | 695 | 2-16 | $ | 724 | $ | 712 | |||||||||
|
New York Stock Exchange (NYSE) Designated Market Maker
(DMM) rights
|
449 | 13 | 462 | 459 | ||||||||||||
|
Insurance-related
assets (2)
|
271 | 7 | 303 | 271 | ||||||||||||
|
Exchange-traded
fund (ETF) lead market maker rights
|
93 | 19 | 95 | 95 | ||||||||||||
|
Other (3)
|
102 | 1-17 | 93 | 83 | ||||||||||||
|
Total
|
$ | 1,610 | $ | 1,677 | $ | 1,620 | ||||||||||
| (1) | Primarily includes our clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco. | |
| (2) | Consists of the value of business acquired (VOBA) and deferred acquisition costs (DAC). VOBA represents the present value of estimated future gross profits of acquired variable annuity and life insurance businesses. DAC results from commissions paid by Goldman Sachs to the primary insurer (ceding company) on life and annuity reinsurance agreements as compensation to place the business with us and to cover the ceding company’s acquisition expenses. VOBA and DAC are amortized over the estimated life of the underlying contracts based on estimated gross profits, and amortization is adjusted based on actual experience. The seven-year estimated life represents the weighted average remaining amortization period of the underlying contracts (certain of which extend for approximately 30 years). | |
| (3) | Primarily includes marketing-related assets and other contractual rights. |
A prolonged period of weakness in global equity markets and the
trading of securities in multiple markets and on multiple
exchanges could adversely impact our businesses and impair the
value of our identifiable intangible assets. In addition,
certain events could indicate a potential impairment of our
identifiable intangible assets, including (i) changes in
market structure that could adversely affect our specialist
businesses (see discussion below), (ii) an adverse action
or assessment by a regulator or (iii) adverse actual
experience on the contracts in our variable annuity and life
insurance business.
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In October 2008, the SEC approved the NYSE’s proposal
to create a new market model and redefine the role of NYSE DMMs.
This new rule set further aligns the NYSE’s model with
investor requirements for speed and efficiency of execution and
establishes specialists as DMMs. While DMMs still have an
obligation to commit capital, they are now able to trade on
parity with other market participants. In addition, in
November 2008 the NYSE introduced a reserve order type that
allows for anonymous trade execution, which is expected to allow
the NYSE to recapture liquidity and market share from other
venues in which anonymous reserve orders have been available for
some time. The new rule set and the launch of the reserve order
type, in combination with technology improvements to increase
execution speed, are expected to continue to bolster the
NYSE’s competitive position.
Since the approval of the new rule set and the introduction of
the new reserve order type, there have been no events or changes
in circumstances indicating that NYSE DMM rights intangible
asset may not be recoverable. However, we will continue to
evaluate the performance of the specialist business under the
new market model. There can be no assurance that these rule and
structure changes will result in sufficient cash flows to avoid
impairment of our NYSE DMM rights in the future. As of
March 2009, the carrying value of our NYSE DMM rights was
$449 million. To the extent that there were to be an
impairment in the future, it could result in a significant
writedown in the carrying value of these DMM rights.
Use of
Estimates
The use of generally accepted accounting principles requires
management to make certain estimates and assumptions. In
addition to the estimates we make in connection with fair value
measurements and the accounting for goodwill and identifiable
intangible assets, the use of estimates and assumptions is also
important in determining provisions for potential losses that
may arise from litigation and regulatory proceedings and tax
audits.
A substantial portion of our compensation and benefits
represents discretionary compensation, which are determined at
year-end. We believe the most appropriate way to allocate
estimated annual discretionary compensation among interim
periods is in proportion to the net revenues earned in such
periods. In addition to the level of net revenues, our overall
compensation expense in any given year is also influenced by,
among other factors, prevailing labor markets, business mix and
the structure of our
share-based
compensation programs. Our ratio of compensation and benefits to
net revenues was 50.0% for the first quarter of 2009 compared
with 48.0% for the first quarter of 2008.
We estimate and provide for potential losses that may arise out
of litigation and regulatory proceedings to the extent that such
losses are probable and can be estimated, in accordance with
SFAS No. 5, “Accounting for Contingencies.”
We estimate and provide for potential liabilities that may arise
out of tax audits to the extent that uncertain tax positions
fail to meet the recognition standard of FIN 48,
“Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109.”
Significant judgment is required in making these estimates and
our final liabilities may ultimately be materially different.
Our total estimated liability in respect of litigation and
regulatory proceedings is determined on a
case-by-case
basis and represents an estimate of probable losses after
considering, among other factors, the progress of each case or
proceeding, our experience and the experience of others in
similar cases or proceedings, and the opinions and views of
legal counsel. Given the inherent difficulty of predicting the
outcome of our litigation and regulatory matters, particularly
in cases or proceedings in which substantial or indeterminate
damages or fines are sought, we cannot estimate losses or ranges
of losses for cases or proceedings where there is only a
reasonable possibility that a loss may be incurred. See
“— Legal
Proceedings” in Part I, Item 3 of our Annual
Report on
Form 10-K,
and in Part II, Item 1 of this Quarterly Report on
Form 10-Q
for information on our judicial, regulatory and arbitration
proceedings.
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Table of Contents
Results of
Operations
The composition of our net revenues has varied over time as
financial markets and the scope of our operations have changed.
The composition of net revenues can also vary over the shorter
term due to fluctuations in U.S. and global economic and
market conditions. See “Risk Factors” in Part I,
Item 1A of our Annual Report on
Form 10-K
for a further discussion of the impact of economic and market
conditions on our results of operations.
Financial
Overview
The following table sets forth an overview of our financial
results:
Financial
Overview
($ in millions, except per share amounts)
($ in millions, except per share amounts)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Net revenues
|
$ | 9,425 | $ | 8,335 | $ | 183 | ||||||
|
Pre-tax
earnings/(loss)
|
2,629 | 2,143 | (1,258 | ) | ||||||||
|
Net earnings/(loss)
|
1,814 | 1,511 | (780 | ) | ||||||||
|
Net earnings/(loss) applicable to common shareholders
|
1,659 | 1,467 | (1,028 | ) | ||||||||
|
Diluted earnings/(loss) per common share
|
3.39 | 3.23 | (2.15 | ) | ||||||||
|
Annualized return on average common shareholders’
equity (1)
|
14.3 | % | 14.8 | % | N.M. | |||||||
| (1) | Annualized return on average common shareholders’ equity (ROE) is computed by dividing annualized net earnings applicable to common shareholders by average monthly common shareholders’ equity. The following table sets forth our average common shareholders’ equity: |
| Average for the | ||||||||||||
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Total shareholders’ equity
|
$ | 63,061 | $ | 42,779 | $ | 63,712 | ||||||
|
Preferred stock
|
(16,495 | ) | (3,100 | ) | (16,477 | ) | ||||||
|
Common shareholders’ equity
|
$ | 46,566 | $ | 39,679 | $ | 47,235 | ||||||
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Table of Contents
Net
Revenues
Three Months Ended March 2009 versus
February 2008. Our net revenues were
$9.43 billion for the first quarter of 2009, an increase of
13% compared with the first quarter of 2008, reflecting
significantly higher net revenues in Trading and Principal
Investments, partially offset by significantly lower net
revenues in Asset Management and Securities Services, and
Investment Banking. The increase in Trading and Principal
Investments reflected particularly strong results in FICC, as
net revenues were more than double the amount in the first
quarter of 2008, partially offset by very weak results in
Principal Investments and lower net revenues in Equities. The
increase in FICC reflected particularly strong performance in
interest rate products, commodities and credit products, as FICC
operated in a generally favorable environment characterized by
client-driven activity, particularly in more liquid products,
and high levels of volatility. However, illiquid assets
generally continued to decline in value. Net revenues in
currencies were solid, but lower compared with a particularly
strong first quarter of 2008. Results in mortgages were higher
compared with a difficult first quarter of 2008. During the
quarter, credit products included losses from corporate debt and
private equity investments, and mortgages included a loss of
approximately $800 million (excluding hedges) on commercial
mortgage loans and securities. In the first quarter of 2008,
credit products included a loss of approximately
$1 billion, net of hedges, related to
non-investment-grade
credit origination activities, and mortgages included a net loss
of approximately $1 billion on residential mortgage loans
and securities. In the first quarter of 2009, results in
Principal Investments reflected net losses of $640 million
from real estate principal investments and $621 million
from corporate principal investments, as well as a
$151 million loss related to our investment in the ordinary
shares of ICBC. The decline in Equities reflected lower net
revenues in the shares business due to lower commissions,
primarily reflecting lower levels of activity outside of the
U.S. In addition, net revenues in derivatives were solid,
but lower compared with the first quarter of 2008. Results in
principal strategies were also lower compared with the first
quarter of 2008. During the quarter, Equities operated in an
environment generally characterized by continued weakness in
global equity markets and high, but declining, levels of
volatility.
The decline in Asset Management and Securities Services
reflected significant decreases in both Asset Management and
Securities Services compared with the first quarter of 2008. The
decrease in Asset Management was due to lower management and
other fees, reflecting lower assets under management,
principally due to market depreciation, and lower incentive
fees. The decrease in Securities Services primarily reflected
the impact of lower customer balances.
The decline in Investment Banking reflected significantly lower
net revenues in both Underwriting and Financial Advisory. The
decrease in Underwriting primarily reflected a significant
decline in
industry-wide
equity and
equity-related
offerings, as well as a decrease in leveraged finance activity.
The decrease in Financial Advisory reflected lower levels of
deal activity.
One Month Ended December 2008. Our net
revenues were $183 million for the month of
December 2008. These results reflected a continuation of
the difficult operating environment experienced during our
fiscal fourth quarter of 2008, particularly across global equity
and credit markets. Trading and Principal Investments recorded
negative net revenues of $507 million. Results in Principal
Investments reflected net losses of $529 million from real
estate principal investments and $501 million from
corporate principal investments, partially offset by a gain of
$228 million related to our investment in the ordinary
shares of ICBC. Results in FICC included a loss in credit
products of approximately $1 billion (net of hedges)
related to
non-investment-grade
credit origination activities, primarily reflecting a writedown
of approximately $850 million related to the bridge and
bank loan facilities held in LyondellBasell Finance Company. In
addition, results in mortgages included a net loss of
approximately $625 million (excluding hedges) on commercial
mortgage loans and securities. Interest rate products,
currencies and commodities each produced strong results for the
month of December 2008. During the month of December,
although market opportunities were favorable for certain
businesses, FICC operated in an environment generally
characterized by continued weakness in the broader credit
markets. Results in Equities reflected lower commission volumes
and lower net revenues from derivatives compared with average
monthly levels in 2008, as well as weak results in
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Table of Contents
principal strategies. During the month of December, Equities
operated in an environment characterized by continued weakness
in global equity markets and continued high levels of volatility.
Net revenues in Investment Banking were $135 million for
the month of December and reflected very low levels of activity
in
industry-wide
completed mergers and acquisitions, as well as continued
challenging market conditions across equity and leveraged
finance markets, which adversely affected our Underwriting
business.
Net revenues in Asset Management and Securities Services were
$555 million for the month of December, reflecting Asset
Management net revenues of $319 million and Securities
Services net revenues of $236 million. During the month of
December, assets under management increased $19 billion to
$798 billion due to $13 billion of market
appreciation, primarily in fixed income and equity assets, and
$6 billion of net inflows. Net inflows reflected inflows in
money market assets, partially offset by outflows in fixed
income, equity and alternative investment assets. Net revenues
in Securities Services reflected favorable changes in the
composition of securities lending balances, but were negatively
impacted by a decline in total average customer balances.
Operating
Expenses
Our operating expenses are primarily influenced by compensation,
headcount and levels of business activity. Compensation and
benefits expenses for the three months ended March 2009 and
February 2008 includes discretionary compensation which is
significantly impacted by, among other factors, the level of net
revenues, prevailing labor markets, business mix and the
structure of our
share-based
compensation programs. During the first quarter of 2009, our
ratio of compensation and benefits to net revenues was 50.0%
compared with 48.0% for the first quarter of 2008. Compensation
and benefits expenses (including salaries, amortization of
equity awards and other items such as payroll taxes, severance
costs and benefits) for the one month ended December 2008
did not include an accrual for discretionary compensation.
The following table sets forth our operating expenses and number
of employees:
Operating
Expenses and Employees
($ in millions)
($ in millions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Compensation and
benefits (1)
|
$ | 4,712 | $ | 4,001 | $ | 744 | ||||||
|
Brokerage, clearing, exchange and distribution fees
|
536 | 790 | 165 | |||||||||
|
Market development
|
68 | 144 | 16 | |||||||||
|
Communications and technology
|
173 | 187 | 62 | |||||||||
|
Depreciation and amortization
|
511 | 170 | 72 | |||||||||
|
Amortization of identifiable intangible assets
|
38 | 84 | 39 | |||||||||
|
Occupancy
|
241 | 236 | 82 | |||||||||
|
Professional fees
|
135 | 178 | 58 | |||||||||
|
Other expenses
|
382 | 402 | 203 | |||||||||
|
Total
non-compensation
expenses
|
2,084 | 2,191 | 697 | |||||||||
|
Total operating expenses
|
$ | 6,796 | $ | 6,192 | $ | 1,441 | ||||||
|
Employees at period
end (2)
|
27,898 | 31,874 | 29,182 | |||||||||
| (1) | Compensation and benefits includes $70 million, $63 million and $23 million for the three months ended March 2009 and February 2008 and one month ended December 2008, respectively, attributable to consolidated entities held for investment purposes. Consolidated entities held for investment purposes are entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to our principal businesses. | |
| (2) | Excludes 3,930, 4,818 and 4,631 employees as of March 2009, February 2008 and December 2008, respectively, of consolidated entities held for investment purposes (see footnote 1 above). |
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Table of Contents
The following table sets forth
non-compensation
expenses of consolidated entities held for investment purposes
and our remaining
non-compensation
expenses by line item:
Non-Compensation
Expenses
(in millions)
(in millions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Non-compensation
expenses of consolidated
investments (1)
|
$ | 460 | $ | 125 | $ | 60 | ||||||
|
Non-compensation
expenses excluding consolidated investments
|
||||||||||||
|
Brokerage, clearing, exchange and distribution fees
|
536 | 790 | 165 | |||||||||
|
Market development
|
66 | 141 | 15 | |||||||||
|
Communications and technology
|
172 | 186 | 62 | |||||||||
|
Depreciation and amortization
|
166 | 146 | 49 | |||||||||
|
Amortization of identifiable intangible assets
|
35 | 83 | 38 | |||||||||
|
Occupancy
|
208 | 217 | 72 | |||||||||
|
Professional fees
|
133 | 176 | 57 | |||||||||
|
Other expenses
|
308 | 327 | 179 | |||||||||
|
Subtotal
|
1,624 | 2,066 | 637 | |||||||||
|
Total
non-compensation
expenses, as reported
|
$ | 2,084 | $ | 2,191 | $ | 697 | ||||||
| (1) | Consolidated entities held for investment purposes are entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to our principal businesses. For example, these investments include consolidated entities that hold real estate assets, such as hotels, but exclude investments in entities that primarily hold financial assets. We believe that it is meaningful to review non-compensation expenses excluding expenses related to these consolidated entities in order to evaluate trends in non-compensation expenses related to our principal business activities. Revenues related to such entities are included in “Trading and principal investments” in the condensed consolidated statements of earnings. |
Three Months Ended March 2009 versus
February 2008. Operating expenses of
$6.80 billion for the first quarter of 2009 increased 10%
compared with the first quarter of 2008. Compensation and
benefits expenses (including salaries, discretionary
compensation, amortization of equity awards and other items such
as payroll taxes, severance costs and benefits) of
$4.71 billion increased 18% compared with the first quarter
of 2008, primarily due to higher net revenues. During the first
quarter of 2009, our ratio of compensation and benefits to net
revenues was 50.0% compared with 48.0% for the first quarter of
2008. Employment levels decreased 7% compared with the end of
fiscal year 2008.
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Table of Contents
Non-compensation
expenses, excluding consolidated entities held for investment
purposes, were $1.62 billion, 21% lower than the first
quarter of 2008. More than
one-half of
the decrease compared with the first quarter of 2008 was
attributable to lower brokerage, clearing, exchange and
distribution fees, principally reflecting lower transaction
volumes in Equities. The remainder of the decrease compared with
the first quarter of 2008 generally reflected lower levels of
business activity, the impact of reduced employment levels and
the effect of expense reduction initiatives. The increase in
non-compensation
expenses related to consolidated entities held for investment
purposes primarily reflected impairment charges of approximately
$300 million related to real estate assets during the first
quarter of 2009. This loss, which was measured based on
discounted cash flow analysis, is included within our Trading
and Principal Investments segment and reflected weakness in the
commercial real estate markets, particularly in Asia. Including
consolidated entities held for investment purposes,
non-compensation
expenses were $2.08 billion, 5% lower than the first
quarter of 2008.
One Month Ended December 2008. Operating
expenses were $1.44 billion for the month of
December 2008. Compensation and benefits expenses
(including salaries, amortization of equity awards and other
items such as payroll taxes, severance costs and benefits) were
$744 million. No discretionary compensation was accrued for
the month of December. Employment levels decreased 3% compared
with the end of fiscal year 2008.
Non-compensation
expenses were $697 million for the month of
December 2008. Excluding consolidated entities held for
investment purposes,
non-compensation
expenses were $637 million for the month of
December 2008 and were generally lower than average monthly
levels in 2008, primarily reflecting lower levels of business
activity. Total
non-compensation
expenses included $68 million of net provisions for a
number of litigation and regulatory proceedings.
Provision for
Taxes
Three Months Ended March 2009 versus
February 2008. The effective income tax rate
for the first quarter of 2009 was 31.0%, up from approximately
1% for fiscal year 2008 and 29.5% for the first quarter of 2008.
The increases in the effective tax rate were primarily due to
changes in geographic earnings mix.
One Month Ended December 2008. The
effective income tax rate was 38.0% for the month of
December 2008, compared with approximately 1% for fiscal
year 2008. The change in the effective income tax rate was
primarily due to changes in geographic earnings mix.
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Table of Contents
Segment Operating
Results
The following table sets forth the net revenues, operating
expenses and
pre-tax
earnings of our segments:
Segment Operating
Results
(in millions)
(in millions)
|
Three Months |
Three Months |
One Month |
||||||||||||
| Ended March | Ended February | Ended December | ||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||
|
Investment
|
Net revenues | $ | 823 | $ | 1,172 | $ | 135 | |||||||
|
Banking
|
Operating expenses | 705 | 940 | 169 | ||||||||||
| Pre-tax earnings/(loss) | $ | 118 | $ | 232 | $ | (34 | ) | |||||||
|
Trading and Principal
|
Net revenues | $ | 7,150 | $ | 5,124 | $ | (507 | ) | ||||||
|
Investments
|
Operating expenses | 4,873 | 3,743 | 875 | ||||||||||
| Pre-tax earnings/(loss) | $ | 2,277 | $ | 1,381 | $ | (1,382 | ) | |||||||
|
Asset Management and
|
Net revenues | $ | 1,452 | $ | 2,039 | $ | 555 | |||||||
|
Securities Services
|
Operating expenses | 1,205 | 1,493 | 329 | ||||||||||
| Pre-tax earnings | $ | 247 | $ | 546 | $ | 226 | ||||||||
|
Total
|
Net revenues | $ | 9,425 | $ | 8,335 | $ | 183 | |||||||
| Operating expenses (1) | 6,796 | 6,192 | 1,441 | |||||||||||
| Pre-tax earnings/(loss) | $ | 2,629 | $ | 2,143 | $ | (1,258 | ) | |||||||
| (1) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $13 million, $16 million and $68 million for the three months ended March 2009 and February 2008 and one month ended December 2008, respectively, that have not been allocated to our segments. |
Net revenues in our segments include allocations of interest
income and interest expense to specific securities, commodities
and other positions in relation to the cash generated by, or
funding requirements of, such underlying positions. See
Note 16 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our business segments.
The cost drivers of Goldman Sachs taken as a whole —
compensation, headcount and levels of business
activity — are broadly similar in each of our business
segments. Compensation and benefits expenses within our segments
reflect, among other factors, the overall performance of Goldman
Sachs as well as the performance of individual business units.
Consequently,
pre-tax
margins in one segment of our business may be significantly
affected by the performance of our other business segments. A
discussion of segment operating results follows.
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Table of Contents
Investment
Banking
Our Investment Banking segment is divided into two components:
| • | Financial Advisory. Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. | |
| • | Underwriting. Underwriting includes public offerings and private placements of a wide range of securities and other financial instruments. |
The following table sets forth the operating results of our
Investment Banking segment:
Investment
Banking Operating Results
(in millions)
(in millions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Financial Advisory
|
$ | 527 | $ | 663 | $ | 72 | ||||||
|
Equity underwriting
|
48 | 172 | 19 | |||||||||
|
Debt underwriting
|
248 | 337 | 44 | |||||||||
|
Total Underwriting
|
296 | 509 | 63 | |||||||||
|
Total net revenues
|
823 | 1,172 | 135 | |||||||||
|
Operating expenses
|
705 | 940 | 169 | |||||||||
|
Pre-tax
earnings/(loss)
|
$ | 118 | $ | 232 | $ | (34 | ) | |||||
The following table sets forth our financial advisory and
underwriting transaction volumes:
Goldman Sachs
Global Investment Banking Volumes
(1)
(in billions)
(in billions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Announced mergers and acquisitions
|
$ | 161 | $ | 141 | $ | 22 | ||||||
|
Completed mergers and acquisitions
|
227 | 142 | 10 | |||||||||
|
Equity and
equity-related
offerings (2)
|
2 | 10 | 2 | |||||||||
|
Debt
offerings (3)
|
77 | 62 | 22 | |||||||||
| (1) | Source: Thomson Reuters. Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or a change in the value of a transaction. | |
| (2) | Includes Rule 144A and public common stock offerings, convertible offerings and rights offerings. | |
| (3) | Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. |
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Three Months Ended March 2009 versus
February 2008. Net revenues in Investment
Banking of $823 million for the first quarter of 2009
decreased 30% compared with the first quarter of 2008.
Net revenues in Financial Advisory of $527 million
decreased 21% compared with the first quarter of 2008,
reflecting lower levels of deal activity. Net revenues in our
Underwriting business of $296 million decreased 42%
compared with the first quarter of 2008. Net revenues in equity
underwriting were significantly lower, primarily reflecting a
significant decline in
industry-wide
equity and
equity-related
offerings. Net revenues in debt underwriting were also
significantly lower, primarily due to a decline in leveraged
finance activity. Our investment banking transaction backlog
decreased during the quarter.
(1)
Operating expenses of $705 million for the first quarter of
2009 decreased 25% compared with the first quarter of 2008,
primarily due to decreased compensation and benefits expenses
resulting from lower levels of discretionary compensation.
Pre-tax
earnings of $118 million in the first quarter of 2009
decreased 49% compared with the first quarter of 2008.
One Month Ended December 2008. Net
revenues in Investment Banking were $135 million for the
month of December 2008. Net revenues in Financial Advisory
were $72 million, reflecting very low levels of
industry-wide
completed mergers and acquisitions activity. Net revenues in our
Underwriting business were $63 million, reflecting
continued challenging market conditions across equity and
leveraged finance markets. Our investment banking transaction
backlog decreased from the end of fiscal year 2008.
(1)
Operating expenses were $169 million for the month of
December 2008.
Pre-tax loss
was $34 million for the month of December 2008.
Trading and
Principal Investments
Our Trading and Principal Investments segment is divided into
three components:
| • | FICC. We make markets in and trade interest rate and credit products, mortgage-related securities and loan products and other asset-backed instruments, currencies and commodities, structure and enter into a wide variety of derivative transactions, and engage in proprietary trading and investing. | |
| • | Equities. We make markets in and trade equities and equity-related products, structure and enter into equity derivative transactions and engage in proprietary trading. We generate commissions from executing and clearing client transactions on major stock, options and futures exchanges worldwide through our Equities client franchise and clearing activities. We also engage in specialist and insurance activities. | |
| • | Principal Investments. We make real estate and corporate principal investments, including our investment in the ordinary shares of ICBC. We generate net revenues from returns on these investments and from the increased share of the income and gains derived from our merchant banking funds when the return on a fund’s investments over the life of the fund exceeds certain threshold returns (typically referred to as an override). |
Substantially all of our inventory is
marked-to-market
daily and, therefore, its value and our net revenues are subject
to fluctuations based on market movements. In addition, net
revenues derived from our principal investments, including those
in privately held concerns and in real estate, may fluctuate
significantly depending on the revaluation of these investments
in any given period. We also regularly enter into large
transactions as part of our trading businesses. The number and
size of such transactions may affect our results of operations
in a given period.
(1) Our
investment banking transaction backlog represents an estimate of
our future net revenues from investment banking transactions
where we believe that future revenue realization is more likely
than not.
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Table of Contents
Net revenues from Principal Investments do not include
management fees generated from our merchant banking funds. These
management fees are included in the net revenues of the Asset
Management and Securities Services segment.
The following table sets forth the operating results of our
Trading and Principal Investments segment:
Trading and
Principal Investments Operating Results
(in millions)
(in millions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
FICC
|
$ | 6,557 | $ | 3,142 | $ | (320 | ) | |||||
|
Equities trading
|
1,027 | 1,276 | 363 | |||||||||
|
Equities commissions
|
974 | 1,238 | 251 | |||||||||
|
Total Equities
|
2,001 | 2,514 | 614 | |||||||||
|
ICBC
|
(151 | ) | (135 | ) | 228 | |||||||
|
Gross gains
|
672 | 552 | 213 | |||||||||
|
Gross losses
|
(1,933 | ) | (962 | ) | (1,243 | ) | ||||||
|
Net other corporate and real estate investments
|
(1,261 | ) | (410 | ) | (1,030 | ) | ||||||
|
Overrides
|
4 | 13 | 1 | |||||||||
|
Total Principal Investments
|
(1,408 | ) | (532 | ) | (801 | ) | ||||||
|
Total net revenues
|
7,150 | 5,124 | (507 | ) | ||||||||
|
Operating expenses
|
4,873 | 3,743 | 875 | |||||||||
|
Pre-tax
earnings/(loss)
|
$ | 2,277 | $ | 1,381 | $ | (1,382 | ) | |||||
Three Months Ended March 2009 versus
February 2008. Net revenues in Trading and
Principal Investments of $7.15 billion increased 40%
compared with the first quarter of 2008.
Net revenues in FICC of $6.56 billion were more than double
the amount in the first quarter of 2008. These results reflected
particularly strong performance in interest rate products,
commodities and credit products, as FICC operated in a generally
favorable environment characterized by
client-driven
activity, particularly in more liquid products, and high levels
of volatility. However, illiquid assets generally continued to
decline in value. Net revenues in currencies were solid, but
lower compared with a particularly strong first quarter of 2008.
Results in mortgages were higher compared with a difficult first
quarter of 2008. During the quarter, credit products included
losses from corporate debt and private equity investments, and
mortgages included a loss of approximately $800 million
(excluding hedges) on commercial mortgage loans and securities.
In the first quarter of 2008, credit products included a loss of
approximately $1 billion, net of hedges, related to
non-investment-grade
credit origination activities, and mortgages included a net loss
of approximately $1 billion on residential mortgage loans
and securities.
Net revenues in Equities of $2.00 billion decreased 20%
compared with the first quarter of 2008. Net revenues in the
shares business were lower compared with the first quarter of
2008 due to lower commissions, primarily reflecting lower levels
of activity outside of the U.S. Net revenues in derivatives
were solid, but lower compared with the first quarter of 2008.
Results in principal strategies were also lower compared with
the first quarter of 2008. During the quarter, Equities operated
in an environment generally characterized by continued weakness
in global equity markets and high, but declining, levels of
volatility.
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Table of Contents
Principal Investments recorded a net loss of $1.41 billion
for the first quarter of 2009. These results included net losses
of $640 million from real estate principal investments and
$621 million from corporate principal investments, as well
as a $151 million loss related to our investment in the
ordinary shares of ICBC.
Operating expenses of $4.87 billion for the first quarter
of 2009 increased 30% compared with the first quarter of 2008,
due to increased compensation and benefits expenses, resulting
from higher levels of discretionary compensation, and impairment
charges of approximately $300 million related to real
estate assets of consolidated entities held for investment
purposes during the first quarter of 2009. These increases were
partially offset by lower brokerage, clearing, exchange and
distribution fees, principally reflecting lower transaction
volumes in Equities.
Pre-tax
earnings of $2.28 billion in the first quarter of 2009
increased 65% compared with the first quarter of 2008.
One Month Ended December 2008. Trading
and Principal Investments recorded negative net revenues of
$507 million for the month of December 2008.
FICC recorded negative net revenues of $320 million for the
month of December 2008. Results in credit products included
a loss of approximately $1 billion (net of hedges) related
to
non-investment-grade
credit origination activities, primarily reflecting a writedown
of approximately $850 million related to the bridge and
bank loan facilities held in LyondellBasell Finance Company. In
addition, results in mortgages included a net loss of
approximately $625 million (excluding hedges) on commercial
mortgage loans and securities. Interest rate products,
currencies and commodities each produced strong results for the
month of December 2008. During the month of December,
although market opportunities were favorable for certain
businesses, FICC operated in an environment generally
characterized by continued weakness in the broader credit
markets.
Net revenues in Equities were $614 million for the month of
December 2008. These results reflected lower commission
volumes and lower net revenues from derivatives compared with
average monthly levels in 2008, as well as weak results in
principal strategies. During the month of December, Equities
operated in an environment characterized by continued weakness
in global equity markets and continued high levels of volatility.
Principal Investments recorded a net loss of $801 million
for the month of December 2008. These results included net
losses of $529 million from real estate principal
investments and $501 million from corporate principal
investments, partially offset by a gain of $228 million
related to our investment in the ordinary shares of ICBC.
Operating expenses were $875 million for the month of
December 2008.
Pre-tax loss
was $1.38 billion for the month of December 2008.
Asset
Management and Securities Services
Our Asset Management and Securities Services segment is divided
into two components:
| • | Asset Management. Asset Management provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and primarily generates revenues in the form of management and incentive fees. | |
| • | Securities Services. Securities Services provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide, and generates revenues primarily in the form of interest rate spreads or fees. |
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Table of Contents
Assets under management typically generate fees as a percentage
of asset value, which is affected by investment performance and
by inflows and redemptions. The fees that we charge vary by
asset class, as do our related expenses. In certain
circumstances, we are also entitled to receive incentive fees
based on a percentage of a fund’s return or when the return
on assets under management exceeds specified benchmark returns
or other performance targets. Incentive fees are recognized when
the performance period ends and they are no longer subject to
adjustment. We have numerous incentive fee arrangements, many of
which have annual performance periods that end on
December 31.
The following table sets forth the operating results of our
Asset Management and Securities Services segment:
Asset Management
and Securities Services Operating Results
(in millions)
(in millions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Management and other fees
|
$ | 931 | $ | 1,123 | $ | 318 | ||||||
|
Incentive fees
|
18 | 194 | 1 | |||||||||
|
Total Asset Management
|
949 | 1,317 | 319 | |||||||||
|
Securities Services
|
503 | 722 | 236 | |||||||||
|
Total net revenues
|
1,452 | 2,039 | 555 | |||||||||
|
Operating expenses
|
1,205 | 1,493 | 329 | |||||||||
|
Pre-tax
earnings
|
$ | 247 | $ | 546 | $ | 226 | ||||||
Assets under management include our mutual funds, alternative
investment funds and separately managed accounts for
institutional and individual investors. Substantially all assets
under management are valued as of calendar month-end. Assets
under management do not include:
| • | assets in brokerage accounts that generate commissions, mark-ups and spreads based on transactional activity; | |
| • | our own investments in funds that we manage; or | |
| • | non-fee-paying assets, including interest-bearing deposits held through our depository institution subsidiaries. |
The following table sets forth our assets under management by
asset class:
Assets Under
Management by Asset Class
(in billions)
(in billions)
| As of | ||||||||||||||||||||
| March 31, | February 29, | December 31, | November 30, | |||||||||||||||||
| 2009 | 2008 | 2008 | 2008 | 2007 | ||||||||||||||||
|
Alternative
investments (1)
|
$ | 141 | $ | 148 | $ | 145 | $ | 146 | $ | 151 | ||||||||||
|
Equity
|
101 | 214 | 114 | 112 | 255 | |||||||||||||||
|
Fixed income
|
248 | 259 | 253 | 248 | 256 | |||||||||||||||
|
Total
non-money
market assets
|
490 | 621 | 512 | 506 | 662 | |||||||||||||||
|
Money markets
|
281 | 252 | 286 | 273 | 206 | |||||||||||||||
|
Total assets under management
|
$ | 771 | (2) | $ | 873 | $ | 798 | $ | 779 | $ | 868 | |||||||||
| (1) | Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. | |
| (2) | Excludes the federal agency pass-through mortgage-backed securities account managed for the Federal Reserve. |
110
Table of Contents
The following table sets forth a summary of the changes in our
assets under management:
Changes in Assets
Under Management
(in billions)
(in billions)
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March 31, | Ended February 29, | Ended December 31, | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
|
Balance, beginning of period
|
$ | 798 | $ | 868 | $ | 779 | ||||||
|
Net inflows/(outflows)
|
||||||||||||
|
Alternative investments
|
(2 | ) | (2 | ) | (2 | ) | ||||||
|
Equity
|
(1 | ) | (17 | ) | (2 | ) | ||||||
|
Fixed income
|
(3 | ) | 2 | (3 | ) | |||||||
|
Total
non-money
market net inflows/(outflows)
|
(6 | ) | (17 | ) | (7 | ) | ||||||
|
Money markets
|
(5 | ) | 46 | 13 | ||||||||
|
Total net inflows/(outflows)
|
(11 | ) (1) | 29 | 6 | ||||||||
|
Net market appreciation/(depreciation)
|
(16 | ) | (24 | ) | 13 | |||||||
|
Balance, end of period
|
$ | 771 | $ | 873 | $ | 798 | ||||||
| (1) | Excludes the federal agency pass-through mortgage-backed securities account managed for the Federal Reserve. |
Three Months Ended March 2009 versus
February 2008. Net revenues in Asset
Management and Securities Services of $1.45 billion
decreased 29% compared with the first quarter of 2008.
Asset Management net revenues of $949 million decreased 28%
compared with the first quarter of 2008, due to lower management
and other fees, reflecting lower assets under management,
principally due to market depreciation, and lower incentive
fees. During the quarter, assets under management decreased
$27 billion to $771 billion, due to $16 billion
of market depreciation, primarily in equity assets, and
$11 billion of net outflows.
Securities Services net revenues of $503 million decreased
30% compared with the first quarter of 2008. The decrease in net
revenues primarily reflected the impact of lower customer
balances.
Operating expenses of $1.21 billion for the first quarter
of 2009 decreased 19% compared with the first quarter of 2008,
primarily due to decreased compensation and benefits expenses
resulting from lower levels of discretionary compensation, and
lower distribution fees, primarily reflecting lower assets under
management, principally due to market depreciation.
Pre-tax
earnings of $247 million decreased 55% compared with the
first quarter of 2008.
One Month Ended December 2008. Net
revenues in Asset Management and Securities Services were
$555 million for the month of December 2008.
Asset Management net revenues were $319 million for the
month of December 2008. During the month of December,
assets under management increased $19 billion to
$798 billion due to $13 billion of market
appreciation, primarily in fixed income and equity assets, and
$6 billion of net inflows. Net inflows reflected inflows in
money market assets, partially offset by outflows in fixed
income, equity and alternative investment assets.
Securities Services net revenues were $236 million for the
month of December 2008. These results reflected favorable
changes in the composition of securities lending balances, but
were negatively impacted by a decline in total average customer
balances.
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Table of Contents
Operating expenses were $329 million for the month of
December 2008.
Pre-tax
earnings were $226 million for the month of
December 2008.
Geographic
Data
See Note 16 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for a summary of our total net revenues and
pre-tax
earnings by geographic region.
Off-Balance-Sheet
Arrangements
We have various types of
off-balance-sheet
arrangements that we enter into in the ordinary course of
business. Our involvement in these arrangements can take many
different forms, including purchasing or retaining residual and
other interests in
mortgage-backed
and other
asset-backed
securitization vehicles; holding senior and subordinated debt,
interests in limited and general partnerships, and preferred and
common stock in other nonconsolidated vehicles; entering into
interest rate, foreign currency, equity, commodity and credit
derivatives, including total return swaps; entering into
operating leases; and providing guarantees, indemnifications,
loan commitments, letters of credit and representations and
warranties.
We enter into these arrangements for a variety of business
purposes, including the securitization of commercial and
residential mortgages, government and corporate bonds, and other
types of financial assets. Other reasons for entering into these
arrangements include underwriting client securitization
transactions; providing secondary market liquidity; making
investments in performing and nonperforming debt, equity, real
estate and other assets; providing investors with
credit-linked
and
asset-repackaged
notes; and receiving or providing letters of credit to satisfy
margin requirements and to facilitate the clearance and
settlement process.
We engage in transactions with variable interest entities (VIEs)
and qualifying
special-purpose
entities (QSPEs).
Asset-backed
financing vehicles are critical to the functioning of several
significant investor markets, including the
mortgage-backed
and other
asset-backed
securities markets, since they offer investors access to
specific cash flows and risks created through the securitization
process. Our financial interests in, and derivative transactions
with, such nonconsolidated entities are accounted for at fair
value, in the same manner as our other financial instruments,
except in cases where we apply the equity method of accounting.
We did not have
off-balance-sheet
commitments to purchase or finance any CDOs held by structured
investment vehicles as of March 2009, December 2008 or
November 2008.
In December 2007, the American Securitization Forum (ASF)
issued the “Streamlined Foreclosure and Loss Avoidance
Framework for Securitized Subprime Adjustable Rate Mortgage
Loans” (ASF Framework). The ASF Framework provides guidance
for servicers to streamline borrower evaluation procedures and
to facilitate the use of foreclosure and loss prevention
measures for securitized subprime residential mortgages that
meet certain criteria. For certain eligible loans as defined in
the ASF Framework, servicers may presume default is reasonably
foreseeable and apply a
fast-track
loan modification plan, under which the loan interest rate will
be kept at the then current rate for a period up to five years
following the upcoming reset date. Mortgage loan modifications
of these eligible loans will not affect our accounting treatment
for QSPEs that hold the subprime loans.
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Table of Contents
The following table sets forth where a discussion of
off-balance-sheet
arrangements may be found in Part I, Items 1 and 2 of
this Quarterly Report on
Form 10-Q:
| Type of Off-Balance-Sheet Arrangement | Disclosure in Quarterly Report on Form 10-Q | |
| Retained interests or other continuing involvement relating to assets transferred by us to nonconsolidated entities | See Note 4 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Leases, letters of credit, and loans and other commitments | See “— Contractual Obligations” below and Note 8 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Guarantees | See Note 8 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Other obligations, including contingent obligations, arising out of variable interests we have in nonconsolidated entities | See Note 4 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Derivative contracts | See “— Critical Accounting Policies” above, and “— Risk Management” and “— Derivatives” below and Notes 3 and 7 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
In addition, see Note 2 to the condensed consolidated
financial statements in Part I, Item 1 of this
Quarterly Report on
Form 10-Q
for a discussion of our consolidation policies.
Equity
Capital
The level and composition of our equity capital are principally
determined by our consolidated regulatory capital requirements
but may also be influenced by rating agency guidelines,
subsidiary capital requirements, the business environment,
conditions in the financial markets and assessments of potential
future losses due to extreme and adverse changes in our business
and market environments. As of March 2009, our total
shareholders’ equity was $63.55 billion (consisting of
common shareholders’ equity of $47.05 billion and
preferred stock of $16.51 billion). As of
November 2008, our total shareholders’ equity was
$64.37 billion (consisting of common shareholders’
equity of $47.90 billion and preferred stock of
$16.47 billion). As of December 2008, our total
shareholders’ equity was $63.05 billion (consisting of
common shareholders’ equity of $46.57 billion and
preferred stock of $16.48 billion). In addition to total
shareholders’ equity, we consider our $5.00 billion of
junior subordinated debt issued to trusts to be part of our
equity capital, as it qualifies as capital for regulatory and
certain rating agency purposes.
Consolidated
Capital Requirements
The Federal Reserve Board is the primary U.S. regulator of
Group Inc. As a bank holding company, we are subject to
consolidated regulatory capital requirements administered by the
Federal Reserve Board. Our bank depository institution
subsidiaries, including GS Bank USA, are subject to similar
capital requirements. Under the Federal Reserve Board’s
capital adequacy requirements and the regulatory framework for
prompt corrective action (PCA) that is applicable to GS Bank
USA, Goldman Sachs and its bank depository institution
subsidiaries must meet specific capital requirements that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet
113
Table of Contents
items as calculated under regulatory reporting practices.
Goldman Sachs and its bank depository institution
subsidiaries’ capital levels, as well as GS Bank USA’s
PCA classification, are also subject to qualitative judgments by
the regulators about components, risk weightings and other
factors.
Many of our subsidiaries, including GS&Co. and our other
broker-dealer
subsidiaries, are subject to separate regulation and capital
requirements as described below under
“— Subsidiary
Capital Requirements.”
We continue to disclose our capital ratios in accordance with
the capital guidelines applicable to us before we became a bank
holding company in September 2008, when we were regulated
by the SEC as a Consolidated Supervised Entity (CSE). These
guidelines were generally consistent with those set out in the
Revised Framework for the International Convergence of Capital
Measurement and Capital Standards issued by the Basel Committee
on Banking Supervision (Basel II). Subsequent to becoming a bank
holding company, we no longer report the CSE capital ratios to
the SEC and the CSE program has been discontinued.
Beginning with the first quarter of 2009, we are also reporting
estimated capital ratios in accordance with the regulatory
capital requirements currently applicable to bank holding
companies, which are based on the Capital Accord of the Basel
Committee on Banking Supervision (Basel I). These ratios are
used by the Federal Reserve Board and other U.S. Federal
banking agencies in the supervisory review process, including
the assessment of our capital adequacy.
Consolidated
Capital Ratios
The following table sets forth information regarding our capital
ratios as of March 2009, November 2008 and
December 2008 calculated in the same manner (generally
consistent with Basel II) as when we were regulated by
the SEC as a CSE:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| ($ in millions) | ||||||||||||
|
I. Tier 1 and Total Allowable Capital
|
||||||||||||
|
Common shareholders’ equity
|
$ | 47,046 | $ | 47,898 | $ | 46,571 | ||||||
|
Preferred stock
|
16,507 | 16,471 | 16,483 | |||||||||
|
Junior subordinated debt issued to trusts
|
5,000 | 5,000 | 5,000 | |||||||||
|
Less: Goodwill
|
(3,528 | ) | (3,523 | ) | (3,526 | ) | ||||||
|
Less: Disallowable intangible assets
|
(1,610 | ) | (1,386 | ) | (1,620 | ) | ||||||
|
Less: Other
deductions (1)
|
(1,783 | ) | (1,823 | ) | (1,278 | ) | ||||||
|
Tier 1 Capital
|
61,632 | 62,637 | 61,630 | |||||||||
|
Other components of Total Allowable Capital
|
||||||||||||
|
Qualifying subordinated
debt (2)
|
13,606 | 13,703 | 13,717 | |||||||||
|
Less: Other
deductions (1)
|
(184 | ) | (690 | ) | (101 | ) | ||||||
|
Total Allowable Capital
|
$ | 75,054 | $ | 75,650 | $ | 75,246 | ||||||
|
II.
Risk-Weighted
Assets
|
||||||||||||
|
Market risk
|
$ | 156,504 | $ | 176,646 | $ | 175,252 | ||||||
|
Credit risk
|
188,548 | 184,055 | 208,243 | |||||||||
|
Operational risk
|
39,600 | 39,675 | 39,675 | |||||||||
|
Total
Risk-Weighted
Assets
|
$ | 384,652 | $ | 400,376 | $ | 423,170 | ||||||
|
III. Tier 1 Capital Ratio
|
16.0 | % | 15.6 | % | 14.6 | % | ||||||
|
IV. Total Capital Ratio
|
19.5 | % | 18.9 | % | 17.8 | % | ||||||
| (1) | Principally includes the cumulative change in the fair value of our unsecured borrowings attributable to the impact of changes in our own credit spreads, disallowed deferred tax assets, and investments in certain nonconsolidated entities. | |
| (2) | Substantially all of our existing subordinated debt qualifies as Total Allowable Capital for CSE purposes. |
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We are currently working to implement the Basel II framework as
applicable to us as a bank holding company (as opposed to as a
CSE). U.S. banking regulators have incorporated the Basel
II framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as Group Inc., transition to Basel
II over the next several years.
Our
Risk-Weighted
Assets (RWAs), as applicable to us when we were regulated as a
CSE, are driven by the amount of market risk, credit risk and
operational risk associated with our business activities in a
manner generally consistent with methodologies set out in Basel
II. The methodologies used to compute RWAs for each of market
risk, credit risk and operational risk are closely aligned with
our risk management practices. See
“— Market
Risk” and
“— Credit
Risk” below for a discussion of how we manage risks in our
trading and principal investing businesses. See “—
Equity Capital” in Part II, Item 7 of our Annual
Report on
Form 10-K
for the fiscal year ended November 2008 for further details
on the methodologies used to calculate RWAs.
The following table sets forth information regarding our
estimated capital ratios as of March 2009 calculated in
accordance with the Federal Reserve Board’s regulatory
capital requirements currently applicable to bank holding
companies, which are based on Basel I. The calculation of these
estimated ratios includes certain market risk measures that are
under review by the Federal Reserve Board, as part of our
transition to bank holding company status. The calculation of
these estimated ratios has not been reviewed with the Federal
Reserve Board and, accordingly, these ratios may be revised in
subsequent filings.
|
As of |
||||
|
March 2009
|
||||
| ($ in millions) | ||||
|
Tier 1 Capital
|
||||
|
Common shareholders’ equity
|
$ | 47,046 | ||
|
Preferred stock
|
16,507 | |||
|
Junior subordinated debt issued to trusts
|
5,000 | |||
|
Less: Goodwill
|
(3,528 | ) | ||
|
Less: Disallowable intangible assets
|
(1,610 | ) | ||
|
Less: Other
deductions (1)
|
(6,733 | ) | ||
|
Tier 1 Capital
|
56,682 | |||
|
Tier 2 Capital
|
||||
|
Qualifying subordinated
debt (2)
|
13,606 | |||
|
Less: Other
deductions (1)
|
(184 | ) | ||
|
Tier 2 Capital
|
$ | 13,422 | ||
|
Total Capital
|
$ | 70,104 | ||
|
Total
Risk-Weighted
Assets
|
$ | 415,112 | ||
|
Tier 1 Capital Ratio
|
13.7 | % | ||
|
Total Capital Ratio
|
16.9 | % | ||
|
Tier 1 Leverage Ratio
|
5.9 | % | ||
| (1) | Principally includes non-financial equity investments and the cumulative change in the fair value of our unsecured borrowings attributable to the impact of changes in our own credit spreads, disallowed deferred tax assets, and investments in certain nonconsolidating entities. | |
| (2) | Substantially all of our existing subordinated debt qualifies as Tier 2 capital for Basel I purposes. |
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Table of Contents
Our estimated Tier 1 leverage ratio is defined as
Tier 1 capital under Basel I divided by adjusted average
total assets (which includes adjustments for disallowed goodwill
and certain intangible assets).
Federal Reserve Board regulations require bank holding companies
to maintain a minimum Tier 1 capital ratio of 4% and a
minimum total capital ratio of 8%. The required minimum
Tier 1 capital ratio and total capital ratio in order to be
considered a “well capitalized” bank holding company
under the Federal Reserve Board guidelines are 6% and 10%,
respectively. Bank holding companies may be expected to maintain
ratios well above the minimum levels, depending upon their
particular condition, risk profile and growth plans. The minimum
Tier 1 leverage ratio is 3% for bank holding companies that
have received the highest supervisory rating under Federal
Reserve Board guidelines or that have implemented the Federal
Reserve Board’s capital measure for market risk. Other bank
holding companies must have a minimum Tier 1 leverage ratio
of 4%. Our RWAs, as calculated under Basel I, are driven by
the amount of market risk and credit risk associated with our
business activities. Further details on the methodologies used
to calculate RWAs under Basel I are set forth below.
Risk-Weighted
Assets under Basel I
There are several differences between the methodology for
computing capital ratios under Basel I and the Basel
II-based regulations that were applicable to us when we were
regulated by the SEC as a CSE. An important difference is that
the capital requirements for principal investments are recorded
as a deduction from shareholders’ equity in order to arrive
at Tier I capital under Basel I; under Basel II, there is
no such deduction in the computation of Tier I capital, but
rather the capital requirements for principal investments are
expressed as
risk-weighted
assets. In addition, under Basel II, there are capital
requirements for operational risk, while the capital
requirements for credit risk are based on regulator-approved
internal models and estimates; under Basel I, there are no
capital requirements for operational risk and the capital
requirements for credit risk are based on percentages (including
percentages of the notional underliers of derivative contracts)
that are prescribed by regulation.
Subsidiary
Capital Requirements
Many of our subsidiaries are subject to separate regulation and
capital requirements in the
U.S. and/or
elsewhere. GS&Co. and Goldman Sachs Execution &
Clearing, L.P. are registered
U.S. broker-dealers
and futures commissions merchants, and are subject to regulatory
capital requirements, including those imposed by the SEC, the
Commodity Futures Trading Commission, the Chicago Board of
Trade, the Financial Industry Regulatory Authority, Inc. (FINRA)
and the National Futures Association.
GS Bank USA, a New York State-chartered bank and a member of the
Federal Reserve System and the FDIC, is regulated by the Federal
Reserve Board and the New York State Banking Department (NYSBD)
and is subject to minimum capital requirements that (subject to
certain exceptions) are similar to those applicable to bank
holding companies. GS Bank USA computes its capital ratios in
accordance with the regulatory capital guidelines currently
applicable to state member banks, which are based on Basel I, as
implemented by the Federal Reserve Board, for purposes of
assessing the adequacy of its capital. In order to be considered
a “well capitalized” depository institution under the
Federal Reserve Board guidelines, GS Bank USA must maintain a
Tier 1 capital ratio of at least 6%, a total capital ratio
of at least 10% and a Tier 1 leverage ratio of at least 5%.
In November 2008, we contributed subsidiaries into GS Bank
USA. In connection with this contribution, GS Bank USA agreed
with the Federal Reserve Board to minimum capital ratios in
excess of these “well capitalized” levels.
Accordingly, for a period of time, GS Bank USA is expected to
maintain a Tier 1 capital ratio of at least 8%, a total
capital ratio of at least 11% and a Tier 1 leverage ratio
of at least 6%.
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Table of Contents
The following table sets forth information regarding GS Bank
USA’s capital ratios under Basel I, as implemented by the
Federal Reserve Board, as of March 2009 and
December 2008.
| As of | ||||||||
|
March |
December |
|||||||
| 2009 | 2008 | |||||||
|
Tier 1 Capital Ratio
|
10.8 | % | 8.7 | % | ||||
|
Total Capital Ratio
|
14.5 | % | 12.0 | % | ||||
|
Tier 1 Leverage Ratio
|
9.1 | % | 8.0 | % (1) | ||||
| (1) | Calculated using adjusted average total assets for the one-month period ended December 2008. |
As agreed with the Federal Reserve Board in February 2009,
GS Bank USA amended the methodology for calculating aspects of
its Tier 1 capital and total capital ratios. This
methodology change has been incorporated into the calculations
of GS Bank USA’s March 2009 and December 2008
Tier 1 capital and total capital ratios.
GS Bank USA is currently working to implement the Basel II
framework. Similar to our requirement as a bank holding company,
GS Bank USA is required to transition to Basel II over the
next several years.
Group Inc. has guaranteed the payment obligations of
GS&Co., GS Bank USA and GS Bank Europe, subject to certain
exceptions. In November 2008, as noted above, we
contributed subsidiaries into GS Bank USA, and Group Inc. agreed
to guarantee certain losses, including
credit-related
losses, relating to assets held by the contributed entities. In
connection with this guarantee, Group Inc. also agreed to pledge
to GS Bank USA certain collateral, including interests in
subsidiaries and other illiquid assets.
GS Bank Europe, our regulated Irish bank, is subject to minimum
capital requirements imposed by the Irish Financial Services
Regulatory Authority. Several other subsidiaries of Goldman
Sachs are regulated by securities, investment advisory, banking,
insurance, and other regulators and authorities around the
world. Goldman Sachs International (GSI), our regulated U.K.
broker-dealer,
is subject to minimum capital requirements imposed by the
Financial Services Authority (FSA). Goldman Sachs Japan Co.,
Ltd., our regulated Japanese
broker-dealer,
is subject to minimum capital requirements imposed by
Japan’s Financial Services Agency. As of March 2009,
November 2008 and December 2008, these subsidiaries
were in compliance with their local capital requirements.
As discussed above, many of our subsidiaries are subject to
regulatory capital requirements in jurisdictions throughout the
world. Subsidiaries not subject to separate regulation may hold
capital to satisfy local tax guidelines, rating agency
requirements (for entities with assigned credit ratings) or
internal policies, including policies concerning the minimum
amount of capital a subsidiary should hold based on its
underlying level of risk. See
“— Liquidity
and Funding Risk — Conservative Liability
Structure” below for a discussion of our potential
inability to access funds from our subsidiaries.
Equity investments in subsidiaries are generally funded with
parent company equity capital, commensurate with the
entity’s risk of loss. As of March 2009,
November 2008 and December 2008, Group Inc.’s
equity investment in subsidiaries was $62.45 billion,
$51.70 billion and $57.81 billion, respectively,
compared with its total shareholders’ equity of
$63.55 billion, $64.37 billion and $63.05 billion.
Our capital invested in
non-U.S. subsidiaries
is generally exposed to foreign exchange risk, substantially all
of which is managed through a combination of derivative
contracts and
non-U.S. denominated
debt. In addition, we generally manage the
non-trading
exposure to foreign exchange risk that arises from transactions
denominated in currencies other than the transacting
entity’s functional currency.
See Note 15 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for further information regarding our regulated subsidiaries.
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Table of Contents
Rating Agency
Guidelines
The credit rating agencies assign credit ratings to the
obligations of Group Inc., which directly issues or guarantees
substantially all of the firm’s senior unsecured
obligations. In addition, GS Bank USA has been assigned a
long-term issuer rating as well as ratings on its long-term and
short-term bank deposits. The level and composition of our
equity capital are among the many factors considered in
determining our credit ratings. Each agency has its own
definition of eligible capital and methodology for evaluating
capital adequacy, and assessments are generally based on a
combination of factors rather than a single calculation. See
“— Liquidity
and Funding Risk — Credit Ratings” below for
further information regarding our credit ratings.
Equity Capital
Management
Our objective is to maintain a sufficient level and optimal
composition of equity capital. We manage our capital through
repurchases of our common stock, as permitted, and issuances of
common and preferred stock, junior subordinated debt issued to
trusts and other subordinated debt. We manage our capital
requirements principally by setting limits on balance sheet
assets
and/or
limits on risk, in each case at both the consolidated and
business unit levels. We attribute capital usage to each of our
business units based upon our regulatory capital framework and
manage the levels of usage based upon the balance sheet and risk
limits established.
Share Repurchase Program. Subject to the
limitations of the U.S. Treasury’s TARP Capital
Purchase Program described in Note 9 to the condensed
consolidated financial statements in Part 1, Item 1 of
this Quarterly Report on
Form 10-Q,
and under
“— Equity
Capital — Equity Capital Management —
Preferred Stock” in our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008, we seek
to use our share repurchase program to substantially offset
increases in share count over time resulting from employee
share-based
compensation. The repurchase program is effected primarily
through regular
open-market
purchases, the amounts and timing of which are determined
primarily by our current and projected capital positions
(i.e., comparisons of our desired level of capital to our
actual level of capital) but which may also be influenced by
general market conditions and the prevailing price and trading
volumes of our common stock, in each case subject to the limit
imposed under the U.S. Treasury’s TARP Capital
Purchase Program.
As of March 2009, we were authorized to repurchase up to
60.8 million additional shares of common stock pursuant to
our repurchase program. See “Unregistered Sales of Equity
Securities and Use of Proceeds” in Part II,
Item 2 of this Quarterly Report on
Form 10-Q
for additional information on our repurchase program.
See Note 9 to the condensed consolidated financial
statements in Part 1, Item 1 of this Quarterly Report
on
Form 10-Q
for further information regarding our preferred stock, junior
subordinated debt issued to trusts and other subordinated debt.
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Table of Contents
Other Capital
Ratios and Metrics
The following table sets forth information on our assets,
shareholders’ equity, leverage ratios and book value per
common share:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| ($ in millions, except per share amounts) | ||||||||||||
|
Total assets
|
$ | 925,290 | $ | 884,547 | $ | 1,112,225 | ||||||
|
Adjusted
assets (1)
|
535,767 | 528,161 | 726,116 | |||||||||
|
Total shareholders’ equity
|
63,553 | 64,369 | 63,054 | |||||||||
|
Tangible equity
capital (2)
|
63,415 | 64,186 | 62,908 | |||||||||
|
Leverage
ratio (3)
|
14.6 | x | 13.7 | x | 17.6 | x | ||||||
|
Adjusted leverage
ratio (4)
|
8.4 | x | 8.2 | x | 11.5 | x | ||||||
|
Debt to equity
ratio (5)
|
3.0 | x | 2.6 | x | 2.9 | x | ||||||
|
Common shareholders’ equity
|
$ | 47,046 | $ | 47,898 | $ | 46,571 | ||||||
|
Tangible common shareholders’
equity (6)
|
41,908 | 42,715 | 41,425 | |||||||||
|
Book value per common
share (7)
|
$ | 98.82 | $ | 98.68 | $ | 95.84 | ||||||
|
Tangible book value per common
share (8)
|
88.02 | 88.00 | 85.25 | |||||||||
| (1) | Adjusted assets excludes (i) low-risk collateralized assets generally associated with our matched book and securities lending businesses and federal funds sold, (ii) cash and securities we segregate for regulatory and other purposes and (iii) goodwill and identifiable intangible assets, excluding power contracts. We do not deduct identifiable intangible assets associated with power contracts from total assets in order to be consistent with the calculation of tangible equity capital and the adjusted leverage ratio (see footnote 2 below). |
The following table sets forth the reconciliation of total
assets to adjusted assets:
| As of | ||||||||||||||
|
March |
November |
December |
||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||
| (in millions) | ||||||||||||||
|
Total assets
|
$ | 925,290 | $ | 884,547 | $ | 1,112,225 | ||||||||
|
Deduct:
|
Securities borrowed | (228,245 | ) | (180,795 | ) | (203,341 | ) | |||||||
| Securities purchased under agreements to resell, at fair value, and federal funds sold | (143,155 | ) | (122,021 | ) | (129,532 | ) | ||||||||
|
Add:
|
Trading liabilities, at fair value | 147,221 | 175,972 | 186,031 | ||||||||||
| Less derivative liabilities | (90,620 | ) | (117,695 | ) | (121,622 | ) | ||||||||
| Subtotal | 56,601 | 58,277 | 64,409 | |||||||||||
|
Deduct:
|
Cash and securities segregated for regulatory and other purposes | (69,586 | ) | (106,664 | ) | (112,499 | ) | |||||||
| Goodwill and identifiable intangible assets, excluding power contracts | (5,138 | ) | (5,183 | ) | (5,146 | ) | ||||||||
|
Adjusted assets
|
$ | 535,767 | $ | 528,161 | $ | 726,116 | ||||||||
| (2) | Tangible equity capital equals total shareholders’ equity and junior subordinated debt issued to trusts less goodwill and identifiable intangible assets, excluding power contracts. We do not deduct identifiable intangible assets associated with power contracts from total shareholders’ equity because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders’ equity. We consider junior subordinated debt issued to trusts to be a component of our tangible equity capital base due to certain characteristics of the debt, including its long-term nature, our ability to defer payments due on the debt and the subordinated nature of the debt in our capital structure. |
119
Table of Contents
The following table sets forth the reconciliation of total
shareholders’ equity to tangible equity capital:
| As of | ||||||||||||||
|
March |
November |
December |
||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||
| (in millions) | ||||||||||||||
|
Total shareholders’ equity
|
$ | 63,553 | $ | 64,369 | $ | 63,054 | ||||||||
|
Add:
|
Junior subordinated debt issued to trusts | 5,000 | 5,000 | 5,000 | ||||||||||
|
Deduct:
|
Goodwill and identifiable intangible assets, excluding power contracts | (5,138 | ) | (5,183 | ) | (5,146 | ) | |||||||
|
Tangible equity capital
|
$ | 63,415 | $ | 64,186 | $ | 62,908 | ||||||||
| (3) | The leverage ratio equals total assets divided by total shareholders’ equity. This ratio is different from the Tier 1 leverage ratios included in “— Equity Capital — Consolidated Capital Requirements” and “— Equity Capital — Subsidiary Capital Requirements” above. | |
| (4) | The adjusted leverage ratio equals adjusted assets divided by tangible equity capital. We believe that the adjusted leverage ratio is a more meaningful measure of our capital adequacy than the leverage ratio because it excludes certain low-risk collateralized assets that are generally supported with little or no capital and reflects the tangible equity capital deployed in our businesses. | |
| (5) | The debt to equity ratio equals unsecured long-term borrowings divided by total shareholders’ equity. | |
| (6) | Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts. We do not deduct identifiable intangible assets associated with power contracts from total shareholders’ equity because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders’ equity. We believe that tangible common shareholders’ equity is meaningful because it is one of the measures that we and investors use to assess capital adequacy. |
The following table sets forth the reconciliation of total
shareholders’ equity to tangible common shareholders’
equity:
| As of | ||||||||||||||
|
March |
November |
December |
||||||||||||
| 2009 | 2008 | 2008 | ||||||||||||
| (in millions) | ||||||||||||||
|
Total shareholders’ equity
|
$ | 63,553 | $ | 64,369 | $ | 63,054 | ||||||||
|
Deduct:
|
Preferred stock | (16,507 | ) | (16,471 | ) | (16,483 | ) | |||||||
|
Common shareholders’ equity
|
47,046 | 47,898 | 46,571 | |||||||||||
|
Deduct:
|
Goodwill and identifiable intangible assets, excluding power contracts | (5,138 | ) | (5,183 | ) | (5,146 | ) | |||||||
|
Tangible common shareholders’ equity
|
$ | 41,908 | $ | 42,715 | $ | 41,425 | ||||||||
| (7) | Book value per common share is based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 476.1 million, 485.4 million and 485.9 million and as of March 2009, November 2008 and December 2008, respectively. | |
| (8) | Tangible book value per common share is computed by dividing tangible common shareholders’ equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements. |
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Table of Contents
Contractual
Obligations
Goldman Sachs has contractual obligations to make future
payments related to our unsecured
long-term
borrowings, secured
long-term
financings,
long-term
noncancelable lease agreements and purchase obligations and has
commitments under a variety of commercial arrangements.
The following table sets forth our contractual obligations by
fiscal maturity date as of March 2009:
Contractual
Obligations
(in millions)
(in millions)
|
Remainder |
2010- |
2012- |
2014- |
|||||||||||||||||
|
of 2009
|
2011
|
2013
|
Thereafter
|
Total
|
||||||||||||||||
|
Unsecured
long-term
borrowings (1)(2)(3)
|
$ | — | $ | 34,203 | $ | 47,552 | $ | 106,779 | $ | 188,534 | ||||||||||
|
Secured
long-term
financings (1)(2)(4)
|
— | 6,893 | 4,900 | 3,055 | 14,848 | |||||||||||||||
|
Contractual interest
payments (5)
|
5,434 | 13,445 | 10,579 | 32,185 | 61,643 | |||||||||||||||
|
Insurance
liabilities (6)
|
449 | 953 | 782 | 4,453 | 6,637 | |||||||||||||||
|
Minimum rental payments
|
374 | 781 | 518 | 1,637 | 3,310 | |||||||||||||||
|
Purchase obligations
|
587 | 122 | 24 | 24 | 757 | |||||||||||||||
| (1) | Obligations maturing within one year of our financial statement date or redeemable within one year of our financial statement date at the option of the holder are excluded from this table and are treated as short-term obligations. See Note 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our secured financings. | |
| (2) | Obligations that are repayable prior to maturity at the option of Goldman Sachs are reflected at their contractual maturity dates. Obligations that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. | |
| (3) | Includes $17.69 billion accounted for at fair value under SFAS No. 155 or SFAS No. 159, primarily consisting of hybrid financial instruments and prepaid physical commodity transactions. | |
| (4) | These obligations are reported within “Other secured financings” in the condensed consolidated statements of financial condition and include $9.18 billion accounted for at fair value under SFAS No. 159. | |
| (5) | Represents estimated future interest payments related to unsecured long-term borrowings and secured long-term financings based on applicable interest rates as of March 2009. Includes stated coupons, if any, on structured notes. | |
| (6) | Represents estimated undiscounted payments related to future benefits and unpaid claims arising from policies associated with our insurance activities, excluding separate accounts and estimated recoveries under reinsurance contracts. |
As of March 2009, our unsecured
long-term
borrowings were $188.53 billion, with maturities extending
to 2043, and consisted principally of senior borrowings. See
Note 7 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our unsecured
long-term
borrowings.
As of March 2009, our future minimum rental payments, net
of minimum sublease rentals, under noncancelable leases were
$3.31 billion. These lease commitments, principally for
office space, expire on various dates through 2069. Certain
agreements are subject to periodic escalation provisions for
increases in real estate taxes and other charges. See
Note 8 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our leases.
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Table of Contents
Our occupancy expenses include costs associated with office
space held in excess of our current requirements. This excess
space, the cost of which is charged to earnings as incurred, is
being held for potential growth or to replace currently occupied
space that we may exit in the future. We regularly evaluate our
current and future space capacity in relation to current and
projected staffing levels. During the first quarter of 2009, we
incurred exit costs of $16 million related to our office
space (included in “Occupancy” and “Depreciation
and Amortization” in the condensed consolidated statements
of earnings). We may incur exit costs in the future to the
extent we (i) reduce our space capacity or (ii) commit
to, or occupy, new properties in the locations in which we
operate and, consequently, dispose of existing space that had
been held for potential growth. These exit costs may be material
to our results of operations in a given period.
As of March 2009, included in purchase obligations was
$456 million of
construction-related
obligations. As of March 2009, our
construction-related
obligations include commitments of $404 million, related to
our new headquarters in New York City, which is expected to cost
between $2.1 billion and $2.3 billion. We have
partially financed this construction project with
$1.65 billion of
tax-exempt
Liberty Bonds.
Due to the uncertainty of the timing and amounts that will
ultimately be paid, our liability for unrecognized tax benefits
has been excluded from the above contractual obligations table.
See Note 8 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for information regarding our commitments, contingencies and
guarantees.
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Table of Contents
Market
Risk
The potential for changes in the market value of our trading and
investing positions is referred to as market risk. Such
positions result from
market-making,
proprietary trading, underwriting, specialist and investing
activities. Substantially all of our inventory positions are
marked-to-market
on a daily basis and changes are recorded in net revenues.
Categories of market risk include exposures to interest rates,
equity prices, currency rates and commodity prices. A
description of each market risk category is set forth below:
| • | Interest rate risks primarily result from exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates, mortgage prepayment speeds and credit spreads. | |
| • | Equity price risks result from exposures to changes in prices and volatilities of individual equities, equity baskets and equity indices. | |
| • | Currency rate risks result from exposures to changes in spot prices, forward prices and volatilities of currency rates. | |
| • | Commodity price risks result from exposures to changes in spot prices, forward prices and volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products, and precious and base metals. |
We seek to manage these risks by diversifying exposures,
controlling position sizes and establishing economic hedges in
related securities or derivatives. For example, we may seek to
hedge a portfolio of common stocks by taking an offsetting
position in a related
equity-index
futures contract. The ability to manage an exposure may,
however, be limited by adverse changes in the liquidity of the
security or the related hedge instrument and in the correlation
of price movements between the security and related hedge
instrument.
In addition to applying business judgment, senior management
uses a number of quantitative tools to manage our exposure to
market risk for “Trading assets, at fair value” and
“Trading liabilities, at fair value” in the condensed
consolidated statements of financial condition. These tools
include:
| • | risk limits based on a summary measure of market risk exposure referred to as VaR; | |
| • | scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events, including, but not limited to, a large widening of credit spreads, a substantial decline in equity markets and significant moves in selected emerging markets; and | |
| • | inventory position limits for selected business units. |
VaR
VaR is the potential loss in value of trading positions due to
adverse market movements over a defined time horizon with a
specified confidence level.
For the VaR numbers reported below, a
one-day time
horizon and a 95% confidence level were used. This means that
there is a 1 in 20 chance that daily trading net revenues will
fall below the expected daily trading net revenues by an amount
at least as large as the reported VaR. Thus, shortfalls from
expected trading net revenues on a single trading day greater
than the reported VaR would be anticipated to occur, on average,
about once a month. Shortfalls on a single day can exceed
reported VaR by significant amounts. Shortfalls can also occur
more frequently or accumulate over a longer time horizon such as
a number of consecutive trading days.
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The modeling of the risk characteristics of our trading
positions involves a number of assumptions and approximations.
While we believe that these assumptions and approximations are
reasonable, there is no standard methodology for estimating VaR,
and different assumptions
and/or
approximations could produce materially different VaR estimates.
We use historical data to estimate our VaR and, to better
reflect current asset volatilities, we generally weight
historical data to give greater importance to more recent
observations. Given its reliance on historical data, VaR is most
effective in estimating risk exposures in markets in which there
are no sudden fundamental changes or shifts in market
conditions. An inherent limitation of VaR is that the
distribution of past changes in market risk factors may not
produce accurate predictions of future market risk. Different
VaR methodologies and distributional assumptions could produce a
materially different VaR. Moreover, VaR calculated for a
one-day time
horizon does not fully capture the market risk of positions that
cannot be liquidated or offset with hedges within one day.
The following tables set forth the daily VaR:
Average Daily VaR
(1)
(in millions)
(in millions)
| Average for the | ||||||||||||
|
Three Months |
Three Months |
One Month |
||||||||||
| Ended March | Ended February | Ended December | ||||||||||
|
Risk Categories
|
2009 | 2008 | 2008 | |||||||||
|
Interest rates
|
$ | 218 | $ | 106 | $ | 221 | ||||||
|
Equity prices
|
38 | 89 | 40 | |||||||||
|
Currency rates
|
38 | 31 | 44 | |||||||||
|
Commodity prices
|
40 | 38 | 40 | |||||||||
|
Diversification
effect (2)
|
(94 | ) | (107 | ) | (102 | ) | ||||||
|
Total
|
$ | 240 | $ | 157 | $ | 243 | ||||||
| (1) | Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g., due to transfer restrictions and/or illiquidity). See “— Other Market Risk Measures” below. | |
| (2) | Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. |
Our average daily VaR increased to $240 million for the
first quarter of 2009 from $157 million for the first
quarter of 2008, principally due to an increase in the interest
rate category, partially offset by a decrease in the equity
price category. The increase in interest rates was primarily due
to higher levels of exposure and volatility, and wider credit
spreads. The decrease in equity prices was primarily due to
lower levels of exposures.
VaR excludes the impact of changes in counterparty and our own
credit spreads on derivatives as well as changes in our own
credit spreads on unsecured borrowings for which the fair value
option was elected. The estimated sensitivity of our net
revenues to a one basis point increase in credit spreads
(counterparty and our own) on derivatives was $(1) million and
$(2) million as of March 2009 and December 2008,
respectively. In addition, the estimated sensitivity of our net
revenues to a one basis point increase in our own credit spreads
on unsecured borrowings for which the fair value option was
elected was $7 million (including hedges) as of both
March 2009 and December 2008.
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Table of Contents
Daily VaR
(1)
(in millions)
(in millions)
| As of |
Three Months Ended |
One Month Ended |
||||||||||||||||||||||||||
|
March |
November |
December |
March 2009 | December 2008 | ||||||||||||||||||||||||
|
Risk Categories
|
2009 | 2008 | 2008 |
High
|
Low
|
High
|
Low
|
|||||||||||||||||||||
|
Interest rates
|
$ | 242 | $ | 228 | $ | 209 | $ | 252 | $ | 192 | $ | 229 | $ | 209 | ||||||||||||||
|
Equity prices
|
40 | 38 | 33 | 54 | 32 | 50 | 32 | |||||||||||||||||||||
|
Currency rates
|
43 | 36 | 44 | 61 | 24 | 55 | 36 | |||||||||||||||||||||
|
Commodity prices
|
48 | 33 | 42 | 53 | 33 | 50 | 31 | |||||||||||||||||||||
|
Diversification
effect (2)
|
(107 | ) | (91 | ) | (97 | ) | ||||||||||||||||||||||
|
Total
|
$ | 266 | $ | 244 | $ | 231 | $ | 285 | $ | 208 | $ | 253 | $ | 231 | ||||||||||||||
| (1) | Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g., due to transfer restrictions and/or illiquidity). See “— Other Market Risk Measures” below. | |
| (2) | Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. |
Our daily VaR increased to $266 million as of
March 2009 from $231 million as of December 2008,
primarily due to an increase in the interest rate category,
partially offset by an increase in the diversification benefit
across risk categories. The increase in interest rates was
principally due to higher levels of volatility, partially offset
by lower levels of exposure.
Our daily VaR decreased to $231 million as of
December 2008 from $244 million as of
November 2008, primarily due to a decrease in the interest
rate category. The decrease in interest rates was principally
due to lower levels of exposure.
The following chart presents our daily VaR during the last four
quarters and the one month ended December 2008:
Daily VaR
($ in millions)
($ in millions)
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Table of Contents
Trading Net
Revenues Distribution
The following charts set forth the frequency distribution of our
daily trading net revenues for substantially all inventory
positions included in VaR for the quarter ended March 2009
and the one month ended December 2008:
Daily Trading Net
Revenues
For the Quarter Ended March 2009
($ in millions)
For the Quarter Ended March 2009
($ in millions)
Daily Trading Net
Revenues
For the One Month Ended December 2008
($ in millions)
For the One Month Ended December 2008
($ in millions)
| (1) | Includes one day on which the firm incurred negative trading net revenues of $859 million, principally reflecting a writedown of approximately $850 million related to the bridge and bank loan facilities held in LyondellBasell Finance Company. |
126
Table of Contents
As part of our overall risk control process, daily trading net
revenues are compared with VaR calculated as of the end of the
prior business day. Trading losses incurred on a single day did
not exceed our 95%
one-day VaR
during the first quarter of 2009. Trading losses incurred on a
single day exceeded our 95%
one-day VaR
on one occasion during the one month ended December 2008.
Other Market
Risk Measures
Certain portfolios and individual positions are not included in
VaR, where VaR is not the most appropriate measure of risk
(e.g., due to transfer restrictions
and/or
illiquidity). The market risk related to our investment in the
ordinary shares of ICBC, excluding interests held by investment
funds managed by Goldman Sachs, is measured by estimating the
potential reduction in net revenues associated with a 10%
decline in the ICBC ordinary share price. The market risk
related to the remaining positions is measured by estimating the
potential reduction in net revenues associated with a 10%
decline in asset values.
The sensitivity analyses for equity and debt positions in our
trading portfolio and equity, debt (primarily mezzanine
instruments) and real estate positions in our
non-trading
portfolio are measured by the impact of a decline in the asset
values (including the impact of leverage in the underlying
investments for real estate positions in our
non-trading
portfolio) of such positions. The fair value of the underlying
positions may be impacted by factors such as transactions in
similar instruments, completed or pending
third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity or debt capital markets, and changes in financial
ratios or cash flows.
The following table sets forth market risk for positions not
included in VaR. These measures do not reflect diversification
benefits across asset categories and, given the differing
likelihood of the potential declines in asset categories, these
measures have not been aggregated:
| 10% Sensitivity | ||||||||||||||
| Amount as of | ||||||||||||||
|
Asset Categories
|
10% Sensitivity Measure
|
March 2009
|
November 2008
|
December 2008
|
||||||||||
| (in millions) | ||||||||||||||
|
Trading Risk
(1)
|
||||||||||||||
|
Equity (2)
|
Underlying asset value | $ | 667 | $ | 790 | $ | 772 | |||||||
|
Debt (3)
|
Underlying asset value | 521 | 808 | 796 | ||||||||||
|
Non-trading
Risk
|
||||||||||||||
|
ICBC
|
ICBC ordinary share price | 212 | 202 | 225 | ||||||||||
|
Other
Equity (4)
|
Underlying asset value | 982 | 1,155 | 1,129 | ||||||||||
|
Debt (5)
|
Underlying asset value | 689 | 694 | 734 | ||||||||||
|
Real
Estate (6)
|
Underlying asset value | 942 | 1,330 | 1,229 | ||||||||||
| (1) | In addition to the positions in these portfolios, which are accounted for at fair value, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in “Other assets” in the condensed consolidated statements of financial condition. Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 12 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on “Other assets.” | |
| (2) | Relates to private and restricted public equity securities held within the FICC and Equities components of our Trading and Principal Investments segment. | |
| (3) | Primarily relates to acquired portfolios of distressed loans (primarily backed by commercial and residential real estate collateral), loans backed by commercial real estate, and corporate debt held within the FICC component of our Trading and Principal Investments segment. | |
| (4) | Primarily relates to interests in our merchant banking funds that invest in corporate equities. | |
| (5) | Primarily relates to interests in our merchant banking funds that invest in corporate mezzanine debt instruments. | |
| (6) | Primarily relates to interests in our merchant banking funds that invest in real estate. Such funds typically employ leverage as part of the investment strategy. This sensitivity measure is based on our percentage ownership of the underlying asset values in the funds and unfunded commitments to the funds. |
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Table of Contents
The decrease in our 10% sensitivity measures as of
March 2009 from December 2008 for other equity
(excluding ICBC) and debt positions in our
non-trading
portfolio was due to dispositions and to a decrease in the fair
value of the portfolio. The decrease for equity and debt
positions from December 2008 in our trading portfolio and
real estate positions in our
non-trading
portfolio was primarily due to decreases in the fair value of
the portfolios.
The decrease in our 10% sensitivity measures as of
December 2008 from November 2008 for real estate
positions in our
non-trading
portfolio was due to a decrease in the fair value of our
portfolio.
In addition to the positions included in VaR and the other risk
measures described above, as of March 2009, we held
approximately $11.35 billion of financial instruments in
our bank and insurance subsidiaries, primarily consisting of
$7.36 billion of money market instruments,
$942 million of U.S. government, federal agency and
sovereign obligations, $1.57 billion of corporate debt
securities and other debt obligations, and $1.16 billion of
mortgage and other
asset-backed
loans and securities. As of November 2008, we held
approximately $10.39 billion of financial instruments in
our bank and insurance subsidiaries, primarily consisting of
$2.86 billion of money market instruments,
$3.08 billion of U.S. government, federal agency and
sovereign obligations, $2.87 billion of corporate debt
securities and other debt obligations, and $1.22 billion of
mortgage and other
asset-backed
loans and securities. As of December 2008, we held
approximately $10.20 billion of financial instruments in
our bank and insurance subsidiaries, primarily consisting of
$7.21 billion of money market instruments,
$992 million of U.S. government, federal agency and
sovereign obligations, $912 million of corporate debt
securities and other debt obligations, and $774 million of
mortgage and other
asset-backed
loans and securities. In addition, as of March 2009,
November 2008 and December 2008, we held commitments
and loans under the William Street credit extension program. See
Note 8 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our William Street credit
extension program.
Credit
Risk
Credit risk represents the loss that we would incur if a
counterparty or an issuer of securities or other instruments we
hold fails to perform under its contractual obligations to us,
or upon a deterioration in the credit quality of third parties
whose securities or other instruments, including OTC
derivatives, we hold. Our exposure to credit risk principally
arises through our trading, investing and financing activities.
To reduce our credit exposures, we seek to enter into netting
agreements with counterparties that permit us to offset
receivables and payables with such counterparties. In addition,
we attempt to further reduce credit risk with certain
counterparties by (i) entering into agreements that enable
us to obtain collateral from a counterparty on an upfront or
contingent basis, (ii) seeking
third-party
guarantees of the counterparty’s obligations,
and/or
(iii) transferring our credit risk to third parties using
credit derivatives
and/or other
structures and techniques.
To measure and manage our credit exposures, we use a variety of
tools, including credit limits referenced to both current
exposure and potential exposure. Potential exposure is an
estimate of exposure, within a specified confidence level, that
could be outstanding over the life of a transaction based on
market movements. In addition, as part of our market risk
management process, for positions measured by changes in credit
spreads, we use VaR and other sensitivity measures. To
supplement our primary credit exposure measures, we also use
scenario analyses, such as credit spread widening scenarios,
stress tests and other quantitative tools.
Our global credit management systems monitor credit exposure to
individual counterparties and on an aggregate basis to
counterparties and their affiliates. These systems also provide
management, including the Firmwide Risk and Credit Policy
Committees, with information regarding credit risk by product,
industry sector, country and region.
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Table of Contents
While our activities expose us to many different industries and
counterparties, we routinely execute a high volume of
transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks and
investment funds, resulting in significant credit concentration
with respect to this industry. In the ordinary course of
business, we may also be subject to a concentration of credit
risk to a particular counterparty, borrower or issuer.
As of March 2009, November 2008 and
December 2008, we held $103.37 billion (11% of total
assets), $53.98 billion (6% of total assets) and
$245.96 billion (22% of total assets), respectively, of
U.S. government and federal agency obligations included in
“Trading assets, at fair value” and “Cash and
securities segregated for regulatory and other purposes” in
the condensed consolidated statements of financial condition. As
of March 2009, November 2008 and December 2008,
we held $38.42 billion (4% of total assets),
$21.13 billion (2% of total assets) and $32.00 billion
(3% of total assets), respectively, of other sovereign
obligations, principally consisting of securities issued by the
governments of Japan and the United Kingdom. In addition, as of
March 2009, November 2008 and December 2008,
$110.63 billion, $126.27 billion and
$131.75 billion of our securities purchased under
agreements to resell and securities borrowed (including those in
“Cash and securities segregated for regulatory and other
purposes”), respectively, were collateralized by
U.S. government and federal agency obligations. As of
March 2009, November 2008 and December 2008,
$77.99 billion, $65.37 billion and $71.07 billion
of our securities purchased under agreements to resell and
securities borrowed, respectively, were collateralized by other
sovereign obligations, principally consisting of securities
issued by the governments of Germany and Japan. As of
March 2009, November 2008 and December 2008, we
did not have credit exposure to any other counterparty that
exceeded 2% of our total assets. However, over the past several
years, the amount and duration of our credit exposures with
respect to OTC derivatives has been increasing, due to, among
other factors, the growth of our OTC derivative activities and
market evolution toward longer-dated transactions. A further
discussion of our derivative activities follows below.
Derivatives
Derivative contracts are instruments, such as futures, forwards,
swaps or option contracts, that derive their value from
underlying assets, indices, reference rates or a combination of
these factors. Derivative instruments may be privately
negotiated contracts, which are often referred to as OTC
derivatives, or they may be listed and traded on an exchange.
Substantially all of our derivative transactions are entered
into to facilitate client transactions, to take proprietary
positions or as a means of risk management. In addition to
derivative transactions entered into for trading purposes, we
enter into derivative contracts to manage currency exposure on
our net investment in
non-U.S. operations
and to manage the interest rate and currency exposure on our
long-term
borrowings and certain
short-term
borrowings.
Derivatives are used in many of our businesses, and we believe
that the associated market risk can only be understood relative
to all of the underlying assets or risks being hedged, or as
part of a broader trading strategy. Accordingly, the market risk
of derivative positions is managed together with our
nonderivative positions.
The fair value of our derivative contracts is reflected net of
cash paid or received pursuant to credit support agreements and
is reported on a
net-by-counterparty
basis in our condensed consolidated statements of financial
condition when we believe a legal right of setoff exists under
an enforceable netting agreement. For an OTC derivative, our
credit exposure is directly with our counterparty and continues
until the maturity or termination of such contract.
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Table of Contents
The following tables set forth the fair values of our OTC
derivative assets and liabilities by risk type and by remaining
contractual maturity:
OTC
Derivatives
(in millions)
(in millions)
| Assets | As of March 2009 | |||||||||||||||||||
|
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
|||||||||||||||||
|
Risk Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 17,345 | $ | 50,529 | $ | 33,168 | $ | 34,425 | $ | 135,467 | ||||||||||
|
Credit derivatives
|
8,889 | 44,484 | 19,183 | 11,349 | 83,905 | |||||||||||||||
|
Currencies
|
14,026 | 11,541 | 5,431 | 5,371 | 36,369 | |||||||||||||||
|
Commodities
|
13,406 | 10,734 | 684 | 165 | 24,989 | |||||||||||||||
|
Equities
|
15,366 | 7,337 | 1,447 | 127 | 24,277 | |||||||||||||||
|
Netting across risk
types (1)
|
(4,977 | ) | (8,165 | ) | (4,023 | ) | (4,028 | ) | (21,193 | ) | ||||||||||
|
Subtotal
|
$ | 64,055 | (4) | $ | 116,460 | $ | 55,890 | $ | 47,409 | $ | 283,814 | |||||||||
|
Cross maturity
netting (2)
|
(37,087 | ) | ||||||||||||||||||
|
Cash collateral
netting (3)
|
(149,081 | ) | ||||||||||||||||||
|
Total
|
$ | 97,646 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
|||||||||||||||||
|
Risk Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 8,012 | $ | 18,360 | $ | 14,384 | $ | 19,041 | $ | 59,797 | ||||||||||
|
Credit derivatives
|
8,125 | 15,697 | 6,367 | 11,618 | 41,807 | |||||||||||||||
|
Currencies
|
14,467 | 9,080 | 3,464 | 1,842 | 28,853 | |||||||||||||||
|
Commodities
|
13,950 | 7,390 | 1,268 | 1,152 | 23,760 | |||||||||||||||
|
Equities
|
11,639 | 1,309 | 575 | 85 | 13,608 | |||||||||||||||
|
Netting across risk
types (1)
|
(4,977 | ) | (8,165 | ) | (4,023 | ) | (4,028 | ) | (21,193 | ) | ||||||||||
|
Subtotal
|
$ | 51,216 | (4) | $ | 43,671 | $ | 22,035 | $ | 29,710 | $ | 146,632 | |||||||||
|
Cross maturity
netting (2)
|
(37,087 | ) | ||||||||||||||||||
|
Cash collateral
netting (3)
|
(27,065 | ) | ||||||||||||||||||
|
Total
|
$ | 82,480 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across risk types within a maturity category, pursuant to credit support agreements. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories, pursuant to credit support agreements. | |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (4) | Includes fair values of OTC derivative assets and liabilities, maturing within six months, of $38.39 billion and $31.75 billion, respectively. |
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Table of Contents
OTC
Derivatives
(in millions)
(in millions)
| Assets | As of November 2008 | |||||||||||||||||||
|
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
|||||||||||||||||
|
Risk Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 16,220 | $ | 43,864 | $ | 35,050 | $ | 40,649 | $ | 135,783 | ||||||||||
|
Credit derivatives
|
10,364 | 45,596 | 20,110 | 13,788 | 89,858 | |||||||||||||||
|
Currencies
|
28,056 | 12,191 | 5,980 | 4,137 | 50,364 | |||||||||||||||
|
Commodities
|
13,660 | 12,717 | 1,175 | 1,681 | 29,233 | |||||||||||||||
|
Equities
|
17,830 | 4,742 | 3,927 | 1,061 | 27,560 | |||||||||||||||
|
Netting across risk
types (1)
|
(6,238 | ) | (9,160 | ) | (3,515 | ) | (3,802 | ) | (22,715 | ) | ||||||||||
|
Subtotal
|
$ | 79,892 | (4) | $ | 109,950 | $ | 62,727 | $ | 57,514 | $ | 310,083 | |||||||||
|
Cross maturity
netting (2)
|
(48,750 | ) | ||||||||||||||||||
|
Cash collateral
netting (3)
|
(137,160 | ) | ||||||||||||||||||
|
Total
|
$ | 124,173 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
|||||||||||||||||
|
Risk Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 8,004 | $ | 16,152 | $ | 17,456 | $ | 26,399 | $ | 68,011 | ||||||||||
|
Credit derivatives
|
6,591 | 20,958 | 10,301 | 13,610 | 51,460 | |||||||||||||||
|
Currencies
|
29,130 | 13,755 | 4,109 | 2,051 | 49,045 | |||||||||||||||
|
Commodities
|
12,685 | 10,391 | 1,575 | 827 | 25,478 | |||||||||||||||
|
Equities
|
14,016 | 4,741 | 1,751 | 320 | 20,828 | |||||||||||||||
|
Netting across risk
types (1)
|
(6,238 | ) | (9,160 | ) | (3,515 | ) | (3,802 | ) | (22,715 | ) | ||||||||||
|
Subtotal
|
$ | 64,188 | (4) | $ | 56,837 | $ | 31,677 | $ | 39,405 | $ | 192,107 | |||||||||
|
Cross maturity
netting (2)
|
(48,750 | ) | ||||||||||||||||||
|
Cash collateral
netting (3)
|
(34,009 | ) | ||||||||||||||||||
|
Total
|
$ | 109,348 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across risk types within a maturity category, pursuant to credit support agreements. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories, pursuant to credit support agreements. | |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (4) | Includes fair values of OTC derivative assets and liabilities, maturing within six months, of $56.72 billion and $51.26 billion, respectively. |
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Table of Contents
OTC
Derivatives
(in millions)
(in millions)
| Assets | As of December 2008 | |||||||||||||||||||
|
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
|||||||||||||||||
|
Risk Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 18,555 | $ | 52,533 | $ | 40,243 | $ | 45,283 | $ | 156,614 | ||||||||||
|
Credit derivatives
|
9,390 | 45,310 | 20,117 | 13,167 | 87,984 | |||||||||||||||
|
Currencies
|
22,357 | 13,143 | 6,337 | 5,948 | 47,785 | |||||||||||||||
|
Commodities
|
17,480 | 13,598 | 932 | 211 | 32,221 | |||||||||||||||
|
Equities
|
16,410 | 5,309 | 3,338 | 1,077 | 26,134 | |||||||||||||||
|
Netting across risk
types (1)
|
(4,670 | ) | (10,855 | ) | (5,224 | ) | (3,956 | ) | (24,705 | ) | ||||||||||
|
Subtotal
|
$ | 79,522 | (4) | $ | 119,038 | $ | 65,743 | $ | 61,730 | $ | 326,033 | |||||||||
|
Cross maturity
netting (2)
|
(48,014 | ) | ||||||||||||||||||
|
Cash collateral
netting (3)
|
(154,686 | ) | ||||||||||||||||||
|
Total
|
$ | 123,333 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
|||||||||||||||||
|
Risk Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 11,558 | $ | 20,772 | $ | 19,249 | $ | 29,759 | $ | 81,338 | ||||||||||
|
Credit derivatives
|
6,612 | 23,390 | 8,196 | 11,033 | 49,231 | |||||||||||||||
|
Currencies
|
20,821 | 13,773 | 4,854 | 1,971 | 41,419 | |||||||||||||||
|
Commodities
|
16,736 | 9,411 | 1,234 | 747 | 28,128 | |||||||||||||||
|
Equities
|
13,274 | 4,090 | 1,253 | 7 | 18,624 | |||||||||||||||
|
Netting across risk
types (1)
|
(4,670 | ) | (10,855 | ) | (5,224 | ) | (3,956 | ) | (24,705 | ) | ||||||||||
|
Subtotal
|
$ | 64,331 | (4) | $ | 60,581 | $ | 29,562 | $ | 39,561 | $ | 194,035 | |||||||||
|
Cross maturity
netting (2)
|
(48,014 | ) | ||||||||||||||||||
|
Cash collateral
netting (3)
|
(32,912 | ) | ||||||||||||||||||
|
Total
|
$ | 113,109 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across risk types within a maturity category, pursuant to credit support agreements. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories, pursuant to credit support agreements. | |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (4) | Includes fair values of OTC derivative assets and liabilities, maturing within six months, of $53.37 billion and $44.72 billion, respectively. |
In the tables above, for option contracts that require
settlement by delivery of an underlying derivative instrument,
the remaining contractual maturity is generally classified based
upon the maturity date of the underlying derivative instrument.
In those instances where the underlying instrument does not have
a maturity date or either counterparty has the right to settle
in cash, the remaining contractual maturity is generally based
upon the option expiration date.
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Table of Contents
The following table sets forth the distribution, by credit
rating, of our exposure with respect to OTC derivatives by
remaining contractual maturity, both before and after
consideration of the effect of collateral and netting
agreements. The categories shown reflect our internally
determined public rating agency equivalents:
OTC Derivative
Credit Exposure
(in millions)
(in millions)
| As of March 2009 | ||||||||||||||||||||||||||||||||
|
Exposure |
||||||||||||||||||||||||||||||||
|
Credit Rating |
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
Net of |
|||||||||||||||||||||||||||
|
Equivalent
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
Netting (2)
|
Exposure
|
Collateral
|
||||||||||||||||||||||||
|
AAA/Aaa
|
$ | 4,699 | $ | 6,734 | $ | 5,994 | $ | 2,964 | $ | 20,391 | $ | (8,178 | ) | $ | 12,213 | $ | 11,509 | |||||||||||||||
|
AA/Aa2
|
18,619 | 40,015 | 22,228 | 10,095 | 90,957 | (71,881 | ) | 19,076 | 16,025 | |||||||||||||||||||||||
|
A/A2
|
21,148 | 39,369 | 16,955 | 19,767 | 97,239 | (66,342 | ) | 30,897 | 25,220 | |||||||||||||||||||||||
|
BBB/Baa2
|
8,185 | 19,413 | 6,833 | 12,571 | 47,002 | (31,280 | ) | 15,722 | 10,358 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
8,734 | 9,922 | 3,568 | 1,652 | 23,876 | (8,116 | ) | 15,760 | 10,339 | |||||||||||||||||||||||
|
Unrated
|
2,670 | 1,007 | 312 | 360 | 4,349 | (371 | ) | 3,978 | 3,314 | |||||||||||||||||||||||
|
Total
|
$ | 64,055 | (1) | $ | 116,460 | $ | 55,890 | $ | 47,409 | $ | 283,814 | $ | (186,168 | ) | $ | 97,646 | $ | 76,765 | ||||||||||||||
| As of November 2008 | ||||||||||||||||||||||||||||||||
|
Exposure |
||||||||||||||||||||||||||||||||
|
Credit Rating |
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
Net of |
|||||||||||||||||||||||||||
|
Equivalent
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
Netting (2)
|
Exposure
|
Collateral
|
||||||||||||||||||||||||
|
AAA/Aaa
|
$ | 5,700 | $ | 7,000 | $ | 4,755 | $ | 2,726 | $ | 20,181 | $ | (6,765 | ) | $ | 13,416 | $ | 12,328 | |||||||||||||||
|
AA/Aa2
|
26,040 | 37,378 | 30,293 | 18,084 | 111,795 | (78,085 | ) | 33,710 | 29,438 | |||||||||||||||||||||||
|
A/A2
|
22,374 | 34,796 | 15,317 | 20,498 | 92,985 | (58,744 | ) | 34,241 | 28,643 | |||||||||||||||||||||||
|
BBB/Baa2
|
11,844 | 19,200 | 7,635 | 13,302 | 51,981 | (29,791 | ) | 22,190 | 16,155 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
13,161 | 10,403 | 4,035 | 2,711 | 30,310 | (12,515 | ) | 17,795 | 11,212 | |||||||||||||||||||||||
|
Unrated
|
773 | 1,173 | 692 | 193 | 2,831 | (10 | ) | 2,821 | 1,550 | |||||||||||||||||||||||
|
Total
|
$ | 79,892 | (1) | $ | 109,950 | $ | 62,727 | $ | 57,514 | $ | 310,083 | $ | (185,910 | ) | $ | 124,173 | $ | 99,326 | ||||||||||||||
| As of December 2008 | ||||||||||||||||||||||||||||||||
|
Exposure |
||||||||||||||||||||||||||||||||
|
Credit Rating |
0 - 12 |
1 - 5 |
5 - 10 |
10 Years |
Net of |
|||||||||||||||||||||||||||
|
Equivalent
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
Netting (2)
|
Exposure
|
Collateral
|
||||||||||||||||||||||||
|
AAA/Aaa
|
$ | 6,519 | $ | 8,097 | $ | 6,189 | $ | 3,404 | $ | 24,209 | $ | (9,411 | ) | $ | 14,798 | $ | 14,000 | |||||||||||||||
|
AA/Aa2
|
24,400 | 44,195 | 29,257 | 18,237 | 116,089 | (84,013 | ) | 32,076 | 28,262 | |||||||||||||||||||||||
|
A/A2
|
19,164 | 35,463 | 18,228 | 23,386 | 96,241 | (64,383 | ) | 31,858 | 24,289 | |||||||||||||||||||||||
|
BBB/Baa2
|
12,593 | 19,906 | 7,814 | 14,354 | 54,667 | (34,454 | ) | 20,213 | 13,424 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
14,477 | 10,575 | 4,089 | 1,949 | 31,090 | (10,376 | ) | 20,714 | 14,270 | |||||||||||||||||||||||
|
Unrated
|
2,369 | 802 | 166 | 400 | 3,737 | (63 | ) | 3,674 | 2,626 | |||||||||||||||||||||||
|
Total
|
$ | 79,522 | (1) | $ | 119,038 | $ | 65,743 | $ | 61,730 | $ | 326,033 | $ | (202,700 | ) | $ | 123,333 | $ | 96,871 | ||||||||||||||
| (1) | Includes fair values of OTC derivative assets, maturing within six months, of $38.39 billion, $56.72 billion and $53.37 billion as of March 2009, November 2008 and December 2008, respectively. |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories and the netting of cash collateral received, pursuant to credit support agreements. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate. |
Derivative transactions may also involve legal risks including
the risk that they are not authorized or appropriate for a
counterparty, that documentation has not been properly executed
or that executed agreements may not be enforceable against the
counterparty. We attempt to minimize these risks by obtaining
advice of counsel on the enforceability of agreements as well as
on the authority of a counterparty to effect the derivative
transaction. In addition, certain derivative transactions
(e.g., credit derivative contracts) involve the risk that
we may have difficulty obtaining, or be unable to obtain, the
underlying security or obligation in order to satisfy any
physical settlement requirement.
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Table of Contents
Liquidity and
Funding Risk
Liquidity is of critical importance to companies in the
financial services sector. Most failures of financial
institutions have occurred in large part due to insufficient
liquidity resulting from adverse circumstances. Accordingly,
Goldman Sachs has in place a comprehensive set of liquidity and
funding policies that are intended to maintain significant
flexibility to address both Goldman Sachs-specific and broader
industry or market liquidity events. Our principal objective is
to be able to fund Goldman Sachs and to enable our core
businesses to continue to generate revenues, even under adverse
circumstances.
We have implemented a number of policies according to the
following liquidity risk management framework:
| • | Excess Liquidity — We maintain substantial excess liquidity to meet a broad range of potential cash outflows in a stressed environment, including financing obligations. | |
| • | Asset-Liability Management — We seek to maintain secured and unsecured funding sources that are sufficiently long-term in order to withstand a prolonged or severe liquidity-stressed environment without having to rely on asset sales. | |
| • | Conservative Liability Structure — We seek to access funding across a diverse range of markets, products and counterparties, emphasize less credit-sensitive sources of funding and conservatively manage the distribution of funding across our entity structure. | |
| • | Crisis Planning — We base our liquidity and funding management on stress-scenario planning and maintain a crisis plan detailing our response to a liquidity-threatening event. |
Excess
Liquidity
Our most important liquidity policy is to
pre-fund
what we estimate will be our likely cash needs during a
liquidity crisis and hold such excess liquidity in the form of
unencumbered, highly liquid securities that may be sold or
pledged to provide
same-day
liquidity. This “Global Core Excess” is intended to
allow us to meet immediate obligations without needing to sell
other assets or depend on additional funding from
credit-sensitive
markets. We believe that this pool of excess liquidity provides
us with a resilient source of funds and gives us significant
flexibility in managing through a difficult funding environment.
Our Global Core Excess reflects the following principles:
| • | The first days or weeks of a liquidity crisis are the most critical to a company’s survival. | |
| • | Focus must be maintained on all potential cash and collateral outflows, not just disruptions to financing flows. Our businesses are diverse, and our cash needs are driven by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. | |
| • | During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms or availability of other types of secured financing may change. | |
| • | As a result of our policy to pre-fund liquidity that we estimate may be needed in a crisis, we hold more unencumbered securities and have larger unsecured debt balances than our businesses would otherwise require. We believe that our liquidity is stronger with greater balances of highly liquid unencumbered securities, even though it increases our unsecured liabilities and our funding costs. |
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Table of Contents
The size of our Global Core Excess is based on an internal
liquidity model together with a qualitative assessment of the
condition of the financial markets and of Goldman Sachs. Our
liquidity model identifies and estimates cash and collateral
outflows over a
short-term
horizon in a liquidity crisis, including, but not limited to:
| • | upcoming maturities of unsecured debt and letters of credit; | |
| • | potential buybacks of a portion of our outstanding negotiable unsecured debt and potential withdrawals of client deposits; | |
| • | adverse changes in the terms or availability of secured funding; | |
| • | derivatives and other margin and collateral outflows, including those due to market moves; | |
| • | potential cash outflows associated with our prime brokerage business; | |
| • | additional collateral that could be called in the event of a two-notch downgrade in our credit ratings; | |
| • | draws on our unfunded commitments not supported by William Street Funding Corporation (1); and | |
| • | upcoming cash outflows, such as tax and other large payments. |
The following table sets forth the average loan value (the
estimated amount of cash that would be advanced by
counterparties against these securities), as well as overnight
cash deposits, of our Global Core Excess:
|
Three Months |
Year Ended |
One Month |
||||||||||
| Ended March | November | Ended December | ||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
U.S. dollar-denominated
|
$ | 120,952 | $ | 78,048 | $ | 103,152 | ||||||
|
Non-U.S. dollar-denominated
|
42,789 | 18,677 | 36,196 | |||||||||
|
Total Global Core Excess
|
$ | 163,741 | $ | 96,725 | $ | 139,348 | ||||||
The
U.S. dollar-denominated
excess is comprised of only unencumbered U.S. government
securities, U.S. agency securities and highly liquid
U.S. agency
mortgage-backed
securities, all of which are eligible as collateral in Federal
Reserve open market operations, as well as overnight cash
deposits. Our
non-U.S. dollar-denominated
excess is comprised of only unencumbered French, German, United
Kingdom and Japanese government bonds and overnight cash
deposits in highly liquid currencies. We strictly limit our
Global Core Excess to this narrowly defined list of securities
and cash because we believe they are highly liquid, even in a
difficult funding environment. We do not believe that other
potential sources of excess liquidity, such as lower-quality
unencumbered securities or committed credit facilities, are as
reliable in a liquidity crisis.
We maintain our Global Core Excess to enable us to meet current
and potential liquidity requirements of our parent company,
Group Inc., and all of its subsidiaries. The amount of our
Global Core Excess is driven by our assessment of potential cash
and collateral outflows, regulatory obligations and the currency
and timing requirements of our global business model. In
addition, we recognize that our Global Core Excess held in a
regulated entity may not be available to our parent company or
other subsidiaries and therefore may only be available to meet
the potential liquidity requirements of that entity.
(1) The
Global Core Excess excludes liquid assets of $4.44 billion
held separately by William Street Funding Corporation. See
Note 8 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding the William Street credit
extension program.
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Table of Contents
In addition to our Global Core Excess, we have a significant
amount of other unencumbered securities as a result of our
business activities. These assets, which are located in the
U.S., Europe and Asia, include other government bonds,
high-grade
money market securities, corporate bonds and marginable
equities. We do not include these securities in our Global Core
Excess.
We maintain our Global Core Excess and other unencumbered assets
in an amount that, if pledged or sold, would provide the funds
necessary to replace at least 110% of our unsecured obligations
that are scheduled to mature (or where holders have the option
to redeem) within the next 12 months. We assume
conservative loan values that are based on
stress-scenario
borrowing capacity and we regularly review these assumptions
asset class by asset class. The estimated aggregate loan value
of our Global Core Excess, as well as overnight cash deposits,
and our other unencumbered assets averaged $196.54 billion,
$163.41 billion and $175.48 billion for the three
months ended March 2009, year ended November 2008 and
one month ended December 2008, respectively.
Asset-Liability
Management
We seek to maintain a highly liquid balance sheet and
substantially all of our inventory is
marked-to-market
daily. We utilize aged inventory limits for certain financial
instruments as a disincentive to our businesses to hold
inventory over longer periods of time. We believe that these
limits provide a complementary mechanism for ensuring
appropriate balance sheet liquidity in addition to our standard
position limits. Although our balance sheet fluctuates due to
client activity, market conventions and periodic market
opportunities in certain of our businesses, our total assets and
adjusted assets at financial statement dates are typically not
materially different from those occurring within our reporting
periods.
We seek to manage the maturity profile of our secured and
unsecured funding base such that we should be able to liquidate
our assets prior to our liabilities coming due, even in times of
prolonged or severe liquidity stress. We do not rely on
immediate sales of assets (other than our Global Core Excess) to
maintain liquidity in a distressed environment, although we
recognize orderly asset sales may be prudent or necessary in a
severe or persistent liquidity crisis.
In order to avoid reliance on asset sales, our goal is to ensure
that we have sufficient total capital (unsecured
long-term
borrowings plus total shareholders’ equity) to fund our
balance sheet for at least one year. The target amount of our
total capital is based on an internal liquidity model which
incorporates, among other things, the following
long-term
financing requirements:
| • | the portion of trading assets that we believe could not be funded on a secured basis in periods of market stress, assuming conservative loan values; | |
| • | goodwill and identifiable intangible assets, property, leasehold improvements and equipment, and other illiquid assets; | |
| • | derivative and other margin and collateral requirements; | |
| • | anticipated draws on our unfunded loan commitments; and | |
| • | capital or other forms of financing in our regulated subsidiaries that are in excess of their long-term financing requirements. See “— Conservative Liability Structure” below for a further discussion of how we fund our subsidiaries. |
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Table of Contents
Certain financial instruments may be more difficult to fund on a
secured basis during times of market stress. Accordingly, we
generally hold higher levels of total capital for these assets
than more liquid types of financial instruments. The following
table sets forth our aggregate holdings in these categories of
financial instruments:
| As of | ||||||||||||
|
March |
November |
December |
||||||||||
| 2009 | 2008 | 2008 | ||||||||||
| (in millions) | ||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
$ | 15,446 | $ | 22,393 | $ | 20,094 | ||||||
|
Bank loans and bridge
loans (1)
|
21,211 | 21,839 | 20,516 | |||||||||
|
Emerging market debt securities
|
1,357 | 2,827 | 1,605 | |||||||||
|
High-yield
and other debt obligations
|
10,137 | 9,998 | 10,598 | |||||||||
|
Private equity and real estate fund
investments (2)
|
14,644 | 18,171 | 17,012 | |||||||||
|
Emerging market equity securities
|
3,695 | 2,665 | 2,866 | |||||||||
|
ICBC ordinary
shares (3)
|
5,754 | 5,496 | 6,125 | |||||||||
|
SMFG convertible preferred stock
|
1,231 | 1,135 | 1,305 | |||||||||
|
Other restricted public equity securities
|
276 | 568 | 602 | |||||||||
|
Other investments in
funds (4)
|
2,625 | 2,714 | 2,581 | |||||||||
| (1) | Includes funded commitments and inventory held in connection with our origination and secondary trading activities. | |
| (2) | Includes interests in our merchant banking funds. Such amounts exclude assets related to consolidated investment funds of $1.11 billion, $1.16 billion and $1.15 billion as of March 2009, November 2008 and December 2008, respectively, for which Goldman Sachs does not bear economic exposure. | |
| (3) | Includes interests of $3.64 billion, $3.48 billion and $3.87 billion as of March 2009, November 2008 and December 2008, respectively, held by investment funds managed by Goldman Sachs. | |
| (4) | Includes interests in other investment funds that we manage. |
A significant portion of these assets are funded through secured
funding markets or nonrecourse financing. We focus on funding
these assets on a secured basis with long contractual maturities
to reduce refinancing risk in periods of market stress.
See Note 3 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for further information regarding the financial instruments we
hold.
Conservative
Liability Structure
We seek to structure our liabilities conservatively to reduce
refinancing risk and the risk that we may be required to redeem
or repurchase certain of our borrowings prior to their
contractual maturity.
We fund a substantial portion of our inventory on a secured
basis, which we believe provides Goldman Sachs with a more
stable source of liquidity than unsecured financing, as it is
less sensitive to changes in our credit due to the underlying
collateral. However, we recognize that the terms or availability
of secured funding, particularly overnight funding, can
deteriorate rapidly in a difficult environment. To help mitigate
this risk, we raise the majority of our funding for durations
longer than overnight. We seek longer terms for secured funding
collateralized by lower-quality assets, as we believe these
funding transactions may pose greater refinancing risk. The
weighted average life of our secured funding, excluding funding
collateralized by highly liquid securities, such as U.S.,
French, German, United Kingdom and Japanese government bonds,
and U.S. agency securities, exceeded 100 days as of
March 2009.
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Table of Contents
Our liquidity also depends, to an important degree, on the
stability of our
short-term
unsecured financing base. Accordingly, we prefer the use of
promissory notes (in which Goldman Sachs does not make a market)
over commercial paper, which we may repurchase prior to maturity
through the ordinary course of business as a market maker. As of
March 2009, our unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings, were $44.60 billion. See Note 6 to the
condensed consolidated financial statements in Part I,
Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our unsecured
short-term
borrowings.
We issue
long-term
borrowings as a source of total capital in order to meet our
long-term
financing requirements. The following table sets forth our
quarterly unsecured
long-term
borrowings maturity profile through the first quarter of 2015:
Unsecured
Long-Term
Borrowings Maturity Profile
($ in millions)
($ in millions)
The weighted average maturity of our unsecured
long-term
borrowings as of March 2009 was approximately seven years.
To mitigate refinancing risk, we seek to limit the principal
amount of debt maturing on any one day or during any week or
year. We swap a substantial portion of our
long-term
borrowings into
short-term
floating rate obligations in order to minimize our exposure to
interest rates and foreign exchange movements.
We issue substantially all of our unsecured debt without
provisions that would, based solely upon an adverse change in
our credit ratings, financial ratios, earnings, cash flows or
stock price, trigger a requirement for an early payment,
collateral support, change in terms, acceleration of maturity or
the creation of an additional financial obligation.
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Table of Contents
As of March 2009, our bank depository institution
subsidiaries had $44.50 billion in customer deposits,
including $30.00 billion of deposits from bank sweep
programs and $14.50 billion of certificates of deposit and
other time deposits with a weighted average maturity of three
years. Since September 2008, GS Bank USA has had access to
funding through the Federal Reserve Bank discount window. While
we do not rely on funding through the Federal Reserve Bank
discount window in our liquidity modeling and stress testing, we
maintain policies and procedures necessary to access this
funding.
We seek to maintain broad and diversified funding sources
globally for both secured and unsecured funding. We make
extensive use of the repurchase agreement and securities lending
markets, as well as other secured funding markets. In addition,
we issue debt through syndicated U.S. registered offerings,
U.S. registered and 144A
medium-term
note programs, offshore
medium-term
note offerings and other bond offerings, U.S. and
non-U.S. commercial
paper and promissory note issuances and other methods. We also
arrange for letters of credit to be issued on our behalf.
We seek to distribute our funding products through our own sales
force to a large, diverse global creditor base and we believe
that our relationships with our creditors are critical to our
liquidity. Our creditors include banks, governments, securities
lenders, pension funds, insurance companies, mutual funds and
individuals. We access funding in a variety of markets in the
Americas, Europe and Asia. We have imposed various internal
guidelines on creditor concentration, including the amount of
our commercial paper and promissory notes that can be owned and
letters of credit that can be issued by any single creditor or
group of creditors.
Since the latter half of 2008, we have been unable to raise
significant amounts of
long-term
unsecured debt in the public markets, other than as a result of
the issuance of securities guaranteed by the FDIC under the
TLGP. It is unclear when we will regain access to the public
long-term
unsecured debt markets on customary terms or whether any similar
program will be available after the TLGP’s scheduled
October 2009 expiration. However, we continue to have
access to
short-term
funding and to a number of sources of secured funding, both in
the private markets and through various government and central
bank sponsored initiatives.
Over the past year, a number of U.S. regulatory agencies
have taken steps to enhance the liquidity support available to
financial services companies such as Group Inc., GS&Co.,
GSI and GS Bank USA. Some of these steps include:
| • | The Federal Reserve Bank of New York established the Primary Dealer Credit Facility in March 2008 to provide overnight funding to primary dealers in exchange for a specified range of collateral. In September 2008, the eligible collateral was expanded to include all collateral eligible in tri-party repurchase arrangements with the major clearing banks, and the facility was made available to GSI. This facility is scheduled to expire on October 30, 2009. | |
| • | The Federal Reserve Board introduced a new Term Securities Lending Facility (TSLF) in March 2008, which extended the term for which the Federal Reserve Board will lend U.S. Treasury securities to primary dealers from overnight to 28 days and, in September 2008, expanded the types of assets that can be used as collateral under the TSLF to include all investment-grade debt securities (rather than just U.S. Treasury, agency and certain AAA-rated asset-backed securities). This facility is scheduled to expire on October 30, 2009. | |
| • | In October 2008, the Federal Reserve Board established the Commercial Paper Funding Facility (CPFF) to serve as a funding backstop to facilitate the issuance of term commercial paper by eligible issuers. Through the CPFF, the Federal Reserve Bank of New York will finance the purchase of unsecured and asset-backed highly rated, U.S. dollar-denominated, three-month commercial paper from eligible issuers through its primary dealers. The facility is scheduled to expire on October 30, 2009. Our available funding under the CPFF is approximately $11 billion. |
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Table of Contents
| • | The FDIC’s TLGP, which was established in October 2008, provides a guarantee of certain newly issued senior unsecured debt issued by eligible entities, including Group Inc. and GS Bank USA, as well as funds over $250,000 in non-interest-bearing transaction deposit accounts held by FDIC-insured banks (such as GS Bank USA). The debt guarantee is available, subject to limitations, for debt issued through October 31, 2009 and the deposit coverage lasts through December 31, 2009. We are able to have outstanding approximately $35 billion of debt under the TLGP that is issued prior to October 31, 2009. As of March 2009 and May 1, 2009, we had outstanding $29.84 billion of senior unsecured debt (comprised of $9.10 billion of short-term and $20.74 billion of long-term) and $27.96 billion of senior unsecured debt (comprised of $7.27 billion of short-term and $20.69 billion of long-term), respectively, under the TLGP. |
See “Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K
for a discussion of factors that could impair our ability to
access the capital markets.
Subsidiary Funding Policies. Substantially all
of our unsecured funding is raised by our parent company, Group
Inc. The parent company then lends the necessary funds to its
subsidiaries, some of which are regulated, to meet their asset
financing and capital requirements. In addition, the parent
company provides its regulated subsidiaries with the necessary
capital to meet their regulatory requirements. The benefits of
this approach to subsidiary funding include enhanced control and
greater flexibility to meet the funding requirements of our
subsidiaries. Funding is also raised at the subsidiary level
through secured funding and deposits.
Our intercompany funding policies are predicated on an
assumption that, unless legally provided for, funds or
securities are not freely available from a subsidiary to its
parent company or other subsidiaries. In particular, many of our
subsidiaries are subject to laws that authorize regulatory
bodies to block or limit the flow of funds from those
subsidiaries to Group Inc. Regulatory action of that kind could
impede access to funds that Group Inc. needs to make payments on
obligations, including debt obligations. As such, we assume that
capital or other financing provided to our regulated
subsidiaries is not available to our parent company or other
subsidiaries until the maturity of such financing. In addition,
we recognize that the Global Core Excess held in our regulated
entities may not be available to our parent company or other
subsidiaries and therefore may only be available to meet the
potential liquidity requirements of those entities.
We also manage our liquidity risk by requiring senior and
subordinated intercompany loans to have maturities equal to or
shorter than the maturities of the aggregate borrowings of the
parent company. This policy ensures that the subsidiaries’
obligations to the parent company will generally mature in
advance of the parent company’s
third-party
borrowings. In addition, many of our subsidiaries and affiliates
maintain unencumbered assets to cover their unsecured
intercompany borrowings (other than subordinated debt) in order
to mitigate parent company liquidity risk.
Group Inc. has provided substantial amounts of equity and
subordinated indebtedness, directly or indirectly, to its
regulated subsidiaries. For example, as of March 2009,
Group Inc. had $27.37 billion of such equity and
subordinated indebtedness invested in GS&Co., its principal
U.S. registered
broker-dealer;
$23.21 billion invested in GSI, a regulated U.K.
broker-dealer;
$2.61 billion invested in Goldman Sachs
Execution & Clearing, L.P., a U.S. registered
broker-dealer;
$3.88 billion invested in Goldman Sachs Japan Co., Ltd., a
regulated Japanese
broker-dealer;
and $19.65 billion invested in GS Bank USA, a regulated New
York State-chartered bank. Group Inc. also had
$75.61 billion of unsubordinated loans and
$19.04 billion of collateral provided to these entities as
of March 2009, as well as significant amounts of capital
invested in and loans to its other regulated subsidiaries.
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Crisis
Planning
In order to be prepared for a liquidity event, or a period of
market stress, we base our liquidity risk management framework
and our resulting funding and liquidity policies on conservative
stress-scenario
assumptions. Our planning incorporates several
market-based
and operational stress scenarios. We also periodically conduct
liquidity crisis drills to test our lines of communication and
backup funding procedures.
In addition, we maintain a liquidity crisis plan that specifies
an approach for analyzing and responding to a
liquidity-threatening event. The plan provides the framework to
estimate the likely impact of a liquidity event on Goldman Sachs
based on some of the risks identified above and outlines which
and to what extent liquidity maintenance activities should be
implemented based on the severity of the event.
Credit
Ratings
We rely upon the
short-term
and
long-term
debt capital markets to fund a significant portion of our
day-to-day
operations. The cost and availability of debt financing is
influenced by our credit ratings. Credit ratings are important
when we are competing in certain markets and when we seek to
engage in longer-term transactions, including OTC derivatives.
We believe our credit ratings are primarily based on the credit
rating agencies’ assessment of our liquidity, market,
credit and operational risk management practices, the level and
variability of our earnings, our capital base, our franchise,
reputation and management, our corporate governance and the
external operating environment. See “Risk Factors” in
Part I, Item 1A of our Annual Report on
Form 10-K
for a discussion of the risks associated with a reduction in our
credit ratings.
The following table sets forth our unsecured credit ratings
(excluding debt guaranteed by the FDIC under the TLGP) as of
March 2009:
| Short-Term Debt | Long-Term Debt | Subordinated Debt | Preferred Stock | |||||
|
Dominion Bond Rating Service Limited
|
R-1 (middle) | A (high) | A | A (low) | ||||
|
Fitch, Inc.
|
F1+ | A+ | A | A– | ||||
|
Moody’s Investors
Service
(1)
|
P-1 | A1 | A2 | A3 | ||||
|
Standard & Poor’s Ratings Services
|
A-1 | A | A– | BBB | ||||
|
Rating and Investment Information, Inc.
|
a-1+ | AA– | Not Applicable | Not Applicable |
| (1) | GS Bank USA has been assigned a Long-Term Issuer rating of Aa3 as well as a rating of Aa3 for Long-Term Bank Deposits and a rating of P-1 for Short-Term Bank Deposits. |
On January 27, 2009, Fitch Inc. lowered Group
Inc.’s ratings on
Long-Term
Debt (from AA– to A+), Subordinated Debt (from A+ to
A) and Preferred Stock (from A+ to A–). On
April 20, 2009, Dominion Bond Rating Service Limited
lowered Group Inc.’s ratings on Preferred Stock (from A
(low) to BBB) and retained its outlook of “negative.”
Based on our credit ratings as of March 2009, additional
collateral or termination payments pursuant to bilateral
agreements with certain counterparties of approximately
$941 million and $2.14 billion could have been called
by counterparties in the event of a
one-notch
and
two-notch
reduction, respectively, in our
long-term
credit ratings. In evaluating our liquidity requirements, we
consider additional collateral or termination payments that may
be required in the event of a
two-notch
reduction in our
long-term
credit ratings, as well as collateral that has not been called
by counterparties, but is available to them.
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Table of Contents
Cash
Flows
As a global financial institution, our cash flows are complex
and interrelated and bear little relation to our net earnings
and net assets and, consequently, we believe that traditional
cash flow analysis is less meaningful in evaluating our
liquidity position than the excess liquidity and
asset-liability
management policies described above. Cash flow analysis may,
however, be helpful in highlighting certain macro trends and
strategic initiatives in our businesses.
Three Months Ended March 2009. Our cash
and cash equivalents increased by $21.61 billion to
$35.42 billion at the end of the first quarter of 2009. We
raised $22.52 billion in net cash from operating and
financing activities, primarily in bank deposits and unsecured
long-term
borrowings. We used net cash of $913 million in our
investing activities.
Three Months Ended February 2008. Our
cash and cash equivalents increased by $333 million to
$10.62 billion at the end of the first quarter of 2008. We
raised $26.43 billion in net cash from financing
activities, primarily in bank deposits and unsecured
long-term
borrowings. We used net cash of $26.10 billion in our
operating and investing activities, primarily to capitalize on
trading and investing opportunities for our clients and
ourselves.
One Month Ended December 2008. Our cash
and cash equivalents decreased by $1.94 billion to
$13.81 billion at the end of the one month ended
December 2008. We raised $12.01 billion in net cash
from financing activities, primarily in unsecured
long-term
borrowings and bank deposits. We used net cash of
$13.95 billion in our operating and investing activities,
primarily to capitalize on trading and investing opportunities
for our clients and ourselves.
Recent Accounting
Developments
See Note 2 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for information regarding Recent Accounting Developments.
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Table of Contents
Cautionary
Statement Pursuant to the U.S. Private Securities
Litigation Reform Act of 1995
We have included or incorporated by reference in this Quarterly
Report on
Form 10-Q,
and from time to time our management may make, statements that
may constitute “forward-looking statements” within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts but instead represent only
our beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. It is
possible that our actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking
statements. For a discussion of some of the risks and important
factors that could affect our future results and financial
condition, see “Risk Factors” in Part I,
Item 1A of our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008 and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 of our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008.
Certain of the information regarding our capital ratios, as
calculated in accordance with Basel I, is based on certain
market risk measures that are under review by the Federal
Reserve Board. This information is subject to change as the
calculation of these ratios has not been reviewed with the
Federal Reserve Board, and these ratios may be revised in
subsequent filings.
Statements about our investment banking transaction backlog also
may constitute
forward-looking
statements. Such statements are subject to the risk that the
terms of these transactions may be modified or that they may not
be completed at all; therefore, the net revenues, if any, that
we actually earn from these transactions may differ, possibly
materially, from those currently expected. Important factors
that could result in a modification of the terms of a
transaction or a transaction not being completed include, in the
case of underwriting transactions, a decline or continued
weakness in general economic conditions, outbreak of
hostilities, volatility in the securities markets generally or
an adverse development with respect to the issuer of the
securities and, in the case of financial advisory transactions,
a decline in the securities markets, an inability to obtain
adequate financing, an adverse development with respect to a
party to the transaction or a failure to obtain a required
regulatory approval. For a discussion of other important factors
that could adversely affect our investment banking transactions,
see “Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008 and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 of our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008.
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk |
Quantitative and qualitative disclosures about market risk are
set forth under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Market Risk” in Part I, Item 2 above.
| Item 4: | Controls and Procedures |
As of the end of the period covered by this report, an
evaluation was carried out by Goldman Sachs’ management,
with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the U.S. Securities Exchange Act of 1934 (Exchange
Act)). Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that these disclosure
controls and procedures were effective as of the end of the
period covered by this report. In addition, no change in our
internal control over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) occurred during our most recent fiscal
quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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Table of Contents
PART II:
OTHER INFORMATION
| Item 1: | Legal Proceedings |
The following supplements and amends our discussion set forth
under Item 3 “Legal Proceedings” in our Annual
Report on
Form 10-K
for the fiscal year ended November 28, 2008.
IPO Process
Matters
In the lawsuits alleging that the prospectuses for certain
offerings violated the federal securities laws by failing to
disclose the existence of alleged arrangements to
“tie” allocations to higher customer brokerage
commission rates as well as purchase orders in the aftermarket,
on April 2, 2009, the parties entered into a
definitive settlement agreement, subject to court approval.
In the actions asserting violations of, and seeking
short-swing
profit recovery under, Section 16 of the Exchange Act, the
district court granted defendants’ motions to dismiss by a
decision dated March 12, 2009. On
March 31, 2009, plaintiff appealed from the dismissal
order.
In the lawsuit brought by an official committee of unsecured
creditors on behalf of eToys, Inc., by a decision dated
February 10, 2009, the court permitted Plaintiff to
amend the complaint and denied GS&Co.’s cross-motion
to dismiss.
Research
Independence Matters
In the lawsuit alleging that Group Inc., GS&Co. and Henry
M. Paulson, Jr. violated the federal securities laws in
connection with the firm’s research activities, the Goldman
Sachs defendants’ petition for review of the district
court’s class certification ruling was denied by the
U.S. Court of Appeals for the Second Circuit on
March 19, 2009.
Enron Litigation
Matters
In the actions seeking to recover as fraudulent transfers
and/or
preferences payments by Enron Corp. in repurchasing its
commercial paper, the settlement became final and was
consummated.
Specialist
Matters
By a decision dated March 14, 2009, the district court
granted plaintiffs’ motion for class certification. On
April 13, 2009, defendants filed a petition with the
U.S. Court of Appeals for the Second Circuit seeking review
of the certification ruling.
Treasury
Matters
On February 2, 2009, GS&Co. renewed its motion
for summary judgment as to the remaining claims.
Executive
Compensation Litigation
In the action relating to Group Inc.’s 2007 proxy
statement, by a decision dated December 19, 2008, the
district court granted defendants’ motion to dismiss.
Plaintiff appealed on January 13, 2009.
In the action relating to Group Inc.’s 2008 proxy
statement, defendants moved to dismiss on
April 6, 2009.
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Table of Contents
On March 24, 2009, the same plaintiff filed an action
in New York Supreme Court, New York County against Group Inc.,
its directors and certain senior executives alleging violation
of Delaware statutory and common law in connection with
substantively similar allegations regarding stock option awards.
On April 14, 2009, Group Inc. removed the action to
the U.S. District Court for the Southern District of New
York and has moved to transfer to the district court judge
presiding over the other actions described in this section and
to dismiss.
Washington Mutual
Securities Litigation
On December 8, 2008, the underwriter defendants
including GS&Co. moved to dismiss.
IndyMac
Pass-Through Certificates Litigation
GS&Co. is among numerous underwriters named as defendants
in a putative securities class action filed on
January 20, 2009 in California state court and removed
to the U.S. District Court for the Central District of
California on March 4, 2009. As to the underwriters,
plaintiffs allege that the offering documents in connection with
various securitizations of
mortgage-related
assets violated the disclosure requirements of the federal
securities laws. The defendants include IndyMac-related entities
formed in connection with the securitizations, the underwriters
of the offerings, certain ratings agencies which evaluated the
credit quality of the securities, and certain former officers
and directors of IndyMac affiliates. GS&Co. underwrote
approximately $2.94 billion principal amount of the
securities at issue in the complaint.
On July 11, 2008, IndyMac Bank was placed under a
Federal Deposit Insurance Company receivership, and on
July 31, 2008, IndyMac Bancorp, Inc. filed for
Chapter 7 bankruptcy in the U.S. Bankruptcy Court in
Los Angeles, California.
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Table of Contents
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds |
The table below sets forth the information with respect to
purchases made by or on behalf of Group Inc. or any
“affiliated purchaser” (as defined in
Rule 10b-18(a)(3)
under the Exchange Act), of our common stock during the four
months ended March 27, 2009.
|
Total Number of |
Maximum Number |
|||||||||||||||
|
Average |
Shares Purchased |
of Shares That May |
||||||||||||||
|
Total Number |
Price |
as Part of Publicly |
Yet Be Purchased |
|||||||||||||
|
of Shares |
Paid per |
Announced Plans |
Under the Plans or |
|||||||||||||
|
Period
|
Purchased
|
Share
|
or
Programs (1)
|
Programs (1)
|
||||||||||||
|
Month #1
|
— | — | — | 60,852,478 | ||||||||||||
| (November 29, 2008 to December 26, 2008) | ||||||||||||||||
|
Month #2
|
— | — | — | 60,852,478 | ||||||||||||
| (December 27, 2008 to January 30, 2009) | ||||||||||||||||
|
Month #3
|
14,372 | (3) | $ | 84.50 | (3) | 14,372 | (3) | 60,838,106 | ||||||||
| (January 31, 2009 to February 27, 2009) | ||||||||||||||||
|
Month #4
|
— | — | — | 60,838,106 | ||||||||||||
| (February 28, 2009 to March 27, 2009) | ||||||||||||||||
|
Total (2)
|
14,372 | 14,372 | ||||||||||||||
| (1) | On March 21, 2000, we announced that our board of directors had approved a repurchase program, pursuant to which up to 15 million shares of our common stock may be repurchased. This repurchase program was increased by an aggregate of 280 million shares by resolutions of our board of directors adopted on June 18, 2001, March 18, 2002, November 20, 2002, January 30, 2004, January 25, 2005, September 16, 2005, September 11, 2006 and December 17, 2007. We use our share repurchase program to help maintain the appropriate level of common equity and to substantially offset increases in share count over time resulting from employee share-based compensation. Prior to October 28, 2011, unless we have redeemed all the preferred stock issued to the U.S. Treasury on October 28, 2008 or unless the U.S. Treasury has transferred all the preferred stock to a third party, subject to limited exceptions, the consent of the U.S. Treasury will be required for us to repurchase our common stock in an aggregate amount greater than the increase in the number of diluted shares outstanding (as reported in our Quarterly Report on Form 10-Q for the three months ended August 29, 2008) resulting from the grant, vesting or exercise of equity-based compensation to employees and equitably adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction. | |
| The repurchase program is effected primarily through regular open-market purchases, the amounts and timing of which are determined primarily by our current and projected capital positions (i.e., comparisons of our desired level of capital to our actual level of capital) but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock, in each case subject to the limit described in the prior paragraph. The total remaining authorization under the repurchase program was 60,838,106 shares as of April 24, 2009; the repurchase program has no set expiration or termination date. | ||
| (2) | Goldman Sachs generally does not repurchase shares of its common stock as part of the repurchase program during self-imposed “black-out” periods, which run from the last two weeks of a fiscal quarter through and including the date of the earnings release for such quarter. | |
| (3) | Relates to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business. |
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Table of Contents
| Item 6: | Exhibits |
| Exhibits: | ||||
| 10 | .1 | General Guarantee Agreement, dated December 1, 2008, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman Sachs Bank USA (incorporated by reference to Exhibit 4.80 to the Registrant’s Post-Effective Amendment No. 2 to Form S-3, filed March 19, 2009). | ||
| 12 | .1 | Statement re: Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | ||
| 15 | .1 | Letter re: Unaudited Interim Financial Information. | ||
| 31 | .1 | Rule 13a-14(a) Certifications. | ||
| 32 | .1 | Section 1350 Certifications. | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE GOLDMAN SACHS GROUP, INC.
| By: |
/s/ David
A. Viniar
|
Name: David A. Viniar
| Title: | Chief Financial Officer |
| By: |
/s/ Sarah
E. Smith
|
Name: Sarah E. Smith
| Title: | Principal Accounting Officer |
Date: May 5, 2009
148