GOLDMAN SACHS GROUP INC
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For the fiscal year ended
December 31, 2009
|
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.) |
|
|
200 West Street
New York, N.Y. |
10282
(Zip Code) |
|
| (Address of principal executive offices) |
(212) 902-1000
(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class:
|
Name of each exchange on which registered: | |
|
Common stock, par value $.01 per share
|
New York Stock Exchange | |
|
Depositary Shares, Each Representing 1/1,000th Interest in a
Share of Floating Rate
Non-Cumulative
Preferred Stock, Series A
|
New York Stock Exchange | |
|
Depositary Shares, Each Representing 1/1,000th Interest in a
Share of 6.20%
Non-Cumulative
Preferred Stock, Series B
|
New York Stock Exchange | |
|
Depositary Shares, Each Representing 1/1,000th Interest in a
Share of Floating Rate
Non-Cumulative
Preferred Stock, Series C
|
New York Stock Exchange | |
|
Depositary Shares, Each Representing 1/1,000th Interest in a
Share of Floating Rate
Non-Cumulative
Preferred Stock, Series D
|
New York Stock Exchange | |
|
5.793%
Fixed-to-Floating
Rate Normal Automatic Preferred Enhanced Capital Securities of
Goldman Sachs Capital II (and Registrant’s guarantee with
respect thereto)
|
New York Stock Exchange | |
|
Floating Rate Normal Automatic Preferred Enhanced Capital
Securities of Goldman Sachs Capital III (and Registrant’s
guarantee with respect thereto)
|
New York Stock Exchange | |
|
Medium-Term
Notes, Series B, Index-Linked Notes due February 2013;
Index-Linked Notes due April 2013; Index-Linked Notes due
May 2013; Index-Linked Notes due 2010; and Index-Linked
Notes due 2011
|
NYSE Alternext US | |
|
Medium-Term
Notes, Series B, Floating Rate Notes due 2011
|
New York Stock Exchange | |
|
Medium-Term
Notes, Series A, Index-Linked Notes due 2037 of GS Finance
Corp. (and Registrant’s guarantee with respect thereto)
|
NYSE Arca | |
|
Medium-Term
Notes, Series B, Index-Linked Notes due 2037
|
NYSE Arca | |
|
Medium-Term
Notes, Series D, 7.50% Notes due 2019
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes
x
No
o
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes
o
No
x
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.
Yes
x
No
o
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
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of the Annual Report on
Form 10-K
or any amendment to the Annual Report on
Form 10-K.
x
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 (Do not check if a smaller reporting
company)
o
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).
Yes
o
No
x
As of
June 26, 2009, the aggregate market value of the
common stock of the registrant held by
non-affiliates
of the registrant was approximately $73.9 billion.
As of
February 12, 2010, there were 526,251,090 shares
of the registrant’s common stock outstanding.
Documents
incorporated by reference:
Portions of The
Goldman Sachs Group, Inc.’s Proxy Statement for its 2010
Annual Meeting of Shareholders to be held on
May 7, 2010 are incorporated by reference in the
Annual Report on
Form 10-K
in response to Part III, Items 10, 11, 12, 13 and 14.
THE GOLDMAN SACHS
GROUP, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
Table of Contents
PART I
| Item 1. | Business |
Introduction
Goldman Sachs is a leading global investment banking, securities
and investment management firm that provides a wide range of
financial services to a substantial and diversified client base
that includes corporations, financial institutions, governments
and
high-net-worth
individuals. On May 7, 1999, we converted from a
partnership to a corporation and completed an initial public
offering of our common stock. The Goldman Sachs Group, Inc.
(Group Inc.) is a bank holding company and a financial
holding company regulated by the Board of Governors of the
Federal Reserve System (Federal Reserve Board) under the
U.S. Bank Holding Company Act of 1956 (BHC Act). Our
depository institution subsidiary, Goldman Sachs Bank USA (GS
Bank USA), is a New York State-chartered bank.
Our activities are divided into three segments:
(i) Investment Banking, (ii) Trading and Principal
Investments and (iii) Asset Management and Securities
Services.
All references to 2009, 2008 and 2007 refer to our fiscal years
ended, or the dates, as the context requires,
December 31, 2009, November 28, 2008 and
November 30, 2007, respectively. When we use the terms
“Goldman Sachs,” “the firm,” “we,”
“us” and “our,” we mean Group Inc., a
Delaware corporation, and its consolidated subsidiaries.
References herein to this Annual Report on
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
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 Part II,
Item 8 of this Annual Report on
Form 10-K.
In April 2009, the Board of Directors of Group Inc.
approved a change in the firm’s fiscal year-end from the
last Friday of December to December 31. Fiscal 2009 began
on December 27, 2008 and ended on
December 31, 2009.
Financial information concerning our business segments and
geographic regions for each of 2009, 2008 and 2007 is set forth
in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” the consolidated
financial statements and the notes thereto, and the supplemental
financial information, which are in Part II, Items 7,
7A and 8 of this Annual Report on
Form 10-K.
Our internet address is
www.gs.com
and the investor
relations section of our web site is located at
www.gs.com/shareholders
. We make available free of
charge, on or through the investor relations section of our web
site, annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the U.S. Securities Exchange
Act of 1934 (Exchange Act), as well as proxy statements, as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the U.S. Securities and
Exchange Commission. Also posted on our web site, and available
in print upon request of any shareholder to our Investor
Relations Department, are our certificate of incorporation and
by-laws, charters for our Audit Committee, Compensation
Committee, and Corporate Governance and Nominating Committee,
our Policy Regarding Director Independence Determinations, our
Policy on Reporting of Concerns Regarding Accounting and Other
Matters, our Corporate Governance Guidelines and our Code of
Business Conduct and Ethics governing our directors, officers
and employees. Within the time period required by the SEC, we
will post on our web site any amendment to the Code of Business
Conduct and Ethics and any waiver applicable to any executive
officer, director or senior financial officer (as defined in the
Code). In addition, our web site includes information concerning
purchases and sales of our equity securities by our executive
officers and directors, as well as disclosure relating to
certain
non-GAAP
financial measures (as defined in the SEC’s
Regulation G) that we may make public orally,
telephonically, by webcast, by broadcast or by similar means
from time to time.
Our Investor Relations Department can be contacted at The
Goldman Sachs Group, Inc., 200 West Street, 19th Floor, New
York, New York 10282, Attn: Investor Relations, telephone:
212-902-0300,
e-mail:
gs-investor-relations@gs.com
.
1
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 Annual
Report on
Form 10-K,
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. These
statements include statements other than historical information
or statements of current condition and may relate to our future
plans and objectives and results, among other things, and may
also include our belief regarding the effect of various legal
proceedings, as set forth under “Legal Proceedings” in
Part I, Item 3 of this Annual Report on
Form 10-K,
as well as statements about the objectives and effectiveness of
our risk management and liquidity policies, statements about
trends in or growth opportunities for our businesses, statements
about our future status, activities or reporting under
U.S. or
non-U.S. banking
and financial regulation, and statements about our investment
banking transaction backlog. By identifying these statements for
you in this manner, we are alerting you to the possibility that
our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition
indicated in these forward-looking statements. Important factors
that could cause our actual results and financial condition to
differ from those indicated in the forward-looking statements
include, among others, those discussed below and under
“Risk Factors” in Part I, Item 1A of this
Annual Report on
Form 10-K.
In the case of statements about our investment banking
transaction backlog, 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
this Annual Report on
Form 10-K.
2
Table of Contents
Segment Operating
Results
(in millions)
(in millions)
| Year Ended | ||||||||||||||
|
December
|
November
|
November
|
||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||
|
Investment
|
Net revenues | $ | 4,797 | $ | 5,185 | $ | 7,555 | |||||||
|
Banking
|
Operating expenses | 3,527 | 3,143 | 4,985 | ||||||||||
| Pre-tax earnings | $ | 1,270 | $ | 2,042 | $ | 2,570 | ||||||||
|
Trading and Principal
|
Net revenues | $ | 34,373 | $ | 9,063 | $ | 31,226 | |||||||
|
Investments
|
Operating expenses | 17,053 | 11,808 | 17,998 | ||||||||||
| Pre-tax earnings/(loss) | $ | 17,320 | $ | (2,745 | ) | $ | 13,228 | |||||||
|
Asset Management and
|
Net revenues | $ | 6,003 | $ | 7,974 | $ | 7,206 | |||||||
|
Securities Services
|
Operating expenses | 4,660 | 4,939 | 5,363 | ||||||||||
| Pre-tax earnings | $ | 1,343 | $ | 3,035 | $ | 1,843 | ||||||||
|
Total
|
Net revenues | $ | 45,173 | $ | 22,222 | $ | 45,987 | |||||||
| Operating expenses (1) | 25,344 | 19,886 | 28,383 | |||||||||||
| Pre-tax earnings | $ | 19,829 | $ | 2,336 | $ | 17,604 | ||||||||
| (1) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $104 million, $(4) million and $37 million for the years ended December 2009, November 2008 and November 2007, respectively, that have not been allocated to our segments. |
3
Table of Contents
Where We Conduct
Business
As of December 31, 2009, we operated offices in over
30 countries and 42% of our 32,500 total staff were based
outside the Americas (which includes the countries in North and
South America). In 2009, we derived 44% of our net revenues
outside of the Americas. See geographic information in
Note 18 to the consolidated financial statements in
Part II, Item 8 of this Annual Report on
Form 10-K.
Our clients are located worldwide, and we are an active
participant in financial markets around the world. We have
developed and continue to build strong investment banking
relationships in new and developing markets. We also continue to
expand our presence throughout these markets to invest
strategically when opportunities arise and to work more closely
with our private wealth and asset management clients in these
regions. Our global reach is illustrated by the following:
| • | we are a member of and an active participant in most of the world’s major stock, options and futures exchanges and marketplaces; | |
| • | we are a primary dealer in many of the largest government bond markets around the world; | |
| • | we have interbank dealer status in currency markets around the world; | |
| • | we are a member of or have relationships with major commodities exchanges worldwide; and | |
| • | we have commercial banking or deposit-taking institutions organized or operating in the United States, the United Kingdom, Ireland, Brazil, Switzerland, Germany, France, Russia and South Korea. |
Our businesses are supported by our Global Investment Research
division, which, as of December 2009, provided research
coverage of more than 3,000 companies worldwide and over
45 national economies, and maintained a presence in
locations around the world.
4
Table of Contents
Business
Segments
The primary products and activities of our business segments are
set forth in the following chart:
| Business Segment/ Component | Primary Products and Activities | ||
|
Investment Banking:
|
|||
|
Financial Advisory
|
• Mergers and acquisitions advisory services
|
||
|
• Financial restructuring advisory services
|
|||
|
Underwriting
|
• Equity and debt underwriting
|
||
|
Trading and Principal Investments:
|
|||
|
Fixed Income, Currency and Commodities
|
• Commodities and commodity derivatives,
including power generation and related activities
|
||
|
• Credit products, including trading and
investing in credit derivatives, investment-grade corporate
securities, high-yield securities, bank and secured loans,
municipal securities, emerging market and distressed debt,
public and private equity securities and real estate
|
|||
|
• Currencies and currency derivatives
|
|||
|
• Interest rate products, including interest
rate derivatives, global government securities and money market
instruments, including matched book positions
|
|||
|
• Mortgage-related securities and loan products
and other asset-backed instruments
|
|||
|
Equities
|
• Equity securities and derivatives
|
||
|
• Equities and options exchange-based
market-making activities
|
|||
|
• Securities, futures and options clearing
services
|
|||
|
• Insurance activities
|
|||
|
Principal Investments
|
• Principal investments in connection with
merchant banking activities
|
||
|
• Investment in the ordinary shares of
Industrial and Commercial Bank of China Limited
|
|||
|
Asset Management and Securities Services:
|
|||
|
Asset Management
|
• Investment advisory services, financial
planning and investment products (primarily through separately
managed accounts and commingled vehicles) across all major asset
classes, including money markets, fixed income, equities and
alternative investments (including hedge funds, private equity,
real estate, currencies, commodities and asset allocation
strategies), for institutional and individual investors
(including
high-net-worth
clients, as well as retail clients through third-party channels)
|
||
|
• Management of merchant banking funds
|
|||
|
Securities Services
|
• Prime brokerage
|
||
|
• Financing services
|
|||
|
• Securities lending
|
|||
5
Table of Contents
Investment
Banking
Investment Banking represented 11% of 2009 net revenues. We
provide a broad range of investment banking services to a
diverse group of corporations, financial institutions,
investment funds, governments and individuals and seek to
develop and maintain
long-term
relationships with these clients as their lead investment bank.
Our current structure, which is organized by regional, industry
and product groups, seeks to combine client-focused investment
bankers with execution and industry expertise. We continually
assess and adapt our organization to meet the demands of our
clients in each geographic region. Through our commitment to
teamwork, we believe that we provide services in an integrated
fashion for the benefit of our clients.
Our goal is to make available to our clients the entire
resources of the firm in a seamless fashion, with investment
banking serving as “front of the house.” To accomplish
this objective, we focus on coordination among our equity and
debt underwriting activities and our corporate risk and
liability management activities. This coordination is intended
to assist our investment banking clients in managing their asset
and liability exposures and their capital.
Our Investment Banking segment is divided into two components:
Financial Advisory and Underwriting.
Financial
Advisory
Financial Advisory includes advisory assignments with respect to
mergers and acquisitions, divestitures, corporate defense
activities, restructurings and
spin-offs.
Our mergers and acquisitions capabilities are evidenced by our
significant share of assignments in large, complex transactions
for which we provide multiple services, including
“one-stop”
acquisition financing and cross-border structuring expertise, as
well as services in other areas of the firm, such as interest
rate and currency hedging. In particular, a significant number
of the loan commitments and bank and bridge loan facilities that
we enter into arise in connection with our advisory assignments.
Underwriting
Underwriting includes public offerings and private placements of
a wide range of securities and other financial instruments,
including common and preferred stock, convertible and
exchangeable securities,
investment-grade
debt,
high-yield
debt, sovereign and emerging market debt, municipal debt, bank
loans,
asset-backed
securities and real estate-related securities, such as
mortgage-related
securities and the securities of real estate investment trusts.
Equity Underwriting.
Equity underwriting has
been a
long-term
core strength of Goldman Sachs. As with mergers and
acquisitions, we have been particularly successful in winning
mandates for large, complex transactions. We believe our
leadership in worldwide initial public offerings and worldwide
public common stock offerings reflects our expertise in complex
transactions, prior experience and distribution capabilities.
Debt Underwriting.
We engage in the
underwriting and origination of various types of debt
instruments, including
investment-grade
debt securities,
high-yield
debt securities, bank and bridge loans and emerging market debt
securities, which may be issued by, among others, corporate,
sovereign and agency issuers. In addition, we underwrite and
originate structured securities, which include
mortgage-related
securities and other
asset-backed
securities and collateralized debt obligations.
6
Table of Contents
Trading and
Principal Investments
Trading and Principal Investments represented 76% of 2009 net
revenues. Trading and Principal Investments facilitates client
transactions with a diverse group of corporations, financial
institutions, investment funds, governments and individuals
through market making in, trading of and investing in fixed
income and equity products, currencies, commodities and
derivatives on these products. We also take proprietary
positions on certain of these products. In addition, we engage
in
market-making
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.
To meet the needs of our clients, Trading and Principal
Investments is diversified across a wide range of products. We
believe our willingness and ability to take risk to facilitate
client transactions distinguishes us from many of our
competitors and substantially enhances our client relationships.
Our Trading and Principal Investments segment is divided into
three components: Fixed Income, Currency and Commodities;
Equities; and Principal Investments.
Fixed Income,
Currency and Commodities and Equities
Fixed Income, Currency and Commodities (FICC) and Equities are
large and diversified operations through which we assist clients
with their investing and trading strategies and also engage in
proprietary trading and investing activities.
In our client-driven businesses, FICC and Equities strive to
deliver
high-quality
service by offering broad
market-making
and market knowledge to our clients on a global basis. In
addition, we use our expertise to take positions in markets, by
committing capital and taking risk, to facilitate client
transactions and to provide liquidity. Our willingness to make
markets, commit capital and take risk in a broad range of fixed
income, currency, commodity and equity products and their
derivatives is crucial to our client relationships and to
support our underwriting business by providing secondary market
liquidity.
We generate trading net revenues from our client-driven
businesses in three ways:
| • | First, in large, highly liquid markets, we undertake a high volume of transactions for modest spreads and fees. | |
| • | Second, by capitalizing on our strong relationships and capital position, we undertake transactions in less liquid markets where spreads and fees are generally larger. | |
| • | Finally, we structure and execute transactions that address complex client needs. |
Our FICC and Equities businesses operate in close coordination
to provide clients with services and cross-market knowledge and
expertise.
In our proprietary activities in both FICC and Equities, we
assume a variety of risks and devote resources to identify,
analyze and benefit from these exposures. We capitalize on our
analytical models to analyze information and make informed
trading judgments, and we seek to benefit from perceived
disparities in the value of assets in the trading markets and
from macroeconomic and issuer-specific trends.
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. FICC has five principal
businesses: commodities; credit products; currencies; interest
rate products, including money market instruments; and
mortgage-related
securities and loan products and other
asset-backed
instruments.
7
Table of Contents
Commodities.
We make markets in and trade a
wide variety of commodities, commodity derivatives and interests
in commodity-related assets, including oil and oil products,
metals, natural gas and electricity, coal and agricultural
products. As part of our commodities business, we acquire and
dispose of interests in, and engage in the development and
operation of, electric power generation facilities and related
activities.
Credit Products.
We make markets in and trade
a broad array of credit and
credit-linked
products all over the world, including credit derivatives,
investment-grade
corporate securities,
high-yield
securities, bank and secured loans (origination and trading),
municipal securities, and emerging market and distressed debt.
For example, we enter, as principal, into complex structured
transactions designed to meet client needs.
In addition, we provide credit through bridge and other loan
facilities to a broad range of clients. 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. As part of our ongoing credit origination
activities, we may seek to reduce our credit risk on commitments
by syndicating all or substantial portions of commitments to
other investors or, upon funding, by securitizing the positions
through investment vehicles sold to other investors.
Underwriting fees from syndications of these commitments are
recorded in debt underwriting in our Investment Banking segment.
However, to the extent that we recognize losses on these
commitments, such losses are recorded within our Trading and
Principal Investments segment, net of any related underwriting
fees. See Note 8 to the consolidated financial statements
in Part II, Item 8 of this Annual Report on
Form 10-K
for additional information on our commitments.
Our credit products business includes making significant
long-term
and
short-term
investments for our own account (sometimes investing together
with our merchant banking funds) in a broad array of asset
classes (including distressed debt) globally. We
opportunistically invest in debt and equity securities and
secured loans, and in private equity, real estate and other
assets.
Currencies.
We act as a dealer in foreign
exchange and trade in most currencies on exchanges and in cash
and derivative markets globally.
Interest Rate Products.
We make markets in and
trade a variety of interest rate products, including interest
rate swaps, options and other derivatives, and government bonds,
as well as money market instruments, such as commercial paper,
treasury bills, repurchase agreements and other highly liquid
securities and instruments. This business includes our matched
book, which consists of
short-term
collateralized financing transactions.
Mortgage Business.
We make markets in and
trade commercial and residential
mortgage-related
securities and loan products and other
asset-backed
and derivative instruments. We acquire positions in these
products for trading purposes as well as for securitization or
syndication. We also originate and service commercial and
residential mortgages.
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.
Equities includes two principal businesses: our client franchise
business and principal strategies. We also engage in
exchange-based
market-making
activities and in insurance activities.
8
Table of Contents
Client Franchise Business.
Our client
franchise business includes primarily client-driven activities
in the shares, equity derivatives and convertible securities
markets. These activities also include clearing client
transactions on major stock, options and futures exchanges
worldwide, as well as our exchange-based options
market-making
business. Our client franchise business increasingly involves
providing our clients with access to electronic
“low-touch”
equity trading platforms, and electronic trades account for the
majority of our client trading activity in this business.
However, a majority of our net revenues in this business
continues to be derived from our traditional
“high-touch”
handling of more complex trades. We expect both types of trading
activities to remain important components of our client
franchise business.
We trade equity securities and
equity-related
products, including convertible securities, options, futures and
over-the-counter
(OTC) derivative instruments, on a global basis as an agent, as
a market maker or otherwise as a principal. As a principal, we
facilitate client transactions, often by committing capital and
taking risk, to provide liquidity to clients with large blocks
of stocks or options. For example, we are active in the
execution of large block trades. We also execute transactions as
agent and offer clients direct electronic access to trading
markets.
Our derivatives business structures and executes derivatives on
indices, industry groups, financial measures and individual
company stocks. We develop strategies and provide information
with respect to portfolio hedging and restructuring and asset
allocation transactions. We also work with our clients to create
specially tailored instruments to enable sophisticated investors
to undertake hedging strategies and to establish or liquidate
investment positions. We are one of the leading participants in
the trading and development of equity derivative instruments. In
listed options, we are registered as a primary or lead market
maker or otherwise make markets on the International Securities
Exchange, the Chicago Board Options Exchange, NYSE Arca, the
Boston Options Exchange, the Philadelphia Stock Exchange and
NYSE Alternext US. In futures and options on futures, we are
market makers on the Chicago Mercantile Exchange and the Chicago
Board of Trade.
Principal Strategies.
Our principal strategies
business is a multi-strategy investment business that invests
and trades our capital across global public markets. Investment
strategies include fundamental equities and relative value
trading (which involves trading strategies designed to take
advantage of perceived discrepancies in the relative value of
financial instruments, including equity,
equity-related
and debt instruments), event-driven investments (which focus on
event-oriented special situations such as corporate
restructurings, bankruptcies, recapitalizations, mergers and
acquisitions, and legal and regulatory events), convertible bond
trading and various types of volatility trading.
Exchange-Based
Market-Making
Activities.
Our exchange-based
market-making
business consists of our stock and
exchange-traded
funds (ETF)
market-making
activities. In the United States, we are one of the leading
Designated Market Makers for stocks traded on the NYSE. For
ETFs, we are registered market makers on NYSE Arca.
Insurance Activities.
We engage in a range of
insurance and reinsurance businesses, including buying,
originating
and/or
reinsuring fixed and variable annuity and life insurance
contracts, reinsuring property catastrophe and residential
homeowner risks and providing power interruption coverage to
power generating facilities.
Principal
Investments
Principal Investments primarily includes net revenues from three
sources: returns on corporate and real estate investments;
overrides on corporate and real estate investments made by
merchant banking funds that we manage; and our investment in the
ordinary shares of Industrial and Commercial Bank of China
Limited (ICBC).
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Returns on Corporate and Real Estate
Investments.
As of December 2009, the
aggregate carrying value of our principal investments held
directly or through our merchant banking funds, excluding our
investment in the ordinary shares of ICBC and our investment in
the convertible preferred stock of Sumitomo Mitsui Financial
Group, Inc. (SMFG), was $13.98 billion, comprised of
corporate principal investments with an aggregate carrying value
of $12.60 billion and real estate investments with an
aggregate carrying value of $1.38 billion. In addition, as
of December 2009, we had outstanding unfunded equity
capital commitments of up to $12.27 billion, comprised of
corporate principal investment commitments of $9.82 billion
and real estate investment commitments of $2.45 billion.
Overrides.
Consists of 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). Overrides are recognized in net revenues
when all material contingencies have been resolved.
ICBC.
Our investment in the ordinary shares of
ICBC is valued using the quoted market price adjusted for
transfer restrictions. Under the original transfer restrictions,
the ICBC shares we held would have become free from transfer
restrictions in equal installments on April 28, 2009
and October 20, 2009. During the quarter ended
March 2009, the shares became subject to new supplemental
transfer restrictions. Under these new supplemental transfer
restrictions, on April 28, 2009, 20% of the ICBC
shares that we held became free from transfer restrictions and
we completed the disposition of these shares during the second
quarter of 2009. Our remaining ICBC shares are subject to
transfer restrictions, which prohibit liquidation at any time
prior to April 28, 2010. As of December 2009, the
fair value of our investment in the ordinary shares of ICBC was
$8.11 billion, of which $5.13 billion is held by
investment funds managed by Goldman Sachs. For further
information regarding our investment in the ordinary shares of
ICBC, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Critical Accounting Policies — Fair Value —
Cash Instruments” in Part II, Item 7 of this
Annual Report on
Form 10-K.
Asset Management
and Securities Services
Asset Management and Securities Services represented 13% of 2009
net revenues. Our asset management business provides investment
and wealth advisory services and offers investment products
(primarily through separately managed accounts and commingled
vehicles) across all major asset classes to a diverse group of
institutions and individuals worldwide. Asset Management
primarily generates revenues in the form of management and
incentive fees. 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.
Our Asset Management and Securities Services segment is divided
into two components: Asset Management and Securities Services.
Asset
Management
Asset Management primarily consists of two related
businesses — Goldman Sachs Asset Management (GSAM) and
Private Wealth Management (PWM) — through which we
offer a broad array of investment strategies and wealth advisory
services to a diverse group of clients worldwide. In addition,
Asset Management includes management fees related to our
merchant banking activities.
GSAM.
GSAM provides asset management 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:
money markets, fixed income, equities and alternative
investments (including hedge funds, private equity, real estate,
currencies, commodities and asset allocation strategies). GSAM
distributes investment products directly to the firm’s
institutional clients, including pension funds, governmental
organizations, corporations, insurance
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companies, banks, foundations and endowments, and indirectly to
institutional and individual clients through
third-party
distribution channels, including brokerage firms, banks,
insurance companies and other financial intermediaries. In
addition, our Global Portfolio Solutions team offers clients
investment and advisory services extending to risk management,
portfolio implementation, reporting and monitoring.
PWM.
PWM provides investment and wealth
advisory services globally to
high-net-worth
individuals, family offices and selected institutions
(principally foundations and endowments).
Management of Merchant Banking Funds.
Goldman
Sachs sponsors numerous corporate and real estate private
investment funds. As of December 2009, the amount of Assets
under management (AUM) in these funds (including both funded
amounts and unfunded commitments on which we earn fees) was
$93 billion.
Our strategy with respect to these funds generally is to invest
opportunistically to build a portfolio of investments that is
diversified by industry, product type, geographic region, and
transaction structure and type. Our corporate investment funds
pursue, on a global basis,
long-term
investments in equity and debt securities in privately
negotiated transactions, leveraged buyouts, acquisitions and
investments in funds managed by external parties. Our real
estate investment funds invest in real estate operating
companies, debt and equity interests in real estate assets, and
other real estate-related investments. In addition, our merchant
banking funds include funds that invest in infrastructure and
infrastructure-related assets and companies on a global basis.
Merchant banking activities generate three primary revenue
streams. First, we receive a management fee that is generally a
percentage of a fund’s committed capital, invested capital,
total gross acquisition cost or asset value. These annual
management fees are included in our Asset Management net
revenues. Second, Goldman Sachs, as a substantial investor in
some of these funds, is allocated its proportionate share of the
funds’ unrealized appreciation or depreciation arising from
changes in fair value as well as gains and losses upon
realization. Third, after a fund has achieved a minimum return
for fund investors, we receive an increased share of the
fund’s income and gains that is a percentage of the income
and gains from the fund’s investments. The second and third
of these revenue streams are included in Principal Investments
within our Trading and Principal Investments segment.
Assets under management.
AUM typically
generates 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
(in most cases, on December 31) and they are no longer
subject to adjustment.
AUM includes assets in our mutual funds, alternative investment
funds and separately managed accounts for institutional and
individual investors. Alternative investments include our
merchant banking funds, which generate revenues as described
above under
“— Management
of Merchant Banking Funds.” AUM includes assets in
clients’ brokerage accounts to the extent that they
generate fees based on the assets in the accounts rather than
commissions on transactional activity in the accounts.
AUM does not include assets in brokerage accounts that generate
commissions,
mark-ups
and
spreads based on transactional activity, or our own investments
in funds that we manage. Net revenues from these assets are
included in our Trading and Principal Investments segment. AUM
also does not include
non-fee-paying
assets, including interest-bearing deposits held through our
bank depository institution subsidiaries.
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The amount of AUM is set forth in the graph below. In the
following graph, as well as in the following tables,
substantially all assets under management are valued as of
December 31 (in the case of 2009) and November 30 (in the
case of earlier years):
Assets Under
Management
(in billions)
(in billions)
The following table sets forth AUM by asset class:
Assets Under
Management by Asset Class
(in billions)
(in billions)
| As of | ||||||||||||
|
December 31,
|
November 30,
|
November 30,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Alternative
investments
(1)
|
$ | 146 | $ | 146 | $ | 151 | ||||||
|
Equity
|
146 | 112 | 255 | |||||||||
|
Fixed income
|
315 | 248 | 256 | |||||||||
|
Total
non-money
market assets
|
607 | 506 | 662 | |||||||||
|
Money markets
|
264 | 273 | 206 | |||||||||
|
Total assets under management
|
$ | 871 | $ | 779 | $ | 868 | ||||||
| (1) | Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. |
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The table below sets forth the amount of AUM by distribution
channel and client category:
Assets Under
Management by Distribution Channel
(in billions)
(in billions)
| As of | ||||||||||||
|
December 31,
|
November 30,
|
November 30,
|
||||||||||
|
|
2009
|
2008
|
2007
|
|||||||||
|
• Directly Distributed
|
||||||||||||
|
— Institutional
|
$ | 297 | $ | 273 | $ | 354 | ||||||
|
— High-net-worth
individuals
|
231 | 215 | 219 | |||||||||
|
•
Third-Party
Distributed
|
||||||||||||
|
— Institutional,
high-net-worth
individuals and retail
|
343 | 291 | 295 | |||||||||
|
Total
|
$ | 871 | $ | 779 | $ | 868 | ||||||
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.
Prime brokerage services.
We offer prime
brokerage services to our clients, allowing them the flexibility
to trade with most brokers while maintaining a single source for
financing and consolidated portfolio reports. Our prime
brokerage business provides clearing and custody in
53 markets globally and provides consolidated
multi-currency accounting and reporting, fund administration and
other ancillary services.
Financing services.
A central element of our
prime brokerage business involves providing financing to our
clients for their securities trading activities through margin
and securities loans that are collateralized by securities, cash
or other acceptable collateral.
Securities lending services.
Securities
lending services principally involve the borrowing and lending
of securities to cover clients’ and Goldman Sachs’
short sales and otherwise to make deliveries into the market. In
addition, we are an active participant in the
broker-to-broker
securities lending business and the
third-party
agency lending business. As a general matter, net revenues in
securities lending services in our second quarter are higher due
to seasonally higher activity levels in Europe.
Global Investment
Research
Global Investment Research provides fundamental research on
companies, industries, economies, currencies and commodities and
macro strategy research on a worldwide basis.
Global Investment Research employs a team approach that as of
December 2009 provided research coverage of more than 3,000
companies worldwide and over 45 national economies. This is
accomplished by the following departments:
| • | The Equity Research Departments provide fundamental analysis, earnings forecasts and investment opinions for equity securities; | |
| • | The Credit Research Department provides fundamental analysis, forecasts and investment opinions as to investment-grade and high-yield corporate bonds and credit derivatives; and |
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| • | The Global ECS Department formulates macroeconomic forecasts for economic activity, foreign exchange and interest rates, provides research on the commodity markets, and provides equity market forecasts, opinions on both asset and industry sector allocation, equity trading strategies, credit trading strategies and options research. |
Further information regarding research at Goldman Sachs is
provided below under “— Regulation —
Regulations Applicable in and Outside the United States”
and “Legal Proceedings — Research Independence
Matters” in Part I, Item 3 of this Annual Report
on
Form 10-K.
Business
Continuity and Information Security
Business continuity and information security are high priorities
for Goldman Sachs. Our Business Continuity Program has been
developed to provide reasonable assurance of business continuity
in the event of disruptions at the firm’s critical
facilities and to comply with the regulatory requirements of the
Financial Industry Regulatory Authority. Because we are a bank
holding company, our Business Continuity Program is also subject
to review by the Federal Reserve Board. The key elements of the
program are crisis management, people recovery facilities,
business recovery, systems and data recovery, and process
improvement. In the area of information security, we have
developed and implemented a framework of principles, policies
and technology to protect the information assets of the firm and
our clients. Safeguards are applied to maintain the
confidentiality, integrity and availability of information
resources.
Employees
Management believes that a major strength and principal reason
for the success of Goldman Sachs is the quality and dedication
of our people and the shared sense of being part of a team. We
strive to maintain a work environment that fosters
professionalism, excellence, diversity, cooperation among our
employees worldwide and high standards of business ethics.
Instilling the Goldman Sachs culture in all employees is a
continuous process, in which training plays an important part.
All employees are offered the opportunity to participate in
education and periodic seminars that we sponsor at various
locations throughout the world. Another important part of
instilling the Goldman Sachs culture is our employee review
process. Employees are reviewed by supervisors, co-workers and
employees they supervise in a
360-degree
review process that is integral to our team approach.
As of December 2009, we had 32,500 total staff, excluding
staff at consolidated entities held for investment purposes. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of
Operations — Operating Expenses” in Part II,
Item 7 of this Annual Report on
Form 10-K
for additional information on our consolidated entities held for
investment purposes.
Competition
The financial services industry — and all of our
businesses — are intensely competitive, and we expect
them to remain so. Our competitors are other entities that
provide investment banking, securities and investment management
services, as well as those entities that make investments in
securities, commodities, derivatives, real estate, loans and
other financial assets. These entities include brokers and
dealers, investment banking firms, commercial banks, insurance
companies, investment advisers, mutual funds, hedge funds,
private equity funds and merchant banks. We compete with some of
our competitors globally and with others on a regional, product
or niche basis. Our competition is based on a number of factors,
including transaction execution, our products and services,
innovation, reputation and price.
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We also face intense competition in attracting and retaining
qualified employees. Our ability to continue to compete
effectively in our businesses will depend upon our ability to
attract new employees and retain and motivate our existing
employees and to continue to compensate employees competitively
amid intense public and regulatory scrutiny on the compensation
practices of large financial institutions. Our pay practices and
those of our principal competitors are subject to review by, and
the standards of, the Federal Reserve Board and regulators
outside the United States, including the Financial Services
Authority (FSA) in the United Kingdom. See
“Regulation — Banking Regulation —
Compensation Practices” below and “Risk
Factors — Our businesses may be adversely affected if
we are unable to hire and retain qualified employees” in
Part I, Item 1A of this Annual Report on
Form 10-K
for more information on the regulation of our compensation
practices.
Over time, there has been substantial consolidation and
convergence among companies in the financial services industry.
This trend accelerated in recent years as the credit crisis
caused numerous mergers and asset acquisitions among industry
participants. Many commercial banks and other
broad-based
financial services firms have had the ability for some time to
offer a wide range of products, from loans, deposit-taking and
insurance to brokerage, asset management and investment banking
services, which may enhance their competitive position. They
also have had the ability to support investment banking and
securities products with commercial banking, insurance and other
financial services revenues in an effort to gain market share,
which has resulted in pricing pressure in our investment banking
and trading businesses and could result in pricing pressure in
other of our businesses.
Moreover, we have faced, and expect to continue to face,
pressure to retain market share by committing capital to
businesses or transactions on terms that offer returns that may
not be commensurate with their risks. In particular, corporate
clients seek such commitments (such as agreements to participate
in their commercial paper backstop or other loan facilities)
from financial services firms in connection with investment
banking and other assignments.
We provide these commitments primarily through GS Bank USA and
its subsidiaries (including the William Street entities) and
through Goldman Sachs Lending Partners LLC. With respect to most
of these commitments, SMFG provides us with credit loss
protection that is generally limited to 95% of the first loss we
realize on approved loan commitments, up to a maximum of
approximately $950 million. In addition, subject to the
satisfaction of certain conditions, upon our 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
December 2009. We also use other financial instruments to
mitigate credit risks related to certain of these commitments
that are not covered by SMFG. See Note 8 to the
consolidated financial statements in Part II, Item 8
of this Annual Report on
Form 10-K
for more information regarding the William Street entities and
for a description of the credit loss protection provided by
SMFG. An increasing number of our commitments in connection with
investment banking and other assignments are made through GS
Bank USA and its subsidiaries (other than the William Street
entities) or our other subsidiaries. In addition, an increasing
number of these commitments do not benefit from the SMFG loss
protection.
The trend toward consolidation and convergence has significantly
increased the capital base and geographic reach of some of our
competitors. This trend has also hastened the globalization of
the securities and other financial services markets. As a
result, we have had to commit capital to support our
international operations and to execute large global
transactions. To take advantage of some of our most significant
challenges and opportunities, we will have to compete
successfully with financial institutions that are larger and
better capitalized and that may have a stronger local presence
and longer operating history outside the United States.
We have experienced intense price competition in some of our
businesses in recent years. For example, over the past several
years the increasing volume of trades executed electronically,
through the internet and through alternative trading systems,
has increased the pressure on trading commissions, in that
commissions for
“low-touch”
electronic trading are generally lower than for
15
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“high-touch”
non-electronic
trading. It appears that this trend toward electronic and other
“low-touch,”
low-commission
trading will continue. In addition, we believe that we will
continue to experience competitive pressures in these and other
areas in the future as some of our competitors seek to obtain
market share by further reducing prices.
Regulation
Goldman Sachs, as a participant in the banking, securities,
commodity futures and options and insurance industries, is
subject to extensive regulation in the United States and the
other countries in which we operate. See “Risk
Factors — Our businesses and those of our clients are
subject to extensive and pervasive regulation around the
world” in Part I, Item 1A of this Annual Report
on
Form 10-K
for a further discussion of the effect that regulation may have
on our businesses. As a matter of public policy, regulatory
bodies around the world are charged with safeguarding the
integrity of the securities and other financial markets and with
protecting the interests of clients participating in those
markets, including depositors in U.S. depository
institutions such as GS Bank USA. They are not, however,
generally charged with protecting the interests of Goldman
Sachs’ shareholders or creditors.
Recent market disruptions have led to numerous proposals in the
United States and internationally for potentially significant
changes in the regulation of the financial services industry.
See “Risk Factors — Our business and those of our
clients are subject to extensive and pervasive regulation around
the world” in Part I, Item 1A of this Annual
Report on
Form 10-K
for a further discussion of some of these proposals and their
potential impact on us.
Banking
Regulation
On September 21, 2008, Group Inc. became a bank
holding company under the BHC Act. As of that date, the Federal
Reserve Board became the primary U.S. regulator of
Group Inc., as a consolidated entity. As of
August 14, 2009, Group Inc. elected to become a
financial holding company under the
U.S. Gramm-Leach-Bliley
Act of 1999 (GLB Act), as described below.
Supervision
and Regulation
As a bank holding company and a financial holding company under
the BHC Act, Group Inc. is subject to supervision and
examination by the Federal Reserve Board. Under the system of
“functional regulation” established under the BHC Act,
the Federal Reserve Board supervises Group Inc., including
all of its nonbank subsidiaries, as an “umbrella
regulator” of the consolidated organization and generally
defers to the primary U.S. regulators of
Group Inc.’s U.S. depository institution
subsidiary, as applicable, and to the other U.S. regulators
of Group Inc.’s
U.S. non-depository
institution subsidiaries that regulate certain activities of
those subsidiaries. Such “functionally regulated”
non-depository
institution subsidiaries include
broker-dealers
registered with the SEC, such as our principal
U.S. broker-dealer,
Goldman, Sachs & Co. (GS&Co.), insurance
companies regulated by state insurance authorities, investment
advisors registered with the SEC with respect to their
investment advisory activities and entities regulated by the
U.S. Commodity Futures Trading Commission (CFTC) with
respect to certain futures-related activities.
Activities
The BHC Act generally restricts bank holding companies from
engaging in business activities other than the business of
banking and certain closely related activities. As a financial
holding company under the GLB Act, we may engage in a broader
range of financial and related activities than are permissible
for bank holding companies as long as we continue to meet the
eligibility requirements for financial holding companies. These
activities include underwriting, dealing and making markets in
securities, insurance underwriting and making merchant banking
investments in nonfinancial companies. In addition, we are
permitted under the GLB Act to continue to engage in
16
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certain commodities activities in the United States that were
impermissible for bank holding companies as of
September 30, 1997, if the assets held pursuant to
these activities do not equal 5% or more of our consolidated
assets. Our ability to maintain financial holding company status
is dependent on a number of factors, including our
U.S. depository institution subsidiaries continuing to
qualify as “well capitalized” and
“well-managed” as described under
“— Prompt
Corrective Action” below.
Although we do not believe that any activities that are material
to our current or currently proposed business are impermissible
activities for us as a financial holding company, the BHC Act
also grants a new bank holding company, such as Group Inc.,
two years from the date the entity becomes a bank holding
company to comply with the restrictions on its activities
imposed by the BHC Act with respect to any activities in which
it was engaged when it became a bank holding company. In
addition, under the BHC Act, we can apply to the Federal Reserve
Board for up to three
one-year
extensions.
As a bank holding company, Group Inc. is required to obtain
prior Federal Reserve Board approval before directly or
indirectly acquiring more than 5% of any class of voting shares
of any unaffiliated depository institution. In addition, as a
bank holding company, we may generally engage in banking and
other financial activities abroad, including investing in and
owning
non-U.S. banks,
if those activities and investments do not exceed certain limits
and, in some cases, if we have obtained the prior approval of
the Federal Reserve Board.
Capital
Requirements
We are subject to regulatory capital requirements administered
by the U.S. federal banking agencies. 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
items as calculated under regulatory reporting practices.
Goldman Sachs and its bank depository institution
subsidiaries’ capital amounts, 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.
We report capital ratios computed 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.
Our Tier 1 capital consists of common shareholders’
equity, qualifying preferred stock and our junior subordinated
debt issued to trusts, less deductions for goodwill, disallowed
intangible assets and other items. Our total capital consists of
our Tier 1 capital and our qualifying subordinated debt,
less certain deductions. Our total capital ratio is equal to
total capital as a percentage of
Risk-Weighted
Assets (RWAs), which are calculated in accordance with the
Federal Reserve Board’s
risk-based
capital requirements, and our Tier 1 capital ratio is equal
to Tier 1 capital as a percentage of RWAs. The calculation
of RWAs is based on the amount of the firm’s market risk
and credit risk. Certain measures included in the calculation of
the firm’s RWAs for market risk are under review by the
Federal Reserve Board. Additional information on the calculation
of our Tier 1 capital, total capital and RWAs is set forth
in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Equity
Capital — Consolidated Capital Requirements,” and
in Note 17 to the consolidated financial statements, which
are in Part II, Items 7 and 8 of this Annual Report on
Form 10-K.
As of December 2009, our total capital ratio was 18.2%, and
our Tier 1 capital ratio was 15.0%.
17
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We are currently working to implement the requirements 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 applicable
to us as a bank holding company. 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 several years. During a parallel period, we
anticipate that Group Inc.’s capital calculations
computed under both the Basel I rules and the Basel II rules
will be reported to the Federal Reserve Board for examination
and compliance for at least four consecutive quarterly periods.
Once the parallel period and subsequent three-year transition
period are successfully completed, Group Inc. will utilize
the Basel II framework as its means of capital adequacy
assessment, measurement and reporting and will discontinue use
of Basel I. The Basel II framework was implemented in several
countries during the second half of 2007 and in 2008, while
others began implementation in 2009. The Basel II rules
therefore already apply to certain of our operations in
non-U.S. jurisdictions.
The Federal Reserve Board also has established minimum leverage
ratio requirements. The 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). 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
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%. Bank
holding companies may be expected to maintain ratios well above
the minimum levels, depending upon their particular condition,
risk profile and growth plans. As of December 2009, our
Tier 1 leverage ratio under Basel I was 7.6%.
Payment of
Dividends
Federal and state law imposes limitations on the payment of
dividends by our bank depository institution subsidiaries. The
amount of dividends that may be paid by a state-chartered bank
that is a member of the Federal Reserve System, such as GS Bank
USA or our national bank trust company subsidiary, is limited to
the lesser of the amounts calculated under a “recent
earnings” test and an “undivided profits” test.
Under the recent earnings test, a dividend may not be paid if
the total of all dividends declared by a bank in any calendar
year is in excess of the current year’s net income combined
with the retained net income of the two preceding years, unless
the bank obtains the approval of its chartering authority. Under
the undivided profits test, a dividend may not be paid in excess
of a bank’s “undivided profits.” New York law
imposes similar limitations on New York State-chartered banks.
As of December 2009, GS Bank USA could have declared
dividends of $3.30 billion to Group Inc. in accordance
with these limitations. In addition to the dividend restrictions
described above, the banking regulators have authority to
prohibit or to limit the payment of dividends by the banking
organizations they supervise if, in the banking regulator’s
opinion, payment of a dividend would constitute an unsafe or
unsound practice in light of the financial condition of the
banking organization.
It is also the policy of the Federal Reserve Board that a bank
holding company generally only pay dividends on common stock out
of net income available to common shareholders over the past
year and only if the prospective rate of earnings retention
appears consistent with the bank holding company’s capital
needs, asset quality, and overall financial condition. In the
current financial and economic environment, the Federal Reserve
Board has indicated that bank holding companies should carefully
review their dividend policy and has discouraged dividend
pay-out ratios that are at the 100% level unless both asset
quality and capital are very strong. A bank holding company also
should not maintain a dividend level that places undue pressure
on the capital of bank depository institution subsidiaries, or
that may undermine the bank holding company’s ability to
serve as a source of strength for such bank depository
institution subsidiaries. Under temporary guidelines in effect
for the “near- to
medium-term,”
certain large bank holding companies (including Group Inc.)
are required to
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consult with the Federal Reserve Board before increasing
dividends. In addition, certain of Group Inc.’s
nonbank subsidiaries are subject to separate regulatory
limitations on dividends and distributions, including our
broker-dealer
and our insurance subsidiaries as described below.
Source of
Strength
Under Federal Reserve Board policy, Group Inc. is expected
to act as a source of strength to GS Bank USA and to commit
capital and financial resources to support this subsidiary. Such
support may be required by the Federal Reserve Board at times
when we might otherwise determine not to provide it. Capital
loans by a bank holding company to any of its subsidiary banks
are subordinate in right of payment to deposits and to certain
other indebtedness of such subsidiary banks. In the event of a
bank holding company’s bankruptcy, any commitment by the
bank holding company to a federal bank regulator to maintain the
capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
However, because the BHC Act provides for functional regulation
of bank holding company activities by various regulators, the
BHC Act prohibits the Federal Reserve Board from requiring
payment by a holding company or subsidiary to a depository
institution if the functional regulator of the payor objects to
such payment. In such a case, the Federal Reserve Board could
instead require the divestiture of the depository institution
and impose operating restrictions pending the divestiture.
Cross-guarantee
Provisions
Each insured depository institution “controlled” (as
defined in the BHC Act) by the same bank holding company can be
held liable to the U.S. Federal Deposit Insurance
Corporation for any loss incurred, or reasonably expected to be
incurred, by the FDIC due to the default of any other insured
depository institution controlled by that holding company and
for any assistance provided by the FDIC to any of those banks
that is in danger of default. Such a “cross-guarantee”
claim against a depository institution is generally superior in
right of payment to claims of the holding company and its
affiliates against that depository institution. At this time, we
control only one insured depository institution for this
purpose, namely GS Bank USA. However, if, in the future, we were
to control other insured depository institutions, such
cross-guarantee would apply to all such insured depository
institutions.
Compensation
Practices
Our compensation practices are subject to oversight by the
Federal Reserve Board. In October 2009, the Federal Reserve
Board issued a comprehensive proposal on incentive compensation
policies that applies to all banking organizations supervised by
the Federal Reserve Board, including bank holding companies such
as Group Inc. The proposal sets forth three key principles
for incentive compensation arrangements that are designed to
help ensure that incentive compensation plans do not encourage
excessive
risk-taking
and are consistent with the safety and soundness of banking
organizations. The three principles provide that a banking
organization’s incentive compensation arrangements should
provide incentives that do not encourage
risk-taking
beyond the organization’s ability to effectively identify
and manage risks, be compatible with effective internal controls
and risk management, and be supported by strong corporate
governance. The proposal also contemplates a detailed review by
the Federal Reserve Board of the incentive compensation policies
and practices of a number of “large, complex banking
organizations,” including us. Any deficiencies in
compensation practices that are identified may be incorporated
into the organization’s supervisory ratings, which can
affect its ability to make acquisitions or perform other
actions. The proposal provides that enforcement actions may be
taken against a banking organization if its incentive
compensation arrangements or related
risk-management
control or governance processes pose a risk to the
organization’s safety and soundness and the organization is
not taking prompt and effective measures to correct the
deficiencies. The scope and content of the Federal Reserve
Board’s policies on executive compensation are continuing
to develop, and we expect that these policies will evolve over a
number of years.
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In September 2009, the Financial Stability Board,
established at the direction of the leaders of the Group of 20,
released standards for implementing certain compensation
principles for banks and other financial companies designed to
encourage sound compensation practices. These standards are to
be implemented by local regulators. Thus far, regulators in a
number of countries, including the United Kingdom, France and
Germany, have proposed or adopted policies related to
compensation at financial institutions. These policies are in
addition to the proposals made by the Federal Reserve Board in
October 2009. The United Kingdom has proposed a
non-deductible 50% tax on certain financial institutions in
respect of discretionary bonuses in excess of £25,000
awarded under arrangements made between
December 9, 2009 and April 5, 2010 to
“relevant banking employees.” Separately, the FDIC has
solicited comments on whether to amend its
risk-based
deposit insurance assessment system to potentially increase
assessment rates on financial institutions with compensation
programs that put the Deposit Insurance Fund at risk.
FDIC Temporary
Liquidity Guarantee Program
Group Inc. and GS Bank USA participated in the FDIC’s
Temporary Liquidity Guarantee Program (TLGP), which applied to,
among others, all U.S. depository institutions insured by
the FDIC and all U.S. bank holding companies, unless they
opted out of the TLGP or the FDIC terminated their
participation. Under the TLGP, the FDIC guarantees certain
senior unsecured debt of Group Inc., and, until
December 31, 2009, guaranteed noninterest-bearing
transaction account deposits at GS Bank USA, and in return for
these guarantees the FDIC was paid a fee based on the amount of
the deposit or the amount and maturity of the debt. Under the
debt guarantee component of the TLGP, the FDIC will pay the
unpaid principal and interest on an FDIC-guaranteed debt
instrument upon the uncured failure of the participating entity
to make a timely payment of principal or interest in accordance
with the terms of the instrument. We have not issued
long-term
debt under the TLGP since March 2009, and all of our
previously issued debt under the TLGP will mature on or prior to
June 15, 2012. The debt guarantee component expired
with respect to new issuances by us on
October 31, 2009. Effective January 1, 2010,
GS Bank USA is not participating in the transaction account
guarantee component of the TLGP. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Funding Risk —
Asset-Liability Management” in Part II, Item 7 of
this Annual Report on
Form 10-K
for a further discussion of our participation in the TLGP.
GS Bank
USA
Our U.S. depository institution subsidiary, 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 and is subject
to minimum capital requirements that (subject to certain
exceptions) are similar to those applicable to bank holding
companies. A number of our businesses are conducted partially or
entirely through GS Bank USA and its subsidiaries, including:
bank loan trading and origination; interest rate, credit,
currency and other derivatives; leveraged finance; commercial
and residential mortgage origination, trading and servicing;
structured finance; and agency lending, custody and hedge fund
administration services. These businesses are subject to
regulation by the Federal Reserve Board, the New York State
Banking Department and the FDIC.
Deposit
Insurance
GS Bank USA accepts deposits, and those deposits have the
benefit of FDIC insurance up to the applicable limits. The
FDIC’s Deposit Insurance Fund is funded by assessments on
insured depository institutions, which depend on the risk
category of an institution and the amount of insured deposits
that it holds. The FDIC required us to prepay our estimated
assessments for all of 2010, 2011 and 2012 on
December 30, 2009. The FDIC may increase or decrease
the assessment rate schedule on a
semi-annual
basis. We also participated in the TLGP as discussed above under
“— FDIC Temporary Liquidity Guarantee
Program.”
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Prompt
Corrective Action
The U.S. Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), among other things, requires the federal
banking agencies to take “prompt corrective action” in
respect of depository institutions that do not meet specified
capital requirements. FDICIA establishes five capital categories
for FDIC-insured banks: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized. A depository institution is
generally deemed to be “well capitalized,” the highest
category, if it has a total capital ratio of 10% or greater, a
Tier 1 capital ratio of 6% or greater and a Tier 1
leverage ratio of 5% or greater. In connection with the
November 2008 asset transfer described under
“— Transactions with Affiliates” below, 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%. As of December 2009, GS Bank
USA’s Tier 1 capital ratio was 14.9%, its total
capital ratio was 19.3% and its Tier 1 leverage ratio was
15.4%. GS Bank USA computes its capital ratios in accordance
with the regulatory capital requirements currently applicable to
state member banks, which are based on Basel I as implemented by
the Federal Reserve Board. An institution may be downgraded to,
or deemed to be in, a capital category that is lower than is
indicated by its capital ratios if it is determined to be in an
unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters. FDICIA
imposes progressively more restrictive constraints on
operations, management and capital distributions, as the capital
category of an institution declines. Failure to meet the capital
requirements could also subject a depository institution to
capital raising requirements. Ultimately, critically
undercapitalized institutions are subject to the appointment of
a receiver or conservator.
The prompt corrective action regulations apply only to
depository institutions and not to bank holding companies such
as Group Inc. However, the Federal Reserve Board is
authorized to take appropriate action at the holding company
level, based upon the undercapitalized status of the holding
company’s depository institution subsidiaries. In certain
instances relating to an undercapitalized depository institution
subsidiary, the bank holding company would be required to
guarantee the performance of the undercapitalized
subsidiary’s capital restoration plan and might be liable
for civil money damages for failure to fulfill its commitments
on that guarantee. Furthermore, in the event of the bankruptcy
of the parent holding company, the guarantee would take priority
over the parent’s general unsecured creditors.
Insolvency of
an Insured Depository Institution
If the FDIC is appointed the conservator or receiver of an
insured depository institution such as GS Bank USA, upon its
insolvency or in certain other events, the FDIC has the power:
| • | to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors; | |
| • | to enforce the terms of the depository institution’s contracts pursuant to their terms; or | |
| • | to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution. |
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In addition, under federal law, the claims of holders of deposit
liabilities and certain claims for administrative expenses
against an insured depository institution would be afforded a
priority over other general unsecured claims against such an
institution, including claims of debt holders of the
institution, in the “liquidation or other resolution”
of such an institution by any receiver. As a result, whether or
not the FDIC ever sought to repudiate any debt obligations of GS
Bank USA, the debt holders would be treated differently from,
and could receive, if anything, substantially less than, the
depositors of the depository institution.
Transactions
with Affiliates
Transactions between GS Bank USA and Group Inc. and its
subsidiaries and affiliates are regulated by the Federal Reserve
Board. These regulations limit the types and amounts of
transactions (including loans to and credit extensions from GS
Bank USA) that may take place and generally require those
transactions to be on an arms-length basis. These regulations
generally do not apply to transactions between GS Bank USA and
its subsidiaries. In November 2008, Group Inc.
transferred assets and operations to GS Bank USA. In connection
with this transfer, Group Inc. entered into a guarantee
agreement with GS Bank USA whereby Group Inc. agreed to
(i) purchase from GS Bank USA certain transferred assets
(other than derivatives and mortgage servicing rights) or
reimburse GS Bank USA for certain losses relating to those
assets; (ii) reimburse GS Bank USA for
credit-related
losses from assets transferred to GS Bank USA; and
(iii) protect GS Bank USA or reimburse it for certain
losses arising from derivatives and mortgage servicing rights
transferred to GS Bank USA. In accordance with the
guarantee agreement, as of December 2009, Group Inc.
is also required to pledge approximately $4 billion of
collateral to GS Bank USA.
Trust Companies
Group Inc.’s two limited purpose trust company
subsidiaries operate under state or federal law. They are not
permitted to and do not accept deposits or make loans (other
than as incidental to their trust activities) and, as a result,
are not insured by the FDIC. The Goldman Sachs
Trust Company, N.A., a national banking association that is
limited to fiduciary activities, is regulated by the Office of
the Comptroller of the Currency and is a member bank of the
Federal Reserve System. The Goldman Sachs Trust Company of
Delaware, a Delaware limited purpose trust company, is regulated
by the Office of the Delaware State Bank Commissioner.
U.S. Securities
and Commodities Regulation
Goldman Sachs’
broker-dealer
subsidiaries are subject to regulations that cover all aspects
of the securities business, including sales methods, trade
practices, use and safekeeping of clients’ funds and
securities, capital structure, recordkeeping, the financing of
clients’ purchases, and the conduct of directors, officers
and employees.
In the United States, the SEC is the federal agency responsible
for the administration of the federal securities laws.
GS&Co. is registered as a
broker-dealer
and as an investment adviser with the SEC and as a
broker-dealer
in all 50 states and the District of Columbia. Self-regulatory
organizations, such as FINRA and the NYSE, adopt rules that
apply to, and examine,
broker-dealers
such as GS&Co. In addition, state securities and other
regulators also have regulatory or oversight authority over
GS&Co. Similarly, our businesses are also subject to
regulation by various
non-U.S. governmental
and regulatory bodies and self-regulatory authorities in
virtually all countries where we have offices. Goldman Sachs
Execution & Clearing, L.P. (GSEC) and one of its
subsidiaries are registered
U.S. broker-dealers
and are regulated by the SEC, the NYSE and FINRA. Goldman Sachs
Financial Markets, L.P. is registered with the SEC as an OTC
derivatives dealer and conducts certain OTC derivatives
businesses.
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The commodity futures and commodity options industry in the
United States is subject to regulation under the
U.S. Commodity Exchange Act (CEA). The CFTC is the federal
agency charged with the administration of the CEA. Several of
Goldman Sachs’ subsidiaries, including GS&Co. and
GSEC, are registered with the CFTC and act as futures commission
merchants, commodity pool operators or commodity trading
advisors and are subject to the CEA. The rules and regulations
of various self-regulatory organizations, such as the Chicago
Board of Trade and the Chicago Mercantile Exchange, other
futures exchanges and the National Futures Association, also
govern the commodity futures and commodity options businesses of
these entities.
GS&Co. and GSEC are subject to
Rule 15c3-1
of the SEC and Rule 1.17 of the CFTC, which specify uniform
minimum net capital requirements 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 December 2009, GS&Co. had regulatory net
capital, as defined by
Rule 15c3-1,
of $13.65 billion, which exceeded the amount required by
$11.81 billion. As of December 2009, GSEC had
regulatory net capital, as defined by
Rule 15c3-1,
of $1.97 billion, which exceeded the amount required by
$1.86 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
December 2009, GS&Co. had tentative net capital and
net capital in excess of both the minimum and the notification
requirements. These net capital requirements may have the effect
of prohibiting these entities from distributing or withdrawing
capital and may require prior notice to the SEC for certain
withdrawals of capital. See Note 17 to the consolidated
financial statements in Part II, Item 8 of this Annual
Report on
Form 10-K.
Our exchange-based
market-making
businesses are subject to extensive regulation by a number of
securities exchanges. As a Designated Market Maker on the NYSE
and as a market maker on other exchanges, we are required to
maintain orderly markets in the securities to which we are
assigned. Under the NYSE’s Designated Market Maker rules,
this may require us to supply liquidity to these markets in
certain circumstances.
J. Aron & Company is authorized by the
U.S. Federal Energy Regulatory Commission (FERC) to sell
wholesale physical power at
market-based
rates. As a FERC-authorized power marketer,
J. Aron & Company is subject to regulation under
the U.S. Federal Power Act and FERC regulations and to the
oversight of FERC. As a result of our investing activities,
GS&Co. is also an “exempt holding company” under
the U.S. Public Utility Holding Company Act of 2005 and
applicable FERC rules.
In addition, as a result of our power-related and commodities
activities, we are subject to extensive and evolving energy,
environmental and other governmental laws and regulations, as
discussed under “Risk Factors — Our commodities
activities, particularly our power generation interests and our
physical commodities businesses, subject us to extensive
regulation, potential catastrophic events and environmental,
reputational and other risks that may expose us to significant
liabilities and costs” in Part I, Item 1A of this
Annual Report on
Form 10-K.
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Other Regulation
in the United States
Our U.S. insurance subsidiaries 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, and Group Inc. is subject to oversight as an
insurance holding company in states where our insurance
subsidiaries are domiciled. State insurance regulations limit
the ability of our insurance subsidiaries to pay dividends to
Group Inc. in certain circumstances, and could require
regulatory approval for any change in “control” of
Group Inc., which may include control of 10% or more of our
voting stock. In addition, a number of our other businesses,
including our lending and mortgage businesses, require us to
obtain licenses, adhere to applicable regulations and be subject
to the oversight of various regulators in the states in which we
conduct these businesses.
The U.S. Bank Secrecy Act (BSA), as amended by the USA
PATRIOT Act of 2001 (PATRIOT Act), contains anti-money
laundering and financial transparency laws and mandated the
implementation of various regulations applicable to all
financial institutions, including standards for verifying client
identification at account opening, and obligations to monitor
client transactions and report suspicious activities. Through
these and other provisions, the BSA and the PATRIOT Act seek to
promote the identification of parties that may be involved in
terrorism, money laundering or other suspicious activities.
Anti-money laundering laws outside the United States contain
some similar provisions. The obligation of financial
institutions, including Goldman Sachs, to identify their
clients, to monitor for and report suspicious transactions, to
respond to requests for information by regulatory authorities
and law enforcement agencies, and to share information with
other financial institutions, has required the implementation
and maintenance of internal practices, procedures and controls
that have increased, and may continue to increase, our costs,
and any failure with respect to our programs in this area could
subject us to substantial liability and regulatory fines.
Regulation Outside
the United States
Goldman Sachs provides investment services in and from the
United Kingdom under the regulation of the FSA. Goldman Sachs
International (GSI), our regulated U.K.
broker-dealer,
is subject to the capital requirements imposed by the FSA. As of
December 2009, GSI was in compliance with the FSA capital
requirements. Other subsidiaries, including Goldman Sachs
International Bank, are also regulated by the FSA.
Goldman Sachs Bank (Europe) PLC (GS Bank Europe), our regulated
Irish bank, is subject to minimum capital requirements imposed
by the Irish Financial Services Regulatory Authority. As of
December 2009, this bank was in compliance with all
regulatory capital requirements. Group Inc. has issued a
general guarantee of the obligations of this bank.
Various other Goldman Sachs entities are regulated by the
banking, insurance and securities regulatory authorities of the
European countries in which they operate, including, among
others, the Federal Financial Supervisory Authority (BaFin) and
the Bundesbank in Germany, Banque de France and the
Autorité des Marchés Financiers in France, Banca
d’Italia and the Commissione Nazionale per le Società
e la Borsa (CONSOB) in Italy, the Federal Financial Markets
Service in Russia and the Swiss Financial Market Supervisory
Authority. Certain Goldman Sachs entities are also regulated by
the European securities, derivatives and commodities exchanges
of which they are members.
The investment services that are subject to oversight by the FSA
and other regulators within the European Union (EU) are
regulated in accordance with national laws, many of which
implement EU directives requiring, among other things,
compliance with certain capital adequacy standards, customer
protection requirements and market conduct and trade reporting
rules. These standards, requirements and rules are similarly
implemented, under the same directives, throughout the EU.
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Goldman Sachs Japan Co., Ltd. (GSJCL), our regulated Japanese
broker-dealer,
is subject to the capital requirements imposed by Japan’s
Financial Services Agency. As of December 2009, GSJCL was
in compliance with its capital adequacy requirements. GSJCL is
also regulated by the Tokyo Stock Exchange, the Osaka Securities
Exchange, the Tokyo Financial Exchange, the Japan Securities
Dealers Association, the Tokyo Commodity Exchange and the
Ministry of Economy, Trade and Industry in Japan.
Also in Asia, the Securities and Futures Commission in Hong
Kong, the Monetary Authority of Singapore, the China Securities
Regulatory Commission, the Korean Financial Supervisory Service,
the Reserve Bank of India and the Securities and Exchange Board
of India, among others, regulate various of our subsidiaries and
also have capital standards and other requirements comparable to
the rules of the SEC.
Various Goldman Sachs entities are regulated by the banking and
regulatory authorities in other
non-U.S. countries
in which Goldman Sachs operates, including, among others, Brazil
and Dubai. In addition, certain of our insurance subsidiaries
are part of the Lloyd’s market (which is regulated by the
FSA) and certain are regulated by the Bermuda Monetary Authority.
Regulations
Applicable in and Outside the United States
The U.S. and
non-U.S. government
agencies, regulatory bodies and self-regulatory organizations,
as well as state securities commissions and other state
regulators in the United States, are empowered to conduct
administrative proceedings that can result in censure, fine, the
issuance of cease and desist orders, or the suspension or
expulsion of a
broker-dealer
or its directors, officers or employees. From time to time, our
subsidiaries have been subject to investigations and
proceedings, and sanctions have been imposed for infractions of
various regulations relating to our activities, none of which
has had a material adverse effect on us or our businesses.
The SEC and FINRA have rules governing research analysts,
including rules imposing restrictions on the interaction between
equity research analysts and investment banking personnel at
member securities firms. Various
non-U.S. jurisdictions
have imposed both substantive and disclosure-based requirements
with respect to research and may impose additional regulations.
In 2003, GS&Co. agreed to a global settlement with certain
federal and state securities regulators and self-regulatory
organizations to resolve investigations into equity research
analysts’ alleged conflicts of interest. The global
settlement includes certain restrictions and undertakings that
impose costs and limitations on the conduct of our businesses,
including restrictions on the interaction between research and
investment banking areas.
Our investment management businesses are subject to significant
regulation in numerous jurisdictions around the world relating
to, among other things, the safeguarding of client assets and
our management of client funds.
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 or internal policies, including policies concerning
the minimum amount of capital a subsidiary should hold based
upon its underlying risk.
Certain of our businesses are subject to compliance with
regulations enacted by U.S. federal and state governments,
the European Union or other jurisdictions
and/or
enacted by various regulatory organizations or exchanges
relating to the privacy of the information of clients, employees
or others, and any failure to comply with these regulations
could expose us to liability
and/or
reputational damage.
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Item 1A. Risk
Factors
We face a variety of risks that are substantial and inherent in
our businesses, including market, liquidity, credit,
operational, legal, regulatory and reputational risks. The
following are some of the more important factors that could
affect our businesses.
Our businesses
have been and may continue to be adversely affected by
conditions in the global financial markets and economic
conditions generally.
Our businesses, by their nature, do not produce predictable
earnings, and all of our businesses are materially affected by
conditions in the global financial markets and economic
conditions generally. In the past several years, these
conditions have changed suddenly and, for a period of time, very
negatively.
In 2008 and through early 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.
This was initially triggered by declines in the values of
subprime mortgages, but spread to all mortgage and real estate
asset classes, to leveraged bank loans and to nearly all asset
classes, including equities. The global markets during this
period were characterized by substantially increased volatility
and
short-selling
and an overall loss of investor and public confidence. The
decline in asset values caused increases in margin calls for
investors, requirements that derivatives counterparties post
additional collateral and redemptions by mutual and hedge fund
investors, all of which increased the downward pressure on asset
values and outflows of client funds across the financial
services industry. While the markets have generally stabilized
and improved since the first quarter of 2009, asset values for
many asset classes have not returned to previous levels.
Business, financial and economic conditions, particularly
unemployment levels, lending activities and the housing markets,
continue to be negatively impacted by the events of recent years.
Market conditions led to the failure or merger of a number of
prominent financial institutions. Financial institution failures
or near-failures resulted in further losses as a consequence of
defaults on securities issued by them and defaults under
bilateral derivatives and other contracts entered into with such
entities as counterparties. Furthermore, declining asset values,
defaults on mortgages and consumer loans, and the lack of market
and investor confidence, as well as other factors, combined to
increase credit default swap spreads, to cause rating agencies
to lower credit ratings, and to otherwise increase the cost and
decrease the availability of liquidity, despite very significant
declines in central bank borrowing rates and other government
actions.
Banks and other lenders have suffered significant losses and
some have become reluctant to lend, even on a secured basis, due
to the increased risk of default, the impact of declining asset
values on the value of collateral and the impact of
“risky” assets and transactions on capital
requirements. In addition, some financial institutions are
unwilling to sell assets where the value of such assets are not
“marked-to-market”
and would have to be sold at a loss because they are worth
significantly less than their current book value. The markets
for securitized debt offerings backed by mortgages, loans,
credit card receivables and other assets, which for the most
part were closed during 2008 and the beginning of 2009, have
very recently begun to reopen.
Since 2008, governments, regulators and central banks in the
United States and worldwide have taken numerous steps to
increase liquidity and to restore investor and public
confidence. In addition, there are numerous legislative and
regulatory actions that have been taken or proposed to deal with
what regulators, politicians and others believe to be the root
causes of the financial crisis, including proposals relating to
financial institution capital requirements and compensation
practices, proposals relating to restrictions on the type of
activities in which financial institutions are permitted to
engage and the size of financial institutions, and proposals to
impose additional taxes on certain financial institutions, as
well as proposals calling for increased regulatory scrutiny and
coordination with respect to the financial services industry and
markets. It is presently unclear which of these proposals will
be adopted and in what form and whether the net effect of such
proposals will in fact be positive or negative for the financial
markets over either the short or
long-term.
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During 2009, the economies of the United States, Europe and
Japan experienced a recession. Business activity across a wide
range of industries and regions has been greatly reduced and
many companies were, and some continue to be, in serious
difficulty due to reduced consumer spending and low levels of
liquidity in the credit markets. National and local governments
are facing difficult financial conditions due to significant
reductions in tax revenues, particularly from corporate and
personal income taxes, as well as increased outlays for
unemployment benefits due to high unemployment levels and the
cost of stimulus programs.
Declines in asset values, the lack of liquidity, general
uncertainty about economic and market activities and a lack of
consumer, investor and CEO confidence have negatively impacted
many of our businesses, including our investment banking,
merchant banking, asset management, leveraged lending and equity
principal strategies businesses.
Our financial performance is highly dependent on the environment
in which our businesses operate. A favorable business
environment is generally characterized by, among other factors,
high global gross domestic product growth, transparent, liquid
and efficient capital markets, low inflation, high business and
investor confidence, stable geopolitical conditions, and strong
business earnings. Unfavorable or uncertain economic and market
conditions can be caused by: declines in economic growth,
business activity or investor or business confidence;
limitations on the availability or increases in the cost of
credit and capital; increases in inflation, interest rates,
exchange rate volatility, default rates or the price of basic
commodities; outbreaks of hostilities or other geopolitical
instability; corporate, political or other scandals that reduce
investor confidence in capital markets; natural disasters or
pandemics; or a combination of these or other factors.
The business environment became generally more favorable after
the first quarter of 2009, but there can be no assurance that
these conditions will continue in the near or long term. If they
do not, our results of operations may be adversely affected.
Our businesses
have been and may be adversely affected by declining asset
values.
Many of our businesses, such as our merchant banking businesses,
our mortgages, leveraged loan and credit products businesses in
our FICC segment, and our equity principal strategies business,
have net “long” positions in debt securities, loans,
derivatives, mortgages, equities (including private equity) and
most other asset classes. In addition, many of our
market-making
and other businesses in which we act as a principal to
facilitate our clients’ activities, including our
exchange-based
market-making
businesses, commit large amounts of capital to maintain trading
positions in interest rate and credit products, as well as
currencies, commodities and equities. Because nearly all of
these investing and trading positions are
marked-to-market
on a daily basis, declines in asset values directly and
immediately impact our earnings, unless we have effectively
“hedged” our exposures to such declines. In certain
circumstances (particularly in the case of leveraged loans and
private equities or other securities that are not freely
tradable or lack established and liquid trading markets), it may
not be possible or economic to hedge such exposures and to the
extent that we do so the hedge may be ineffective or may greatly
reduce our ability to profit from increases in the values of the
assets. Sudden declines and significant volatility in the prices
of assets may substantially curtail or eliminate the trading
markets for certain assets, which may make it very difficult to
sell, hedge or value such assets. The inability to sell or
effectively hedge assets reduces our ability to limit losses in
such positions and the difficulty in valuing assets may require
us to maintain additional capital and increase our funding costs.
In our exchange-based
market-making
businesses, we are obligated by stock exchange rules to maintain
an orderly market, including by purchasing shares in a declining
market. In markets where asset values are declining and in
volatile markets, this results in trading losses and an
increased need for liquidity.
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We receive
asset-based
management fees based on the value of our clients’
portfolios or investment in funds managed by us and, in some
cases, we also receive incentive fees based on increases in the
value of such investments. Declines in asset values reduce the
value of our clients’ portfolios or fund assets, which in
turn reduce the fees we earn for managing such assets.
We post collateral to support our obligations and receive
collateral to support the obligations of our clients and
counterparties in connection with our trading businesses. When
the value of the assets posted as collateral declines, the party
posting the collateral may need to provide additional collateral
or, if possible, reduce its trading position. A classic example
of such a situation is a “margin call” in connection
with a brokerage account. Therefore, declines in the value of
asset classes used as collateral mean that either the cost of
funding trading positions is increased or the size of trading
positions is decreased. If we are the party providing collateral
this can increase our costs and reduce our profitability and if
we are the party receiving collateral this can also reduce our
profitability by reducing the level of business done with our
clients and counterparties. In addition, volatile or less liquid
markets increase the difficulty of valuing assets which can lead
to costly and time-consuming disputes over asset values and the
level of required collateral, as well as increased credit risk
to the recipient of the collateral due to delays in receiving
adequate collateral.
Our businesses
have been and may be adversely affected by disruptions in the
credit markets, including reduced access to credit and higher
costs of obtaining credit.
Widening credit spreads, as well as significant declines in the
availability of credit, have in the past adversely affected our
ability to borrow on a secured and unsecured basis and may do so
in the future. We fund ourselves on an unsecured basis by
issuing
long-term
debt, promissory notes and commercial paper, by accepting
deposits at our bank subsidiaries or by obtaining bank loans or
lines of credit. We seek to finance many of our assets on a
secured basis, including by entering into repurchase agreements.
Any disruptions in the credit markets may make it harder and
more expensive to obtain funding for our businesses. If our
available funding is limited or we are forced to fund our
operations at a higher cost, these conditions may require us to
curtail our business activities and increase our cost of
funding, both of which could reduce our profitability,
particularly in our businesses that involve investing, lending
and taking principal positions, including market making.
Our clients engaging in mergers and acquisitions often rely on
access to the secured and unsecured credit markets to finance
their transactions. A lack of available credit or an increased
cost of credit can adversely affect the size, volume and timing
of our clients’ merger and acquisition
transactions — particularly large
transactions — and adversely affect our financial
advisory and underwriting businesses.
In addition, we may incur significant unrealized gains or losses
due solely to changes in our credit spreads or those of third
parties, as these changes may affect the fair value of our
derivative instruments and the debt securities that we hold or
issue.
Our businesses
have been and may be affected by changes in the levels of market
volatility.
Certain of our trading businesses depend on market volatility to
provide trading and arbitrage opportunities, and decreases in
volatility may reduce these opportunities and adversely affect
the results of these businesses. On the other hand, increased
volatility, while it can increase trading volumes and spreads,
also increases risk as measured by VaR and may expose us to
increased risks in connection with our
market-making
and proprietary businesses or cause us to reduce the size of
these businesses in order to avoid increasing our VaR. Limiting
the size of our
market-making
positions and investing businesses can adversely affect our
profitability, even though spreads are widening and we may earn
more on each trade. In periods when volatility is increasing,
but asset values are declining significantly, it may not be
possible to sell assets at all or it may only be possible to do
so at steep discounts. In such circumstances we may be forced to
either take on additional risk or to incur losses in order to
decrease our VaR. In addition, increases in volatility increase
the level of our risk weighted assets and increase our capital
requirements which in turn increases our funding costs.
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Our businesses
have been adversely affected and may continue to be adversely
affected by market uncertainty or lack of confidence among
investors and CEOs due to general declines in economic activity
and other unfavorable economic, geopolitical or market
conditions.
Our investment banking business has been and may continue to be
adversely affected by market conditions. Poor economic
conditions and other adverse geopolitical conditions can
adversely affect and have adversely affected investor and CEO
confidence, resulting in significant
industry-wide
declines in the size and number of underwritings and of
financial advisory transactions, which could have an adverse
effect on our revenues and our profit margins. In particular,
because a significant portion of our investment banking revenues
is derived from our participation in large transactions, a
decline in the number of large transactions would adversely
affect our investment banking business.
In certain circumstances, market uncertainty or general declines
in market or economic activity may affect our trading businesses
by decreasing levels of overall activity or by decreasing
volatility, but at other times market uncertainty and even
declining economic activity may result in higher trading volumes
or higher spreads or both.
Market uncertainty, volatility and adverse economic conditions,
as well as declines in asset values, may cause our clients to
transfer their assets out of our funds or other products or
their brokerage accounts and result in reduced net revenues,
principally in our asset management business. To the extent that
clients do not withdraw their funds, they may invest them in
products that generate less fee income.
Our investing
businesses may be affected by the poor investment performance of
our investment products.
Poor investment returns in our asset management business, due to
either general market conditions or underperformance (against
the performance of benchmarks or of our competitors) by funds or
accounts that we manage or investment products that we design or
sell, affects our ability to retain existing assets and to
attract new clients or additional assets from existing clients.
This could affect the asset management and incentive fees that
we earn on assets under management or the commissions that we
earn for selling other investment products, such as structured
notes or derivatives.
We have in the past provided financial support to certain of our
investment products in difficult market circumstances and, at
our discretion, we may decide to do so in the future for
reputational or business reasons, including through equity
investments or cash infusions.
We may incur
losses as a result of ineffective risk management processes and
strategies.
We seek to monitor and control our risk exposure through a risk
and control framework encompassing a variety of separate but
complementary financial, credit, operational, compliance and
legal reporting systems, internal controls, management review
processes and other mechanisms. Our trading risk management
process seeks to balance our ability to profit from trading
positions with our exposure to potential losses. While we employ
a broad and diversified set of risk monitoring and risk
mitigation techniques, those techniques and the judgments that
accompany their application cannot anticipate every economic and
financial outcome or the specifics and timing of such outcomes.
Thus, we may, in the course of our activities, incur losses.
Market conditions in recent years have involved unprecedented
dislocations and highlight the limitations inherent in using
historical data to manage risk.
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The models that we use to assess and control our risk exposures
reflect assumptions about the degrees of correlation or lack
thereof among prices of various asset classes or other market
indicators. In times of market stress or other unforeseen
circumstances, such as occurred during 2008 and early 2009,
previously uncorrelated indicators may become correlated, or
conversely previously correlated indicators may move in
different directions. These types of market movements have at
times limited the effectiveness of our hedging strategies and
have caused us to incur significant losses, and they may do so
in the future. These changes in correlation can be exacerbated
where other market participants are using risk or trading models
with assumptions or algorithms that are similar to ours. In
these and other cases, it may be difficult to reduce our risk
positions due to the activity of other market participants or
widespread market dislocations, including circumstances where
asset values are declining significantly or no market exists for
certain assets. To the extent that we make investments directly
through various of our businesses in securities, including
private equity, that do not have an established liquid trading
market or are otherwise subject to restrictions on sale or
hedging, we may not be able to reduce our positions and
therefore reduce our risk associated with such positions. In
addition, we invest our own capital in our merchant banking,
alternative investment and infrastructure funds, and limitations
on our ability to withdraw some or all of our investments in
these funds, whether for legal, reputational or other reasons,
may make it more difficult for us to control the risk exposures
relating to these investments.
For a further discussion of our risk management policies and
procedures, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Risk Management” in Part II, Item 7 of this
Annual Report on
Form 10-K.
Our liquidity,
profitability and businesses may be adversely affected by an
inability to access the debt capital markets or to sell assets
or by a reduction in our credit ratings or by an increase in our
credit spreads.
Liquidity is essential to our businesses. Our liquidity may be
impaired by an inability to access secured
and/or
unsecured debt markets, an inability to access funds from our
subsidiaries, an inability to sell assets or redeem our
investments, or unforeseen outflows of cash or collateral. This
situation may arise due to circumstances that we may be unable
to control, such as a general market disruption or an
operational problem that affects third parties or us, or even by
the perception among market participants that we, or other
market participants, are experiencing greater liquidity risk.
The financial instruments that we hold and the contracts to
which we are a party are complex, as we employ structured
products to benefit our clients and ourselves, and these complex
structured products often do not have readily available markets
to access in times of liquidity stress. Our investing activities
may lead to situations where the holdings from these activities
represent a significant portion of specific markets, which could
restrict liquidity for our positions. Further, our ability to
sell assets may be impaired if other market participants are
seeking to sell similar assets at the same time, as is likely to
occur in a liquidity or other market crisis. In addition,
financial institutions with which we interact may exercise
set-off rights or the right to require additional collateral,
including in difficult market conditions, which could further
impair our access to liquidity.
Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger our obligations under
certain bilateral provisions in some of our trading and
collateralized financing contracts. Under these provisions,
counterparties could be permitted to terminate contracts with
Goldman Sachs or require us to post additional collateral.
Termination of our trading and collateralized financing
contracts could cause us to sustain losses and impair our
liquidity by requiring us to find other sources of financing or
to make significant cash payments or securities movements.
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Our cost of obtaining
long-term
unsecured funding is directly related to our credit spreads (the
amount in excess of the interest rate of U.S. Treasury
securities (or other benchmark securities) of the same maturity
that we need to pay to our debt investors). Increases in our
credit spreads can significantly increase our cost of this
funding. Changes in credit spreads are continuous,
market-driven,
and subject at times to unpredictable and highly volatile
movements. Credit spreads are influenced by market perceptions
of our creditworthiness. In addition, our credit spreads may be
influenced by movements in the costs to purchasers of credit
default swaps referenced to our
long-term
debt. The market for credit default swaps is relatively new,
although very large, and it has proven to be extremely volatile
and currently lacks a high degree of structure or transparency.
Group Inc.
is a holding company and is dependent for liquidity on payments
from its subsidiaries, which are subject to
restrictions.
Group Inc. is a holding company and, therefore, depends on
dividends, distributions and other payments from its
subsidiaries to fund dividend payments and to fund all payments
on its obligations, including debt obligations. Many of our
subsidiaries, including our
broker-dealer,
bank and insurance subsidiaries, are subject to laws that
restrict dividend payments or authorize regulatory bodies to
block or reduce the flow of funds from those subsidiaries to
Group Inc. In addition, our
broker-dealer,
bank and insurance subsidiaries are subject to restrictions on
their ability to lend or transact with affiliates and to minimum
regulatory capital requirements, as well as restrictions on
their ability to use funds deposited with them in brokerage or
bank accounts to fund their businesses. Additional restrictions
on related-party transactions, increased capital requirements
and additional limitations on the use of funds on deposit in
bank or brokerage accounts, as well as lower earnings, can
reduce the amount of funds available to meet the obligations of
Group Inc. and even require Group Inc. to provide
additional funding to such subsidiaries. Restrictions or
regulatory action of that kind could impede access to funds that
Group Inc. needs to make payments on its obligations,
including debt obligations, or dividend payments. In addition,
Group Inc.’s right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is
subject to the prior claims of the subsidiary’s creditors.
Furthermore, Group Inc. has guaranteed the payment
obligations of GS&Co., GS Bank USA and GS Bank Europe,
subject to certain exceptions, and has pledged significant
assets to GS Bank USA to support obligations to GS Bank USA. In
addition, Group Inc. guarantees many of the obligations of
its other consolidated subsidiaries on a
transaction-by-transaction
basis, as negotiated with counterparties. These guarantees may
require Group Inc. to provide substantial funds or assets
to its subsidiaries or their creditors or counterparties at a
time when Group Inc. is in need of liquidity to fund its
own obligations. See “Business — Regulation”
in Part I, Item 1 of this Annual Report on
Form 10-K.
Our
businesses, profitability and liquidity may be adversely
affected by deterioration in the credit quality of, or defaults
by, third parties who owe us money, securities or other assets
or whose securities or obligations we hold.
We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations.
These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, operational failure or other
reasons. A failure of a significant market participant, or even
concerns about a default by such an institution, could lead to
significant liquidity problems, losses or defaults by other
institutions, which in turn could adversely affect us.
We are also subject to the risk that our rights against third
parties may not be enforceable in all circumstances. In
addition, deterioration in the credit quality of third parties
whose securities or obligations we hold could result in losses
and/or
adversely affect our ability to rehypothecate or otherwise use
those securities or obligations for liquidity purposes. A
significant downgrade in the credit ratings of our
counterparties could also have a negative impact on our results.
While in many cases we are permitted to require additional
collateral from counterparties that experience financial
difficulty, disputes may arise as to the amount of collateral we
are entitled to receive and the value of pledged
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assets. The termination of contracts and the foreclosure on
collateral may subject us to claims for the improper exercise of
our rights. Default rates, downgrades and disputes with
counterparties as to the valuation of collateral increase
significantly in times of market stress and illiquidity.
As part of our clearing business, we finance our client
positions, and we could be held responsible for the defaults or
misconduct of our clients. Although we regularly review credit
exposures to specific clients and counterparties and to specific
industries, countries and regions that we believe may present
credit concerns, default risk may arise from events or
circumstances that are difficult to detect or foresee.
Concentration
of risk increases the potential for significant
losses.
Concentration of risk increases the potential for significant
losses in our
market-making,
proprietary trading, investing, block trading, merchant banking,
underwriting and lending businesses. This risk may increase to
the extent we expand our
market-making,
trading, investing and lending businesses. The number and size
of such transactions may affect our results of operations in a
given period. Moreover, because of concentration of risk, we may
suffer losses even when economic and market conditions are
generally favorable for our competitors. Disruptions in the
credit markets can make it difficult to hedge these credit
exposures effectively or economically. In addition, we extend
large commitments as part of our credit origination activities.
Our inability to reduce our credit risk by selling, syndicating
or securitizing these positions, including during periods of
market stress, could negatively affect our results of operations
due to a decrease in the fair value of the positions, including
due to the insolvency or bankruptcy of the borrower, as well as
the loss of revenues associated with selling such securities or
loans.
In the ordinary course of business, we may be subject to a
concentration of credit risk to a particular counterparty,
borrower or issuer, including sovereign issuers, and a failure
or downgrade of, or default by, such entity could negatively
impact our businesses, perhaps materially, and the systems by
which we set limits and monitor the level of our credit exposure
to individual entities, industries and countries may not
function as we have anticipated. 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, clearing houses, exchanges and investment
funds. This has resulted in significant credit concentration
with respect to this industry. To the extent regulatory or
market developments lead to an increased centralization of
trading activity through particular clearing houses, central
agents or exchanges, this may increase our concentration of risk
with respect to these entities.
The financial
services industry is highly competitive.
The financial services industry — and all of our
businesses — are intensely competitive, and we expect
them to remain so. We compete on the basis of a number of
factors, including transaction execution, our products and
services, innovation, reputation, creditworthiness and price.
Over time, there has been substantial consolidation and
convergence among companies in the financial services industry.
This trend accelerated over recent years as a result of numerous
mergers and asset acquisitions among industry participants. This
trend has also hastened the globalization of the securities and
other financial services markets. As a result, we have had to
commit capital to support our international operations and to
execute large global transactions. To the extent we expand into
new business areas and new geographic regions, we will face
competitors with more experience and more established
relationships with clients, regulators and industry participants
in the relevant market, which could adversely affect our ability
to expand. Governments and regulators have recently put forward
various proposals that may impact our ability to conduct certain
of our businesses in a
cost-effective
manner or at all, including proposals relating to restrictions
on the type of activities in which financial institutions are
permitted to engage and the size of financial institutions, and
proposals to impose additional taxes on certain financial
institutions. These or other similar proposals, which may not
apply to all our competitors, could impact our ability to
compete effectively.
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Pricing and other competitive pressures in our investment
banking business, as well as our other businesses, have
continued to increase, particularly in situations where some of
our competitors may seek to increase market share by reducing
prices. For example, in connection with investment banking and
other assignments, we have experienced pressure to extend and
price credit at levels that may not always fully compensate us
for the risks we take.
We face
enhanced risks as new business initiatives lead us to transact
with a broader array of clients and counterparties and expose us
to new asset classes and new markets.
A number of our recent and planned business initiatives and
expansions of existing businesses may bring us into contact,
directly or indirectly, with individuals and entities that are
not within our traditional client and counterparty base and
expose us to new asset classes and new markets. These business
activities expose us to new and enhanced risks, including risks
associated with dealing with governmental entities, reputational
concerns arising from dealing with less sophisticated
counterparties and investors, greater regulatory scrutiny of
these activities, increased
credit-related,
sovereign and operational risks, risks arising from accidents or
acts of terrorism, and reputational concerns with the manner in
which these assets are being operated or held.
Derivative
transactions and delayed settlements may expose us to unexpected
risk and potential losses.
We are party to a large number of derivative transactions,
including credit derivatives. Many of these derivative
instruments are individually negotiated and
non-standardized,
which can make exiting, transferring or settling positions
difficult. Many credit derivatives require that we deliver to
the counterparty the underlying security, loan or other
obligation in order to receive payment. In a number of cases, we
do not hold the underlying security, loan or other obligation
and may not be able to obtain, the underlying security, loan or
other obligation. This could cause us to forfeit the payments
due to us under these contracts or result in settlement delays
with the attendant credit and operational risk as well as
increased costs to the firm.
Derivative contracts and other transactions, including secondary
bank loan purchases and sales, entered into with third parties
are not always confirmed by the counterparties or settled on a
timely basis. While the transaction remains unconfirmed or
during any delay in settlement, we are subject to heightened
credit and operational risk and in the event of a default may
find it more difficult to enforce our rights. In addition, as
new and more complex derivative products are created, covering a
wider array of underlying credit and other instruments, disputes
about the terms of the underlying contracts could arise, which
could impair our ability to effectively manage our risk
exposures from these products and subject us to increased costs.
Any regulatory effort to create an exchange or trading platform
for credit derivatives and other OTC derivative contracts, or a
market shift toward standardized derivatives, could reduce the
risk associated with such transactions, but under certain
circumstances could also limit our ability to develop
derivatives that best suit the needs of our clients and
ourselves and adversely affect our profitability and increase
our credit exposure to such platform.
Our businesses
may be adversely affected if we are unable to hire and retain
qualified employees.
Our performance is largely dependent on the talents and efforts
of highly skilled individuals; therefore, our continued ability
to compete effectively in our businesses, to manage our
businesses effectively and to expand into new businesses and
geographic areas depends on our ability to attract new employees
and to retain and motivate our existing employees. Competition
from within the financial services industry and from businesses
outside the financial services industry for qualified employees
has often been intense. This is particularly the case in
emerging markets, where we are often competing for qualified
employees with entities that have a significantly greater
presence or more extensive experience in the region.
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As described further in “Business —
Regulation — Banking Regulation —
Compensation Practices” in Part I, Item 1 of this
Annual Report on
Form 10-K,
our compensation practices are subject to review by, and the
standards of, the Federal Reserve Board. As a large financial
and banking institution, we may be subject to limitations on
compensation practices (which may or may not affect our
competitors) by the Federal Reserve Board, the FDIC or other
regulators worldwide. These limitations, including any imposed
by or as a result of future legislation or regulation or the
Federal Reserve Board’s proposal on incentive compensation
policies, may require us to alter our compensation practices in
ways that could adversely affect our ability to attract and
retain talented employees. We may also be required to make
additional disclosure with respect to the compensation of
employees, including
non-executive
officers, in a manner that directly or indirectly results in the
identity of such employees and their compensation being made
public. Any such additional public disclosure of employee
compensation may also make it difficult to attract and retain
talented employees.
Our businesses
and those of our clients are subject to extensive and pervasive
regulation around the world.
As a participant in the financial services industry and a bank
holding company, we are subject to extensive regulation in
jurisdictions around the world. We face the risk of significant
intervention by regulatory and taxing authorities in all
jurisdictions in which we conduct our businesses. Among other
things, as a result of regulators enforcing existing laws and
regulations, we could be fined, prohibited from engaging in some
of our business activities, subject to limitations or conditions
on our business activities or subjected to new or substantially
higher taxes or other governmental charges in connection with
the conduct of our business or with respect to our employees. In
addition, recent market disruptions have led to numerous
proposals in the United States and internationally for changes
in the regulation and taxation of the financial services
industry, including increased capital or new liquidity or
leverage requirements for banks.
There is also the risk that new laws or regulations or changes
in enforcement of existing laws or regulations applicable to our
businesses or those of our clients, including tax burdens and
compensation restrictions, could be imposed on a limited subset
of financial institutions (either based on size, activities,
geography or other criteria), which may adversely affect our
ability to compete effectively with other institutions that are
not affected in the same way.
The impact of such developments could impact our profitability
in the affected jurisdictions, or even make it uneconomic for us
to continue to conduct all or certain of our businesses in such
jurisdictions, or could cause us to incur significant costs
associated with changing our business practices, restructuring
our businesses, moving all or certain of our businesses and our
employees to other locations or complying with applicable
capital requirements, including liquidating assets or raising
capital in a manner that adversely increases our funding costs
or otherwise adversely affects our shareholders and creditors.
For a discussion of the extensive regulation to which our
businesses are subject, see “Business —
Regulation” in Part I, Item 1 of this Annual
Report on
Form 10-K.
We may be
adversely affected by increased governmental and regulatory
scrutiny or negative publicity.
Governmental scrutiny from regulators, legislative bodies and
law enforcement agencies with respect to matters relating to
compensation, our business practices, our past actions and other
matters has increased dramatically in the past several years.
The financial crisis and the current political and public
sentiment regarding financial institutions has resulted in a
significant amount of adverse press coverage, as well as adverse
statements or charges by regulators or elected officials. Press
coverage and other public statements that assert some form of
wrongdoing, regardless of the factual basis for the assertions
being made, often results in some type of investigation by
regulators,
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legislators and law enforcement officials or in lawsuits.
Responding to these investigations and lawsuits, regardless of
the ultimate outcome of the proceeding, is time consuming and
expensive and can divert the time and effort of our senior
management from our business. Penalties and fines sought by
regulatory authorities have increased substantially over the
last several years, and certain regulators have been more likely
in recent years to commence enforcement actions or to advance or
support legislation targeted at the financial services industry.
Adverse publicity, governmental scrutiny and legal and
enforcement proceedings can also have a negative impact on our
reputation and on the morale and performance of our employees,
which could adversely affect our businesses and results of
operations.
A failure in
our operational systems or infrastructure, or those of third
parties, could impair our liquidity, disrupt our businesses,
result in the disclosure of confidential information, damage our
reputation and cause losses.
Our businesses are highly dependent on our ability to process
and monitor, on a daily basis, a very large number of
transactions, many of which are highly complex, across numerous
and diverse markets in many currencies. These transactions, as
well as the information technology services we provide to
clients, often must adhere to client-specific guidelines, as
well as legal and regulatory standards. As our client base and
our geographical reach expands, developing and maintaining our
operational systems and infrastructure becomes increasingly
challenging. Our financial, accounting, data processing or other
operating systems and facilities may fail to operate properly or
become disabled as a result of events that are wholly or
partially beyond our control, such as a spike in transaction
volume, adversely affecting our ability to process these
transactions or provide these services. We must continuously
update these systems to support our operations and growth. This
updating entails significant costs and creates risks associated
with implementing new systems and integrating them with existing
ones.
In addition, we also face the risk of operational failure,
termination or capacity constraints of any of the clearing
agents, exchanges, clearing houses or other financial
intermediaries we use to facilitate our securities transactions,
and as our interconnectivity with our clients grows, we
increasingly face the risk of operational failure with respect
to our clients’ systems. In recent years, there has been
significant consolidation among clearing agents, exchanges and
clearing houses, which has increased our exposure to operational
failure, termination or capacity constraints of the particular
financial intermediaries that we use and could affect our
ability to find adequate and
cost-effective
alternatives in the event of any such failure, termination or
constraint. Industry consolidation, whether among market
participants or financial intermediaries, increases the risk of
operational failure as disparate complex systems need to be
integrated, often on an accelerated basis.
Furthermore, the interconnectivity of multiple financial
institutions with central agents, exchanges and clearing houses,
and the increased centrality of these entities under proposed
and potential regulation, increases the risk that an operational
failure at one institution or entity may cause an
industry-wide
operational failure that could materially impact our ability to
conduct business. Any such failure, termination or constraint
could adversely affect our ability to effect transactions,
service our clients, manage our exposure to risk or expand our
businesses or result in financial loss or liability to our
clients, impairment of our liquidity, disruption of our
businesses, regulatory intervention or reputational damage.
Despite the resiliency plans and facilities we have in place,
our ability to conduct business may be adversely impacted by a
disruption in the infrastructure that supports our businesses
and the communities in which we are located. This may include a
disruption involving electrical, communications, internet,
transportation or other services used by us or third parties
with which we conduct business. These disruptions may occur as a
result of events that affect only our buildings or the buildings
of such third parties, or as a result of events with a broader
impact globally, regionally or in the cities where those
buildings are located.
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Nearly all of our employees in our primary locations, including
the New York metropolitan area, London, Frankfurt, Hong Kong,
Tokyo and Bangalore, work in close proximity to one another, in
one or more buildings. Notwithstanding our efforts to maintain
business continuity, given that our headquarters and the largest
concentration of our employees are in the New York metropolitan
area, depending on the intensity and longevity of the event, a
catastrophic event impacting our New York metropolitan area
offices could very negatively affect our business. If a
disruption occurs in one location and our employees in that
location are unable to occupy our offices or communicate with or
travel to other locations, our ability to service and interact
with our clients may suffer, and we may not be able to
successfully implement contingency plans that depend on
communication or travel.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures and endeavor to modify them as circumstances warrant,
our computer systems, software and networks may be vulnerable to
unauthorized access, misuse, computer viruses or other malicious
code and other events that could have a security impact. If one
or more of such events occur, this potentially could jeopardize
our or our clients’ or counterparties’ confidential
and other information processed and stored in, and transmitted
through, our computer systems and networks, or otherwise cause
interruptions or malfunctions in our, our clients’, our
counterparties’ or third parties’ operations, which
could result in significant losses or reputational damage. We
may be required to expend significant additional resources to
modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are either not insured
against or not fully covered through any insurance maintained by
us.
We routinely transmit and receive personal, confidential and
proprietary information by email and other electronic means. We
have discussed and worked with clients, vendors, service
providers, counterparties and other third parties to develop
secure transmission capabilities, but we do not have, and may be
unable to put in place, secure capabilities with all of our
clients, vendors, service providers, counterparties and other
third parties and we may not be able to ensure that these third
parties have appropriate controls in place to protect the
confidentiality of the information. An interception, misuse or
mishandling of personal, confidential or proprietary information
being sent to or received from a client, vendor, service
provider, counterparty or other third party could result in
legal liability, regulatory action and reputational harm.
Conflicts of
interest are increasing and a failure to appropriately identify
and deal with conflicts of interest could adversely affect our
businesses.
As we have expanded the scope of our businesses and our client
base, we increasingly must address potential conflicts of
interest, including situations where our services to a
particular client or our own investments or other interests
conflict, or are perceived to conflict, with the interests of
another client, as well as situations where one or more of our
businesses have access to material
non-public
information that may not be shared with other businesses within
the firm and situations where we may be a creditor of an entity
with which we also have an advisory or other relationship. In
addition, our status as a bank holding company subjects us to
heightened regulation and increased regulatory scrutiny by the
Federal Reserve Board with respect to transactions between GS
Bank USA and entities that are or could be seen as affiliates of
ours.
We have extensive procedures and controls that are designed to
identify and address conflicts of interest, including those
designed to prevent the improper sharing of information among
our businesses. However, appropriately identifying and dealing
with conflicts of interest is complex and difficult, and our
reputation, which is one of our most important assets, could be
damaged and the willingness of clients to enter into
transactions in which such a conflict might arise may be
affected if we fail, or appear to fail, to identify and deal
appropriately with conflicts of interest. In addition, potential
or perceived conflicts could give rise to litigation or
regulatory enforcement actions.
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Substantial
legal liability or significant regulatory action against us
could have material adverse financial effects or cause us
significant reputational harm, which in turn could seriously
harm our business prospects.
We face significant legal risks in our businesses, and the
volume of claims and amount of damages and penalties claimed in
litigation and regulatory proceedings against financial
institutions remain high. See “Legal Proceedings” in
Part I, Item 3 of this Annual Report on
Form 10-K
for a discussion of certain legal proceedings in which we are
involved. Our experience has been that legal claims by customers
and clients increase in a market downturn and that
employment-related claims increase in periods when we have
reduced the total number of employees.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees in the financial services
industry in recent years, and we run the risk that employee
misconduct could occur. It is not always possible to deter or
prevent employee misconduct and the precautions we take to
prevent and detect this activity have not been and may not be
effective in all cases.
The growth of
electronic trading and the introduction of new trading
technology may adversely affect our business and may increase
competition.
Technology is fundamental to our business and our industry. The
growth of electronic trading and the introduction of new
technologies is changing our businesses and presenting us with
new challenges. Securities, futures and options transactions are
increasingly occurring electronically, both on our own systems
and through other alternative trading systems, and it appears
that the trend toward alternative trading systems will continue
and probably accelerate. Some of these alternative trading
systems compete with our trading businesses, including our
exchange-based
market-making
businesses, and we may experience continued competitive
pressures in these and other areas. In addition, the increased
use by our clients of
low-cost
electronic trading systems and direct electronic access to
trading markets could cause a reduction in commissions and
spreads. As our clients increasingly use our systems to trade
directly in the markets, we may incur liabilities as a result of
their use of our order routing and execution infrastructure. We
have invested significant resources into the development of
electronic trading systems and expect to continue to do so, but
there is no assurance that the revenues generated by these
systems will yield an adequate return on our investment,
particularly given the relatively lower commissions arising from
electronic trades.
Our
commodities activities, particularly our power generation
interests and our physical commodities businesses, subject us to
extensive regulation, potential catastrophic events and
environmental, reputational and other risks that may expose us
to significant liabilities and costs.
We engage in, or invest in entities that engage in, the
production, storage, transportation, marketing and trading of
numerous commodities, including crude oil, oil products, natural
gas, electric power, agricultural products, natural gas, metals
(base and precious), minerals (including uranium), emission
credits, coal, freight, liquefied natural gas and related
products and indices. These activities subject us to extensive
and evolving federal, state and local energy, environmental and
other governmental laws and regulations worldwide, including
environmental laws and regulations relating to, among others,
air quality, water quality, waste management, transportation of
hazardous substances, natural resources, site remediation and
health and safety. Additionally, rising climate change concerns
can lead to additional regulation that may increase the
operating costs and profitability of our investments.
We may incur substantial costs in complying with current or
future laws and regulations relating to our commodities-related
businesses and investments, particularly electric power
generation, transportation and storage of physical commodities
and wholesale sales and trading of electricity and natural gas.
Compliance with these laws and regulations could require us to
commit significant capital toward environmental monitoring,
installation of pollution control equipment, renovation of
storage
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facilities or transport vessels, payment of emission fees and
carbon or other taxes, and application for, and holding of,
permits and licenses. Our commodities-related activities are
also subject to the risk of unforeseen or catastrophic events,
many of which are outside of our control, including breakdown or
failure of power generation equipment, transmission lines,
transport vessels, storage facilities or other equipment or
processes or other mechanical malfunctions, fires, leaks, spills
or release of hazardous substances, performance below expected
levels of output or efficiency, terrorist attacks, natural
disasters or other hostile or catastrophic events. In addition,
we rely on third party suppliers or service providers to perform
their contractual obligations and any failure on their part,
including the failure to obtain raw materials at reasonable
prices or to safely transport or store commodities could
adversely affect our business. In addition, we may not be able
to obtain insurance to cover some of these risks and the
insurance that we have may be inadequate to cover our losses.
The occurrence of any of such events may prevent us from
performing under our agreements with clients, may impair our
operations or financial results and may result in litigation,
regulatory action, negative publicity or other reputational harm.
In conducting
our businesses around the world, we are subject to political,
economic, legal, operational and other risks that are inherent
in operating in many countries.
In conducting our businesses and maintaining and supporting our
global operations, we are subject to risks of possible
nationalization, expropriation, price controls, capital
controls, exchange controls and other restrictive governmental
actions, as well as the outbreak of hostilities or acts of
terrorism. In many countries, the laws and regulations
applicable to the securities and financial services industries
and many of the transactions in which we are involved are
uncertain and evolving, and it may be difficult for us to
determine the exact requirements of local laws in every market.
Any determination by local regulators that we have not acted in
compliance with the application of local laws in a particular
market or our failure to develop effective working relationships
with local regulators could have a significant and negative
effect not only on our businesses in that market but also on our
reputation generally. We are also subject to the enhanced risk
that transactions we structure might not be legally enforceable
in all cases.
Our businesses and operations are increasingly expanding into
new regions throughout the world, including emerging markets,
and we expect this trend to continue. Various emerging market
countries have experienced severe economic and financial
disruptions, including significant devaluations of their
currencies, defaults or threatened defaults on sovereign debt,
capital and currency exchange controls, and low or negative
growth rates in their economies, as well as military activity or
acts of terrorism. The possible effects of any of these
conditions include an adverse impact on our businesses and
increased volatility in financial markets generally.
We may incur
losses as a result of unforeseen or catastrophic events,
including the emergence of a pandemic, terrorist attacks or
natural disasters.
The occurrence of unforeseen or catastrophic events, including
the emergence of a pandemic or other widespread health emergency
(or concerns over the possibility of such an emergency),
terrorist attacks or natural disasters, could create economic
and financial disruptions, could lead to operational
difficulties (including travel limitations) that could impair
our ability to manage our businesses, and could expose our
insurance businesses to significant losses.
Item 1B. Unresolved
Staff Comments
There are no material unresolved written comments that were
received from the SEC staff 180 days or more before the end
of our fiscal year relating to our periodic or current reports
under the Exchange Act.
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| Item 2. | Properties |
Our principal executive offices are located at 200 West Street,
New York, New York and comprise approximately 2.1 million
gross square feet. The building is located on a parcel leased
from Battery Park City Authority pursuant to a ground lease.
Under the lease, Battery Park City Authority holds title to all
improvements, including the office building, subject to Goldman
Sachs’ right of exclusive possession and use until
June 2069, the expiration date of the lease. Under the
terms of the ground lease, we made a lump sum ground rent
payment in June 2007 of $161 million for rent through
the term of the lease.
We have offices at 30 Hudson Street in Jersey City, New Jersey,
which we own and which include approximately 1.6 million
gross square feet of office space, and we own over 700,000
square feet of additional commercial space spread among four
locations in New York and New Jersey.
We have additional offices in the U.S. and elsewhere in the
Americas, which together comprise approximately 2.8 million
rentable square feet of leased space.
In Europe, the Middle East and Africa, we have offices that
total approximately 2.2 million rentable square feet. Our
European headquarters is located in London at Peterborough
Court, pursuant to a lease expiring in 2026. In total, we lease
approximately 1.6 million rentable square feet in London
through various leases, relating to various properties.
In Asia, we have offices that total approximately
1.6 million rentable square feet. Our headquarters in this
region are in Tokyo, at the Roppongi Hills Mori Tower, and in
Hong Kong, at the Cheung Kong Center. In Tokyo, we currently
lease approximately 440,000 rentable square feet, the majority
of which will expire in 2018. In Hong Kong, we currently lease
approximately 310,000 rentable square feet under lease
agreements, the majority of which will expire in 2011.
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. We regularly evaluate our current and future space
capacity in relation to current and projected staffing levels.
In 2009, we incurred exit costs of $61 million related to
our office space. 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.
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| Item 3. | Legal Proceedings |
We are involved in a number of judicial, regulatory and
arbitration proceedings (including those described below)
concerning matters arising in connection with the conduct of our
businesses. We believe, based on currently available
information, that the results of such proceedings, in the
aggregate, will not have a material adverse effect on our
financial condition, but might be material to our operating
results for any particular period, depending, in part, upon the
operating results for such period. Given the range of litigation
and investigations presently under way, our litigation expenses
can be expected to remain high.
IPO Process
Matters
Group Inc. and GS&Co. are among the numerous financial
services companies that have been named as defendants in a
variety of lawsuits alleging improprieties in the process by
which those companies participated in the underwriting of public
offerings in recent years.
GS&Co. has, together with other underwriters in certain
offerings as well as the issuers and certain of their officers
and directors, been named as a defendant in a number of related
lawsuits filed in the U.S. District Court for the Southern
District of New York alleging, among other things, that the
prospectuses for the offerings violated the federal securities
laws by failing to disclose the existence of alleged
arrangements tying allocations in certain offerings to higher
customer brokerage commission rates as well as purchase orders
in the aftermarket, and that the alleged arrangements resulted
in market manipulation. On April 2, 2009, the parties
entered into a definitive settlement agreement, and by a
decision dated October 5, 2009, the district court
approved the proposed settlement. On October 23, 2009,
certain objectors filed a petition in the U.S. Court of
Appeals for the Second Circuit seeking review of the district
court’s certification of a class for purposes of the
settlement, and various objectors have appealed certain aspects
of the settlement’s approval.
GS&Co. is among numerous underwriting firms named as
defendants in a number of complaints filed commencing
October 3, 2007, in the U.S. District Court for
the Western District of Washington alleging violations of the
federal securities laws in connection with offerings of
securities for 16 issuers during 1999 and 2000. The complaints
generally assert that the underwriters, together with each
issuer’s directors, officers and principal shareholders,
entered into purported agreements to tie allocations in the
offerings to increased brokerage commissions and aftermarket
purchase orders. The complaints further allege that, based upon
these and other purported agreements, the underwriters violated
the reporting provisions of, and are subject to
short-swing
profit recovery under, Section 16 of the Exchange Act. On
October 29, 2007, the cases were reassigned to a
single district judge. 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.
GS&Co. has been named as a defendant in an action commenced
on May 15, 2002 in New York Supreme Court, New York
County, by an official committee of unsecured creditors on
behalf of eToys, Inc., alleging that the firm intentionally
underpriced eToys, Inc.’s initial public offering. The
action seeks, among other things, unspecified compensatory
damages resulting from the alleged lower amount of offering
proceeds. The court granted GS&Co.’s motion to dismiss
as to five of the claims; plaintiff appealed from the dismissal
of the five claims, and GS&Co. appealed from the denial of
its motion as to the remaining claim. The New York Appellate
Division, First Department affirmed in part and reversed in part
the lower court’s ruling on the firm’s motion to
dismiss, permitting all claims to proceed except the claim for
fraud, as to which the appellate court granted leave to replead,
and the New York Court of Appeals affirmed in part and reversed
in part, dismissing claims for breach of contract, professional
malpractice and unjust enrichment, but permitting claims for
breach of fiduciary duty and fraud to continue. On remand to the
lower court, GS&Co. moved to dismiss the surviving claims
or, in the alternative, for summary judgment, but the motion was
denied by a decision dated March 21, 2006, and the
court subsequently permitted plaintiff to amend the complaint
again.
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Group Inc. and certain of its affiliates have, together
with various underwriters in certain offerings, received
subpoenas and requests for documents and information from
various governmental agencies and self-regulatory organizations
in connection with investigations relating to the public
offering process. Goldman Sachs has cooperated with these
investigations.
World Online
Litigation
In March 2001, a Dutch shareholders association initiated
legal proceedings for an unspecified amount of damages against
GSI and others in Amsterdam District Court in connection with
the initial public offering of World Online in March 2000,
alleging misstatements and omissions in the offering materials
and that the market was artificially inflated by improper public
statements and stabilization activities. Goldman Sachs and ABN
AMRO Rothschild served as joint global coordinators of the
approximately €2.9 billion offering. GSI underwrote
20,268,846 shares and GS&Co. underwrote
6,756,282 shares for a total offering price of
approximately €1.16 billion.
The district court rejected the claims against GSI and ABN AMRO,
but found World Online liable in an amount to be determined. On
appeal, by a decision dated May 3, 2007, the
Netherlands Court of Appeals affirmed in part and reversed in
part the decision of the district court holding that certain of
the alleged disclosure deficiencies were actionable as to GSI
and ABN AMRO. On further appeal, the Netherlands Supreme Court
on November 27, 2009 affirmed the rulings of the Court
of Appeals, except found certain additional aspects of the
offering materials actionable and held that GSI and ABN AMRO
could potentially be held responsible for certain public
statements and press releases by World Online and its former CEO.
Research
Independence Matters
GS&Co. is one of several investment firms that have been
named as defendants in substantively identical purported class
actions filed in the U.S. District Court for the Southern
District of New York alleging violations of the federal
securities laws in connection with research coverage of certain
issuers and seeking compensatory damages. In one such action,
relating to coverage of RSL Communications, Inc. commenced on
July 15, 2003, GS&Co.’s motion to dismiss
the complaint was denied. The district court granted the
plaintiffs’ motion for class certification and the
U.S. Court of Appeals for the Second Circuit, by an order
dated January 26, 2007, vacated the district
court’s class certification and remanded for
reconsideration. By a decision dated August 4, 2009,
the district court granted plaintiffs’ renewed motion
seeking class certification. Defendants’ petition with the
appellate court seeking review of the certification ruling was
denied on January 25, 2010.
A purported shareholder derivative action was filed in New York
Supreme Court, New York County on June 13, 2003
against Group Inc. and its board of directors, which, as
amended on March 3, 2004 and June 14, 2005,
alleges that the directors breached their fiduciary duties in
connection with the firm’s research as well as the
firm’s IPO allocations practices.
Group Inc., GS&Co. and Henry M. Paulson, Jr., the
former Chairman and Chief Executive Officer of Group Inc.,
have been named as defendants in a purported class action filed
on July 18, 2003 on behalf of purchasers of
Group Inc. stock from July 1, 1999 through
May 7, 2002. The complaint, now pending in the
U.S. District Court for the Southern District of New York,
alleges that defendants breached their fiduciary duties and
violated the federal securities laws in connection with the
firm’s research activities and seeks, among other things,
unspecified compensatory damages
and/or
rescission. The district court granted the defendants’
motion to dismiss with leave to amend, and plaintiffs filed a
second amended complaint. In a decision dated
September 29, 2006 on defendants’ renewed motion
to dismiss, the federal district court granted
Mr. Paulson’s motion with leave to replead but
otherwise denied the motion. Plaintiffs’ motion for class
certification was granted by a decision dated
September 15, 2008. 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.
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Group Inc. and its affiliates, together with other
financial services firms, have received requests for information
from various governmental agencies and self-regulatory
organizations in connection with their review of research
related issues. Goldman Sachs has cooperated with these
requests. See “Business — Regulation —
Regulations Applicable in and Outside the United States” in
Part I, Item 1 of our Annual Report on
Form 10-K
for a discussion of our global research settlement.
Enron Litigation
Matters
Goldman Sachs affiliates are defendants in certain actions
relating to Enron Corp., which filed for protection under the
U.S. bankruptcy laws on December 2, 2001.
GS&Co. and co-managing underwriters have been named as
defendants in certain purported securities class and individual
actions commenced beginning on December 14, 2001 in the
U.S. District Court for the Southern District of Texas and
California Superior Court brought by purchasers of $255,875,000
(including over-allotments) of Exchangeable Notes of Enron Corp.
in August 1999. The notes were mandatorily exchangeable in 2002
into shares of Enron Oil & Gas Company held by Enron
Corp. or their cash equivalent. The complaints also name as
defendants Group Inc. as well as certain past and present
officers and directors of Enron Corp. and the company’s
outside accounting firm. The complaints generally allege
violations of the disclosure requirements of the federal
securities laws
and/or
state
law, and seek compensatory damages. GS&Co. underwrote
$127,937,500 (including over-allotments) principal amount of the
notes. Group Inc. and GS&Co. moved to dismiss the class
action complaint in the Texas federal court and the motion was
granted as to Group Inc. but denied as to GS&Co. One of the
plaintiffs moved for class certification, and GS&Co. moved
for judgment on the pleadings against all plaintiffs. The
parties subsequently reached a settlement pursuant to which
GS&Co. has contributed $11.5 million to a settlement
fund, and the district court approved the settlement on
February 4, 2010. (Plaintiffs in various consolidated
actions relating to Enron Corp. entered into a settlement with
Banc of America Securities LLC on July 2, 2004 and with
Citigroup, Inc. on June 10, 2005, including with respect to
claims relating to the Exchangeable Notes offering, as to which
affiliates of those settling defendants were two of the three
underwriters (together with GS&Co.).)
Several funds which allegedly sustained investment losses of
approximately $125 million in connection with secondary
market purchases of the Exchangeable Notes as well as Zero
Coupon Convertible Notes of Enron Corp. commenced an action in
the U.S. District Court for the Southern District of New
York on January 16, 2002. As amended, the lawsuit
names as defendants the underwriters of the August 1999
offering and the company’s outside accounting firm, and
alleges violations of the disclosure requirements of the federal
securities laws, fraud and misrepresentation. The Judicial Panel
on Multidistrict Litigation has transferred that action to the
Texas federal district court for purposes of coordinated or
consolidated pretrial proceedings with other matters relating to
Enron Corp. GS&Co. moved to dismiss the complaint and the
motion was granted in part and denied in part. The district
court granted the funds’ motion for leave to file a second
amended complaint on January 22, 2007.
Montana Power
Litigation
GS&Co. and Group Inc. have been named as defendants in
two actions relating to financial advisory work rendered to
Montana Power Company. On November 13, 2009, all
parties entered into a settlement and the settlement was
preliminarily approved on February 10, 2010. A final
hearing has been scheduled for May 20, 2010 to May 21,
2010.
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One of the actions is a purported class action commenced
originally on October 1, 2001 in Montana District
Court, Second Judicial District on behalf of former shareholders
of Montana Power Company. The complaint generally alleges that
Montana Power Company violated Montana law by failing to procure
shareholder approval of certain corporate strategies and
transactions, that the company’s board breached its
fiduciary duties in pursuing those strategies and transactions,
and that GS&Co. aided and abetted the board’s breaches
and rendered negligent advice in its role as financial advisor
to the company. The complaint seeks, among other things,
compensatory damages. In addition to GS&Co. and
Group Inc., the defendants include Montana Power Company,
certain of its officers and directors, an outside law firm for
the Montana Power Company, and certain companies that purchased
assets from Montana Power Company and its affiliates. The
Montana state court denied the Goldman Sachs defendants’
motions to dismiss. Following the bankruptcies of certain
defendants in the action, defendants removed the action to
federal court, the U.S. District Court for the District of
Montana, Butte Division.
On October 26, 2004, a creditors committee of Touch
America Holdings, Inc. brought the other action against
GS&Co., Group Inc., and a former outside law firm for
Montana Power Company in Montana District Court, Second Judicial
District. The complaint asserts that Touch America Holdings,
Inc. is the successor to Montana Power Corporation and alleges
substantially the same claims as in the purported class action.
Defendants removed the action to federal court. Defendants moved
to dismiss the complaint, but the motion was denied by a
decision dated June 10, 2005.
Adelphia
Communications Fraudulent Conveyance Litigation
GS&Co. is among numerous entities named as defendants in
two adversary proceedings commenced in the U.S. Bankruptcy
Court for the Southern District of New York, one on
July 6, 2003 by a creditors committee, and the second
on or about July 31, 2003 by an equity committee of
Adelphia Communications, Inc. Those proceedings have now been
consolidated in a single amended complaint filed by the Adelphia
Recovery Trust on October 31, 2007. The complaint
seeks, among other things, to recover, as fraudulent
conveyances, payments made allegedly by Adelphia Communications,
Inc. and its affiliates to certain brokerage firms, including
approximately $62.9 million allegedly paid to GS&Co.,
in respect of margin calls made in the ordinary course of
business on accounts owned by members of the family that
formerly controlled Adelphia Communications, Inc. By a decision
dated May 4, 2009, the district court denied
GS&Co.’s motion to dismiss the claim related to margin
payments. GS&Co. moved for reconsideration, and by a
decision dated June 15, 2009, the district court
granted the motion insofar as requiring plaintiff to amend its
complaint to specify the source of the margin payments to
GS&Co. By a decision dated July 30, 2009, the
district court held that the sufficiency of the amended claim
would be determined at the summary judgment stage.
Specialist
Matters
Spear, Leeds & Kellogg Specialists LLC (SLKS) and
certain affiliates have received requests for information from
various governmental agencies and self-regulatory organizations
as part of an
industry-wide
investigation relating to activities of floor specialists in
recent years. Goldman Sachs has cooperated with the requests.
On March 30, 2004, certain specialist firms on the
NYSE, including SLKS, without admitting or denying the
allegations, entered into a final global settlement with the SEC
and the NYSE covering certain activities during the years 1999
through 2003. The SLKS settlement involves, among other things,
(i) findings by the SEC and the NYSE that SLKS violated
certain federal securities laws and NYSE rules, and in some
cases failed to supervise certain individual specialists, in
connection with trades that allegedly disadvantaged customer
orders, (ii) a cease and desist order against SLKS,
(iii) a censure of SLKS, (iv) SLKS’ agreement to
pay an aggregate of $45.3 million in disgorgement and a
penalty to be used to compensate customers, (v) certain
undertakings with respect to SLKS’ systems and procedures,
and (v) SLKS’ retention of an independent consultant
to review and evaluate
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certain of SLKS’ compliance systems, policies and
procedures. Comparable findings were made and sanctions imposed
in the settlements with other specialist firms. The settlement
did not resolve the related private civil actions against SLKS
and other firms or regulatory investigations involving
individuals or conduct on other exchanges.
SLKS, Spear, Leeds & Kellogg, L.P. and Group Inc.
are among numerous defendants named in purported class actions
brought beginning in October 2003 on behalf of investors in
the U.S. District Court for the Southern District of New
York alleging violations of the federal securities laws and
state common law in connection with NYSE floor specialist
activities. The actions seek unspecified compensatory damages,
restitution and disgorgement on behalf of purchasers and sellers
of unspecified securities between October 17, 1998 and
October 15, 2003. Plaintiffs filed a consolidated
amended complaint on September 16, 2004. The
defendants’ motion to dismiss the amended complaint was
granted in part and denied in part by a decision dated
December 13, 2005. 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. By an order dated
October 1, 2009, the U.S. Court of Appeals for
the Second Circuit declined to review the certification ruling.
The specialist defendants filed a petition for rehearing
and/or
rehearing en banc on October 15, 2009.
Treasury
Matters
On September 4, 2003, the SEC announced that
GS&Co. had settled an administrative proceeding arising
from certain trading in U.S. Treasury bonds over an
approximately eight-minute period after GS&Co. received an
October 31, 2001 telephone call from a Washington,
D.C.-based political consultant concerning a forthcoming
Treasury refunding announcement. Without admitting or denying
the allegations, GS&Co. consented to the entry of an order
that, among other things, (i) censured GS&Co.;
(ii) directed GS&Co. to cease and desist from
committing or causing any violations of
Sections 15(c)(1)(A) and (C) and 15(f) of, and
Rule 15c1-2
under, the Exchange Act; (iii) ordered GS&Co. to pay
disgorgement and prejudgment interest in the amount of
$1,742,642, and a civil monetary penalty of $5 million; and
(iv) directed GS&Co. to conduct a review of its
policies and procedures and adopt, implement and maintain
policies and procedures consistent with the order and that
review. GS&Co. also undertook to pay $2,562,740 in
disgorgement and interest relating to certain trading in
U.S. Treasury bond futures during the same eight-minute
period.
GS&Co. has been named as a defendant in a purported class
action filed on March 10, 2004 in the
U.S. District Court for the Northern District of Illinois
on behalf of holders of short positions in
30-year
U.S. Treasury futures and options on the morning of
October 31, 2001. The complaint alleges that the firm
purchased
30-year
bonds and futures prior to the Treasury’s refunding
announcement that morning based on
non-public
information about that announcement, and that such purchases
increased the costs of covering such short positions. The
complaint also names as defendants the Washington, D.C.-based
political consultant who allegedly was the source of the
information, a former GS&Co. economist who allegedly
received the information, and another company and one of its
employees who also allegedly received and traded on the
information prior to its public announcement. The complaint
alleges violations of the federal commodities and antitrust
laws, as well as Illinois statutory and common law, and seeks,
among other things, unspecified damages including treble damages
under the antitrust laws. The district court dismissed the
antitrust and Illinois state law claims but permitted the
federal commodities law claims to proceed. Plaintiff’s
motion for class certification was denied by a decision dated
August 22, 2008. GS&Co. moved for summary
judgment, and by a decision dated July 30, 2008, the
district court granted the motion insofar as the remaining claim
relates to the trading of treasury bonds, but denied the motion
without prejudice to the extent the claim relates to trading of
treasury futures. By a decision dated August 6, 2009,
the federal district court denied GS&Co.’s motion for
summary judgment as to the remaining claims. On
October 13, 2009, the parties filed an offer of
judgment and notice of acceptance with respect to
plaintiff’s individual claim. On
December 11, 2009, the plaintiff purported to appeal
with respect to the
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district court’s prior denial of class certification, and
GS&Co. moved to dismiss the appeal on
January 25, 2010.
Mutual
Fund Matters
GS&Co. and certain mutual fund affiliates have received
subpoenas and requests for information from various governmental
agencies and self-regulatory organizations including the SEC as
part of the
industry-wide
investigation relating to the practices of mutual funds and
their customers. GS&Co. and its affiliates have cooperated
with such requests.
Refco Securities
Litigation
GS&Co. and the other lead underwriters for the
August 2005 initial public offering of
26,500,000 shares of common stock of Refco Inc. are among
the defendants in various putative class actions filed in the
U.S. District Court for the Southern District of New York
beginning in October 2005 by investors in Refco Inc. in
response to certain publicly reported events that culminated in
the October 17, 2005 filing by Refco Inc. and certain
affiliates for protection under U.S. bankruptcy laws. The
actions, which have been consolidated, allege violations of the
disclosure requirements of the federal securities laws and seek
compensatory damages. In addition to the underwriters, the
consolidated complaint names as defendants Refco Inc. and
certain of its affiliates, certain officers and directors of
Refco Inc., Thomas H. Lee Partners, L.P. (which held a majority
of Refco Inc.’s equity through certain funds it manages),
Grant Thornton (Refco Inc.’s outside auditor), and BAWAG
P.S.K. Bank fur Arbeit und Wirtschaft und Osterreichische
Postsparkasse Aktiengesellschaft (BAWAG). Lead plaintiffs
entered into a settlement with BAWAG, which was approved
following certain amendments on June 29, 2007.
GS&Co. underwrote 5,639,200 shares of common stock at
a price of $22 per share for a total offering price of
approximately $124 million.
GS&Co. has, together with other underwriters of the Refco
Inc. initial public offering, received requests for information
from various governmental agencies and self-regulatory
organizations. GS&Co. is cooperating with those requests.
Short-Selling
Litigation
Group Inc., GS&Co. and Goldman Sachs
Execution & Clearing, L.P. are among the numerous
financial services firms that have been named as defendants in a
purported class action filed on April 12, 2006 in the
U.S. District Court for the Southern District of New York
by customers who engaged in
short-selling
transactions in equity securities since
April 12, 2000. The amended complaint generally
alleges that the customers were charged fees in connection with
the short sales but that the applicable securities were not
necessarily borrowed to effect delivery, resulting in failed
deliveries, and that the defendants conspired to set a minimum
threshold borrowing rate for securities designated as hard to
borrow. The complaint asserts a claim under the federal
antitrust laws, as well as claims under the New York Business
Law and common law, and seeks treble damages as well as
injunctive relief. Defendants’ motion to dismiss the
complaint was granted by a decision dated
December 20, 2007. On December 3, 2009, the
dismissal was affirmed by the U.S. Court of Appeals for the
Second Circuit.
Fannie Mae
Litigation
GS&Co.
was added as a defendant in an amended
complaint filed on August 14, 2006 in a purported
class action pending in the U.S. District Court for the
District of Columbia. The complaint asserts violations of the
federal securities laws generally arising from allegations
concerning Fannie Mae’s accounting practices in connection
with certain Fannie Mae-sponsored REMIC transactions that were
allegedly arranged by GS&Co. The other defendants include
Fannie Mae, certain of its past and present officers and
directors, and accountants. By a decision dated
May 8, 2007, the district court granted
GS&Co.’s motion to dismiss the claim against it. The
time for an appeal will not begin to run until disposition of
the claims against other defendants.
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Beginning in September 2006, Group Inc.
and/or
GS&Co. were added named as defendants in four Fannie Mae
shareholder derivative actions in the U.S. District Court
for the District of Columbia. The complaints generally allege
that the Goldman Sachs defendants aided and abetted a breach of
fiduciary duty by Fannie Mae’s directors and officers in
connection with certain Fannie Mae-sponsored REMIC transactions
and one of the complaints also asserts a breach of contract
claim. The complaints also name as defendants certain former
officers and directors of Fannie Mae as well as an outside
accounting firm. The complaints seek,
inter alia
,
unspecified damages. The Goldman Sachs defendants were dismissed
without prejudice from the first filed of these actions, and the
remaining claims in that action were dismissed for failure to
make a demand on Fannie Mae’s board of directors. That
dismissal has been affirmed on appeal. The remaining three
actions have been stayed by the district court.
Compensation
Related Litigation
On March 16, 2007, Group Inc., its board of
directors, executive officers and members of its management
committee were named as defendants in a purported shareholder
derivative action in the U.S. District Court for the
Eastern District of New York challenging the sufficiency of the
firm’s February 21, 2007 Proxy Statement and the
compensation of certain employees. The complaint generally
alleges that the Proxy Statement undervalues stock option awards
disclosed therein, that the recipients received excessive awards
because the proper methodology was not followed, and that the
firm’s senior management received excessive compensation,
constituting corporate waste. The complaint seeks, among other
things, an injunction against the 2007 Annual Meeting of
Shareholders, the voiding of any election of directors in the
absence of an injunction and an equitable accounting for the
allegedly excessive compensation. On July 20, 2007,
defendants moved to dismiss the complaint, and the motion was
granted by an order dated December 18, 2008. Plaintiff
appealed on January 13, 2009, and the dismissal was
affirmed by the U.S. Court of Appeals for the Second
Circuit on December 14, 2009.
On January 17, 2008, Group Inc., its board of
directors, executive officers and members of its management
committee were named as defendants in a related purported
shareholder derivative action brought by the same plaintiff in
the same court predicting that the firm’s 2008 Proxy
Statement will violate the federal securities laws by
undervaluing certain stock option awards and alleging that
senior management received excessive compensation for 2007. The
complaint seeks, among other things, an injunction against the
distribution of the 2008 Proxy Statement, the voiding of any
election of directors in the absence of an injunction and an
equitable accounting for the allegedly excessive compensation.
On January 25, 2008, the plaintiff moved for a
preliminary injunction to prevent the 2008 Proxy Statement from
using options valuations that the plaintiff alleges are
incorrect and to require the amendment of SEC Form 4s filed
by certain of the executive officers named in the complaint to
reflect the stock option valuations alleged by the plaintiff.
Plaintiff’s motion for a preliminary injunction was denied
by order dated February 14, 2008, plaintiff appealed
and twice moved to expedite the appeal, with the motions being
denied by orders dated February 29, 2008 and
April 3, 2008. The appeal was dismissed on
February 23, 2009. On February 13, 2009, the
plaintiff filed an amended complaint, which added purported
direct
(i.e., non-derivative)
claims based on substantially the same theory. Defendants moved
to dismiss on April 6, 2009. On
April 15, 2009, defendants moved to enjoin plaintiff
and his counsel from filing or prosecuting similar claims in
other courts. Adjudication of the motion has been adjourned
until resolution of the pending dismissal and remand motions in
this and the 2009 action, subject to plaintiff’s agreement
not to bring other related actions.
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
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actions described in this section and to dismiss. The action has
been transferred on consent to the U.S. District Court for
the Eastern District of New York, where defendants moved to
dismiss on April 23, 2009. On July 10, 2009,
plaintiff moved to remand the action to state court.
Purported shareholder derivative actions have been commenced in
New York Supreme Court, New York County and Delaware Court of
Chancery beginning on December 14, 2009, alleging that
Group Inc.’s board of directors breached its fiduciary
duties in connection with setting compensation levels for the
year 2009 and that such levels are excessive. The complaints
name as defendants Group Inc., its board of directors and
certain senior executives. The complaints seek,
inter
alia
, damages, restitution of certain compensation paid, and
an order requiring the firm to adopt corporate reforms.
Group Inc. and certain of its affiliates have received
inquiries from various governmental agencies and self-regulatory
organizations regarding the firm’s compensation processes.
The firm is cooperating with the requests.
Group Inc.’s board of directors has received several
demand letters from shareholders relating to compensation
matters, including demands that Group Inc.’s board of
directors investigates compensation awards over recent years,
take steps to recoup alleged excessive compensation, and adopt
certain reforms. After considering the demand letters,
Group Inc.’s board of directors rejected the demands.
Mortgage-Related
Matters
GS&Co. and certain of its affiliates, together with other
financial services firms, have received requests for information
from various governmental agencies and self-regulatory
organizations relating to subprime mortgages, and
securitizations, collateralized debt obligations and synthetic
products related to subprime mortgages. GS&Co. and its
affiliates are cooperating with the requests.
GS&Co., along with numerous other financial institutions,
is a defendant in an action brought by the City of Cleveland
alleging that the defendants’ activities in connection with
securitizations of subprime mortgages created a “public
nuisance” in Cleveland. The action is pending in the
U.S. District Court for the Northern District of Ohio, and
the complaint seeks, among other things, unspecified
compensatory damages. The district court granted
defendants’ motion to dismiss by a decision dated
May 15, 2009. The City appealed on
May 18, 2009.
GS&Co., Goldman Sachs Mortgage Company and GS Mortgage
Securities Corp. and three current or former Goldman Sachs
employees are defendants in a purported class action commenced
on December 11, 2008 in the U.S. District Court
for the Southern District of New York brought on behalf of
purchasers of various mortgage pass-through certificates and
asset-backed
certificates issued by various securitization trusts in 2007 and
underwritten by GS&Co. The second amended complaint
generally alleges that the registration statement and prospectus
supplements for the certificates violated the federal securities
laws, and seeks unspecified compensatory damages and rescission
or recessionary damages. On December 19, 2009,
defendants moved to dismiss the second amended complaint, and
the motion was granted on January 28, 2010 with leave
to replead certain claims.
Group Inc., GS&Co., Goldman Sachs Mortgage Company and
GS Mortgage Securities Corp. are among the defendants in a
separate putative class action commenced on
February 6, 2009 in the U.S. District Court for
the Southern District of New York brought on behalf of
purchasers of various mortgage pass-through certificates and
asset-backed
certificates issued by various securitization trusts in 2006 and
underwritten by GS&Co. The other defendants include three
current or former Goldman Sachs employees and various rating
agencies. The second amended complaint generally alleges that
the registration statement and prospectus supplements for the
certificates violated the federal securities laws, and seeks
unspecified compensatory and rescissionary damages. On
November 2, 2009, defendants moved to dismiss the
second amended complaint.
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Auction Products
Matters
On August 21, 2008, GS&Co. entered into a
settlement in principle with the Office of Attorney General of
the State of New York and the Illinois Securities Department (on
behalf of the North American Securities Administrators
Association) regarding auction rate securities. On
June 2, 2009, GS&Co. entered into an Assurance of
Discontinuance with the Office of Attorney General of the State
of New York. Under the agreement, Goldman Sachs agreed, among
other things, (i) to offer to repurchase at par the
outstanding auction rate securities that its private wealth
management clients purchased through the firm prior to
February 11, 2008, with the exception of those auction
rate securities where auctions are clearing, (ii) to
continue to work with issuers and other interested parties,
including regulatory and governmental entities, to expeditiously
provide liquidity solutions for institutional investors, and
(iii) to pay a $22.5 million fine. The settlement,
which is subject to definitive documentation and approval by the
various states, other than New York, does not resolve any
potential regulatory action by the SEC. On
June 2, 2009, GS&Co. entered into an Assurance of
Discontinuance with the New York Attorney General.
On August 28, 2008, a putative shareholder derivative
action was filed in the U.S. District Court for the
Southern District of New York naming as defendants
Group Inc., its board of directors, and certain senior
officers. The complaint alleges generally that
Group Inc.’s board of directors breached its fiduciary
duties and committed mismanagement in connection with its
oversight of auction rate securities marketing and trading
operations, that certain individual defendants engaged in
insider selling by selling shares of Group Inc., and that
the firm’s public filings were false and misleading in
violation of the federal securities laws by failing to
accurately disclose the alleged practices involving auction rate
securities. The complaint seeks damages, injunctive and
declaratory relief, restitution, and an order requiring the firm
to adopt corporate reforms. On May 19, 2009, the
district court granted defendants’ motion to dismiss, and
on July 20, 2009 denied plaintiffs’ motion for
reconsideration. Following the dismissal of the shareholder
derivative action, the named plaintiff in such action sent
Group Inc.’s board of directors a letter demanding
that Group Inc.’s board of directors investigate the
allegations set forth in the complaint. Group Inc.’s
board of directors is considering the demand letter.
On September 4, 2008, Group Inc. was named as a
defendant, together with numerous other financial services
firms, in two complaints filed in the U.S. District Court
for the Southern District of New York alleging that the
defendants engaged in a conspiracy to manipulate the auction
securities market in violation of federal antitrust laws. The
actions were filed, respectively, on behalf of putative classes
of issuers of and investors in auction rate securities and seek,
among other things, treble damages. Defendants’ motion to
dismiss was granted on January 26, 2010.
Private
Equity-Sponsored
Acquisitions Litigation
Group Inc. and “GS Capital Partners” are among
numerous private equity firms and investment banks named as
defendants in a federal antitrust action filed in the
U.S. District Court for the District of Massachusetts in
December 2007. As amended, the complaint generally alleges
that the defendants have colluded to limit competition in
bidding for private
equity-sponsored
acquisitions of public companies, thereby resulting in lower
prevailing bids and, by extension, less consideration for
shareholders of those companies in violation of Section 1
of the U.S. Sherman Antitrust Act and common law.
Defendants moved to dismiss on August 27, 2008. By an
order dated November 19, 2008, the district court
dismissed claims relating to certain transactions that were the
subject of releases as part of the settlement of shareholder
actions challenging such transactions, and by an order dated
December 15, 2008 otherwise denied the motion to
dismiss.
Washington Mutual
Securities Litigation
GS&Co. is among numerous underwriters named as defendants
in a putative securities class action amended complaint filed on
August 5, 2008 in the U.S. District Court for the
Western District of Washington. As to the underwriters,
plaintiffs allege that the offering documents in connection with
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various securities offerings by Washington Mutual, Inc. failed
to describe accurately the company’s exposure to
mortgage-related
activities in violation of the disclosure requirements of the
federal securities laws. The defendants include past and present
directors and officers of Washington Mutual, the company’s
former outside auditors, and numerous underwriters. By a
decision dated May 15, 2009, the district court
granted in part and denied in part the underwriter
defendants’ motion to dismiss, with leave to replead, and
on June 15, 2009, plaintiffs filed an amended
complaint. By a decision dated October 27, 2009, the
federal district court granted and denied in part the
underwriters’ motion to dismiss.
GS&Co. underwrote $788,500,000 principal amount of
securities in the offerings at issue.
On September 25, 2008, the FDIC took over the primary
banking operations of Washington Mutual, Inc. and then sold
them. On September 27, 2008, Washington Mutual, Inc.
filed for Chapter 11 bankruptcy in the U.S. bankruptcy
court in Delaware.
Britannia Bulk
Securities Litigation
GS&Co. is among the underwriters named as defendants in
numerous putative securities class actions filed beginning on
November 6, 2008 in the U.S. District Court for
the Southern District of New York arising from the
June 17, 2008 $125 million initial public
offering of common stock of Britannia Bulk Holdings, Inc. The
complaints name as defendants the company, certain of its
directors and officers, and the underwriters for the offering.
Plaintiffs allege that the offering materials violated the
disclosure requirements of the federal securities laws and seek
compensatory damages. By a decision dated
October 19, 2009, the district court granted the
underwriter defendants’ motion to dismiss, and plaintiffs
have elected not to appeal, disposing of the matter.
GS&Co. underwrote 3.75 million shares of common stock
for a total offering price of $56.25 million. Britannia
Bulk Holdings, Inc. and its principal operating subsidiary are
subject to an insolvency proceedings in the U.K. courts.
IndyMac
Pass-Through Certificates Litigation
GS&Co. is among numerous underwriters named as defendants
in a putative securities class action filed on
May 14, 2009 in the U.S. District Court for the
Southern District of New York. 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. On
November 2, 2009, the underwriters moved to dismiss
the complaint. The motion was granted in part on
February 17, 2010 to the extent of dismissing claims based
on offerings in which no plaintiff purchased, and the court
reserved judgment as to the other aspects of the motion.
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.
Credit
Derivatives
Group Inc. and certain of its affiliates have received
inquiries from various governmental agencies and self-regulatory
organizations regarding credit derivative instruments. The firm
is cooperating with the requests.
| Item 4. | Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of security holders
during the fourth quarter of our fiscal year ended
December 31, 2009.
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EXECUTIVE
OFFICERS OF THE GOLDMAN SACHS GROUP, INC.
Set forth below are the name, age, present title, principal
occupation and certain biographical information as of
February 1, 2010 for our executive officers. All of
our executive officers have been appointed by and serve at the
pleasure of our board of directors.
Lloyd C.
Blankfein, 55
Mr. Blankfein has been our Chairman and Chief Executive
Officer since June 2006, and a director since
April 2003. Previously, he had been our President and Chief
Operating Officer since January 2004. Prior to that, from
April 2002 until January 2004, he was a Vice Chairman
of Goldman Sachs, with management responsibility for Goldman
Sachs’ Fixed Income, Currency and Commodities Division
(FICC) and Equities Division (Equities). Prior to becoming a
Vice Chairman, he had served as co-head of FICC since its
formation in 1997. From 1994 to 1997, he headed or co-headed the
Currency and Commodities Division. Mr. Blankfein is not
currently on the board of any public company other than Goldman
Sachs. He is affiliated with certain
non-profit
organizations, including as a member of the Dean’s Advisory
Board at Harvard Law School, the Harvard University Committee on
University Resources and the Advisory Board of the Tsinghua
University School of Economics and Management, an overseer of
the Weill Medical College of Cornell University, and a
co-chairman of the Partnership for New York City.
Alan M. Cohen,
59
Mr. Cohen has been an Executive Vice President of Goldman
Sachs and our Global Head of Compliance since
February 2004. From 1991 until January 2004, he was a
partner in the law firm of O’Melveny & Myers LLP.
He is affiliated with certain
non-profit
organizations, including as a board member of the New York Stem
Cell Foundation.
Gary D. Cohn,
49
Mr. Cohn has been our President and Chief Operating Officer
(or Co-Chief Operating Officer) and a director since
June 2006. Previously, he had been the co-head of Goldman
Sachs’ global securities businesses since
January 2004. He also had been the co-head of Equities
since 2003 and the co-head of FICC since September 2002.
From March 2002 to September 2002, he served as
co-chief
operating officer of FICC. Prior to that, beginning in 1999,
Mr. Cohn managed the FICC macro businesses. From 1996 to
1999, he was the global head of Goldman Sachs’ commodities
business. Mr. Cohn is not currently on the board of any
public company other than Goldman Sachs. He is affiliated with
certain
non-profit
organizations, including the Gilmour Academy, NYU Hospital, NYU
Medical School, the Harlem Children’s Zone and American
University.
J. Michael Evans,
52
Mr. Evans has been a Vice Chairman of Goldman Sachs since
February 2008 and chairman of Goldman Sachs Asia since
2004. Prior to becoming a Vice Chairman, he had served as global
co-head
of
Goldman Sachs’ securities business since 2003. Previously,
he had been co-head of the Equities Division since 2001.
Mr. Evans is a board member of CASPER (Center for
Advancement of Standards-based Physical Education Reform). He
also serves as a trustee of the Bendheim Center for Finance at
Princeton University.
Gregory K. Palm,
61
Mr. Palm has been an Executive Vice President of Goldman
Sachs since May 1999, and our General Counsel and head or
co-head of the Legal Department since May 1992.
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Michael S.
Sherwood, 44
Mr. Sherwood has been a Vice Chairman of Goldman Sachs
since February 2008 and co-chief executive officer of
Goldman Sachs International since 2005. Prior to becoming a Vice
Chairman, he had served as global co-head of Goldman Sachs’
securities business since 2003. Prior to that, he had been head
of the Fixed Income, Currency and Commodities Division in Europe
since 2001.
Esta E. Stecher,
52
Ms. Stecher has been an Executive Vice President of Goldman
Sachs and our General Counsel and co-head of the Legal
Department since December 2000. From 1994 to 2000, she was
head of the firm’s Tax Department, over which she continues
to have senior oversight responsibility. She is also a trustee
of Columbia University.
David A. Viniar,
54
Mr. Viniar has been an Executive Vice President of Goldman
Sachs and our Chief Financial Officer since May 1999. He
has been the head of Operations, Technology, Finance and
Services Division since December 2002. He was head of the
Finance Division and co-head of Credit Risk Management and
Advisory and Firmwide Risk from December 2001 to
December 2002. Mr. Viniar was co-head of Operations,
Finance and Resources from March 1999 to
December 2001. He was Chief Financial Officer of The
Goldman Sachs Group, L.P. from March 1999 to May 1999.
From July 1998 until March 1999, he was Deputy Chief
Financial Officer and from 1994 until July 1998, he was
head of Finance, with responsibility for Controllers and
Treasury. From 1992 to 1994, he was head of Treasury and prior
to that was in the Structured Finance Department of Investment
Banking. He also serves on the Board of Trustees of Union
College.
John S. Weinberg,
52
Mr. Weinberg has been a Vice Chairman of Goldman Sachs
since June 2006. He has been
co-head
of
Goldman Sachs’ Investment Banking Division since
December 2002. From January 2002 to
December 2002, he was co-head of the Investment Banking
Division in the Americas. Prior to that, he served as co-head of
the Investment Banking Services Department since 1997. He is
affiliated with certain
non-profit
organizations, including as a trustee of NewYork-Presbyterian
Hospital, The Steppingstone Foundation, the Greenwich Country
Day School and Community Anti-Drug Coalitions of America.
Mr. Weinberg also serves on the Visiting Committee for
Harvard Business School.
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The principal market on which our common stock is traded is the
NYSE. Information relating to the high and low sales prices per
share of our common stock, as reported by the Consolidated Tape
Association, for each full quarterly period during fiscal 2008
and 2009 is set forth under the heading “Supplemental
Financial Information — Common Stock Price Range”
in Part II, Item 8 of this Annual Report on
Form 10-K.
As of February 12, 2010, there were 11,720 holders of
record of our common stock.
During fiscal 2008 and fiscal 2009, dividends of $0.35 per
common share were declared on December 17, 2007,
March 17, 2008, June 16, 2008,
September 15, 2008, April 13, 2009,
July 13, 2009 and October 14, 2009. In
addition, dividends of $0.35 per common share and $0.4666666 per
common share were declared on January 19, 2010 and
December 15, 2008, respectively. The dividend of
$0.4666666 per common share was reflective of a four-month
period (December 2008 through March 2009), due to the
change in our fiscal year-end. The holders of our common stock
share proportionately on a per share basis in all dividends and
other distributions on common stock declared by our board of
directors.
The declaration of dividends by Goldman Sachs is subject to the
discretion of our board of directors. Our board of directors
will take into account such matters as general business
conditions, our financial results, capital requirements,
contractual, legal and regulatory restrictions on the payment of
dividends by us to our shareholders or by our subsidiaries to
us, the effect on our debt ratings and such other factors as our
board of directors may deem relevant. See
“Business — Regulation” in Part I,
Item 1 of this Annual Report on
Form 10-K
for a discussion of potential regulatory limitations on our
receipt of funds from our regulated subsidiaries and our payment
of dividends to shareholders of Group Inc.
52
Table of Contents
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 fourth
quarter of our fiscal year ended December 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
(September 26, 2009 to October 31, 2009) |
— | — | — | 60,838,106 | ||||||||||||
|
Month #2
(November 1, 2009 to November 30, 2009) |
650 | (2) | $ | 172.78 | 650 | (2) | 60,837,456 | |||||||||
|
Month #3
(December 1, 2009 to December 31, 2009) |
50 | (2) | $ | 165.71 | 50 | (2) | 60,837,406 | |||||||||
|
Total
|
700 | 700 | ||||||||||||||
| (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. |
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, the prevailing price and trading
volumes of our common stock and regulatory restrictions. The
total remaining authorization under the repurchase program was
60,837,406 shares as of February 12, 2010; the
repurchase program has no set expiration or termination date.
Since July 2008, we have not repurchased shares of our
common stock in the open market other than repurchases of the
type described in footnote (2). Any repurchase of our common
stock requires approval by the Federal Reserve Board.
| (2) | Relates to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business. |
Information relating to compensation plans under which our
equity securities are authorized for issuance is set forth in
Part III, Item 12 of this Annual Report on
Form 10-K.
| Item 6. | Selected Financial Data |
The Selected Financial Data table is set forth under
Part II, Item 8 of this Annual Report on
Form 10-K.
53
| Item 7. |
Management’s
Discussion and Analysis of Financial Condition and
Results of Operations |
INDEX
|
Page
|
||||
| No. | ||||
| 55 | ||||
| 57 | ||||
| 59 | ||||
| 61 | ||||
| 65 | ||||
| 65 | ||||
| 73 | ||||
| 75 | ||||
| 76 | ||||
| 76 | ||||
| 82 | ||||
| 91 | ||||
| 91 | ||||
| 93 | ||||
| 100 | ||||
| 101 | ||||
| 103 | ||||
| 108 | ||||
| 109 | ||||
| 113 | ||||
| 120 | ||||
| 121 | ||||
54
Table of Contents
Introduction
The Goldman Sachs Group, Inc. (Group Inc.) is a leading
global investment banking, securities and investment management
firm that provides a wide range of financial 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 through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. We also take proprietary positions on certain of these products. In addition, we engage in market-making 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 and wealth advisory 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. |
When we use the terms “Goldman Sachs,” “the
firm,” “we,” “us” and “our,”
we mean Group Inc., a Delaware corporation, and its
consolidated subsidiaries. References herein to our Annual
Report on
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
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 Part II,
Item 8 of our Annual Report on
Form 10-K.
In April 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. Fiscal 2009 began
on December 27, 2008 and ended on
December 31, 2009.
All references to 2009, 2008 and 2007, unless specifically
stated otherwise, refer to our fiscal years ended, or the dates,
as the context requires, December 31, 2009,
November 28, 2008 and November 30, 2007,
respectively, and any reference to a future year refers to a
fiscal year ending on December 31 of that year. All references
to December 2008, unless specifically stated otherwise,
refer to our fiscal one month ended, or the date, as the context
requires, December 26, 2008. Certain reclassifications
have been made to previously reported amounts to conform to the
current presentation.
In this discussion, we have included 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. These
statements include statements other than historical information
or statements of current condition and may relate to our future
plans and objectives and results, among other things, and may
also include statements about the objectives and effectiveness
of our risk management and
55
Table of Contents
liquidity policies, statements about trends in or growth
opportunities for our businesses, statements about our future
status, activities or reporting under U.S. or
non-U.S. banking
and financial regulation, and statements about our investment
banking transaction backlog. By identifying these statements for
you in this manner, we are alerting you to the possibility that
our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition
indicated in these forward-looking statements. Important factors
that could cause our actual results and financial condition to
differ from those indicated in these forward-looking statements
include, among others, those discussed below under
“— Certain Risk Factors That May Affect Our
Businesses” as well as “Risk Factors” in
Part I, Item 1A of our Annual Report on
Form 10-K
and “Cautionary Statement Pursuant to the U.S. Private
Securities Litigation Reform Act of 1995” in Part I,
Item 1 of our Annual Report on
Form 10-K.
56
Table of Contents
Executive
Overview
Our diluted earnings per common share were $22.13 for the year
ended December 31, 2009, compared with $4.47 for the
year ended November 28, 2008. Return on average common
shareholders’ equity
(ROE)
(1)
was 22.5% for 2009. Net revenues for 2009 were
$45.17 billion, more than double the amount in 2008. Our
ratio of compensation and benefits to net revenues for 2009 was
35.8% and represented our lowest annual ratio of compensation
and benefits to net revenues. In addition, compensation was
reduced by $500 million to fund a charitable contribution
to Goldman Sachs Gives, our donor-advised fund. This
contribution of $500 million was part of total commitments
to charitable and small business initiatives during the year in
excess of $1 billion. During the twelve months ended
December 31, 2009, book value per common share
increased 23% to $117.48 and tangible book value per common
share
(2)
increased 27% to $108.42. During the year, the firm repurchased
the preferred stock and associated warrant that were issued to
the U.S. Department of the Treasury (U.S. Treasury)
pursuant to the U.S. Treasury’s TARP Capital Purchase
Program. The firm’s cumulative payments to the
U.S. Treasury related to this program totaled
$11.42 billion, including the return of the
U.S. Treasury’s $10.0 billion investment,
$318 million in preferred dividends and $1.1 billion
related to the warrant repurchase. In addition, in 2009 the firm
completed a public offering of common stock for proceeds of
$5.75 billion. Our Tier 1 capital ratio under Basel
I
(3)
was 15.0% as of December 31, 2009 and our Tier 1
common ratio under Basel
I
(3)
was 12.2% as of December 31, 2009.
Net revenues in Trading and Principal Investments were
significantly higher compared with 2008, reflecting a very
strong performance in Fixed Income, Currency and Commodities
(FICC) and significantly improved results in Principal
Investments, as well as higher net revenues in Equities. During
2009, FICC operated in an environment characterized by strong
client-driven activity, particularly in more liquid products. In
addition, asset values generally improved and corporate credit
spreads tightened significantly for most of the year. Net
revenues in FICC were significantly higher compared with 2008,
reflecting particularly strong performances in credit products,
mortgages and interest rate products, which were each
significantly higher than 2008. Net revenues in commodities were
also particularly strong and were slightly higher than 2008,
while net revenues in currencies were strong, but lower than a
particularly strong 2008. During 2009, mortgages included a loss
of approximately $1.5 billion (excluding hedges) on
commercial mortgage loans. Results in 2008 were negatively
impacted by asset writedowns across
non-investment-grade
credit origination activities, corporate debt, private and
public equities, and residential and commercial mortgage loans
and securities. The increase in Principal Investments reflected
gains on corporate principal investments and our investment in
the ordinary shares of Industrial and Commercial Bank of China
Limited (ICBC) compared with net losses in 2008. In 2009,
results in Principal Investments included a gain of
$1.58 billion related to our investment in the ordinary
shares of ICBC, a gain of $1.31 billion from corporate
principal investments and a loss of $1.76 billion from real
estate principal investments. Net revenues in Equities for 2009
reflected strong results in the client franchise businesses.
However,
(1)
ROE
is computed by dividing 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 (RSUs) 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 — Capital Ratios and Metrics” below for
further information regarding tangible common shareholders’
equity.
(3)
As
a bank holding company, we are subject to consolidated
regulatory capital requirements administered by the Board of
Governors of the Federal Reserve System (Federal Reserve Board).
We are reporting our Tier 1 capital ratios calculated 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 Tier 1 capital ratio equals Tier 1
capital divided by total
risk-weighted
assets (RWAs). The Tier 1 common ratio equals Tier 1
capital less preferred stock and junior subordinated debt issued
to trusts, divided by RWAs. See
“— Equity
Capital — Consolidated Capital Requirements”
below for further information regarding our capital ratios.
57
Table of Contents
results in the client franchise businesses were lower than a
strong 2008 and included significantly lower commissions.
Results in principal strategies were positive compared with
losses in 2008. During 2009, Equities operated in an environment
characterized by a significant increase in global equity prices,
favorable market opportunities and a significant decline in
volatility levels.
Net revenues in Asset Management and Securities Services
decreased significantly compared with 2008, reflecting
significantly lower net revenues in Securities Services, as well
as lower net revenues in Asset Management. The decrease in
Securities Services primarily reflected the impact of lower
customer balances, reflecting lower hedge fund industry assets
and reduced leverage. The decrease in Asset Management primarily
reflected the impact of changes in the composition of assets
managed, principally due to equity market depreciation during
the fourth quarter of 2008, as well as lower incentive fees.
During the year ended December 31, 2009, assets under
management increased $73 billion to $871 billion, due
to $76 billion of market appreciation, primarily in fixed
income and equity assets, partially offset by $3 billion of
net outflows. Outflows in money market assets were offset by
inflows in fixed income assets.
Net revenues in Investment Banking decreased compared with 2008,
reflecting significantly lower net revenues in Financial
Advisory, partially offset by higher net revenues in our
Underwriting business. The decrease in Financial Advisory
reflected a decline in
industry-wide
completed mergers and acquisitions. The increase in Underwriting
reflected higher net revenues in equity underwriting, primarily
reflecting an increase in
industry-wide
equity and
equity-related
offerings. Net revenues in debt underwriting were slightly lower
than in 2008. Our investment banking transaction backlog
increased significantly during the twelve months ended
December 31, 2009.
(1)
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, economic
conditions generally and other factors. For a further discussion
of the factors that may affect our future operating results, see
“— Certain Risk Factors That May Affect Our Businesses” below as well as “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K.
“— Certain Risk Factors That May Affect Our Businesses” below as well as “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.
58
Table of Contents
Business
Environment
Our financial performance is highly dependent on the environment
in which our businesses operate. During 2009, the economies of
the U.S., Europe and Japan experienced a recession. Business
activity across a wide range of industries and regions was
greatly reduced, reflecting a reduction in consumer spending and
low levels of liquidity across credit markets. In addition,
unemployment continued to rise in 2009. However, economic
conditions became generally more favorable during the second
half of the year as real gross domestic product (GDP) growth
turned positive in most major economies and growth in emerging
markets improved. In addition, equity and credit markets were
characterized by increasing asset prices, lower volatility and
improved liquidity during the last nine months of the year. For
a further discussion of how market conditions affect our
businesses, see
“— Certain
Risk Factors That May Affect Our Businesses” below as well
as “Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K.
A further discussion of the business environment in 2009 is set
forth below.
Global.
The global economy weakened during
2009, as evidenced by declines in real GDP in the major
economies. In addition, economic growth in emerging markets
slowed during the year, especially among those economies most
reliant upon international trade. Volatility levels across fixed
income and equity markets declined during the year and corporate
credit spreads generally tightened, particularly in the second
half of the year. In addition, global equity markets increased
significantly during our fiscal year. The U.S. Federal
Reserve, The Bank of Japan and The People’s Bank of China
left interest rates unchanged during 2009, while central banks
in the Eurozone and the United Kingdom lowered interest rates
during the first half of the year. After a significant decline
in the second half of calendar year 2008, the price of crude oil
increased significantly during 2009. The U.S. dollar
weakened against the British pound and the Euro, but
strengthened against the Japanese yen. In investment banking,
industry-wide
mergers and acquisitions activity remained weak, while
industry-wide
debt offerings and equity and
equity-related
offerings increased significantly compared with 2008.
United States.
Real GDP in the
U.S. declined by an estimated 2.4% in calendar year 2009,
compared with an increase of 0.4% in 2008. The recession in the
U.S., which started near the beginning of our 2008 fiscal year,
appeared to end in the third quarter of 2009, as real GDP
increased during the second half of the year. Exports declined
significantly in the first half of the year, but improved during
the second half of the year. Consumer expenditure declined
during 2009, despite significant support from the federal
government’s fiscal stimulus package. Business and consumer
confidence improved during the year, but remained at low levels.
The rate of inflation decreased during the year, reflecting an
increase in unemployment and significant excess production
capacity, which caused downward pressure on wages and prices.
The U.S. Federal Reserve maintained its federal funds rate
at a target range of zero to 0.25% during the year. In addition,
the Federal Reserve purchased significant amounts of
mortgage-backed
securities, as well as U.S. Treasury and federal agency
debt in order to improve liquidity and expand the availability
of credit. The yield on the
10-year
U.S. Treasury note increased by 169 basis points to 3.85%
during our fiscal year. The NASDAQ Composite Index, the S&P
500 Index and the Dow Jones Industrial Average ended our fiscal
year higher by 48%, 28% and 22%, respectively.
59
Table of Contents
Europe.
Real GDP in the Eurozone economies
declined by an estimated 4.0% in calendar year 2009, compared
with an increase of 0.5% in 2008. Fixed investment, consumer
expenditure and exports declined during 2009. However, surveys
of business and consumer confidence improved during the year.
Although employment levels declined in many economies, the
largest decreases were in the countries that were most affected
by the housing market decline. The rate of inflation declined
during the year. In response to economic weakness and concerns
about the health of the financial system, the European Central
Bank lowered its main refinancing operations rate by 150 basis
points to 1.00%. In the United Kingdom, real GDP declined by an
estimated 4.8% for calendar year 2009, compared with an increase
of 0.5% in 2008. Although real GDP declined significantly in the
first half of the year, it appeared to increase during the
fourth quarter of 2009. The Bank of England lowered its official
bank rate during our fiscal year by a total of 150 basis points
to 0.50%.
Long-term
government bond yields in both the Eurozone and the U.K.
increased during our fiscal year. The Euro and British pound
appreciated by 2% and 11%, respectively, against the
U.S. dollar during our fiscal year. Major European equity
markets ended our fiscal year significantly higher.
Asia.
In Japan, real GDP decreased by an
estimated 5.0% in calendar year 2009, compared with a decrease
of 1.2% in 2008. Measures of business investment, consumer
expenditures and exports declined. Measures of inflation also
declined during 2009. The Bank of Japan maintained its target
overnight call rate at 0.10% during the year, while the yield on
10-year
Japanese government bond increased during our fiscal year. The
yen depreciated by 2% against the U.S. dollar. The
Nikkei 225 increased 21% during our fiscal year.
In China, real GDP growth was an estimated 8.7% in calendar year
2009, down from 9.6% in 2008. While exports declined during
2009, the impact on economic activity was mitigated by an
increase in fixed investment and consumer spending, partially
due to fiscal stimulus and strong credit expansion. Measures of
inflation declined for most of 2009, but began to increase
toward the end of the year. The People’s Bank of China left
its
one-year
benchmark lending rate unchanged at 5.31% during the year and
maintained a broadly stable exchange rate against the
U.S. dollar. The Shanghai Composite Index increased 77%
during our fiscal year. Real GDP growth in India decreased
slightly to an estimated 6.6% in calendar year 2009 from 6.7% in
2008. Industrial production and consumer spending increased
during 2009. Exports declined significantly during 2009, but
began to increase by the end of the year. The rate of wholesale
inflation decreased during the year. The Indian rupee
strengthened against the U.S. dollar. Equity markets in
Hong Kong, India and South Korea increased significantly during
our fiscal year.
Other Markets.
Real GDP in Brazil declined by
an estimated 0.1% in calendar year 2009 compared with an
increase of 5.1% in 2008. Although investment spending declined,
an increase in commodity prices contributed to significant
capital inflows, which helped support consumer spending. The
Brazilian real strengthened against the U.S. dollar. In
Russia, real GDP declined by an estimated 7.9% in calendar year
2009, compared with an increase of 5.6% in 2008. Low oil prices
earlier in the year, as well as a tightening in credit
availability, led to a significant decline in investment,
consumption and exports. In addition, the Russian ruble
depreciated against the U.S. dollar. Brazilian and Russian
equity prices ended our fiscal year significantly higher.
60
Table of Contents
Certain Risk
Factors That May Affect Our Businesses
We face a variety of risks that are substantial and inherent in
our businesses, including market, liquidity, credit,
operational, legal, regulatory and reputational risks. For a
discussion of how management seeks to manage some of these
risks, see
“— Risk
Management” below. A summary of the more important factors
that could affect our businesses follows below. For a further
discussion of these and other important factors that could
affect our businesses, see “Risk Factors” in
Part I, Item 1A of our Annual Report on
Form 10-K.
Market Conditions and Market Risk.
Our
financial performance is highly dependent on the environment in
which our businesses operate. A favorable business environment
is generally characterized by, among other factors, high global
GDP growth, transparent, liquid and efficient capital markets,
low inflation, high business and investor confidence, stable
geopolitical conditions, and strong business earnings.
Unfavorable or uncertain economic and market conditions can be
caused by: declines in economic growth, business activity or
investor or business confidence; limitations on the availability
or increases in the cost of credit and capital; increases in
inflation, interest rates, exchange rate volatility, default
rates or the price of basic commodities; outbreaks of
hostilities or other geopolitical instability; corporate,
political or other scandals that reduce investor confidence in
capital markets; natural disasters or pandemics; or a
combination of these or other factors. Our businesses and
profitability have been and may continue to be adversely
affected by market conditions in many ways, including the
following:
| • | Many of our businesses, such as our merchant banking businesses, our mortgages, leveraged loan and credit products businesses in our FICC segment, and our equity principal strategies business, have net “long” positions in debt securities, loans, derivatives, mortgages, equities (including private equity) and most other asset classes. In addition, many of our market-making and other businesses in which we act as a principal to facilitate our clients’ activities, including our exchange-based market-making businesses, commit large amounts of capital to maintain trading positions in interest rate and credit products, as well as currencies, commodities and equities. Because nearly all of these investing and trading positions are marked-to-market on a daily basis, declines in asset values directly and immediately impact our earnings, unless we have effectively “hedged” our exposures to such declines. In certain circumstances (particularly in the case of leveraged loans and private equities or other securities that are not freely tradable or lack established and liquid trading markets), it may not be possible or economic to hedge such exposures and to the extent that we do so the hedge may be ineffective or may greatly reduce our ability to profit from increases in the values of the assets. Sudden declines and significant volatility in the prices of assets may substantially curtail or eliminate the trading markets for certain assets, which may make it very difficult to sell, hedge or value such assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions and the difficulty in valuing assets may require us to maintain additional capital and increase our funding costs. | |
| • | Our cost of obtaining long-term unsecured funding is directly related to our credit spreads. Credit spreads are influenced by market perceptions of our creditworthiness. Widening credit spreads, as well as significant declines in the availability of credit, have in the past adversely affected our ability to borrow on a secured and unsecured basis and may do so in the future. We fund ourselves on an unsecured basis by issuing long-term debt, promissory notes and commercial paper, by accepting deposits at our bank subsidiaries or by obtaining bank loans or lines of credit. We seek to finance many of our assets on a secured basis, including by entering into repurchase agreements. Any disruptions in the credit markets may make it harder and more expensive to obtain funding for our businesses. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability, particularly in our businesses that involve investing, lending and taking principal positions, including market making. |
61
Table of Contents
| • | Our investment banking business has been and may continue to be adversely affected by market conditions. Poor economic conditions and other adverse geopolitical conditions can adversely affect and have adversely affected investor and CEO confidence, resulting in significant industry-wide declines in the size and number of underwritings and of financial advisory transactions, which could have an adverse effect on our revenues and our profit margins. In addition, our clients engaging in mergers and acquisitions often rely on access to the secured and unsecured credit markets to finance their transactions. A lack of available credit or an increased cost of credit can adversely affect the size, volume and timing of our clients’ merger and acquisition transactions — particularly large transactions. Because a significant portion of our investment banking revenues is derived from our participation in large transactions, a decline in the number of large transactions would adversely affect our investment banking business. | |
| • | Certain of our trading businesses depend on market volatility to provide trading and arbitrage opportunities, and decreases in volatility may reduce these opportunities and adversely affect the results of these businesses. On the other hand, increased volatility, while it can increase trading volumes and spreads, also increases risk as measured by VaR and may expose us to increased risks in connection with our market-making and proprietary businesses or cause us to reduce the size of these businesses in order to avoid increasing our VaR. Limiting the size of our market-making positions and investing businesses can adversely affect our profitability. | |
| • | We receive asset-based management fees based on the value of our clients’ portfolios or investment in funds managed by us and, in some cases, we also receive incentive fees based on increases in the value of such investments. Declines in asset values reduce the value of our clients’ portfolios or fund assets, which in turn reduce the fees we earn for managing such assets. Market uncertainty, volatility and adverse economic conditions, as well as declines in asset values, may cause our clients to transfer their assets out of our funds or other products or their brokerage accounts or affect our ability to attract new clients or additional assets from existing clients and result in reduced net revenues, principally in our asset management business. To the extent that clients do not withdraw their funds, they may invest them in products that generate less fee income. | |
| • | Concentration of risk increases the potential for significant losses in our market-making, proprietary trading, investing, block trading, merchant banking, underwriting and lending businesses. This risk may increase to the extent we expand our market-making, trading, investing and lending businesses. |
Liquidity Risk.
Liquidity is essential to our
businesses. Our liquidity may be impaired by an inability to
access secured
and/or
unsecured debt markets, an inability to access funds from our
subsidiaries, an inability to sell assets or redeem our
investments, or unforeseen outflows of cash or collateral. This
situation may arise due to circumstances that we may be unable
to control, such as a general market disruption or an
operational problem that affects third parties or us, or even by
the perception among market participants that we, or other
market participants, are experiencing greater liquidity risk.
The financial instruments that we hold and the contracts to
which we are a party are complex, as we employ structured
products to benefit our clients and ourselves, and these complex
structured products often do not have readily available markets
to access in times of liquidity stress. Our investing activities
may lead to situations where the holdings from these activities
represent a significant portion of specific markets, which could
restrict liquidity for our positions. Further, our ability to
sell assets may be impaired if other market participants are
seeking to sell similar assets at the same time, as is likely to
occur in a liquidity or other market crisis. In addition,
financial institutions with which we interact may exercise
set-off rights or the right to require additional collateral,
including in difficult market conditions, which could further
impair our access to liquidity.
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Table of Contents
Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger our obligations under
certain bilateral provisions in some of our trading and
collateralized financing contracts. Under these provisions,
counterparties could be permitted to terminate contracts with
Goldman Sachs or require us to post additional collateral.
Termination of our trading and collateralized financing
contracts could cause us to sustain losses and impair our
liquidity by requiring us to find other sources of financing or
to make significant cash payments or securities movements. For a
discussion of the potential impact on Goldman Sachs of a
reduction in our credit ratings, see
“— Liquidity
and Funding Risk — Credit Ratings” below.
Group Inc. has guaranteed the payment obligations of
Goldman, Sachs & Co. (GS&Co.), Goldman Sachs Bank
USA (GS Bank USA) and Goldman Sachs Bank (Europe) PLC (GS Bank
Europe), subject to certain exceptions, and has pledged
significant assets to GS Bank USA to support obligations to GS
Bank USA. In addition, Group Inc. guarantees many of the
obligations of its other consolidated subsidiaries on a
transaction-by-transaction
basis, as negotiated with counterparties. These guarantees may
require Group Inc. to provide substantial funds or assets
to its subsidiaries or their creditors or counterparties at a
time when Group Inc. is in need of liquidity to fund its
own obligations.
Credit Risk.
We are exposed to the risk that
third parties that owe us money, securities or other assets will
not perform their obligations. These parties may default on
their obligations to us due to bankruptcy, lack of liquidity,
operational failure or other reasons. A failure of a significant
market participant, or even concerns about a default by such an
institution, could lead to significant liquidity problems,
losses or defaults by other institutions, which in turn could
adversely affect us. We are also subject to the risk that our
rights against third parties may not be enforceable in all
circumstances. In addition, deterioration in the credit quality
of third parties whose securities or obligations we hold could
result in losses
and/or
adversely affect our ability to rehypothecate or otherwise use
those securities or obligations for liquidity purposes. A
significant downgrade in the credit ratings of our
counterparties could also have a negative impact on our results.
While in many cases we are permitted to require additional
collateral from counterparties that experience financial
difficulty, disputes may arise as to the amount of collateral we
are entitled to receive and the value of pledged assets. Default
rates, downgrades and disputes with counterparties as to the
valuation of collateral increase significantly in times of
market stress and illiquidity.
Although we regularly review credit exposures to specific
clients and counterparties and to specific industries, countries
and regions that we believe may present credit concerns, default
risk may arise from events or circumstances that are difficult
to detect or foresee, particularly as new business initiatives
and market developments lead us to transact with a broader array
of clients and counterparties, as well as clearing houses and
exchanges, and expose us to new asset classes and new markets.
We have experienced, due to competitive factors, pressure to
extend and price credit at levels that may not always fully
compensate us for the risks we take. In particular, corporate
clients seek such commitments from financial services firms in
connection with investment banking and other assignments.
Operational Risk.
Our businesses are highly
dependent on our ability to process and monitor, on a daily
basis, a very large number of transactions, many of which are
highly complex, across numerous and diverse markets in many
currencies. These transactions, as well as the information
technology services we provide to clients, often must adhere to
client-specific guidelines, as well as legal and regulatory
standards. Despite the resiliency plans and facilities we have
in place, our ability to conduct business may be adversely
impacted by a disruption in the infrastructure that supports our
businesses and the communities in which we are located. This may
include a disruption involving electrical, communications,
internet, transportation or other services used by us or third
parties with which we conduct business.
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Table of Contents
Industry consolidation, whether among market participants or
financial intermediaries, increases the risk of operational
failure as disparate complex systems need to be integrated,
often on an accelerated basis. Furthermore, the
interconnectivity of multiple financial institutions with
central agents, exchanges and clearing houses, and the increased
centrality of these entities under proposed and potential
regulation, increases the risk that an operational failure at
one institution or entity may cause an
industry-wide
operational failure that could materially impact our ability to
conduct business.
Legal, Regulatory and Reputational Risk.
We
are subject to extensive and evolving regulation in
jurisdictions around the world. Several of our subsidiaries are
subject to regulatory capital requirements and, as a bank
holding company, we are subject to minimum capital standards and
a minimum Tier 1 leverage ratio on a consolidated basis.
Our status as a bank holding company and the operation of our
lending and other businesses through GS Bank USA
subject us to additional regulation and limitations on our
activities, as described in “Regulation — Banking
Regulation” in Part I, Item 1 of our Annual
Report on
Form 10-K.
New regulations could impact our profitability in the affected
jurisdictions, or even make it uneconomic for us to continue to
conduct all or certain of our businesses in such jurisdictions,
or could cause us to incur significant costs associated with
changing our business practices, restructuring our businesses,
moving all or certain of our businesses and our employees to
other locations or complying with applicable capital
requirements, including liquidating assets or raising capital in
a manner that adversely increases our funding costs or otherwise
adversely affects our shareholders and creditors. To the extent
new laws or regulations or changes in enforcement of existing
laws or regulations are imposed on a limited subset of financial
institutions, this could adversely affect our ability to compete
effectively with other institutions that are not affected in the
same way.
A Financial Crisis Responsibility Fee to be assessed on the
largest financial firms by the U.S. government was proposed
on January 14, 2010. However, since this is still in
the proposal stage and has not been approved by Congress,
details surrounding the fee have not been finalized. We are
currently evaluating the impact of the proposal on our results
of operations. The impact of the proposal, if any, will be
recorded when it is ultimately enacted.
Substantial legal liability or a significant regulatory action
against us, or adverse publicity, governmental scrutiny or legal
and enforcement proceedings regardless of the ultimate outcome,
could have material adverse financial effects, cause significant
reputational harm to us or adversely impact the morale and
performance of our employees, which in turn could seriously harm
our businesses and results of operations. We face significant
legal risks in our businesses, and the volume of claims and
amount of damages and penalties claimed in litigation and
regulatory proceedings against financial institutions remain
high. Our experience has been that legal claims by customers and
clients increase in a market downturn and that
employment-related claims increase in periods when we have
reduced the total number of employees. For a discussion of how
we account for our legal and regulatory exposures, see
“— Use
of Estimates” below.
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Table of Contents
Critical
Accounting Policies
Fair
Value
The use of fair value to measure financial instruments, with
related gains or losses generally recognized in “Trading
and principal investments” in our 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). Financial
assets are marked to bid prices and financial liabilities are
marked to offer prices. Fair value measurements do not include
transaction costs.
Substantially all trading assets and trading liabilities are
reflected in our consolidated statements of financial condition
at fair value. 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 December 2009 | As of November 2008 | |||||||||||||||
|
Trading
|
Trading
|
Trading
|
Trading
|
|||||||||||||
|
Assets, at
|
Liabilities, at
|
Assets, at
|
Liabilities, at
|
|||||||||||||
|
Fair Value
|
Fair Value
|
Fair Value
|
Fair Value
|
|||||||||||||
|
Cash trading instruments
|
$ | 244,124 | $ | 72,117 | $ | 186,231 | $ | 57,143 | ||||||||
|
ICBC
|
8,111 | (1) | — | 5,496 | (1) | — | ||||||||||
|
SMFG
|
933 | 893 | (4) | 1,135 | 1,134 | (4) | ||||||||||
|
Other principal investments
|
13,981 | (2) | — | 15,126 | (2) | — | ||||||||||
|
Principal investments
|
23,025 | 893 | 21,757 | 1,134 | ||||||||||||
|
Cash instruments
|
267,149 | 73,010 | 207,988 | 58,277 | ||||||||||||
|
Exchange-traded
|
6,831 | 2,548 | 6,164 | 8,347 | ||||||||||||
|
Over-the-counter
|
68,422 | 53,461 | 124,173 | 109,348 | ||||||||||||
|
Derivative contracts
|
75,253 | (3) | 56,009 | (5) | 130,337 | (3) | 117,695 | (5) | ||||||||
|
Total
|
$ | 342,402 | $ | 129,019 | $ | 338,325 | $ | 175,972 | ||||||||
| (1) | Includes interests of $5.13 billion and $3.48 billion as of December 2009 and November 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 (other than 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 December 2009 | As of November 2008 | |||||||||||||||||||||||
|
Corporate
|
Real Estate
|
Total
|
Corporate
|
Real Estate
|
Total
|
|||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Private
|
$ | 9,507 | $ | 1,325 | $ | 10,832 | $ | 10,726 | $ | 2,935 | $ | 13,661 | ||||||||||||
|
Public
|
3,091 | 58 | 3,149 | 1,436 | 29 | 1,465 | ||||||||||||||||||
|
Total
|
$ | 12,598 | $ | 1,383 | $ | 13,981 | $ | 12,162 | $ | 2,964 | $ | 15,126 | ||||||||||||
| (3) | Net of cash received pursuant to credit support agreements of $124.60 billion and $137.16 billion as of December 2009 and November 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 $14.74 billion and $34.01 billion as of December 2009 and November 2008, respectively. |
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Cash Instruments.
Cash instruments include
cash trading instruments, public principal investments and
private principal investments.
| • | Cash Trading Instruments. Our cash trading instruments (e.g., equity and debt securities) 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 government 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, most corporate bonds, certain
mortgage products, certain bank loans and bridge loans, less
liquid listed equities, certain 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 investments 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 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 investment in the ordinary shares of ICBC is valued using
the quoted market price adjusted for transfer restrictions.
Under the original transfer restrictions, the ICBC shares we
held would have become free from transfer restrictions in equal
installments on April 28, 2009 and
October 20, 2009. During the quarter ended
March 2009, the shares became subject to new supplemental
transfer restrictions. Under these new supplemental transfer
restrictions, on April 28, 2009, 20% of the ICBC
shares that we held became free from transfer restrictions and
we completed the disposition of these shares during the second
quarter of 2009. Our remaining ICBC shares are subject to
transfer restrictions, which prohibit liquidation 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 December 2009, we remained hedged
on substantially all of 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 recent third-party investments or pending transactions, third-party independent appraisals, transactions in similar instruments, discounted cash flow techniques, valuation multiples and public comparables. |
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, voluntary and involuntary prepayment rates, loss
severity 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.
The fair value hierarchy under
Financial Accounting Standards Board Accounting Standards
Codification (ASC) 820 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 consolidated financial statements in Part II,
Item 8 of our Annual Report on
Form 10-K
for further information regarding fair value measurements.
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
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Table of Contents
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:
| • | Equities and convertible debentures. Substantially all of our level 3 equities and convertible debentures consist of private equity investments and real estate fund investments. For private equity investments, 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 one or more of the following methodologies, as appropriate and available: transactions in similar instruments, discounted cash flow techniques, third-party independent appraisals, 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). Real estate fund investments are carried at net asset value per share. The underlying investments in the funds are generally valued using discounted cash flow techniques, for which the key inputs are the amount and timing of expected future cash flows, capitalization rates and valuation multiples. | |
| • | 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 may be 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), and discounted cash flow techniques. In the recent market environment, the most significant inputs to the valuation of these instruments are rates and timing 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 $46.48 billion and
$66.19 billion as of December 2009 and
November 2008, respectively. The decrease in level 3
assets as of December 2009 compared with November 2008
primarily reflected unrealized losses (principally on private
equity investments and real estate fund investments, loans and
securities backed by commercial real estate, and bank loans and
bridge loans) and sales and paydowns (principally on loans and
securities backed by commercial real estate, bank loans and
bridge loans, and other debt obligations).
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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
|
Equities and convertible
debentures
(1)
|
$ | 11,871 | $ | 16,006 | ||||
|
Bank loans and bridge
loans
(2)
|
9,560 | 11,957 | ||||||
|
Corporate debt securities and other debt
obligations
(3)
|
5,584 | 7,596 | ||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||
|
Loans and securities backed by commercial real estate
|
4,620 | 9,340 | ||||||
|
Loans and securities backed by residential real estate
|
1,880 | 2,049 | ||||||
|
Loan
portfolios
(4)
|
1,364 | 4,118 | ||||||
|
Cash instruments
|
34,879 | 51,066 | ||||||
|
Derivative contracts
|
11,596 | 15,124 | ||||||
|
Total level 3 assets at fair value
|
46,475 | 66,190 | ||||||
|
Level 3 assets for which we do not bear economic
exposure
(5)
|
(3,127 | ) | (6,616 | ) | ||||
|
Level 3 assets for which we bear economic exposure
|
$ | 43,348 | $ | 59,574 | ||||
| (1) | Substantially all consists of private equity investments and real estate fund investments. Real estate investments were $1.23 billion and $2.62 billion as of December 2009 and November 2008, respectively. | |
| (2) | Includes certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt. | |
| (3) | Includes $741 million and $804 million as of December 2009 and November 2008, respectively, of CDOs and collateralized loan obligations 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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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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
|
Prime
(1)
|
$ | 2,483 | $ | 1,494 | ||||
|
Alt-A
|
1,761 | 1,845 | ||||||
|
Subprime
(2)
|
2,460 | 1,906 | ||||||
|
Total
(3)
|
$ | 6,704 | $ | 5,245 | ||||
| (1) | Excludes U.S. government agency-issued collateralized mortgage obligations of $6.33 billion and $4.27 billion as of December 2009 and November 2008, respectively. Also excludes U.S. government agency-issued mortgage pass-through certificates. | |
| (2) | Includes $381 million and $228 million of CDOs backed by subprime mortgages as of December 2009 and November 2008, respectively. | |
| (3) | Includes $1.88 billion and $2.05 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 December 2009 and November 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 December 2009 was primarily due to
sales and paydowns.
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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
|
Americas
(1)
|
$ | 5,157 | $ | 7,433 | ||||
|
EMEA
(2)
|
1,032 | 3,304 | ||||||
|
Asia
|
14 | 157 | ||||||
|
Total
(3)
|
$ | 6,203 | (4) | $ | 10,894 | (5) | ||
| (1) | Substantially all relates to the U.S. | |
| (2) | EMEA (Europe, Middle East and Africa). | |
| (3) | Includes $4.62 billion and $9.34 billion of financial instruments classified within level 3 of the fair value hierarchy as of December 2009 and November 2008, respectively. | |
| (4) | Comprised of loans of $4.70 billion and commercial mortgage-backed securities of $1.50 billion as of December 2009, of which $5.68 billion was floating rate and $519 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. |
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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
notional 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 December 2009 | As of November 2008 | |||||||||||||||||||||||
|
Funded
|
Unfunded
|
Total
|
Funded
|
Unfunded
|
Total
|
|||||||||||||||||||
|
Americas
(1)
|
$ | 1,029 | $ | 1,120 | $ | 2,149 | $ | 3,036 | $ | 1,735 | $ | 4,771 | ||||||||||||
|
EMEA
|
1,624 | 50 | 1,674 | 2,294 | 259 | 2,553 | ||||||||||||||||||
|
Asia
|
600 | 27 | 627 | 568 | 73 | 641 | ||||||||||||||||||
|
Total
|
$ | 3,253 | $ | 1,197 | $ | 4,450 | (2) | $ | 5,898 | $ | 2,067 | $ | 7,965 | (2) | ||||||||||
| (1) | Substantially all relates to the U.S. | |
| (2) | Represents the notional amount. We account for these transactions at fair value and our exposure was $2.27 billion and $5.53 billion as of December 2009 and November 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 ASC
815-15
and
ASC
825-10
(i.e., 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, debt raised through our William Street credit extension program and certain other nonrecourse financings; | |
| • | certain unsecured long-term borrowings, including prepaid physical commodity transactions and certain hybrid financial instruments; | |
| • | resale and repurchase agreements; | |
| • | securities borrowed and loaned within Trading and Principal Investments, consisting of our matched book and certain firm financing activities; | |
| • | certain deposits issued by our bank subsidiaries, as well as securities held by GS Bank USA; | |
| • | certain receivables from customers and counterparties, including certain margin loans, transfers accounted for as secured loans rather than purchases and prepaid variable share forwards; | |
| • | certain insurance and reinsurance contracts and certain guarantees; and | |
| • | in general, investments acquired after November 24, 2006, when the fair value option became available, where we have significant influence over the investee and would otherwise apply the equity method of accounting. In certain cases, we 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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Table of Contents
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, 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 2009
fourth quarter and no impairment was identified.
During 2008 (particularly during the fourth quarter) and early
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 there was a prolonged period of
weakness in the business environment and financial markets, our
businesses would 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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
|
Investment Banking
|
||||||||
|
Underwriting
|
$ | 125 | $ | 125 | ||||
|
Trading and Principal Investments
|
||||||||
|
FICC
|
265 | 247 | ||||||
|
Equities
(1)
|
2,389 | 2,389 | ||||||
|
Principal Investments
|
84 | 80 | ||||||
|
Asset Management and Securities Services
|
||||||||
|
Asset
Management
(2)
|
563 | 565 | ||||||
|
Securities Services
|
117 | 117 | ||||||
|
Total
|
$ | 3,543 | $ | 3,523 | ||||
| (1) | Primarily related to SLK. | |
| (2) | Primarily related to Ayco. |
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Table of Contents
Identifiable Intangible Assets.
We amortize
our identifiable intangible assets over their estimated lives
or, in the case of insurance contracts, in proportion to
estimated gross profits or premium revenues. 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. 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
estimated remaining lives of our identifiable intangible assets
by major asset class:
Identifiable
Intangible Assets by Asset Class
($ in millions)
($ in millions)
| As of December 2009 | As of November 2008 | |||||||||||
|
Range of Estimated
|
||||||||||||
|
Carrying
|
Remaining Lives
|
Carrying
|
||||||||||
|
Value
|
(in years)
|
Value | ||||||||||
|
Customer
lists
(1)
|
$ | 645 | 2-16 | $ | 724 | |||||||
|
New York Stock Exchange (NYSE) Designated Market Maker
(DMM) rights
|
420 | 12 | 462 | |||||||||
|
Insurance-related
assets
(2)
|
150 | 6 | 155 | |||||||||
|
Exchange-traded
fund (ETF) lead market maker rights
|
90 | 18 | 95 | |||||||||
|
Other
(3)
|
72 | 2-16 | 93 | |||||||||
|
Total
|
$ | 1,377 | $ | 1,529 | ||||||||
| (1) | Primarily includes our clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco. | |
| (2) | Primarily includes the value of business acquired related to our insurance businesses. | |
| (3) | Primarily includes marketing-related assets and other contractual rights. |
A prolonged period of weakness in global equity markets 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 trading volumes
or market structure that could adversely affect our
exchange-based
market-making
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.
In October 2008, the SEC approved the NYSE’s proposal
to create a new market model and redefine the role of NYSE DMMs.
In June 2009, the NYSE successfully completed the rollout
of new systems architecture that further reduces order
completion time, which enables the NYSE to offer competitive
execution speeds, while continuing to incorporate the price
discovery provided by DMMs. Following solid performance during
the first half of 2009, in the latter half of 2009, our DMM
business was adversely impacted primarily by the lack of timely
market data in the internal order/execution system of the NYSE
(which, at times, results in DMMs making markets without
real-time price information) and to a lesser extent, by lower
trading volumes and lower volatility. In 2010, the NYSE is
expected to address this market data issue. There can be no
assurance that changes in these factors will result in
sufficient cash flows to avoid impairment of our NYSE DMM rights
in the future. In accordance with the requirements of ASC 360,
we will be closely monitoring the performance of our DMM
business to determine whether an impairment loss is required in
the future. As of December 2009, the carrying value of our
NYSE DMM rights was $420 million. To the extent that there
were to be an impairment in the future, it would result in a
significant writedown in the carrying value of these DMM rights.
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Table of Contents
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.
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 reasonably estimated. In
accounting for income taxes, 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 under ASC 740. See Note 2 to the consolidated
financial statements in Part II, Item 8 of our Annual
Report on
Form 10-K
for further information regarding accounting for income taxes.
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
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
“— Certain
Risk Factors That May Affect Our Businesses” above and
“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)
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Net revenues
|
$ | 45,173 | $ | 22,222 | $ | 45,987 | $ | 183 | ||||||||
|
Pre-tax
earnings/(loss)
|
19,829 | 2,336 | 17,604 | (1,258 | ) | |||||||||||
|
Net earnings/(loss)
|
13,385 | 2,322 | 11,599 | (780 | ) | |||||||||||
|
Net earnings/(loss) applicable to common shareholders
|
12,192 | 2,041 | 11,407 | (1,028 | ) | |||||||||||
|
Diluted earnings/(loss) per common share
|
22.13 | 4.47 | 24.73 | (2.15 | ) | |||||||||||
|
Return on average common shareholders’
equity
(1)
|
22.5 | % | 4.9 | % | 32.7 | % | N.M. | |||||||||
| (1) | ROE is computed by dividing 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 | ||||||||||||||||
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Total shareholders’ equity
|
$ | 65,527 | $ | 47,167 | $ | 37,959 | $ | 63,712 | ||||||||
|
Preferred stock
|
(11,363 | ) | (5,157 | ) | (3,100 | ) | (16,477 | ) | ||||||||
|
Common shareholders’ equity
|
$ | 54,164 | $ | 42,010 | $ | 34,859 | $ | 47,235 | ||||||||
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Table of Contents
Net
Revenues
2009 versus 2008.
Our net revenues were
$45.17 billion in 2009, more than double the amount in
2008, reflecting significantly higher net revenues in Trading
and Principal Investments. The increase in Trading and Principal
Investments reflected a very strong performance in FICC and
significantly improved results in Principal Investments, as well
as higher net revenues in Equities. During 2009, FICC operated
in an environment characterized by strong client-driven
activity, particularly in more liquid products. In addition,
asset values generally improved and corporate credit spreads
tightened significantly for most of the year. Net revenues in
FICC were significantly higher compared with 2008, reflecting
particularly strong performances in credit products, mortgages
and interest rate products, which were each significantly higher
than 2008. Net revenues in commodities were also particularly
strong and were slightly higher than 2008, while net revenues in
currencies were strong, but lower than a particularly strong
2008. During 2009, mortgages included a loss of approximately
$1.5 billion (excluding hedges) on commercial mortgage
loans. Results in 2008 were negatively impacted by asset
writedowns across
non-investment-grade
credit origination activities, corporate debt, private and
public equities, and residential and commercial mortgage loans
and securities. The increase in Principal Investments reflected
gains on corporate principal investments and our investment in
the ordinary shares of ICBC compared with net losses in 2008. In
2009, results in Principal Investments included a gain of
$1.58 billion related to our investment in the ordinary
shares of ICBC, a gain of $1.31 billion from corporate
principal investments and a loss of $1.76 billion from real
estate principal investments. Net revenues in Equities for 2009
reflected strong results in the client franchise businesses.
However, results in the client franchise businesses were lower
than a strong 2008 and included significantly lower commissions.
Results in principal strategies were positive compared with
losses in 2008. During 2009, Equities operated in an environment
characterized by a significant increase in global equity prices,
favorable market opportunities and a significant decline in
volatility levels.
Net revenues in Asset Management and Securities Services
decreased significantly compared with 2008, reflecting
significantly lower net revenues in Securities Services, as well
as lower net revenues in Asset Management. The decrease in
Securities Services primarily reflected the impact of lower
customer balances, reflecting lower hedge fund industry assets
and reduced leverage. The decrease in Asset Management primarily
reflected the impact of changes in the composition of assets
managed, principally due to equity market depreciation during
the fourth quarter of 2008, as well as lower incentive fees.
During the year ended December 31, 2009, assets under
management increased $73 billion to $871 billion, due
to $76 billion of market appreciation, primarily in fixed
income and equity assets, partially offset by $3 billion of
net outflows. Outflows in money market assets were offset by
inflows in fixed income assets.
Net revenues in Investment Banking decreased compared with 2008,
reflecting significantly lower net revenues in Financial
Advisory, partially offset by higher net revenues in our
Underwriting business. The decrease in Financial Advisory
reflected a decline in
industry-wide
completed mergers and acquisitions. The increase in Underwriting
reflected higher net revenues in equity underwriting, primarily
reflecting an increase in
industry-wide
equity and
equity-related
offerings. Net revenues in debt underwriting were slightly lower
than in 2008.
2008 versus 2007.
Our net revenues were
$22.22 billion in 2008, a decrease of 52% compared with
2007, reflecting a particularly difficult operating environment,
including significant asset price declines, high levels of
volatility and reduced levels of liquidity, particularly in the
fourth quarter. In addition, credit markets experienced
significant dislocation between prices for cash instruments and
the related derivative contracts and between credit indices and
underlying single names. Net revenues in Trading and Principal
Investments were significantly lower compared with 2007,
reflecting significant declines in FICC, Principal Investments
and Equities. The decrease in FICC primarily reflected losses in
credit products, which included a loss of approximately
$3.1 billion (net of hedges) related to
non-investment-grade
credit origination activities and losses from investments,
including corporate debt and private and public equities.
Results in mortgages included net losses of approximately
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Table of Contents
$1.7 billion on residential mortgage loans and securities
and approximately $1.4 billion on commercial mortgage loans
and securities. Interest rate products, currencies and
commodities each produced particularly strong results and net
revenues were higher compared with 2007. During 2008, although
client-driven activity was generally solid, FICC operated in a
challenging environment characterized by
broad-based
declines in asset values, wider mortgage and corporate credit
spreads, reduced levels of liquidity and
broad-based
investor deleveraging, particularly in the second half of the
year. The decline in Principal Investments primarily reflected
net losses of $2.53 billion from corporate principal
investments and $949 million from real estate principal
investments, as well as a $446 million loss from our
investment in the ordinary shares of ICBC. In Equities, the
decrease compared with particularly strong net revenues in 2007
reflected losses in principal strategies, partially offset by
higher net revenues in our client franchise businesses.
Commissions were particularly strong and were higher than 2007.
During 2008, Equities operated in an environment characterized
by a significant decline in global equity prices,
broad-based
investor deleveraging and very high levels of volatility,
particularly in the second half of the year.
Net revenues in Investment Banking also declined significantly
compared with 2007, reflecting significantly lower net revenues
in both Financial Advisory and Underwriting. In Financial
Advisory, the decrease compared with particularly strong net
revenues in 2007 reflected a decline in
industry-wide
completed mergers and acquisitions. The decrease in Underwriting
primarily reflected significantly lower net revenues in debt
underwriting, primarily due to a decline in leveraged finance
and
mortgage-related
activity, reflecting difficult market conditions. Net revenues
in equity underwriting were slightly lower compared with 2007,
reflecting a decrease in
industry-wide
equity and
equity-related
offerings.
Net revenues in Asset Management and Securities Services
increased compared with 2007. Securities Services net revenues
were higher, reflecting the impact of changes in the composition
of securities lending customer balances, as well as higher total
average customer balances. Asset Management net revenues
increased slightly compared with 2007. During the year, assets
under management decreased $89 billion to
$779 billion, due to $123 billion of market
depreciation, primarily in equity assets, partially offset by
$34 billion of net inflows.
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 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.
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Table of Contents
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 calendar
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 includes salaries, discretionary compensation,
amortization of equity awards and other items such as payroll
taxes, severance costs and benefits. Discretionary compensation
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. Our ratio of compensation and benefits to
net revenues was 35.8% for 2009 and represented our lowest
annual ratio of compensation and benefits to net revenues. While
net revenues for 2009 were only 2% lower than our record net
revenues in 2007, total compensation and benefits expenses for
2009 were 20% lower than 2007. For 2008, our ratio of
compensation and benefits (excluding severance costs of
approximately $275 million in the fourth quarter of
2008) to net revenues was 48.0%. Our compensation expense
can vary from year to year and is based on our performance,
prevailing labor markets and other factors. Our record low
compensation ratio for 2009 reflects both very strong net
revenues and the broader environment in which we currently
operate.
On December 9, 2009, the United Kingdom proposed
legislation that would impose a
non-deductible
50% tax on certain financial institutions in respect of
discretionary bonuses in excess of £25,000 awarded under
arrangements made between December 9, 2009 and
April 5, 2010 to “relevant banking
employees.” We are currently evaluating the impact of the
draft legislation on our results of operations. However, since
this legislation is in draft form, certain details surrounding
the tax have not been finalized. The impact of the tax will be
recorded when the legislation is enacted, which is currently
expected to occur in the second quarter of 2010.
79
Table of Contents
The following table sets forth our operating expenses and total
staff:
Operating
Expenses and Total Staff
($ in millions)
($ in millions)
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Compensation and benefits
|
$ | 16,193 | $ | 10,934 | $ | 20,190 | $ | 744 | ||||||||
|
Brokerage, clearing, exchange and distribution fees
|
2,298 | 2,998 | 2,758 | 165 | ||||||||||||
|
Market development
|
342 | 485 | 601 | 16 | ||||||||||||
|
Communications and technology
|
709 | 759 | 665 | 62 | ||||||||||||
|
Depreciation and
amortization
(1)
|
1,734 | 1,262 | 819 | 111 | ||||||||||||
|
Occupancy
|
950 | 960 | 975 | 82 | ||||||||||||
|
Professional fees
|
678 | 779 | 714 | 58 | ||||||||||||
|
Other expenses
|
2,440 | 1,709 | 1,661 | 203 | ||||||||||||
|
Total
non-compensation
expenses
|
9,151 | 8,952 | 8,193 | 697 | ||||||||||||
|
Total operating expenses
|
$ | 25,344 | $ | 19,886 | $ | 28,383 | $ | 1,441 | ||||||||
|
Total staff at period
end
(2)
|
32,500 | 34,500 | 35,500 | 33,300 | ||||||||||||
|
Total staff at period end including consolidated entities held
for investment
purposes
(3)
|
36,200 | 39,200 | 40,000 | 38,000 | ||||||||||||
| (1) | Beginning in the second quarter of 2009, “Amortization of identifiable intangible assets” is included in “Depreciation and amortization” in the consolidated statements of earnings. Prior periods have been reclassified to conform to the current presentation. | |
| (2) | Includes employees, consultants and temporary staff. | |
| (3) | Compensation and benefits and non-compensation expenses related to consolidated entities held for investment purposes are included in their respective line items in the consolidated statements of earnings. 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. |
2009 versus 2008.
Operating expenses of
$25.34 billion for 2009 increased 27% compared with 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 $16.19 billion were higher compared with 2008, due to
higher net revenues. Our ratio of compensation and benefits to
net revenues for 2009 was 35.8%, down from 48.0% (excluding
severance costs of approximately $275 million in the fourth
quarter of 2008) for 2008. In 2009, compensation was
reduced by $500 million to fund a charitable contribution
to Goldman Sachs Gives, our donor-advised fund. Total staff
decreased 2% during 2009. Total staff including consolidated
entities held for investment purposes decreased 5% during 2009.
Non-compensation
expenses of $9.15 billion for 2009 increased 2% compared
with 2008. The increase compared with 2008 reflected the impact
of charitable contributions of approximately $850 million
(included in other expenses) during 2009, primarily including
$310 million to The Goldman Sachs Foundation and
$500 million to Goldman Sachs Gives. Compensation was
reduced to fund the charitable contribution to Goldman Sachs
Gives. The focus for this $500 million contribution to
Goldman Sachs Gives is on those areas that have proven to be
fundamental to creating jobs and economic growth, building and
stabilizing communities, honoring service and veterans and
increasing educational opportunities. We will ask our
participating managing directors to make recommendations
regarding potential charitable recipients for this contribution.
Depreciation and amortization expenses also increased compared
with 2008 and included real estate impairment
80
Table of Contents
charges of approximately $600 million related to
consolidated entities held for investment purposes during 2009.
The real estate impairment charges, which were measured based on
discounted cash flow analysis, are included in our Trading and
Principal Investments segment and reflected weakness in the
commercial real estate markets, particularly in Asia. These
increases were partially offset by the impact of lower
brokerage, clearing, exchange and distribution fees, principally
reflecting lower transaction volumes in Equities, and the impact
of reduced staff levels and expense reduction initiatives during
2009.
2008 versus 2007.
Operating expenses of
$19.89 billion for 2008 decreased 30% compared with 2007.
Compensation and benefits expenses (including salaries,
discretionary compensation, amortization of equity awards and
other items such as payroll taxes, severance costs and benefits)
of $10.93 billion decreased 46% compared with 2007,
reflecting lower levels of discretionary compensation due to
lower net revenues. For 2008, our ratio of compensation and
benefits (excluding severance costs of approximately
$275 million in the fourth quarter of 2008) to net
revenues was 48.0%. Our ratio of compensation and benefits to
net revenues was 43.9% for 2007. Total staff decreased 3% during
2008. Total staff including consolidated entities held for
investment purposes decreased 2% during 2008.
Non-compensation
expenses of $8.95 billion for 2008 increased 9% compared
with 2007. The increase compared with 2007 was principally
attributable to higher depreciation and amortization expenses,
primarily reflecting the impact of real estate impairment
charges related to consolidated entities held for investment
purposes during 2008, and higher brokerage, clearing, exchange
and distribution fees, primarily due to increased activity
levels in Equities and FICC.
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. Total staff decreased 3% compared with
the end of fiscal year 2008. Total staff including consolidated
entities held for investment purposes decreased 3% compared with
the end of fiscal year 2008.
Non-compensation
expenses of $697 million for the month of
December 2008 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
During 2009, the firm incurred $6.44 billion of corporate
taxes, resulting in an effective income tax rate of 32.5%. The
effective income tax rate for 2008 was approximately 1% and the
effective income tax rate for 2007 was 34.1%. The increase in
the effective income tax rate for 2009 compared with 2008 was
primarily due to changes in the geographic earnings mix and a
decrease in permanent benefits as a percentage of higher
earnings. The effective tax rate for 2009 represents a return to
a geographic earnings mix that is more in line with our historic
earnings mix. The decrease in the effective income tax rate for
2008 compared with 2007 was primarily due to an increase in
permanent benefits as a percentage of lower earnings and changes
in geographic earnings mix. During 2008, we incurred losses in
various U.S. and
non-U.S. entities
whose income/(losses) are subject to tax in the U.S. We
also had profitable operations in certain
non-U.S. entities
that are taxed at their applicable local tax rates, which are
generally lower than the U.S. rate. The effective income
tax rate for the month of December 2008 was 38.0%.
Effective January 1, 2010, the rules related to the
deferral of U.S. tax on certain
non-repatriated
active financing income expired. We are currently assessing the
impact but do not expect this change to be material to our
financial condition, results of operations or cash flows for
2010.
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Our effective income tax rate can vary from period to period
depending on, among other factors, the geographic and business
mix of our earnings, the level of our
pre-tax
earnings, the level of our tax credits and the effect of tax
audits. Certain of these and other factors, including our
history of
pre-tax
earnings, are taken into account in assessing our ability to
realize our net deferred tax assets. See Note 16 to the
consolidated financial statements in Part II, Item 8
of our Annual Report on
Form 10-K
for further information regarding our provision for taxes.
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)
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||||
|
Investment
|
Net revenues | $ | 4,797 | $ | 5,185 | $ | 7,555 | $ | 135 | |||||||||
|
Banking
|
Operating expenses | 3,527 | 3,143 | 4,985 | 169 | |||||||||||||
| Pre-tax earnings/(loss) | $ | 1,270 | $ | 2,042 | $ | 2,570 | $ | (34 | ) | |||||||||
|
Trading and Principal
|
Net revenues | $ | 34,373 | $ | 9,063 | $ | 31,226 | $ | (507 | ) | ||||||||
|
Investments
|
Operating expenses | 17,053 | 11,808 | 17,998 | 875 | |||||||||||||
| Pre-tax earnings/(loss) | $ | 17,320 | $ | (2,745 | ) | $ | 13,228 | $ | (1,382 | ) | ||||||||
|
Asset Management and
|
Net revenues | $ | 6,003 | $ | 7,974 | $ | 7,206 | $ | 555 | |||||||||
|
Securities Services
|
Operating expenses | 4,660 | 4,939 | 5,363 | 329 | |||||||||||||
| Pre-tax earnings | $ | 1,343 | $ | 3,035 | $ | 1,843 | $ | 226 | ||||||||||
|
Total
|
Net revenues | $ | 45,173 | $ | 22,222 | $ | 45,987 | $ | 183 | |||||||||
| Operating expenses (1) | 25,344 | 19,886 | 28,383 | 1,441 | ||||||||||||||
| Pre-tax earnings/(loss) | $ | 19,829 | $ | 2,336 | $ | 17,604 | $ | (1,258 | ) | |||||||||
| (1) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $104 million, $(4) million, $37 million and $68 million for the years ended December 2009, November 2008 and November 2007 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 18 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
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)
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Financial Advisory
|
$ | 1,893 | $ | 2,656 | $ | 4,222 | $ | 72 | ||||||||
|
Equity underwriting
|
1,771 | 1,353 | 1,382 | 19 | ||||||||||||
|
Debt underwriting
|
1,133 | 1,176 | 1,951 | 44 | ||||||||||||
|
Total Underwriting
|
2,904 | 2,529 | 3,333 | 63 | ||||||||||||
|
Total net revenues
|
4,797 | 5,185 | 7,555 | 135 | ||||||||||||
|
Operating expenses
|
3,527 | 3,143 | 4,985 | 169 | ||||||||||||
|
Pre-tax
earnings/(loss)
|
$ | 1,270 | $ | 2,042 | $ | 2,570 | $ | (34 | ) | |||||||
The following table sets forth our financial advisory and
underwriting transaction volumes:
Goldman Sachs
Global Investment Banking
Volumes
(1)
(in billions)
(in billions)
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Announced mergers and
acquisitions
(2)
|
$ | 651 | $ | 804 | $ | 1,260 | $ | 18 | ||||||||
|
Completed mergers and
acquisitions
(2)
|
682 | 829 | 1,490 | 15 | ||||||||||||
|
Equity and
equity-related
offerings
(3)
|
78 | 56 | 66 | 2 | ||||||||||||
|
Debt
offerings
(4)
|
257 | 165 | 324 | 19 | ||||||||||||
| (1) | 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) | Source: Dealogic. | |
| (3) | Source: Thomson Reuters. Includes Rule 144A and public common stock offerings, convertible offerings and rights offerings. | |
| (4) | Source: Thomson Reuters. Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. Excludes leveraged loans. |
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Table of Contents
2009 versus 2008.
Net revenues in Investment
Banking of $4.80 billion for 2009 decreased 7% compared
with 2008.
Net revenues in Financial Advisory of $1.89 billion
decreased 29% compared with 2008, reflecting a decline in
industry-wide
completed mergers and acquisitions. Net revenues in our
Underwriting business of $2.90 billion increased 15%
compared with 2008, due to higher net revenues in equity
underwriting, primarily reflecting an increase in
industry-wide
equity and
equity-related
offerings. Net revenues in debt underwriting were slightly lower
than in 2008. Our investment banking transaction backlog
increased significantly during the twelve months ended
December 31, 2009.
(1)
Operating expenses of $3.53 billion for 2009 increased 12%
compared with 2008, due to increased compensation and benefits
expenses.
Pre-tax
earnings of $1.27 billion in 2009 decreased 38% compared
with 2008.
2008 versus 2007.
Net revenues in Investment
Banking of $5.19 billion for 2008 decreased 31% compared
with 2007.
Net revenues in Financial Advisory of $2.66 billion
decreased 37% compared with particularly strong net revenues in
2007, primarily reflecting a decline in
industry-wide
completed mergers and acquisitions. Net revenues in our
Underwriting business of $2.53 billion decreased 24%
compared with 2007, principally due to significantly lower net
revenues in debt underwriting. The decrease in debt underwriting
was primarily due to a decline in leveraged finance and
mortgage-related
activity, reflecting difficult market conditions. Net revenues
in equity underwriting were slightly lower compared with 2007,
reflecting a decrease in
industry-wide
equity and
equity-related
offerings. Our investment banking transaction backlog ended the
year significantly lower than at the end of 2007.
(1)
Operating expenses of $3.14 billion for 2008 decreased 37%
compared with 2007, due to decreased compensation and benefits
expenses, resulting from lower levels of discretionary
compensation.
Pre-tax
earnings of $2.04 billion in 2008 decreased 21% compared
with 2007.
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.
(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
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 exchange-based market-making activities and in 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.
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.
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Table of Contents
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)
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
FICC
|
$ | 23,316 | $ | 3,713 | $ | 16,165 | $ | (320 | ) | |||||||
|
Equities trading
|
6,046 | 4,208 | 6,725 | 363 | ||||||||||||
|
Equities commissions
|
3,840 | 4,998 | 4,579 | 251 | ||||||||||||
|
Total Equities
|
9,886 | 9,206 | 11,304 | 614 | ||||||||||||
|
ICBC
|
1,582 | (446 | ) | 495 | 228 | |||||||||||
|
Gross gains
|
3,415 | 1,335 | 3,728 | 213 | ||||||||||||
|
Gross losses
|
(3,870 | ) | (4,815 | ) | (943 | ) | (1,243 | ) | ||||||||
|
Net other corporate and real estate investments
|
(455 | ) | (3,480 | ) | 2,785 | (1,030 | ) | |||||||||
|
Overrides
|
44 | 70 | 477 | 1 | ||||||||||||
|
Total Principal Investments
|
1,171 | (3,856 | ) | 3,757 | (801 | ) | ||||||||||
|
Total net revenues
|
34,373 | 9,063 | 31,226 | (507 | ) | |||||||||||
|
Operating expenses
|
17,053 | 11,808 | 17,998 | 875 | ||||||||||||
|
Pre-tax
earnings/(loss)
|
$ | 17,320 | $ | (2,745 | ) | $ | 13,228 | $ | (1,382 | ) | ||||||
2009 versus 2008.
Net revenues in Trading and
Principal Investments of $34.37 billion for 2009 increased
significantly compared with 2008.
Net revenues in FICC of $23.32 billion for 2009 increased
significantly compared with 2008. During 2009, FICC operated in
an environment characterized by strong client-driven activity,
particularly in more liquid products. In addition, asset values
generally improved and corporate credit spreads tightened
significantly for most of the year. The increase in net revenues
compared with 2008 reflected particularly strong performances in
credit products, mortgages and interest rate products, which
were each significantly higher than 2008. Net revenues in
commodities were also particularly strong and were slightly
higher than 2008, while net revenues in currencies were strong,
but lower than a particularly strong 2008. During 2009,
mortgages included a loss of approximately $1.5 billion
(excluding hedges) on commercial mortgage loans. Results in 2008
were negatively impacted by asset writedowns across
non-investment-grade
credit origination activities, corporate debt, private and
public equities, and residential and commercial mortgage loans
and securities.
Net revenues in Equities of $9.89 billion for 2009
increased 7% compared with 2008. Net revenues for 2009 reflected
strong results in the client franchise businesses. However,
these results were lower than a strong 2008 and included
significantly lower commissions. Results in principal strategies
were positive compared with losses in 2008. During 2009,
Equities operated in an environment characterized by a
significant increase in global equity prices, favorable market
opportunities and a significant decline in volatility levels.
Principal Investments recorded net revenues of
$1.17 billion for 2009. These results included a gain of
$1.58 billion related to our investment in the ordinary
shares of ICBC, a gain of $1.31 billion from corporate
principal investments and a loss of $1.76 billion from real
estate principal investments.
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Table of Contents
Operating expenses of $17.05 billion for 2009 increased 44%
compared with 2008, due to increased compensation and benefits
expenses, resulting from higher net revenues. In addition,
depreciation and amortization expenses were higher than 2008,
reflecting the impact of real estate impairment charges of
approximately $600 million related to consolidated entities
held for investment purposes during 2009, while brokerage,
clearing, exchange and distribution fees were lower than 2008,
principally reflecting lower transaction volumes in Equities.
Pre-tax
earnings were $17.32 billion in 2009 compared with a
pre-tax
loss
of $2.75 billion in 2008.
2008 versus 2007.
Net revenues in Trading and
Principal Investments of $9.06 billion for 2008 decreased
71% compared with 2007.
Net revenues in FICC of $3.71 billion for 2008 decreased
77% compared with 2007, primarily reflecting losses in credit
products, which included a loss of approximately
$3.1 billion (net of hedges) related to
non-investment-grade
credit origination activities and losses from investments,
including corporate debt and private and public equities.
Results in mortgages included net losses of approximately
$1.7 billion on residential mortgage loans and securities
and approximately $1.4 billion on commercial mortgage loans
and securities. Interest rate products, currencies and
commodities each produced particularly strong results and net
revenues were higher compared with 2007. During 2008, although
client-driven activity was generally solid, FICC operated in a
challenging environment characterized by
broad-based
declines in asset values, wider mortgage and corporate credit
spreads, reduced levels of liquidity and
broad-based
investor deleveraging, particularly in the second half of the
year.
Net revenues in Equities of $9.21 billion for 2008
decreased 19% compared with a particularly strong 2007,
reflecting losses in principal strategies, partially offset by
higher net revenues in the client franchise businesses.
Commissions were particularly strong and were higher than 2007.
During 2008, Equities operated in an environment characterized
by a significant decline in global equity prices,
broad-based
investor deleveraging and very high levels of volatility,
particularly in the second half of the year.
Principal Investments recorded a net loss of $3.86 billion
for 2008. These results included net losses of
$2.53 billion from corporate principal investments and
$949 million from real estate principal investments, as
well as a $446 million loss related to our investment in
the ordinary shares of ICBC.
Operating expenses of $11.81 billion for 2008 decreased 34%
compared with 2007, due to decreased compensation and benefits
expenses, resulting from lower levels of discretionary
compensation. This decrease was partially offset by increased
depreciation and amortization expenses, primarily reflecting the
impact of real estate impairment charges related to consolidated
entities held for investment purposes during 2008, and higher
brokerage, clearing, exchange and distribution fees, primarily
reflecting increased activity levels in Equities and FICC.
Pre-tax
loss
was $2.75 billion in 2008 compared with
pre-tax
earnings of $13.23 billion in 2007.
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 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.
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Table of Contents
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 and wealth advisory 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. |
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 (in most cases, on December
31) and they are no longer subject to adjustment.
88
Table of Contents
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)
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Management and other fees
|
$ | 3,833 | $ | 4,321 | $ | 4,303 | $ | 318 | ||||||||
|
Incentive fees
|
137 | 231 | 187 | 1 | ||||||||||||
|
Total Asset Management
|
3,970 | 4,552 | 4,490 | 319 | ||||||||||||
|
Securities Services
|
2,033 | 3,422 | 2,716 | 236 | ||||||||||||
|
Total net revenues
|
6,003 | 7,974 | 7,206 | 555 | ||||||||||||
|
Operating expenses
|
4,660 | 4,939 | 5,363 | 329 | ||||||||||||
|
Pre-tax
earnings
|
$ | 1,343 | $ | 3,035 | $ | 1,843 | $ | 226 | ||||||||
Assets under management include assets in 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 bank 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 | ||||||||||||
|
December 31,
|
November 30, | |||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Alternative
investments
(1)
|
$ | 146 | $ | 146 | $ | 151 | ||||||
|
Equity
|
146 | 112 | 255 | |||||||||
|
Fixed income
|
315 | 248 | 256 | |||||||||
|
Total
non-money
market assets
|
607 | 506 | 662 | |||||||||
|
Money markets
|
264 | 273 | 206 | |||||||||
|
Total assets under management
|
$ | 871 | $ | 779 | $ | 868 | ||||||
| (1) | Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. |
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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)
| Year Ended | ||||||||||||
|
December 31,
|
November 30, | |||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, beginning of year
|
$ | 798 | (1) | $ | 868 | $ | 676 | |||||
|
Net inflows/(outflows)
|
||||||||||||
|
Alternative investments
|
(5 | ) | 8 | 9 | ||||||||
|
Equity
|
(2 | ) | (55 | ) | 26 | |||||||
|
Fixed income
|
26 | 14 | 38 | |||||||||
|
Total
non-money
market net inflows/(outflows)
|
19 | (33 | ) | 73 | (2) | |||||||
|
Money markets
|
(22 | ) | 67 | 88 | ||||||||
|
Total net inflows/(outflows)
|
(3 | ) | 34 | 161 | ||||||||
|
Net market appreciation/(depreciation)
|
76 | (123 | ) | 31 | ||||||||
|
Balance, end of year
|
$ | 871 | $ | 779 | $ | 868 | ||||||
| (1) | Includes market appreciation of $13 billion and net inflows of $6 billion during the calendar month of December 2008. | |
| (2) | Includes $7 billion in net asset inflows in connection with our acquisition of Macquarie — IMM Investment Management. |
2009 versus 2008.
Net revenues in Asset
Management and Securities Services of $6.00 billion for
2009 decreased 25% compared with 2008.
Asset Management net revenues of $3.97 billion for 2009
decreased 13% compared with 2008, primarily reflecting the
impact of changes in the composition of assets managed,
principally due to equity market depreciation during the fourth
quarter of 2008, as well as lower incentive fees. During the
year ended December 31, 2009, assets under management
increased $73 billion to $871 billion, due to
$76 billion of market appreciation, primarily in fixed
income and equity assets, partially offset by $3 billion of
net outflows. Outflows in money market assets were offset by
inflows in fixed income assets.
Securities Services net revenues of $2.03 billion decreased
41% compared with 2008. The decrease in net revenues primarily
reflected the impact of lower customer balances, reflecting
lower hedge fund industry assets and reduced leverage.
Operating expenses of $4.66 billion for 2009 decreased 6%
compared with 2008, due to decreased compensation and benefits
expenses.
Pre-tax
earnings of $1.34 billion in 2009 decreased 56% compared
with 2008.
2008 versus 2007.
Net revenues in Asset
Management and Securities Services of $7.97 billion for
2008 increased 11% compared with 2007.
Asset Management net revenues of $4.55 billion for 2008
increased 1% compared with 2007. During 2008, assets under
management decreased $89 billion to $779 billion, due
to $123 billion of market depreciation, primarily in equity
assets, partially offset by $34 billion of net inflows. Net
inflows reflected inflows in money market, fixed income and
alternative investment assets, partially offset by outflows in
equity assets.
Securities Services net revenues of $3.42 billion for 2008
increased 26% compared with 2007, reflecting the impact of
changes in the composition of securities lending customer
balances, as well as higher total average customer balances.
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Operating expenses of $4.94 billion for 2008 decreased 8%
compared with 2007, due to decreased compensation and benefits
expenses, resulting from lower levels of discretionary
compensation.
Pre-tax
earnings of $3.04 billion in 2008 increased 65% compared
with 2007.
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 calendar 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.
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 18 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for a summary of our total net revenues,
pre-tax
earnings and net 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, 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), including VIEs that were considered qualifying
special-purpose
entities (QSPEs) prior to our adoption of Accounting Standards
Update
2009-16,
“Transfers and Servicing (Topic 860) — Accounting
for Transfers of Financial Assets,” in the first quarter of
2010.
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 December 2009 or
November 2008.
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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 did not affect our accounting treatment
for QSPEs that hold the subprime loans.
The following table sets forth where a discussion of
off-balance-sheet
arrangements may be found in Part II, Items 7 and 8 of
our Annual Report on
Form 10-K:
| Type of Off-Balance-Sheet Arrangement | Disclosure in Annual Report on Form 10-K | |
| Retained interests or other continuing involvement relating to assets transferred by us to nonconsolidated entities | See Note 4 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K. | |
| Leases, letters of credit, and loans and other commitments | See Note 8 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K and “— Contractual Obligations” below. | |
| Guarantees | See Note 8 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K. | |
| Other obligations, including contingent obligations, arising out of variable interests we have in nonconsolidated entities | See Note 4 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K. | |
| Derivative contracts | See “— Critical Accounting Policies” above, and “— Risk Management” and “— Derivatives” below and Notes 3 and 7 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K. | |
In addition, see Note 2 to the consolidated financial
statements in Part II, Item 8 of our Annual Report on
Form 10-K
for a discussion of our consolidation policies and recent
accounting developments that affected these policies effective
January 1, 2010.
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Table of Contents
Equity
Capital
The level and composition of our equity capital are determined
by multiple factors including our consolidated regulatory
capital requirements and an internal
risk-based
capital assessment, and 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 adverse changes in our
business and market environments.
Our consolidated regulatory capital requirements are determined
by the Federal Reserve Board, as described below. Our internal
risk-based
capital assessment is designed to identify and measure material
risks associated with our business activities, including market
risk, credit risk and operational risk, in a manner that is
closely aligned with our risk management practices.
As of December 2009, our total shareholders’ equity
was $70.71 billion (consisting of common shareholders’
equity of $63.76 billion and preferred stock of
$6.96 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). In addition to total
shareholders’ equity, we consider our $5.00 billion of
junior subordinated debt issued to trusts to be part of our
equity capital, as it qualifies as capital for regulatory and
certain rating agency purposes.
Consolidated
Capital Requirements
The Federal Reserve Board is the primary U.S. regulator of
Group Inc., a bank holding company that in August 2009
also became a financial holding company under the
U.S. Gramm-Leach-Bliley Act of 1999. As a bank holding
company, we are subject to consolidated regulatory capital
requirements administered by the Federal Reserve Board. Under
the Federal Reserve Board’s capital adequacy rules, Goldman
Sachs must meet specific capital requirements that involve
quantitative measures of assets, liabilities and certain
off-balance-sheet
items as calculated under regulatory reporting practices. The
firm’s capital levels are also subject to qualitative
judgments by its regulators about components, risk weightings
and other factors.
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Table of Contents
Consolidated
Capital Ratios
The following table sets forth information regarding our
consolidated capital ratios as of December 2009 calculated
in accordance with the Federal Reserve Board’s regulatory
capital requirements currently applicable to bank holding
companies, which are based on Basel I. These ratios are used by
the Federal Reserve Board and other U.S. federal banking
agencies in the supervisory review process, including the
assessment of our capital adequacy. The calculation of these
ratios includes certain market risk measures that are under
review by the Federal Reserve Board. The calculation of these
ratios has not been reviewed with the Federal Reserve Board and,
accordingly, these ratios may be revised in subsequent filings.
|
As of
|
||||
|
December
|
||||
| 2009 | ||||
| ($ in millions) | ||||
|
Tier 1 Capital
|
||||
|
Common shareholders’ equity
|
$ | 63,757 | ||
|
Preferred stock
|
6,957 | |||
|
Junior subordinated debt issued to trusts
|
5,000 | |||
|
Less: Goodwill
|
(3,543 | ) | ||
|
Less: Disallowable intangible assets
|
(1,377 | ) | ||
|
Less: Other
deductions
(1)
|
(6,152 | ) | ||
|
Tier 1 Capital
|
64,642 | |||
|
Tier 2 Capital
|
||||
|
Qualifying subordinated
debt
(2)
|
14,004 | |||
|
Less: Other
deductions
(1)
|
(176 | ) | ||
|
Tier 2 Capital
|
$ | 13,828 | ||
|
Total Capital
|
$ | 78,470 | ||
|
Risk-Weighted
Assets
|
$ | 431,890 | ||
|
Tier 1 Capital Ratio
|
15.0 | % | ||
|
Total Capital Ratio
|
18.2 | % | ||
|
Tier 1 Leverage Ratio
|
7.6 | % | ||
| (1) | Principally includes equity investments in non-financial companies 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 subordinated debt qualifies as Tier 2 capital for Basel I purposes. |
RWAs under the Federal Reserve Board’s
risk-based
capital guidelines are calculated based on the amount of market
risk and credit risk. RWAs for market risk include certain
measures that are under review by the Federal Reserve Board.
Credit risk for on-balance sheet assets is based on the balance
sheet value. For off-balance sheet exposures, including OTC
derivatives and commitments, a credit equivalent amount is
calculated based on the notional of each trade. All such assets
and amounts are then assigned a risk weight depending on, among
other things, whether the counterparty is a sovereign, bank or
qualifying securities firm, or other entity (or if collateral is
held, depending on the nature of the collateral).
Our 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).
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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
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%.
During 2009, the Basel Committee on Banking Supervision proposed
several changes to the method of computing capital ratios. In
addition, there are several other proposals which could
potentially impact capital requirements. As a consequence, it is
possible that minimum capital ratios required to be maintained
under Federal Reserve Board regulations could be increased. It
is also possible that changes in the prescribed calculation
methodology could result in higher RWAs and lower capital ratios
than are currently computed.
Subsidiary
Capital Requirements
Many of our subsidiaries are subject to separate regulation and
capital requirements in jurisdictions throughout the world. GS
Bank USA, a New York State-chartered bank and a member of the
Federal Reserve System and the Federal Deposit Insurance
Corporation (FDIC), is regulated by the Federal Reserve Board
and the New York State Banking Department and is subject to
minimum capital requirements that (subject to certain
exceptions) are similar to those applicable to bank holding
companies. GS Bank USA and its subsidiaries are subject to the
regulatory framework for prompt corrective action (PCA). 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. GS Bank USA’s capital levels and PCA
classification are subject to qualitative judgments by its
regulators about components, risk weightings and other factors.
GS&Co. and Goldman Sachs Execution & Clearing,
L.P. are registered
U.S. broker-dealers
and futures commission 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. and the
National Futures Association. Goldman Sachs International (GSI)
and Goldman Sachs Japan Co., Ltd., our principal
non-U.S. regulated
broker-dealer
subsidiaries, are subject to the capital requirements of the
U.K.’s Financial Services Authority and Japan’s
Financial Services Agency, respectively.
See Note 17 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for information regarding GS Bank USA’s capital ratios
under Basel I as implemented by the Federal Reserve Board, and
for further information regarding the capital requirements of
our other regulated subsidiaries.
Subsidiaries not subject to separate regulatory capital
requirements 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. In certain instances, Group Inc.
may be limited in its ability to access capital held at certain
subsidiaries as a result of regulatory, tax or other
constraints. As of December 2009, Group Inc.’s
equity investment in subsidiaries was $65.74 billion
compared with its total shareholders’ equity of
$70.71 billion.
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Table of Contents
Group Inc. has guaranteed the payment obligations of
GS&Co., GS Bank USA and GS Bank Europe, subject to certain
exceptions. In November 2008, 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.
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.
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. GS Bank USA has also been assigned a
long-term
issuer rating as well as ratings on its
long-term
and
short-term
bank deposits. In addition, credit rating agencies have assigned
ratings to debt obligations of certain other subsidiaries of
Group Inc.
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 principally manage our capital
through issuances and repurchases of our common stock. We may
also, from time to time, issue or repurchase our preferred
stock, junior subordinated debt issued to trusts and other
subordinated debt as business conditions warrant. 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 internal
risk-based
capital framework and manage the levels of usage based upon the
balance sheet and risk limits established.
Stock Offering.
During the second quarter of
2009, we completed a public offering of 46.7 million common
shares at $123.00 per share for total proceeds of
$5.75 billion.
Preferred Stock.
In June 2009, we
repurchased from the U.S. Treasury the 10.0 million
shares of our Fixed Rate Cumulative Perpetual Preferred Stock,
Series H (Series H Preferred Stock), that were issued
to the U.S. Treasury pursuant to the
U.S. Treasury’s TARP Capital Purchase Program. The
repurchase resulted in a
one-time
preferred dividend of $426 million, which is included in
the consolidated statement of earnings for the year ended
December 2009. This
one-time
preferred dividend represented the difference between the
carrying value and the redemption value of the Series H
Preferred Stock. In connection with the issuance of the
Series H Preferred Stock in October 2008, we 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. We repurchased this warrant in full in
July 2009 for $1.1 billion, which was recorded as a
reduction to additional
paid-in
capital. Our cumulative payments to the U.S. Treasury
related to the U.S. Treasury’s TARP Capital Purchase
Program totaled $11.42 billion, including the return of the
U.S. Treasury’s $10.0 billion investment
(inclusive of the $426 million described above),
$318 million in preferred dividends and $1.1 billion
related to the warrant repurchase.
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Table of Contents
In October 2008, we issued to Berkshire Hathaway and
certain affiliates 50,000 shares of 10% Cumulative
Perpetual Preferred Stock, Series G (Series G
Preferred Stock), and a five-year warrant to purchase up to
43.5 million shares of common stock at an exercise price of
$115.00 per share, for aggregate proceeds of $5.00 billion.
The allocated carrying values of the warrant and the
Series G Preferred Stock (based on their relative fair
values on the date of issuance) were $1.14 billion and
$3.86 billion, respectively. The Series G Preferred
Stock is redeemable at the firm’s option, subject to the
approval of the Federal Reserve Board, at a redemption value of
$5.50 billion, plus accrued and unpaid dividends.
Accordingly, upon a redemption in full at any time in the future
of the Series G Preferred Stock, we would recognize a
one-time
preferred dividend of $1.64 billion (calculated as the
difference between the carrying value and redemption value of
the preferred stock), which would be recorded as a reduction to
our earnings applicable to common shareholders and to our common
shareholders’ equity in the period of redemption.
Share Repurchase Program.
We seek to 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. 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. Any repurchase of our common stock
requires approval by the Federal Reserve Board.
As of December 2009, we were authorized to repurchase up to
60.8 million additional shares of common stock pursuant to
our repurchase program, subject to the approval of the Federal
Reserve Board. See “Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities” in Part II, Item 5 and
Note 9 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for additional information on our repurchase program.
See Notes 7 and 9 to the consolidated financial statements
in Part II, Item 8 of our Annual Report on
Form 10-K
for further information regarding our preferred stock, junior
subordinated debt issued to trusts and other subordinated debt.
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Table of Contents
Capital Ratios
and Metrics
The following table sets forth information on our assets,
shareholders’ equity, leverage ratios, capital ratios and
book value per common share:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
|
($ in millions, except
|
||||||||
| per share amounts) | ||||||||
|
Total assets
|
$ | 848,942 | $ | 884,547 | ||||
|
Adjusted
assets
(1)
|
546,151 | 528,292 | ||||||
|
Total shareholders’ equity
|
70,714 | 64,369 | ||||||
|
Tangible equity
capital
(2)
|
70,794 | 64,317 | ||||||
|
Leverage
ratio
(3)
|
12.0 | x | 13.7 | x | ||||
|
Adjusted leverage
ratio
(4)
|
7.7 | x | 8.2 | x | ||||
|
Debt to equity
ratio
(5)
|
2.6 | x | 2.6 | x | ||||
|
Common shareholders’ equity
|
$ | 63,757 | $ | 47,898 | ||||
|
Tangible common shareholders’
equity
(6)
|
58,837 | 42,846 | ||||||
|
Book value per common
share
(7)
|
117.48 | 98.68 | ||||||
|
Tangible book value per common
share
(6)(7)
|
108.42 | 88.27 | ||||||
| As of | ||||||||
|
December
|
||||||||
| 2009 | ||||||||
| Basel I (8) | ||||||||
|
Tier 1 capital ratio
|
15.0 | % | ||||||
|
Total capital ratio
|
18.2 | % | ||||||
|
Tier 1 leverage ratio
|
7.6 | % | ||||||
|
Tier 1 common
ratio
(9)
|
12.2 | % | ||||||
|
Tangible common shareholders’
equity
(6)
to
risk-weighted
assets ratio
|
13.6 | % | ||||||
| (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 which are deducted when calculating tangible equity capital (see footnote 2 below). |
The following table sets forth the reconciliation of total
assets to adjusted assets:
| As of | ||||||||||
|
December
|
November
|
|||||||||
| 2009 | 2008 | |||||||||
| (in millions) | ||||||||||
|
Total assets
|
$ | 848,942 | $ | 884,547 | ||||||
|
Deduct:
|
Securities borrowed | (189,939 | ) | (180,795 | ) | |||||
| Securities purchased under agreements to resell and federal funds sold | (144,279 | ) | (122,021 | ) | ||||||
|
Add:
|
Trading liabilities, at fair value | 129,019 | 175,972 | |||||||
| Less derivative liabilities | (56,009 | ) | (117,695 | ) | ||||||
| Subtotal | 73,010 | 58,277 | ||||||||
|
Deduct:
|
Cash and securities segregated for regulatory and other purposes | (36,663 | ) | (106,664 | ) | |||||
| Goodwill and identifiable intangible assets | (4,920 | ) | (5,052 | ) | ||||||
|
Adjusted assets
|
$ | 546,151 | $ | 528,292 | ||||||
| (2) | Tangible equity capital equals total shareholders’ equity and junior subordinated debt issued to trusts less goodwill and identifiable intangible assets. 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. |
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Table of Contents
The following table sets forth the reconciliation of total
shareholders’ equity to tangible equity capital:
| As of | ||||||||||
|
December
|
November
|
|||||||||
| 2009 | 2008 | |||||||||
| (in millions) | ||||||||||
|
Total shareholders’ equity
|
$ | 70,714 | $ | 64,369 | ||||||
|
Add:
|
Junior subordinated debt issued to trusts | 5,000 | 5,000 | |||||||
|
Deduct:
|
Goodwill and identifiable intangible assets | (4,920 | ) | (5,052 | ) | |||||
|
Tangible equity capital
|
$ | 70,794 | $ | 64,317 | ||||||
| (3) | The leverage ratio equals total assets divided by total shareholders’ equity. This ratio is different from the Tier 1 leverage ratio included above, which is described in Note 17 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K. | |
| (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. Tangible book value per common share is computed by dividing tangible common shareholders’ equity by the number of common shares outstanding, including RSUs 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. |
The following table sets forth the reconciliation of total
shareholders’ equity to tangible common shareholders’
equity:
| As of | ||||||||||
|
December
|
November
|
|||||||||
| 2009 | 2008 | |||||||||
| (in millions) | ||||||||||
|
Total shareholders’ equity
|
$ | 70,714 | $ | 64,369 | ||||||
|
Deduct:
|
Preferred stock | (6,957 | ) | (16,471 | ) | |||||
|
Common shareholders’ equity
|
63,757 | 47,898 | ||||||||
|
Deduct:
|
Goodwill and identifiable intangible assets | (4,920 | ) | (5,052 | ) | |||||
|
Tangible common shareholders’ equity
|
$ | 58,837 | $ | 42,846 | ||||||
| (7) | Book value and tangible book value per common share are based on common shares outstanding, including RSUs granted to employees with no future service requirements, of 542.7 million and 485.4 million as of December 2009 and November 2008, respectively. | |
| (8) | Calculated in accordance with the regulatory capital requirements currently applicable to bank holding companies. RWAs were $431.89 billion as of December 2009 under Basel I. See Note 17 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for further information regarding our regulatory capital ratios. | |
| (9) | The Tier 1 common ratio equals Tier 1 capital less preferred stock and junior subordinated debt issued to trusts, divided by RWAs. We believe that the Tier 1 common ratio 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 Tier 1
capital to Tier 1 common capital:
| As of | ||||||||||
|
December
|
||||||||||
| 2009 | ||||||||||
| (in millions) | ||||||||||
|
Tier 1 capital
|
$ | 64,642 | ||||||||
|
Deduct:
|
Preferred stock | (6,957 | ) | |||||||
|
Deduct:
|
Junior subordinated debt issued to trusts | (5,000 | ) | |||||||
|
Tier 1 common capital
|
$ | 52,685 | ||||||||
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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, time deposits,
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
maturity date as of December 2009:
Contractual
Obligations
(in millions)
(in millions)
|
2011-
|
2013-
|
2015-
|
||||||||||||||||||
| 2010 | 2012 | 2014 | Thereafter | Total | ||||||||||||||||
|
Unsecured
long-term
borrowings
(1)(2)(3)
|
$ | — | $ | 50,950 | $ | 41,674 | $ | 92,461 | $ | 185,085 | ||||||||||
|
Secured
long-term
financings
(1)(2)(4)
|
— | 5,558 | 3,135 | 2,510 | 11,203 | |||||||||||||||
|
Time deposits
(long-term)
(5)
|
— | 2,474 | 2,251 | 2,058 | 6,783 | |||||||||||||||
|
Contractual interest
payments
(6)
|
7,228 | 12,628 | 9,588 | 29,780 | 59,224 | |||||||||||||||
|
Insurance
liabilities
(7)
|
692 | 1,253 | 1,084 | 9,082 | 12,111 | |||||||||||||||
|
Minimum rental payments
|
494 | 664 | 455 | 1,555 | 3,168 | |||||||||||||||
|
Purchase obligations
|
251 | 58 | 38 | 33 | 380 | |||||||||||||||
| (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 consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K 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 $21.39 billion accounted for at fair value under the fair value option, primarily consisting of hybrid financial instruments and prepaid physical commodity transactions. | |
| (4) | These obligations are reported in “Other secured financings” in the consolidated statements of financial condition and include $8.00 billion accounted for at fair value under the fair value option, primarily consisting of transfers accounted for as financings rather than sales and debt raised through our William Street credit extension program. | |
| (5) | Excludes $2.51 billion of time deposits maturing within one year of our financial statement date. | |
| (6) | Represents estimated future interest payments related to unsecured long-term borrowings, secured long-term financings and time deposits based on applicable interest rates as of December 2009. Includes stated coupons, if any, on structured notes. | |
| (7) | 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 December 2009, our unsecured
long-term
borrowings were $185.09 billion, with maturities extending
to 2043, and consisted principally of senior borrowings. See
Note 7 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for further information regarding our unsecured
long-term
borrowings.
As of December 2009, our future minimum rental payments,
net of minimum sublease rentals, under noncancelable leases were
$3.17 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 consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for further information regarding our leases.
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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. In 2009, we incurred exit costs of
$61 million related to our office space (included in
“Occupancy” and “Depreciation and
Amortization” in the 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 December 2009, included in purchase obligations was
$142 million of
construction-related
obligations. As of December 2009, our
construction-related
obligations include commitments of $104 million related to
our new headquarters in New York City. Initial occupancy of our
new headquarters occurred during the fourth quarter of 2009.
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 consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for information regarding our commitments, contingencies and
guarantees.
Risk
Management
Management believes that effective risk management is of primary
importance to the success of Goldman Sachs. Accordingly, we have
a comprehensive risk management process to monitor, evaluate and
manage the principal risks we assume in conducting our
activities. These risks include market, credit, liquidity,
operational, legal, regulatory and reputational exposures.
Risk Management
Structure
We seek to monitor and control our risk exposure through a
variety of separate but complementary financial, credit,
operational, compliance and legal reporting systems. In
addition, a number of committees are responsible for monitoring
risk exposures and for general oversight of our risk management
process, as described further below. These committees (including
their subcommittees), meet regularly and consist of senior
members of both our revenue-producing units and departments that
are independent of our revenue-producing units.
Segregation of duties and management oversight are fundamental
elements of our risk management process. In addition to the
committees described below, functions that are independent of
the revenue-producing units, such as Compliance, Finance, Legal,
Management Controls (Internal Audit) and Operations, perform
risk management functions, which include monitoring, analyzing
and evaluating risk.
Management Committee.
The Management
Committee oversees the global activities of the firm, including
all firm risk control functions. The Committee provides this
oversight directly and through authority delegated to the
committees it has established.
Risk Committees.
The Firmwide Risk Committee
is globally responsible for the ongoing monitoring and control
of financial risks associated with the activities of the firm.
Through both direct and delegated authority, the Committee
approves firmwide, product, divisional and business unit limits
for both market and credit risks, approves sovereign credit risk
limits and credit risk limits by ratings groups, and reviews
stress test and scenario analyses results. The Committee also
approves new businesses and products.
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The Securities Division Risk Committee sets market risk
limits for our trading activities, subject to overall firmwide
risk limits, for the FICC and Equities businesses based on a
number of risk measures, including VaR, stress tests, scenario
analyses, and inventory levels.
Business unit risk limits are established by the appropriate
risk committee and may be further allocated by the business unit
managers to individual trading desks. Trading desk managers have
the first line of responsibility for managing risk within
prescribed limits. These managers have in-depth knowledge of the
primary sources of risk in their respective markets and the
instruments available to hedge their exposures.
Market risk limits are monitored by the Finance Division and are
reviewed regularly by the appropriate risk committee. Limit
violations are reported to the appropriate risk committee and
business unit managers and addressed, as necessary. Credit risk
limits are also monitored by the Finance Division and reviewed
by the appropriate risk committee.
The Investment Management Division Risk Committee oversees
market, counterparty credit and liquidity risks related to our
asset management businesses.
Business Practices Committee.
The Business
Practices Committee assists senior management in its oversight
of compliance and operational risks and related reputational
concerns, seeks to ensure the consistency of our policies,
practices and procedures with our Business Principles, and makes
recommendations on ways to mitigate potential risks.
Firmwide Capital Committee.
The Firmwide
Capital Committee provides approval and oversight of
debt-related transactions, including principal commitments of
the firm’s capital. Such capital commitments include, but
are not limited to, extensions of credit, alternative liquidity
commitments and certain debt underwritings. The Firmwide Capital
Committee aims to ensure that business and reputational
standards for underwritings and capital commitments are
maintained on a global basis.
Commitments Committee.
The Commitments
Committee reviews and approves underwriting and distribution
activities, primarily with respect to offerings of equity and
equity-related
securities, and sets and maintains policies and procedures
designed to ensure that legal, reputational, regulatory and
business standards are maintained in conjunction with these
activities. In addition to reviewing specific transactions, the
Commitments Committee periodically conducts strategic reviews of
industry sectors and products and establishes policies in
connection with transaction practices.
Credit Policy Committee.
The Credit Policy
Committee establishes and reviews broad credit policies and
parameters that are implemented by the Credit Department.
Finance Committee.
The Finance Committee has
oversight responsibility for liquidity risk, the size and
composition of our balance sheet and capital base, and our
credit ratings. The Finance Committee regularly reviews our
liquidity, balance sheet, funding position and capitalization
and makes adjustments in light of current events, risks and
exposures, and regulatory requirements.
New Products Committee.
The New Products
Committee, under the oversight of the Firmwide Risk Committee,
is responsible for reviewing and approving new product proposals.
Operational Risk Committee.
The Operational
Risk Committee provides oversight of the ongoing development and
implementation of our operational risk policies, framework and
methodologies, and monitors the effectiveness of operational
risk management.
Structured Products Committee.
The Structured
Products Committee reviews and approves proposed structured
product transactions to be entered into with our clients that
raise legal, regulatory, tax or accounting issues or present
reputational risk to Goldman Sachs.
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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 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
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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Table of Contents
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)
| Year Ended | ||||||||||||
|
December
|
November
|
November
|
||||||||||
|
Risk Categories
|
2009 | 2008 | 2007 | |||||||||
|
Interest rates
|
$ | 176 | $ | 142 | $ | 85 | ||||||
|
Equity prices
|
66 | 72 | 100 | |||||||||
|
Currency rates
|
36 | 30 | 23 | |||||||||
|
Commodity prices
|
36 | 44 | 26 | |||||||||
|
Diversification
effect
(2)
|
(96 | ) | (108 | ) | (96 | ) | ||||||
|
Total
|
$ | 218 | $ | 180 | $ | 138 | ||||||
| (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 $218 million in 2009
from $180 million in 2008, principally due to an increase
in the interest rates category and a reduction in the
diversification benefit across risk categories, partially offset
by a decrease in the commodity prices category. The increase in
interest rates was primarily due to wider spreads. The decrease
in commodity prices was primarily due to lower energy prices.
Our average daily VaR increased to $180 million in 2008
from $138 million in 2007, principally due to increases in
the interest rate, commodity price and currency rate categories,
partially offset by a decrease in the equity prices category.
The increase in interest rates was primarily due to higher
levels of volatility and wider spreads, partially offset by
position reductions, and the increases in commodity prices and
currency rates were primarily due to higher levels of
volatility. The decrease in equity prices was principally due to
position reductions, partially offset by higher levels of
volatility.
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 a $1 million
loss as of December 2009. 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 an $8 million gain
(including hedges) as of December 2009.
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Daily VaR
(1)
(in millions)
(in millions)
| As of |
Year Ended
|
|||||||||||||||
|
December
|
November
|
December 2009 | ||||||||||||||
|
Risk Categories
|
2009 | 2008 |
High
|
Low
|
||||||||||||
|
Interest rates
|
$ | 122 | $ | 228 | $ | 252 | $ | 111 | ||||||||
|
Equity prices
|
99 | 38 | 123 | 32 | ||||||||||||
|
Currency rates
|
21 | 36 | 61 | 20 | ||||||||||||
|
Commodity prices
|
33 | 33 | 59 | 18 | ||||||||||||
|
Diversification
effect
(2)
|
(122 | ) | (91 | ) | ||||||||||||
|
Total
|
$ | 153 | $ | 244 | $ | 285 | $ | 153 | ||||||||
| (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 decreased to $153 million as of
December 2009 from $244 million as of
November 2008, due to a decrease in the interest rate and
currency rate categories as well as an increase in the
diversification benefit across risk categories, partially offset
by an increase in the equity prices category. The decrease in
interest rates was principally due to lower market volatilities,
tighter spreads and lower levels of exposure. The decrease in
currency rates was primarily due to lower market volatilities.
The increase in equity prices was primarily due to higher levels
of exposure.
The following chart presents our daily VaR during 2009:
Daily VaR
($ in millions)
($ in millions)
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Table of Contents
Trading Net
Revenues Distribution
The following chart sets forth the frequency distribution of our
daily trading net revenues for substantially all inventory
positions included in VaR for the year ended December 2009:
Daily Trading Net
Revenues
($ in millions)
($ in millions)
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 2009. Trading losses incurred on a single day exceeded
our 95%
one-day
VaR
on 13 occasions during 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 these equity and debt positions in
the FICC and Equities components of our Trading and Principal
Investments segment and equity, debt (primarily mezzanine
instruments) and real estate positions in the Principal
Investments component of our Trading and Principal Investments
segment 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 the Principal
Investments component) of such positions. The fair value of the
underlying positions may be impacted by recent
third-party
investments or pending transactions,
third-party
independent appraisals, transactions in similar instruments,
valuation multiples and public comparables, and changes in
financial ratios or cash flows.
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Table of Contents
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:
|
Asset Categories
|
10% Sensitivity Measure
|
10% Sensitivity | ||||||||
| Amount as of | ||||||||||
|
December
|
November
|
|||||||||
| 2009 | 2008 | |||||||||
| (in millions) | ||||||||||
|
FICC and Equities
(1)
|
||||||||||
|
Equity
(2)
|
Underlying asset value | $ | 616 | $ | 790 | |||||
|
Debt
(3)
|
Underlying asset value | 431 | 808 | |||||||
|
Principal Investments
(4)
|
||||||||||
|
ICBC
|
ICBC ordinary share price | 298 | 202 | |||||||
|
Other
Equity
(5)
|
Underlying asset value | 1,001 | 1,155 | |||||||
|
Debt
(6)
|
Underlying asset value | 947 | 694 | |||||||
|
Real
Estate
(7)
|
Underlying asset value | 690 | 1,330 | |||||||
| (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 consolidated statements of financial condition. Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 12 to the consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K 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) | Represents investments included within the Principal Investments component of our Trading and Principal Investments segment. | |
| (5) | Primarily relates to interests in our merchant banking funds that invest in corporate equities. | |
| (6) | Primarily relates to interests in our merchant banking funds that invest in corporate mezzanine debt instruments. | |
| (7) | 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. |
The decrease in our 10% sensitivity measures as of
December 2009 from November 2008 for debt and equity
positions in the FICC and Equities components of our Trading and
Principal Investments segment was primarily due to decreases in
the fair value of the portfolios as well as due to dispositions.
The decrease in our 10% sensitivity measure for equity positions
in our Principal Investments component was primarily due to
dispositions. The increase in our 10% sensitivity measure for
debt positions in our Principal Investments component was
primarily due to new investment activity. The decrease in our
10% sensitivity measure for real estate positions in our
Principal Investments component was primarily due to a decrease
in the fair value of the portfolio.
In addition to the positions included in VaR and the other risk
measures described above, as of December 2009, we held
approximately $10.70 billion of financial instruments in
our bank and insurance subsidiaries, primarily consisting of
$5.12 billion of money market instruments,
$1.25 billion of government and U.S. federal agency
obligations, $2.78 billion of corporate debt securities and
other debt obligations, and $1.31 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 government and U.S. federal agency
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. In addition, as of December 2009 and
November 2008, we held commitments and loans under the
William Street credit extension program. See Note 8 to the
consolidated financial statements in Part II, Item 8
of our Annual Report on
Form 10-K
for further information regarding our William Street credit
extension program.
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Table of Contents
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 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 subsidiaries. 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.
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,
clearing houses, exchanges and investment funds. This has
resulted 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, including sovereign issuers,
or to a particular clearing house or exchange.
As of December 2009 and November 2008, we held
$83.83 billion (10% of total assets) and
$53.98 billion (6% 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 consolidated statements of financial condition. As of
December 2009 and November 2008, we held
$38.61 billion (5% of total assets) and $21.13 billion
(2% of total assets), respectively, of other sovereign
obligations, principally consisting of securities issued by the
governments of the United Kingdom and Japan. In addition, as of
December 2009 and November 2008, $87.63 billion
and $126.27 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
December 2009 and November 2008, $77.99 billion
and $65.37 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,
the United Kingdom and Japan. As of December 2009 and
November 2008, we did not have credit exposure to any other
counterparty that exceeded 2% of our total assets.
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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 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.
The following tables set forth the fair values of our OTC
derivative assets and liabilities by tenor and by product type
or credit rating. Tenor is based on expected duration for
mortgage-related
credit derivatives and generally on remaining contractual
maturity for other derivatives. For option contracts that
require settlement by delivery of an underlying derivative
instrument, the tenor 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 tenor is generally based upon the option expiration
date.
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Table of Contents
The following tables set forth the fair values of our OTC
derivative assets and liabilities by product type and by tenor.
OTC
Derivatives
(in millions)
(in millions)
| Assets | As of December 2009 | |||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 14,266 | $ | 37,146 | $ | 25,608 | $ | 37,721 | $ | 114,741 | ||||||||||
|
Credit derivatives
|
5,743 | 20,465 | 11,497 | 6,281 | 43,986 | |||||||||||||||
|
Currencies
|
9,870 | 12,789 | 6,408 | 6,955 | 36,022 | |||||||||||||||
|
Commodities
|
6,201 | 7,546 | 521 | 41 | 14,309 | |||||||||||||||
|
Equities
|
6,742 | 8,818 | 4,920 | 2,350 | 22,830 | |||||||||||||||
|
Netting across product
types
(1)
|
(3,480 | ) | (6,256 | ) | (3,047 | ) | (1,399 | ) | (14,182 | ) | ||||||||||
|
Subtotal
|
$ | 39,342 | (4) | $ | 80,508 | $ | 45,907 | $ | 51,949 | $ | 217,706 | |||||||||
|
Cross maturity
netting
(2)
|
(24,681 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(124,603 | ) | ||||||||||||||||||
|
Total
|
$ | 68,422 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 7,042 | $ | 12,831 | $ | 11,421 | $ | 12,518 | $ | 43,812 | ||||||||||
|
Credit derivatives
|
2,487 | 7,168 | 2,356 | 2,116 | 14,127 | |||||||||||||||
|
Currencies
|
12,202 | 4,003 | 2,789 | 2,132 | 21,126 | |||||||||||||||
|
Commodities
|
6,922 | 7,161 | 1,157 | 846 | 16,086 | |||||||||||||||
|
Equities
|
4,213 | 3,746 | 3,371 | 586 | 11,916 | |||||||||||||||
|
Netting across product
types
(1)
|
(3,480 | ) | (6,256 | ) | (3,047 | ) | (1,399 | ) | (14,182 | ) | ||||||||||
|
Subtotal
|
$ | 29,386 | (4) | $ | 28,653 | $ | 18,047 | $ | 16,799 | $ | 92,885 | |||||||||
|
Cross maturity
netting
(2)
|
(24,681 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(14,743 | ) | ||||||||||||||||||
|
Total
|
$ | 53,461 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category, pursuant to enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category, where appropriate. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories, pursuant to enforceable netting 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 $21.60 billion and $18.08 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
|
|||||||||||||||||
|
Product Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 10,530 | $ | 38,918 | $ | 35,196 | $ | 48,008 | $ | 132,652 | ||||||||||
|
Credit derivatives
|
19,866 | 30,235 | 27,410 | 8,907 | 86,418 | |||||||||||||||
|
Currencies
|
28,148 | 12,259 | 6,102 | 4,440 | 50,949 | |||||||||||||||
|
Commodities
|
14,857 | 12,404 | 1,177 | 618 | 29,056 | |||||||||||||||
|
Equities
|
10,520 | 7,614 | 5,083 | 3,901 | 27,118 | |||||||||||||||
|
Netting across product
types
(1)
|
(4,736 | ) | (9,316 | ) | (5,864 | ) | (2,826 | ) | (22,742 | ) | ||||||||||
|
Subtotal
|
$ | 79,185 | (4) | $ | 92,114 | $ | 69,104 | $ | 63,048 | $ | 303,451 | |||||||||
|
Cross maturity
netting
(2)
|
(42,118 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(137,160 | ) | ||||||||||||||||||
|
Total
|
$ | 124,173 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months
|
Years
|
Years
|
or Greater
|
Total
|
|||||||||||||||
|
Interest rates
|
$ | 7,465 | $ | 15,150 | $ | 14,160 | $ | 27,908 | $ | 64,683 | ||||||||||
|
Credit derivatives
|
8,943 | 23,603 | 13,259 | 2,242 | 48,047 | |||||||||||||||
|
Currencies
|
29,233 | 13,911 | 4,244 | 2,411 | 49,799 | |||||||||||||||
|
Commodities
|
12,884 | 10,359 | 1,577 | 483 | 25,303 | |||||||||||||||
|
Equities
|
11,381 | 2,038 | 5,533 | 1,433 | 20,385 | |||||||||||||||
|
Netting across product
types
(1)
|
(4,736 | ) | (9,316 | ) | (5,864 | ) | (2,826 | ) | (22,742 | ) | ||||||||||
|
Subtotal
|
$ | 65,170 | (4) | $ | 55,745 | $ | 32,909 | $ | 31,651 | $ | 185,475 | |||||||||
|
Cross maturity
netting
(2)
|
(42,118 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(34,009 | ) | ||||||||||||||||||
|
Total
|
$ | 109,348 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category, pursuant to enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category, where appropriate. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories, pursuant to enforceable netting 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 $54.68 billion and $51.16 billion, respectively. |
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Table of Contents
The following tables set forth the distribution, by credit
rating, of our exposure with respect to OTC derivatives by
tenor, 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 December 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
|
$ | 2,020 | $ | 3,157 | $ | 3,507 | $ | 2,567 | $ | 11,251 | $ | (5,603 | ) | $ | 5,648 | $ | 5,109 | |||||||||||||||
|
AA/Aa2
|
5,285 | 10,745 | 7,090 | 8,954 | 32,074 | (19,653 | ) | 12,421 | 8,735 | |||||||||||||||||||||||
|
A/A2
|
22,707 | 47,891 | 30,267 | 31,203 | 132,068 | (107,942 | ) | 24,126 | 20,111 | |||||||||||||||||||||||
|
BBB/Baa2
|
4,402 | 8,300 | 3,024 | 7,830 | 23,556 | (11,064 | ) | 12,492 | 6,202 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
4,444 | 9,438 | 1,735 | 1,354 | 16,971 | (4,914 | ) | 12,057 | 7,381 | |||||||||||||||||||||||
|
Unrated
|
484 | 977 | 284 | 41 | 1,786 | (108 | ) | 1,678 | 1,161 | |||||||||||||||||||||||
|
Total
|
$ | 39,342 | (1) | $ | 80,508 | $ | 45,907 | $ | 51,949 | $ | 217,706 | $ | (149,284 | ) | $ | 68,422 | (3) | $ | 48,699 | |||||||||||||
| 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
|
$ | 5,392 | $ | 3,792 | $ | 6,104 | $ | 4,652 | $ | 19,940 | $ | (6,583 | ) | $ | 13,357 | $ | 12,269 | |||||||||||||||
|
AA/Aa2
|
24,736 | 32,470 | 30,244 | 19,388 | 106,838 | (72,709 | ) | 34,129 | 29,857 | |||||||||||||||||||||||
|
A/A2
|
24,440 | 27,578 | 18,657 | 21,704 | 92,379 | (58,700 | ) | 33,679 | 28,081 | |||||||||||||||||||||||
|
BBB/Baa2
|
11,609 | 16,601 | 8,464 | 14,525 | 51,199 | (29,209 | ) | 21,990 | 15,955 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
12,264 | 10,857 | 4,718 | 2,563 | 30,402 | (12,064 | ) | 18,338 | 11,755 | |||||||||||||||||||||||
|
Unrated
|
744 | 816 | 917 | 216 | 2,693 | (13 | ) | 2,680 | 1,409 | |||||||||||||||||||||||
|
Total
|
$ | 79,185 | (1) | $ | 92,114 | $ | 69,104 | $ | 63,048 | $ | 303,451 | $ | (179,278 | ) | $ | 124,173 | $ | 99,326 | ||||||||||||||
| (1) | Includes fair values of OTC derivative assets, maturing within six months, of $21.60 billion and $54.68 billion as of December 2009 and November 2008, respectively. |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories, pursuant to enforceable netting agreements, and the netting of cash collateral received, pursuant to credit support agreements. Receivable and payable balances with the same counterparty in the same tenor category are netted within such tenor category, where appropriate. |
| (3) | The decrease in the fair value of our OTC derivative credit exposure from November 2008 to December 2009 primarily reflects increases in equity prices, tightening credit spreads, and changes in interest and currency rates. |
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. 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 manage liquidity risk according to the following framework:
| • | Excess Liquidity — We maintain substantial excess liquidity to meet a broad range of potential cash outflows in a stressed environment, including financing obligations. The amount of our excess liquidity is based on an internal liquidity model together with a qualitative assessment of the condition of the financial markets and of Goldman Sachs. | |
| • | Asset-Liability Management — Our funding strategy includes an assessment of the overall characteristics of our assets with respect to their anticipated holding periods and potential illiquidity in a stressed environment. In addition, we manage the maturities and diversity of our secured and unsecured funding liabilities across markets, products and counterparties, and we seek to maintain liabilities of appropriate term relative to our asset base. | |
| • | Contingency Funding Plan (CFP) — We maintain a CFP to help identify, measure, monitor and mitigate liquidity and funding risk. The CFP considers various risk factors that could occur during a crisis and provides a framework for analyzing and responding to a liquidity crisis. |
Excess
Liquidity
Our most important liquidity policy is to
pre-fund
what we estimate will be our potential 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 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 total assets, 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, through which we analyze the consolidated firm
as well as our major
broker-dealer
and bank depository institution subsidiaries, identifies and
estimates potential contractual and contingent cash and
collateral outflows over a
short-term
horizon in a liquidity crisis, including, but not limited to:
| • | upcoming maturities of unsecured long-term debt, promissory notes, commercial paper, term deposits and other unsecured funding products; | |
| • | potential buybacks of a portion of our outstanding unsecured funding; | |
| • | potential withdrawals of client deposits in our banking entities; | |
| • | adverse changes in the terms of, or the inability to refinance, secured funding trades with upcoming maturities, reflecting, among other factors, the quality of the underlying collateral and counterparty concentration; |
| • | outflows of cash or collateral associated with the impact of market moves on our OTC derivatives, listed derivatives and securities and loans pledged as collateral for financing transactions; |
| • | other outflows of cash or collateral related to derivatives, including the impact of trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments (in the event of a two-notch downgrade in our credit ratings), collateral that has not been called by counterparties but is available to them, or additional margin that could be requested by exchanges or clearing houses in a stressed environment; | |
| • | potential liquidity outflows associated with our prime brokerage business, including those related to customer credit balances; | |
| • | draws on our unfunded commitments not supported by William Street Funding Corporation (1) , with draw assumptions varying in magnitude reflecting, among other things, the type of commitment and counterparty, and | |
| • | other upcoming cash outflows, such as tax and other large payments. |
The following table sets forth the average loan value of the
securities (the estimated amount of cash that would be advanced
by counterparties against these securities), as well as certain
overnight cash deposits that are included in our Global Core
Excess:
| Year Ended | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
U.S. dollar-denominated
|
$ | 120,970 | $ | 78,048 | ||||
|
Non-U.S. dollar-denominated
|
45,404 | 18,677 | ||||||
|
Total Global Core Excess
|
$ | 166,374 | $ | 96,725 | ||||
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 certain overnight
cash deposits. Our
non-U.S. dollar-denominated
excess is comprised of only unencumbered French, German, United
Kingdom and Japanese government bonds and certain 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.
(1)
The
Global Core Excess excludes liquid assets of $4.31 billion
held separately by William Street Funding Corporation. See
Note 8 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for further information regarding the William Street credit
extension program.
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Table of Contents
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 Global Core
Excess is held at Group Inc. and our major
broker-dealer
and bank depository institution subsidiaries. Each of these
entities has its own liquidity model and funding risk management
framework with separate excess liquidity pools intended to meet
potential outflows in each entity in a stressed environment.
Liquidity held in each of these subsidiaries is assumed to be
usable only by that entity for the purpose of meeting its
liquidity requirements. Subsidiary liquidity is not available to
Group Inc. unless legally provided for and assuming no
additional regulatory, tax or other restrictions.
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 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.
In reporting our Global Core Excess and other unencumbered
assets, we use 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, cash deposits not included in the
Global Core Excess and our other unencumbered assets averaged
$210.48 billion and $163.41 billion for the years
ended December 2009 and November 2008, respectively.
Asset-Liability
Management
Assets.
We seek to maintain a liquid balance
sheet and substantially all of our inventory is
marked-to-market
daily. We impose balance sheet limits for each business and
utilize aged inventory limits for certain financial instruments
as a disincentive to our businesses to hold inventory over
longer periods of time. 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.
Liabilities.
We seek to structure our
liabilities to meet the following objectives:
| • | Term Structure — We seek to structure our liabilities to have long-dated maturities in order to reduce refinancing risk. We manage maturity concentrations for both secured and unsecured funding to ensure we are able to mitigate any concentrated funding outflows. |
| • | Diversity of Funding Sources — We seek to maintain broad and diversified funding sources globally for both secured and unsecured funding. We make use of the repurchase agreement and securities lending markets, as well as other secured funding markets. We issue long-term debt through syndicated U.S. registered offerings, U.S. registered and 144A medium-term note programs, offshore medium-term note offerings and other debt offerings. We issue short-term debt through U.S. and non-U.S. commercial paper and promissory note issuances and other methods. We raise demand and savings deposits through cash sweep programs and time deposits through internal and third-party broker networks. We generally distribute our funding products through our own sales force to a large, diverse global creditor base. 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 by any single creditor or group of creditors. |
| • | Structural Protection — We structure our liabilities to reduce the risk that we may be required to redeem or repurchase certain of our borrowings prior to their contractual maturity. We issue substantially all of our unsecured debt without put provisions or other 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
Secured Funding.
We fund a substantial portion
of our inventory on a secured basis, which we believe provides
us with a more stable source of liquidity than unsecured
financing, as it is less sensitive to changes in our credit
quality 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 generally do not
rely on overnight secured funding, unless collateralized with
highly liquid securities such as securities eligible for
inclusion in our Global Core Excess. Substantially all of our
other secured funding is executed for tenors of one month or
greater. Additionally, we monitor counterparty concentration and
hold a portion of our Global Core Excess for refinancing risk
associated with all secured funding transactions. 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 eligible for inclusion in our Global Core
Excess, exceeded 100 days as of December 2009.
Unsecured
Short-Term
Borrowings.
Our liquidity also depends on the
stability of our unsecured
short-term
financing base. Accordingly, we prefer issuing promissory notes,
in which we do 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 December 2009, our
unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings, were $37.52 billion. See Note 6 to the
consolidated financial statements in Part II, Item 8
of our Annual Report on
Form 10-K
for further information regarding our unsecured
short-term
borrowings.
Unsecured
Long-Term
Borrowings.
We issue unsecured
long-term
borrowings as a source of total capital in order to meet our
long-term
financing requirements. The following table sets forth our
quarterly unsecured
long-term
borrowings maturity profile through 2015 as of
December 2009:
Unsecured
Long-Term Borrowings Maturity Profile
($ in millions)
($ in millions)
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Table of Contents
The weighted average maturity of our unsecured
long-term
borrowings as of December 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.
Deposits.
As of December 2009, our bank
depository institution subsidiaries had $39.42 billion in
customer deposits, including $9.30 billion of certificates
of deposit and other time deposits with a weighted average
maturity of four years, and $30.12 billion of other
deposits, substantially all of which were from cash sweep
programs. GS Bank USA has 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.
Government Facilities.
As a bank holding
company, we have access to certain programs and facilities
established on a temporary basis by a number of
U.S. regulatory agencies. As of December 2009, we had
outstanding $20.76 billion of senior unsecured debt
(comprised of $1.73 billion of
short-term
and $19.03 billion of
long-term)
guaranteed by the FDIC under the Temporary Liquidity Guarantee
Program (TLGP), all of which will mature on or prior to
June 15, 2012. We have not issued
long-term
debt under the TLGP since March 2009 and the program
expired for new issuances with respect to the firm on
October 31, 2009.
See
“— Certain
Risk Factors That May Affect Our Businesses” above, and
“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.
Funding Policies.
We seek to manage our assets
and 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.
In order to avoid reliance on asset sales (other than our Global
Core Excess), 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. However, we recognize that
orderly asset sales may be prudent or necessary in a severe or
persistent liquidity crisis. The target amount of our total
capital is based on an internal funding 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 stressed 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. |
117
Table of Contents
Certain financial instruments may be more difficult to fund on a
secured basis during times of market stress. Accordingly, we
focus on funding these assets with longer contractual maturities
to reduce refinancing risk in periods of market stress and
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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Mortgage and other
asset-backed
loans and securities
|
$ | 14,277 | $ | 22,393 | ||||
|
Bank loans and bridge
loans
(1)
|
19,345 | 21,839 | ||||||
|
Emerging market debt securities
|
2,957 | 2,827 | ||||||
|
High-yield
and other debt obligations
|
12,028 | 9,998 | ||||||
|
Private equity investments and real estate fund
investments
(2)
|
14,633 | 18,171 | ||||||
|
Emerging market equity securities
|
5,193 | 2,665 | ||||||
|
ICBC ordinary
shares
(3)
|
8,111 | 5,496 | ||||||
|
SMFG convertible preferred stock
|
933 | 1,135 | ||||||
|
Other restricted public equity securities
|
203 | 568 | ||||||
|
Other investments in
funds
(4)
|
2,911 | 2,714 | ||||||
| (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 $919 million and $1.16 billion as of December 2009 and November 2008, respectively, for which Goldman Sachs does not bear economic exposure. | |
| (3) | Includes interests of $5.13 billion and $3.48 billion as of December 2009 and November 2008, respectively, held by investment funds managed by Goldman Sachs. | |
| (4) | Includes interests in other investment funds that we manage. |
See Note 3 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for further information regarding the financial instruments we
hold.
Subsidiary Funding Policies.
The majority of
our unsecured funding is raised by Group Inc.
Group Inc. then lends the necessary funds to its
subsidiaries, some of which are regulated, to meet their asset
financing, liquidity and capital requirements. In addition,
Group Inc. 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 a variety of products, including secured funding,
unsecured borrowings 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 reduce 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 Group Inc. or other
subsidiaries until the maturity of such financing.
Group Inc. has provided substantial amounts of equity and
subordinated indebtedness, directly or indirectly, to its
regulated subsidiaries. For example, as of December 2009,
Group Inc. had $25.45 billion of such equity and
subordinated indebtedness invested in GS&Co., its principal
U.S. registered
broker-dealer;
$21.90 billion invested in GSI, a regulated U.K.
broker-dealer;
$2.64 billion invested in Goldman Sachs
Execution & Clearing, L.P., a U.S. registered
broker-dealer;
$3.74 billion invested in Goldman Sachs Japan Co., Ltd., a
regulated Japanese
broker-dealer;
and
118
Table of Contents
$22.32 billion invested in GS Bank USA, a regulated New
York State-chartered bank. Group Inc. also had
$78.59 billion of unsubordinated loans and
$18.09 billion of collateral provided to these entities as
of December 2009, as well as significant amounts of capital
invested in and loans to its other regulated subsidiaries.
Contingency
Funding Plan
The Goldman Sachs CFP sets out the plan of action to fund
business activity in emergency situations
and/or
periods of market stress. The CFP outlines the appropriate
communication channels to be followed throughout a crisis period
and also provides a framework for analyzing and responding to a
liquidity crisis including, but not limited to, the potential
risk factors, identification of liquidity outflows, mitigants
and potential actions.
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, including the perceived level of
government support. See
“— Certain
Risk Factors That May Affect Our Businesses” above, and
“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) and
outlook as of December 2009. Preferred Stock in the table
below includes Group Inc.’s non-cumulative preferred stock
and the Normal Automatic Preferred Enhanced Capital Securities
(APEX) issued by Goldman Sachs Capital II and Goldman Sachs
Capital III. As of December 2009, the trust preferred securities
(Trust Preferred) issued by Goldman Sachs Capital I were rated A
by DBRS, Inc., A- by Fitch, Inc., A2 by Moody’s Investors
Service, and BBB by Standard & Poor’s Ratings Services.
|
Short-Term
|
Long-Term
|
Subordinated
|
Preferred
|
Rating
|
||||||
|
Debt
|
Debt
|
Debt
|
Stock
|
Outlook
|
||||||
|
DBRS, Inc.
|
R-1 (middle) | A (high) | A | BBB | Stable (3) | |||||
|
Fitch,
Inc.
(1)
|
F1+ | A+ | A | A- | Stable (4) | |||||
|
Moody’s Investors
Service
(2)
|
P-1 | A1 | A2 | A3 | Negative (5) | |||||
|
Standard & Poor
’
s Ratings Services
|
A-1 | A | A- | BBB | Negative (5) | |||||
|
Rating and Investment Information, Inc.
|
a-1+ | AA- | A+ | Not Applicable | Negative (6) |
| (1) | As of February 1, 2010, GS Bank USA has been assigned a rating of AA- for long-term bank deposits, F1+ for short-term bank deposits and A+ for long-term issuer. |
| (2) | GS Bank USA has been assigned a rating of Aa3 for long-term bank deposits, P-1 for short-term bank deposits and Aa3 for long-term issuer. |
| (3) | Applies to long-term and short-term ratings. |
| (4) | Applies to long-term issuer default ratings. |
| (5) | Applies to long-term ratings. |
| (6) | Applies to issuer rating. |
119
Table of Contents
On February 25, 2010, Moody’s Investors Service
lowered the ratings on Group Inc.’s
non-cumulative
preferred stock and the APEX from A3 to Baa2, and the rating on
the Trust Preferred from A2 to A3.
Based on our credit ratings as of December 2009, additional
collateral or termination payments pursuant to bilateral
agreements with certain counterparties of approximately
$1.12 billion and $2.36 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.
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.
Year Ended December 2009.
Our cash and
cash equivalents increased by $24.49 billion to
$38.29 billion at the end of 2009. We generated
$48.88 billion in net cash from operating activities. We
used net cash of $24.39 billion for investing and financing
activities, primarily for net repayments in unsecured and
secured
short-term
borrowings and the repurchases of Series H Preferred Stock
and the related common stock warrant from the
U.S. Treasury, partially offset by an increase in bank
deposits and the issuance of common stock.
Year Ended November 2008.
Our cash and
cash equivalents increased by $5.46 billion to
$15.74 billion at the end of 2008. We raised
$9.80 billion in net cash from financing and operating
activities, primarily from common and preferred stock issuances
and deposits, partially offset by repayments of
short-term
borrowings. We used net cash of $4.34 billion in our
investing activities.
Operational
Risk
Operational risk relates to the risk of loss arising from
shortcomings or failures in internal processes, people or
systems, or from external events. Operational risk can arise
from many factors ranging from routine processing errors to
potentially costly incidents related to, for example, major
systems failures. Operational risk may also cause reputational
harm. Thus, efforts to identify, manage and mitigate operational
risk must be equally sensitive to the risk of reputational
damage as well as the risk of financial loss.
We manage operational risk through the application of
long-standing,
but continuously evolving, firmwide control standards which are
supported by the training, supervision and development of our
people; the active participation and commitment of senior
management in a continuous process of identifying and mitigating
key operational risks across Goldman Sachs; and a framework of
strong and independent control departments that monitor
operational risk on a daily basis. Together, these elements form
a strong firmwide control culture that serves as the foundation
of our efforts to minimize operational risk exposure.
Operational Risk Management & Analysis, a risk
management function independent of our revenue-producing units,
is responsible for developing and implementing a formalized
framework to identify, measure, monitor, and report operational
risks to support active risk management across Goldman Sachs.
This framework, which evolves with the changing needs of our
businesses and regulatory guidance, incorporates analysis of
internal and external operational risk events, business
environment and internal control factors, and scenario analysis.
The framework also provides regular reporting of our operational
risk exposures to our Board, risk committees and senior
management. For
120
Table of Contents
a further discussion of operational risk see
“— Certain
Risk Factors That May Affect Our Businesses” above, and
“— Risk
Factors” in Part I, Item 1A of our Annual Report
on
Form 10-K.
Recent Accounting
Developments
See Note 2 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for information regarding Recent Accounting Developments.
Item 7A.
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 —
Risk Management” in Part II, Item 7 of our Annual
Report on
Form 10-K.
121
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
INDEX
|
Page
|
||||
| No. | ||||
| 123 | ||||
| 124 | ||||
|
Consolidated Financial Statements
|
||||
| 125 | ||||
| 126 | ||||
| 127 | ||||
| 128 | ||||
| 129 | ||||
| 130 | ||||
| 131 | ||||
| 131 | ||||
| 145 | ||||
| 166 | ||||
| 173 | ||||
| 174 | ||||
| 175 | ||||
| 178 | ||||
| 183 | ||||
| 186 | ||||
| 187 | ||||
| 189 | ||||
| 191 | ||||
| 196 | ||||
| 200 | ||||
| 201 | ||||
| 204 | ||||
| 208 | ||||
| 212 | ||||
| 213 | ||||
| 214 | ||||
| 215 | ||||
| 216 | ||||
| 217 | ||||
122
Table of Contents
Management’s
Report on Internal Control over
Financial Reporting
Financial Reporting
Management of The Goldman Sachs Group, Inc., together with its
consolidated subsidiaries (the firm), is responsible for
establishing and maintaining adequate internal control over
financial reporting. The firm’s internal control over
financial reporting is a process designed under the supervision
of the firm’s principal executive and principal financial
officers to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
firm’s financial statements for external reporting purposes
in accordance with U.S. generally accepted accounting
principles.
As of the end of the firm’s 2009 fiscal year, management
conducted an assessment of the firm’s internal control over
financial reporting based on the framework established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has
determined that the firm’s internal control over financial
reporting as of December 31, 2009 was effective.
Our internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and
expenditures are being made only in accordance with
authorizations of management and the directors of the firm; and
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
firm’s assets that could have a material effect on our
financial statements.
The firm’s internal control over financial reporting as of
December 31, 2009 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report appearing on
page 124, which expresses an unqualified opinion on the
effectiveness of the firm’s internal control over financial
reporting as of December 31, 2009.
123
Table of Contents
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of
The Goldman Sachs Group, Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of The Goldman Sachs Group, Inc. and its
subsidiaries (the Company) at December 31, 2009 and
November 28, 2008, and the results of its operations
and its cash flows for the fiscal years ended
December 31, 2009, November 28, 2008 and
November 30, 2007 and for the
one-month
period ended December 26, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
Management’s Report on Internal Control over Financial
Reporting appearing on page 123. Our responsibility is to
express opinions on these financial statements and on the
Company’s internal control over financial reporting based
on our audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
New York, New York
February 26, 2010
124
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||
|
December
|
November
|
November
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions, except per share amounts) | ||||||||||||
|
Revenues
|
||||||||||||
|
Investment banking
|
$ | 4,797 | $ | 5,179 | $ | 7,555 | ||||||
|
Trading and principal investments
|
28,879 | 8,095 | 29,714 | |||||||||
|
Asset management and securities services
|
4,090 | 4,672 | 4,731 | |||||||||
|
Total
non-interest
revenues
|
37,766 | 17,946 | 42,000 | |||||||||
|
Interest income
|
13,907 | 35,633 | 45,968 | |||||||||
|
Interest expense
|
6,500 | 31,357 | 41,981 | |||||||||
|
Net interest income
|
7,407 | 4,276 | 3,987 | |||||||||
|
Net revenues, including net interest income
|
45,173 | 22,222 | 45,987 | |||||||||
|
Operating expenses
|
||||||||||||
|
Compensation and benefits
|
16,193 | 10,934 | 20,190 | |||||||||
|
Brokerage, clearing, exchange and distribution fees
|
2,298 | 2,998 | 2,758 | |||||||||
|
Market development
|
342 | 485 | 601 | |||||||||
|
Communications and technology
|
709 | 759 | 665 | |||||||||
|
Depreciation and amortization
|
1,734 | 1,262 | 819 | |||||||||
|
Occupancy
|
950 | 960 | 975 | |||||||||
|
Professional fees
|
678 | 779 | 714 | |||||||||
|
Other expenses
|
2,440 | 1,709 | 1,661 | |||||||||
|
Total
non-compensation
expenses
|
9,151 | 8,952 | 8,193 | |||||||||
|
Total operating expenses
|
25,344 | 19,886 | 28,383 | |||||||||
|
Pre-tax
earnings
|
19,829 | 2,336 | 17,604 | |||||||||
|
Provision for taxes
|
6,444 | 14 | 6,005 | |||||||||
|
Net earnings
|
13,385 | 2,322 | 11,599 | |||||||||
|
Preferred stock dividends
|
1,193 | 281 | 192 | |||||||||
|
Net earnings applicable to common shareholders
|
$ | 12,192 | $ | 2,041 | $ | 11,407 | ||||||
|
Earnings per common share
|
||||||||||||
|
Basic
|
$ | 23.74 | $ | 4.67 | $ | 26.34 | ||||||
|
Diluted
|
22.13 | 4.47 | 24.73 | |||||||||
|
Average common shares outstanding
|
||||||||||||
|
Basic
|
512.3 | 437.0 | 433.0 | |||||||||
|
Diluted
|
550.9 | 456.2 | 461.2 | |||||||||
See page 130 for consolidated financial statements for the
one month ended December 2008.
The accompanying notes are an integral part of these
consolidated financial statements.
125
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
|
(in millions, except share
|
||||||||
| and per share amounts) | ||||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 38,291 | $ | 15,740 | ||||
|
Cash and securities segregated for regulatory and other purposes
(includes $18,853 and $78,830 at fair value as of
December 2009 and November 2008, respectively)
|
36,663 | 106,664 | ||||||
|
Collateralized agreements:
|
||||||||
|
Securities purchased under agreements to resell and federal
funds sold (includes $144,279 and $116,671 at fair value as of
December 2009 and November 2008, respectively)
|
144,279 | 122,021 | ||||||
|
Securities borrowed (includes $66,329 and $59,810 at fair value
as of December 2009 and November 2008, respectively)
|
189,939 | 180,795 | ||||||
|
Receivables from brokers, dealers and clearing organizations
|
12,597 | 25,899 | ||||||
|
Receivables from customers and counterparties (includes $1,925
and $1,598 at fair value as of December 2009 and
November 2008, respectively)
|
55,303 | 64,665 | ||||||
|
Trading assets, at fair value (includes $31,485 and $26,313
pledged as collateral as of December 2009 and
November 2008, respectively)
|
342,402 | 338,325 | ||||||
|
Other assets
|
29,468 | 30,438 | ||||||
|
Total assets
|
$ | 848,942 | $ | 884,547 | ||||
|
Liabilities and shareholders’ equity
|
||||||||
|
Deposits (includes $1,947 and $4,224 at fair value as of
December 2009 and November 2008, respectively)
|
$ | 39,418 | $ | 27,643 | ||||
|
Collateralized financings:
|
||||||||
|
Securities sold under agreements to repurchase, at fair value
|
128,360 | 62,883 | ||||||
|
Securities loaned (includes $6,194 and $7,872 at fair value as
of December 2009 and November 2008, respectively)
|
15,207 | 17,060 | ||||||
|
Other secured financings (includes $15,228 and $20,249 at fair
value as of December 2009 and November 2008,
respectively)
|
24,134 | 38,683 | ||||||
|
Payables to brokers, dealers and clearing organizations
|
5,242 | 8,585 | ||||||
|
Payables to customers and counterparties
|
180,392 | 245,258 | ||||||
|
Trading liabilities, at fair value
|
129,019 | 175,972 | ||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings (includes $18,403 and $23,075 at fair value as of
December 2009 and November 2008, respectively)
|
37,516 | 52,658 | ||||||
|
Unsecured
long-term
borrowings (includes $21,392 and $17,446 at fair value as of
December 2009 and November 2008, respectively)
|
185,085 | 168,220 | ||||||
|
Other liabilities and accrued expenses (includes $2,054 and $978
at fair value as of December 2009 and November 2008,
respectively)
|
33,855 | 23,216 | ||||||
|
Total liabilities
|
778,228 | 820,178 | ||||||
|
Commitments, contingencies and guarantees
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Preferred stock, par value $0.01 per share; aggregate
liquidation preference of $8,100 and $18,100 as of
December 2009 and November 2008, respectively
|
6,957 | 16,471 | ||||||
|
Common stock, par value $0.01 per share;
4,000,000,000 shares authorized, 753,412,247 and
680,953,836 shares issued as of December 2009 and
November 2008, respectively, and 515,113,890 and
442,537,317 shares outstanding as of December 2009 and
November 2008, respectively
|
8 | 7 | ||||||
|
Restricted stock units and employee stock options
|
6,245 | 9,284 | ||||||
|
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, no shares issued and
outstanding
|
— | — | ||||||
|
Additional
paid-in
capital
|
39,770 | 31,071 | ||||||
|
Retained earnings
|
50,252 | 39,913 | ||||||
|
Accumulated other comprehensive loss
|
(362 | ) | (202 | ) | ||||
|
Common stock held in treasury, at cost, par value $0.01 per
share; 238,298,357 and 238,416,519 shares as of
December 2009 and November 2008, respectively
|
(32,156 | ) | (32,175 | ) | ||||
|
Total shareholders’ equity
|
70,714 | 64,369 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 848,942 | $ | 884,547 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
126
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||
|
December
|
November
|
November
|
||||||||||
| 2009 (1) | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Preferred stock
|
||||||||||||
|
Balance, beginning of year
|
$ | 16,483 | $ | 3,100 | $ | 3,100 | ||||||
|
Issued
|
— | 13,367 | — | |||||||||
|
Accretion
|
48 | 4 | — | |||||||||
|
Repurchased
|
(9,574 | ) | — | — | ||||||||
|
Balance, end of year
|
6,957 | 16,471 | 3,100 | |||||||||
|
Common stock
|
||||||||||||
|
Balance, beginning of year
|
7 | 6 | 6 | |||||||||
|
Issued
|
1 | 1 | — | |||||||||
|
Balance, end of year
|
8 | 7 | 6 | |||||||||
|
Restricted stock units and employee stock options
|
||||||||||||
|
Balance, beginning of year
|
9,463 | 9,302 | 6,290 | |||||||||
|
Issuance and amortization of restricted stock units and employee
stock options
|
2,064 | 2,254 | 4,684 | |||||||||
|
Delivery of common stock underlying restricted stock units
|
(5,206 | ) | (1,995 | ) | (1,548 | ) | ||||||
|
Forfeiture of restricted stock units and employee stock options
|
(73 | ) | (274 | ) | (113 | ) | ||||||
|
Exercise of employee stock options
|
(3 | ) | (3 | ) | (11 | ) | ||||||
|
Balance, end of year
|
6,245 | 9,284 | 9,302 | |||||||||
|
Additional
paid-in
capital
|
||||||||||||
|
Balance, beginning of year
|
31,070 | 22,027 | 19,731 | |||||||||
|
Issuance of common stock
|
5,750 | 5,750 | — | |||||||||
|
Issuance of common stock warrants
|
— | 1,633 | — | |||||||||
|
Repurchase of common stock warrants
|
(1,100 | ) | — | — | ||||||||
|
Delivery of common stock underlying restricted stock units and
proceeds from the exercise of employee stock options
|
5,708 | 2,331 | 2,338 | |||||||||
|
Cancellation of restricted stock units in satisfaction of
withholding tax requirements
|
(863 | ) | (1,314 | ) | (929 | ) | ||||||
|
Stock purchase contract fee related to automatic preferred
enhanced capital securities
|
— | — | (20 | ) | ||||||||
|
Preferred and common stock issuance costs
|
— | (1 | ) | — | ||||||||
|
Excess net tax benefit/(provision) related to
share-based
compensation
|
(793 | ) | 645 | 908 | ||||||||
|
Cash settlement of
share-based
compensation
|
(2 | ) | — | (1 | ) | |||||||
|
Balance, end of year
|
39,770 | 31,071 | 22,027 | |||||||||
|
Retained earnings
|
||||||||||||
|
Balance, beginning of year, as previously reported
|
38,579 | 38,642 | 27,868 | |||||||||
|
Cumulative effect from adoption of amended principles related to
accounting for uncertainty in income taxes
|
— | (201 | ) | — | ||||||||
|
Cumulative effect of adjustment from adoption of amended
accounting principles related to fair value measurements, net of
tax
|
— | — | 51 | |||||||||
|
Cumulative effect of adjustment from adoption of amended
accounting principles related to the fair value option, net of
tax
|
— | — | (45 | ) | ||||||||
|
Balance, beginning of year, after cumulative effect of
adjustments
|
38,579 | 38,441 | 27,874 | |||||||||
|
Net earnings
|
13,385 | 2,322 | 11,599 | |||||||||
|
Dividends and dividend equivalents declared on common stock and
restricted stock units
|
(588 | ) | (642 | ) | (639 | ) | ||||||
|
Dividends declared on preferred stock
|
(1,076 | ) | (204 | ) | (192 | ) | ||||||
|
Preferred stock accretion
|
(48 | ) | (4 | ) | — | |||||||
|
Balance, end of year
|
50,252 | 39,913 | 38,642 | |||||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||||||
|
Balance, beginning of year
|
(372 | ) | (118 | ) | 21 | |||||||
|
Adjustment from adoption of amended accounting principles
related to employers’ accounting for defined benefit
pension and other postretirement plans, net of tax
|
— | — | (194 | ) | ||||||||
|
Currency translation adjustment, net of tax
|
(70 | ) | (98 | ) | 39 | |||||||
|
Pension and postretirement liability adjustments, net of tax
|
(17 | ) | 69 | 38 | ||||||||
|
Net gains/(losses) on cash flow hedges, net of tax
|
— | — | (2 | ) | ||||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
97 | (55 | ) | (12 | ) | |||||||
|
Reclassification to retained earnings from adoption of amended
accounting principles related to the fair value option, net of
tax
|
— | — | (8 | ) | ||||||||
|
Balance, end of year
|
(362 | ) | (202 | ) | (118 | ) | ||||||
|
Common stock held in treasury, at cost
|
||||||||||||
|
Balance, beginning of year
|
(32,176 | ) | (30,159 | ) | (21,230 | ) | ||||||
|
Repurchased
|
(2 | ) (2) | (2,037 | ) | (8,956 | ) | ||||||
|
Reissued
|
22 | 21 | 27 | |||||||||
|
Balance, end of year
|
(32,156 | ) | (32,175 | ) | (30,159 | ) | ||||||
|
Total shareholders’ equity
|
$ | 70,714 | $ | 64,369 | $ | 42,800 | ||||||
| (1) | In connection with becoming a bank holding company, the firm was required to change its fiscal year-end from November to December. The beginning of the year ended December 2009 is December 27, 2008. |
| (2) | Relates primarily 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
consolidated financial statements.
127
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||
|
December
|
November
|
November
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||
|
Net earnings
|
$ | 13,385 | $ | 2,322 | $ | 11,599 | ||||||
|
Non-cash
items included in net earnings
|
||||||||||||
|
Depreciation and amortization
|
1,943 | 1,625 | 1,167 | |||||||||
|
Deferred income taxes
|
(431 | ) | (1,763 | ) | 129 | |||||||
|
Share-based
compensation
|
2,009 | 1,611 | 4,465 | |||||||||
|
Changes in operating assets and liabilities
|
||||||||||||
|
Cash and securities segregated for regulatory and other purposes
|
76,531 | 12,995 | (39,079 | ) | ||||||||
|
Net receivables from brokers, dealers and clearing organizations
|
6,265 | (6,587 | ) | (3,811 | ) | |||||||
|
Net payables to customers and counterparties
|
(47,414 | ) | (50 | ) | 53,857 | |||||||
|
Securities borrowed, net of securities loaned
|
7,033 | 85,054 | (51,655 | ) | ||||||||
|
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell and federal
funds sold
|
(146,807 | ) | (130,999 | ) | 6,845 | |||||||
|
Trading assets, at fair value
|
186,295 | 97,723 | (118,864 | ) | ||||||||
|
Trading liabilities, at fair value
|
(57,010 | ) | (39,051 | ) | 57,938 | |||||||
|
Other, net
|
7,076 | (20,986 | ) | 7,962 | ||||||||
|
Net cash provided by/(used for) operating activities
|
48,875 | 1,894 | (69,447 | ) | ||||||||
|
Cash flows from investing activities
|
||||||||||||
|
Purchase of property, leasehold improvements and equipment
|
(1,556 | ) | (2,027 | ) | (2,130 | ) | ||||||
|
Proceeds from sales of property, leasehold improvements and
equipment
|
82 | 121 | 93 | |||||||||
|
Business acquisitions, net of cash acquired
|
(221 | ) | (2,613 | ) | (1,900 | ) | ||||||
|
Proceeds from sales of investments
|
303 | 624 | 4,294 | |||||||||
|
Purchase of
available-for-sale
securities
|
(2,722 | ) | (3,851 | ) | (872 | ) | ||||||
|
Proceeds from sales of
available-for-sale
securities
|
2,553 | 3,409 | 911 | |||||||||
|
Net cash provided by/(used for) investing activities
|
(1,561 | ) | (4,337 | ) | 396 | |||||||
|
Cash flows from financing activities
|
||||||||||||
|
Unsecured
short-term
borrowings, net
|
(9,790 | ) | (19,295 | ) | 12,262 | |||||||
|
Other secured financings
(short-term),
net
|
(10,451 | ) | (8,727 | ) | 2,780 | |||||||
|
Proceeds from issuance of other secured financings
(long-term)
|
4,767 | 12,509 | 21,703 | |||||||||
|
Repayment of other secured financings
(long-term),
including the current portion
|
(6,667 | ) | (20,653 | ) | (7,355 | ) | ||||||
|
Proceeds from issuance of unsecured
long-term
borrowings
|
25,363 | 37,758 | 57,516 | |||||||||
|
Repayment of unsecured
long-term
borrowings, including the current portion
|
(29,018 | ) | (25,579 | ) | (14,823 | ) | ||||||
|
Preferred stock repurchased
|
(9,574 | ) | — | — | ||||||||
|
Repurchase of common stock warrants
|
(1,100 | ) | — | — | ||||||||
|
Derivative contracts with a financing element, net
|
2,168 | 781 | 4,814 | |||||||||
|
Deposits, net
|
7,288 | 12,273 | 4,673 | |||||||||
|
Common stock repurchased
|
(2 | ) | (2,034 | ) | (8,956 | ) | ||||||
|
Dividends and dividend equivalents paid on common stock,
preferred stock and restricted stock units
|
(2,205 | ) | (850 | ) | (831 | ) | ||||||
|
Proceeds from issuance of common stock, including stock option
exercises
|
6,260 | 6,105 | 791 | |||||||||
|
Proceeds from issuance of preferred stock, net of issuance costs
|
— | 13,366 | — | |||||||||
|
Proceeds from issuance of common stock warrants
|
— | 1,633 | — | |||||||||
|
Excess tax benefit related to
share-based
compensation
|
135 | 614 | 817 | |||||||||
|
Cash settlement of
share-based
compensation
|
(2 | ) | — | (1 | ) | |||||||
|
Net cash provided by/(used for) financing activities
|
(22,828 | ) | 7,901 | 73,390 | ||||||||
|
Net increase in cash and cash equivalents
|
24,486 | 5,458 | 4,339 | |||||||||
|
Cash and cash equivalents, beginning of year
|
13,805 | 10,282 | 5,943 | |||||||||
|
Cash and cash equivalents, end of year
|
$ | 38,291 | $ | 15,740 | $ | 10,282 | ||||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of capitalized interest, were
$7.32 billion, $32.37 billion and $40.74 billion
for the years ended December 2009, November 2008 and
November 2007, respectively.
Cash payments for income taxes, net of refunds, were
$4.78 billion, $3.47 billion and $5.78 billion
for the years ended December 2009, November 2008 and
November 2007, respectively.
Non-cash
activities:
The firm assumed $16 million, $790 million and
$409 million of debt in connection with business
acquisitions for the years ended December 2009,
November 2008 and November 2007, respectively.
See page 130 for consolidated financial statements for the
one month ended December 2008.
The accompanying notes are an integral part of these
consolidated financial statements.
128
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||
|
December
|
November
|
November
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in millions) | ||||||||||||
|
Net earnings
|
$ | 13,385 | $ | 2,322 | $ | 11,599 | ||||||
|
Currency translation adjustment, net of tax
|
(70 | ) | (98 | ) | 39 | |||||||
|
Pension and postretirement liability adjustments, net of tax
|
(17 | ) | 69 | 38 | ||||||||
|
Net gains/(losses) on cash flow hedges, net of tax
|
— | — | (2 | ) | ||||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities,
net of tax |
97 | (55 | ) | (12 | ) | |||||||
|
Comprehensive income
|
$ | 13,395 | $ | 2,238 | $ | 11,662 | ||||||
See page 130 for consolidated financial statements for the
one month ended December 2008.
The accompanying notes are an integral part of these
consolidated financial statements.
129
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
ONE MONTH ENDED DECEMBER 2008
Consolidated
Statement of Earnings
| One Month Ended December 2008 | ||||
| (in millions, except per share amounts) | ||||
|
Revenues
|
||||
|
Investment banking
|
$ | 135 | ||
|
Trading and principal investments
|
(964 | ) | ||
|
Asset management and securities services
|
327 | |||
|
Total
non-interest
revenues
|
(502 | ) | ||
|
Interest income
|
1,687 | |||
|
Interest expense
|
1,002 | |||
|
Net interest income
|
685 | |||
|
Net revenues, including net interest income
|
183 | |||
|
Operating expenses
|
||||
|
Compensation and benefits
|
744 | |||
|
Brokerage, clearing, exchange and distribution fees
|
165 | |||
|
Market development
|
16 | |||
|
Communications and technology
|
62 | |||
|
Depreciation and amortization
|
111 | |||
|
Occupancy
|
82 | |||
|
Professional fees
|
58 | |||
|
Other expenses
|
203 | |||
|
Total
non-compensation
expenses
|
697 | |||
|
Total operating expenses
|
1,441 | |||
|
Pre-tax
loss
|
(1,258 | ) | ||
|
Benefit for taxes
|
(478 | ) | ||
|
Net loss
|
(780 | ) | ||
|
Preferred stock dividends
|
248 | |||
|
Net loss applicable to common shareholders
|
$ | (1,028 | ) | |
|
|
||||
|
Loss per common share
|
||||
|
Basic
|
$ | (2.15 | ) | |
|
Diluted
|
(2.15 | ) | ||
|
Dividends declared per common share
|
$ | 0.47 | (1) | |
|
Average common shares outstanding
|
||||
|
Basic
|
485.5 | |||
|
Diluted
|
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. |
Consolidated
Statement of Comprehensive Loss
| One Month Ended December 2008 | ||||
| (in millions) | ||||
|
Net loss
|
$ | (780 | ) | |
|
Currency translation adjustment, net of tax
|
(32 | ) | ||
|
Pension and postretirement liability adjustments, net of tax
|
(175 | ) | ||
|
Net unrealized gains on
available-for-sale
securities, net of tax
|
37 | |||
|
Comprehensive loss
|
$ | (950 | ) | |
|
|
||||
Consolidated
Statement of Cash Flows
| One Month Ended December 2008 | ||||
| (in millions) | ||||
|
Cash flows from operating activities
|
||||
|
Net loss
|
$ | (780 | ) | |
|
Non-cash
items included in net loss
|
||||
|
Depreciation and amortization
|
143 | |||
|
Share-based
compensation
|
180 | |||
|
Changes in operating assets and liabilities
|
||||
|
Cash and securities segregated for regulatory and other purposes
|
(5,835 | ) | ||
|
Net receivables from brokers, dealers and clearing organizations
|
3,693 | |||
|
Net payables to customers and counterparties
|
(7,635 | ) | ||
|
Securities borrowed, net of securities loaned
|
(18,030 | ) | ||
|
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell and federal
funds sold
|
190,027 | |||
|
Trading assets, at fair value
|
(192,883 | ) | ||
|
Trading liabilities, at fair value
|
10,059 | |||
|
Other, net
|
7,156 | |||
|
Net cash used for operating activities
|
(13,905 | ) | ||
|
Cash flows from investing activities
|
||||
|
Purchase of property, leasehold improvements and equipment
|
(61 | ) | ||
|
Proceeds from sales of property, leasehold improvements and
equipment
|
4 | |||
|
Business acquisitions, net of cash acquired
|
(59 | ) | ||
|
Proceeds from sales of investments
|
141 | |||
|
Purchase of
available-for-sale
securities
|
(95 | ) | ||
|
Proceeds from sales of
available-for-sale
securities
|
26 | |||
|
Net cash used for investing activities
|
(44 | ) | ||
|
Cash flows from financing activities
|
||||
|
Unsecured
short-term
borrowings, net
|
2,816 | |||
|
Other secured financings
(short-term),
net
|
(1,068 | ) | ||
|
Proceeds from issuance of other secured financings
(long-term)
|
437 | |||
|
Repayment of other secured financings
(long-term),
including the current portion
|
(349 | ) | ||
|
Proceeds from issuance of unsecured
long-term
borrowings
|
9,310 | |||
|
Repayment of unsecured
long-term
borrowings, including the current portion
|
(3,686 | ) | ||
|
Derivative contracts with a financing element, net
|
66 | |||
|
Deposits, net
|
4,487 | |||
|
Common stock repurchased
|
(1 | ) | ||
|
Proceeds from issuance of common stock, including stock option
exercises
|
2 | |||
|
Net cash provided by financing activities
|
12,014 | |||
|
Net decrease in cash and cash equivalents
|
(1,935 | ) | ||
|
Cash and cash equivalents, beginning of period
|
15,740 | |||
|
Cash and cash equivalents, end of period
|
$ | 13,805 | ||
|
|
||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of
capitalized interest, were $459 million for the one month
ended December 2008.
Cash payments for income taxes, net
of refunds, were $171 million for the one month ended
December 2008.
The accompanying notes are an
integral part of these consolidated financial statements.
130
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
| 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 investment
banking, securities and investment management firm that provides
a wide range of financial 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 through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. The firm also takes proprietary positions on certain of these products. In addition, the firm engages in market-making 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 and wealth advisory 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 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
(GAAP).
| • | 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. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest. |
131
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| • | 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. 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. See “— Recent Accounting Developments” below for information regarding amendments to accounting for VIEs. | |
| • | QSPEs. QSPEs are passive entities that are commonly used in mortgage and other securitization transactions. To be considered a QSPE, an entity must satisfy certain criteria. 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. The firm does not consolidate QSPEs. See “— Recent Accounting Developments” below for information regarding amendments to accounting for 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 under the equity method of accounting or at fair value pursuant to the fair value option available under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10. In general, the firm accounts for investments acquired subsequent to November 24, 2006, when the fair value option became available, at fair value. In certain cases, the firm applies 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 the fair value option. | |
| • | 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 consolidated statements of financial condition. |
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CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In April 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. Fiscal 2009 began on
December 27, 2008 and ended on
December 31, 2009.
All references to 2009, 2008 and 2007, unless specifically
stated otherwise, refer to the firm’s fiscal years ended,
or the dates, as the context requires,
December 31, 2009, November 28, 2008 and
November 30, 2007, respectively, and any reference to
a future year refers to a fiscal year ending on December 31 of
that year. All references to December 2008, unless
specifically stated otherwise, refer to the firm’s fiscal
one month ended, or the date, as the context requires,
December 26, 2008. Certain reclassifications have been
made to previously reported amounts to conform to the current
presentation.
Use of
Estimates
These 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 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 consolidated statements
of financial condition at fair value. Related gains or losses
are generally recognized in “Trading and principal
investments” in the 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 ASC
815-15
and
825-10
(i.e., 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; |
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| • | certain other secured financings, primarily transfers accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings; | |
| • | certain unsecured long-term borrowings, including prepaid physical commodity transactions and certain hybrid financial instruments; | |
| • | 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 deposits issued by the firm’s bank subsidiaries, as well as securities held by Goldman Sachs Bank USA (GS Bank USA); | |
| • | certain receivables from customers and counterparties, including certain margin loans, transfers accounted for as secured loans rather than purchases and prepaid variable share forwards; | |
| • | certain insurance and reinsurance contracts and certain guarantees; and | |
| • | in general, investments acquired after November 24, 2006, when the fair value option became available, 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.
The fair value hierarchy under ASC 820 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 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.
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 trading assets, at
fair value and 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 government obligations, active listed equities and certain money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. Instruments classified within level 1 of the fair value hierarchy are required to be carried at quoted market prices, 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, most corporate bonds, certain
mortgage products, certain bank loans and bridge loans, less
liquid listed equities, certain 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 investments 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 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
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
generally based on market evidence where available. In the
absence of such evidence, management’s best estimate is
used.
| • | 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, voluntary and involuntary prepayment
rates, loss severity 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 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, in the consolidated statements of earnings over
the life of the transaction. Collateralized agreements and
financings are presented on a
net-by-counterparty
basis when a right of setoff exists.
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| • | 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 consolidated statements of financial condition at fair value under the fair value option. Resale and repurchase agreements are generally valued based on inputs with reasonable levels of price transparency and are generally classified within level 2 of the fair value hierarchy. | |
| • | 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 the fair value option. 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 the fair value option to transfers accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension 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 classified within level 2 of the fair value hierarchy. Other 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 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 from the associated debt, 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 the fair value
option. 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 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. See
“— Recent
Accounting Developments” below for information regarding
amendments to accounting for transfers of financial assets.
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commissions.
Commission revenues from
executing and clearing client transactions on stock, options and
futures markets are recognized in “Trading and principal
investments” in the 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 the fair value option, with changes in
fair value included in “Trading and principal
investments” in the consolidated statements of earnings.
Revenues from variable annuity and life insurance and
reinsurance contracts not accounted for at fair value generally
consist of fees assessed on contract holder account balances for
mortality charges, policy administration fees and surrender
charges, and are recognized in “Trading and principal
investments” in the 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 consolidated
statements of earnings.
Premiums earned for underwriting property catastrophe
reinsurance are recognized in “Trading and principal
investments” in the 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 in
“Other expenses” in the 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 consolidated
statements of earnings only when all material contingencies have
been resolved. Overrides are included in “Trading and
principal investments” in the consolidated statements of
earnings.
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 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 consolidated statements of earnings.
Share-Based
Compensation
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 in accordance with ASC 718.
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.
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm pays cash dividend equivalents on outstanding
restricted stock units (RSUs). Dividend equivalents paid on RSUs
are generally charged to retained earnings. Dividend equivalents
paid on RSUs expected to be forfeited are included in
compensation expense. In the first quarter of fiscal 2009, the
firm adopted amended accounting principles related to income tax
benefits of dividends on
share-based
payment awards (ASC 718). These amended principles require the
tax benefit related to dividend equivalents paid on RSUs to be
accounted for as an increase to additional
paid-in
capital. Previously, the firm accounted for this tax benefit as
a reduction to income tax expense. See
“— Recent
Accounting Developments” below for further information on
these amended principles.
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. 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.
Identifiable
Intangible Assets
Identifiable intangible assets, which consist primarily of
customer lists, New York Stock Exchange (NYSE) Designated Market
Maker (DMM) rights and the value of business acquired
(VOBA) in the firm’s insurance subsidiaries, are amortized
over their estimated lives or, in the case of insurance
contracts, in proportion to estimated gross profits or premium
revenues. 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. 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 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. 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
consolidated statements of
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings. 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 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 consolidated
statements 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 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 consolidated statements of earnings.
Income
Taxes
Income taxes are provided for using the asset and liability
method. 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
consolidated statements of financial condition. The firm adopted
amended accounting principles related to the accounting for
uncertainty in income taxes (ASC 740) 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. The firm
recognizes tax positions 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 for taxes” in the consolidated statements
of earnings and income tax penalties in “Other
expenses” in the 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 RSUs 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 RSUs
for which future service is required as a condition to the
delivery of the underlying common stock. In the first quarter of
fiscal 2009, the firm adopted amended accounting principles
related to determining whether instruments granted in
share-based
payment transactions are participating
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
securities. Accordingly, the firm treats unvested
share-based
payment awards that have
non-forfeitable
rights to dividends or dividend equivalents as a separate class
of securities in calculating earnings per common share. See
“— Recent
Accounting Developments” below for further information on
these amended principles.
Cash and Cash
Equivalents
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business. As of
December 2009 and November 2008, “Cash and cash
equivalents” on the consolidated statements of financial
condition included $4.45 billion and $5.60 billion,
respectively, of cash and due from banks and $33.84 billion
and $10.14 billion, respectively, of interest-bearing
deposits with banks.
Recent
Accounting Developments
FASB Accounting Standards Codification.
In
July 2009, the FASB launched the FASB Accounting Standards
Codification (the Codification) as the single source of GAAP.
While the Codification did not change GAAP, it introduced a new
structure to the accounting literature and changed references to
accounting standards and other authoritative accounting
guidance. The Codification was effective for the firm for the
third quarter of fiscal 2009 and did not have an effect on the
firm’s financial condition, results of operations or cash
flows.
Accounting for Income Tax Benefits of Dividends on
Share-Based
Payment Awards (ASC 718).
In June 2007,
the FASB issued amended accounting principles related to income
tax benefits of dividends on
share-based
payment awards, which require that the tax benefit related to
dividend equivalents paid on RSUs, 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. These amended accounting
principles were applied prospectively for tax benefits on
dividend equivalents declared beginning in the first quarter of
fiscal 2009. Adoption did not have a material effect on the
firm’s financial condition, results of operations or cash
flows.
Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions (ASC 860).
In
February 2008, the FASB issued amended accounting
principles related to transfers of financial assets and
repurchase financing transactions. These amended principles
require 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 (for purposes of determining whether a sale
has occurred) unless certain criteria are met, including that
the transferred asset must be readily obtainable in the
marketplace. The firm adopted these amended accounting
principles for new transactions entered into after
November 2008. Adoption did not have a material effect on
the firm’s financial condition, results of operations or
cash flows.
Disclosures About Derivative Instruments and Hedging
Activities (ASC 815).
In March 2008, the
FASB issued amended principles related to disclosures about
derivative instruments and hedging activities, which were
effective for the firm beginning in the one month ended
December 2008. Since these amended principles require only
additional disclosures concerning derivatives and hedging
activities, adoption did not affect the firm’s financial
condition, results of operations or cash flows.
Determining Whether Instruments Granted in
Share-Based
Payment Transactions Are Participating Securities (ASC
260).
In June 2008, the FASB issued amended
accounting principles related to determining whether instruments
granted in
share-based
payment transactions are participating securities. These amended
principles require companies to treat unvested
share-based
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
payment awards that have
non-forfeitable
rights to dividends or dividend equivalents as a separate class
of securities in calculating earnings per common share under the
two-class method. The firm adopted these amended accounting
principles in the first quarter of fiscal 2009. The impact to
basic earnings per common share for the year ended
December 2009 was a reduction of $0.06 per common share.
There was no impact on diluted earnings per common share for the
year ended December 2009. Prior periods have not been
restated due to immateriality.
Business Combinations (ASC 805).
In
December 2007, the FASB issued amended accounting
principles related to business combinations, which changed 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
amended principles require that the acquiring company 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. These amended accounting principles
applied to the firm’s business combinations beginning in
the first quarter of fiscal 2009. Adoption 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.
Noncontrolling Interests in Consolidated Financial Statements
(ASC 810).
In December 2007, the FASB issued
amended accounting principles related to noncontrolling
interests in consolidated financial statements, which require
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. These amended accounting
principles were effective for the firm beginning in the first
quarter of fiscal 2009. Adoption did not have a material effect
on the firm’s financial condition, results of operations or
cash flows.
Disclosures by Public Entities (Enterprises) about Transfers
of Financial Assets and Interests in Variable Interest Entities
(ASC 860 and 810).
In December 2008, the
FASB issued amended principles related to disclosures by public
entities (enterprises) about transfers of financial assets and
interests in variable interest entities, which were effective
for the firm beginning in the one month ended
December 2008. Since these amended principles require only
additional disclosures concerning transfers of financial assets
and interests in VIEs, adoption did not affect the firm’s
financial condition, results of operations or cash flows.
Determining Whether an Instrument (or Embedded Feature) Is
Indexed to an Entity’s Own Stock (ASC
815).
In June 2008, the FASB issued amended
accounting principles related to determining whether an
instrument (or embedded feature) is indexed to an entity’s
own stock. These amended accounting principles provide guidance
about whether an instrument (such as the firm’s outstanding
common stock warrants) should be classified as equity and not
subsequently recorded at fair value. The firm adopted these
amended accounting principles in the first quarter of fiscal
2009. Adoption did not affect the firm’s financial
condition, results of operations or cash flows.
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 (ASC
820).
In April 2009, the FASB issued amended
accounting principles related to 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. Specifically, these amended principles list factors
which should be evaluated to determine whether a transaction is
orderly, clarify 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
provide guidance for determining the concurrent weighting of the
transaction price relative to fair value indications from other
valuation techniques when estimating fair value. The firm
adopted these amended accounting principles in the second
quarter of fiscal 2009.
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GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Since the firm’s fair value methodologies were consistent
with these amended accounting principles, adoption did not
affect the firm’s financial condition, results of
operations or cash flows.
Recognition and Presentation of
Other-Than-Temporary
Impairments (ASC 320).
In April 2009, the
FASB issued amended accounting principles related to recognition
and presentation of
other-than-temporary
impairments. These amended principles prescribe that 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. Previously, the entire
other-than-temporary
impairment was recognized in current period earnings. The firm
adopted these amended accounting principles in the second
quarter of fiscal 2009. Adoption did not have a material effect
on the firm’s financial condition, results of operations or
cash flows.
Interim Disclosures about Fair Value of Financial Instruments
(ASC 825).
In April 2009, the FASB issued
amended principles related to interim disclosures about fair
value of financial instruments. The firm adopted these amended
principles in the second quarter of fiscal 2009. Adoption did
not affect the firm’s financial condition, results of
operations or cash flows.
Transfers of Financial Assets and Interests in Variable
Interest Entities (ASC 860 and 810).
In
June 2009, the FASB issued amended accounting principles
which change the accounting for securitizations and VIEs. These
principles were codified as Accounting Standards Update
(ASU) No. 2009-16,
“Transfers and Servicing (Topic 860) — Accounting
for Transfers of Financial Assets” and ASU
No. 2009-17,
“Consolidations (Topic 810) — Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities” in December 2009. ASU
No. 2009-16
eliminates the concept of a QSPE, changes the requirements for
derecognizing financial assets, and requires additional
disclosures about transfers of financial assets, including
securitization transactions and continuing involvement with
transferred financial assets. ASU
No. 2009-17
changes the determination of when a VIE should be consolidated.
Under ASU
No. 2009-17,
the determination of whether to consolidate a VIE is based on
the power to direct the activities of the VIE that most
significantly impact the VIE’s economic performance
together with either the obligation to absorb losses or the
right to receive benefits that could be significant to the VIE,
as well as the VIE’s purpose and design. ASU
No. 2009-16
and
2009-17
are effective for fiscal years beginning after
November 15, 2009. In February 2010, the FASB
finalized a standard which defers the requirements of ASU
No. 2009-17
for certain interests in investment funds and certain similar
entities. Adoption of ASU Nos.
2009-16
and
2009-17
on
January 1, 2010 did not have a material effect on the
firm’s financial condition, results of operations or cash
flows. However, continued application of these principles
requires the firm to make judgments that are subject to change
based on new facts and circumstances, and evolving
interpretations and practices.
Fair Value Measurements and Disclosures — Measuring
Liabilities at Fair Value (ASC 820).
In
August 2009, the FASB issued ASU
No. 2009-05,
“Fair Value Measurements and Disclosures (Topic
820) — Measuring Liabilities at Fair Value.” ASU
No. 2009-05
provides guidance in measuring liabilities when a quoted price
in an active market for an identical liability is not available
and clarifies that a reporting entity should not make an
adjustment to fair value for a restriction that prevents the
transfer of the liability. The firm adopted ASU
No. 2009-05
in the fourth quarter of fiscal 2009. Since the firm’s fair
value methodologies were consistent with ASU
No. 2009-5,
adoption did not affect the firm’s financial condition,
results of operations or cash flows.
Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent) (ASC 820).
In
September 2009, the FASB issued ASU
No. 2009-12,
“Fair Value Measurements and Disclosures (Topic
820) — Investments in Certain Entities That Calculate
Net
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Asset Value per Share (or Its Equivalent).” ASU
No. 2009-12
provides guidance about using net asset value to measure the
fair value of interests in certain investment funds and requires
additional disclosures about interests in investment funds. The
firm adopted ASU
No. 2009-12
in the fourth quarter of fiscal 2009. Since the firm’s fair
value methodologies were consistent with ASU
No. 2009-12,
adoption did not affect the firm’s financial condition,
results of operations or cash flows.
Improving Disclosures about Fair Value Measurements (ASC
820).
In January 2010, the FASB issued ASU
No. 2010-06,
“Fair Value Measurements and Disclosures (Topic
820) — Improving Disclosures about Fair Value
Measurements.” ASU
No. 2010-06
provides amended disclosure requirements related to fair value
measurements. ASU
No. 2010-06
is effective for financial statements issued for reporting
periods beginning after December 15, 2009 for certain
disclosures and for reporting periods beginning after
December 15, 2010 for other disclosures. Since these
amended principles require only additional disclosures
concerning fair value measurements, adoption will not affect the
firm’s financial condition, results of operations or cash
flows.
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 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 | ||||||||||||||||
| December 2009 | November 2008 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| (in millions) | ||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 9,111 | (1) | $ | — | $ | 8,662 | (1) | $ | — | ||||||
|
Government and U.S. federal agency obligations
|
117,194 | 44,825 | 69,653 | 37,000 | ||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
14,277 | 103 | 22,393 | 340 | ||||||||||||
|
Bank loans and bridge loans
|
19,345 | 1,541 | (4) | 21,839 | 3,108 | (4) | ||||||||||
|
Corporate debt securities and other debt obligations
|
32,041 | 6,265 | 27,879 | 5,711 | ||||||||||||
|
Equities and convertible debentures
|
71,474 | 20,253 | 57,049 | 12,116 | ||||||||||||
|
Physical commodities
|
3,707 | 23 | 513 | 2 | ||||||||||||
|
Derivative contracts
|
75,253 | (2) | 56,009 | (5) | 130,337 | (2) | 117,695 | (5) | ||||||||
|
Total
|
$ | 342,402 | (3) | $ | 129,019 | $ | 338,325 | (3) | $ | 175,972 | ||||||
| (1) | Includes $4.31 billion and $4.40 billion as of December 2009 and November 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 credit extension program. | |
| (2) | Net of cash received pursuant to credit support agreements of $124.60 billion and $137.16 billion as of December 2009 and November 2008, respectively. | |
| (3) | Includes $3.86 billion and $1.68 billion as of December 2009 and November 2008, respectively, of securities held within the firm’s insurance subsidiaries which are accounted for as available-for-sale. | |
| (4) | Consists of the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets, at fair value. | |
| (5) | Net of cash paid pursuant to credit support agreements of $14.74 billion and $34.01 billion as of December 2009 and November 2008, respectively. |
145
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value
Hierarchy
The firm’s financial assets at fair value classified within
level 3 of the fair value hierarchy are summarized below:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| ($ in millions) | ||||||||
|
Total level 3 assets
|
$ | 46,475 | $ | 66,190 | ||||
|
Level 3 assets for which the firm bears economic
exposure
(1)
|
43,348 | 59,574 | ||||||
|
Total assets
|
848,942 | 884,547 | ||||||
|
Total financial assets at fair value
|
573,788 | 595,234 | ||||||
|
Total level 3 assets as a percentage of Total assets
|
5.5 | % | 7.5 | % | ||||
|
Level 3 assets for which the firm bears economic exposure
as a percentage of Total assets
|
5.1 | 6.7 | ||||||
|
Total level 3 assets as a percentage of Total financial
assets at fair value
|
8.1 | 11.1 | ||||||
|
Level 3 assets for which the firm bears economic exposure
as a percentage of Total financial assets at fair value
|
7.6 | 10.0 | ||||||
| (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 the fair value option as of
December 2009 and November 2008. See Note 2 for
further information on the fair value hierarchy. Assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
146
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Financial Assets at Fair Value as of December 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
|
$ | 5,026 | $ | 4,085 | $ | — | $ | — | $ | 9,111 | ||||||||||
|
U.S. government and federal agency obligations
|
36,391 | 41,945 | — | — | 78,336 | |||||||||||||||
|
Non-U.S. government
obligations
|
33,881 | 4,977 | — | — | 38,858 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and
securities
(1)
:
|
||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 1,583 | 4,620 | — | 6,203 | |||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 4,824 | 1,880 | — | 6,704 | |||||||||||||||
|
Loan
portfolios
(2)
|
— | 6 | 1,364 | — | 1,370 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 9,785 | 9,560 | — | 19,345 | |||||||||||||||
|
Corporate debt
securities
(3)
|
164 | 23,969 | 2,235 | — | 26,368 | |||||||||||||||
|
State and municipal obligations
|
— | 1,645 | 1,114 | — | 2,759 | |||||||||||||||
|
Other debt obligations
|
— | 679 | 2,235 | — | 2,914 | |||||||||||||||
|
Equities and convertible debentures
|
37,103 | (5) | 22,500 | (7) | 11,871 | (10) | — | 71,474 | ||||||||||||
|
Physical commodities
|
— | 3,707 | — | — | 3,707 | |||||||||||||||
|
Cash instruments
|
112,565 | 119,705 | 34,879 | — | 267,149 | |||||||||||||||
|
Derivative contracts
|
161 | 190,816 | (8) | 11,596 | (8) | (127,320 | ) (11) | 75,253 | ||||||||||||
|
Trading assets, at fair value
|
112,726 | 310,521 | 46,475 | (127,320 | ) | 342,402 | ||||||||||||||
|
Securities segregated for regulatory and other purposes
|
14,381 | (6) | 4,472 | (9) | — | — | 18,853 | |||||||||||||
|
Securities purchased under agreements to resell
|
— | 144,279 | — | — | 144,279 | |||||||||||||||
|
Securities borrowed
|
— | 66,329 | — | — | 66,329 | |||||||||||||||
|
Receivables from customers and counterparties
|
— | 1,925 | — | — | 1,925 | |||||||||||||||
|
Total financial assets at fair value
|
$ | 127,107 | $ | 527,526 | $ | 46,475 | $ | (127,320 | ) | $ | 573,788 | |||||||||
|
Level 3 assets for which the firm does not bear economic
exposure
(4)
|
(3,127 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm bears economic exposure
|
$ | 43,348 | ||||||||||||||||||
| (1) | Includes $291 million and $311 million of CDOs and collateralized loan obligations (CLOs) backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy. | |
| (2) | Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. | |
| (3) | Includes $338 million and $741 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy. | |
| (4) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. | |
| (5) | Consists of publicly listed equity securities. | |
| (6) | Principally consists of U.S. Department of the Treasury (U.S. Treasury) securities and money market instruments as well as insurance separate account assets measured at fair value. | |
| (7) | Substantially all of the firm’s level 2 equities and convertible debentures are less liquid publicly listed securities. | |
| (8) | Includes $31.44 billion and $9.58 billion of credit derivative assets within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types. | |
| (9) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| (10) | Substantially all consists of private equity investments and real estate fund investments. Includes $10.56 billion of private equity investments, $1.23 billion of real estate investments and $79 million of convertible debentures. |
| (11) | 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. |
147
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GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Financial Liabilities at Fair Value as of December 2009 | ||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Collateral | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 20,940 | $ | 42 | $ | — | $ | — | $ | 20,982 | ||||||||||
|
Non-U.S. government
obligations
|
23,306 | 537 | — | — | 23,843 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 29 | — | — | 29 | |||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 74 | — | — | 74 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 1,128 | 413 | — | 1,541 | |||||||||||||||
|
Corporate debt
securities
(1)
|
65 | 6,018 | 146 | — | 6,229 | |||||||||||||||
|
State and municipal obligations
|
— | 36 | — | — | 36 | |||||||||||||||
|
Equities and convertible
debentures
(2)
|
19,072 | 1,168 | 13 | — | 20,253 | |||||||||||||||
|
Physical commodities
|
— | 23 | — | — | 23 | |||||||||||||||
|
Cash instruments
|
63,383 | 9,055 | 572 | — | 73,010 | |||||||||||||||
|
Derivative contracts
|
126 | 66,943 | (3) | 6,400 | (3) | (17,460 | ) (5) | 56,009 | ||||||||||||
|
Trading liabilities, at fair value
|
63,509 | 75,998 | 6,972 | (17,460 | ) | 129,019 | ||||||||||||||
|
Deposits
|
— | 1,947 | — | — | 1,947 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | 127,966 | 394 | — | 128,360 | |||||||||||||||
|
Securities loaned
|
— | 6,194 | — | — | 6,194 | |||||||||||||||
|
Other secured financings
|
118 | 8,354 | 6,756 | — | 15,228 | |||||||||||||||
|
Unsecured
short-term
borrowings
|
— | 16,093 | 2,310 | — | 18,403 | |||||||||||||||
|
Unsecured
long-term
borrowings
|
— | 18,315 | 3,077 | — | 21,392 | |||||||||||||||
|
Other liabilities and accrued expenses
|
— | 141 | 1,913 | — | 2,054 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 63,627 | $ | 255,008 | $ | 21,422 | (4) | $ | (17,460 | ) | $ | 322,597 | ||||||||
| (1) | Includes $45 million of CDOs and CLOs backed by corporate obligations within level 3 of the fair value hierarchy. |
| (2) | Substantially all consists of publicly listed equity securities. |
| (3) | Includes $7.96 billion and $3.20 billion of credit derivative liabilities within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types. |
| (4) | Level 3 liabilities were 6.6% of Total financial liabilities at fair value. |
| (5) | 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. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 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 | ||||||||||
|
Government and U.S. federal agency 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 | (5) | — | 57,049 | ||||||||||||||
|
Physical commodities
|
— | 513 | — | — | 513 | |||||||||||||||
|
Cash instruments
|
65,356 | 91,566 | 51,066 | — | 207,988 | |||||||||||||||
|
Derivative contracts
|
24 | 256,412 | (3) | 15,124 | (3) | (141,223 | ) (6) | 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 | (2) | 58,800 | (4) | — | — | 78,830 | |||||||||||||
|
Securities purchased under agreements to resell
|
— | 116,671 | — | — | 116,671 | |||||||||||||||
|
Securities borrowed
|
— | 59,810 | — | — | 59,810 | |||||||||||||||
|
Receivables from customers and counterparties
|
— | 1,598 | — | — | 1,598 | |||||||||||||||
|
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
(1)
|
(6,616 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm bears economic exposure
|
$ | 59,574 | ||||||||||||||||||
| (1) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
| (2) | Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value. |
| (3) | Includes $66.00 billion and $8.32 billion of credit derivative assets within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types. |
| (4) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| (5) | Substantially all consists of private equity investments and real estate fund investments. |
| (6) | 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. |
149
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Financial Liabilities at Fair Value as of November 2008 | ||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Collateral | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Government and U.S. federal agency 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 | (1) | 9,968 | (1) | (38,071 | ) (3) | 117,695 | ||||||||||||
|
Trading liabilities, at fair value
|
48,347 | 154,349 | 11,347 | (38,071 | ) | 175,972 | ||||||||||||||
|
Deposits
|
— | 4,224 | — | — | 4,224 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | 62,883 | — | — | 62,883 | |||||||||||||||
|
Securities loaned
|
— | 7,872 | — | — | 7,872 | |||||||||||||||
|
Other secured financings
|
— | 16,429 | 3,820 | — | 20,249 | |||||||||||||||
|
Unsecured
short-term
borrowings
|
— | 17,916 | 5,159 | — | 23,075 | |||||||||||||||
|
Unsecured
long-term
borrowings
|
— | 15,886 | 1,560 | — | 17,446 | |||||||||||||||
|
Other liabilities and accrued expenses
|
— | 978 | — | — | 978 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 48,347 | $ | 280,537 | $ | 21,886 | (2) | $ | (38,071 | ) | $ | 312,699 | ||||||||
| (1) | Includes $31.20 billion and $4.74 billion of credit derivative liabilities within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types. |
| (2) | Level 3 liabilities were 7.0% of Total financial liabilities at fair value. |
| (3) | 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. |
150
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 at fair value still held at the
reporting date for the years ended December 2009,
November 2008 and November 2007 and one month ended
December 2008:
| Level 3 Unrealized Gains/(Losses) | ||||||||||||||||
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Cash instruments — assets
|
$ | (4,781 | ) | $ | (11,485 | ) | $ | (2,292 | ) | $ | (3,116 | ) | ||||
|
Cash instruments — liabilities
|
474 | (871 | ) | (294 | ) | (78 | ) | |||||||||
|
Net unrealized losses on level 3 cash instruments
|
(4,307 | ) | (12,356 | ) | (2,586 | ) | (3,194 | ) | ||||||||
|
Derivative contracts — net
|
(1,018 | ) | 5,577 | 4,543 | (210 | ) | ||||||||||
|
Other secured financings
|
(812 | ) | 838 | — | (1 | ) | ||||||||||
|
Unsecured
short-term
borrowings
|
(81 | ) | 737 | (666 | ) | (70 | ) | |||||||||
|
Unsecured
long-term
borrowings
|
(291 | ) | 657 | 22 | (127 | ) | ||||||||||
|
Other liabilities and accrued expenses
|
53 | — | — | — | ||||||||||||
|
Total level 3 unrealized gains/(losses)
|
$ | (6,456 | ) | $ | (4,547 | ) | $ | 1,313 | $ | (3,602 | ) | |||||
Cash
Instruments
The net unrealized loss on level 3 cash instruments of
$4.31 billion for the year ended December 2009
primarily consisted of unrealized losses on private equity
investments and real estate fund investments, and loans and
securities backed by commercial real estate, reflecting weakness
in these less liquid asset classes. The net unrealized loss on
level 3 cash instruments of $12.36 billion for the
year ended November 2008 primarily consisted of unrealized
losses on loans and securities backed by commercial real estate,
certain bank loans and bridge loans, private equity investments
and real estate fund investments. 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
investments 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.
151
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative
Contracts
The net unrealized loss on level 3 derivative contracts of
$1.02 billion for the year ended December 2009 was
primarily attributable to tighter credit spreads on the
underlying instruments and increases in underlying equity index
prices, partially offset by increases in commodities prices (all
of which are level 2 observable inputs). The net unrealized
gain on level 3 derivative contracts of $5.58 billion
for the year ended November 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 at fair value for the years ended
December 2009 and November 2008 and one month ended
December 2008. The tables reflect gains and losses,
including gains and losses for the entire period on financial
assets and financial liabilities at fair value that were
transferred to level 3 during the period, for all financial
assets and financial liabilities at fair value categorized as
level 3 as of December 2009, November 2008 and
December 2008, respectively. The tables do not include
gains or losses that were reported in level 3 in prior
periods for instruments that were sold or transferred out of
level 3 prior to the end of the period presented.
152
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Level 3 Financial Assets and Financial Liabilities at Fair Value | ||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
|||||||||||||||||||||||
|
relating to
|
purchases,
|
|||||||||||||||||||||||
|
Balance,
|
instruments still
|
issuances
|
Net transfers
|
Balance,
|
||||||||||||||||||||
|
beginning
|
Net realized
|
held at the
|
and
|
in
and/or
out
|
end of
|
|||||||||||||||||||
| of year | gains/(losses) | reporting date | settlements | of level 3 | year | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Year Ended December 2009
|
||||||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
$ | 9,170 | $ | 166 | $ | (1,148 | ) | $ | (3,097 | ) | $ | (471 | ) | $ | 4,620 | |||||||||
|
Loans and securities backed by residential real estate
|
1,927 | 101 | 58 | (158 | ) | (48 | ) | 1,880 | ||||||||||||||||
|
Loan portfolios
|
4,266 | 167 | (327 | ) | (1,195 | ) | (1,547 | ) (4) | 1,364 | |||||||||||||||
|
Bank loans and bridge loans
|
11,169 | 747 | (145 | ) | (2,128 | ) | (83 | ) | 9,560 | |||||||||||||||
|
Corporate debt securities
|
2,734 | 366 | (68 | ) | (624 | ) | (173 | ) | 2,235 | |||||||||||||||
|
State and municipal obligations
|
1,356 | (5 | ) | 13 | (662 | ) | 412 | 1,114 | ||||||||||||||||
|
Other debt obligations
|
3,903 | 173 | (203 | ) | (1,425 | ) | (213 | ) | 2,235 | |||||||||||||||
|
Equities and convertible debentures
|
15,127 | 21 | (2,961 | ) | 662 | (978 | ) (5) | 11,871 | ||||||||||||||||
|
Total cash instruments — assets
|
49,652 | 1,736 | (1) | (4,781 | ) (1) | (8,627 | ) | (3,101 | ) | 34,879 | ||||||||||||||
|
Cash instruments — liabilities
|
(1,727 | ) | 38 | (2) | 474 | (2) | 463 | 180 | (572 | ) | ||||||||||||||
|
Derivative contracts — net
|
3,315 | 759 | (2) | (1,018 | ) (2)(3) | 2,333 | (193 | ) | 5,196 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | — | — | (394 | ) | — | (394 | ) | ||||||||||||||||
|
Other secured financings
|
(4,039 | ) | 19 | (2) | (812 | ) (2) | 804 | (2,728 | ) (6) | (6,756 | ) | |||||||||||||
|
Unsecured
short-term
borrowings
|
(4,712 | ) | (126 | ) (2) | (81 | ) (2) | (1,419 | ) | 4,028 | (6) | (2,310 | ) | ||||||||||||
|
Unsecured
long-term
borrowings
|
(1,689 | ) | (92 | ) (2) | (291 | ) (2) | 726 | (1,731 | ) (6) | (3,077 | ) | |||||||||||||
|
Other liabilities and accrued expenses
|
— | (22 | ) (2) | 53 | (2) | (991 | ) | (953 | ) (7) | (1,913 | ) | |||||||||||||
| (1) | The aggregate amounts include approximately $(4.69) billion and $1.64 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the consolidated statements of earnings for the year ended December 2009. |
| (2) | Substantially all is reported in “Trading and principal investments” in the consolidated statements of earnings. |
| (3) | Principally resulted from changes in level 2 inputs. |
| (4) | Principally reflects the deconsolidation of certain loan portfolios for which the firm did not bear economic exposure. |
| (5) | Principally reflects transfers to level 2 within the fair value hierarchy of certain private equity investments, reflecting improved transparency of prices for these financial instruments, primarily as a result of market transactions. |
| (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 transparency of mortality curve inputs used to value these instruments as a result of less observable trading activity. |
153
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Level 3 Financial Assets and Financial Liabilities at Fair Value | ||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
|||||||||||||||||||||||
|
relating to
|
purchases,
|
|||||||||||||||||||||||
|
Balance,
|
instruments still
|
issuances
|
Net transfers
|
Balance,
|
||||||||||||||||||||
|
beginning
|
Net realized
|
held at the
|
and
|
in
and/or
out
|
end of
|
|||||||||||||||||||
| of year | gains/(losses) | reporting date | settlements | of level 3 | year | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Year Ended November 2008
|
||||||||||||||||||||||||
|
Cash instruments — assets
|
$ | 53,451 | $ | 1,930 | (1) | $ | (11,485 | ) (1) | $ | 3,955 | $ | 3,215 | (4) | $ | 51,066 | |||||||||
|
Cash instruments — liabilities
|
(554 | ) | 28 | (2) | (871 | ) (2) | 55 | (37 | ) | (1,379 | ) | |||||||||||||
|
Derivative contracts — net
|
2,056 | 267 | (2) | 5,577 | (2)(3) | (1,813 | ) | (931 | ) (5) | 5,156 | ||||||||||||||
|
Other secured financings
|
— | 87 | (2) | 838 | (2) | 416 | (5,161 | ) (6) | (3,820 | ) | ||||||||||||||
|
Unsecured
short-term
borrowings
|
(4,271 | ) | 354 | (2) | 737 | (2) | (1,353 | ) | (626 | ) | (5,159 | ) | ||||||||||||
|
Unsecured
long-term
borrowings
|
(767 | ) | (20 | ) (2) | 657 | (2) | (1,314 | ) | (116 | ) | (1,560 | ) | ||||||||||||
| (1) | The aggregate amounts include approximately $(11.54) billion and $1.98 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the consolidated statements of earnings for the year ended November 2008. |
| (2) | Substantially all is reported in “Trading and principal investments” in the consolidated statements of earnings. |
| (3) | Principally resulted from changes in level 2 inputs. |
| (4) | Principally reflects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial real estate, reflecting reduced price transparency for these financial instruments. |
| (5) | Principally reflects transfers to level 2 within the fair value hierarchy of mortgage-related derivative assets, as recent trading activity provided improved transparency of correlation inputs. This decrease was partially offset by transfers from level 2 within the fair value hierarchy of credit and equity-linked derivatives due to reduced price transparency. |
| (6) | Consists of transfers from level 2 within the fair value hierarchy. |
| Level 3 Financial Assets and Financial Liabilities at Fair Value | ||||||||||||||||||||||||
|
Net unrealized
|
Net
|
|||||||||||||||||||||||
|
losses relating to
|
purchases,
|
|||||||||||||||||||||||
|
Balance,
|
instruments still
|
issuances
|
Net transfers
|
Balance,
|
||||||||||||||||||||
|
beginning
|
Net realized
|
held at the
|
and
|
in
and/or
out
|
end of
|
|||||||||||||||||||
| of period | gains/(losses) | reporting date | settlements | of level 3 | period | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
One Month Ended December 2008
|
||||||||||||||||||||||||
|
Cash instruments — assets
|
$ | 51,066 | $ | 157 | (1) | $ | (3,116 | ) (1) | $ | 921 | $ | 624 | (4) | $ | 49,652 | |||||||||
|
Cash instruments — liabilities
|
(1,379 | ) | 3 | (2) | (78 | ) (2) | (159 | ) | (114 | ) | (1,727 | ) | ||||||||||||
|
Derivative contracts — net
|
5,156 | 15 | (2) | (210 | ) (2)(3) | (699 | ) | (947 | ) (5) | 3,315 | ||||||||||||||
|
Other secured financings
|
(3,820 | ) | (2 | ) (2) | (1 | ) (2) | (51 | ) | (165 | ) | (4,039 | ) | ||||||||||||
|
Unsecured
short-term
borrowings
|
(5,159 | ) | 27 | (2) | (70 | ) (2) | 482 | 8 | (4,712 | ) | ||||||||||||||
|
Unsecured
long-term
borrowings
|
(1,560 | ) | (1 | ) (2) | (127 | ) (2) | 42 | (43 | ) | (1,689 | ) | |||||||||||||
| (1) | The aggregate amounts include approximately $(3.18) billion and $221 million reported in “Trading and principal investments” and “Interest income,” respectively, in the consolidated statements of earnings for the one month ended December 2008. |
| (2) | Substantially all is reported in “Trading and principal investments” in the consolidated statements of earnings. |
| (3) | Principally resulted from changes in level 2 inputs. |
| (4) | 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. |
| (5) | 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. |
154
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 (including derivative assets and liabilities and
related hedges) was $572 million, $(137) million,
$86 million and $(188) million for the years ended
December 2009, November 2008 and November 2007
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 borrowings for which the fair value option was
elected. The firm calculates the fair value of borrowings by
discounting future cash flows at a rate which incorporates the
firm’s observable credit spreads.
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Net gains/(losses) including hedges
|
$ | (1,103 | ) | $ | 1,127 | $ | 203 | $ | (113 | ) | ||||||
|
Net gains/(losses) excluding hedges
|
(1,116 | ) | 1,196 | 216 | (114 | ) | ||||||||||
The net gain/(loss) attributable to changes in
instrument-specific credit spreads on loans and loan commitments
for which the fair value option was elected was
$1.65 billion, $(4.61) billion and $(2.06) billion for the
years ended December 2009 and November 2008 and one
month ended December 2008, respectively. Such
gains/(losses) were not material for the year ended
November 2007. 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.
155
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Fair Value
Option
Gains/(Losses)
The following table sets forth the gains/(losses) included in
earnings for the years ended December 2009,
November 2008 and November 2007 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 (i) trading assets, at fair
value, and trading liabilities, at fair value, (ii) gains
and losses on assets and liabilities that would have been
accounted for at fair value under other GAAP if the firm had not
elected the fair value option, and (iii) gains and losses
on secured financings related to transfers of financial assets
accounted for as financings rather than sales, as such gains and
losses are offset by gains and losses on the related financial
assets.
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Unsecured
long-term
borrowings
(1)
|
$ | (884 | ) | $ | 915 | $ | 202 | $ | (104 | ) | ||||||
|
Other secured
financings
(2)
|
(822 | ) | 894 | (293 | ) | (2 | ) | |||||||||
|
Unsecured
short-term
borrowings
(3)
|
(182 | ) | 266 | 6 | (9 | ) | ||||||||||
|
Receivables from customers and
counterparties
(4)
|
255 | (68 | ) | — | (41 | ) | ||||||||||
|
Other liabilities and accrued
expenses
(5)
|
(214 | ) | 131 | — | 7 | |||||||||||
|
Other
(6)
|
79 | (83 | ) | 18 | (60 | ) | ||||||||||
|
Total
(7)
|
$ | (1,768 | ) | $ | 2,055 | $ | (67 | ) | $ | (209 | ) | |||||
| (1) | Excludes gains/(losses) of $(4.15) billion, $2.42 billion, $(2.18) billion and $(623) million for the years ended December 2009, November 2008 and November 2007 and one month ended December 2008, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even 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 $48 million, $1.29 billion and $2.19 billion for the years ended December 2009, November 2008 and November 2007, respectively, related to financings recorded as a result of transactions that were accounted for as secured financings rather than sales. Changes in the fair value of these secured financings are offset by changes in the fair value of the related financial instruments included in “Trading assets, at fair value” in the consolidated statements of financial condition. Such gains/(losses) were not material for the one month ended December 2008. | |
| (3) | Excludes gains/(losses) of $(3.15) billion, $6.37 billion, $(1.07) billion and $92 million for the years ended December 2009, November 2008 and November 2007 and one month ended December 2008, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even 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 gains/(losses) on certain reinsurance contracts. | |
| (5) | Primarily consists of gains/(losses) on certain insurance and reinsurance contracts. | |
| (6) | Primarily consists of gains/(losses) on resale and repurchase agreements, and securities borrowed and loaned within Trading and Principal Investments. | |
| (7) | Reported in “Trading and principal investments” in the consolidated statements of earnings. The amounts exclude contractual interest, which is included in “Interest income” and “Interest expense” in the consolidated statements of earnings, 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 standards (principally ASC 320, ASC 940 and ASC
815). Excluding equities commissions of $3.84 billion,
$5.00 billion, $4.58 billion and $251 million for
the years ended December 2009, November 2008 and
November 2007 and one month ended December 2008,
respectively, and the gains and losses on the instruments
accounted for under the fair value option described above,
“Trading and principal investments” in the
consolidated statements of earnings primarily represents gains
and losses on “Trading assets, at fair value” and
“Trading liabilities, at fair value” in the
consolidated statements of financial condition.
156
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loans and Loan
Commitments
As of December 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 $41.96 billion, including a
difference of $36.30 billion related to loans with an
aggregate fair value of $4.28 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). 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 December 2009 and November 2008, the fair value
of unfunded lending commitments for which the fair value option
was elected was a liability of $879 million and
$3.52 billion, respectively, and the related total
contractual amount of these lending commitments was
$44.05 billion and $39.49 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 $752 million and
$2.42 billion as of December 2009 and
November 2008, respectively.
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments in
Funds That Calculate Net Asset Value Per Share
The firm’s investments in funds that calculate net asset
value per share primarily consist of investments in
firm-sponsored funds where the firm co-invests with third-party
investors. The private equity, private debt and real estate
funds are primarily closed-end funds in which the firm’s
investments are not eligible for redemption. Distributions will
be received from these funds as the underlying assets are
liquidated and it is estimated that substantially all of the
underlying assets of these existing funds will be liquidated
over the next 10 years. The firm’s investments in
hedge funds are generally redeemable on a quarterly basis with
91 days notice, subject to a maximum redemption level of
25% of the firm’s initial investments at any quarter-end.
The following table sets forth the fair value of the firm’s
investments in and unfunded commitments to funds that calculate
net asset value per share:
| As of December 2009 | ||||||||
|
Fair Value of
|
Unfunded
|
|||||||
| Investments | Commitments | |||||||
| (in millions) | ||||||||
|
Private equity
funds
(1)
|
$ | 8,229 | $ | 5,722 | ||||
|
Private debt
funds
(2)
|
3,628 | 4,048 | ||||||
|
Hedge
funds
(3)
|
3,133 | — | ||||||
|
Real estate
funds
(4)
|
939 | 2,398 | ||||||
|
Total
|
$ | 15,929 | $ | 12,168 | ||||
| (1) | These funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buy-outs, recapitalizations, and growth investments. | |
| (2) | These funds generally invest in fixed income instruments and an associated equity component and are focused on providing private high-yield capital for mid to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. | |
| (3) | These funds are primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage. | |
| (4) | These funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and direct property. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit
Concentrations
Credit concentrations may arise from trading, investing,
underwriting, lending and securities borrowing activities and
may be impacted by changes in economic, industry or political
factors. The firm seeks to mitigate credit risk by actively
monitoring exposures and obtaining collateral as deemed
appropriate. While the firm’s activities expose it to many
different industries and counterparties, the firm routinely
executes a high volume of transactions with counterparties in
the financial services industry, including brokers and dealers,
commercial banks, clearing houses, exchanges and investment
funds. This has resulted in significant credit concentration
with respect to this industry. In the ordinary course of
business, the firm may also be subject to a concentration of
credit risk to a particular counterparty, borrower or issuer,
including sovereign issuers, or to a particular clearing house
or exchange.
As of December 2009 and November 2008, the firm held
$83.83 billion (10% of total assets) and
$53.98 billion (6% 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 consolidated statements of financial condition. As of
December 2009 and November 2008, the firm held
$38.61 billion (5% of total assets) and $21.13 billion
(2% of total assets), respectively, of other sovereign
obligations, principally consisting of securities issued by the
governments of the United Kingdom and Japan. In addition, as of
December 2009 and November 2008, $87.63 billion
and $126.27 billion of the firm’s 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
December 2009 and November 2008, $77.99 billion
and $65.37 billion of the firm’s 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, the United Kingdom and Japan. As of
December 2009 and November 2008, the firm did not have
credit exposure to any other counterparty that exceeded 2% of
the firm’s total assets.
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.
159
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm applies hedge accounting 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
under the
long-haul
method. 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 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 these
hedges are included in “Interest expense” in the
consolidated statements of earnings. These gains or losses were
not material for the years ended December 2009,
November 2008 and November 2007 or the one month ended
December 2008. Gains and losses on derivatives used for
trading purposes are included in “Trading and principal
investments” in the consolidated statements of earnings.
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 product type on a
gross basis as of December 2009. 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:
| As of December 2009 | ||||||||||||
|
Number
|
||||||||||||
|
Derivative
|
Derivative
|
of
|
||||||||||
| Assets | Liabilities | Contracts | ||||||||||
| (in millions, except number of contracts) | ||||||||||||
|
Derivative contracts for trading activities
|
||||||||||||
|
Interest rates
|
$ | 458,614 | (4) | $ | 407,125 | (4) | 270,707 | |||||
|
Credit
|
164,669 | 134,810 | 443,450 | |||||||||
|
Currencies
|
77,223 | 62,413 | 171,760 | |||||||||
|
Commodities
|
47,234 | 48,163 | 73,010 | |||||||||
|
Equities
|
67,559 | 53,207 | 237,625 | |||||||||
|
Subtotal
|
$ | 815,299 | $ | 705,718 | 1,196,552 | |||||||
|
Derivative contracts accounted for as
hedges
(1)
|
||||||||||||
|
Interest rates
|
$ | 19,563 | (5) | $ | 1 | (5) | 806 | |||||
|
Currencies
|
8 | (6) | 47 | (6) | 58 | |||||||
|
Subtotal
|
$ | 19,571 | $ | 48 | 864 | |||||||
|
Gross fair value of derivative contracts
|
$ | 834,870 | $ | 705,766 | 1,197,416 | |||||||
|
Counterparty
netting
(2)
|
(635,014 | ) | (635,014 | ) | ||||||||
|
Cash collateral
netting
(3)
|
(124,603 | ) | (14,743 | ) | ||||||||
|
Fair value included in trading assets, at fair value
|
$ | 75,253 | ||||||||||
|
Fair value included in trading liabilities, at fair value
|
$ | 56,009 | ||||||||||
| (1) | As of November 2008, the gross fair value of derivative contracts accounted for as hedges 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 enforceable netting agreements. | |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (4) | Presented after giving effect to $412.08 billion of derivative assets and $395.57 billion of derivative liabilities settled with clearing organizations. | |
| (5) | For the year ended December 2009 and one month ended December 2008, the gain/(loss) recognized on interest rate derivative contracts accounted for as hedges was $(10.07) billion and $3.59 billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $9.95 billion and $(3.53) billion, respectively. These gains and losses are included in “Interest expense” in the consolidated statements of earnings. For the year ended December 2009, the gain/(loss) recognized on these derivative contracts included losses of $1.23 billion, which were excluded from the assessment of hedge effectiveness. Such excluded gains/(losses) were not material for the one month ended December 2008. | |
| (6) | For the year ended December 2009 and one month ended December 2008, the loss on currency derivative contracts accounted for as hedges was $495 million and $212 million, respectively. Such amounts are included in “Currency translation adjustment, net of tax” in the 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 year ended December 2009 or the one month ended December 2008. |
161
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm also has embedded derivatives that have been bifurcated
from related borrowings. Such derivatives, which are classified
in unsecured
short-term
and unsecured
long-term
borrowings in the firm’s consolidated statements of
financial condition, had a net asset carrying value of
$96 million and $774 million as of December 2009
and November 2008, respectively. The net asset as of
December 2009, which represented 297 contracts, included
gross assets of $478 million (primarily comprised of equity
and interest rate derivatives) and gross liabilities of
$382 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 December 2009 and November 2008, the firm has
designated $3.38 billion and $3.36 billion,
respectively, of foreign
currency-denominated
debt, included in unsecured
long-term
borrowings and unsecured
short-term
borrowings in the firm’s consolidated statements of
financial condition, as hedges of net investments in
non-U.S. subsidiaries.
For the year ended December 2009 and one month ended
December 2008, the gain/(loss) on these debt instruments
was $106 million and $(186) million, respectively. Such
amounts are included in “Currency translation adjustment,
net of tax” in the consolidated statements of comprehensive
income. The gain/(loss) related to ineffectiveness and the
gain/(loss) reclassified to earnings from accumulated other
comprehensive income was not material for the year ended
December 2009 or one month ended December 2008.
The following table sets forth by major product type the
firm’s gains/(losses) related to trading activities,
including both derivative and nonderivative financial
instruments, for the year ended December 2009 and one month
ended December 2008. 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 product types.
Accordingly, gains or losses in one product type frequently
offset gains or losses in other product types. For example, most
of the firm’s longer-term derivative contracts are
sensitive to changes in interest rates and may be economically
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
economically hedged with foreign currency contracts. The
gains/(losses) set forth below are included in “Trading and
principal investments” in the consolidated statements of
earnings and exclude related interest income and interest
expense.
|
Year Ended
|
One Month Ended
|
|||||||
| December 2009 | December 2008 | |||||||
| (in millions) | ||||||||
|
Interest rates
|
$ | 6,670 | $ | 2,226 | ||||
|
Credit
|
6,225 | (1,437 | ) | |||||
|
Currencies
(1)
|
(682 | ) | (2,256 | ) | ||||
|
Equities
|
6,632 | 130 | ||||||
|
Commodities and other
|
5,341 | 887 | ||||||
|
Total
|
$ | 24,186 | $ | (450 | ) | |||
| (1) | Includes gains/(losses) on currency contracts used to economically hedge positions included in other product types in this table. |
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 December 2009, the aggregate fair
value of such derivative contracts that were in a net liability
position was $20.85 billion, and the aggregate fair value
of assets posted by the firm as collateral for these derivative
contracts was $14.48 billion. As of December 2009,
additional collateral or termination payments pursuant to
bilateral agreements with certain counterparties of
approximately $1.12 billion and $2.36 billion could
have been called by counterparties in the event of a
one-notch
and
two-notch
reduction, respectively, in the firm’s
long-term
credit ratings.
162
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm enters into a broad array of credit derivatives to
facilitate client transactions, to take proprietary positions
and as a means of risk management. The firm uses each of the
credit derivatives described below for these purposes. These
credit derivatives are entered into by various trading desks
around the world, and are actively managed based on the
underlying risks. These activities are frequently part of a
broader trading strategy and are dynamically managed based on
the net risk position. As individually negotiated contracts,
credit derivatives can have numerous settlement and payment
conventions. The more common types of triggers include
bankruptcy of the reference credit entity, acceleration of
indebtedness, failure to pay, restructuring, repudiation and
dissolution of the entity.
| • | Credit default swaps: Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event of a default by the issuer (reference entity). The buyer of protection pays an initial or periodic premium to the seller and receives credit default protection for the period of the contract. If there is no credit default event, as defined by the specific derivative contract, then the seller of protection makes no payments to the buyer of protection. However, if a credit default event occurs, the seller of protection will be required to make a payment to the buyer of protection. Typical credit default events requiring payment include bankruptcy of the reference credit entity, failure to pay the principal or interest, and restructuring of the relevant obligations of the reference entity. | |
| • | Credit indices, baskets and tranches: Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. Typically, in the event of a default of one of the underlying reference obligations, the protection seller will pay to the protection buyer a pro-rata portion of a transaction’s total notional amount relating to the underlying defaulted reference obligation. In tranched transactions, the credit risk of a basket or index is separated into various portions each having different levels of subordination. The most junior tranches cover initial defaults, and once losses exceed the notional amount of these tranches, the excess is covered by the next most senior tranche in the capital structure. | |
| • | Total return swaps: A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives from the protection seller a floating rate of interest and protection against any reduction in fair value of the reference obligation, and in return the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation. | |
| • | Credit options: In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation. |
Substantially all of the firm’s purchased credit derivative
transactions are with financial institutions and are subject to
stringent collateral thresholds. The firm economically hedges
its exposure to written credit derivatives primarily by entering
into offsetting purchased credit derivatives with identical
underlyings. In addition, upon the occurrence of a specified
trigger event, the firm may take possession of the reference
obligations underlying a particular written credit derivative,
and consequently may, upon liquidation of the reference
obligations, recover amounts on the underlying reference
obligations in the event of default. As of December 2009,
the firm’s written and purchased credit derivatives had
total gross notional amounts of $2.54 trillion and
$2.71 trillion, respectively, for total net purchased
protection of $164.13 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 $255.24 billion in
notional value. The decrease in notional amounts from
November 2008 to December 2009 primarily reflects
compression efforts across the industry.
163
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth certain information related to
the firm’s credit derivatives. Fair values in the table
below exclude the effects of both netting under enforceable
netting agreements and netting of cash paid pursuant to credit
support agreements, and therefore are not representative of the
firm’s exposure.
|
Maximum
|
||||||||||||||||||||||||||||||||||||
|
Payout/Notional
|
||||||||||||||||||||||||||||||||||||
|
Maximum Payout/Notional Amount
|
Amount of Purchased
|
Fair Value of
|
||||||||||||||||||||||||||||||||||
| of Written Credit Derivatives by Tenor (1) | Credit Derivatives | Written Credit Derivatives | ||||||||||||||||||||||||||||||||||
|
Offsetting
|
Other
|
|||||||||||||||||||||||||||||||||||
|
5 Years
|
Purchased
|
Purchased
|
||||||||||||||||||||||||||||||||||
|
0 - 12
|
1 - 5
|
or
|
Credit
|
Credit
|
Net Asset/
|
|||||||||||||||||||||||||||||||
| Months | Years | Greater | Total | Derivatives (2) | Derivatives (3) | Asset | Liability | (Liability) | ||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||||||
|
As of December 2009
|
||||||||||||||||||||||||||||||||||||
|
Credit spread on
underlying (basis points) (4) |
||||||||||||||||||||||||||||||||||||
|
0-250
|
$ | 283,353 | $ | 1,342,649 | $ | 414,809 | $ | 2,040,811 | $ | 1,884,864 | $ | 299,329 | $ | 39,740 | $ | 13,441 | $ | 26,299 | ||||||||||||||||||
|
251-500
|
15,151 | 142,732 | 39,337 | 197,220 | 182,583 | 27,194 | 5,008 | 6,816 | (1,808 | ) | ||||||||||||||||||||||||||
|
501-1,000
|
10,364 | 101,621 | 34,194 | 146,179 | 141,317 | 5,673 | 2,841 | 12,448 | (9,607 | ) | ||||||||||||||||||||||||||
|
Greater than 1,000
|
20,262 | 107,768 | 31,208 | 159,238 | 117,914 | 48,699 | 1,524 | 60,279 | (58,755 | ) | ||||||||||||||||||||||||||
|
Total
|
$ | 329,130 | $ | 1,694,770 | $ | 519,548 | $ | 2,543,448 | $ | 2,326,678 | $ | 380,895 | $ | 49,113 | $ | 92,984 | $ | (43,871 | ) (5)(6) | |||||||||||||||||
|
As of November 2008
|
||||||||||||||||||||||||||||||||||||
|
Credit spread on
underlying (basis points) (4) |
||||||||||||||||||||||||||||||||||||
|
0-250
|
$ | 108,555 | $ | 1,093,651 | $ | 623,944 | $ | 1,826,150 | $ | 1,632,681 | $ | 347,573 | $ | 7,133 | $ | 84,969 | $ | (77,836 | ) | |||||||||||||||||
|
251-500
|
51,015 | 551,971 | 186,084 | 789,070 | 784,149 | 26,316 | 1,403 | 95,681 | (94,278 | ) | ||||||||||||||||||||||||||
|
501-1,000
|
34,756 | 404,661 | 148,052 | 587,469 | 538,251 | 67,958 | 680 | 75,759 | (75,079 | ) | ||||||||||||||||||||||||||
|
Greater than 1,000
|
41,496 | 373,211 | 161,475 | 576,182 | 533,816 | 103,362 | 100 | 222,446 | (222,346 | ) | ||||||||||||||||||||||||||
|
Total
|
$ | 235,822 | $ | 2,423,494 | $ | 1,119,555 | $ | 3,778,871 | $ | 3,488,897 | $ | 545,209 | $ | 9,316 | $ | 478,855 | $ | (469,539 | ) (5) | |||||||||||||||||
| (1) | Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives. |
| (2) | Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent they economically hedge written credit derivatives with identical underlyings. |
| (3) | 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. |
| (4) | Credit spread on the underlying, together with the tenor of the contract, 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 tenor is “0-12 Months.” The likelihood of payment or performance is generally greater as the credit spread on the underlying and tenor increase. |
| (5) | These net liabilities differ from the carrying values related to credit derivatives in the firm’s consolidated statements of financial condition because they exclude 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 (across written and purchased credit derivatives) pursuant to enforceable netting agreements, the firm’s consolidated statements of financial condition as of December 2009 and November 2008 included a net asset related to credit derivatives of $39.74 billion and $71.78 billion, respectively, and a net liability related to credit derivatives of $9.75 billion and $33.48 billion, respectively. These net amounts exclude the netting of cash collateral paid pursuant to credit support agreements. |
| (6) | The decrease in this net liability from November 2008 to December 2009 primarily reflected tightening credit spreads. |
164
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
December 2009 and November 2008, the fair value of
financial instruments received as collateral by the firm that it
was permitted to deliver or repledge was $561.77 billion
and $578.72 billion, respectively, of which the firm
delivered or repledged $392.89 billion and
$445.11 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 consolidated statements of financial
condition and were $31.49 billion and $26.31 billion
as of December 2009 and November 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 consolidated statements of financial
condition and were $109.11 billion and $80.85 billion
as of December 2009 and November 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
$7.93 billion and $9.24 billion as of
December 2009 and November 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 credit extension program; consolidated VIEs;
collateralized central bank financings and other transfers of
financial assets that are accounted for as financings rather
than sales (primarily pledged bank loans and mortgage whole
loans); and other structured financing arrangements.
165
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other secured financings by maturity are set forth in the table
below:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Other secured financings
(short-term)
(1)(2)
|
$ | 12,931 | $ | 21,225 | ||||
|
Other secured financings
(long-term):
|
||||||||
|
2010
|
— | 2,157 | ||||||
|
2011
|
3,832 | 4,578 | ||||||
|
2012
|
1,726 | 3,040 | ||||||
|
2013
|
1,518 | 1,377 | ||||||
|
2014
|
1,617 | 1,512 | ||||||
|
2015-thereafter
|
2,510 | 4,794 | ||||||
|
Total other secured financings
(long-term)
(3)(4)
|
11,203 | 17,458 | ||||||
|
Total other secured
financings
(5)(6)
|
$ | 24,134 | $ | 38,683 | ||||
| (1) | As of December 2009 and November 2008, consists of U.S. dollar-denominated financings of $6.47 billion and $12.53 billion, respectively, with a weighted average interest rate of 3.44% and 2.98%, respectively, and non-U.S. dollar-denominated financings of $6.46 billion and $8.70 billion, respectively, with a weighted average interest rate of 1.57% and 0.95%, respectively, after giving effect to hedging activities. The weighted average interest rates as of December 2009 and November 2008 excluded financial instruments accounted for at fair value under the fair value option. | |
| (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 December 2009 and November 2008, consists of U.S. dollar-denominated financings of $7.28 billion and $9.55 billion, respectively, with a weighted average interest rate of 1.83% and 4.62%, respectively, and non-U.S. dollar-denominated financings of $3.92 billion and $7.91 billion, respectively, with a weighted average interest rate of 2.30% and 4.39%, respectively, after giving effect to hedging activities. The weighted average interest rates as of December 2009 and November 2008 excluded financial instruments accounted for at fair value under the fair value option. | |
| (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 December 2009 and November 2008, $18.25 billion and $31.54 billion, respectively, of these financings were collateralized by trading assets and $5.88 billion and $7.14 billion, respectively, by other assets (primarily real estate and cash). Other secured financings include $10.63 billion and $13.74 billion of nonrecourse obligations as of December 2009 and November 2008, respectively. | |
| (6) | As of December 2009, other secured financings includes $9.51 billion related to transfers of financial assets accounted for as financings rather than sales. Such financings were collateralized by financial assets included in “Trading assets, at fair value” in the consolidated statement of financial condition of $9.78 billion as of December 2009. |
| Note 4. | Securitization Activities and Variable Interest Entities |
Securitization
Activities
The firm securitizes residential and commercial mortgages,
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.
166
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 consolidated statements of financial
condition. See Note 2 for additional information regarding
fair value measurement.
During the year ended December 2009, the firm securitized
$48.58 billion of financial assets in which the firm had
continuing involvement, including $47.89 billion of
residential mortgages, primarily in connection with government
agency securitizations, and $691 million of other financial
assets. During the year ended November 2008, the firm
securitized $14.46 billion of financial assets, including
$6.67 billion of residential mortgages, $773 million
of commercial mortgages, and $7.01 billion of other
financial assets, primarily in connection with CLOs. During the
year ended November 2007, the firm securitized
$81.40 billion of financial assets, including
$24.95 billion of residential mortgages,
$19.50 billion of commercial mortgages, and
$36.95 billion of other financial assets, primarily in
connection with CDOs and CLOs. During the one month ended
December 2008, the firm securitized $604 million of
financial assets, including $557 million of residential
mortgages and $47 million of other financial assets. Cash
flows received on retained interests were $507 million,
$505 million, $705 million and $26 million for
the years ended December 2009, November 2008 and
November 2007 and one month ended December 2008,
respectively.
The following table sets 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 December 2009. The
outstanding principal amount set forth in the table below is
presented for the purpose of providing information about the
size of the securitization entities 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 December 2009 (1) | ||||||||||||
|
Outstanding
|
Fair Value of
|
Fair Value of
|
||||||||||
|
Principal
|
Retained
|
Purchased
|
||||||||||
| Amount | Interests | Interests (2) | ||||||||||
| (in millions) | ||||||||||||
|
Residential
mortgage-backed
(3)
|
$ | 59,410 | $ | 3,956 | $ | 17 | ||||||
|
Commercial
mortgage-backed
|
11,643 | 56 | 96 | |||||||||
|
Other
asset-backed
(4)
|
17,768 | 93 | 54 | |||||||||
|
Total
|
$ | 88,821 | $ | 4,105 | $ | 167 | ||||||
| (1) | As of December 2009, fair value of other continuing involvement excludes $1.04 billion 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. See Note 3 for information on the firm’s derivative contracts. | |
| (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 nonconsolidated VIEs for which the carrying value was a net liability of $87 million as of December 2009. The notional amounts of these transactions are included in maximum exposure to loss in the nonconsolidated VIE table below. | |
| (3) | Primarily consists of outstanding principal and retained interests related to government agency QSPEs. | |
| (4) | Primarily consists of CDOs backed by corporate and mortgage obligations and CLOs. Outstanding principal amount and fair value of retained interests include $16.22 billion and $72 million, respectively, as of December 2009 related to VIEs which are also included in the nonconsolidated VIE table below. |
167
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the weighted average key economic
assumptions used in measuring the fair value of the firm’s
retained interests and the sensitivity of this fair value to
immediate adverse changes of 10% and 20% in those assumptions:
| As of December 2009 | As of November 2008 | |||||||||||||||
| Type of Retained Interests (1) | Type of Retained Interests (1) | |||||||||||||||
|
Other
|
Other
|
|||||||||||||||
|
Mortgage-
|
Asset-
|
Mortgage-
|
Asset-
|
|||||||||||||
| Backed | Backed (2) | Backed | Backed | |||||||||||||
| ($ in millions) | ||||||||||||||||
|
Fair value of retained interests
|
$ | 4,012 | $ | 93 | $ | 1,415 | $ | 367 | (5) | |||||||
|
Weighted average life (years)
|
4.4 | 4.4 | 6.0 | 5.1 | ||||||||||||
|
Constant prepayment
rate
(3)
|
23.5 | % | N.M. | 15.5 | % | 4.5 | % | |||||||||
|
Impact of 10% adverse
change
(3)
|
$ | (44 | ) | N.M. | $ | (14 | ) | $ | (6 | ) | ||||||
|
Impact of 20% adverse
change
(3)
|
(92 | ) | N.M. | (27 | ) | (12 | ) | |||||||||
|
Discount
rate
(4)
|
8.4 | % | N.M. | 21.1 | % | 29.2 | % | |||||||||
|
Impact of 10% adverse change
|
$ | (76 | ) | N.M. | $ | (46 | ) | $ | (25 | ) | ||||||
|
Impact of 20% adverse change
|
(147 | ) | N.M. | (89 | ) | (45 | ) | |||||||||
| (1) | Includes $4.03 billion and $1.53 billion as of December 2009 and November 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 December 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the firm’s carrying value of $93 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 sales. |
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.
168
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 2009 and November 2008, the firm held
mortgage servicing rights with a fair value of $88 million
and $147 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 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:
| Year Ended | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Balance, beginning of period
|
$ | 153 | $ | 93 | ||||
|
Purchases
|
— | 272 | (3) | |||||
|
Servicing assets that resulted from transfers of financial assets
|
1 | 3 | ||||||
|
Changes in fair value due to changes in valuation inputs and
assumptions
|
(66 | ) | (221 | ) | ||||
|
Balance, end of
period
(1)
|
$ | 88 | $ | 147 | ||||
|
Contractually specified servicing
fees
(2)
|
$ | 320 | $ | 315 | ||||
| (1) | As of December 2009 and November 2008, the fair value was estimated using a weighted average discount rate of approximately 16% and 16%, respectively, and a weighted average prepayment rate of approximately 20% and 27%, respectively. | |
| (2) | Contractually specified servicing fees for the one month ended December 2008 were $25 million. | |
| (3) | Primarily related to the acquisition of Litton Loan Servicing LP. |
Variable
Interest Entities
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.
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.
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
169
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2009, in accordance with amended
principles requiring enhanced disclosures, the following table
also sets forth the total assets and total liabilities included
in the consolidated statements of financial condition related to
the firm’s interests in these 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 December 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)
|
$ | 9,114 | $ | 182 | $ | 10 | $ | 135 | $ | — | $ | 4,111 | (7) | $ | — | $ | 4,246 | |||||||||||||||||
|
Corporate CDOs and
CLOs
(2)
|
32,490 | 834 | 400 | 259 | 3 | 7,577 | (8) | — | 7,839 | |||||||||||||||||||||||||
|
Real estate,
credit-related
and other
investing
(3)
|
22,618 | 2,386 | 204 | — | 397 | — | 2,425 | 2,822 | ||||||||||||||||||||||||||
|
Other
asset-backed
(2)
|
497 | 16 | 12 | — | — | 497 | — | 497 | ||||||||||||||||||||||||||
|
Power-related
(4)
|
592 | 224 | 3 | — | 37 | — | 224 | 261 | ||||||||||||||||||||||||||
|
Principal-protected
notes
(5)
|
2,209 | 12 | 1,357 | — | — | 2,512 | — | 2,512 | ||||||||||||||||||||||||||
|
Total
|
$ | 67,520 | $ | 3,654 | $ | 1,986 | $ | 394 | $ | 437 | (6) | $ | 14,697 | (6) | $ | 2,649 | $ | 18,177 | ||||||||||||||||
| 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 | |||||||||||||||||||||
170
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| (1) | Such amounts do not represent the anticipated losses in connection with these transactions because 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 consolidated statement 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 assets,” and “Other liabilities and accrued expenses,” respectively, in the consolidated statement of financial condition. |
| (4) | Assets and liabilities held by the firm related to these VIEs are included in “Other assets” and “Other liabilities and accrued expenses,” respectively, in the consolidated statement 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, including the current portion of unsecured long-term borrowings” or “Unsecured long-term borrowings” in the consolidated statement of financial condition. Assets in VIE, carrying value of liabilities and maximum exposure to loss exclude $3.97 billion as of December 2009, associated with guarantees related to the firm’s performance under borrowings from the VIE, which are recorded as liabilities in the consolidated statement 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 $4.66 billion as of December 2009, 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. |
171
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2009, in
accordance with amended principles requiring enhanced
disclosures, the following table also sets forth the total
liabilities included in the consolidated statement 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 | ||||||||||||
| December 2009 | November 2008 | |||||||||||
|
VIE
|
VIE
|
VIE
|
||||||||||
| Assets (1) | Liabilities (1) | Assets (1) | ||||||||||
| (in millions) | ||||||||||||
|
Real estate,
credit-related
and other investing
|
$ | 942 | $ | 680 | (2) | $ | 1,560 | |||||
|
Municipal bond securitizations
|
679 | 782 | (3) | 985 | ||||||||
|
CDOs,
mortgage-backed
and other
asset-backed
|
639 | 583 | (4) | 32 | ||||||||
|
Foreign exchange and commodities
|
227 | 179 | (5) | 652 | ||||||||
|
Principal-protected notes
|
214 | 214 | (6) | 215 | ||||||||
|
Total
|
$ | 2,701 | $ | 2,438 | $ | 3,444 | ||||||
| (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 “Other assets” in the consolidated statements of financial condition. | |
| (2) | These VIE liabilities are generally collateralized by the related VIE assets and included in “Other secured financings” and “Other liabilities and accrued expenses” in the consolidated statement of financial condition. These VIE liabilities generally do not provide for recourse to the general credit of the firm. | |
| (3) | These VIE liabilities, which are partially collateralized by the related VIE assets, are included in “Other secured financings” in the consolidated statement of financial condition. | |
| (4) | These VIE liabilities are primarily included in “Securities sold under agreements to repurchase, at fair value” and “Other secured financings” in the consolidated statement 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” in the consolidated statement of financial condition. | |
| (6) | These VIE liabilities are included in “Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings” in the consolidated statement 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 December 2009 or
November 2008.
172
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 5. | Deposits |
The following table sets forth deposits as of December 2009
and November 2008:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
U.S. offices
(1)
|
$ | 32,797 | $ | 23,018 | ||||
|
Non-U.S. offices
(2)
|
6,621 | 4,625 | ||||||
|
Total
|
$ | 39,418 | $ | 27,643 | ||||
| (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 were held at Goldman Sachs Bank (Europe) PLC (GS Bank Europe). |
Included in the above table are time deposits of
$9.30 billion and $8.49 billion as of
December 2009 and November 2008, respectively. The
following table sets forth the maturities of time deposits as of
December 2009:
| As of December 2009 | ||||||||||||
| U.S. | Non-U.S. | Total | ||||||||||
| (in millions) | ||||||||||||
|
2010
|
$ | 1,777 | $ | 737 | $ | 2,514 | ||||||
|
2011
|
1,603 | — | 1,603 | |||||||||
|
2012
|
871 | — | 871 | |||||||||
|
2013
|
1,720 | — | 1,720 | |||||||||
|
2014
|
531 | — | 531 | |||||||||
|
2015-thereafter
|
2,058 | — | 2,058 | |||||||||
|
Total
|
$ | 8,560 | (1) | $ | 737 | (2) | $ | 9,297 | ||||
| (1) | Includes $242 million greater than $100,000, of which $111 million matures within three months, $58 million matures within three to six months, $32 million matures within six to twelve months, and $41 million matures after twelve months. | |
| (2) | Substantially all were greater than $100,000. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 6. | Short-Term Borrowings |
As of December 2009 and November 2008,
short-term
borrowings were $50.45 billion and $73.89 billion,
respectively, comprised of $12.93 billion and
$21.23 billion, respectively, included in “Other
secured financings” in the consolidated statements of
financial condition and $37.52 billion and
$52.66 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 the fair value option.
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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Current portion of unsecured
long-term
borrowings
(1)(2)
|
$ | 17,928 | $ | 26,281 | ||||
|
Hybrid financial instruments
|
10,741 | 12,086 | ||||||
|
Promissory
notes
(3)
|
2,119 | 6,944 | ||||||
|
Commercial
paper
(4)
|
1,660 | 1,125 | ||||||
|
Other
short-term
borrowings
|
5,068 | 6,222 | ||||||
|
Total
(5)
|
$ | 37,516 | $ | 52,658 | ||||
| (1) | Includes $1.73 billion as of December 2009, guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). | |
| (2) | Includes $17.05 billion and $25.12 billion as of December 2009 and November 2008, respectively, issued by Group Inc. | |
| (3) | Includes $0 and $3.42 billion as of December 2009 and November 2008, respectively, guaranteed by the FDIC under the TLGP. | |
| (4) | Includes $0 and $751 million as of December 2009 and November 2008, respectively, guaranteed by the FDIC under the TLGP. | |
| (5) | The weighted average interest rates for these borrowings, after giving effect to hedging activities, were 1.31% and 3.37% as of December 2009 and November 2008, respectively, and excluded financial instruments accounted for at fair value under the fair value option. |
174
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 7. | Long-Term Borrowings |
As of December 2009 and November 2008,
long-term
borrowings were $196.29 billion and $185.68 billion,
respectively, comprised of $11.20 billion and
$17.46 billion, respectively, included in “Other
secured financings” in the consolidated statements of
financial condition and $185.09 billion and
$168.22 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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Fixed rate
obligations
(1)
|
||||||||
|
Group Inc.
|
$ | 114,695 | $ | 101,454 | ||||
|
Subsidiaries
|
2,718 | 2,371 | ||||||
|
Floating rate
obligations
(2)
|
||||||||
|
Group Inc.
|
60,390 | 57,018 | ||||||
|
Subsidiaries
|
7,282 | 7,377 | ||||||
|
Total
(3)
|
$ | 185,085 | $ | 168,220 | ||||
| (1) | As of December 2009 and November 2008, $79.12 billion and $70.08 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% and from 3.87% to 10.04%, respectively. As of December 2009 and November 2008, $38.29 billion and $33.75 billion, respectively, of the firm’s fixed rate debt obligations were denominated in non-U.S. dollars and interest rates ranged from 0.80% to 7.45% and from 0.67% to 8.88%, respectively. | |
| (2) | As of December 2009 and November 2008, $32.26 billion and $32.41 billion, respectively, of the firm’s floating rate debt obligations were denominated in U.S. dollars. As of December 2009 and November 2008, $35.41 billion and $31.99 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 $19.03 billion as of December 2009, guaranteed by the FDIC under the TLGP. |
Unsecured
long-term
borrowings by maturity date are set forth below:
| As of December 2009 | ||||||||||||
| Group Inc. | Subsidiaries | Total | ||||||||||
| (in millions) | ||||||||||||
|
2011
|
$ | 22,302 | $ | 1,234 | $ | 23,536 | ||||||
|
2012
|
25,749 | 1,665 | 27,414 | |||||||||
|
2013
|
23,305 | 33 | 23,338 | |||||||||
|
2014
|
18,303 | 33 | 18,336 | |||||||||
|
2015-thereafter
|
85,426 | 7,035 | 92,461 | |||||||||
|
Total
(1)(2)
|
$ | 175,085 | $ | 10,000 | $ | 185,085 | ||||||
| (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 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. |
175
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December 2009 and
November 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 would be a reduction in the
carrying value of total unsecured
long-term
borrowings of less than 1% and approximately 9% as of
December 2009 and November 2008, respectively.
The effective weighted average interest rates for unsecured
long-term
borrowings are set forth below:
| As of | ||||||||||||||||
| December 2009 | November 2008 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| ($ in millions) | ||||||||||||||||
|
Fixed rate obligations
|
||||||||||||||||
|
Group Inc.
|
$ | 1,896 | 5.52 | % | $ | 1,863 | 5.71 | % | ||||||||
|
Subsidiaries
|
2,424 | 5.46 | 2,152 | 4.32 | ||||||||||||
|
Floating rate
obligations
(1)(2)
|
||||||||||||||||
|
Group Inc.
|
173,189 | 1.33 | 156,609 | 2.66 | ||||||||||||
|
Subsidiaries
|
7,576 | 1.20 | 7,596 | 4.23 | ||||||||||||
|
Total
|
$ | 185,085 | 1.42 | $ | 168,220 | 2.73 | ||||||||||
| (1) | Includes fixed rate obligations that have been converted into floating rate obligations through derivative contracts. | |
| (2) | The weighted average interest rates as of December 2009 and November 2008 excluded financial instruments accounted for at fair value under the fair value option. |
Subordinated
Borrowings
As of December 2009 and November 2008, unsecured
long-term
borrowings were comprised of subordinated borrowings with
outstanding principal amounts of $19.16 billion and
$19.26 billion, respectively, as set forth below, of which
$18.87 billion and $18.79 billion, respectively, has
been issued by Group Inc.
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 Normal 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
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 accounted for the stock purchase contracts as equity
instruments 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.
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 APEX.
Subordinated Debt.
As of December 2009,
the firm had $14.07 billion of other subordinated debt
outstanding, of which $13.78 billion has been issued by
Group Inc., with maturities ranging from 2012 to 2038. The
effective weighted average interest rate on this debt was 1.51%,
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, of which $13.70 billion has
been issued by Group Inc., 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. This debt is junior in right of payment to all
of the firm’s senior indebtedness.
177
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 8. | Commitments, Contingencies and Guarantees |
Commitments
The following table summarizes the firm’s commitments as of
December 2009 and November 2008:
|
Commitment Amount by Period
|
||||||||||||||||||||||||
| of Expiration as of December 2009 | Total Commitments as of | |||||||||||||||||||||||
|
2011-
|
2013-
|
2015-
|
December
|
November
|
||||||||||||||||||||
| 2010 | 2012 | 2014 | Thereafter | 2009 | 2008 | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Commitments to extend
credit
(1)
|
||||||||||||||||||||||||
|
Commercial lending:
|
||||||||||||||||||||||||
|
Investment-grade
|
$ | 4,665 | $ | 5,175 | $ | 1,000 | $ | 575 | $ | 11,415 | $ | 8,007 | ||||||||||||
|
Non-investment-grade
(2)
|
1,425 | 4,379 | 2,105 | 244 | 8,153 | 9,318 | ||||||||||||||||||
|
William Street credit extension program
|
4,850 | 18,112 | 2,256 | — | 25,218 | 22,610 | ||||||||||||||||||
|
Warehouse financing
|
12 | — | — | — | 12 | 1,101 | ||||||||||||||||||
|
Total commitments to extend credit
|
10,952 | 27,666 | 5,361 | 819 | 44,798 | 41,036 | ||||||||||||||||||
|
Forward starting resale and securities borrowing agreements
|
34,844 | — | — | — | 34,844 | 61,455 | ||||||||||||||||||
|
Forward starting repurchase and securities lending agreements
|
10,545 | — | — | — | 10,545 | 6,948 | ||||||||||||||||||
|
Underwriting commitments
|
1,811 | — | — | — | 1,811 | 241 | ||||||||||||||||||
|
Letters of
credit
(3)
|
1,621 | 33 | 146 | 4 | 1,804 | 7,251 | ||||||||||||||||||
|
Investment
commitments
(4)
|
2,686 | 9,153 | 128 | 1,273 | 13,240 | 14,266 | ||||||||||||||||||
|
Construction-related
commitments
(5)
|
142 | — | — | — | 142 | 483 | ||||||||||||||||||
|
Other
|
109 | 58 | 38 | 33 | 238 | 260 | ||||||||||||||||||
|
Total commitments
|
$ | 62,710 | $ | 36,910 | $ | 5,673 | $ | 2,129 | $ | 107,422 | $ | 131,940 | ||||||||||||
| (1) | Commitments to extend credit are presented net of amounts syndicated to third parties. |
| (2) | Included within non-investment-grade commitments as of December 2009 and November 2008 were $1.20 billion and $2.07 billion, respectively, related to leveraged lending capital market transactions; $40 million and $164 million, respectively, related to commercial real estate transactions; and $6.91 billion and $7.09 billion, respectively, arising from other unfunded credit facilities. Including funded loans, the total notional amount of the firm’s leveraged lending capital market transactions was $4.45 billion and $7.97 billion as of December 2009 and November 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, consisting of $2.46 billion and $3.15 billion as of December 2009 and November 2008, respectively, related to real estate private investments and $10.78 billion and $11.12 billion as of December 2009 and November 2008, respectively, related to corporate and other private investments. Such commitments include $11.38 billion and $12.25 billion as of December 2009 and November 2008, respectively, of commitments to invest in funds managed by the firm, which will be funded at market value on the date of investment. |
| (5) | Includes commitments of $104 million and $388 million as of December 2009 and November 2008, respectively, related to the firm’s new headquarters in New York City. |
178
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 credit extension 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, GS Bank USA and other subsidiaries of GS Bank USA. 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 approximately $950 million. 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 had been provided as of both December 2009 and November 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 December 2009 and November 2008. |
179
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
|
As of
|
||||
| December 2009 | ||||
| (in millions) | ||||
|
2010
|
$ | 494 | ||
|
2011
|
369 | |||
|
2012
|
295 | |||
|
2013
|
260 | |||
|
2014
|
195 | |||
|
2015-thereafter
|
1,555 | |||
|
Total
|
$ | 3,168 | ||
Rent charged to operating expense is set forth below:
| (in millions) | ||||||
|
2007
|
$ | 412 | ||||
|
2008
|
438 | |||||
|
2009
|
434 | |||||
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 $6.35 billion and $6.13 billion
of contract holder account balances as of December 2009 and
November 2008, respectively, for such benefits. The
weighted average attained age of these contract holders was
68 years as of both December 2009 and
November 2008. The net amount at risk, representing
guaranteed minimum death and income benefits in excess of
contract holder account balances, was $1.96 billion and
$2.96 billion as of December 2009 and
November 2008, respectively. See Note 12 for more
information on the firm’s insurance liabilities.
Guarantees
The firm enters into various derivative contracts that meet the
definition of a guarantee under ASC 460. Disclosures about
derivative contracts are not required 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.
180
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 December 2009.
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
|
||||||||||||||||||||||||
|
Value of
|
2011-
|
2013-
|
2015-
|
|||||||||||||||||||||
| Net Liability | 2010 | 2012 | 2014 | Thereafter | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
As of
December 2009
|
||||||||||||||||||||||||
|
Derivatives
(2)
|
$ | 7,221 | $ | 145,126 | $ | 105,744 | $ | 48,350 | $ | 66,965 | $ | 366,185 | ||||||||||||
|
Securities lending
indemnifications
(3)
|
— | 27,314 | — | — | — | 27,314 | ||||||||||||||||||
|
Other financial
guarantees
(4)
|
207 | 357 | 352 | 358 | 1,010 | 2,077 | ||||||||||||||||||
| (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 do not meet the definition of a guarantee under ASC 460 and, therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities. As of November 2008, the carrying value of the net liability related to derivative guarantees was $17.46 billion. |
| (3) | Collateral held by the lenders in connection with securities lending indemnifications was $28.07 billion and $19.95 billion as of December 2009 and November 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. |
| (4) | As of November 2008, the carrying value of the net liability related to other financial guarantees was $235 million. |
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. Group Inc. also fully
and unconditionally guarantees the securities issued by GS
Finance Corp., a wholly owned finance subsidiary of the firm,
which is consolidated for accounting purposes.
181
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 consolidated statements of financial condition as of
December 2009 and November 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 consolidated
statements of financial condition as of December 2009 and
November 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 table above, Group Inc.’s liabilities
as guarantor are not separately disclosed.
182
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 9. | Shareholders’ Equity |
Common and
Preferred Equity
During 2009, common shares outstanding increased by 72.6 million
shares, which included 46.7 million common shares issued
through a public offering at $123.00 per share for total
proceeds of $5.75 billion during the second quarter of 2009.
In June 2009, Group Inc. repurchased from the
U.S. Department of the Treasury (U.S. Treasury) the
10.0 million shares of the Company’s Fixed Rate
Cumulative Perpetual Preferred Stock, Series H
(Series H Preferred Stock), that were issued to the
U.S. Treasury pursuant to the U.S. Treasury’s
TARP Capital Purchase Program. The repurchase resulted in a
one-time
preferred dividend of $426 million, which is included in
the consolidated statement of earnings for the year ended
December 2009. This
one-time
preferred dividend represented the difference between the
carrying value and the redemption value of the Series H
Preferred Stock. In connection with the issuance of the
Series H Preferred Stock in October 2008, 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 firm repurchased this warrant in full in
July 2009 for $1.1 billion. This amount was recorded
as a reduction to additional
paid-in
capital. The firm’s cumulative payments to the
U.S. Treasury related to the U.S. Treasury’s TARP
Capital Purchase Program totaled $11.42 billion, including
the return of the U.S. Treasury’s $10.0 billion
investment (inclusive of the $426 million described above),
$318 million in preferred dividends and $1.1 billion
related to the warrant repurchase.
Dividends declared per common share were $1.05 in 2009, $1.40 in
2008 and $1.40 in 2007. On January 19, 2010, the Board
declared a dividend of $0.35 per common share to be paid on
March 30, 2010 to common shareholders of record on
March 2, 2010. 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.
During 2009 and 2008, the firm repurchased 19,578 and
10.5 million shares of its common stock at an average cost
per share of $80.83 and $193.18, for a total cost of
$2 million and $2.04 billion, respectively. Shares
repurchased during 2009 primarily related to repurchases made by
GS&Co. to facilitate customer transactions in the ordinary
course of business. In addition, to satisfy minimum statutory
employee tax withholding requirements related to the delivery of
common stock underlying RSUs, the firm cancelled
11.2 million and 6.7 million of RSUs with a total
value of $863 million and $1.31 billion in 2009 and
2008, respectively.
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. Any repurchase of the firm’s common stock requires
approval by the Board of Governors of the Federal Reserve System
(Federal Reserve Board).
183
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 2009, the firm had 174,000 shares of
perpetual preferred stock issued and outstanding as set forth in
the following table:
|
Dividend
|
Shares
|
Shares
|
Earliest
|
Redemption 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 | October 1, 2008 | 5,500 | ||||||||||||
| 174,000 | 235,000 | $ | 8,600 | |||||||||||||||
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 Federal Reserve Board, at a
redemption price equal to $25,000 plus declared and unpaid
dividends.
Each share of 10% Cumulative Perpetual Preferred Stock,
Series G (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.
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 2007, the Board authorized 17,500.1 shares of perpetual
Non-Cumulative
Preferred Stock, Series E (Series E Preferred Stock),
and 5,000.1 shares of perpetual
Non-Cumulative
Preferred Stock, Series F (Series F Preferred Stock),
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
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.
184
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Preferred dividends declared are set forth below:
| Year Ended | One Month Ended | |||||||||||||||||||||||||||||||
| December 2009 | November 2008 | November 2007 | December 2008 | |||||||||||||||||||||||||||||
| (per share) | (in millions) | (per share) | (in millions) | (per share) | (in millions) | (per share) | (in millions) | |||||||||||||||||||||||||
|
Series A
|
$ | 710.94 | $ | 21 | $ | 1,068.86 | $ | 32 | $ | 1,563.51 | $ | 47 | $ | 239.58 | $ | 7 | ||||||||||||||||
|
Series B
|
1,162.50 | 38 | 1,550.00 | 50 | 1,550.00 | 50 | 387.50 | 12 | ||||||||||||||||||||||||
|
Series C
|
758.34 | 6 | 1,110.18 | 9 | 1,563.51 | 12 | 255.56 | 2 | ||||||||||||||||||||||||
|
Series D
|
758.34 | 41 | 1,105.18 | 59 | 1,543.06 | 83 | 255.56 | 14 | ||||||||||||||||||||||||
|
Series G
|
7,500.00 | 375 | 1,083.33 | 54 | — | — | 2,500.00 | 125 | ||||||||||||||||||||||||
|
Series H
|
12.50 | (1) | 125 | (1) | — | — | — | — | 14.86 | 149 | ||||||||||||||||||||||
|
Total
|
$ | 606 | $ | 204 | $ | 192 | $ | 309 | ||||||||||||||||||||||||
| (1) | Excludes the one-time preferred dividend of $426 million related to the repurchase of the TARP Series H Preferred Stock in the second quarter of 2009, as well as $44 million of accrued dividends paid upon repurchase of the Series H Preferred Stock. |
On January 19, 2010, the Board declared dividends of
$239.58, $387.50, $255.56 and $255.56 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 February 10, 2010 to preferred
shareholders of record on January 26, 2010. In
addition, the Board declared a dividend of $2,500 per share of
Series G Preferred Stock to be paid on
February 10, 2010 to preferred shareholders of record
on January 26, 2010.
Accumulated
Other Comprehensive Income
The following table sets forth the firm’s accumulated other
comprehensive income/(loss) by type:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Currency translation adjustment, net of tax
|
$ | (132 | ) | $ | (30 | ) | ||
|
Pension and postretirement liability adjustments, net of tax
|
(317 | ) | (125 | ) | ||||
|
Net unrealized gains/(losses) on
available-for-sale
securities,
net of tax (1) |
87 | (47 | ) | |||||
|
Total accumulated other comprehensive loss, net of tax
|
$ | (362 | ) | $ | (202 | ) | ||
| (1) | Consists of net unrealized gains/(losses) of $84 million and $(55) million on available-for-sale securities held by the firm’s insurance subsidiaries as of December 2009 and November 2008, respectively, and net unrealized gains of $3 million and $8 million on available-for-sale securities held by investees accounted for under the equity method as of December 2009 and November 2008, respectively. |
185
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 10. | Earnings Per Common Share |
The computations of basic and diluted earnings per common share
are set forth below:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions, except per share amounts) | ||||||||||||||||
|
Numerator for basic and diluted EPS —
net earnings/(loss) applicable to common shareholders |
$ | 12,192 | $ | 2,041 | $ | 11,407 | $ | (1,028 | ) | |||||||
|
Denominator for basic EPS — weighted average number of
common shares
|
512.3 | 437.0 | 433.0 | 485.5 | ||||||||||||
|
Effect of dilutive
securities
(1)
|
||||||||||||||||
|
Restricted stock units
|
15.7 | 10.2 | 13.6 | — | ||||||||||||
|
Stock options and warrants
|
22.9 | 9.0 | 14.6 | — | ||||||||||||
|
Dilutive potential common shares
|
38.6 | 19.2 | 28.2 | — | ||||||||||||
|
Denominator for diluted EPS — weighted average number
of common shares and dilutive potential common shares
|
550.9 | 456.2 | 461.2 | 485.5 | ||||||||||||
|
Basic
EPS
(2)
|
$ | 23.74 | $ | 4.67 | $ | 26.34 | $ | (2.15 | ) | |||||||
|
Diluted
EPS
(2)
|
22.13 | 4.47 | 24.73 | (2.15 | ) | |||||||||||
| (1) | The diluted EPS computations do not include the antidilutive effect of RSUs, stock options and warrants as follows: |
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Number of antidilutive RSUs and common shares underlying
antidilutive stock options and warrants
|
24.7 | 60.5 | — | 157.2 | ||||||||||||
| (2) | In the first quarter of fiscal 2009, the firm adopted amended accounting principles which require that unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents be treated as a separate class of securities in calculating earnings per common share. The impact of applying these amended principles for the year ended December 2009 and one month ended December 2008 was a reduction in basic earnings per common share of $0.06 and an increase in basic and diluted loss per common share of $0.03, respectively. There was no impact on diluted earnings per common share for the year ended December 2009. Prior periods have not been restated due to immateriality. |
186
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| 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 consolidated statements of
financial condition:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Investment Banking
|
||||||||
|
Underwriting
|
$ | 125 | $ | 125 | ||||
|
Trading and Principal Investments
|
||||||||
|
FICC
|
265 | 247 | ||||||
|
Equities
(1)
|
2,389 | 2,389 | ||||||
|
Principal Investments
|
84 | 80 | ||||||
|
Asset Management and Securities Services
|
||||||||
|
Asset
Management
(2)
|
563 | 565 | ||||||
|
Securities Services
|
117 | 117 | ||||||
|
Total
|
$ | 3,543 | $ | 3,523 | ||||
| (1) | Primarily related to SLK LLC (SLK). | |
| (2) | Primarily related to The Ayco Company, L.P. (Ayco). |
187
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 | ||||||||||
|
December
|
November
|
|||||||||
| 2009 | 2008 | |||||||||
| (in millions) | ||||||||||
|
Customer
lists
(1)
|
Gross carrying amount | $ | 1,117 | $ | 1,160 | |||||
| Accumulated amortization | (472 | ) | (436 | ) | ||||||
| Net carrying amount | $ | 645 | $ | 724 | ||||||
|
NYSE DMM rights
|
Gross carrying amount | $ | 714 | $ | 714 | |||||
| Accumulated amortization | (294 | ) | (252 | ) | ||||||
| Net carrying amount | $ | 420 | $ | 462 | ||||||
|
Insurance-related
|
Gross carrying amount | $ | 292 | $ | 292 | |||||
|
assets
(2)
|
Accumulated amortization | (142 | ) | (137 | ) | |||||
| Net carrying amount | $ | 150 | $ | 155 | ||||||
|
Exchange-traded
|
Gross carrying amount | $ | 138 | $ | 138 | |||||
|
fund (ETF) lead
|
Accumulated amortization | (48 | ) | (43 | ) | |||||
|
market maker rights
|
Net carrying amount | $ | 90 | $ | 95 | |||||
|
Other
(3)
|
Gross carrying amount | $ | 170 | $ | 178 | |||||
| Accumulated amortization | (98 | ) | (85 | ) | ||||||
| Net carrying amount | $ | 72 | $ | 93 | ||||||
|
Total
|
Gross carrying amount | $ | 2,431 | $ | 2,482 | |||||
| Accumulated amortization | (1,054 | ) | (953 | ) | ||||||
| Net carrying amount | $ | 1,377 | $ | 1,529 | ||||||
| (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) | Primarily includes VOBA related to the firm’s insurance businesses. | |
| (3) | Primarily includes marketing-related assets and other contractual rights. |
188
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 intangible assets is
approximately 11 years. “Depreciation and
amortization” in the consolidated statements of earnings
includes amortization related to identifiable intangible assets
of $96 million, $240 million and $39 million for
the years ended December 2009 and November 2008 and
one month ended December 2008, respectively.
The estimated future amortization for existing identifiable
intangible assets through 2014 is set forth below:
|
As of
|
||||
| December 2009 | ||||
| (in millions) | ||||
|
2010
|
$ | 141 | ||
|
2011
|
135 | |||
|
2012
|
129 | |||
|
2013
|
123 | |||
|
2014
|
119 | |||
| 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 | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Property, leasehold improvements and
equipment
(1)
|
$ | 11,380 | $ | 10,793 | ||||
|
Goodwill and identifiable intangible
assets
(2)
|
4,920 | 5,052 | ||||||
|
Income tax-related assets
|
7,937 | 8,359 | ||||||
|
Equity-method
investments
(3)
|
1,484 | 1,454 | ||||||
|
Miscellaneous receivables and other
|
3,747 | 4,780 | ||||||
|
Total
|
$ | 29,468 | $ | 30,438 | ||||
| (1) | Net of accumulated depreciation and amortization of $7.28 billion and $6.55 billion as of December 2009 and November 2008, respectively. | |
| (2) | See Note 11 for further information regarding the firm’s goodwill and identifiable intangible assets. | |
| (3) | Excludes investments of $2.95 billion and $3.45 billion accounted for at fair value under the fair value option as of December 2009 and November 2008, respectively, which are included in “Trading assets, at fair value” in the consolidated statements of financial condition. |
189
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
Liabilities
The following table sets forth the firm’s other liabilities
and accrued expenses by type:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Compensation and benefits
|
$ | 11,170 | $ | 4,646 | ||||
|
Insurance-related
liabilities
(1)
|
11,832 | 9,673 | ||||||
|
Noncontrolling
interests
(2)
|
960 | 1,127 | ||||||
|
Income tax-related liabilities
|
4,022 | 2,865 | ||||||
|
Employee interests in consolidated funds
|
416 | 517 | ||||||
|
Accrued expenses and other payables
|
5,455 | 4,388 | ||||||
|
Total
|
$ | 33,855 | $ | 23,216 | ||||
| (1) | Insurance-related liabilities are set forth in the table below: |
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Separate account liabilities
|
$ | 4,186 | $ | 3,628 | ||||
|
Liabilities for future benefits and unpaid claims
|
6,484 | 4,778 | ||||||
|
Contract holder account balances
|
874 | 899 | ||||||
|
Reserves for guaranteed minimum death and income benefits
|
288 | 368 | ||||||
|
Total insurance-related liabilities
|
$ | 11,832 | $ | 9,673 | ||||
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 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 of $1.29 billion
and $1.30 billion as of December 2009 and
November 2008, respectively, related to such reinsurance
contracts, which is reported in “Receivables from customers
and counterparties” in the 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
$870 million and $1.20 billion as of
December 2009 and November 2008, respectively, related
to such reinsurance contracts, which is reported in
“Receivables from customers and counterparties” in the
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 $1.84 billion and
$978 million carried at fair value under the fair value
option as of December 2009 and November 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 based on total payments expected to be made less
total fees expected to be assessed over the life of the contract.
| (2) | Includes $598 million and $784 million related to consolidated investment funds as of December 2009 and November 2008, respectively. |
190
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 13. | Employee Benefit Plans |
The firm sponsors various pension plans and certain other
postretirement benefit plans, primarily healthcare and life
insurance. The firm also provides certain benefits to former or
inactive employees prior to retirement.
Defined
Benefit Pension Plans and Postretirement Plans
Employees of certain
non-U.S. subsidiaries
participate in various defined benefit pension plans. These
plans generally provide benefits based on years of credited
service and a percentage of the employee’s eligible
compensation. The firm maintains a defined benefit pension plan
for most U.K. employees. As of April 2008, the U.K. defined
benefit plan was closed to new participants, but will continue
to accrue benefits for existing participants.
The firm also maintains a defined benefit pension plan for
substantially all U.S. employees hired prior to
November 1, 2003. As of November 2004, this plan
was closed to new participants and frozen such that existing
participants would not accrue any additional benefits. In
addition, the firm maintains unfunded postretirement benefit
plans that provide medical and life insurance for eligible
retirees and their dependents covered under these programs.
On November 30, 2007, the firm adopted amended
principles related to employers’ accounting for defined
benefit pension and other postretirement plans which require an
entity to recognize in its statement of financial condition the
funded status of its defined benefit pension and postretirement
plans, measured as the difference between the fair value of the
plan assets and the benefit obligation. Upon adoption, these
amended accounting principles required an entity to recognize
previously unrecognized actuarial gains and losses, prior
service costs, and transition obligations and assets within
“Accumulated other comprehensive income/(loss)” in the
consolidated statements of changes in shareholders’ equity,
and to derecognize additional minimum pension liabilities.
As a result of adopting these amended accounting principles, the
firm recorded in 2007 increases of $59 million and
$253 million to “Other assets” and “Other
liabilities and accrued expenses,” respectively, and a
$194 million loss, net of taxes, within “Accumulated
other comprehensive income/(loss).”
191
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a summary of the changes in the
plans’ benefit obligations and the fair value of plan
assets for the years ended December 2009 and
November 2008, as well as a statement of the funded status
of the plans as of December 2009 and November 2008:
| As of or for the Year Ended | ||||||||||||||||||||||||
| December 2009 | November 2008 | |||||||||||||||||||||||
|
U.S.
|
Non-U.S.
|
Post-
|
U.S.
|
Non-U.S.
|
Post-
|
|||||||||||||||||||
| Pension | Pension | retirement | Pension | Pension | retirement | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Benefit obligation
|
||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 485 | $ | 513 | $ | 569 | $ | 399 | $ | 748 | $ | 445 | ||||||||||||
|
Service cost
|
— | 52 | 18 | — | 84 | 26 | ||||||||||||||||||
|
Interest cost
|
25 | 34 | 27 | 24 | 41 | 31 | ||||||||||||||||||
|
Plan amendments
|
— | — | (35 | ) | — | — | (61 | ) | ||||||||||||||||
|
Actuarial loss/(gain)
|
(42 | ) | 325 | (84 | ) | (50 | ) | (261 | ) | 10 | ||||||||||||||
|
Benefits paid
|
(10 | ) | (11 | ) | (11 | ) | (8 | ) | (2 | ) | (10 | ) | ||||||||||||
|
Curtailment
|
— | (11 | ) | — | — | — | — | |||||||||||||||||
|
Effect of foreign exchange rates
|
— | 58 | — | — | (154 | ) | — | |||||||||||||||||
|
Balance, end of year
|
$ | 458 | $ | 960 | $ | 484 | $ | 365 | $ | 456 | $ | 441 | ||||||||||||
|
Fair value of plan assets
|
||||||||||||||||||||||||
|
Balance, beginning of year
|
$ | 299 | $ | 562 | $ | — | $ | 450 | $ | 614 | $ | — | ||||||||||||
|
Actual return on plan assets
|
78 | 113 | — | (151 | ) | (77 | ) | — | ||||||||||||||||
|
Firm contributions
|
— | 50 | 11 | — | 184 | 9 | ||||||||||||||||||
|
Employee contributions
|
— | 1 | — | — | 1 | — | ||||||||||||||||||
|
Benefits paid
|
(10 | ) | (10 | ) | (11 | ) | (8 | ) | (1 | ) | (9 | ) | ||||||||||||
|
Curtailment
|
— | (9 | ) | — | — | — | — | |||||||||||||||||
|
Effect of foreign exchange rates
|
— | 59 | — | — | (170 | ) | — | |||||||||||||||||
|
Balance, end of year
|
$ | 367 | $ | 766 | $ | — | $ | 291 | $ | 551 | $ | — | ||||||||||||
|
Funded status of plans
|
$ | (91 | ) | $ | (194 | ) | $ | (484 | ) | $ | (74 | ) | $ | 95 | $ | (441 | ) | |||||||
|
Amounts recognized in the Consolidated Statements of Financial
Condition consist of:
|
||||||||||||||||||||||||
|
Other assets
|
$ | — | $ | — | $ | — | $ | — | $ | 129 | $ | — | ||||||||||||
|
Other liabilities and accrued expenses
|
(91 | ) | (194 | ) | (484 | ) | (74 | ) | (34 | ) | (441 | ) | ||||||||||||
|
Net amount recognized
|
$ | (91 | ) | $ | (194 | ) | $ | (484 | ) | $ | (74 | ) | $ | 95 | $ | (441 | ) | |||||||
|
Amounts recognized in accumulated other comprehensive
income/(loss) consist of:
|
||||||||||||||||||||||||
|
Actuarial loss/(gain)
|
$ | 174 | $ | 231 | $ | 155 | $ | 195 | $ | (59 | ) | $ | 129 | |||||||||||
|
Prior service cost/(credit)
|
— | 3 | (82 | ) | — | 3 | (39 | ) | ||||||||||||||||
|
Transition obligation/(asset)
|
(8 | ) | 2 | — | (11 | ) | 3 | — | ||||||||||||||||
|
Total amount recognized —
Pre-tax
|
$ | 166 | $ | 236 | $ | 73 | $ | 184 | $ | (53 | ) | $ | 90 | |||||||||||
192
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The accumulated benefit obligation for all defined benefit
pension plans was $1.31 billion and $769 million as of
December 2009 and November 2008, respectively.
For plans in which the accumulated benefit obligation exceeded
plan assets, the aggregate projected benefit obligation and
accumulated benefit obligation was $1.39 billion and
$1.29 billion, respectively, as of December 2009, and
$426 million and $413 million, respectively, as of
November 2008. The fair value of plan assets for each of
these plans was $1.11 billion and $317 million as of
December 2009 and November 2008, respectively.
The components of pension expense/(income) and postretirement
expense are set forth below:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
U.S. pension
|
||||||||||||||||
|
Interest cost
|
$ | 25 | $ | 24 | $ | 22 | $ | 2 | ||||||||
|
Expected return on plan assets
|
(20 | ) | (33 | ) | (32 | ) | (2 | ) | ||||||||
|
Net amortization
|
26 | (1 | ) | 1 | 2 | |||||||||||
|
Total
|
$ | 31 | $ | (10 | ) | $ | (9 | ) | $ | 2 | ||||||
|
Non-U.S. pension
|
||||||||||||||||
|
Service cost
|
$ | 52 | $ | 84 | $ | 78 | $ | 3 | ||||||||
|
Interest cost
|
34 | 41 | 34 | 3 | ||||||||||||
|
Expected return on plan assets
|
(36 | ) | (41 | ) | (36 | ) | (3 | ) | ||||||||
|
Net amortization
|
2 | 2 | 10 | — | ||||||||||||
|
Curtailment
|
1 | — | — | — | ||||||||||||
|
Total
|
$ | 53 | $ | 86 | $ | 86 | $ | 3 | ||||||||
|
Postretirement
|
||||||||||||||||
|
Service cost
|
$ | 18 | $ | 26 | $ | 21 | $ | 1 | ||||||||
|
Interest cost
|
27 | 31 | 23 | 2 | ||||||||||||
|
Net amortization
|
22 | 23 | 19 | 2 | ||||||||||||
|
Total
|
$ | 67 | $ | 80 | $ | 63 | $ | 5 | ||||||||
|
Estimated 2010 amortization from accumulated other comprehensive
income:
|
||||||||||||||||
|
Actuarial loss/(gain)
|
$ | 46 | ||||||||||||||
|
Prior service cost/(credit)
|
(9 | ) | ||||||||||||||
|
Transition obligation/(asset)
|
(3 | ) | ||||||||||||||
|
Total
|
$ | 34 | ||||||||||||||
193
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average assumptions used to develop the actuarial
present value of the projected benefit obligation and net
periodic pension cost are set forth below. These assumptions
represent a weighted average of the assumptions used for the
U.S. and
non-U.S. plans
and are based on the economic environment of each applicable
country.
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Defined benefit pension plans
|
||||||||||||||||
|
U.S. pension — projected benefit obligation
|
||||||||||||||||
|
Discount rate
|
5.75 | % | 6.75 | % | 6.00 | % | 5.25 | % | ||||||||
|
Rate of increase in future compensation levels
|
N/A | N/A | N/A | N/A | ||||||||||||
|
U.S. pension — net periodic benefit cost
|
||||||||||||||||
|
Discount rate
|
5.25 | 6.00 | 5.50 | 6.75 | ||||||||||||
|
Rate of increase in future compensation levels
|
N/A | N/A | N/A | N/A | ||||||||||||
|
Expected
long-term
rate of return on plan assets
|
7.00 | 7.50 | 7.50 | 7.00 | ||||||||||||
|
Non-U.S. pension —
projected benefit obligation
|
||||||||||||||||
|
Discount rate
|
5.60 | 6.79 | 5.91 | 6.35 | ||||||||||||
|
Rate of increase in future compensation levels
|
3.99 | 3.85 | 5.38 | 3.85 | ||||||||||||
|
Non-U.S. pension —
net periodic benefit cost
|
||||||||||||||||
|
Discount rate
|
6.35 | 5.91 | 4.85 | 6.79 | ||||||||||||
|
Rate of increase in future compensation levels
|
3.85 | 5.38 | 4.98 | 3.85 | ||||||||||||
|
Expected
long-term
rate of return on plan assets
|
7.05 | 5.89 | 6.84 | 5.73 | ||||||||||||
|
Postretirement plans — benefit obligation
|
||||||||||||||||
|
Discount rate
|
5.75 | % | 6.75 | % | 6.00 | % | 5.25 | % | ||||||||
|
Rate of increase in future compensation levels
|
5.00 | 5.00 | 5.00 | 5.00 | ||||||||||||
|
Postretirement plans — net periodic benefit cost
|
||||||||||||||||
|
Discount rate
|
5.25 | % | 6.00 | % | 5.50 | % | 6.75 | % | ||||||||
|
Rate of increase in future compensation levels
|
5.00 | 5.00 | 5.00 | 5.00 | ||||||||||||
Generally, the firm determined the discount rates for its
defined benefit plans by referencing indices for
long-term,
high-quality
bonds and ensuring that the discount rate does not exceed the
yield reported for those indices after adjustment for the
duration of the plans’ liabilities.
The firm’s approach in determining the
long-term
rate of return for plan assets is based upon historical
financial market relationships that have existed over time with
the presumption that this trend will generally remain constant
in the future.
194
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For measurement purposes, an annual growth rate in the per
capita cost of covered healthcare benefits of 8.51% was assumed
for the year ending December 2010. The rate was assumed to
decrease ratably to 5.00% for the year ending December 2017
and remain at that level thereafter.
The assumed cost of healthcare has an effect on the amounts
reported for the firm’s postretirement plans. A 1% change
in the assumed healthcare cost trend rate would have the
following effects:
| 1% Increase | 1% Decrease | |||||||||||||||
|
December
|
November
|
December
|
November
|
|||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Service plus interest costs
|
$ | 10 | $ | 11 | $ | (8 | ) | $ | (9 | ) | ||||||
|
Obligation
|
101 | 90 | (78 | ) | (70 | ) | ||||||||||
The following table sets forth the composition of plan assets
for the U.S. and
non-U.S. defined
benefit pension plans by asset category:
| As of | ||||||||||||||||
| December 2009 | November 2008 | |||||||||||||||
|
U.S.
|
Non-U.S.
|
U.S.
|
Non-U.S.
|
|||||||||||||
| Pension | Pension | Pension | Pension | |||||||||||||
|
Equity securities
|
72 | % | 65 | % | 69 | % | 28 | % | ||||||||
|
Debt securities
|
27 | 18 | 29 | 7 | ||||||||||||
|
Other
|
1 | 17 | 2 | 65 | ||||||||||||
|
Total
|
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
The investment approach of the firm’s U.S. and major
non-U.S. defined
benefit pension plans involves employing a sufficient level of
flexibility to capture investment opportunities as they occur,
while maintaining reasonable parameters to ensure that prudence
and care are exercised in the execution of the investment
programs. The plans employ a total return on investment
approach, whereby a mix, which is broadly similar to the actual
asset allocation as of December 2009, of equity securities,
debt securities and other assets, is targeted to maximize the
long-term
return on assets for a given level of risk. Investment risk is
measured and monitored on an ongoing basis by the firm’s
Retirement Committee through periodic portfolio reviews,
meetings with investment managers and annual liability
measurements.
The firm’s pension plan assets consist of collective bank
trusts, mutual funds, corporate bonds, alternative investments
(e.g., hedge funds), cash and
short-term
investments, and real estate investment trust holdings.
Substantially all of the firm’s pension plan assets are
classified within level 1 or level 2 of the fair value
hierarchy as of December 31, 2009. Only one
investment, which is in the U.S. pension plan, is
classified within level 3 of the fair value hierarchy as of
December 31, 2009. This level 3 asset comprised
less than 1% of the firm’s total pension plan assets as of
December 31, 2009.
The firm expects to contribute a minimum of $49 million to
its pension plans and $13 million to its postretirement
plans in 2010.
195
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth benefits projected to be paid
from the firm’s U.S. and
non-U.S. defined
benefit pension and postretirement plans (net of Medicare
subsidy receipts) and reflects expected future service costs,
where appropriate:
|
U.S.
|
Non-U.S.
|
Post-
|
||||||||||
| Pension | Pension | retirement | ||||||||||
| (in millions) | ||||||||||||
|
2010
|
$ | 11 | $ | 8 | $ | 13 | ||||||
|
2011
|
12 | 8 | 14 | |||||||||
|
2012
|
13 | 8 | 14 | |||||||||
|
2013
|
14 | 9 | 15 | |||||||||
|
2014
|
15 | 9 | 17 | |||||||||
|
2015-2019
|
94 | 48 | 112 | |||||||||
Defined
Contribution Plans
The firm contributes to employer-sponsored U.S. and
non-U.S. defined
contribution plans. The firm’s contribution to these plans
was $178 million, $208 million and $258 million
for the years ended December 2009, November 2008 and
November 2007, respectively.
| Note 14. | Employee Incentive Plans |
Stock
Incentive Plan
The firm sponsors a stock incentive plan, The Goldman Sachs
Amended and Restated Stock Incentive Plan (SIP), which provides
for grants of incentive stock options, nonqualified stock
options, stock appreciation rights, dividend equivalent rights,
restricted stock, RSUs, awards with performance conditions and
other
share-based
awards. In the second quarter of 2003, the SIP was approved by
the firm’s shareholders, effective for grants after
April 1, 2003, and was further amended and restated,
effective December 31, 2008.
The total number of shares of common stock that may be delivered
pursuant to awards granted under the SIP through the end of our
2008 fiscal year could not exceed 250 million shares. The
total number of shares of common stock that may be delivered
pursuant to awards granted under the SIP in our 2009 fiscal year
and each fiscal year thereafter cannot exceed 5% of the issued
and outstanding shares of common stock, determined as of the
last day of the immediately preceding fiscal year, increased by
the number of shares available for awards in previous years but
not covered by awards granted in such years. As of
December 2009 and November 2008, 140.6 million
and 162.4 million shares, respectively, were available for
grant under the SIP.
196
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
Compensation Arrangements
The firm has maintained deferred compensation plans for eligible
employees. In general, under the plans, participants were able
to defer payment of a portion of their cash year-end
compensation. During the deferral period, participants were able
to notionally invest their deferrals in certain alternatives
available under the plans. Generally, under current tax law,
participants are not subject to income tax on amounts deferred
or on any notional investment earnings until the returns are
distributed, and the firm is not entitled to a corresponding tax
deduction until the amounts are distributed. Beginning with the
2008 year, these deferred compensation plans were frozen
with respect to new contributions and the plans were terminated.
Participants generally received distributions of their benefits
in 2009 except that no payments were accelerated for certain
senior executives. The firm has recognized compensation expense
for the amounts deferred under these plans. As of
December 2009 and November 2008, $9 million and
$220 million, respectively, related to these plans was
included in “Other liabilities and accrued expenses”
in the consolidated statements of financial condition.
The firm has a discount stock program through which
Participating Managing Directors may be permitted to acquire
RSUs at an effective 25% discount (for 2009 and
2008 year-end compensation, the program was suspended, and
no individual was permitted to acquire discounted RSUs
thereunder). In prior years, the 25% discount was effected by an
additional grant of RSUs equal to
one-third
of
the number of RSUs purchased by qualifying participants. The
purchased RSUs were 100% vested when granted, but the shares
underlying them generally were subject to certain transfer
restrictions (which were waived in December 2008 except for
certain senior executives). The shares underlying the RSUs that
were granted to effect the 25% discount generally vest in equal
installments on the second and third anniversaries following the
grant date and were not transferable before the third
anniversary of the grant date (transfer restrictions on vested
awards were waived in December 2008 except for certain
senior executives). Compensation expense related to these RSUs
is recognized over the vesting period. The total value of RSUs
granted for 2007 in order to effect the 25% discount was
$66 million.
197
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted
Stock Units
The firm issues RSUs to employees under the SIP, primarily in
connection with year-end compensation and acquisitions. RSUs are
valued based on the closing price of the underlying shares on
the date of grant after taking into account a liquidity discount
for any applicable post-vesting transfer restrictions. Year-end
RSUs generally vest and deliver as outlined in the applicable
RSU agreements. All employee RSU agreements provide that vesting
is accelerated in certain circumstances, such as upon
retirement, death and extended absence. Of the total RSUs
outstanding as of December 2009, November 2008 and
December 2008 (i) 16.7 million units,
12.0 million units and 32.0 million units,
respectively, required future service as a condition to the
delivery of the underlying shares of common stock and
(ii) 28.1 million units, 43.9 million units and
44.4 million units, respectively, did not require future
service. In all cases, delivery of the underlying shares of
common stock is conditioned on the grantees satisfying certain
vesting and other requirements outlined in the award agreements.
The activity related to these RSUs is set forth below:
|
Weighted Average Grant-Date
|
||||||||||||||||
|
Restricted Stock
|
Fair Value of Restricted
|
|||||||||||||||
| Units Outstanding | Stock Units Outstanding | |||||||||||||||
|
Future
|
No Future
|
Future
|
No Future
|
|||||||||||||
|
Service
|
Service
|
Service
|
Service
|
|||||||||||||
| Required | Required | Required | Required | |||||||||||||
|
Outstanding, November 2008
|
11,963,864 | 43,883,221 | $ | 203.19 | $ | 182.74 | ||||||||||
|
Granted
(1)(2)
|
20,610,264 | 54,632 | 67.59 | 69.18 | ||||||||||||
|
Forfeited
|
(56,129 | ) | (42,703 | ) | 170.68 | 187.40 | ||||||||||
|
Vested
(2)
|
(507,828 | ) | 507,828 | 168.42 | 168.42 | |||||||||||
|
Outstanding, December 2008
|
32,010,171 | 44,402,978 | $ | 116.49 | $ | 182.44 | ||||||||||
|
Granted
(1)(2)
|
1,106,498 | 8,862 | 151.85 | 83.67 | ||||||||||||
|
Forfeited
|
(1,553,816 | ) | (38,307 | ) | 117.81 | 270.22 | ||||||||||
|
Delivered
(3)
|
— | (31,215,605 | ) | — | 170.47 | |||||||||||
|
Vested
(2)
|
(14,907,659 | ) | 14,907,659 | 113.37 | 113.37 | |||||||||||
|
Outstanding, December 2009
|
16,655,194 | 28,065,587 | $ | 121.50 | $ | 158.91 | ||||||||||
| (1) | The weighted average grant-date fair value of RSUs granted during the years ended December 2009, November 2008 and November 2007 and one month ended December 2008 was $151.31, $154.31, $224.13 and $67.60, respectively. The fair value of the December 2008 grant includes a 14.3% liquidity discount to reflect post-vesting transfer restrictions of up to 4 years. | |
| (2) | The aggregate fair value of awards that vested during the years ended December 2009, November 2008 and November 2007 and one month ended December 2008 was $2.18 billion, $1.03 billion, $5.63 billion and $41 million, respectively. | |
| (3) | Includes RSUs that were cash settled. |
In the first quarter of 2010, the firm granted to its employees
27.1 million year-end RSUs, of which 14.1 million RSUs
require future service as a condition of delivery and
13.0 million RSUs do not require future service. These RSUs
are subject to additional conditions as outlined in the RSU
agreements. Generally, shares underlying RSUs, net of required
withholding tax, vest and deliver over a three-year period but
are subject to post-vesting transfer restrictions through
January 2015. These grants are not included in the above
table.
198
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock
Options
Stock options granted to employees generally vest as outlined in
the applicable stock option agreement. No options were granted
in fiscal 2009. Year-end options granted in December 2008
will become exercisable in
one-third
installments in January 2010, January 2011 and
January 2012. Shares received on exercise cannot be sold,
transferred or otherwise disposed of until January 2014.
Year-end 2008 options will expire on
December 31, 2018. Year-end options granted in
December 2007 will become exercisable in January 2011
and expire on November 24, 2017. Shares received on
exercise of year-end 2007 options cannot be sold, transferred or
otherwise disposed of until January 2013. All employee
stock option agreements provide that vesting is accelerated in
certain circumstances, such as upon retirement, death and
extended absence. In general, all stock options expire on the
tenth anniversary of the grant date, although they may be
subject to earlier termination or cancellation under certain
circumstances in accordance with the terms of the SIP and the
applicable stock option agreement. The dilutive effect of the
firm’s outstanding stock options is included in
“Average common shares outstanding —
Diluted” on the consolidated statements of earnings.
The activity related to these stock options is set forth below:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Aggregate
|
Average
|
||||||||||||||
|
Options
|
Average
|
Intrinsic Value
|
Remaining
|
|||||||||||||
| Outstanding | Exercise Price | (in millions) | Life (years) | |||||||||||||
|
Outstanding, November 2008
|
33,639,132 | $ | 109.47 | |||||||||||||
|
Granted
|
35,988,192 | 78.78 | ||||||||||||||
|
Exercised
|
(32,222 | ) | 53.00 | |||||||||||||
|
Forfeited
|
(93,615 | ) | 78.92 | |||||||||||||
|
Outstanding, December 2008
|
69,501,487 | $ | 93.65 | $ | 29 | 7.17 | ||||||||||
|
Exercised
|
(6,445,370 | ) | 79.77 | |||||||||||||
|
Forfeited
|
(784,020 | ) | 78.85 | |||||||||||||
|
Outstanding, December 2009
|
62,272,097 | $ | 95.27 | $ | 4,781 | 6.64 | ||||||||||
|
Exercisable, December 2009
|
21,164,084 | $ | 92.40 | $ | 1,618 | 2.50 | ||||||||||
The total intrinsic value of options exercised during the years
ended December 2009, November 2008 and
November 2007 and one month ended December 2008 was
$484 million, $433 million, $1.32 billion and
$1 million, respectively.
The options outstanding as of December 2009 are set forth
below:
|
Weighted
|
||||||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||||||
|
Options
|
Average
|
Remaining
|
||||||||||||||||||
|
Exercise Price
|
Outstanding | Exercise Price | Life (years) | |||||||||||||||||
| $ | 75.00 – | $ | 89.99 | 44,123,046 | $ | 79.19 | 7.57 | |||||||||||||
| 90.00 – | 104.99 | 9,376,427 | 91.86 | 1.99 | ||||||||||||||||
| 105.00 – | 119.99 | — | — | — | ||||||||||||||||
| 120.00 – | 134.99 | 2,791,500 | 131.64 | 5.92 | ||||||||||||||||
| 135.00 – | 194.99 | — | — | — | ||||||||||||||||
| 195.00 – | 209.99 | 5,981,124 | 202.27 | 7.48 | ||||||||||||||||
|
Outstanding, December 2009
|
62,272,097 | |||||||||||||||||||
199
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average fair value of options granted for the year
ended 2007 and in the one month ended December 2008 was
$51.04 and $14.08 per option, respectively. Fair value was
estimated as of the grant date based on a Black-Scholes
option-pricing model principally using the following weighted
average assumptions:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
Risk-free
interest rate
|
N/A | N/A | 4.0 | % | 1.1 | % | ||||||||||
|
Expected volatility
|
N/A | N/A | 35.0 | 50.1 | ||||||||||||
|
Annual dividend per share
|
N/A | N/A | $1.40 | $1.40 | ||||||||||||
|
Expected life
|
N/A | N/A | 7.5 years | 4.0 years | ||||||||||||
The common stock underlying the options granted for the year
ended 2007 is subject to transfer restrictions through
January 2013. The common stock underlying the options
granted in the one month ended December 2008 is subject to
transfer restrictions through January 2014. The value of
the common stock underlying the options granted for the year
ended 2007 and in the one month ended December 2008
reflects a liquidity discount of 24.0% and 26.7%, respectively,
as a result of these transfer restrictions. The liquidity
discount was based on the firm’s
pre-determined
written liquidity discount policies.
The following table sets forth
share-based
compensation and the related tax benefit:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Share-based
compensation
|
$ | 2,030 | $ | 1,587 | $ | 4,549 | $ | 180 | ||||||||
|
Excess tax benefit related to options exercised
|
166 | 144 | 469 | — | ||||||||||||
|
Excess tax benefit/(provision) related to
share-based
compensation
(1)
|
(793 | ) | 645 | 908 | — | |||||||||||
| (1) | Represents the tax benefit/(provision), recognized in additional paid-in capital, on stock options exercised and the delivery of common stock underlying RSUs. |
As of December 2009, there was $983 million of total
unrecognized compensation cost related to nonvested
share-based
compensation arrangements. This cost is expected to be
recognized over a weighted average period of 1.59 years.
| Note 15. | 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
$2.52 billion, $3.14 billion, $3.62 billion and
$206 million for the years ended December 2009,
November 2008 and November 2007 and one month ended
December 2008, respectively. As of December 2009 and
November 2008, the fees receivable from these funds were
$1.04 billion and $861 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 $13.84 billion and
$14.45 billion as of December 2009 and
November 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.
200
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 16. | Income Taxes |
The components of the net tax expense reflected in the
consolidated statements of earnings are set forth below:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Current taxes
|
||||||||||||||||
|
U.S. federal
|
$ | 4,039 | $ | (278 | ) | $ | 2,934 | $ | 157 | |||||||
|
State and local
|
594 | 91 | 388 | 10 | ||||||||||||
|
Non-U.S.
|
2,242 | 1,964 | 2,554 | 287 | ||||||||||||
|
Total current tax expense
|
6,875 | 1,777 | 5,876 | 454 | ||||||||||||
|
Deferred taxes
|
||||||||||||||||
|
U.S. federal
|
(763 | ) | (880 | ) | 118 | (857 | ) | |||||||||
|
State and local
|
(130 | ) | (92 | ) | 100 | (26 | ) | |||||||||
|
Non-U.S.
|
462 | (791 | ) | (89 | ) | (49 | ) | |||||||||
|
Total deferred tax (benefit)/expense
|
(431 | ) | (1,763 | ) | 129 | (932 | ) | |||||||||
|
Net tax expense
|
$ | 6,444 | $ | 14 | $ | 6,005 | $ | (478 | ) | |||||||
Deferred income taxes reflect the net tax effects of temporary
differences between the financial reporting and tax bases of
assets and liabilities. These temporary differences result in
taxable or deductible amounts in future years and are measured
using the tax rates and laws that will be in effect when such
differences are expected to reverse.
Significant components of the firm’s deferred tax assets
and liabilities are set forth below:
| As of | ||||||||
|
December
|
November
|
|||||||
| 2009 | 2008 | |||||||
| (in millions) | ||||||||
|
Deferred tax assets
|
||||||||
|
Compensation and benefits
|
$ | 3,338 | $ | 3,732 | ||||
|
Unrealized losses
|
1,754 | 375 | ||||||
|
ASC 740 asset
|
1,004 | 625 | ||||||
|
Non-U.S. operations
|
807 | 657 | ||||||
|
Foreign tax credits
|
277 | 334 | ||||||
|
Net operating losses
|
184 | 212 | ||||||
|
Occupancy related
|
159 | 137 | ||||||
|
Other, net
|
427 | 194 | ||||||
| 7,950 | 6,266 | |||||||
|
Valuation
allowance
(1)
|
(74 | ) | (93 | ) | ||||
|
Total deferred tax
assets
(2)
|
$ | 7,876 | $ | 6,173 | ||||
|
Total deferred tax
liabilities
(2)(3)
|
$ | 1,611 | $ | 1,558 | ||||
| (1) | Relates primarily to the ability to utilize losses in various tax jurisdictions. | |
| (2) | Before netting within tax jurisdictions. | |
| (3) | Relates to depreciation and amortization. |
201
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm permanently reinvests eligible earnings of certain
foreign subsidiaries and, accordingly, does not accrue any
U.S. income taxes that would arise if such earnings were
repatriated. As of December 2009 and November 2008,
this policy resulted in an unrecognized net deferred tax
liability of $2.34 billion and $1.08 billion,
respectively, attributable to reinvested earnings of
$16.21 billion and $11.60 billion, respectively.
During both 2009 and 2008, the valuation allowance was decreased
by $19 million, primarily due to the utilization of losses
previously considered more likely than not to expire unused.
The firm had federal net operating loss carryforwards, primarily
resulting from acquisitions, of $266 million and
$172 million as of December 2009 and
November 2008, respectively. The firm recorded a related
net deferred income tax asset of $91 million and
$56 million as of December 2009 and
November 2008, respectively. These carryforwards are
subject to annual limitations on utilization and will begin to
expire in 2016.
The firm had state and local net operating loss carryforwards,
primarily resulting from acquisitions, of $1.78 billion and
$2.59 billion as of December 2009 and
November 2008, respectively. The firm recorded a related
net deferred income tax asset of $47 million and
$97 million as of December 2009 and
November 2008, respectively. These carryforwards are
subject to annual limitations on utilization and will begin to
expire in 2012.
The firm had foreign net operating loss carryforwards of
$24 million and $5 million as of December 2009
and November 2008, respectively. No net deferred tax asset
was recorded for these losses as it is more likely than not that
the asset will not be realized. These carryforwards are subject
to limitation on utilization and can be carried forward
indefinitely.
The firm recorded valuation allowances on net operating losses
of $46 million and $60 million as of
December 2009 and November 2008, respectively.
The firm had foreign tax credit carryforwards of
$277 million and $334 million as of December 2009
and November 2008, respectively. These carryforwards are
subject to limitation on utilization and will begin to expire in
2019.
The firm had capital loss carryforwards of $99 million and
$50 million as of December 2009 and
November 2008, respectively. The firm recorded a related
net deferred income tax asset of $35 million and
$17 million as of December 2009 and
November 2008, respectively. These carryforwards are
subject to annual limitations on utilization and will begin to
expire in 2010.
The firm adopted amended principles related to accounting for
uncertainty in income taxes as of December 1, 2007 and
recorded a transition adjustment resulting in a reduction of
$201 million to beginning retained earnings.
The following table sets forth the changes in the firm’s
unrecognized tax benefits (in millions):
| 2009 | 2008 | |||||||
|
Balance, beginning of year
|
$ | 1,548 | (1) | $ | 1,042 | |||
|
Increases based on tax positions related to the current year
|
143 | 172 | ||||||
|
Increases based on tax positions related to prior years
|
379 | 264 | ||||||
|
Decreases related to tax positions of prior years
|
(19 | ) | (67 | ) | ||||
|
Decreases related to settlements
|
(91 | ) | (38 | ) | ||||
|
Exchange rate fluctuations
|
(35 | ) | — | |||||
|
Balance, end of year
|
$ | 1,925 | $ | 1,373 | ||||
| (1) | Includes $175 million recorded in the one month ended December 2008. |
202
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 2009 and November 2008, the firm’s
liability for unrecognized tax benefits reported in “Other
liabilities and accrued expenses” in the consolidated
statements of financial condition was $1.93 billion and
$1.37 billion, respectively. As of December 2009 and
November 2008, the firm reported a related deferred tax
asset of $1.00 billion and $625 million, respectively,
in “Other assets” in the consolidated statements of
financial condition. If recognized, the net tax benefit of
$921 million and $748 million, would reduce the
firm’s effective income tax rate as of December 2009
and November 2008, respectively. As of December 2009
and November 2008, the firm’s accrued liability for
interest expense related to income tax matters and income tax
penalties was $194 million and $111 million,
respectively. The firm reports interest expense related to
income tax matters in “Provision for taxes” in the
consolidated statements of earnings and income tax penalties in
“Other expenses” in the consolidated statements of
earnings. The firm recognized $62 million, $37 million
and $3 million of interest and income tax penalties for the
years ended December 2009 and November 2008 and one
month ended December 2008, respectively. It is reasonably
possible that unrecognized tax benefits could change
significantly during the twelve months subsequent to
December 2009. At this time, it is not possible to estimate
the change or its impact on the firm’s effective tax rate
over the next twelve months.
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.
Below is a table of the earliest tax years that remain subject
to examination by major jurisdiction:
|
As of
|
||||||||
|
Jurisdiction
|
December 2009 | |||||||
|
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. IRS examination of fiscal 2003 and 2004 has been completed but the liabilities for those years are not yet final. | |
| (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.
203
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the U.S. federal statutory income tax
rate to the firm’s effective income tax rate is set forth
below:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
|
U.S. federal statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
|
Increase related to state and local taxes, net of
U.S. income tax effects
|
1.5 | — | 1.8 | 0.8 | ||||||||||||
|
Tax credits
|
(0.3 | ) | (4.3 | ) | (0.5 | ) | 0.8 | |||||||||
|
Foreign operations
|
(3.5 | ) | (29.8 | ) | (1.6 | ) | 4.3 | |||||||||
|
Tax-exempt
income, including dividends
|
(0.4 | ) | (5.9 | ) | (0.4 | ) | 1.0 | |||||||||
|
Other
|
0.2 | 5.6 | (1) | (0.2 | ) (2) | (3.9 | ) | |||||||||
|
Effective income tax rate
|
32.5 | % | 0.6 | % | 34.1 | % | 38.0 | % | ||||||||
| (1) | Primarily includes the effect of the liability increase as a result of adopting amended principles related to accounting for uncertainty in income taxes. | |
| (2) | Primarily includes the effect of audit settlements. |
Tax benefits/(provision) of approximately $(793) million,
$645 million, $908 million and $0 for the years ended
December 2009, November 2008 and November 2007
and one month ended December 2008, respectively, related to
the delivery of common stock underlying RSUs and the exercise of
options, were recorded in “Additional
paid-in
capital” in the consolidated statements of financial
condition and changes in shareholders’ equity.
| Note 17. | Regulation and Capital Adequacy |
The Federal Reserve Board is the primary U.S. regulator of
Group Inc., a bank holding company that in August 2009
also became a financial holding company under the
U.S. Gramm-Leach-Bliley
Act of 1999. 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 amounts, 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.
204
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth information regarding
Group Inc.’s capital ratios as of December 2009
calculated in accordance with the Federal Reserve Board’s
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 calculation of these ratios includes certain
market risk measures that are under review by the Federal
Reserve Board. The calculation of these ratios has not been
reviewed with the Federal Reserve Board and, accordingly, these
ratios may be revised in subsequent filings.
|
As of
|
||||
| December 2009 | ||||
| ($ in millions) | ||||
|
Tier 1 capital
|
$ | 64,642 | ||
|
Tier 2 capital
|
13,828 | |||
|
Total capital
|
78,470 | |||
|
Risk-weighted
assets
|
431,890 | |||
|
Tier 1 capital ratio
|
15.0 | % | ||
|
Total capital ratio
|
18.2 | % | ||
|
Tier 1 leverage ratio
|
7.6 | % | ||
Risk-Weighted
Assets (RWAs) under the Federal Reserve Board’s
risk-based
capital guidelines are calculated based on the amount of market
risk and credit risk. RWAs for market risk include certain
measures that are under review by the Federal Reserve Board.
Credit risk for on-balance sheet assets is based on the balance
sheet value. For off-balance sheet exposures, including OTC
derivatives and commitments, a credit equivalent amount is
calculated based on the notional of each trade. All such assets
and amounts are then assigned a risk weight depending on, among
other things, whether the counterparty is a sovereign, bank or
qualifying securities firm, or other entity (or if collateral is
held, depending on the nature of the collateral).
The firm’s 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
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%.
The firm is currently working to implement the requirements 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 applicable
to it as a bank holding company. 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 several years.
205
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GS Bank USA, a New York State-chartered bank and a member of the
Federal Reserve System and the Federal Deposit Insurance
Corporation (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%.
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 December 2009.
|
As of
|
||||
| December 2009 | ||||
|
Tier 1 capital ratio
|
14.9 | % | ||
|
Total capital ratio
|
19.3 | % | ||
|
Tier 1 leverage ratio
|
15.4 | % | ||
Consistent with the calculation of Group Inc.’s
capital ratios, the calculation of GS Bank USA’s capital
ratios includes certain market risk measures that are under
review by the Federal Reserve Board. Accordingly, these ratios
may be revised in subsequent filings. 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 $27.43 billion and $94 million as of
December 2009 and November 2008, respectively, which
exceeded required reserve amounts by $25.86 billion and
$6 million as of December 2009 and November 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
December 2009 and November 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.
206
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 December 2009, GS&Co. had regulatory net
capital, as defined by
Rule 15c3-1,
of $13.65 billion, which exceeded the amount required by
$11.81 billion. As of December 2009, GSEC had
regulatory net capital, as defined by
Rule 15c3-1,
of $1.97 billion, which exceeded the amount required by
$1.86 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
December 2009 and November 2008, GS&Co. had
tentative net capital and net capital in excess of both the
minimum and the notification requirements.
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 part of the
Lloyd’s market (which is regulated by the U.K.’s
Financial Services Authority (FSA)) and certain are regulated by
the Bermuda Monetary Authority. The firm’s insurance
subsidiaries were in compliance with all regulatory capital
requirements as of December 2009 and November 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 December 2009 and
November 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 December 2009 and November 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. As of December 2009 and
November 2008, approximately $23.49 billion and
$26.92 billion, respectively, of net assets of regulated
subsidiaries were restricted as to the payment of dividends to
Group Inc. 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.
207
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 18. | 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.
Basis of
Presentation
In reporting segments, certain of the firm’s business lines
have been aggregated where they have similar economic
characteristics and are similar in each of the following areas:
(i) the nature of the services they provide,
(ii) their methods of distribution, (iii) the types of
clients they serve and (iv) the regulatory environments in
which they operate.
The cost drivers of the firm taken as a whole —
compensation, headcount and levels of business
activity — are broadly similar in each of the
firm’s business segments. Compensation and benefits
expenses within the firm’s segments reflect, among other
factors, the overall performance of the firm as well as the
performance of individual business units. Consequently,
pre-tax
margins in one segment of the firm’s business may be
significantly affected by the performance of the firm’s
other business segments.
The firm allocates revenues and expenses among the three
business segments. Due to the integrated nature of these
segments, estimates and judgments have been made in allocating
certain revenue and expense items. Transactions between segments
are based on specific criteria or approximate
third-party
rates. Total operating expenses include corporate items that
have not been allocated to individual business segments. The
allocation process is based on the manner in which management
views the business of the firm.
The segment information presented in the table below is prepared
according to the following methodologies:
| • | Revenues and expenses directly associated with each segment are included in determining pre-tax earnings. | |
| • | Net revenues in the firm’s 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. Net interest is included within segment net revenues as it is consistent with the way in which management assesses segment performance. | |
| • | Overhead expenses not directly allocable to specific segments are allocated ratably based on direct segment expenses. |
208
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 | ||||||||||||||||||
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||||
| (in millions) | ||||||||||||||||||
|
Investment
|
Net revenues | $ | 4,797 | $ | 5,185 | $ | 7,555 | $ | 135 | |||||||||
|
Banking
|
Operating expenses | 3,527 | 3,143 | 4,985 | 169 | |||||||||||||
| Pre-tax earnings/(loss) | $ | 1,270 | $ | 2,042 | $ | 2,570 | $ | (34 | ) | |||||||||
| Segment assets | $ | 1,482 | $ | 1,948 | $ | 5,526 | $ | 1,491 | ||||||||||
|
Trading and
|
Net revenues | $ | 34,373 | $ | 9,063 | $ | 31,226 | $ | (507 | ) | ||||||||
|
Principal
|
Operating expenses | 17,053 | 11,808 | 17,998 | 875 | |||||||||||||
|
Investments
|
Pre-tax earnings/(loss) | $ | 17,320 | $ | (2,745 | ) | $ | 13,228 | $ | (1,382 | ) | |||||||
| Segment assets | $ | 662,754 | $ | 645,267 | $ | 744,647 | $ | 871,323 | ||||||||||
|
Asset Management
|
Net revenues | $ | 6,003 | $ | 7,974 | $ | 7,206 | $ | 555 | |||||||||
|
and Securities
|
Operating expenses | 4,660 | 4,939 | 5,363 | 329 | |||||||||||||
|
Services
|
Pre-tax earnings | $ | 1,343 | $ | 3,035 | $ | 1,843 | $ | 226 | |||||||||
| Segment assets | $ | 184,706 | $ | 237,332 | $ | 369,623 | $ | 239,411 | ||||||||||
|
Total
|
Net revenues (1)(2) | $ | 45,173 | $ | 22,222 | $ | 45,987 | $ | 183 | |||||||||
| Operating expenses (3) | 25,344 | 19,886 | 28,383 | 1,441 | ||||||||||||||
| Pre-tax earnings/(loss) (4) | $ | 19,829 | $ | 2,336 | $ | 17,604 | $ | (1,258 | ) | |||||||||
| Total assets | $ | 848,942 | $ | 884,547 | $ | 1,119,796 | $ | 1,112,225 | ||||||||||
| (1) | Net revenues include net interest income as set forth in the table below: |
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Investment Banking
|
$ | — | $ | 6 | $ | — | $ | — | ||||||||
|
Trading and Principal Investments
|
5,494 | 968 | 1,512 | 457 | ||||||||||||
|
Asset Management and Securities Services
|
1,913 | 3,302 | 2,475 | 228 | ||||||||||||
|
Total net interest
|
$ | 7,407 | $ | 4,276 | $ | 3,987 | $ | 685 | ||||||||
| (2) | Net revenues include non-interest revenues as set forth in the table below: |
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Investment banking fees
|
$ | 4,797 | $ | 5,179 | $ | 7,555 | $ | 135 | ||||||||
|
Equities commissions
|
3,840 | 4,998 | 4,579 | 251 | ||||||||||||
|
Asset management and other fees
|
4,090 | 4,672 | 4,731 | 327 | ||||||||||||
|
Trading and principal investments revenues
|
25,039 | 3,097 | 25,135 | (1,215 | ) | |||||||||||
|
Total
non-interest
revenues
|
$ | 37,766 | $ | 17,946 | $ | 42,000 | $ | (502 | ) | |||||||
209
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Trading and principal investments revenues include
$36 million, $(61) million, $6 million and $(2)
million for the years ended December 2009,
November 2008 and November 2007 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.
| (3) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $104 million, $(4) million, $37 million and $68 million for the years ended December 2009, November 2008 and November 2007 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: |
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Investment Banking
|
$ | 159 | $ | 187 | $ | 137 | $ | 14 | ||||||||
|
Trading and Principal Investments
|
1,510 | 1,161 | 845 | 101 | ||||||||||||
|
Asset Management and Securities Services
|
274 | 277 | 185 | 28 | ||||||||||||
|
Total depreciation and amortization
|
$ | 1,943 | $ | 1,625 | $ | 1,167 | $ | 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.
Geographic results are generally allocated as follows:
| • | Investment Banking: location of the client and investment banking team. | |
| • | Fixed Income, Currency and Commodities, and Equities: location of the trading desk. | |
| • | Principal Investments: location of the investment. | |
| • | Asset Management: location of the sales team. | |
| • | Securities Services: location of the primary market for the underlying security. |
210
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the total net revenues,
pre-tax
earnings and net earnings of the firm by geographic region
allocated based on the methodology referred to above, as well as
the percentage of total net revenues,
pre-tax
earnings and net earnings for each geographic region:
| Year Ended | One Month Ended | |||||||||||||||||||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||
|
Net revenues
|
||||||||||||||||||||||||||||||||
|
Americas
(1)
|
$ | 25,313 | 56 | % | $ | 15,485 | 70 | % | $ | 23,412 | 51 | % | $ | 197 | N.M. | |||||||||||||||||
|
EMEA
(2)
|
11,595 | 26 | 5,910 | 26 | 13,538 | 29 | (440 | ) | N.M. | |||||||||||||||||||||||
|
Asia
|
8,265 | 18 | 827 | 4 | 9,037 | 20 | 426 | N.M. | ||||||||||||||||||||||||
|
Total net revenues
|
$ | 45,173 | 100 | % | $ | 22,222 | 100 | % | $ | 45,987 | 100 | % | $ | 183 | 100 | % | ||||||||||||||||
|
Pre-tax
earnings/(loss)
|
||||||||||||||||||||||||||||||||
|
Americas
(1)
|
$ | 10,690 | 54 | % | $ | 4,879 | N.M. | $ | 7,673 | 43 | % | $ | (555 | ) | N.M. | |||||||||||||||||
|
EMEA
(2)
|
5,411 | 27 | 169 | N.M. | 5,458 | 31 | (806 | ) | N.M. | |||||||||||||||||||||||
|
Asia
|
3,832 | 19 | (2,716 | ) | N.M. | 4,510 | 26 | 171 | N.M. | |||||||||||||||||||||||
|
Corporate
(3)
|
(104 | ) | N.M. | 4 | N.M. | (37 | ) | N.M. | (68 | ) | N.M. | |||||||||||||||||||||
|
Total
pre-tax
earnings/(loss)
|
$ | 19,829 | 100 | % | $ | 2,336 | 100 | % | $ | 17,604 | 100 | % | $ | (1,258 | ) | 100 | % | |||||||||||||||
|
Net earnings/(loss)
|
||||||||||||||||||||||||||||||||
|
Americas
(1)
|
$ | 6,639 | 49 | % | $ | 3,371 | N.M. | $ | 4,981 | 43 | % | $ | (366 | ) | N.M. | |||||||||||||||||
|
EMEA
(2)
|
4,129 | 31 | 694 | N.M. | 3,735 | 32 | (498 | ) | N.M. | |||||||||||||||||||||||
|
Asia
|
2,686 | 20 | (1,746 | ) | N.M. | 2,907 | 25 | 130 | N.M. | |||||||||||||||||||||||
|
Corporate
(3)
|
(69 | ) | N.M. | 3 | N.M. | (24 | ) | N.M. | (46 | ) | N.M. | |||||||||||||||||||||
|
Total net earnings/(loss)
|
$ | 13,385 | 100 | % | $ | 2,322 | 100 | % | $ | 11,599 | 100 | % | $ | (780 | ) | 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. |
211
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 19. | Interest Income and Interest Expense |
The following table sets forth the details of the firm’s
interest income and interest expense:
| Year Ended | One Month Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| 2009 | 2008 | 2007 | 2008 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Interest
income
(1)
|
||||||||||||||||
|
Deposits with banks
|
$ | 65 | $ | 188 | $ | 119 | $ | 2 | ||||||||
|
Securities borrowed, securities purchased under agreements to
resell and federal funds sold
|
951 | 11,746 | 18,013 | 301 | ||||||||||||
|
Trading assets, at fair value
|
11,106 | 13,150 | 13,120 | 1,172 | ||||||||||||
|
Other
interest
(2)
|
1,785 | 10,549 | 14,716 | 212 | ||||||||||||
|
Total interest income
|
$ | 13,907 | $ | 35,633 | $ | 45,968 | $ | 1,687 | ||||||||
|
Interest expense
|
||||||||||||||||
|
Deposits
|
$ | 415 | $ | 756 | $ | 677 | $ | 51 | ||||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
1,317 | 7,414 | 12,612 | 229 | ||||||||||||
|
Trading liabilities, at fair value
|
1,854 | 2,789 | 3,866 | 174 | ||||||||||||
|
Short-term
borrowings
(3)
|
623 | 1,864 | 3,398 | 107 | ||||||||||||
|
Long-term
borrowings
(4)
|
2,585 | 6,975 | 6,830 | 297 | ||||||||||||
|
Other
interest
(5)
|
(294 | ) | 11,559 | 14,598 | 144 | |||||||||||
|
Total interest expense
|
$ | 6,500 | $ | 31,357 | $ | 41,981 | $ | 1,002 | ||||||||
|
Net interest income
|
$ | 7,407 | $ | 4,276 | $ | 3,987 | $ | 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. |
212
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Note 20. | Parent Company |
Group Inc. —
Condensed Statements of Earnings
|
One
|
||||||||||||||||
|
Month
|
||||||||||||||||
| Year Ended | Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| (in millions) | 2009 | 2008 | 2007 | 2008 | ||||||||||||
|
Revenues
|
||||||||||||||||
|
Dividends from bank subsidiary
|
$ | — | $ | 2,922 | $ | 18 | $ | 5 | ||||||||
|
Dividends from nonbank subsidiaries
|
8,793 | 3,716 | 4,273 | 130 | ||||||||||||
|
Undistributed earnings/(loss) of subsidiaries
|
5,884 | (3,971 | ) | 6,708 | (1,115 | ) | ||||||||||
|
Other revenues
|
(1,018 | ) | (2,886 | ) | 2,062 | (1,004 | ) | |||||||||
|
Interest income
|
4,565 | 7,167 | 9,049 | 462 | ||||||||||||
|
|
||||||||||||||||
|
Total revenues
|
18,224 | 6,948 | 22,110 | (1,522 | ) | |||||||||||
|
Interest expense
|
3,112 | 8,229 | 8,914 | 448 | ||||||||||||
|
Revenues, net of interest expense
|
15,112 | (1,281 | ) | 13,196 | (1,970 | ) | ||||||||||
|
Operating expenses
|
||||||||||||||||
|
Compensation and benefits
|
637 | 122 | 780 | (94 | ) | |||||||||||
|
Other expenses
|
1,034 | 471 | 281 | 32 | ||||||||||||
|
Total operating expenses
|
1,671 | 593 | 1,061 | (62 | ) | |||||||||||
|
Pre-tax
earnings/(loss)
|
13,441 | (1,874 | ) | 12,135 | (1,908 | ) | ||||||||||
|
Provision/(benefit) for taxes
|
56 | (4,196 | ) | 536 | (1,128 | ) | ||||||||||
|
Net earnings/(loss)
|
13,385 | 2,322 | 11,599 | (780 | ) | |||||||||||
|
Preferred stock dividends
|
1,193 | 281 | 192 | 248 | ||||||||||||
|
Net earnings/(loss) applicable to common shareholders
|
$ | 12,192 | $ | 2,041 | $ | 11,407 | $ | (1,028 | ) | |||||||
|
|
||||||||||||||||
Group Inc. —
Condensed Statements of Financial Condition
| As of | ||||||||
|
December
|
November
|
|||||||
| (in millions) | 2009 | 2008 | ||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 1,140 | $ | 1,035 | ||||
|
Loans to and receivables from subsidiaries
|
||||||||
|
Bank subsidiary
|
5,564 | 19,247 | ||||||
|
Nonbank subsidiaries
|
177,952 | 157,086 | ||||||
|
Investments in subsidiaries and associates
|
||||||||
|
Bank subsidiary
|
17,318 | 13,322 | ||||||
|
Nonbank subsidiaries and associates
|
48,421 | 38,375 | ||||||
|
Trading assets, at fair value
|
23,977 | 40,171 | ||||||
|
Other assets
|
11,254 | 10,414 | ||||||
|
Total assets
|
$ | 285,626 | $ | 279,650 | ||||
|
Liabilities and shareholders’ equity
|
||||||||
|
Unsecured
short-term
borrowings
(1)
|
||||||||
|
With third parties
|
$ | 24,604 | $ | 37,941 | ||||
|
With subsidiaries
|
4,208 | 7,462 | ||||||
|
Payables to subsidiaries
|
509 | 754 | ||||||
|
Trading liabilities, at fair value
|
1,907 | 3,530 | ||||||
|
Other liabilities
|
6,682 | 5,247 | ||||||
|
Unsecured
long-term
borrowings
(2)
|
||||||||
|
With third parties
|
175,300 | 158,472 | ||||||
|
With
subsidiaries
(3)
|
1,702 | 1,875 | ||||||
|
Total liabilities
|
214,912 | 215,281 | ||||||
|
Commitments, contingencies and guarantees
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Preferred stock
|
6,957 | 16,471 | ||||||
|
Common stock
|
8 | 7 | ||||||
|
Restricted stock units and employee stock options
|
6,245 | 9,284 | ||||||
|
Additional
paid-in
capital
|
39,770 | 31,071 | ||||||
|
Retained earnings
|
50,252 | 39,913 | ||||||
|
Accumulated other comprehensive loss
|
(362 | ) | (202 | ) | ||||
|
Common stock held in treasury, at cost
|
(32,156 | ) | (32,175 | ) | ||||
|
Total shareholders’ equity
|
70,714 | 64,369 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 285,626 | $ | 279,650 | ||||
|
|
||||||||
Group Inc. —
Condensed Statements of Cash Flows
|
One
|
||||||||||||||||
|
Month
|
||||||||||||||||
| Year Ended | Ended | |||||||||||||||
|
December
|
November
|
November
|
December
|
|||||||||||||
| (in millions) | 2009 | 2008 | 2007 | 2008 | ||||||||||||
|
Cash flows from operating activities
|
||||||||||||||||
|
Net earnings/(loss)
|
$ | 13,385 | $ | 2,322 | $ | 11,599 | $ | (780 | ) | |||||||
|
Non-cash
items included in net earnings
|
||||||||||||||||
|
Undistributed (earnings)/loss of subsidiaries
|
(5,884 | ) | 3,971 | (6,708 | ) | 1,115 | ||||||||||
|
Depreciation and
amortization
(4)
|
39 | 36 | 35 | 3 | ||||||||||||
|
Deferred income taxes
|
(3,347 | ) | (2,178 | ) | 877 | (847 | ) | |||||||||
|
Share-based
compensation
|
100 | 40 | 459 | — | ||||||||||||
|
Changes in operating assets and liabilities
|
||||||||||||||||
|
Trading assets, at fair value
|
24,382 | (4,661 | ) | (17,795 | ) | (8,188 | ) | |||||||||
|
Trading liabilities, at fair value
|
(1,032 | ) | 1,559 | 86 | (557 | ) | ||||||||||
|
Other,
net
(4)
|
10,081 | (12,162 | ) | 12,111 | 4,091 | |||||||||||
|
Net cash provided by/(used for) operating activities
|
37,724 | (11,073 | ) | 664 | (5,163 | ) | ||||||||||
|
Cash flows from investing activities
|
||||||||||||||||
|
Purchase of property, leasehold improvements and equipment
|
(5 | ) | (49 | ) | (29 | ) | — | |||||||||
|
Proceeds from sales of property, leasehold improvements and
equipment
|
— | — | 11 | — | ||||||||||||
|
Issuance of short-term loans to subsidiaries, net of repayments
|
(6,335 | ) | 3,701 | (22,668 | ) | 1,923 | ||||||||||
|
Issuance of term loans to subsidiaries
|
(13,823 | ) | (14,242 | ) | (48,299 | ) | (1,687 | ) | ||||||||
|
Repayments of term loans by subsidiaries
|
9,601 | 24,925 | 41,143 | 714 | ||||||||||||
|
Capital contributions to subsidiaries, net
|
(2,781 | ) | (22,245 | ) | (4,517 | ) | (6,179 | ) | ||||||||
|
Net cash used for investing activities
|
(13,343 | ) | (7,910 | ) | (34,359 | ) | (5,229 | ) | ||||||||
|
Cash flows from financing activities
|
||||||||||||||||
|
Unsecured
short-term
borrowings, net
|
(13,266 | ) | (10,564 | ) | 3,255 | 4,616 | ||||||||||
|
Secured
short-term
financings, net
|
— | — | (380 | ) | — | |||||||||||
|
Proceeds from issuance of
long-term
borrowings
|
22,814 | 35,645 | 53,041 | 9,171 | ||||||||||||
|
Repayment of
long-term
borrowings, including the current portion
|
(27,374 | ) | (23,959 | ) | (13,984 | ) | (3,358 | ) | ||||||||
|
Common stock repurchased
|
(2 | ) | (2,034 | ) | (8,956 | ) | (1 | ) | ||||||||
|
Preferred stock repurchased
|
(9,574 | ) | — | — | — | |||||||||||
|
Repurchase of common stock warrants
|
(1,100 | ) | — | — | — | |||||||||||
|
Dividends and dividend equivalents paid on common stock,
preferred stock and restricted stock units
|
(2,205 | ) | (850 | ) | (831 | ) | — | |||||||||
|
Proceeds from issuance of common stock, including stock option
exercises
|
6,260 | 6,105 | 791 | 2 | ||||||||||||
|
Proceeds from issuance of preferred stock, net of issuance costs
|
— | 13,366 | — | — | ||||||||||||
|
Proceeds from issuance of common stock warrants
|
— | 1,633 | — | — | ||||||||||||
|
Excess tax benefit related to
share-based
compensation
|
135 | 614 | 817 | — | ||||||||||||
|
Cash settlement of
share-based
compensation
|
(2 | ) | — | (1 | ) | — | ||||||||||
|
Net cash provided by/(used for) financing activities
|
(24,314 | ) | 19,956 | 33,752 | 10,430 | |||||||||||
|
Net increase in cash and cash equivalents
|
67 | 973 | 57 | 38 | ||||||||||||
|
Cash and cash equivalents, beginning of year
|
1,073 | 62 | 5 | 1,035 | ||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 1,140 | $ | 1,035 | $ | 62 | $ | 1,073 | ||||||||
|
|
||||||||||||||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for
third-party
interest, net of capitalized interest, were $2.77 billion,
$7.18 billion, $7.78 billion and $248 million for
the years ended December 2009, November 2008 and
November 2007 and one month ended December 2008,
respectively.
Cash payments for income taxes, net
of refunds, were $2.77 billion, $991 million,
$3.27 billion and $1 million for the years ended
December 2009, November 2008 and November 2007
and one month ended December 2008, respectively.
|
(1)
Includes
$6.57 billion and $11.67 billion at fair value as of
December 2009 and November 2008, respectively.
|
||
|
(2)
Includes
$13.67 billion and $10.90 billion at fair value as of
December 2009 and November 2008, respectively.
|
||
|
(3)
Unsecured
long-term
borrowings with subsidiaries by maturity date are $1.05 billion
in 2011, $98 million in 2012, $179 million in 2013,
$64 million in 2014 and $309 million in
2015-thereafter.
|
||
|
(4)
Prior
periods have been reclassified to conform to the current
presentation.
|
213
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Quarterly Results
(unaudited)
The following represents the firm’s unaudited quarterly
results for the fiscal years ended December 2009 and
November 2008. These quarterly results were prepared in
accordance with generally accepted accounting principles and
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results. These adjustments
are of a normal recurring nature.
| Three Months Ended (1) | ||||||||||||||||
|
March
|
June
|
September
|
December
|
|||||||||||||
| 2009 | 2009 | 2009 | 2009 | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
|
Total
non-interest
revenues
|
$ | 7,518 | $ | 11,719 | $ | 10,682 | $ | 7,847 | ||||||||
|
Interest income
|
4,362 | 3,470 | 3,000 | 3,075 | ||||||||||||
|
Interest expense
|
2,455 | 1,428 | 1,310 | 1,307 | ||||||||||||
|
Net interest income
|
1,907 | 2,042 | 1,690 | 1,768 | ||||||||||||
|
Net revenues, including net interest income
|
9,425 | 13,761 | 12,372 | 9,615 | ||||||||||||
|
Operating
expenses
(2)
|
6,796 | 8,732 | 7,578 | 2,238 | ||||||||||||
|
Pre-tax
earnings
|
2,629 | 5,029 | 4,794 | 7,377 | ||||||||||||
|
Provision for taxes
|
815 | 1,594 | 1,606 | 2,429 | ||||||||||||
|
Net earnings
|
1,814 | 3,435 | 3,188 | 4,948 | ||||||||||||
|
Preferred stock dividends
|
155 | 717 | 160 | 161 | ||||||||||||
|
Net earnings applicable to common shareholders
|
$ | 1,659 | $ | 2,718 | $ | 3,028 | $ | 4,787 | ||||||||
|
Earnings per common share
|
||||||||||||||||
|
Basic
|
$ | 3.48 | $ | 5.27 | $ | 5.74 | $ | 9.01 | ||||||||
|
Diluted
|
3.39 | 4.93 | 5.25 | 8.20 | ||||||||||||
|
Dividends declared per common share
|
— | 0.35 | 0.35 | 0.35 | ||||||||||||
| Three Months Ended (1) | ||||||||||||||||
|
February
|
May
|
August
|
November
|
|||||||||||||
| 2008 | 2008 | 2008 | 2008 | |||||||||||||
| (in millions, except per share data) | ||||||||||||||||
|
Total
non-interest
revenues
|
$ | 7,384 | $ | 8,145 | $ | 4,908 | $ | (2,491 | ) | |||||||
|
Interest income
|
11,245 | 9,498 | 8,717 | 6,173 | ||||||||||||
|
Interest expense
|
10,294 | 8,221 | 7,582 | 5,260 | ||||||||||||
|
Net interest income
|
951 | 1,277 | 1,135 | 913 | ||||||||||||
|
Net revenues, including net interest income
|
8,335 | 9,422 | 6,043 | (1,578 | ) | |||||||||||
|
Operating
expenses
(2)
|
6,192 | 6,590 | 5,083 | 2,021 | ||||||||||||
|
Pre-tax
earnings/(loss)
|
2,143 | 2,832 | 960 | (3,599 | ) | |||||||||||
|
Provision/(benefit) for taxes
|
632 | 745 | 115 | (1,478 | ) | |||||||||||
|
Net earnings/(loss)
|
1,511 | 2,087 | 845 | (2,121 | ) | |||||||||||
|
Preferred stock dividends
|
44 | 36 | 35 | 166 | ||||||||||||
|
Net earnings/(loss) applicable to common shareholders
|
$ | 1,467 | $ | 2,051 | $ | 810 | $ | (2,287 | ) | |||||||
|
Earnings/(loss) per common share
|
||||||||||||||||
|
Basic
|
$ | 3.39 | $ | 4.80 | $ | 1.89 | $ | (4.97 | ) | |||||||
|
Diluted
|
3.23 | 4.58 | 1.81 | (4.97 | ) | |||||||||||
|
Dividends declared per common share
|
0.35 | 0.35 | 0.35 | 0.35 | ||||||||||||
| (1) | Financial information for the three months ended March 2008, June 2008, September 2008 and December 2008 has not been included for the following reasons: (i) the three months ended February 2008, May 2008, August 2008 and November 2008 (collectively, the 2008 quarters) provide a meaningful comparison for the three months ended March 2009, June 2009, September 2009 and December 2009 (collectively, the 2009 quarters), respectively; (ii) there are no seasonal or other factors that would impact the comparability of the results for the 2009 quarters with the results for the 2008 quarters; and (iii) it was not practicable or cost justified to prepare this information. |
| (2) | The timing and magnitude of changes in the firm’s discretionary compensation accruals can have a significant effect on results in a given quarter. |
214
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Common Stock
Price Range
The following table sets forth, for the quarters indicated, the
high and low sales prices per share of the firm’s common
stock:
| Year Ended | ||||||||||||||||||||||||
|
December
|
November
|
November
|
||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
|||||||||||||||||||
|
First quarter
|
$ | 115.65 | $ | 59.13 | $ | 229.35 | $ | 169.00 | $ | 222.75 | $ | 191.50 | ||||||||||||
|
Second quarter
|
151.17 | 100.46 | 203.39 | 140.27 | 232.41 | 189.85 | ||||||||||||||||||
|
Third quarter
|
188.00 | 135.23 | 190.04 | 152.25 | 233.97 | 157.38 | ||||||||||||||||||
|
Fourth quarter
|
193.60 | 160.20 | 172.45 | 47.41 | 250.70 | 175.00 | ||||||||||||||||||
As of February 12, 2010, there were 11,720 holders of
record of the firm’s common stock.
On February 12, 2010, the last reported sales price
for the firm’s common stock on the New York Stock Exchange
was $153.93 per share.
215
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Selected
Financial Data
| As of or for the | ||||||||||||||||||||||||
| Year Ended | One Month Ended | |||||||||||||||||||||||
|
December
|
November
|
November
|
November
|
November
|
December
|
|||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | 2008 | |||||||||||||||||||
|
Income statement data (in millions)
|
||||||||||||||||||||||||
|
Total
non-interest
revenues
|
$ | 37,766 | $ | 17,946 | $ | 42,000 | $ | 34,167 | $ | 22,141 | $ | (502 | ) | |||||||||||
|
Interest income
|
13,907 | 35,633 | 45,968 | 35,186 | 21,250 | 1,687 | ||||||||||||||||||
|
Interest expense
|
6,500 | 31,357 | 41,981 | 31,688 | 18,153 | 1,002 | ||||||||||||||||||
|
Net interest income
|
7,407 | 4,276 | 3,987 | 3,498 | 3,097 | 685 | ||||||||||||||||||
|
Net revenues, including net interest income
|
45,173 | 22,222 | 45,987 | 37,665 | 25,238 | 183 | ||||||||||||||||||
|
Compensation and benefits
|
16,193 | 10,934 | 20,190 | 16,457 | 11,758 | 744 | ||||||||||||||||||
|
Other operating expenses
|
9,151 | 8,952 | 8,193 | 6,648 | 5,207 | 697 | ||||||||||||||||||
|
Pre-tax
earnings/(loss)
|
$ | 19,829 | $ | 2,336 | $ | 17,604 | $ | 14,560 | $ | 8,273 | $ | (1,258 | ) | |||||||||||
|
Balance sheet data (in millions)
|
||||||||||||||||||||||||
|
Total assets
|
$ | 848,942 | $ | 884,547 | $ | 1,119,796 | $ | 838,201 | $ | 706,804 | $ | 1,112,225 | ||||||||||||
|
Other secured financings
(long-term)
|
11,203 | 17,458 | 33,300 | 26,134 | 15,669 | 18,413 | ||||||||||||||||||
|
Unsecured
long-term
borrowings
|
185,085 | 168,220 | 164,174 | 122,842 | 84,338 | 185,564 | ||||||||||||||||||
|
Total liabilities
|
778,228 | 820,178 | 1,076,996 | 802,415 | 678,802 | 1,049,171 | ||||||||||||||||||
|
Total shareholders’ equity
|
70,714 | 64,369 | 42,800 | 35,786 | 28,002 | 63,054 | ||||||||||||||||||
|
Common share data (in millions, except per share amounts)
|
||||||||||||||||||||||||
|
Earnings/(loss) per common share
|
||||||||||||||||||||||||
|
Basic
|
$ | 23.74 | $ | 4.67 | $ | 26.34 | $ | 20.93 | $ | 11.73 | $ | (2.15 | ) | |||||||||||
|
Diluted
|
22.13 | 4.47 | 24.73 | 19.69 | 11.21 | (2.15 | ) | |||||||||||||||||
|
Dividends declared per common share
|
1.05 | 1.40 | 1.40 | 1.30 | 1.00 | 0.47 | (5) | |||||||||||||||||
|
Book value per common
share
(1)
|
117.48 | 98.68 | 90.43 | 72.62 | 57.02 | 95.84 | ||||||||||||||||||
|
Average common shares outstanding
|
||||||||||||||||||||||||
|
Basic
|
512.3 | 437.0 | 433.0 | 449.0 | 478.1 | 485.5 | ||||||||||||||||||
|
Diluted
|
550.9 | 456.2 | 461.2 | 477.4 | 500.2 | 485.5 | ||||||||||||||||||
|
Selected data (unaudited)
|
||||||||||||||||||||||||
|
Total staff
|
||||||||||||||||||||||||
|
Americas
|
18,900 | 19,700 | 20,100 | 18,100 | 16,900 | 19,200 | ||||||||||||||||||
|
Non-Americas
|
13,600 | 14,800 | 15,400 | 12,800 | 10,600 | 14,100 | ||||||||||||||||||
|
Total
staff
(2)
|
32,500 | 34,500 | 35,500 | 30,900 | 27,500 | 33,300 | ||||||||||||||||||
|
Total staff, including consolidated entities held for investment
purposes
|
36,200 | 39,200 | 40,000 | 34,700 | 34,900 | 38,000 | ||||||||||||||||||
|
Assets under management (in
billions)
(3)
|
||||||||||||||||||||||||
|
Asset class
|
||||||||||||||||||||||||
|
Alternative
investments
(4)
|
$ | 146 | $ | 146 | $ | 151 | $ | 145 | $ | 110 | $ | 145 | ||||||||||||
|
Equity
|
146 | 112 | 255 | 215 | 167 | 114 | ||||||||||||||||||
|
Fixed income
|
315 | 248 | 256 | 198 | 154 | 253 | ||||||||||||||||||
|
Total
non-money
market assets
|
607 | 506 | 662 | 558 | 431 | 512 | ||||||||||||||||||
|
Money markets
|
264 | 273 | 206 | 118 | 101 | 286 | ||||||||||||||||||
|
Total assets under management
|
$ | 871 | $ | 779 | $ | 868 | $ | 676 | $ | 532 | $ | 798 | ||||||||||||
| (1) | Book value per common share is based on common shares outstanding, including RSUs granted to employees with no future service requirements, of 542.7 million, 485.4 million, 439.0 million, 450.1 million, 460.4 million and 485.9 million as of December 2009, November 2008, November 2007, November 2006, November 2005 and December 2008, respectively. |
| (2) | Includes employees, consultants and temporary staff. |
| (3) | Substantially all assets under management are valued as of calendar month-end. |
| (4) | Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. |
| (5) | 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. |
216
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
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 years ended
December 2009, November 2008 and November 2007:
| For the Year Ended | ||||||||||||||||||||||||||||||||||||
| December 2009 | November 2008 | November 2007 | ||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||||
|
balance
|
Interest
|
rate
|
balance
|
Interest
|
rate
|
balance
|
Interest
|
rate
|
||||||||||||||||||||||||||||
| (in millions, except rates) | ||||||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Deposits with banks
|
$ | 22,108 | $ | 65 | 0.29 | % | $ | 5,887 | $ | 188 | 3.19 | % | $ | 3,516 | $ | 119 | 3.38 | % | ||||||||||||||||||
|
U.S.
|
18,134 | 45 | 0.25 | 1,541 | 41 | 2.66 | 741 | 23 | 3.10 | |||||||||||||||||||||||||||
|
Non-U.S.
|
3,974 | 20 | 0.50 | 4,346 | 147 | 3.38 | 2,775 | 96 | 3.46 | |||||||||||||||||||||||||||
|
Securities borrowed, securities purchased under agreements to
resell, at fair value, and federal funds sold
|
355,636 | 951 | 0.27 | 421,157 | 11,746 | 2.79 | 348,691 | 18,013 | 5.17 | |||||||||||||||||||||||||||
|
U.S.
|
255,785 | 14 | 0.01 | 331,043 | 8,791 | 2.66 | 279,456 | 15,449 | 5.53 | |||||||||||||||||||||||||||
|
Non-U.S.
|
99,851 | 937 | 0.94 | 90,114 | 2,955 | 3.28 | 69,235 | 2,564 | 3.70 | |||||||||||||||||||||||||||
|
Trading
assets
(1)(2)
|
277,706 | 11,106 | 4.00 | 328,208 | 13,150 | 4.01 | 336,412 | 13,120 | 3.90 | |||||||||||||||||||||||||||
|
U.S.
|
198,849 | 8,429 | 4.24 | 186,498 | 7,700 | 4.13 | 190,589 | 8,167 | 4.29 | |||||||||||||||||||||||||||
|
Non-U.S.
|
78,857 | 2,677 | 3.39 | 141,710 | 5,450 | 3.85 | 145,823 | 4,953 | 3.40 | |||||||||||||||||||||||||||
|
Other interest-earning
assets
(3)
|
127,067 | 1,785 | 1.40 | 221,040 | 10,549 | 4.77 | 203,048 | 14,716 | 7.25 | |||||||||||||||||||||||||||
|
U.S.
|
83,000 | 1,052 | 1.27 | 131,778 | 4,438 | 3.37 | 97,830 | 6,480 | 6.62 | |||||||||||||||||||||||||||
|
Non-U.S.
|
44,067 | 733 | 1.66 | 89,262 | 6,111 | 6.85 | 105,218 | 8,236 | 7.83 | |||||||||||||||||||||||||||
|
Total interest-earning assets
|
782,517 | 13,907 | 1.78 | 976,292 | 35,633 | 3.65 | 891,667 | 45,968 | 5.16 | |||||||||||||||||||||||||||
|
Cash and due from banks
|
5,066 | 7,975 | 3,926 | |||||||||||||||||||||||||||||||||
|
Other noninterest-earning
assets
(2)
|
124,554 | 154,727 | 102,312 | |||||||||||||||||||||||||||||||||
|
Total Assets
|
$ | 912,137 | $ | 1,138,994 | $ | 997,905 | ||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 41,076 | 415 | 1.01 | $ | 26,455 | 756 | 2.86 | $ | 13,227 | 677 | 5.12 | ||||||||||||||||||||||||
|
U.S.
|
35,043 | 371 | 1.06 | 21,598 | 617 | 2.86 | 13,128 | 674 | 5.13 | |||||||||||||||||||||||||||
|
Non-U.S.
|
6,033 | 44 | 0.73 | 4,857 | 139 | 2.86 | 99 | 3 | 3.03 | |||||||||||||||||||||||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
156,794 | 1,317 | 0.84 | 194,935 | 7,414 | 3.80 | 214,511 | 12,612 | 5.88 | |||||||||||||||||||||||||||
|
U.S.
|
111,718 | 392 | 0.35 | 107,361 | 3,663 | 3.41 | 95,391 | 7,697 | 8.07 | |||||||||||||||||||||||||||
|
Non-U.S.
|
45,076 | 925 | 2.05 | 87,574 | 3,751 | 4.28 | 119,120 | 4,915 | 4.13 | |||||||||||||||||||||||||||
|
Trading
liabilities
(1)(2)
|
72,866 | 1,854 | 2.54 | 95,377 | 2,789 | 2.92 | 109,736 | 3,866 | 3.52 | |||||||||||||||||||||||||||
|
U.S.
|
39,647 | 586 | 1.48 | 49,152 | 1,202 | 2.45 | 61,510 | 2,334 | 3.79 | |||||||||||||||||||||||||||
|
Non-U.S.
|
33,219 | 1,268 | 3.82 | 46,225 | 1,587 | 3.43 | 48,226 | 1,532 | 3.18 | |||||||||||||||||||||||||||
|
Commercial paper
|
1,002 | 5 | 0.50 | 4,097 | 145 | 3.54 | 5,605 | 269 | 4.80 | |||||||||||||||||||||||||||
|
U.S.
|
284 | 3 | 1.06 | 3,147 | 121 | 3.84 | 4,871 | 242 | 4.97 | |||||||||||||||||||||||||||
|
Non-U.S.
|
718 | 2 | 0.28 | 950 | 24 | 2.53 | 734 | 27 | 3.68 | |||||||||||||||||||||||||||
|
Other
borrowings
(4)(5)
|
58,129 | 618 | 1.06 | 99,351 | 1,719 | 1.73 | 89,924 | 3,129 | 3.48 | |||||||||||||||||||||||||||
|
U.S.
|
36,164 | 525 | 1.45 | 52,126 | 1,046 | 2.01 | 44,789 | 1,779 | 3.97 | |||||||||||||||||||||||||||
|
Non-U.S.
|
21,965 | 93 | 0.42 | 47,225 | 673 | 1.43 | 45,135 | 1,350 | 2.99 | |||||||||||||||||||||||||||
|
Long-term
borrowings
(5)(6)
|
203,280 | 2,585 | 1.27 | 203,360 | 6,975 | 3.43 | 167,997 | 6,830 | 4.07 | |||||||||||||||||||||||||||
|
U.S.
|
192,054 | 2,313 | 1.20 | 181,775 | 6,271 | 3.45 | 158,694 | 6,416 | 4.04 | |||||||||||||||||||||||||||
|
Non-U.S.
|
11,226 | 272 | 2.42 | 21,585 | 704 | 3.26 | 9,303 | 414 | 4.45 | |||||||||||||||||||||||||||
|
Other interest-bearing
liabilities
(7)
|
207,148 | (294 | ) | (0.14 | ) | 345,956 | 11,559 | 3.34 | 248,640 | 14,598 | 5.87 | |||||||||||||||||||||||||
|
U.S.
|
147,206 | (723 | ) | (0.49 | ) | 214,780 | 6,275 | 2.92 | 142,002 | 10,567 | 7.44 | |||||||||||||||||||||||||
|
Non-U.S.
|
59,942 | 429 | 0.72 | 131,176 | 5,284 | 4.03 | 106,638 | 4,031 | 3.78 | |||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
740,295 | 6,500 | 0.88 | 969,531 | 31,357 | 3.23 | 849,640 | 41,981 | 4.94 | |||||||||||||||||||||||||||
|
Noninterest-bearing deposits
|
115 | 4 | — | |||||||||||||||||||||||||||||||||
|
Other noninterest-bearing
liabilities
(2)
|
106,200 | 122,292 | 110,306 | |||||||||||||||||||||||||||||||||
|
Total liabilities
|
846,610 | 1,091,827 | 959,946 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
||||||||||||||||||||||||||||||||||||
|
Preferred stock
|
11,363 | 5,157 | 3,100 | |||||||||||||||||||||||||||||||||
|
Common stock
|
54,164 | 42,010 | 34,859 | |||||||||||||||||||||||||||||||||
|
Total shareholders’ equity
|
65,527 | 47,167 | 37,959 | |||||||||||||||||||||||||||||||||
|
Total liabilities, preferred stock and shareholders’
equity
|
$ | 912,137 | $ | 1,138,994 | $ | 997,905 | ||||||||||||||||||||||||||||||
|
Interest rate spread
|
0.90 | % | 0.42 | % | 0.22 | % | ||||||||||||||||||||||||||||||
|
Net interest income and net yield on interest-earning assets
|
$ | 7,407 | 0.95 | $ | 4,276 | 0.44 | $ | 3,987 | 0.45 | |||||||||||||||||||||||||||
|
U.S.
|
6,073 | 1.09 | 1,775 | 0.27 | 410 | 0.07 | ||||||||||||||||||||||||||||||
|
Non-U.S.
|
1,334 | 0.59 | 2,501 | 0.77 | 3,577 | 1.11 | ||||||||||||||||||||||||||||||
|
Percentage of interest-earning assets and interest-bearing
liabilities attributable to
non-U.S. operations
(8)
|
||||||||||||||||||||||||||||||||||||
|
Assets
|
28.98 | % | 33.33 | % | 36.23 | % | ||||||||||||||||||||||||||||||
|
Liabilities
|
24.07 | 35.03 | 38.75 | |||||||||||||||||||||||||||||||||
217
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
| (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 interest rate swaps accounted for as hedges. |
| (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 location of the legal entity in which the assets and liabilities are held. |
218
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Changes in Net
Interest Income, Volume and Rate Analysis
The following table sets forth an analysis of the effect on net
interest income of volume and rate changes for the periods 2009
versus 2008 and 2008 versus 2007. In this analysis, changes due
to volume/rate variance have been allocated to volume.
| For the Year Ended | ||||||||||||||||||||||||
| December 2009 versus November 2008 | November 2008 versus November 2007 | |||||||||||||||||||||||
| Increase (decrease) due to change in: | Increase (decrease) due to change in: | |||||||||||||||||||||||
|
Net
|
Net
|
|||||||||||||||||||||||
|
Volume
|
Rate
|
change
|
Volume
|
Rate
|
change
|
|||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Interest-earning assets
|
||||||||||||||||||||||||
|
Deposits with banks
|
$ | 39 | $ | (162 | ) | $ | (123 | ) | $ | 74 | $ | (5 | ) | $ | 69 | |||||||||
|
U.S.
|
41 | (37 | ) | 4 | 21 | (3 | ) | 18 | ||||||||||||||||
|
Non-U.S.
|
(2 | ) | (125 | ) | (127 | ) | 53 | (2 | ) | 51 | ||||||||||||||
|
Securities borrowed, securities purchased under agreements to
resell, at fair value and federal funds sold
|
87 | (10,882 | ) | (10,795 | ) | 2,055 | (8,322 | ) | (6,267 | ) | ||||||||||||||
|
U.S.
|
(4 | ) | (8,773 | ) | (8,777 | ) | 1,370 | (8,028 | ) | (6,658 | ) | |||||||||||||
|
Non-U.S.
|
91 | (2,109 | ) | (2,018 | ) | 685 | (294 | ) | 391 | |||||||||||||||
|
Trading assets
|
(1,610 | ) | (434 | ) | (2,044 | ) | (327 | ) | 357 | 30 | ||||||||||||||
|
U.S.
|
524 | 205 | 729 | (169 | ) | (298 | ) | (467 | ) | |||||||||||||||
|
Non-U.S.
|
(2,134 | ) | (639 | ) | (2,773 | ) | (158 | ) | 655 | 497 | ||||||||||||||
|
Other interest-earning assets
|
(1,370 | ) | (7,394 | ) | (8,764 | ) | 51 | (4,218 | ) | (4,167 | ) | |||||||||||||
|
U.S.
|
(618 | ) | (2,768 | ) | (3,386 | ) | 1,143 | (3,185 | ) | (2,042 | ) | |||||||||||||
|
Non-U.S.
|
(752 | ) | (4,626 | ) | (5,378 | ) | (1,092 | ) | (1,033 | ) | (2,125 | ) | ||||||||||||
|
Change in interest income
|
(2,854 | ) | (18,872 | ) | (21,726 | ) | 1,853 | (12,188 | ) | (10,335 | ) | |||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||
|
Interest-bearing deposits
|
151 | (492 | ) | (341 | ) | 378 | (299 | ) | 79 | |||||||||||||||
|
U.S.
|
142 | (388 | ) | (246 | ) | 242 | (299 | ) | (57 | ) | ||||||||||||||
|
Non-U.S.
|
9 | (104 | ) | (95 | ) | 136 | — | 136 | ||||||||||||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
(857 | ) | (5,240 | ) | (6,097 | ) | (943 | ) | (4,255 | ) | (5,198 | ) | ||||||||||||
|
U.S.
|
15 | (3,286 | ) | (3,271 | ) | 408 | (4,442 | ) | (4,034 | ) | ||||||||||||||
|
Non-U.S.
|
(872 | ) | (1,954 | ) | (2,826 | ) | (1,351 | ) | 187 | (1,164 | ) | |||||||||||||
|
Trading liabilities
|
(636 | ) | (299 | ) | (935 | ) | (371 | ) | (706 | ) | (1,077 | ) | ||||||||||||
|
U.S.
|
(140 | ) | (476 | ) | (616 | ) | (302 | ) | (830 | ) | (1,132 | ) | ||||||||||||
|
Non-U.S.
|
(496 | ) | 177 | (319 | ) | (69 | ) | 124 | 55 | |||||||||||||||
|
Commercial paper
|
(31 | ) | (109 | ) | (140 | ) | (61 | ) | (63 | ) | (124 | ) | ||||||||||||
|
U.S.
|
(30 | ) | (88 | ) | (118 | ) | (66 | ) | (55 | ) | (121 | ) | ||||||||||||
|
Non-U.S.
|
(1 | ) | (21 | ) | (22 | ) | 5 | (8 | ) | (3 | ) | |||||||||||||
|
Other borrowings
|
(339 | ) | (762 | ) | (1,101 | ) | 177 | (1,587 | ) | (1,410 | ) | |||||||||||||
|
U.S.
|
(232 | ) | (289 | ) | (521 | ) | 147 | (880 | ) | (733 | ) | |||||||||||||
|
Non-U.S.
|
(107 | ) | (473 | ) | (580 | ) | 30 | (707 | ) | (677 | ) | |||||||||||||
|
Long-term
debt
|
(128 | ) | (4,262 | ) | (4,390 | ) | 1,197 | (1,052 | ) | 145 | ||||||||||||||
|
U.S.
|
123 | (4,081 | ) | (3,958 | ) | 796 | (941 | ) | (145 | ) | ||||||||||||||
|
Non-U.S.
|
(251 | ) | (181 | ) | (432 | ) | 401 | (111 | ) | 290 | ||||||||||||||
|
Other interest-bearing liabilities
|
(178 | ) | (11,675 | ) | (11,853 | ) | 3,115 | (6,154 | ) | (3,039 | ) | |||||||||||||
|
U.S.
|
332 | (7,330 | ) | (6,998 | ) | 2,127 | (6,419 | ) | (4,292 | ) | ||||||||||||||
|
Non-U.S.
|
(510 | ) | (4,345 | ) | (4,855 | ) | 988 | 265 | 1,253 | |||||||||||||||
|
Change in interest expense
|
(2,018 | ) | (22,839 | ) | (24,857 | ) | 3,492 | (14,116 | ) | (10,624 | ) | |||||||||||||
|
Change in net interest income
|
$ | (836 | ) | $ | 3,967 | $ | 3,131 | $ | (1,639 | ) | $ | 1,928 | $ | 289 | ||||||||||
219
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Available-for-sale
Securities Portfolio
The following table sets forth the amortized cost, gross
unrealized gains and losses, and fair value of
available-for-sale
securities at December 2009 and November 2008:
|
Gross
|
Gross
|
|||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
| (in millions) | ||||||||||||||||
|
Available-for-sale
securities, December 2009
|
||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 309 | $ | — | $ | — | $ | 309 | ||||||||
|
U.S. government, federal agency and sovereign obligations
|
1,014 | 9 | (40 | ) | 983 | |||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
583 | 70 | (15 | ) | 638 | |||||||||||
|
Corporate debt securities and other debt obligations
|
1,772 | 168 | (6 | ) | 1,934 | |||||||||||
|
Total
available-for-sale
securities
|
$ | 3,678 | $ | 247 | $ | (61 | ) | $ | 3,864 | |||||||
|
Available-for-sale
securities, November 2008
|
||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 259 | $ | — | $ | — | $ | 259 | ||||||||
|
U.S. government, federal agency and sovereign obligations
|
574 | 23 | (3 | ) | 594 | |||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
213 | — | (49 | ) | 164 | |||||||||||
|
Corporate debt securities and other debt obligations
|
750 | 5 | (90 | ) | 665 | |||||||||||
|
Total
available-for-sale
securities
|
$ | 1,796 | $ | 28 | $ | (142 | ) | $ | 1,682 | |||||||
220
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
| As of December 2009 | ||||||||||||||||||||||||||||||||||||||||
|
Due After
|
Due After
|
|||||||||||||||||||||||||||||||||||||||
|
One Year
|
Five Years
|
|||||||||||||||||||||||||||||||||||||||
|
Through
|
Through
|
Due After
|
||||||||||||||||||||||||||||||||||||||
| Due in One Year or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
|||||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Fair value of
available-for-sale
securities
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 309 | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 309 | — | % | ||||||||||||||||||||
|
U.S. government, federal agency and sovereign obligations
|
15 | 3 | 175 | 3 | 148 | 4 | 645 | 4 | 983 | 4 | ||||||||||||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | — | — | — | 22 | 5 | 616 | 15 | 638 | 15 | ||||||||||||||||||||||||||||||
|
Corporate debt securities and other debt obligations
|
71 | 6 | 303 | 5 | 663 | 6 | 897 | 7 | 1,934 | 6 | ||||||||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 395 | $ | 478 | $ | 833 | $ | 2,158 | $ | 3,864 | ||||||||||||||||||||||||||||||
|
Amortized cost of available-for-sale securities
|
$ | 394 | $ | 458 | $ | 772 | $ | 2,054 | $ | 3,678 | ||||||||||||||||||||||||||||||
| As of November 2008 | ||||||||||||||||||||||||||||||||||||||||
|
Due After
|
Due After
|
|||||||||||||||||||||||||||||||||||||||
|
One Year
|
Five Years
|
|||||||||||||||||||||||||||||||||||||||
|
Due in One Year
|
Through
|
Through
|
Due After
|
|||||||||||||||||||||||||||||||||||||
| or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
Amount
|
Yield
(1)
|
|||||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||||||||||
|
Fair value of
available-for-sale
securities
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 259 | 1 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 259 | 1 | % | ||||||||||||||||||||
|
U.S. government, federal agency and sovereign obligations
|
— | — | 144 | 2 | 133 | 4 | 317 | 5 | 594 | 4 | ||||||||||||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | — | — | — | — | — | 164 | 21 | 164 | 21 | ||||||||||||||||||||||||||||||
|
Corporate debt securities and other debt obligations
|
48 | 16 | 227 | 7 | 94 | 8 | 296 | 9 | 665 | 9 | ||||||||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 307 | $ | 371 | $ | 227 | $ | 777 | $ | 1,682 | ||||||||||||||||||||||||||||||
|
Amortized cost of available-for-sale securities
|
$ | 310 | $ | 377 | $ | 229 | $ | 880 | $ | 1,796 | ||||||||||||||||||||||||||||||
| (1) | Yields are calculated on a weighted average basis. |
221
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Deposits
The following table sets forth a summary of the average balances
and average interest rates for the firm’s interest-bearing
deposits for the years ended December 2009,
November 2008 and November 2007:
| Average Balances | Average Interest Rates | |||||||||||||||||||||||
|
December
|
November
|
November
|
December
|
November
|
November
|
|||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||
|
U.S.:
|
||||||||||||||||||||||||
|
Savings
(1)
|
$ | 23,024 | $ | 20,214 | $ | 13,096 | 0.62 | % | 2.82 | % | 5.12 | % | ||||||||||||
|
Time
|
12,019 | 1,384 | 32 | 1.89 | 3.40 | 9.96 | ||||||||||||||||||
|
Total U.S. deposits
|
35,043 | 21,598 | 13,128 | 1.06 | 2.86 | 5.13 | ||||||||||||||||||
|
Non-U.S.:
|
||||||||||||||||||||||||
|
Demand
|
5,402 | 4,842 | 99 | 0.61 | 2.83 | 3.03 | ||||||||||||||||||
|
Time
|
631 | 15 | — | 1.65 | 13.00 | — | ||||||||||||||||||
|
Total
Non-U.S. deposits
|
6,033 | 4,857 | 99 | 0.73 | 2.86 | 3.03 | ||||||||||||||||||
|
Total deposits
|
$ | 41,076 | $ | 26,455 | $ | 13,227 | 1.01 | % | 2.86 | % | 5.12 | % | ||||||||||||
| (1) | Amounts are available for withdrawal upon short notice, generally within seven days. |
Ratios
The following table sets forth selected financial ratios:
| Year Ended | ||||||||||||
|
December
|
November
|
November
|
||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net earnings to average assets
|
1.5 | % | 0.2 | % | 1.2 | % | ||||||
|
Return on common shareholders’
equity
(1)
|
22.5 | 4.9 | 32.7 | |||||||||
|
Return on total shareholders’
equity
(2)
|
20.4 | 4.9 | 30.6 | |||||||||
|
Total average equity to average assets
|
7.2 | 4.1 | 3.8 | |||||||||
| (1) | Based on net earnings applicable to common shareholders divided by average monthly common shareholders’ equity. | |
| (2) | Based on net earnings divided by average monthly total shareholders’ equity. |
222
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Short-term
and Other Borrowed Funds
(1)
The following table sets forth a summary of the firm’s
securities loaned and securities sold under agreements to
repurchase and
short-term
borrowings as of or for the years ended December 2009,
November 2008 and November 2007 as indicated below:
|
Securities Loaned and
|
||||||||||||||||||||||||||||||||||||
|
Securities Sold Under
|
||||||||||||||||||||||||||||||||||||
| Agreements to Repurchase | Commercial Paper | Other Funds Borrowed (2)(3) | ||||||||||||||||||||||||||||||||||
|
December
|
November
|
November
|
December
|
November
|
November
|
December
|
November
|
November
|
||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||||||
|
Amounts outstanding at year-end
|
$ | 143,567 | $ | 79,943 | $ | 187,802 | $ | 1,660 | $ | 1,125 | $ | 4,343 | $ | 48,787 | $ | 72,758 | $ | 99,624 | ||||||||||||||||||
|
Average outstanding during the year
|
156,794 | 194,935 | 214,511 | 1,002 | 4,097 | 5,605 | 58,129 | 99,351 | 89,924 | |||||||||||||||||||||||||||
|
Maximum month-end outstanding
|
169,083 | 256,596 | 270,991 | 3,060 | 12,718 | 8,846 | 77,712 | 109,927 | 105,845 | |||||||||||||||||||||||||||
|
Weighted average interest rate
|
||||||||||||||||||||||||||||||||||||
|
During the year
|
0.84 | % | 3.80 | % | 5.88 | % | 0.50 | % | 3.54 | % | 4.80 | % | 1.06 | % | 1.73 | % | 3.48 | % | ||||||||||||||||||
|
At year-end
|
0.26 | 3.27 | 5.15 | 0.37 | 2.79 | 4.81 | 0.76 | 2.06 | 3.11 | |||||||||||||||||||||||||||
| (1) | Includes borrowings maturing within one year of the financial statement date and borrowings that are redeemable at the option of the holder within one year of the financial statement date. |
| (2) | Includes short-term secured financings of $12.93 billion as of December 2009, $21.23 billion as of November 2008 and $32.41 billion as of November 2007. |
| (3) | As of December 2009, November 2008 and November 2007, weighted average interest rates include the effects of hedging. |
223
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
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 tables set forth cross-border outstandings for
each country in which cross-border outstandings exceed 0.75% of
consolidated assets as of December 2009 and
November 2008 in accordance with the FFIEC guidelines:
| As of December 2009 | ||||||||||||||||
|
Banks
|
Governments
|
Other
|
Total
|
|||||||||||||
| (in millions) | ||||||||||||||||
|
Country
|
||||||||||||||||
|
United Kingdom
|
$ | 3,276 | $ | 4,843 | $ | 52,342 | $ | 60,461 | ||||||||
|
Japan
|
18,251 | 107 | 6,624 | 24,982 | ||||||||||||
|
France
|
8,844 | 4,648 | 5,863 | 19,355 | ||||||||||||
|
Germany
|
8,610 | 6,050 | 3,594 | 18,254 | ||||||||||||
|
China
|
9,105 | 108 | 4,196 | 13,409 | ||||||||||||
|
Ireland
|
5,633 | 20 | 1,815 | 7,468 | ||||||||||||
| As of November 2008 | ||||||||||||||||
|
Banks
|
Governments
|
Other
|
Total
|
|||||||||||||
| (in millions) | ||||||||||||||||
|
Country
|
||||||||||||||||
|
United Kingdom
|
$ | 5,104 | $ | 4,600 | $ | 51,898 | $ | 61,602 | ||||||||
|
Cayman Islands
|
50 | — | 14,461 | 14,511 | ||||||||||||
|
Germany
|
3,973 | 2,518 | 7,653 | 14,144 | ||||||||||||
|
France
|
2,264 | 1,320 | 9,632 | 13,216 | ||||||||||||
|
Japan
|
4,003 | 100 | 3,770 | 7,873 | ||||||||||||
224
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal
years.
Item 9A. 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 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 the fourth quarter of
our fiscal year ended December 31, 2009 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial
Reporting and the Report of Independent Registered Public
Accounting Firm are set forth in Part II, Item 8 of
this Annual Report on
Form 10-K.
Item 9B. Other
Information
Not applicable.
225
Table of Contents
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
Information relating to our executive officers is included on
pages 50 to 51 of this Annual Report on
Form 10-K.
Information relating to our directors, including our audit
committee and audit committee financial experts and the
procedures by which shareholders can recommend director
nominees, and our executive officers will be in our definitive
Proxy Statement for our 2010 Annual Meeting of Shareholders to
be held on May 7, 2010, which will be filed within
120 days of the end of our fiscal year ended
December 31, 2009 (2010 Proxy Statement) and is
incorporated herein by reference. Information relating to our
Code of Business Conduct and Ethics that applies to our senior
financial officers, as defined in the Code, is included in
Part I, Item 1 of this Annual Report on
Form 10-K.
| Item 11. | Executive Compensation |
Information relating to our executive officer and director
compensation and the compensation committee of our board of
directors will be in the 2010 Proxy Statement and is
incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information relating to security ownership of certain beneficial
owners of our common stock and information relating to the
security ownership of our management will be in the 2010 Proxy
Statement and is incorporated herein by reference.
226
Table of Contents
The following table provides information as of
December 31, 2009, the last day of fiscal 2009,
regarding securities to be issued on exercise of outstanding
stock options or pursuant to outstanding restricted stock units
and performance-based awards, and securities remaining available
for issuance under our equity compensation plans that were in
effect during fiscal 2009.
|
Number of Securities
|
||||||||||||||||
|
Number of
|
Remaining Available
|
|||||||||||||||
|
Securities to be
|
for Future Issuance
|
|||||||||||||||
|
Issued Upon
|
Weighted-Average
|
Under Equity
|
||||||||||||||
|
Exercise of
|
Exercise Price of
|
Compensation Plans
|
||||||||||||||
|
Outstanding
|
Outstanding
|
(Excluding Securities
|
||||||||||||||
|
Options, Warrants
|
Options, Warrants
|
Reflected in the
|
||||||||||||||
|
Plan Category
|
and Rights
|
and Rights
|
Second Column)
|
|||||||||||||
|
Equity compensation plans approved by security holders
|
The Goldman
Sachs Amended and Restated Stock Incentive Plan (1) |
106,752,445 | (2) | $ | 95.25 | (3) | 140,552,906 | (4) | ||||||||
|
Equity compensation plans not approved by security holders
|
None | — | — | — | ||||||||||||
|
Total
|
106,752,445 | (2) | 140,552,906 | (4) | ||||||||||||
| (1) | The Goldman Sachs Amended and Restated Stock Incentive Plan (SIP) was approved by the shareholders of Goldman Sachs at our 2003 Annual Meeting of Shareholders and is a successor plan to The Goldman Sachs 1999 Stock Incentive Plan (1999 Plan), which was approved by our shareholders immediately prior to our initial public offering in May 1999 and under which no additional awards have been granted since approval of the SIP. | |
| (2) | Includes: (i) 62,363,847 shares of common stock that may be issued upon exercise of outstanding options; (ii) 44,278,092 shares that may be issued pursuant to outstanding restricted stock units, including 44,250,832 shares granted under the SIP and 27,260 shares granted under the 1999 Plan; and (iii) 110,506 shares that may be issued pursuant to outstanding performance-based units granted under the SIP. These awards are subject to vesting and other conditions to the extent set forth in the respective award agreements, and the underlying shares will be delivered net of any required tax withholding. | |
| (3) | This weighted-average exercise price relates only to the options described in footnote (2). Shares underlying restricted stock units and performance-based units are deliverable without the payment of any consideration, and therefore these awards have not been taken into account in calculating the weighted-average exercise price. | |
| (4) | Represents shares remaining to be issued under the SIP, excluding shares reflected in the second column. The total number of shares of common stock that may be delivered pursuant to awards granted under the SIP through the end of our 2008 fiscal year could not exceed 250 million shares. The total number of shares of common stock that may be delivered pursuant to awards granted under the SIP in our 2009 fiscal year and each fiscal year thereafter cannot exceed 5% of the issued and outstanding shares of common stock, determined as of the last day of the immediately preceding fiscal year, increased by the number of shares available for awards in previous years but not covered by awards granted in such years. There are no shares remaining to be issued under the 1999 Plan other than those reflected in the second column. |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
Information regarding certain relationships and related
transactions and director independence will be in the 2010 Proxy
Statement and is incorporated herein by reference.
| Item 14. | Principal Accountant Fees and Services |
Information regarding principal accountant fees and services
will be in the 2010 Proxy Statement and is incorporated herein
by reference.
227
Table of Contents
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
| (a) | Documents filed as part of this Report: |
| 1. | Consolidated Financial Statements |
The consolidated financial statements required to be filed
in this Annual Report on
Form 10-K
are included in Part II, Item 8 hereof.
| 2. | Exhibits |
|
2.1
|
Plan of Incorporation (incorporated by reference to the corresponding exhibit to the Registrant’s registration statement on Form S-1 (No. 333-74449)). | |||
|
3.1
|
Restated Certificate of Incorporation of The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 25, 2009). | |||
|
3.2
|
Amended and Restated By-Laws of The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q for the period ended September 25, 2009). | |||
|
4.1
|
Indenture, dated as of May 19, 1999, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 6 to the Registrant’s registration statement on Form 8-A, filed June 29, 1999). | |||
|
4.2
|
Subordinated Debt Indenture, dated as of February 20, 2004, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2003). | |||
|
4.3
|
Warrant Indenture, dated as of February 14, 2006, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.34 to the Registrant’s Post-Effective Amendment No. 3 to Form S-3, filed on March 1, 2006). | |||
|
4.4
|
Senior Debt Indenture, dated as of December 4, 2007, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.69 to the Registrant’s Post-Effective Amendment No. 10 to Form S-3, filed on December 4, 2007). | |||
|
4.5
|
Form of floating rate senior debt security (TLGP) issued under the Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). | |||
|
4.6
|
Form of fixed rate senior debt security (TLGP) issued under the Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). | |||
|
4.7
|
Form of floating rate Medium-Term Note, Series D (TLGP) issued under the Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.7 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). |
228
Table of Contents
|
4.8
|
Form of fixed rate Medium-Term Note, Series D (TLGP) issued under the Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). | |||
| Certain instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S - K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments. | ||||
|
4.9
|
Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.82 to the Registrant’s Post-Effective Amendment No. 11 to Form S-3 (No. 333-130074), filed July 17, 2008). | |||
|
4.10
|
Senior Debt Indenture, dated as of October 10, 2008, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.70 to the Registrant’s registration statement on Form S-3 (No. 333-154173), filed October 10, 2008). | |||
|
10.1
|
The Goldman Sachs Amended and Restated Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008).† | |||
|
10.2
|
The Goldman Sachs Amended and Restated Restricted Partner Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended February 24, 2006).† | |||
|
10.3
|
Form of Employment Agreement for pre-IPO Participating Managing Directors (incorporated by reference to Exhibit 10.19 to the Registrant’s registration statement on Form S-1 (No. 333-75213)).† | |||
|
10.4
|
Form of Agreement Relating to Noncompetition and Other Covenants (incorporated by reference to Exhibit 10.20 to the Registrant’s registration statement on Form S-1 (No. 333-75213)).† | |||
|
10.5
|
Tax Indemnification Agreement, dated as of May 7, 1999, by and among The Goldman Sachs Group, Inc. and various parties (incorporated by reference to Exhibit 10.25 to the Registrant’s registration statement on Form S-1 (No. 333-75213)). | |||
|
10.6
|
Amended and Restated Shareholders’ Agreement, effective as of January 22, 2010, among The Goldman Sachs Group, Inc. and various parties. | |||
|
10.7
|
Instrument of Indemnification (incorporated by reference to Exhibit 10.27 to the Registrant’s registration statement on Form S-1 (No. 333-75213)). | |||
|
10.8
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 26, 1999). | |||
|
10.9
|
Form of Indemnification Agreement (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 26, 1999). | |||
|
10.10
|
Form of Indemnification Agreement, dated as of July 5, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2000). | |||
|
10.11
|
Amendment No. 1, dated as of September 5, 2000, to the Tax Indemnification Agreement, dated as of May 7, 1999 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2000). | |||
|
10.12
|
Letter, dated February 6, 2001, from The Goldman Sachs Group, Inc. to Dr. Ruth J. Simmons (incorporated by reference to Exhibit 10.63 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2000).† |
229
Table of Contents
|
10.13
|
Letter, dated February 6, 2001, from The Goldman Sachs Group, Inc. to Mr. John H. Bryan (incorporated by reference to Exhibit 10.64 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2000).† | |||
|
10.14
|
Letter, dated February 6, 2001, from The Goldman Sachs Group, Inc. to Mr. James A. Johnson (incorporated by reference to Exhibit 10.65 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2000).† | |||
|
10.15
|
Letter, dated December 18, 2002, from The Goldman Sachs Group, Inc. to Mr. William W. George (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 29, 2002).† | |||
|
10.16
|
Letter, dated June 20, 2003, from The Goldman Sachs Group, Inc. to Mr. Claes Dahlbäck (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended May 30, 2003).† | |||
|
10.17
|
Letter, dated March 31, 2004, from The Goldman Sachs Group, Inc. to Ms. Lois D. Juliber (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended May 28, 2004).† | |||
|
10.18
|
Letter, dated April 6, 2005, from The Goldman Sachs Group, Inc. to Mr. Stephen Friedman (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed April 8, 2005).† | |||
|
10.19
|
Letter, dated May 12, 2009, from The Goldman Sachs Group, Inc. to Mr. James J. Schiro (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 26, 2009).† | |||
|
10.20
|
Form of Amendment, dated November 27, 2004, to Agreement Relating to Noncompetition and Other Covenants, dated May 7, 1999 (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 26, 2004).† | |||
|
10.21
|
Form of RSU Award Agreement for PMD Discount Stock Program (subject to transfer restrictions) (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.22
|
Form of RSU Award Agreement for PMD Discount Stock Program (not subject to transfer restrictions) (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.23
|
Form of RSU Award Agreement for PMD Discount Stock Program (subject to transfer restrictions) (French alternative award) (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.24
|
Form of RSU Award Agreement for PMD Discount Stock Program (not subject to transfer restrictions) (French alternative award) (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.25
|
Form of RSU Award Agreement for PMD Discount Stock Program (U.K. employee benefit trusts) (incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.26
|
Form of Year-End Restricted Stock Award (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.27
|
Form of Year-End Restricted Stock Award in Connection with Outstanding RSU Awards (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.28
|
The Goldman Sachs Group, Inc. Non-Qualified Deferred Compensation Plan for U.S. Participating Managing Directors (terminated as of December 15, 2008) (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† |
230
Table of Contents
|
10.29
|
Form of Year-End Option Award Agreement (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008).† | |||
|
10.30
|
Form of Year-End RSU Award Agreement (not fully vested).† | |||
|
10.31
|
Form of Year-End RSU Award Agreement (fully vested).† | |||
|
10.32
|
Form of Year-End RSU Award Agreement (French alternative award).† | |||
|
10.33
|
Amendments to 2005 and 2006 Year-End RSU and Option Award Agreements (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007).† | |||
|
10.34
|
Form of Non-Employee Director Option Award Agreement.† | |||
|
10.35
|
Form of Non-Employee Director RSU Award Agreement.† | |||
|
10.36
|
Description of Non-Employee Director Compensation.† | |||
|
10.37
|
Ground Lease, dated August 23, 2005, between Battery Park City Authority d/b/a/ Hugh L. Carey Battery Park City Authority, as Landlord, and Goldman Sachs Headquarters LLC, as Tenant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 26, 2005). | |||
|
10.38
|
General Guarantee Agreement, dated January 30, 2006, made by The Goldman Sachs Group, Inc. (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005). | |||
|
10.39
|
Letter, dated November 10, 2006, from The Goldman Sachs Group, Inc. to Mr. Rajat K. Gupta (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed November 13, 2006).† | |||
|
10.40
|
Goldman, Sachs & Co. Executive Life Insurance Policy and Certificate with Metropolitan Life Insurance Company for Participating Managing Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2006).† | |||
|
10.41
|
Form of Goldman, Sachs & Co. Executive Life Insurance Policy with Pacific Life & Annuity Company for Participating Managing Directors, including policy specifications and form of restriction on Policy Owner’s Rights (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2006).† | |||
|
10.42
|
Form of Signature Card for Equity Awards.† | |||
|
10.43
|
Form of Employment Agreement for post-IPO Participating Managing Directors (incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006).† | |||
|
10.44
|
Form of Second Amendment, dated November 25, 2006, to Agreement Relating to Noncompetition and Other Covenants, dated May 7, 1999, as amended effective November 27, 2004 (incorporated by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006).† | |||
|
10.45
|
Description of PMD Retiree Medical Program (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended February 29, 2008).† | |||
|
10.46
|
Letter, dated June 28, 2008, from The Goldman Sachs Group, Inc. to Mr. Lakshmi N. Mittal (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed June 30, 2008).† | |||
|
10.47
|
Securities Purchase Agreement, dated September 29, 2008, between The Goldman Sachs Group, Inc. and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 29, 2008). |
231
Table of Contents
|
10.48
|
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). | |||
|
10.49
|
Form of Letter Agreement between The Goldman Sachs Group, Inc. and each of Lloyd C. Blankfein, Gary D. Cohn, Jon Winkelried and David A. Viniar (incorporated by reference to Exhibit O to Amendment No. 70 to Schedule 13D, filed October 1, 2008, relating to the Registrant’s common stock (No. 005-56295)). | |||
|
10.50
|
General Guarantee Agreement, dated November 24, 2008, made by The Goldman Sachs Group, Inc. relating to the obligations of Goldman Sachs Bank (Europe) PLC (incorporated by reference to Exhibit 10.59 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). | |||
|
10.51
|
Guarantee Agreement, dated November 28, 2008 and amended effective as of January 1, 2010, between The Goldman Sachs Group, Inc. and Goldman Sachs Bank USA. | |||
|
10.52
|
Collateral Agreement, dated November 28, 2008, between The Goldman Sachs Group, Inc., Goldman Sachs Bank USA and each other party that becomes a pledgor pursuant thereto (incorporated by reference to Exhibit 10.61 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). | |||
|
10.53
|
Form of Performance-Based One-Time RSU Award Agreement.† | |||
|
10.54
|
Form of Make-Whole One-Time RSU Award Agreement.† | |||
|
10.55
|
Form of Incentive One-Time RSU Award Agreement.† | |||
|
10.56
|
Form of Signature Card for Equity Awards (employees in Asia outside China).† | |||
|
10.57
|
Form of Signature Card for Equity Awards (employees in China).† | |||
|
10.58
|
Amendments to Certain Equity Award Agreements (incorporated by reference to Exhibit 10.68 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008).† | |||
|
10.59
|
Amendments to Certain Non-Employee Director Equity Award Agreements (incorporated by reference to Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008).† | |||
|
10.60
|
Form of Year-End RSU Award Agreement (U.K.).† | |||
|
10.61
|
Form of Year-End Supplemental RSU Award Agreement (U.K.).† | |||
|
10.62
|
Form of Year-End Supplemental RSU Award Agreement (U.K. and France).† | |||
|
12.1
|
Statement re: Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | |||
|
21.1
|
List of significant subsidiaries of The Goldman Sachs Group, Inc. | |||
|
23.1
|
Consent of Independent Registered Public Accounting Firm. | |||
|
31.1
|
Rule 13a-14(a) Certifications.* | |||
|
32.1
|
Section 1350 Certifications.* |
232
Table of Contents
|
99.1
|
Report of Independent Registered Public Accounting Firm on Selected Financial Data. | |||
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Earnings for the fiscal years ended December 31, 2009, November 28, 2008 and November 30, 2007 and the one-month transition period ended December 26, 2008, (ii) the Consolidated Statements of Financial Condition as of December 31, 2009 and November 28, 2008, (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended December 31, 2009, November 28, 2008 and November 30, 2007, (iv) the Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2009, November 28, 2008 and November 30, 2007 and the one-month transition period ended December 26, 2008, (v) the Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2009, November 28, 2008 and November 30, 2007 and the one-month transition period ended December 26, 2008, and (vi) the notes to the Consolidated Financial Statements, tagged as blocks of text.* |
| † | This exhibit is a management contract or a compensatory plan or arrangement. |
| * | This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
233
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
|
| Title: | Chief Financial Officer |
Date: February 26, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
Signature
|
Capacity
|
Date
|
||||
|
/s/ Lloyd
C. Blankfein
|
Director, Chairman and
Chief Executive Officer (Principal Executive Officer) |
February 26, 2010 | ||||
|
/s/ John
H. Bryan
|
Director | February 26, 2010 | ||||
|
/s/ Gary
D. Cohn
|
Director | February 26, 2010 | ||||
|
/s/ Claes
Dahlbäck
|
Director | February 26, 2010 | ||||
|
/s/ Stephen
Friedman
|
Director | February 26, 2010 | ||||
|
/s/ William
W. George
|
Director | February 26, 2010 | ||||
|
/s/ Rajat
K. Gupta
|
Director | February 26, 2010 | ||||
|
/s/ James
A. Johnson
|
Director | February 26, 2010 | ||||
|
/s/ Lois
D. Juliber
|
Director | February 26, 2010 | ||||
|
/s/ Lakshmi
N. Mittal
|
Director | February 26, 2010 | ||||
|
/s/ James
J. Schiro
|
Director | February 26, 2010 | ||||
II-1
Table of Contents
|
Signature
|
Capacity
|
Date
|
||||
|
/s/ Ruth
J. Simmons
|
Director | February 26, 2010 | ||||
|
/s/ David
A. Viniar
|
Chief Financial Officer
(Principal Financial Officer) |
February 26, 2010 | ||||
|
/s/ Sarah
E. Smith
|
Principal Accounting Officer | February 26, 2010 | ||||
II-2
TABLE OF CONTENTS
Part IprintItem 1. BusinessprintItem 1A. Risk FactorsprintItem 1B. Unresolved Staff CommentsprintItem 2. PropertiesprintItem 3. Legal ProceedingsprintItem 4. Submission Of Matters To A Vote Of Security HoldersprintPart IIprintItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesprintItem 6. Selected Financial DataprintItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 7A. Quantitative and Qualitative Disclosures About Market RiskprintItem 8. Financial Statements and Supplementary DataprintNote 1. Description Of BusinessprintNote 2. Significant Accounting PoliciesprintNote 3. Financial InstrumentsprintNote 4. Securitization Activities and Variable Interest EntitiesprintNote 5. DepositsprintNote 6. Short-term BorrowingsprintNote 7. Long-term BorrowingsprintNote 8. Commitments, Contingencies and GuaranteesprintNote 9. Shareholders EquityprintNote 10. Earnings Per Common ShareprintNote 11. Goodwill and Identifiable Intangible AssetsprintNote 12. Other Assets and Other LiabilitiesprintNote 13. Employee Benefit PlansprintNote 14. Employee Incentive PlansprintNote 15. Transactions with Affiliated FundsprintNote 16. Income TaxesprintNote 17. Regulation and Capital AdequacyprintNote 18. Business SegmentsprintNote 19. Interest Income and Interest ExpenseprintNote 20. Parent CompanyprintItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureprintItem 9A. Controls and ProceduresprintItem 9B. Other InformationprintPart IIIprintItem 10. Directors, Executive Officers and Corporate GovernanceprintItem 11. Executive CompensationprintItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersprintItem 13. Certain Relationships and Related Transactions, and Director IndependenceprintItem 14. Principal Accountant Fees and ServicesprintPart IVprintItem 15. Exhibits and Financial Statement Schedulesprint