GOLDMAN SACHS GROUP INC
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
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; and Index-Linked Notes due 2011 | NYSE Amex | |
| 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 | |
|
6.125% Notes due 2060
|
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 30, 2010, the aggregate market value of the
common stock of the registrant held by
non-affiliates
of the registrant was approximately $66.7 billion.
As of
February 11, 2011, there were 520,507,295 shares of
the registrant’s common stock outstanding.
Documents
incorporated by reference:
Portions of The
Goldman Sachs Group, Inc.’s Proxy Statement for its 2011
Annual Meeting of Shareholders to be held on
May 6, 2011 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, 2010
INDEX
Table of Contents
| 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.
When we use the terms “Goldman Sachs,” “the
firm,” “we,” “us” and “our,”
we mean The Goldman Sachs Group, Inc. (Group Inc.), a
Delaware corporation, and its consolidated subsidiaries.
References to “this
Form 10-K”
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010. All
references to 2010, 2009 and 2008 refer to our fiscal years
ended, or the dates, as the context requires,
December 31, 2010, December 31, 2009 and
November 28, 2008, respectively.
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). Our
U.S. depository institution subsidiary, Goldman Sachs Bank
USA (GS Bank USA), is a New York State-chartered bank.
As of December 2010, we had offices in over 30 countries
and 44% of our total staff was based outside the Americas (which
includes the countries in North and South America). Our clients
are located worldwide, and we are an active participant in
financial markets around the world. In 2010, we generated 45% of
our net revenues outside the Americas. For more information on
our geographic results, see Note 27 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K.
Our Business
Segments and Segment Operating Results
We report our activities in four business segments: Investment
Banking; Institutional Client Services; Investing &
Lending; and Investment Management. The chart below presents our
four business segments. Prior to the end of 2010, we reported
our activities in three segments.
1
Table of Contents
The table below presents our segment operating results.
| Year Ended 1 | % of 2010 | |||||||||||||||||||
|
December
|
December
|
November
|
Net
|
|||||||||||||||||
| $ in millions | 2010 | 2009 | 2008 | Revenues | ||||||||||||||||
|
Investment Banking
|
Net revenues | $ | 4,810 | $ | 4,984 | $ | 5,453 | 12% | ||||||||||||
| Operating expenses | 3,511 | 3,482 | 3,269 | |||||||||||||||||
| Pre-tax earnings/(loss) | $ | 1,299 | $ | 1,502 | $ | 2,184 | ||||||||||||||
|
Institutional Client Services
|
Net revenues | $ | 21,796 | $ | 32,719 | $ | 22,345 | 56% | ||||||||||||
| Operating expenses | 14,291 | 13,691 | 10,294 | |||||||||||||||||
| Pre-tax earnings | $ | 7,505 | $ | 19,028 | $ | 12,051 | ||||||||||||||
|
Investing & Lending
|
Net revenues | $ | 7,541 | $ | 2,863 | $ | (10,821 | ) | 19% | |||||||||||
| Operating expenses | 3,361 | 3,523 | 2,719 | |||||||||||||||||
| Pre-tax earnings/(loss) | $ | 4,180 | $ | (660 | ) | $ | (13,540 | ) | ||||||||||||
|
Investment Management
|
Net revenues | $ | 5,014 | $ | 4,607 | $ | 5,245 | 13% | ||||||||||||
| Operating expenses | 4,051 | 3,673 | 3,528 | |||||||||||||||||
| Pre-tax earnings | $ | 963 | $ | 934 | $ | 1,717 | ||||||||||||||
|
Total
|
Net revenues | $ | 39,161 | $ | 45,173 | $ | 22,222 | |||||||||||||
| Operating expenses 2 | 26,269 | 25,344 | 19,886 | |||||||||||||||||
| Pre-tax earnings/(loss) | $ | 12,892 | $ | 19,829 | $ | 2,336 | ||||||||||||||
| 1. | Financial information concerning our business segments for 2010, 2009 and 2008 (with prior periods recast to reflect our new segment reporting) is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data,” which are in Part II, Items 7 and 8, respectively, of this Form 10-K. See Note 27 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a further breakdown of our net revenues. |
| 2. | Includes the following expenses that have not been allocated to our segments: (i) charitable contributions of $345 million and $810 million for the years ended December 2010 and December 2009, respectively; (ii) net provisions for a number of litigation and regulatory proceedings of $682 million, $104 million and $(4) million for the years ended December 2010, December 2009 and November 2008, respectively; and (iii) real estate-related exit costs of $28 million, $61 million and $80 million for the years ended December 2010, December 2009 and November 2008, respectively. |
Investment
Banking
Investment Banking serves corporate and government clients
around the world. We provide financial advisory services and
help companies raise capital to strengthen and grow their
businesses. We seek to develop and maintain
long-term
relationships with a diverse global group of institutional
clients, including governments, states and municipalities. Our
goal is to deliver to our clients the entire resources of the
firm in a seamless fashion, with investment banking serving as
the main initial point of contact with Goldman Sachs.
Financial Advisory.
Financial Advisory
includes strategic advisory assignments with respect to mergers
and acquisitions, divestitures, corporate defense activities,
risk management, restructurings and
spin-offs.
In particular, we help clients execute large, complex
transactions for which we provide multiple services, including
“one-stop”
acquisition financing and cross-border structuring expertise.
We also assist our clients in managing their asset and liability
exposures and their capital. In addition, we may provide lending
commitments and bank loan and bridge loan facilities in
connection with our advisory assignments.
2
Table of Contents
Underwriting.
The other core activity of
Investment Banking is helping companies raise capital to fund
their businesses. As a financial intermediary, our job is to
match the capital of our investing clients — who aim
to grow the savings of millions of people — with
the needs of our corporate and government clients —
who need financing to generate growth, create jobs and deliver
products and services. Our underwriting activities include
public offerings and private placements, including domestic and
cross-border transactions, of a wide range of securities and
other financial instruments. Underwriting also includes revenues
from derivative transactions entered into with institutional
clients in connection with our underwriting activities.
Equity Underwriting.
We underwrite
common and preferred stock and convertible and exchangeable
securities. We regularly receive mandates for large, complex
transactions and have held a leading position in worldwide
public common stock offerings and worldwide initial public
offerings for many years.
Debt Underwriting.
We underwrite and
originate various types of debt instruments, including
investment-grade
and
high-yield
debt, bank loans and bridge loans, and emerging and growth
market debt, which may be issued by, among others, corporate,
sovereign, municipal and agency issuers. In addition, we
underwrite and originate structured securities, which include
mortgage-related
securities and other
asset-backed
securities.
Institutional
Client Services
Institutional Client Services serves our clients who come to the
firm to buy and sell financial products, raise funding and
manage risk. We do this by acting as a market maker and offering
market expertise on a global basis. Institutional Client
Services makes markets and facilitates client transactions in
fixed income, equity, currency and commodity products. In
addition, we make markets in and clear client transactions on
major stock, options and futures exchanges worldwide. Market
makers provide liquidity and play a critical role in price
discovery, which contributes to the overall efficiency of the
capital markets. Our willingness to make markets, commit capital
and take risk in a broad range of products is crucial to our
client relationships.
Our clients are primarily institutions that are professional
market participants, including investment entities whose
ultimate customers include individual investors investing for
their retirement, buying insurance or putting aside surplus cash
in a deposit account.
Through our global sales force, we maintain relationships with
our clients, receiving orders and distributing investment
research, trading ideas, market information and analysis. As a
market maker, we provide prices to clients globally across
thousands of products in all major asset classes and markets. At
times we take the other side of transactions ourselves if a
buyer or seller is not readily available and at other times we
connect our clients to other parties who want to transact. Much
of this connectivity between the firm and its clients is
maintained on technology platforms and operates globally
wherever and whenever markets are open for trading.
Institutional Client Services and our other businesses are
supported by our Global Investment Research division, which, as
of December 2010, provided fundamental research on more
than 3,300 companies worldwide and over 45 national economies,
as well as on industries, currencies and commodities.
Institutional Client Services generates revenues in three ways:
| • | In large, highly liquid markets (such as markets for U.S. Treasury bills or large capitalization S&P 500 stocks), we execute a high volume of transactions for our clients for modest spreads and fees. |
| • | In less liquid markets (such as mid-cap corporate bonds and growth market currencies), we execute transactions for our clients for spreads and fees that are generally somewhat larger. |
| • | We also structure and execute transactions involving customized or tailor-made products that address our clients’ risk exposures, investment objectives or other complex needs (such as a jet fuel hedge for an airline). |
Institutional Client Services activities are organized by asset
class and include both “cash” and
“derivative” instruments. “Cash” refers to
trading the underlying instrument (such as a stock, bond or
barrel of oil). “Derivative” refers to instruments
that derive their value from underlying asset prices, indices,
reference rates and other inputs, or a combination of these
factors (such as an option, which is the right or obligation to
buy or sell a certain bond or stock index on a specified date in
the future at a certain price, or an interest rate swap, which
is the right to convert a fixed rate of interest into a floating
rate or vice versa).
3
Table of Contents
Fixed Income, Currency and Commodities Client
Execution.
Includes interest rate products,
credit products, mortgages, currencies and commodities.
| • | Interest Rate Products. Government bonds, money market instruments such as commercial paper, treasury bills, repurchase agreements and other highly liquid securities and instruments, as well as interest rate swaps, options and other derivatives. |
| • | Credit Products. Investment-grade corporate securities, high-yield securities, bank and secured loans, municipal securities, emerging market and distressed debt, and credit derivatives. |
| • | Mortgages. Commercial and residential mortgage-related securities and loan products, and other asset-backed and derivative instruments. |
| • | Currencies. Most currencies, including growth market currencies. |
| • | Commodities. Oil and natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products. |
Equities.
Includes equity client execution,
commissions and fees, and securities services.
Equities Client Execution.
We make
markets in equity securities and
equity-related
products, including convertible securities, options, futures and
over-the-counter
(OTC) derivative instruments, on a global basis. As a principal,
we facilitate client transactions by providing liquidity to our
clients with large blocks of stocks or options, requiring the
commitment of our capital. In addition, we engage in insurance
activities where we reinsure and purchase portfolios of
insurance risk and acquire pension liabilities.
We also structure and execute derivatives on indices, industry
groups, financial measures and individual company stocks. We
develop strategies and provide information about portfolio
hedging and restructuring and asset allocation transactions for
our clients. We also work with our clients to create specially
tailored instruments to enable sophisticated investors to
establish or liquidate investment positions or undertake hedging
strategies. We are one of the leading participants in the
trading and development of equity derivative instruments.
Our exchange-based
market-making
activities include making markets in stocks and
exchange-traded
funds. In the United States, we are one of the leading
Designated Market Makers (DMMs) for stocks traded on the NYSE.
For ETFs, we are registered market makers on NYSE Arca. 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 Amex. In futures and options on futures, we are market
makers on the Chicago Mercantile Exchange and the Chicago Board
of Trade.
Commissions and Fees.
We generate
commissions and fees from executing and clearing institutional
client transactions on major stock, options and futures
exchanges worldwide. We increasingly provide our clients with
access to electronic
“low-touch”
equity trading platforms, and electronic trades account for the
majority of our equity trading activity. However, a majority of
our net revenues in these activities continue to be derived from
our traditional
“high-touch”
handling of more complex trades. We expect both types of
activity to remain important.
Securities Services.
Includes
financing, securities lending and other prime brokerage services.
| • | Financing Services. We provide financing to our clients for their securities trading activities through margin loans that are collateralized by securities, cash or other acceptable collateral. We earn a spread equal to the difference between the amount we pay for funds and the amount we receive from our client. |
| • | Securities Lending Services. We provide services that principally involve borrowing and lending securities to cover institutional clients’ short sales and borrowing securities to cover our short sales and otherwise to make deliveries into the market. In addition, we are an active participant in broker-to-broker securities lending and third-party agency lending activities. |
| • | Other Prime Brokerage Services. We earn fees by providing clearing, custody and settlement services globally. In addition, we help our hedge fund and other clients maintain the infrastructure that supports their investing activity by providing a suite of services from the moment a client begins the process of establishing a new investing business. We provide a technology platform and reporting which enables clients to monitor their security portfolios, and manage risk exposures. |
4
Table of Contents
Investing &
Lending
Our investing and lending activities, which are typically
longer-term, include the firm’s investing and relationship
lending activities across various asset classes, primarily
including debt securities and loans, public and private equity
securities, and real estate. These activities include investing
directly in publicly and privately traded securities and also
through certain investment funds that we manage. We also provide
financing to our clients. We manage a diversified global
portfolio of investments in equity and debt securities and other
investments in privately negotiated transactions, leveraged
buyouts, acquisitions and investments in funds managed by
external parties.
ICBC.
We have an investment in the ordinary
shares of ICBC, the largest bank in China.
Equity Securities (excluding ICBC).
We
make corporate, real estate and infrastructure
equity-related
investments.
Debt Securities and Loans.
We make
corporate, real estate and infrastructure debt security-related
investments. In addition, we provide credit to corporate clients
through loan facilities and to
high-net-worth
individuals through secured loans.
Other.
Our other investments primarily
include our consolidated investment entities, which are entities
we hold for investment purposes strictly for capital
appreciation. These entities have a defined exit strategy and
are engaged in activities that are not closely related to our
principal businesses. We also invest directly in distressed
assets, currencies, commodities and other assets, including
power generation facilities.
Investment
Management
Investment Management provides investment and wealth advisory
services to help clients preserve and grow their financial
assets. Our clients include institutions and
high-net-worth
individuals as well as retail investors, who access our products
through a network of
third-party
distributors around the world.
We manage client assets across a broad range of asset classes
and investment strategies, including equity, fixed income and
alternative investments. Alternative investments primarily
include hedge funds, private equity, real estate, currencies,
commodities, and asset allocation strategies. Our investment
offerings include those managed on a fiduciary basis by our
portfolio managers as well as strategies managed by
third-party
managers. We offer our investments in a variety of structures,
including separately managed
accounts, mutual funds, private partnerships and other
commingled vehicles.
We also provide customized investment advisory solutions
designed to address our clients’ investment needs. These
solutions begin with identifying clients’ objectives and
continue through portfolio construction, ongoing asset
allocation and risk management and investment realization. We
draw from a variety of
third-party
managers as well as our proprietary offerings to implement
solutions for clients.
We supplement our investment advisory solutions for
high-net-worth
clients with wealth advisory services that include income and
liability management, trust and estate planning, philanthropic
giving and tax planning. We also use the firm’s global
securities and derivatives
market-making
capabilities to address clients’ specific investment needs.
Management and Other Fees.
The majority
of revenues in management and other fees is comprised of
asset-based
management fees on client assets. The fees that we charge vary
by asset class and are affected by investment performance as
well as asset inflows and redemptions. Other fees we receive
include financial counseling fees generated through our wealth
advisory services and fees related to the administration of real
estate assets.
Assets under management include only those client assets where
we earn a fee for managing assets on a discretionary basis. This
includes assets in our mutual funds, hedge funds, private equity
funds and separately managed accounts for institutional and
individual investors. Assets under management do not include the
self-directed
assets of our clients, including brokerage accounts, or
interest-bearing deposits held through our bank depository
institution subsidiaries.
Incentive Fees.
In certain circumstances, we
are also entitled to receive incentive fees based on a
percentage of a fund’s or a separately managed
account’s return, or when the return exceeds a specified
benchmark or other performance targets. Such fees include
overrides, which consist of the increased share of the income
and gains derived primarily from our private equity and real
estate funds when the return on a fund’s investments over
the life of the fund exceeds certain threshold returns.
Incentive fees are recognized only when all material
contingencies are resolved.
Transaction Revenues.
We receive commissions
and net spreads for facilitating transactional activity in
high-net-worth
client accounts. In addition, we earn net interest income
primarily associated with client deposits and margin lending
activity undertaken by such clients.
5
Table of Contents
The tables below present assets under management by asset class
and by distribution channel and client category.
| As of | ||||||||||||||
|
December 31,
|
December 31,
|
November 30,
|
||||||||||||
| in billions | 2010 | 2009 | 2008 | |||||||||||
|
Alternative investments
|
$ | 148 | $ | 146 | $ | 146 | ||||||||
|
Equity
|
144 | 146 | 112 | |||||||||||
|
Fixed income
|
340 | 315 | 248 | |||||||||||
|
Total
non-money
market assets
|
632 | 607 | 506 | |||||||||||
|
Money markets
|
208 | 264 | 273 | |||||||||||
|
Total assets under management
|
$ | 840 | $ | 871 | $ | 779 | ||||||||
| As of | ||||||||||||||
|
December 31,
|
December 31,
|
November 30,
|
||||||||||||
| in billions | 2010 | 2009 | 2008 | |||||||||||
|
Directly Distributed:
|
||||||||||||||
|
Institutional
|
$ | 286 | $ | 297 | $ | 273 | ||||||||
|
High-net-worth
individuals
|
229 | 231 | 215 | |||||||||||
|
Third-Party
Distributed:
|
||||||||||||||
|
Institutional,
high-net-worth
individuals and retail
|
325 | 343 | 291 | |||||||||||
|
Total
|
$ | 840 | $ | 871 | $ | 779 | ||||||||
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 regulatory requirements, including
those of FINRA. 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, and
includes an evaluation of an employee’s performance with
respect to risk management, compliance and diversity.
As of December 2010, we had 35,700 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
Form 10-K
for additional information on our consolidated entities held for
investment purposes.
6
Table of Contents
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
entities 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.
We also face intense competition in attracting and retaining
qualified employees. Our ability to continue to compete
effectively will depend upon our ability to attract new
employees, 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” and “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
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 client execution
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.
Consolidation and convergence have significantly increased the
capital base and geographic reach of some of our competitors,
and have 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 have more capital 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
“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.
The provisions of the
U.S. Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
and other financial regulation could affect our competitive
position to the extent that limitations on activities, increased
fees and compliance costs or other regulatory requirements do
not apply, or do not apply equally, to all of our competitors.
The impact of the Dodd-Frank Act on our competitive position
will depend to a large extent on the details of the required
rulemaking, as discussed further under “Regulation”
below.
7
Table of Contents
Regulation
As a participant in the banking, securities, futures and options
and insurance industries, we are subject to extensive regulation
worldwide. Regulatory bodies around the world are generally
charged with safeguarding the integrity of the securities and
other financial markets and with protecting the interests of the
customers of market participants, including depositors in
banking entities and the customers of
broker-dealers.
They are not, however, generally charged with protecting the
interests of security holders.
The financial services industry has been the subject of intense
regulatory scrutiny in recent years. Our businesses have been
subject to increasing regulation in the United States and other
countries, and we expect this trend to continue in the future.
The Dodd-Frank Act, which was enacted in July 2010,
significantly alters the framework within which we operate,
including through the creation of a new systemic risk oversight
body, the Financial Stability Oversight Council (FSOC). The FSOC
will oversee and coordinate the efforts of the primary
U.S. financial regulatory agencies (including the Federal
Reserve Board, the SEC, the CFTC and the FDIC) in establishing
regulations to address financial stability concerns. The
Dodd-Frank Act directs the FSOC to make recommendations to the
Federal Reserve Board as to supervisory requirements and
prudential standards applicable to systemically important
financial institutions, including
risk-based
capital, leverage, liquidity and
risk-management
requirements. The Dodd-Frank Act mandates that the requirements
applicable to systemically important financial institutions be
more stringent than those applicable to other financial
companies. Although the criteria for treatment as a systemically
important financial institution have not yet been determined, it
is probable that they will apply to our firm.
The implications of the Dodd-Frank Act for our businesses will
depend to a large extent on the provisions of required future
rulemaking by the Federal Reserve, the FDIC, the SEC, the CFTC
and other agencies, as well as the development of market
practices and structures under the regime established by the
legislation and the rules adopted pursuant to it, as discussed
further throughout this section.
Banking
Regulation
In September 2008, Group Inc. became a bank holding
company under the Bank Holding Company Act of 1956 (BHC Act) and
the Federal Reserve Board became the primary regulator of
Group Inc., as a consolidated entity. In August 2009,
Group Inc. became a financial holding company under
amendments to the BHC Act effected by the
U.S. Gramm-Leach-Bliley
Act of 1999 (GLB Act).
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 serves as the primary regulator of our
consolidated organization, but generally defers to the primary
regulators of our
U.S. non-bank
subsidiaries with respect to the activities of those
subsidiaries. Such “functionally regulated”
non-bank
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
advisers registered with the SEC with respect to their
investment advisory activities and entities regulated by the
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, 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, including our
U.S. depository institution subsidiaries (consisting of
GS Bank USA and our national bank trust company subsidiary)
maintaining their status as “well-capitalized” and
“well-managed” as described under
“— Prompt Corrective Action” below. These
activities include underwriting, dealing and making markets in
securities, insurance underwriting and making investments in
nonfinancial companies. In addition, we are permitted under the
GLB Act to continue to engage in certain commodities
activities in the United States that would otherwise be
impermissible for bank holding companies, so long as the assets
held pursuant to these activities do not equal 5% or more of our
consolidated assets.
8
Table of Contents
Beginning in July 2011, our financial holding company
status will also depend on Group Inc.’s maintaining
its status as “well-capitalized” and
“well-managed.”
As a bank holding company, we are 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.
We expect to face additional limitations on our activities upon
implementation of those provisions of the
Dodd-Frank
Act referred to as the “Volcker Rule,” which will
prohibit “proprietary trading” (other than for certain
risk-mitigation
activities) and limit the sponsorship of, and investment in,
hedge funds and private equity funds by banking entities,
including bank holding companies such as us. The extent of the
additional limitations will depend on the details of agency
rulemaking. The Volcker Rule provisions will take effect no
later than July 2012, and companies will be required to
come into compliance within two years after the effective date
(subject to possible extensions).
Capital and
Liquidity Requirements
As a bank holding company, we are subject to consolidated
regulatory capital requirements administered by the Federal
Reserve Board. GS Bank USA is subject to broadly similar
capital requirements, as discussed below. Under the Federal
Reserve Board’s capital adequacy requirements and the
regulatory framework for prompt corrective action that is
applicable to GS Bank USA, Group Inc. and GS Bank
USA must meet specific regulatory capital requirements that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet
items. The calculation of our capital levels and those of
GS Bank USA, as well as GS Bank USA’s prompt
corrective action classification, are also subject to
qualitative judgments by regulators.
Tier 1 Leverage and Basel I Capital
Ratios.
See Note 20 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
for information on our Tier 1 capital ratio, Tier 1
capital, total capital,
risk-weighted
assets and Tier 1 leverage ratio, and for a discussion of
minimum required ratios.
Pending Changes in Capital Requirements.
We
are currently working to implement the requirements set out in
the Federal Reserve Board’s Capital Adequacy Guidelines for
Bank Holding Companies: Internal Ratings-Based and Advanced
Measurement Approaches, which are based on the advanced
approaches under the Revised Framework for the International
Convergence of Capital Measurement and Capital Standards issued
by the Basel Committee on Banking Supervision (Basel Committee)
as such requirements apply to us as a bank holding company
(Basel 2). U.S. banking regulators have incorporated
the Basel 2 framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as us, transition to Basel 2
following the successful completion of a parallel run.
In addition, the Basel Committee has undertaken a program of
substantial revisions to its capital guidelines. In particular,
the changes in the “Basel 2.5” guidelines will
result in increased capital requirements for market risk.
Additionally, the Basel 3 guidelines issued by the Basel
Committee in December 2010 revise the definition of
Tier 1 capital, introduce Tier 1 common equity as a
regulatory metric, set new minimum capital ratios (including a
new “capital conservation buffer,” which must be
composed exclusively of Tier 1 common equity and will be in
addition to the other capital ratios), introduce a Tier 1
leverage ratio within international guidelines for the first
time, and make substantial revisions to the computation of
risk-weighted
assets for credit exposures. Implementation of the new
requirements is expected to take place over an extended
transition period, starting at the end of 2011 (for
Basel 2.5) and end of 2012 (for Basel 3). Although the
U.S. federal banking agencies have now issued proposed
rules that are intended to implement certain aspects of the
Basel 2.5 guidelines, they have not yet addressed all
aspects of those guidelines or the Basel 3 changes. In
addition, both the Basel Committee and U.S. banking
regulators implementing the Dodd-Frank Act have indicated that
they will impose more stringent capital standards on
systemically important financial institutions. Therefore, the
regulations ultimately applicable to us may be substantially
different from those that have been published to date.
9
Table of Contents
The Dodd-Frank Act will subject Goldman Sachs at a firmwide
level to the same leverage and
risk-based
capital requirements that apply to depository institutions, and
directs banking regulators to impose additional capital
requirements, as discussed above. The Federal Reserve Board will
be required to begin implementing the new leverage and
risk-based
capital regulation by January 2012. As a consequence of
these changes, Tier 1 capital treatment for our junior
subordinated debt issued to trusts and our cumulative preferred
stock will be phased out over a three-year period beginning on
January 1, 2013. The interaction between the
Dodd-Frank Act and the Basel Committee’s proposed changes
adds further uncertainty to our future capital requirements. For
example, regulations implementing provisions of the Dodd-Frank
Act are expected to subject us to a continuing “floor”
of the Federal Reserve Board’s regulatory requirements
currently applicable to bank holding companies (Basel 1),
which are based on the Capital Accord of the Basel Committee, in
cases where Basel 2 or Basel 3 would otherwise permit lower
capital requirements.
Liquidity Ratios under Basel 3.
Historically,
regulation and monitoring of bank and bank holding company
liquidity has been addressed as a supervisory matter, both in
the U.S. and internationally, without required formulaic
measures. Basel 3 will require banks and bank holding companies
to measure their liquidity against two specific liquidity tests
that, although similar in some respects to liquidity measures
historically applied by banks and regulators for management and
supervisory purposes, will be required by regulation. One test,
referred to as the liquidity coverage ratio, is designed to
ensure that the banking entity maintains an adequate level of
unencumbered
high-quality
liquid assets equal to the entity’s expected net cash
outflow for a
30-day
time
horizon (or, if greater, 25% of its expected total cash outflow)
under an acute liquidity stress scenario. The other, referred to
as the net stable funding ratio, is designed to promote more
medium- and
long-term
funding of the assets and activities of banking entities over a
one-year
time horizon. These requirements may incent banking entities to
increase their holdings of U.S. Treasury securities and
other sovereign debt as a component of assets and increase the
use of
long-term
debt as a funding source. The liquidity coverage ratio would be
implemented subject to an observation period beginning in 2011,
but would not be introduced as a requirement until
January 1, 2015, and the net stable funding ratio
would not be introduced as a requirement until
January 1, 2018. These new standards are subject to
further rulemaking and their terms may change before
implementation.
Payment of
Dividends
Dividend payments by Group Inc. to its shareholders are
subject to the oversight of the Federal Reserve Board. Under
temporary guidance issued by the Federal Reserve Board in
November 2010, the dividend policy of large bank holding
companies, such as Goldman Sachs, is reviewed by the Federal
Reserve Board based on capital plans and stress tests submitted
by the bank holding company, and will be assessed against, among
other things, the ability to achieve the Basel 3 capital ratio
requirements referred to above as they are phased in by
U.S. regulators and any potential impact of the Dodd-Frank
Act on the company’s risk profile, business strategy,
corporate structure or capital adequacy. The Federal
Reserve’s current guidance provides that, for large bank
holding companies like us, dividend payout ratios exceeding 30%
of after-tax net income will receive particularly close scrutiny.
Federal and state law imposes limitations on the payment of
dividends by our depository institution subsidiaries to
Group Inc. In general, the amount of dividends that may be
paid by 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 the
entity 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 entity obtains prior
regulatory approval. Under the undivided profits test, a
dividend may not be paid in excess of the entity’s
“undivided profits” (generally, accumulated net
profits that have not been paid out as dividends or transferred
to surplus). While GS Bank USA could have declared
dividends of $4.63 billion to Group Inc. as of
December 2010 in accordance with these limitations, the
banking regulators have overriding authority to prohibit the
payment of any dividends by GS Bank USA. 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.
In addition, certain of Group Inc.’s
non-bank
subsidiaries are subject to separate regulatory limitations on
dividends and distributions, including our
broker-dealer
and our insurance subsidiaries as described below.
10
Table of Contents
Source of
Strength
Federal Reserve Board policy historically has required bank
holding companies to act as a source of strength to their bank
subsidiaries and to commit capital and financial resources to
support those subsidiaries. The Dodd-Frank Act codifies this
policy as a statutory requirement. This 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 a subsidiary bank are subordinate in right of payment
to deposits and to certain other indebtedness of the subsidiary
bank. 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 priority
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 entity
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 FDIC 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 depository institutions 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, the cross-guarantee would
apply to all such insured depository institutions.
Compensation
Practices
Our compensation practices are subject to oversight by the
Federal Reserve Board and, with respect to some of our
subsidiaries and employees, by other financial regulatory bodies
worldwide. The scope and content of compensation regulation in
the financial industry are continuing to develop, and we expect
that these policies will evolve over a number of years.
The Dodd-Frank Act requires the U.S. financial regulators,
including the Federal Reserve Board, to establish joint
regulations or guidelines prohibiting incentive-based payment
arrangements at specified regulated entities having at least
$1 billion in total assets (which would include
Group Inc. and some of its depositary institution,
broker-dealer
and investment advisor subsidiaries) that encourage
inappropriate risks by providing an executive officer, employee,
director or principal shareholder with excessive compensation,
fees, or benefits or that could lead to material financial loss
to the entity. In addition, these regulators must establish
regulations or guidelines requiring enhanced disclosure to
regulators of incentive-based compensation arrangements. The
initial version of these regulations was proposed by the FDIC in
February 2011 and the regulations may become effective
before the end of 2011. If the regulations are adopted in the
form initially proposed, they will impose limitations on the
manner in which we may structure compensation for our executives.
In June 2010, the Federal Reserve Board and other financial
regulators jointly issued guidance designed to ensure that
incentive compensation arrangements at banking organizations
take into account risk and are consistent with safe and
sound practices. The guidance sets forth the following three key
principles with respect to incentive compensation arrangements:
the arrangements should provide employees incentives that
appropriately balance risk and financial results in
a manner that does not encourage employees to expose their
organizations to imprudent risk; the arrangements should be
compatible with effective controls and risk management; and the
arrangements should be supported by strong corporate governance.
These three principles are incorporated into the proposed joint
compensation regulations under
Dodd-Frank,
discussed above. In addition, the Federal Reserve Board has
conducted a review of the incentive compensation policies and
practices of a number of large, complex banking organizations,
including us. The June 2010 guidance provides that
supervisory findings with respect to incentive compensation will
be incorporated, as appropriate, into the organization’s
supervisory ratings, which can affect its ability to make
acquisitions or perform other actions. The guidance also
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.
11
Table of Contents
The Financial Stability Board, established at the direction of
the leaders of the Group of 20, has 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. In July 2010, the European Parliament adopted
amendments to the Capital Requirements Directive designed to
implement the Financial Stability Board’s compensation
standards within the EU. Regulators in a number of countries,
including the United Kingdom, France and Germany, have proposed
or adopted compensation policies or regulations applicable to
financial institutions pursuant to the Capital Requirements
Directive. These are in addition to the proposals and guidance
issued by U.S. financial regulators discussed above.
GS Bank
USA
Our subsidiary, GS Bank USA, an FDIC-insured, 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 (described further below) that are
calculated in a manner similar to those applicable to bank
holding companies. A number of our activities are conducted
partially or entirely through GS Bank USA and its
subsidiaries, including: origination of and market making in
bank loans; 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 activities are subject to regulation by the
Federal Reserve Board, the New York State Banking Department and
the FDIC.
The Dodd-Frank Act contains “derivative push-out”
provisions that, beginning in July 2012, will essentially
prevent us from conducting certain
swaps-related
activities through GS Bank USA or another insured
depository institution subsidiary, subject to exceptions for
certain interest rate and currency swaps and for hedging or risk
mitigation activities directly related to the bank’s
business. These precluded activities may be conducted elsewhere
within the firm, subject to certain requirements.
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 arm’s-length basis. These
regulations generally do not apply to transactions between
GS Bank USA and its subsidiaries. The Dodd-Frank Act
significantly expands the coverage and scope of the regulations
that limit affiliate transactions within a banking organization,
including coverage of the credit exposure on derivative
transactions, repurchase and reverse repurchase agreements,
securities borrowing and lending transactions, and transactions
with sponsored hedge funds and private equity funds.
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;
(iii) protect GS Bank USA or reimburse it for certain
losses arising from derivatives and mortgage servicing rights
transferred to GS Bank USA; and (iv) pledge collateral
to GS Bank USA.
The Dodd-Frank Act will require us to prepare and provide to
regulators a resolution plan (a so-called “living
will”) that must, among other things, ensure that our
depository institution subsidiaries are adequately protected
from risks arising from our other subsidiaries. The
establishment and maintenance of this resolution plan may, as a
practical matter, present additional constraints on our entity
structure and transactions among our subsidiaries.
12
Table of Contents
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, such as GS Bank USA, and
these assessments are currently based on the risk category of an
institution and the amount of insured deposits that it holds.
The FDIC required all insured depository institutions to prepay
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. In accordance with the Dodd-Frank Act, the FDIC amended
its regulations, effective April 1, 2011, to base insurance
assessments on the average total consolidated assets less the
average tangible equity of the insured depository institution
during the assessment period.
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 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 connection with
the November 2008 asset transfer described under
“Transactions with Affiliates” below, GS Bank USA
agreed with the Federal Reserve Board to maintain minimum
capital ratios in excess of these “well-capitalized”
levels.
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information on the calculation of GS Bank USA’s
capital ratios under Basel 1 and for a discussion of
minimum required ratios.
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 1 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 holding company, the guarantee would take priority over
the holding company’s general unsecured creditors.
Insolvency of an
Insured Depository Institution or a Bank Holding
Company
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. |
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.
13
Table of Contents
The Dodd-Frank Act creates a resolution regime for systemically
important
non-bank
financial companies, including bank holding companies and their
affiliates, under which the FDIC may be appointed receiver to
liquidate the entity. This resolution authority was based on the
FDIC resolution model for depository institutions, with certain
modifications to reflect differences between depository
institutions and
non-bank
financial companies and to reduce disparities between the
treatment of creditors’ claims under the
U.S. Bankruptcy Code and in an orderly liquidation
authority proceeding compared to those that would exist under
the resolution model for depository institutions.
Trust Companies
Group Inc.’s two limited purpose trust company
subsidiaries 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,
a municipal advisor and 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
activities.
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 CEA regulations. 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
activities of these entities.
For a discussion of net capital requirements applicable to
GS&Co. and GSEC, see Note 20 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K.
Our exchange-based
market-making
activities are subject to extensive regulation by a number of
securities exchanges. As a DMM 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 DMM 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 activities, 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
Form 10-K.
14
Table of Contents
The Dodd-Frank Act will result in additional regulation of our
broker-dealer
and regulated subsidiaries in a number of respects. The
legislation calls for the imposition of expanded standards of
care by market participants in dealing with clients and
customers, including by providing the SEC with authority to
adopt rules establishing fiduciary duties for
broker-dealers
and directing the SEC to examine and improve sales practices and
disclosure by
broker-dealers
and investment advisers. The Dodd-Frank Act also contains
provisions designed to increase transparency in
over-the-counter
derivatives markets by requiring the registration of all swap
dealers and
security-based
swap dealers, and the clearing and execution of
“swaps” through regulated facilities (subject to
limited exceptions, including swaps with
non-financial
end users and swaps that are not cleared by a clearing agency).
Furthermore, federal banking agencies are required under the
Dodd-Frank Act to develop rules whereby anyone who organizes or
initiates an
asset-backed
security transaction must retain a portion (generally, at least
five percent) of any credit risk that the person conveys to a
third party.
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 activities,
including our lending and mortgage activities, 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 activities.
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. Other
subsidiaries, including Goldman Sachs International Bank (GSIB),
our regulated U.K. bank, are also regulated by the FSA. As of
December 2010, GSI and GSIB were in compliance with the FSA
capital requirements.
Goldman Sachs Bank (Europe) PLC (GS Bank Europe), our
regulated Irish bank, is subject to minimum capital requirements
imposed by the Central Bank of Ireland. As of
December 2010, 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, the Autorité de Contrôle
Prudentiel 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 and the Central Bank of the Russian Federation
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.
15
Table of Contents
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 generally
implemented in a similar manner, under the same directives,
throughout the EU.
The EU has adopted risk retention requirements applicable to
asset-backed
security offerings similar to those required under the
Dodd-Frank Act, as well as enhanced disclosure requirements
applicable to such offerings.
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 2010, 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 countries in which Goldman Sachs
operates, including, among others, Brazil and Dubai. In
addition, certain of our insurance subsidiaries are 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.
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.
Our investment management business is 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 EU 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.
16
Table of Contents
Available
Information
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
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 SEC. 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,
Risk 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, 29th Floor, New
York, New York 10282, Attn: Investor Relations, telephone:
212-902-0300,
e-mail:
gs-investor-relations@gs.com
.
Cautionary
Statement Pursuant to the U.S. Private Securities
Litigation Reform Act of 1995
We have included or incorporated by reference in this
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 changes to the
capital and leverage rules applicable to bank holding companies,
the impact of the Dodd-Frank Act on our businesses and
operations, and various legal proceedings as set forth under
“Legal Proceedings” in Note 30 to the
consolidated financial statements in Part II, Item 8
of this
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
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
Form 10-K.
17
Table of Contents
| 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.
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 to deal with what
regulators, politicians and others believe to be the root
causes of the financial crisis, including laws and regulations
relating to financial institution capital requirements and
compensation practices, restrictions on the type of activities
in which financial institutions are permitted to engage, and
generally increased regulatory scrutiny. In some cases,
additional taxes have been (or have been proposed to be) imposed
on certain financial institutions. Many of the regulations that
are required to implement recently adopted legislation
(including the Dodd-Frank Act) are still being drafted or are
not yet in effect; therefore, the exact impact that these
regulations will have on our businesses, results of operations
and cash flows is presently unclear.
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, reduced
volatility, general uncertainty about economic and market
activities and a lack of consumer, investor and CEO confidence
have negatively impacted many of our 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 continued to improve during 2010,
although there were several periods of market disruption, 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.
18
Table of Contents
Our businesses have been and may be adversely affected by
declining asset values. This is particularly true for those
businesses in which we have net “long” positions,
receive fees based on the value of assets managed, or receive or
post collateral.
Many of our businesses have net “long” positions in
debt securities, loans, derivatives, mortgages, equities
(including private equity and real estate) and most other asset
classes. These include positions we take when we act as a
principal to facilitate our clients’ activities, including
our exchange-based
market-making
activities, or commit large amounts of capital to maintain
positions in interest rate and credit products, as well as
through our currencies, commodities and equities activities.
Because nearly all of these investing, lending and market-making
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
activities, 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 losses and an increased need
for liquidity.
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 client execution
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 positions is
increased or the size of 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 market making.
19
Table of Contents
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
market-making
activities have been and may be affected by changes in the
levels of market volatility.
Certain of our
market-making
activities depend on market volatility to provide trading and
arbitrage opportunities to our clients, and decreases in
volatility may reduce these opportunities and adversely affect
the results of these activities. On the other hand, increased
volatility, while it can increase trading volumes and spreads,
also increases risk as measured by
Value-at-Risk
(VaR) and may expose us to increased risks in connection with
our
market-making
activities or cause us to reduce our
market-making
positions in order to avoid increasing our VaR. Limiting the
size of our
market-making
positions 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, both
of which in turn increase our funding costs.
Our investment banking, client execution and investment
management 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 client execution
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 investment management business. To the extent
that clients do not withdraw their funds, they may invest them
in products that generate less fee income.
20
Table of Contents
Our investment management business may be affected by the
poor investment performance of our investment products.
Poor investment returns in our investment management business,
due to either general market conditions or underperformance
(relative to our competitors or to benchmarks) 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 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 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 risk management process
seeks to balance our ability to profit from
market-making,
investing or lending 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.
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 have positions through our
market-making
or origination activities or we make investments directly
through our investing activities 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 private equity, debt,
real estate and hedge funds that we manage 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
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 and
lending 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.
21
Table of Contents
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 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. Certain rating agencies have
indicated that the
Dodd-Frank
Act could result in the rating agencies reducing their assumed
level of government support and therefore result in ratings
downgrades for certain large financial institutions, including
Goldman Sachs.
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, although very
large, has proven to be extremely volatile and currently lacks a
high degree of structure or transparency.
Conflicts of interest are increasing and a failure to
appropriately identify and address 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 viewed 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 with us may be affected if we fail, or appear to
fail, to identify, disclose and deal appropriately with
conflicts of interest. In addition, potential or perceived
conflicts could give rise to litigation or regulatory
enforcement actions.
22
Table of Contents
Group Inc. is a holding company and is dependent for
liquidity on payments from its subsidiaries, many of 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 certain of its subsidiaries, including
GS&Co., GS Bank USA, GS Bank Europe and Goldman
Sachs Execution & Clearing, L.P. 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
Form 10-K
for a further discussion of regulatory restrictions.
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 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 and prime brokerage activities, we
finance our clients’ 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.
23
Table of Contents
Concentration of risk increases the potential for
significant losses in our
market-making,
underwriting, investing and lending activities.
Concentration of risk increases the potential for significant
losses in our
market-making,
underwriting, investing and lending activities. 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.
The Dodd-Frank Act will require issuers of
asset-backed
securities and any person who organizes and initiates an
asset-backed
securities transaction to retain economic exposure to the asset,
which could significantly increase the cost to us of engaging in
securitization 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
engaged in financial services activities, including brokers and
dealers, commercial banks, clearing houses, exchanges and
investment funds. This has resulted in significant credit
concentration with respect to these counterparties. Provisions
of the Dodd-Frank Act are expected to lead to increased
centralization of trading activity through particular clearing
houses, central agents or exchanges, which 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 adopted regulations, imposed taxes
or otherwise put forward various proposals that have or may
impact our ability to conduct certain of our businesses in a
cost-effective
manner or at all in certain or all jurisdictions, including
proposals relating to restrictions on the type of activities in
which financial institutions are permitted to engage. These or
other similar proposals, which may not apply to all our
U.S. or
non-U.S. competitors,
could impact our ability to compete effectively.
Pricing and other competitive pressures in our 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.
24
Table of Contents
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. For example, we
are increasingly transacting business and investing in new
regions, including a wider range of emerging and growth markets.
Furthermore, in a number of our businesses, including where we
make markets, invest and lend, we directly or indirectly own
interests in, or otherwise become affiliated with the ownership
and operation of public services, such as airports, toll roads
and shipping ports, as well as power generation facilities,
physical commodities and other commodities infrastructure
components, both within and outside the United States. Recent
market conditions may lead to an increase in opportunities to
acquire distressed assets and we may determine opportunistically
to increase our exposure to these types of assets.
These 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 transactions may also
involve 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.
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.
The provisions of the Dodd-Frank Act requiring central clearing
of credit derivatives and other OTC derivatives, 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.
25
Table of Contents
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 talented
and diverse employees and to retain and motivate our existing
employees. Factors that affect our ability to attract and retain
such employees include our compensation and benefits, and our
reputation as a successful business with a culture of fairly
hiring, training and promoting qualified 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 and growth markets, where we are often competing for
qualified employees with entities that have a significantly
greater presence or more extensive experience in the region.
As described further in “Business —
Regulation — Banking Regulation” and
“Regulation — Compensation Practices” in
Part I, Item 1 of this
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 FSA, the FDIC or
other regulators worldwide. These limitations, including any
imposed by or as a result of future legislation or regulation,
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.
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
Form 10-K.
26
Table of Contents
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 other government
officials. Press coverage and other public statements that
assert some form of wrongdoing often result in some type of
investigation by regulators, 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 and to respond to changes in regulations and markets.
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 and an increasing
number of derivative transactions are now or in the near future
will be cleared on exchanges, 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, 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.
27
Table of Contents
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 systems or
those of such third parties, or as a result of events with a
broader impact globally, regionally or in the cities where those
buildings or systems are located.
Nearly all of our employees in our primary locations, including
the New York metropolitan area, London, Bangalore, Hong Kong,
Tokyo and Salt Lake City, 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.
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
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
actual or alleged fraud or other misconduct by employees in the
financial services industry in recent years, and we run the risk
that employee misconduct could occur. This misconduct has
included and may include in the future the theft of proprietary
software. 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.
28
Table of Contents
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 us, particularly our exchange-based
market-making
activities, 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 activities,
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, 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 may lead to
additional regulation that could 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
activities 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 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 activities. 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.
29
Table of Contents
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 and growth
markets, and we expect this trend to continue. Various emerging
and growth 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.
While business and other practices throughout the world differ,
our principal legal entities are subject in their operations
worldwide to rules and regulations relating to corrupt and
illegal payments and money laundering, as well as laws relating
to doing business with certain individuals, groups and
countries, such as the U.S. Foreign Corrupt Practices Act,
the USA PATRIOT Act and U.K. Bribery Act. While we have invested
and continue to invest significant resources in training and in
compliance monitoring, the geographical diversity of our
operations, employees, clients and customers, as well as the
vendors and other third parties that we deal with, greatly
increases the risk that we may be found in violation of such
rules or regulations and any such violation could subject us to
significant penalties or adversely affect our reputation.
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 activities to significant losses.
30
Table of Contents
| 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.
| 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 lease
approximately 2.1 million rentable square feet in the New
York Metropolitan Area.
We have additional offices in the U.S. and elsewhere in the
Americas, which together comprise approximately 3.0 million
rentable square feet of leased space.
In Europe, the Middle East and Africa, we have offices that
total approximately 2.1 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 (including India), we have offices that total
approximately 1.7 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 388,000 rentable square
feet, the majority of which will expire in 2018. In Hong Kong,
we currently lease approximately 320,000 rentable square feet
under lease agreements, the majority of which will expire in
2017.
See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Off-Balance-Sheet
Arrangements and Contractual Obligations — Contractual
Obligations” in Part II, Item 7 of this
Form 10-K
for a discussion of exit costs we may incur.
| Item 3. | Legal Proceedings |
We are involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection
with the conduct of our businesses. Many of these
proceedings are at preliminary stages, and many of these cases
seek an indeterminate amount of damages. However, 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 may 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. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Use of
Estimates” in Part II, Item 7 of this
Form 10-K.
See Note 30 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information on certain judicial, regulatory and legal
proceedings.
31
Table of Contents
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, 2011 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, 56
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 Dean’s Council at Harvard
University 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 member of the Board
of Directors of the Partnership for New York City.
Alan M. Cohen,
60
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,
50
Mr. Cohn has been our President and Chief Operating Officer
(or Co-Chief Operating Officer) and a director since
June 2006. From December 2003 to June 2006,
he was the co-head of our global Securities
businesses, having been the co-head of FICC since
September 2002. Prior to that, Mr. Cohn served as
co-chief
operating officer of FICC after having been responsible for
Commodities and a number of other FICC businesses from 1999 to
2002. He was the head of Commodities from 1996 to 1999.
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 NYU Hospital, NYU Medical School, the
Harlem Children’s Zone and American University.
J. Michael Evans,
53
Mr. Evans has been the global head of Growth Markets since
January 2011, 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,
62
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.
Michael S.
Sherwood, 45
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 FICC Europe since 2001.
32
Table of Contents
Esta E. Stecher,
53
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,
55
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,
53
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 New York-Presbyterian
Hospital and the Brunswick School, and as a member of the Board
of Directors of The Steppingstone Foundation. Mr. Weinberg
also serves on the Visiting Committee for Harvard Business
School.
33
Table of Contents
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 2009
and 2010 is set forth under the heading “Supplemental
Financial Information — Common Stock Price Range”
in Part II, Item 8 of this
Form 10-K.
As of February 11, 2011, there were
12,165 holders of record of our common stock.
During fiscal 2009 and fiscal 2010, dividends of $0.35 per
common share were declared on April 13, 2009,
July 13, 2009, October 14, 2009,
January 19, 2010, April 19, 2010,
July 19, 2010 and October 18, 2010. The
holders of our common stock share proportionately on a per share
basis in all dividends and other distributions on common stock
declared by the Board of Directors of Group Inc (Board).
The declaration of dividends by Goldman Sachs is subject to the
discretion of our Board. Our Board 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 may deem
relevant. See “Business — Regulation” in
Part I, Item 1 of this
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.
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 2010.
|
Total Number of Shares
|
Maximum Number of
|
|||||||||||||||||
|
Total Number of
|
Average Price
|
Purchased as Part of
|
Shares That May Yet Be
|
|||||||||||||||
|
Shares
|
Paid per
|
Publicly Announced
|
Purchased Under the
|
|||||||||||||||
| Period | Purchased | Share | Plans or Programs 1 | Plans or Programs 1 | ||||||||||||||
|
Month #1
(October 1, 2010 to October 31, 2010) |
1,200,000 | $ | 159.53 | 1,200,000 | 41,056,476 | |||||||||||||
|
Month #2
(November 1, 2010 to November 30, 2010) |
3,225,100 | $ | 164.06 | 3,225,100 | 37,831,376 | |||||||||||||
|
Month #3
(December 1, 2010 to December 31, 2010) |
2,275,000 | $ | 164.54 | 2,275,000 | 35,556,376 | |||||||||||||
| Total | 6,700,100 | 6,700,100 | ||||||||||||||||
| 1. | On March 21, 2000, we announced that our Board 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 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 substantially offset increases in share count over time resulting from employee share-based compensation and to help maintain the appropriate level of common equity. |
| The repurchase program is effected primarily through regular open-market purchases, the amounts and timing of which are determined primarily by the firm’s issuance of shares resulting from employee share-based compensation as well as its current and projected capital position (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. The total remaining authorization under the repurchase program was 32,156,376 shares as of February 11, 2011; the repurchase program has no set expiration or termination date. | |
| Any repurchase of our common stock requires approval by the Federal Reserve Board. |
Information relating to compensation plans under which our
equity securities are authorized for issuance is presented in
Part III, Item 12 of this
Form 10-K.
| Item 6. | Selected Financial Data |
The Selected Financial Data table is set forth under
Part II, Item 8 of this
Form 10-K.
34
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INDEX
| Page No. | ||||||
| 36 | ||||||
| 37 | ||||||
| 38 | ||||||
| 40 | ||||||
| 44 | ||||||
| 44 | ||||||
| 60 | ||||||
| 66 | ||||||
| 71 | ||||||
| 74 | ||||||
| 78 | ||||||
| 84 | ||||||
| 89 | ||||||
| 94 | ||||||
| 95 | ||||||
| 95 | ||||||
35
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 all major financial centers around
the world.
Over the past year, our Business Standards Committee performed
an extensive review of our business and delivered
recommendations designed to ensure that our business standards
and practices are of the highest quality, that they meet or
exceed the expectations of our clients, regulators and other
stakeholders, and that they contribute to overall financial
stability and economic opportunity. These recommendations have
been approved by our senior management and the Board of
Directors of Group Inc. (Board) and implementation has
already begun. In the fourth quarter of 2010, consistent with
management’s view of the firm’s activities and the
recommendations of our Business Standards Committee, we
reorganized our three previous business segments into four new
business segments: Investment Banking, Institutional Client
Services, Investing & Lending and Investment
Management. Prior periods are presented on a comparable basis.
See “Results of Operations” below for further
information about our business segments.
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 to “this
Form 10-K”
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010.
All references to 2010, 2009 and 2008, unless specifically
stated otherwise, refer to our fiscal years ended, or the dates,
as the context requires, December 31, 2010,
December 31, 2009 and November 28, 2008,
respectively. 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 and analysis of our financial condition and
results of operations, we have included information 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. This
information includes 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 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 this
Form 10-K
and “Cautionary Statement Pursuant to the U.S. Private
Securities Litigation Reform Act of 1995” in Part I,
Item 1 of this
Form 10-K.
36
Table of Contents
Executive
Overview
Our diluted earnings per common share were $13.18 for the year
ended December 2010, compared with $22.13 for the year
ended December 2009. Return on average common
shareholders’ equity
(ROE)
1
was 11.5% for 2010, compared with 22.5% for 2009. Excluding the
impact of the $465 million U.K. bank payroll tax, the
$550 million SEC settlement and the $305 million
impairment of our New York Stock Exchange (NYSE) Designated
Market Maker (DMM) rights, diluted earnings per common
share were
$15.22
2
and ROE was
13.1%
2
for 2010.
Book value per common share increased by approximately 10% to
$128.72 and tangible book value per common
share
3
increased by approximately 9% to $118.63 compared with the end
of 2009. Under Basel 1, our Tier 1 capital
ratio
4
was 16.0% and our Tier 1 common
ratio
4
was 13.3% as of December 2010. Our total assets were
$911 billion as of December 2010, 7% higher compared
with the end of 2009.
The firm generated net revenues of $39.16 billion and net
earnings of $8.35 billion for 2010, despite a challenging
operating environment. These results reflected significantly
lower net revenues in Institutional Client Services and slightly
lower net revenues in Investment Banking compared with 2009.
These decreases were partially offset by significantly higher
net revenues in Investing & Lending and higher net
revenues in Investment Management. The results of each of our
business segments are discussed below.
Institutional
Client Services
The decrease in Institutional Client Services reflected
significantly lower net revenues in Fixed Income, Currency and
Commodities Client Execution and, to a lesser extent, Equities.
During 2010, Fixed Income, Currency and Commodities Client
Execution operated in a challenging environment characterized by
lower client activity levels, which reflected broad market
concerns including European sovereign debt risk and uncertainty
over regulatory reform, as well as tighter bid/offer spreads.
The decrease in net revenues compared with a particularly strong
2009 primarily reflected significantly lower results in interest
rate products, credit products, commodities and, to a lesser
extent, currencies. These decreases were partially offset by
higher net revenues in mortgages.
The decline in Equities compared with 2009 primarily reflected
significantly lower net revenues in equities client execution,
principally due to significantly lower results in derivatives
and shares. Commissions and fees were also lower than 2009,
primarily reflecting lower client activity levels. In addition,
securities services net revenues were significantly lower
compared with 2009, primarily reflecting tighter securities
lending spreads, principally due to the impact of changes in the
composition of customer balances, partially offset by the impact
of higher average customer balances. During 2010, although
equity markets were volatile during the first half of the year,
equity prices generally improved and volatility levels declined
in the second half of the year.
1. See “Results of Operations — Financial
Overview” below for further information about our
calculation of ROE.
2. We believe that presenting our results excluding the
impact of the U.K. bank payroll tax, the SEC settlement and the
NYSE DMM rights impairment is meaningful, as excluding these
items increases the comparability of
period-to-period
results. See “Results of Operations — Financial
Overview” below for further information about our
calculation of diluted earnings per common share and ROE
excluding the impact of these items.
3. We believe that tangible book value per common share is
meaningful because it is one of the measures that we and
investors use to assess capital adequacy. See “Equity
Capital — Other Capital Metrics” below for
further information about our calculation of tangible book value
per common share.
4. See “Equity Capital — Consolidated
Regulatory Capital Ratios” below for further information
about our Tier 1 capital ratio and Tier 1 common ratio.
37
Table of Contents
Investment
Banking
The decrease in Investment Banking reflected lower net revenues
in our Underwriting business, partially offset by higher net
revenues in Financial Advisory. The decline in Underwriting
reflected lower net revenues in equity underwriting, principally
due to a decline in client activity in comparison to 2009, which
included significant capital-raising activity by financial
institution clients. Net revenues in debt underwriting were
essentially unchanged compared with 2009. The increase in
Financial Advisory primarily reflected an increase in client
activity.
Investing &
Lending
During 2010, an increase in global equity markets and tighter
credit spreads provided a favorable backdrop for our
Investing & Lending business. Results in
Investing & Lending for 2010 primarily reflected a
gain of $747 million from our investment in the ordinary
shares of Industrial and Commercial Bank of China Limited
(ICBC), a net gain of $2.69 billion from other equity
securities and a net gain of $2.60 billion from debt
securities and loans.
Investment
Management
The increase in Investment Management primarily reflected higher
incentive fees across our alternative investment products.
Management and other fees also increased, reflecting favorable
changes in the mix of assets under management, as well as the
impact of appreciation in the value of client assets. During
2010, assets under management decreased 4% to $840 billion,
primarily reflecting outflows in money market assets, consistent
with industry trends.
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 this
Form 10-K.
Business
Environment
Global economic conditions generally improved in 2010, as real
gross domestic product (GDP) grew in most major economies
following declines in 2009, and growth in emerging markets was
strong. However, certain unfavorable conditions emerged during
the second quarter of 2010 that made the environment more
challenging for our businesses, including broad market concerns
over European sovereign debt risk and uncertainty regarding
financial regulatory reform, sharply higher equity volatility
levels, lower global equity prices and wider corporate credit
spreads. During the second half of 2010, some of these
conditions reversed, as equity volatility levels decreased,
global equity prices generally recovered and corporate credit
spreads narrowed. In addition, the U.S. Federal Reserve
announced quantitative easing measures during the fourth quarter
of 2010 in order to stimulate economic growth and protect
against the risk of deflation.
Industry-wide
announced mergers and acquisitions volumes increased, while
industry-wide
debt offerings volumes decreased compared with 2009. A
significant increase in initial public offerings volumes
compared with 2009 offset declines in common stock follow-on
offerings and convertible offerings volumes, as 2009 included
significant capital-raising activity by financial institutions.
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 this
Form 10-K.
Global
The global economy strengthened during 2010, as real GDP
increased in most major economies and economic growth in
emerging markets accelerated. The global recovery largely
reflected an increase in business investment, following a
significant decline in 2009. In addition, international trade
grew strongly in 2010. Unemployment levels generally stabilized,
although the rate of unemployment remained elevated in some
economies. During 2010, the U.S. Federal Reserve, the
European Central Bank and the Bank of England left interest
rates unchanged, while the Bank of Japan reduced its target
overnight call rate and the People’s Bank of China
increased its
one-year
benchmark lending rate. The price of crude oil increased
significantly during 2010. The U.S. dollar strengthened
against the Euro and the British pound, but weakened against the
Japanese yen.
38
Table of Contents
United
States
In the United States, real GDP increased by an estimated 2.8% in
2010, compared with a decline of 2.6% in 2009. Growth was
primarily supported by improved business investment spending, as
well as an increase in federal government spending. In addition,
consumer spending and business and consumer confidence improved
during the year. However, residential investment remained weak.
Measures of core inflation decreased during the year, reflecting
high levels of 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 U.S. Federal Reserve announced quantitative easing
measures during the fourth quarter of 2010, including its
intention to purchase significant amounts of U.S. Treasury
debt. The yield on the
10-year
U.S. Treasury note fell by 55 basis points to 3.30% during
2010. The NASDAQ Composite Index, the S&P 500 Index and the
Dow Jones Industrial Average ended the year higher by 17%, 13%
and 11%, respectively.
Europe
Real GDP in the Eurozone economies increased by an estimated
1.7% in 2010, compared with a decline of 4.0% in 2009. Growth
primarily reflected an increase in consumer and government
expenditure, as well as the rebuilding of inventories. Exports
and imports increased significantly, although the contribution
from net trade was not significant. Business investment was weak
for the year, but showed signs of recovery in the second half of
the year, and surveys of business and consumer confidence
improved. However, economic growth in certain Eurozone economies
continued to be weighed down by fiscal challenges and banking
sector concerns. In addition, concerns about sovereign debt risk
in certain Eurozone economies intensified, contributing to
higher volatility and funding pressures. The European Central
Bank and certain governments in the Eurozone took a range of
policy measures to address these issues. Measures of core
inflation remained low and the European Central Bank maintained
its main refinancing operations rate at 1.00% during the year.
In the United Kingdom, real GDP increased by an estimated 1.3%
for 2010, compared with a decrease of 4.9% in 2009. The Bank of
England maintained its official bank rate at 0.50% during the
year.
Long-term
government bond yields in both the Eurozone and the U.K.
decreased during 2010. The Euro and British pound depreciated by
7% and 3%, respectively, against the U.S. dollar during
2010. The DAX
Index and the FTSE 100 Index increased by 16% and 9%,
respectively, while the Euro Stoxx 50 Index and the CAC 40 Index
declined by 6% and 3%, respectively, compared with the end of
2009.
Asia
In Japan, real GDP increased by an estimated 3.9% in 2010,
compared with a decrease of 6.3% in 2009. Growth primarily
reflected a significant increase in exports, as well as an
increase in consumer spending. Measures of inflation remained
negative during 2010. The Bank of Japan reduced its target
overnight call rate from 0.10% to a range of zero to 0.10% and
the yield on
10-year
Japanese government bonds fell by 17 basis points to 1.13%. The
Japanese yen appreciated by 13% against the U.S. dollar.
The Nikkei 225 Index decreased 3% during the year. In China,
real GDP growth was an estimated 10.3% in 2010, up from 9.2% in
2009. Economic growth was
broad-based,
with significant increases in exports, retail spending and
business investment. Measures of inflation increased during
2010, reflecting continued growth in demand. The People’s
Bank of China raised its
one-year
benchmark lending rate by 50 basis points during the year to
5.81% and the Chinese yuan appreciated by 3% against the
U.S. dollar. The Shanghai Composite Index decreased by 14%
during 2010, partially due to concerns over the effect of
tighter policy on economic growth. In India, real GDP growth was
an estimated 8.5% in 2010, up from 7.5% in 2009. Growth
primarily reflected an increase in domestic demand, partially
offset by the impact of lower net exports. The rate of wholesale
inflation increased during the year. The Indian rupee
appreciated by 3% against the U.S. dollar. Equity markets
in Hong Kong ended the year higher and equity markets in India
and South Korea increased significantly during 2010.
Other
Markets
In Brazil, real GDP increased by an estimated 7.6% in 2010,
compared with a decline of 0.6% in 2009. The increase in real
GDP primarily reflected an increase in domestic demand. The
Brazilian real strengthened against the U.S. dollar.
Brazilian equity prices ended the year slightly higher compared
with the end of 2009. In Russia, real GDP increased by an
estimated 4.0% in 2010, compared with a decline of 7.9% in 2009.
Rising oil prices led to a significant improvement in investment
growth, following a decline in 2009. The Russian ruble was
essentially unchanged against the U.S. dollar and Russian
equity prices ended the year significantly higher compared with
2009.
39
Table of Contents
Critical
Accounting Policies
Fair
Value
Fair Value Hierarchy.
Financial instruments
owned, at fair value and Financial instruments sold, but not yet
purchased, at fair value (i.e., inventory), as well as
certain other financial assets and financial liabilities, are
reflected in our consolidated statements of financial condition
at fair value
(i.e., marked-to-market),
with related gains or losses generally recognized in our
consolidated statements of earnings. The use of fair value to
measure financial instruments is fundamental to our risk
management practices 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. In determining fair value, the
hierarchy under U.S. generally accepted accounting
principles (U.S. GAAP) gives (i) the highest priority
to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 inputs), (ii) the next
priority to inputs other than level 1 inputs that are
observable either directly or indirectly (level 2 inputs),
and (iii) the lowest priority to inputs that cannot be
observed in market activity (level 3 inputs). Assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to their fair value
measurement.
The fair values for substantially all of our financial assets
and financial liabilities, including derivatives, are based on
observable prices and inputs and are classified in levels 1
and 2 of the hierarchy. Certain level 2 financial
instruments may require appropriate discounts
(i.e., valuation adjustments) for factors such as:
| • | transfer restrictions; |
| • | the credit quality of a counterparty or the firm; and |
| • | other premiums and discounts that a market participant would require to arrive at fair value. |
Valuation adjustments are generally based on market evidence.
Instruments categorized within level 3 of the fair value
hierarchy, which represent approximately 5% of the firm’s
total assets, require one or more significant inputs that are
not observable. Absent evidence to the contrary, 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. Subsequent to the
transaction date, we use other methodologies to determine fair
value, which vary based on the type of instrument. Estimating
the fair value of level 3 financial instruments may require
judgments to be made. These judgments include:
| • | determining the appropriate valuation methodology and/or model for each type of level 3 financial instrument; |
| • | determining model inputs based on an evaluation of all relevant empirical market data, including prices evidenced by market transactions, interest rates, credit spreads, volatilities and correlations; and |
| • | determining appropriate valuation adjustments related to illiquidity or counterparty credit quality. |
Regardless of the methodology, valuation inputs and assumptions
are only changed when corroborated by substantive evidence.
Controls Over Valuation of Financial
Instruments.
Our control infrastructure is
independent of the revenue-producing units and is fundamental to
ensuring that all of our financial instruments are appropriately
valued at
market-clearing
levels. In particular, our independent price verification
process is critical to ensuring that financial instruments are
properly valued.
40
Table of Contents
Price Verification.
The objective of price
verification is to have an informed and independent opinion with
regard to the valuation of financial instruments under review.
Instruments that have one or more significant inputs which
cannot be corroborated by external market data are classified
within level 3 of the fair value hierarchy.
In situations where there is a question about a valuation, the
ultimate valuation is determined by senior managers in control
and support functions that are independent of the
revenue-producing units (independent control and support
functions). Price verification strategies utilized by our
independent control and support functions include:
| • | Trade Comparison. Analysis of trade data (both internal and external where available) is used to determine the most relevant pricing inputs and valuations. |
| • | External Price Comparison. Valuations and prices are compared to pricing data obtained from third parties (e.g., broker or dealers, MarkIt, Bloomberg, IDC, TRACE). Data obtained from various sources is compared to ensure consistency and validity. When broker or dealer quotations or third-party pricing vendors are used for valuation or price verification, greater priority is generally given to executable quotations. |
| • |
Calibration to Market Comparables.
Market-based transactions are used to corroborate the valuation of positions with similar characteristics, risks and components. |
| • | Relative Value Analyses. Market-based transactions are analyzed to determine the similarity, measured in terms of risk, liquidity and return, of one instrument relative to another, or for a given instrument, of one maturity relative to another. |
| • | Collateral Analyses. Margin disputes on derivatives are examined and investigated to determine the impact, if any, on our valuations. |
| • | Execution of trades. Where appropriate, trading desks are instructed to execute trades in order to provide evidence of market-clearing levels. |
| • | Backtesting. Valuations are corroborated by comparison to values realized upon sales. |
See Notes 5 through 8 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about fair value measurements.
Review of Net Revenues.
Independent control
and support functions ensure adherence to our pricing policy
through a combination of daily procedures, one of which is the
process of validating and understanding results by attributing
and explaining net revenues by the underlying factors. Through
this process we independently validate net revenues, identify
and resolve potential fair value or trade booking issues on a
timely basis and ensure that risks are being properly
categorized and quantified.
Review of Valuation Models.
Quantitative
professionals within our Market Risk Management department
(Market Risk Management) perform an independent model approval
process. This process incorporates a review of a diverse set of
model and trade parameters across a broad range of values
(including extreme
and/or
improbable conditions) in order to critically evaluate:
| • | a model’s suitability for valuation and risk management of a particular instrument type; |
| • | the model’s accuracy in reflecting the characteristics of the related product and its significant risks; |
| • | the suitability and properties of the numerical algorithms incorporated in the model; |
| • | the model’s consistency with models for similar products; and |
| • | the model’s sensitivity to input parameters and assumptions. |
New or changed models are reviewed and approved. Models are
evaluated and re-approved annually to assess the impact of any
changes in the product or market and any market developments in
pricing theories.
See “Market Risk Management” and “Credit Risk
Management” for a further discussion of how we manage the
risks inherent in our businesses.
41
Table of Contents
Level 3 Financial Assets at Fair
Value.
The table below presents financial assets
measured at fair value and the amount of such assets that are
classified within level 3 of the fair value hierarchy.
Total level 3 assets were $45.38 billion and
$46.48 billion as of December 2010 and
December 2009, respectively. The decrease in level 3
assets during the year ended December 2010 primarily
reflected (i) sales and transfers to level 2 of loans
and securities backed by commercial real estate; and
(ii) net
reductions in level 3 financial instruments as a result of
the consolidations of certain variable interest entities (VIEs).
This decrease was partially offset by an increase in derivatives
primarily due to unrealized gains on credit derivatives,
principally resulting from changes in level 2 inputs.
See Notes 5 through 8 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about fair value measurements.
| As of December 2010 | As of December 2009 | |||||||||||||||||
|
Total at
|
Level 3
|
Total at
|
Level 3
|
|||||||||||||||
| in millions | Fair Value | Total | Fair Value | Total | ||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments |
$ | 11,262 | $ | — | $ | 9,111 | $ | — | ||||||||||
| U.S. government and federal agency obligations | 84,928 | — | 78,336 | — | ||||||||||||||
| Non-U.S. government obligations | 40,675 | — | 38,858 | — | ||||||||||||||
| Mortgage and other asset-backed loans and securities: | ||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
6,200 | 2,819 | 6,203 | 4,620 | ||||||||||||||
|
Loans and securities backed by residential real estate
|
9,404 | 2,373 | 6,704 | 1,880 | ||||||||||||||
|
Loan
portfolios
1
|
1,438 | 1,285 | 1,370 | 1,364 | ||||||||||||||
| Bank loans and bridge loans | 18,039 | 9,905 | 2 | 19,345 | 9,560 | 2 | ||||||||||||
| Corporate debt securities | 24,719 | 2,737 | 26,368 | 2,235 | ||||||||||||||
| State and municipal obligations | 2,792 | 754 | 2,759 | 1,114 | ||||||||||||||
| Other debt obligations | 3,232 | 1,274 | 2,914 | 2,235 | ||||||||||||||
| Equities and convertible debentures | 67,833 | 11,060 | 71,474 | 11,871 | ||||||||||||||
| Commodities | 13,138 | — | 3,707 | — | ||||||||||||||
| Total cash instruments | 283,660 | 32,207 | 267,149 | 34,879 | ||||||||||||||
| Derivatives | 73,293 | 12,772 | 75,253 | 11,596 | ||||||||||||||
| Financial instruments owned, at fair value | 356,953 | 44,979 | 342,402 | 46,475 | ||||||||||||||
| Securities segregated for regulatory and other purposes | 36,182 | — | 18,853 | — | ||||||||||||||
| Securities purchased under agreements to resell | 188,355 | 100 | 144,279 | — | ||||||||||||||
| Securities borrowed | 48,822 | — | 66,329 | — | ||||||||||||||
| Receivables from customers and counterparties | 7,202 | 298 | 1,925 | — | ||||||||||||||
| Total | $ | 637,514 | $ | 45,377 | $ | 573,788 | $ | 46,475 | ||||||||||
| 1. | Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate. |
| 2. | Includes certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt. |
42
Table of Contents
Goodwill and
Identifiable Intangible Assets
Goodwill.
Goodwill is the cost of acquired
companies in excess of the fair value of net assets, including
identifiable intangible assets, at the acquisition date. The
reorganization of the firm’s segments in 2010 resulted in
the reallocation of assets, including goodwill, and liabilities
across our reporting units. See Notes 13 and 27 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for further information on segments.
We test the goodwill in each of our reporting units for
impairment at least annually, by comparing the estimated fair
value of each reporting unit with its estimated net book value.
We derive the fair value based on valuation techniques we
believe market participants would use (i.e., observable
price-to-earnings
multiples and
price-to-book
multiples). We derive the net book value by estimating the
amount of shareholders’ equity required to support the
activities of each reporting unit. Estimating the fair value of
our reporting units requires management to make judgments.
Critical inputs include (i) projected earnings,
(ii) estimated
long-term
growth rates and (iii) cost of equity. Our last annual
impairment test was performed during our 2010 fourth quarter and
no impairment was identified. See Note 13 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for the carrying value of our goodwill by operating segment.
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. See Note 13 to
the consolidated financial statements in Part II,
Item 8 of this
Form 10-K
for the carrying value and estimated remaining lives of our
identifiable intangible assets by major asset class and the
carrying value of our identifiable intangible assets by
operating segment.
A prolonged period of market weakness 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 NYSE DMM business (see discussion
below), (ii) an adverse action or assessment by a
regulator, (iii) adverse actual experience on the contracts
in our variable annuity and life insurance business,
(iv) decreases in cash receipts from television broadcast
royalties or (v) decreases in revenues from
commodity-related customer contracts and relationships.
Management judgment is required to evaluate whether indications
of potential impairment have occurred, and to test intangibles
for impairment if required.
NYSE DMM Rights.
During the fourth quarter of
2010, as a result of continuing weak operating results in our
NYSE DMM business, we tested our NYSE DMM rights for impairment
in accordance with Financial Accounting Standards Board
Accounting Standards Codification (ASC) 360. Because the
carrying value of our NYSE DMM rights exceeded the projected
undiscounted cash flows over the estimated remaining useful life
of our NYSE DMM rights, we determined that the rights were
impaired. We recorded an impairment loss of $305 million,
which was included in our Institutional Client Services segment
in the fourth quarter of 2010. This impairment loss represented
the excess of the carrying value of our NYSE DMM rights over
their estimated fair value. We estimated this fair value, which
is a level 3 measurement, using a relative value analysis
which incorporated a comparison to another DMM portfolio that
was transacted between third parties. As of December 2010,
the carrying value of our NYSE DMM rights was $76 million.
43
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 26 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
for further information about 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. See Note 30 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for information on certain judicial, regulatory and legal
proceedings.
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” below and “Risk Factors”
in Part I, Item 1A of this
Form 10-K
for a further discussion of the impact of economic and market
conditions on our results of operations.
44
Table of Contents
Financial
Overview
The table below presents an overview of our financial results.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| $ in millions, except per share amounts | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Net revenues
|
$ | 39,161 | $ | 45,173 | $ | 22,222 | $ | 183 | ||||||||||
|
Pre-tax
earnings/(loss)
|
12,892 | 19,829 | 2,336 | (1,258 | ) | |||||||||||||
|
Net earnings/(loss)
|
8,354 | 13,385 | 2,322 | (780 | ) | |||||||||||||
|
Net earnings/(loss) applicable to common shareholders
|
7,713 | 12,192 | 2,041 | (1,028 | ) | |||||||||||||
|
Diluted earnings/(loss) per common share
|
13.18 | 22.13 | 4.47 | (2.15 | ) | |||||||||||||
|
Return on average common shareholders’
equity
1
|
11.5% | 22.5% | 4.9% | N.M. | ||||||||||||||
|
Diluted earnings per common share, excluding the impact of the
U.K. bank payroll tax, the SEC settlement and the NYSE DMM
rights
impairment
2
|
$ | 15.22 | N/A | N/A | N/A | |||||||||||||
|
Return on average common shareholders’ equity, excluding
the impact of the U.K. bank payroll tax, the SEC settlement and
the NYSE DMM rights
impairment
2
|
13.1% | N/A | N/A | N/A | ||||||||||||||
| 1. | ROE is computed by dividing net earnings applicable to common shareholders by average monthly common shareholders’ equity. The table below presents our average common shareholders’ equity. |
| Average for the | ||||||||||||||||||
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Total shareholders’ equity
|
$ | 74,257 | $ | 65,527 | $ | 47,167 | $ | 63,712 | ||||||||||
|
Preferred stock
|
(6,957 | ) | (11,363 | ) | (5,157 | ) | (16,477 | ) | ||||||||||
|
Common shareholders’ equity
|
$ | 67,300 | $ | 54,164 | $ | 42,010 | $ | 47,235 | ||||||||||
| 2. | We believe that presenting our results excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment is meaningful, as excluding these items increases the comparability of period-to-period results. The tables below present the calculation of net earnings applicable to common shareholders, diluted earnings per common share and average common shareholders’ equity excluding the impact of these amounts. |
|
Year Ended
|
||||||
| in millions, except per share amounts | December 2010 | |||||
|
Net earnings applicable to common shareholders
|
$ | 7,713 | ||||
|
Impact of the U.K. bank payroll tax
|
465 | |||||
|
Pre-tax
impact of the SEC settlement
|
550 | |||||
|
Tax impact of the SEC settlement
|
(6 | ) | ||||
|
Pre-tax
impact of the NYSE DMM rights impairment
|
305 | |||||
|
Tax impact of the NYSE DMM rights impairment
|
(118 | ) | ||||
|
Net earnings applicable to common shareholders, excluding the
impact of the U.K. bank payroll tax, the SEC settlement and the
NYSE DMM rights impairment
|
$ | 8,909 | ||||
|
Divided by: average diluted common shares outstanding
|
585.3 | |||||
|
Diluted earnings per common share, excluding the impact of
the U.K. bank payroll tax, the SEC settlement and the NYSE DMM
rights impairment
|
$ | 15.22 | ||||
|
Average for the
|
||||||
|
Year Ended
|
||||||
| in millions | December 2010 | |||||
|
Total shareholders’ equity
|
$ | 74,257 | ||||
|
Preferred stock
|
(6,957 | ) | ||||
|
Common shareholders’ equity
|
67,300 | |||||
|
Impact of the U.K. bank payroll tax
|
359 | |||||
|
Impact of the SEC settlement
|
293 | |||||
|
Impact of the NYSE DMM rights impairment
|
14 | |||||
|
Common shareholders’ equity, excluding the impact of the
U.K. bank payroll tax, the SEC settlement and the NYSE DMM
rights impairment
|
$ | 67,966 | ||||
45
Table of Contents
Net
Revenues
2010 versus 2009.
Net revenues were
$39.16 billion for 2010, 13% lower than 2009, reflecting
significantly lower net revenues in Institutional Client
Services and slightly lower net revenues in Investment Banking.
These decreases were partially offset by significantly higher
net revenues in Investing & Lending and higher net
revenues in Investment Management.
| • | Institutional Client Services. The decrease in Institutional Client Services reflected significantly lower net revenues in Fixed Income, Currency and Commodities Client Execution and, to a lesser extent, Equities. During 2010, Fixed Income, Currency and Commodities Client Execution operated in a challenging environment characterized by lower client activity levels, which reflected broad market concerns including European sovereign debt risk and uncertainty over regulatory reform, as well as tighter bid/offer spreads. The decrease in net revenues compared with a particularly strong 2009 primarily reflected significantly lower results in interest rate products, credit products, commodities and, to a lesser extent, currencies. These decreases were partially offset by higher net revenues in mortgages, as 2009 included approximately $1 billion of losses on commercial mortgage-related products. |
The decline in Equities compared with 2009 primarily reflected
significantly lower net revenues in equities client execution,
principally due to significantly lower results in derivatives
and shares. Commissions and fees were also lower than 2009,
primarily reflecting lower client activity levels. In addition,
securities services net revenues were significantly lower
compared with 2009, primarily reflecting tighter securities
lending spreads, principally due to the impact of changes in the
composition of customer balances, partially offset by the impact
of higher average customer balances. During 2010, although
equity markets were volatile during the first half of the year,
equity prices generally improved and volatility levels declined
in the second half of the year.
| • | Investment Banking. The decrease in Investment Banking reflected lower net revenues in our Underwriting business, partially offset by higher net revenues in Financial Advisory. The decline in Underwriting reflected lower net revenues in equity underwriting, principally due to a decline in client activity in comparison to 2009, which included significant capital-raising activity by financial institution clients. Net revenues in debt underwriting were essentially unchanged compared with 2009. The increase in Financial Advisory primarily reflected an increase in client activity. |
| • | Investing & Lending. During 2010, an increase in global equity markets and tighter credit spreads provided a favorable backdrop for our Investing & Lending business. Results in Investing & Lending for 2010 primarily reflected a gain of $747 million from our investment in the ordinary shares of ICBC, a net gain of $2.69 billion from other equity securities and a net gain of $2.60 billion from debt securities and loans. In 2009, results in Investing & Lending primarily reflected a gain of $1.58 billion from our investment in the ordinary shares of ICBC, a net gain of $1.05 billion from debt securities and loans, and a net loss of $596 million from other equity securities. |
| • | Investment Management. The increase in Investment Management primarily reflected higher incentive fees across our alternative investment products. Management and other fees also increased, reflecting favorable changes in the mix of assets under management, as well as the impact of appreciation in the value of client assets. During 2010, assets under management decreased 4% to $840 billion, primarily reflecting outflows in money market assets, consistent with industry trends. |
46
Table of Contents
2009 versus 2008.
Net revenues were
$45.17 billion in 2009, more than double the amount in
2008, reflecting significantly improved results in
Investing & Lending, as well as significantly higher
net revenues in Institutional Client Services. These increases
were partially offset by lower net revenues in Investment
Management and Investment Banking.
| • | Investing & Lending. The increase in Investing & Lending primarily reflected net gains from debt securities and loans and from our investment in the ordinary shares of ICBC, compared with net losses in 2008, as well as lower net losses from other equity securities. In 2009, results in Investing & Lending primarily reflected a gain of $1.58 billion from our investment in the ordinary shares of ICBC, a net gain of $1.05 billion from debt securities and loans and a net loss of $596 million from other equity securities. During 2009, our Investing & Lending results reflected a recovery in global credit and equity markets following significant weakness during 2008. However, continued weakness in commercial real estate markets negatively impacted our results during 2009. In 2008, results in Investing & Lending primarily reflected a loss of $446 million from our investment in the ordinary shares of ICBC, a net loss of $6.33 billion from debt securities and loans and a net loss of $5.95 billion from other equity securities. |
| • | Institutional Client Services. The increase in Institutional Client Services reflected a very strong performance in Fixed Income, Currency and Commodities Client Execution. During 2009, Fixed Income, Currency and Commodities Client Execution 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 Fixed Income, Currency and Commodities Client Execution 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 higher than 2008, while net revenues in currencies were strong, but lower than a particularly strong 2008. During 2009, mortgages included approximately $1 billion of losses on commercial mortgage-related products. Fixed Income, Currency and Commodities Client Execution results in 2008 included a loss of approximately $3.1 billion (net of hedges) related to non-investment-grade credit origination activities. In addition, results in mortgages in 2008 included net losses of approximately |
| $900 million on residential mortgage-related products and approximately $600 million on commercial mortgage-related products. |
Net revenues in Equities for 2009 were lower compared with a
particularly strong 2008, reflecting significant decreases in
securities services and commissions and fees. 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 commissions and fees
primarily reflected lower average market levels in Europe and
Asia, as well as lower transaction volumes compared with 2008.
These decreases were partially offset by strong results in
equities client execution, primarily reflecting higher net
revenues in derivatives and shares. During 2009, Equities
operated in an environment characterized by a significant
increase in global equity prices and a significant decline in
volatility levels.
| • | Investment Management. The decrease in Investment 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 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. |
| • | Investment Banking. The decrease in Investment Banking reflected 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, including significant capital-raising activity by financial institution clients during 2009. Net revenues in debt underwriting were lower than 2008, primarily reflecting significantly lower net revenues from leveraged finance activity, partially offset by significantly higher net revenues from investment-grade and municipal activity. |
47
Table of Contents
One Month Ended December 2008.
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.
| • | Investing & Lending. Investing & Lending recorded negative net revenues of $1.63 billion for the month of December 2008. During the month of December, continued weakness in global equity and credit markets negatively impacted results in our Investing & Lending business. Results for December 2008 primarily reflected net losses of $1.08 billion from equity securities (excluding ICBC) and $856 million from debt securities and loans, partially offset by a gain of $228 million from our investment in the ordinary shares of ICBC. |
| • | Institutional Client Services. Net revenues in Institutional Client Services were $1.33 billion for the month of December 2008. During the month of December, market opportunities were favorable for certain of our Fixed Income, Currency and Commodities Client Execution product areas, as interest rate products, commodities and currencies each produced strong results. However, the environment for Fixed Income, Currency and Commodities Client Execution also reflected continued weakness in the broader credit markets, as 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 $400 million on commercial mortgage-related products. |
Results in Equities reflected lower commission volumes, as well
as lower client execution net revenues from derivatives compared
with average monthly levels in 2008. Net revenues in securities
services were also lower compared with average monthly levels in
2008, reflecting a decline in total average customer balances,
partially offset by the impact of favorable changes in the
composition of securities lending balances. During the month of
December, Equities operated in an environment characterized by
continued weakness in global equity markets and continued high
levels of volatility.
| • | Investment Banking. Net revenues in Investment Banking were $138 million for the month of December 2008 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. |
| • | Investment Management. Net revenues in Investment Management were $343 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. |
Net Interest
Income
2010 versus 2009.
Net revenues for 2010
included net interest income of $5.50 billion, 26% lower
than 2009. The decrease compared with 2009 was primarily due to
lower average fixed income assets, most notably
U.S. federal agency obligations, higher interest expense
related to our
long-term
borrowings and tighter securities lending spreads.
2009 versus 2008.
Net revenues for 2009
included net interest income of $7.41 billion, 73% higher
than 2008. The increase compared with 2008 was primarily due to
lower interest expense on our
long-term
and
short-term
borrowings, partially offset by tighter spreads on
collateralized financing activity, as well as lower average
customer margin lending balances and financial instruments
owned, at fair value.
One Month Ended December 2008.
Net
revenues included net interest income of $685 million for
the month of December 2008. The increase compared with
average monthly net interest income in 2008 was primarily due to
higher average fixed income assets, most notably
U.S. federal agency obligations.
Operating
Expenses
Our operating expenses are primarily influenced by compensation,
headcount and levels of business activity. Compensation and
benefits includes salaries, discretionary compensation,
amortization of equity awards and other items such as benefits.
Discretionary compensation is significantly impacted by, among
other factors, the level of net revenues, prevailing labor
markets, business mix, the structure of our
share-based
compensation programs and the external environment.
48
Table of Contents
The table below presents our operating expenses and total staff.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| $ in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Compensation and benefits
|
$ | 15,376 | $ | 16,193 | $ | 10,934 | $ | 744 | ||||||||||
|
U.K. bank payroll tax
|
465 | — | — | — | ||||||||||||||
|
Brokerage, clearing, exchange and distribution fees
|
2,281 | 2,298 | 2,998 | 165 | ||||||||||||||
|
Market development
|
530 | 342 | 485 | 16 | ||||||||||||||
|
Communications and technology
|
758 | 709 | 759 | 62 | ||||||||||||||
|
Depreciation and amortization
|
1,889 | 1,734 | 1,262 | 111 | ||||||||||||||
|
Occupancy
|
1,086 | 950 | 960 | 82 | ||||||||||||||
|
Professional fees
|
927 | 678 | 779 | 58 | ||||||||||||||
|
Other expenses
|
2,957 | 2,440 | 1,709 | 203 | ||||||||||||||
|
Total
non-compensation
expenses
|
10,428 | 9,151 | 8,952 | 697 | ||||||||||||||
|
Total operating expenses
|
$ | 26,269 | $ | 25,344 | $ | 19,886 | $ | 1,441 | ||||||||||
|
Total staff at
period-end
1
|
35,700 | 32,500 | 34,500 | 33,300 | ||||||||||||||
|
Total staff at period-end including consolidated entities held
for investment
purposes
2
|
38,700 | 36,200 | 39,200 | 38,000 | ||||||||||||||
| 1. | Includes employees, consultants and temporary staff. |
| 2. | 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. |
2010 versus 2009.
Operating expenses were
$26.27 billion for 2010, 4% higher than 2009. Compensation
and benefits expenses were $15.38 billion for 2010, a 5%
decline compared with $16.19 billion for 2009, due to lower
net revenues. The ratio of compensation and benefits to net
revenues for 2010 was
39.3%
1
(which excludes the impact of the $465 million U.K. bank
payroll tax), compared with 35.8% for 2009. Total staff
increased 10% during 2010. Total staff including consolidated
entities held for investment purposes increased 7% during 2010.
During 2010, the United Kingdom enacted legislation that imposed
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.” Our operating expenses for 2010 included
$465 million related to this tax.
| 1. | We believe that presenting our ratio of compensation and benefits to net revenues excluding the impact of the U.K. bank payroll tax is meaningful, as excluding this item increases the comparability of period-to-period results. |
|
Year Ended
|
||||||
| $ in millions | December 2010 | |||||
|
Compensation and benefits (which excludes the impact of the
$465 million U.K. bank payroll tax)
|
$ | 15,376 | ||||
|
Ratio of compensation and benefits to net revenues
|
39.3% | |||||
|
Compensation and benefits, including the impact of the
$465 million U.K. bank payroll tax
|
$ | 15,841 | ||||
|
Ratio of compensation and benefits to net revenues, including
the impact of the $465 million U.K. bank payroll tax
|
40.5% | |||||
49
Table of Contents
Non-compensation
expenses were $10.43 billion for 2010, 14% higher than
2009. This increase was primarily attributable to the impact of
net provisions for litigation and regulatory proceedings of
$682 million, including $550 million related to the
SEC settlement (see Note 30 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information), and an impairment of our NYSE DMM
rights of $305 million, each during 2010. The remainder of
the increase compared with 2009 generally reflected higher
professional fees, market development expenses and occupancy
expenses. These increases were partially offset by the impact of
significantly higher real estate impairment charges during 2009
related to our consolidated entities held for investment
purposes, as well as higher charitable contributions during
2009. The real estate impairment charges, which were measured
based on discounted cash flow analyses, are included in our
Investing & Lending segment and reflected weakness in
the commercial real estate markets. Charitable contributions
were approximately $420 million during 2010, primarily
including $25 million to The Goldman Sachs Foundation and
$320 million to Goldman Sachs Gives, our
donor-advised
fund. Compensation was reduced to fund the charitable
contribution to Goldman Sachs Gives. The firm asks its
participating managing directors to make recommendations
regarding potential charitable recipients for this contribution.
2009 versus 2008.
Operating expenses were
$25.34 billion for 2009, 27% higher than 2008. Compensation
and benefits expenses 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.
Total staff decreased 2% during 2009. Total staff including
consolidated entities held for investment purposes decreased 5%
during 2009.
Non-compensation
expenses were $9.15 billion for 2009, 2% higher than 2008.
The increase compared with 2008 reflected the impact of
charitable contributions of approximately $850 million
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 firm asks its
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 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 analyses, are included in our Investing & Lending
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.
One Month Ended December 2008.
Operating
expenses were $1.44 billion for the month of
December 2008. Compensation and benefits expenses 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.
50
Table of Contents
Provision for
Taxes
The effective income tax rate for 2010, excluding the impact of
the $465 million U.K. bank payroll tax and the
$550 million SEC settlement, substantially all of which is
non-deductible,
was
32.7%
1
,
essentially unchanged from 2009. Including the impact of these
amounts, the effective income tax rate was 35.2% for 2010.
The effective income tax rate for 2009 was 32.5%, compared with
approximately 1% for 2008. 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 income tax rate for 2009 represented a return to a
geographic earnings mix that is more in line with our historic
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. During December 2010, the
rules were extended retroactively through
December 31, 2011. If these rules are not extended
beyond December 2011, the expiration may materially
increase our effective income tax rate beginning in 2012.
| 1. | We believe that presenting our effective income tax rate excluding the impact of the U.K. bank payroll tax and the SEC settlement, substantially all of which is non-deductible, is meaningful, as excluding these items increases the comparability of period-to-period results. The table below presents the calculation of the effective income tax rate excluding the impact of these amounts. |
| Year Ended December 2010 | ||||||||||||||
|
Pre-tax
|
Provision
|
Effective income
|
||||||||||||
| $ in millions | earnings | for taxes | tax rate | |||||||||||
|
As reported
|
$ | 12,892 | $ | 4,538 | 35.2% | |||||||||
|
Add back:
|
||||||||||||||
|
Impact of the U.K. bank payroll tax
|
465 | — | ||||||||||||
|
Impact of the SEC settlement
|
550 | 6 | ||||||||||||
|
As adjusted
|
$ | 13,907 | $ | 4,544 | 32.7% | |||||||||
51
Table of Contents
Segment Operating
Results
The table below presents the net revenues, operating expenses
and
pre-tax
earnings/(loss) of our segments.
|
One Month
|
||||||||||||||||||||
| Year Ended | Ended | |||||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||||
|
Investment Banking
|
Net revenues | $ | 4,810 | $ | 4,984 | $ | 5,453 | $ | 138 | |||||||||||
| Operating expenses | 3,511 | 3,482 | 3,269 | 170 | ||||||||||||||||
| Pre-tax earnings/(loss) | $ | 1,299 | $ | 1,502 | $ | 2,184 | $ | (32 | ) | |||||||||||
|
Institutional Client Services
|
Net revenues | $ | 21,796 | $ | 32,719 | $ | 22,345 | $ | 1,332 | |||||||||||
| Operating expenses | 14,291 | 13,691 | 10,294 | 736 | ||||||||||||||||
| Pre-tax earnings | $ | 7,505 | $ | 19,028 | $ | 12,051 | $ | 596 | ||||||||||||
|
Investing & Lending
|
Net revenues | $ | 7,541 | $ | 2,863 | $ | (10,821 | ) | $ | (1,630 | ) | |||||||||
| Operating expenses | 3,361 | 3,523 | 2,719 | 204 | ||||||||||||||||
| Pre-tax earnings/(loss) | $ | 4,180 | $ | (660 | ) | $ | (13,540 | ) | $ | (1,834 | ) | |||||||||
|
Investment Management
|
Net revenues | $ | 5,014 | $ | 4,607 | $ | 5,245 | $ | 343 | |||||||||||
| Operating expenses | 4,051 | 3,673 | 3,528 | 263 | ||||||||||||||||
| Pre-tax earnings | $ | 963 | $ | 934 | $ | 1,717 | $ | 80 | ||||||||||||
|
Total
|
Net revenues | $ | 39,161 | $ | 45,173 | $ | 22,222 | $ | 183 | |||||||||||
| Operating expenses 1 | 26,269 | 25,344 | 19,886 | 1,441 | ||||||||||||||||
| Pre-tax earnings/(loss) | $ | 12,892 | $ | 19,829 | $ | 2,336 | $ | (1,258 | ) | |||||||||||
| 1. | Includes the following expenses that have not been allocated to our segments: (i) charitable contributions of $345 million and $810 million for the years ended December 2010 and December 2009, respectively; (ii) net provisions for a number of litigation and regulatory proceedings of $682 million, $104 million, $(4) million and $68 million for the years ended December 2010, December 2009 and November 2008 and one month ended December 2008, respectively; and (iii) real estate-related exit costs of $28 million, $61 million and $80 million for the years ended December 2010, December 2009 and November 2008, respectively. |
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 27 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information about 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 businesses. 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.
52
Table of Contents
Investment
Banking
Our Investment Banking segment is comprised of:
Financial Advisory.
Includes advisory
assignments with respect to mergers and acquisitions,
divestitures, corporate defense activities, risk management,
restructurings and
spin-offs.
Underwriting.
Includes public offerings and
private placements of a wide range of securities, loans and
other financial instruments, and derivative transactions
directly related to these client underwriting activities.
The table below presents the operating results of our Investment
Banking segment.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Financial Advisory
|
$ | 2,062 | $ | 1,897 | $ | 2,663 | $ | 73 | ||||||||||
|
Equity underwriting
|
1,462 | 1,797 | 1,415 | 19 | ||||||||||||||
|
Debt underwriting
|
1,286 | 1,290 | 1,375 | 46 | ||||||||||||||
|
Total Underwriting
|
2,748 | 3,087 | 2,790 | 65 | ||||||||||||||
|
Total net revenues
|
4,810 | 4,984 | 5,453 | 138 | ||||||||||||||
|
Operating expenses
|
3,511 | 3,482 | 3,269 | 170 | ||||||||||||||
|
Pre-tax
earnings/(loss)
|
$ | 1,299 | $ | 1,502 | $ | 2,184 | $ | (32 | ) | |||||||||
The table below presents our financial advisory and underwriting
transaction
volumes.
1
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in billions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Announced mergers and acquisitions
|
$ | 542 | $ | 533 | $ | 914 | $ | 18 | ||||||||||
|
Completed mergers and acquisitions
|
425 | 591 | 874 | 12 | ||||||||||||||
|
Equity and
equity-related
offerings
2
|
66 | 83 | 64 | 2 | ||||||||||||||
|
Debt
offerings
3
|
229 | 256 | 165 | 19 | ||||||||||||||
| 1. | Source: Thomson Reuters. Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or a change in the value of a transaction. |
| 2. | Includes Rule 144A and public common stock offerings, convertible offerings and rights offerings. |
| 3. | Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. Excludes leveraged loans. |
2010 versus 2009
. Net revenues in Investment
Banking were $4.81 billion for 2010, 3% lower than 2009.
Net revenues in Financial Advisory were $2.06 billion, 9%
higher than 2009, primarily reflecting an increase in client
activity. Net revenues in our Underwriting business were
$2.75 billion, 11% lower than 2009, reflecting lower net
revenues in equity underwriting, principally due to a decline in
client activity in comparison to 2009, which included
significant capital-raising activity by financial institution
clients. Net revenues in debt underwriting were essentially
unchanged compared with 2009.
Our investment banking transaction backlog decreased compared
with the end of 2009. 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. The decrease
compared with the end of 2009 reflected a decline in estimated
net revenues from potential debt and equity underwriting
transactions, primarily related to client mandates to underwrite
leveraged finance transactions and common stock offerings. This
decrease was partially offset by an increase in estimated net
revenues from potential advisory transactions.
Operating expenses were $3.51 billion for 2010, essentially
unchanged from 2009.
Pre-tax
earnings were $1.30 billion in 2010, 14% lower than 2009.
53
Table of Contents
2009 versus 2008
. Net revenues in Investment
Banking were $4.98 billion for 2009, 9% lower than 2008.
Net revenues in Financial Advisory were $1.90 billion for
2009, 29% lower than 2008, reflecting a decline in
industry-wide
completed mergers and acquisitions. Net revenues in our
Underwriting business were $3.09 billion, 11% higher than
2008, due to higher net revenues in equity underwriting,
primarily reflecting an increase in
industry-wide
equity and
equity-related
offerings, including significant
capital-raising
activity by financial institution clients during 2009. Net
revenues in debt underwriting were lower than 2008, primarily
reflecting significantly lower net revenues from leveraged
finance activity, partially offset by significantly higher net
revenues from
investment-grade
and municipal activity.
Our investment banking transaction backlog increased
significantly during the twelve months ended December 2009.
The increase was primarily due to potential equity and debt
underwriting transactions from client mandates to underwrite
initial public offerings and, to a lesser extent, leveraged
finance transactions, principally due to increased levels of
client activity. The advisory backlog also increased, but was
not a material contributor to the change.
Operating expenses were $3.48 billion for 2009, 7% higher
than 2008, due to increased compensation and benefits expenses.
Pre-tax
earnings were $1.50 billion in 2009, 31% lower than 2008.
One Month Ended December 2008.
Net
revenues in Investment Banking were $138 million for the
month of December 2008. Net revenues in Financial Advisory
were $73 million, reflecting very low levels of
industry-wide
completed mergers and acquisitions activity. Net revenues in our
Underwriting business were $65 million, reflecting
continued challenging market conditions across equity and
leveraged finance markets.
Our investment banking transaction backlog decreased during the
one month ended December 2008. The decrease in backlog was
primarily due to a decline in potential advisory transactions,
principally due to a decline in client activity.
Operating expenses were $170 million for the month of
December 2008.
Pre-tax
loss
was $32 million for the month of December 2008.
Institutional
Client Services
Our Institutional Client Services segment is comprised of:
Fixed Income, Currency and Commodities Client
Execution.
Includes client execution activities
related to making markets in interest rate products, credit
products, mortgages, currencies and commodities.
Equities.
Includes client execution activities
related to making markets in equity products, as well as
commissions and fees from executing and clearing institutional
client transactions on major stock, options and futures
exchanges worldwide. Equities also includes our securities
services business, which provides financing, securities lending
and other prime brokerage services to institutional clients,
including hedge funds, mutual funds, pension funds and
foundations, and generates revenues primarily in the form of
interest rate spreads or fees.
The table below presents the operating results of our
Institutional Client Services segment.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Fixed Income, Currency and Commodities Client Execution
|
$ | 13,707 | $ | 21,883 | $ | 9,318 | $ | 446 | ||||||||||
|
Equities client execution
|
3,231 | 5,237 | 4,950 | 420 | ||||||||||||||
|
Commissions and fees
|
3,426 | 3,680 | 4,826 | 239 | ||||||||||||||
|
Securities services
|
1,432 | 1,919 | 3,251 | 227 | ||||||||||||||
|
Total Equities
|
8,089 | 10,836 | 13,027 | 886 | ||||||||||||||
|
Total net revenues
|
21,796 | 32,719 | 22,345 | 1,332 | ||||||||||||||
|
Operating expenses
|
14,291 | 13,691 | 10,294 | 736 | ||||||||||||||
|
Pre-tax
earnings
|
$ | 7,505 | $ | 19,028 | $ | 12,051 | $ | 596 | ||||||||||
54
Table of Contents
2010 versus 2009.
Net revenues in
Institutional Client Services were $21.80 billion for 2010,
33% lower than 2009.
Net revenues in Fixed Income, Currency and Commodities Client
Execution were $13.71 billion for 2010, 37% lower than a
particularly strong 2009. During 2010, Fixed Income, Currency
and Commodities Client Execution operated in a challenging
environment characterized by lower client activity levels, which
reflected broad market concerns including European sovereign
debt risk and uncertainty over regulatory reform, as well as
tighter bid/offer spreads. The decrease in net revenues compared
with 2009 primarily reflected significantly lower results in
interest rate products, credit products, commodities and, to a
lesser extent, currencies. These decreases were partially offset
by higher net revenues in mortgages, as 2009 included
approximately $1 billion of losses on commercial
mortgage-related
products.
Certain unfavorable conditions emerged during the second quarter
of 2010 that made the environment more challenging for our
businesses, resulting in lower client activity levels. These
conditions included broad market concerns, such as European
sovereign debt risk and uncertainty regarding financial
regulatory reform, sharply higher equity volatility levels,
lower global equity prices and wider corporate credit spreads.
In addition, a more competitive environment drove tighter
bid/offer spreads. During the second half of 2010, some of these
conditions reversed as equity volatility levels decreased,
global equity prices recovered and corporate credit spreads
narrowed. However, lower client activity levels, reflecting
broad market concerns, including European sovereign debt risk
and uncertainty over regulatory reform, continued to negatively
impact our results. If these concerns were to continue over the
long term, net revenues in Fixed Income, Currency and
Commodities Client Execution would likely continue to be
negatively impacted.
Net revenues in Equities were $8.09 billion for 2010, 25%
lower than 2009, primarily reflecting significantly lower net
revenues in equities client execution, principally due to
significantly lower results in derivatives and shares.
Commissions and fees were also lower than 2009, primarily
reflecting lower client activity levels. In addition, securities
services net revenues were significantly lower compared with
2009, primarily reflecting tighter securities lending spreads,
principally due to the impact of changes in the composition of
customer balances, partially offset by the impact of higher
average customer balances. During 2010, although equity markets
were volatile during the first half of the year, equity prices
generally improved and volatility levels declined in the second
half of the year.
Operating expenses were $14.29 billion for 2010, 4% higher
than 2009, due to the impact of the U.K. bank payroll tax, as
well as an impairment of our NYSE DMM rights of
$305 million. These increases were partially offset by
lower compensation and benefits expenses, resulting from lower
levels of discretionary compensation.
Pre-tax
earnings were $7.51 billion in 2010, 61% lower than 2009.
2009 versus 2008
. Net revenues in
Institutional Client Services were $32.72 billion for 2009,
46% higher compared with 2008.
Net revenues in Fixed Income, Currency and Commodities Client
Execution were $21.88 billion for 2009, significantly
higher compared with 2008. During 2009, Fixed Income, Currency
and Commodities Client Execution 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 higher than 2008, while net
revenues in currencies were strong, but lower than a
particularly strong 2008. During 2009, mortgages included
approximately $1 billion of losses on commercial
mortgage-related
products. Fixed Income, Currency and Commodities Client
Execution results in 2008 included a loss of approximately
$3.1 billion (net of hedges) related to
non-investment-grade
credit origination activities. In addition, results in mortgages
in 2008 included net losses of approximately $900 million
on residential
mortgage-related
products and approximately $600 million on commercial
mortgage-related
products.
Net revenues in Equities were $10.84 billion for 2009, 17%
lower than a particularly strong 2008, reflecting significant
decreases in securities services and commissions and fees. 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 commissions and
fees primarily reflected lower average market levels in Europe
and Asia, as well as lower transaction volumes compared with
2008. These decreases were partially offset by strong results in
equities client execution, primarily reflecting higher net
revenues in derivatives and shares. During 2009, Equities
operated in an environment characterized by a significant
increase in global equity prices and a significant decline in
volatility levels.
55
Table of Contents
Operating expenses were $13.69 billion for 2009, 33% higher
than 2008, due to increased compensation and benefits expenses,
resulting from higher net revenues. This increase was partially
offset by lower brokerage, clearing, exchange and distribution
fees, principally reflecting lower transaction volumes in
Equities.
Pre-tax
earnings were $19.03 billion in 2009, 58% higher than 2008.
One Month Ended
December 2008.
Institutional Client Services
net revenues were $1.33 billion for the month of
December 2008.
Fixed Income, Currency and Commodities Client Execution recorded
net revenues of $446 million for the month of
December 2008. During the month of December, market
opportunities were favorable for certain of our Fixed Income,
Currency and Commodities Client Execution product areas, as
interest rate products, commodities and currencies each produced
strong results. However, the environment for Fixed Income,
Currency and Commodities Client Execution also reflected
continued weakness in the broader credit markets, as 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
$400 million on commercial
mortgage-related
products.
Net revenues in Equities were $886 million for the month of
December 2008. These results reflected lower commission
volumes, as well as lower client execution net revenues from
derivatives compared with average monthly levels in 2008. Net
revenues in securities services were also lower compared with
average monthly levels in 2008, reflecting a decline in total
average customer balances, partially offset by the impact of
favorable changes in the composition of securities lending
balances. During the month of December, Equities operated in an
environment characterized by continued weakness in global equity
markets and continued high levels of volatility.
Operating expenses were $736 million for the month of
December 2008.
Pre-tax
earnings were $596 million for the month of
December 2008.
Investing &
Lending
Investing & Lending includes our investing activities
and the origination of loans to provide financing to clients.
These investments and loans are typically longer-term in nature.
We make investments, directly and indirectly through funds that
we manage, in debt securities, loans, public and private equity
securities, real estate, consolidated investment entities and
power generation facilities.
The table below presents the operating results of our
Investing & Lending segment.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
ICBC
|
$ | 747 | $ | 1,582 | $ | (446 | ) | $ | 228 | |||||||||
|
Equity securities (excluding ICBC)
|
2,692 | (596 | ) | (5,953 | ) | (1,076 | ) | |||||||||||
|
Debt securities and loans
|
2,597 | 1,045 | (6,325 | ) | (856 | ) | ||||||||||||
|
Other
1
|
1,505 | 832 | 1,903 | 74 | ||||||||||||||
|
Total net revenues
|
7,541 | 2,863 | (10,821 | ) | (1,630 | ) | ||||||||||||
|
Operating expenses
|
3,361 | 3,523 | 2,719 | 204 | ||||||||||||||
|
Pre-tax
earnings/(loss)
|
$ | 4,180 | $ | (660 | ) | $ | (13,540 | ) | $ | (1,834 | ) | |||||||
| 1. | Primarily includes results related to our consolidated entities held for investment purposes. |
2010 versus 2009
. Investing &
Lending recorded net revenues of $7.54 billion for 2010.
During 2010, an increase in global equity markets and tighter
credit spreads provided a favorable backdrop for our
Investing & Lending business. Results for 2010
primarily reflected a gain of $747 million from our
investment in the ordinary shares of ICBC, a net gain of
$2.69 billion from other equity securities and a net gain
of $2.60 billion from debt securities and loans.
Operating expenses were $3.36 billion for 2010, 5% lower
than 2009, due to the impact of significantly higher real estate
impairment charges during 2009 related to consolidated entities
held for investment purposes, as well as decreased compensation
and benefits expenses, resulting from lower levels of
discretionary compensation.
Pre-tax
earnings were $4.18 billion in 2010, compared with a
pre-tax
loss
of $660 million for 2009.
56
Table of Contents
2009 versus 2008.
Investing &
Lending recorded net revenues of $2.86 billion for 2009.
These results primarily reflected a gain of $1.58 billion
from our investment in the ordinary shares of ICBC, a net gain
of $1.05 billion from debt securities and loans and a net
loss of $596 million from other equity securities. During
2009, our Investing & Lending results reflected a
recovery in global credit and equity markets following
significant weakness during 2008. However, continued weakness in
commercial real estate markets negatively impacted our results
during 2009. In 2008, results in Investing & Lending
primarily reflected a loss of $446 million from our
investment in the ordinary shares of ICBC, a net loss of
$6.33 billion from debt securities and loans and a net loss
of $5.95 billion from other equity securities.
Operating expenses were $3.52 billion for 2009, 30% higher
than 2008, due to increased compensation and benefits expenses,
resulting from higher net revenues.
Pre-tax
loss
was $660 million in 2009 compared with a
pre-tax
loss
of $13.54 billion in 2008.
One Month Ended
December 2008.
Investing & Lending
recorded negative net revenues of $1.63 billion for the
month of December 2008. During the month of December,
continued weakness in global equity and credit markets
negatively impacted results in our Investing & Lending
business. Results for December 2008 primarily reflected net
losses of $1.08 billion from equity securities (excluding
ICBC)
and $856 million from debt securities and loans, partially
offset by a gain of $228 million from our investment in the
ordinary shares of ICBC.
Operating expenses were $204 million for the month of
December 2008.
Pre-tax
loss
was $1.83 billion for the month of December 2008.
Investment
Management
Investment Management provides investment 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 to
a diverse set of institutional and individual clients.
Investment Management also offers wealth advisory services,
including portfolio management and financial counseling, and
brokerage and other transaction services to
high-net-worth
individuals and families.
Assets under management typically generate fees as a percentage
of net asset value, which vary by asset class and are affected
by investment performance as well as asset inflows and
redemptions. In certain circumstances, we are also entitled to
receive incentive fees based on a percentage of a fund’s
return or when the return exceeds a specified benchmark or other
performance targets. Incentive fees are recognized when all
material contingencies are resolved.
57
Table of Contents
The table below presents the operating results of our Investment
Management segment.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Management and other fees
|
$ | 3,956 | $ | 3,860 | $ | 4,346 | $ | 320 | ||||||||||
|
Incentive fees
|
527 | 180 | 301 | 2 | ||||||||||||||
|
Transaction revenues
|
531 | 567 | 598 | 21 | ||||||||||||||
|
Total net revenues
|
5,014 | 4,607 | 5,245 | 343 | ||||||||||||||
|
Operating expenses
|
4,051 | 3,673 | 3,528 | 263 | ||||||||||||||
|
Pre-tax
earnings
|
$ | 963 | $ | 934 | $ | 1,717 | $ | 80 | ||||||||||
Assets under management include only those client assets where
we earn a fee for managing assets on a discretionary basis. This
includes assets in our mutual funds, hedge funds, private equity
funds and separately managed accounts for institutional and
individual investors. Assets under management do not include
the self-directed assets of our clients, including brokerage
accounts, or interest-bearing deposits held through our bank
depository institution subsidiaries.
The table below presents our assets under management by asset
class.
| As of | ||||||||||||||
|
December 31,
|
December 31,
|
November 30,
|
||||||||||||
| in billions | 2010 | 2009 | 2008 | |||||||||||
|
Alternative
investments
1
|
$ | 148 | $ | 146 | $ | 146 | ||||||||
|
Equity
|
144 | 146 | 112 | |||||||||||
|
Fixed income
|
340 | 315 | 248 | |||||||||||
|
Total
non-money
market assets
|
632 | 607 | 506 | |||||||||||
|
Money markets
|
208 | 264 | 273 | |||||||||||
|
Total assets under management
|
$ | 840 | $ | 871 | $ | 779 | ||||||||
| 1. | Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. |
The table below presents a summary of the changes in our assets
under management.
| Year Ended | ||||||||||||||
|
December 31,
|
December 31,
|
November 30,
|
||||||||||||
| in billions | 2010 | 2009 | 2008 | |||||||||||
|
Balance, beginning of year
|
$ | 871 | $ | 798 | 1 | $868 | ||||||||
|
Net inflows/(outflows)
|
||||||||||||||
|
Alternative investments
|
(1 | ) | (5 | ) | 8 | |||||||||
|
Equity
|
(21 | ) | (2 | ) | (55 | ) | ||||||||
|
Fixed income
|
7 | 26 | 14 | |||||||||||
|
Total
non-money
market net inflows/(outflows)
|
(15 | ) | 19 | (33 | ) | |||||||||
|
Money markets
|
(56 | ) | (22 | ) | 67 | |||||||||
|
Total net inflows/(outflows)
|
(71 | ) | (3 | ) | 34 | |||||||||
|
Net market appreciation/(depreciation)
|
40 | 76 | (123 | ) | ||||||||||
|
Balance, end of year
|
$ | 840 | $ | 871 | $779 | |||||||||
| 1. | Includes market appreciation of $13 billion and net inflows of $6 billion during the calendar month of December 2008. |
2010 versus 2009.
Net revenues in Investment
Management were $5.01 billion for 2010, 9% higher than
2009, primarily reflecting higher incentive fees across our
alternative investment products. Management and other fees also
increased, reflecting favorable changes in the mix of assets
under management, as well as the impact of appreciation in the
value of client assets. During 2010, assets under management
decreased 4% to $840 billion, primarily
reflecting outflows in money market assets, consistent with
industry trends.
Operating expenses were $4.05 billion for 2010, 10% higher
than 2009, primarily reflecting increased staff levels and the
impact of growth initiatives.
Pre-tax
earnings were $963 million in 2010, 3% higher than 2009.
58
Table of Contents
2009 versus 2008.
Net revenues in Investment
Management were $4.61 billion for 2009, 12% lower than
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 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.
Operating expenses were $3.67 billion for 2009, 4% higher
than 2008, due to higher levels of discretionary compensation.
Pre-tax
earnings were $934 million in 2009, 46% lower than 2008.
One Month Ended December 2008.
Net
revenues in Investment Management were $343 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.
Operating expenses were $263 million for the month of
December 2008.
Pre-tax
earnings were $80 million for the month of
December 2008
.
Geographic
Data
See Note 27 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for a summary of our total net revenues,
pre-tax
earnings and net earnings by geographic region.
Regulatory
Reform
On July 21, 2010, the
U.S. Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
was enacted. The Dodd-Frank Act significantly restructures the
financial regulatory regime under which we operate. The
implications of the
Dodd-Frank
Act for our businesses will depend to a large extent on the
provisions of required future rulemaking by the Board of
Governors of the Federal Reserve System (Federal Reserve Board),
the Federal Deposit Insurance Corporation (FDIC), the SEC, the
U.S. Commodity Futures Trading Commission (CFTC) and other
agencies, as well as the development of market practices and
structures under the regime established by the legislation and
the rules adopted
pursuant to it. However, we expect that there will be two
principal areas of impact for us:
| • | the prohibition on “proprietary trading” and the limitation on the sponsorship of, and investment in, hedge funds and private equity funds by banking entities, including bank holding companies; and |
| • | increased regulation of and restrictions on over-the-counter (OTC) derivatives markets and transactions. |
In addition, the legislation creates a new systemic risk
oversight body to oversee and coordinate the efforts of the
primary U.S. financial regulatory agencies in establishing
regulations to address financial stability concerns, including
more stringent supervisory requirements and prudential standards
applicable to systemically important financial institutions.
Legal and regulatory changes under consideration in other
jurisdictions could also have an impact on our activities in
markets outside the United States. See
“Business — Regulation” in Part I,
Item 1 of this
Form 10-K
for more information.
In light of the Dodd-Frank Act, during 2010, we liquidated
substantially all of the positions that had been held within
Principal Strategies in our former Equities operating segment,
as this was a proprietary trading business. In addition, during
the first quarter of 2011, we commenced the liquidation of the
positions that had been held by the global macro proprietary
trading desk in our former Fixed Income, Currency and
Commodities operating segment. Net revenues from Principal
Strategies and our global macro proprietary trading desk were
not material for the year ended December 2010. The full
impact of the Dodd-Frank Act and other regulatory reforms on our
businesses, our clients and the markets in which we operate will
depend on the manner in which the relevant authorities develop
and implement the required rules and the reaction of market
participants to these regulatory developments over the next
several years. We will continue to assess our business, risk
management, and compliance practices to conform to developments
in the regulatory environment.
59
Table of Contents
Balance Sheet
Management
One of our most important risk management disciplines is our
ability to manage the size and composition of our balance sheet.
While our asset base changes due to client activity, market
fluctuations and business opportunities, the size and
composition of our balance sheet reflect (i) our overall
risk tolerance, (ii) our ability to access stable funding
sources and (iii) the amount of equity capital we hold.
Although our balance sheet fluctuates on a
day-to-day
basis, our total assets and adjusted assets at quarterly and
year-end dates are generally not materially different from those
occurring within our reporting periods.
In order to ensure appropriate risk management, we seek to
maintain a liquid balance sheet and have processes in place to
dynamically manage our assets and liabilities which include:
| • | quarterly planning; |
| • | business-specific limits; |
| • | monitoring of key metrics; and |
| • | scenario analyses. |
Quarterly Planning.
We prepare a quarterly
balance sheet plan that combines our projected total assets and
composition of assets with our expected funding sources and
capital levels for the upcoming quarter. The objectives of this
quarterly planning process are:
| • | to develop our near-term balance sheet projections, taking into account the general state of the financial markets and expected client-driven and firm-driven activity levels; |
| • | to ensure that our projected assets are supported by an adequate level and tenor of funding and that our projected capital and liquidity metrics are within management guidelines; and |
| • | to allow business risk managers and managers from our independent control and support functions to objectively evaluate balance sheet limit requests from business managers in the context of the firm’s overall balance sheet constraints. These constraints include the firm’s liability profile and equity capital levels, maturities and plans for new debt and equity issuances, share repurchases, deposit trends and secured funding transactions. |
To prepare our quarterly balance sheet plan, business risk
managers and managers from our independent control and support
functions meet with business managers to review current and
prior period metrics and discuss expectations for the upcoming
quarter. The specific metrics reviewed include asset and
liability size and composition, aged inventory, limit
utilization, risk and performance measures and capital usage.
Our consolidated quarterly plan, including our balance sheet
plans by business, funding and capital projections, and
projected capital and liquidity metrics, is reviewed by the
Finance Committee. See “Overview and Structure of Risk
Management.”
Business-Specific Limits.
The Finance
Committee sets asset and liability limits for each business and
aged inventory limits for certain financial instruments as a
disincentive to hold inventory over longer periods of time.
These limits are set at levels which are close to actual
operating levels in order to ensure prompt escalation and
discussion among business managers and managers in our
independent control and support functions on a routine basis.
The Finance Committee reviews and approves balance sheet limits
on a quarterly basis and may also approve changes in limits on
an ad hoc basis in response to changing business needs or market
conditions.
60
Table of Contents
Monitoring of Key Metrics.
We monitor key
balance sheet metrics daily both by business and on a
consolidated basis, including asset and liability size and
composition, aged inventory, limit utilization, risk measures
and capital usage. In our consolidated balance sheet, we
allocate assets to businesses and review and analyze movements
resulting from new business activity as well as market
fluctuations.
Scenario Analyses.
We conduct scenario
analyses to determine how we would manage the size and
composition of our balance sheet and maintain appropriate
funding, liquidity and capital positions in a variety of
situations:
| • | These scenarios cover one-year and two-year time horizons using various macro-economic and firm-specific assumptions. We use these analyses to assist us in developing longer-term funding plans, including the level of unsecured debt issuances, the size of our secured funding program and the amount and composition of our equity capital. We also consider any potential future constraints, such as limits on our ability to grow our asset base in the absence of appropriate funding. |
| • | Through our Internal Capital Adequacy Assessment Process (ICAAP) and our resolution and recovery planning, we further analyze how we would manage our balance sheet through the duration of a severe crisis and we develop plans for mitigating actions to access funding, generate liquidity, and/or redeploy equity capital, as appropriate. |
Balance Sheet
Allocation
In addition to preparing our consolidated statement of financial
condition in accordance with U.S. GAAP, we prepare a
balance sheet that generally allocates assets to our businesses.
We believe that presenting our assets on this basis is
meaningful because it is consistent with the way management
views and manages risks associated with the firm’s assets
and better enables investors to assess the liquidity of the
firm’s assets. The table below presents a summary of this
balance sheet allocation.
|
As of
|
||||||
| in millions | December 2010 | |||||
|
Excess liquidity (Global Core
Excess)
|
$ | 174,776 | ||||
|
Other cash
|
7,565 | |||||
|
Excess liquidity and cash
|
182,341 | |||||
|
Secured client financing
|
279,291 | |||||
|
Inventory
|
260,406 | |||||
|
Secured financing agreements
|
70,921 | |||||
|
Receivables
|
32,396 | |||||
|
Institutional Client Services
|
363,723 | |||||
|
ICBC
|
7,589 | |||||
|
Equity (excluding ICBC)
|
22,972 | |||||
|
Debt
|
24,066 | |||||
|
Receivables and other
|
3,291 | |||||
|
Investing & Lending
|
57,918 | |||||
|
Total inventory and related assets
|
421,641 | |||||
|
Other assets
|
28,059 | |||||
|
Total assets
|
$ | 911,332 | ||||
61
Table of Contents
The following is a description of the captions in the table
above.
Excess Liquidity and Cash.
We maintain
substantial excess liquidity to meet a broad range of potential
cash outflows and collateral needs in the event of a stressed
environment. See “Liquidity Risk” below for details on
the composition and sizing of our excess liquidity pool or
“Global Core Excess” (GCE). In addition to our excess
liquidity, we maintain other operating cash balances, primarily
for use in specific currencies, entities, or jurisdictions where
we do not have immediate access to parent company liquidity.
Secured Client Financing.
We provide
collateralized financing for client positions, including margin
loans secured by client collateral, securities borrowed, and
resale agreements primarily collateralized by government
obligations. As a result of client activities, we are required
to segregate cash and securities to satisfy regulatory
requirements. Our secured client financing arrangements, which
are generally
short-term,
are accounted for at fair value or at amounts that approximate
fair value, and include daily margin requirements to mitigate
counterparty credit risk.
Institutional Client Services.
In
Institutional Client Services, we maintain inventory positions
to facilitate market-making in fixed income, equity, currency
and commodity products. Additionally, as part of client
market-making
activities, we enter into resale or
securities borrowing arrangements to obtain securities which we
can use to cover transactions in which we or our clients have
sold securities that have not yet been purchased. The
receivables in Institutional Client Services primarily relate to
securities transactions.
Investing & Lending.
In
Investing & Lending, we make investments and originate
loans to provide financing to clients. These investments and
loans are typically longer-term in nature. We make investments,
directly and indirectly through funds that we manage, in debt
securities, loans, public and private equity securities, real
estate and other investments.
Other Assets.
Other assets are generally less
liquid,
non-financial
assets, including property, leasehold improvements and
equipment, goodwill and identifiable intangible assets, income
tax-related receivables,
equity-method
investments and miscellaneous receivables.
The table below presents the reconciliation of this balance
sheet allocation to our U.S. GAAP balance sheet. In the
tables below, total assets for Institutional Client Services and
Investing & Lending represent the inventory and
related assets. These amounts differ from total assets by
business segment disclosed in Note 27 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
because total assets disclosed in Note 27 include
allocations of our excess liquidity and other cash, secured
client financing and other assets.
| As of December 2010 | ||||||||||||||||||||||||||
|
Excess
|
Secured
|
Institutional
|
||||||||||||||||||||||||
|
Liquidity
|
Client
|
Client
|
Investing &
|
Other
|
Total
|
|||||||||||||||||||||
| in millions | and Cash 1 | Financing | Services | Lending | Assets | Assets | ||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 39,788 | $ | — | $ | — | $ | — | $ | — | $ | 39,788 | ||||||||||||||
|
Cash and securities segregated for regulatory and other purposes
|
— | 53,731 | — | — | — | 53,731 | ||||||||||||||||||||
|
Securities purchased under agreements to resell and federal
funds sold
|
62,854 | 102,537 | 22,866 | 98 | — | 188,355 | ||||||||||||||||||||
|
Securities borrowed
|
37,938 | 80,313 | 48,055 | — | — | 166,306 | ||||||||||||||||||||
|
Receivables from brokers, dealers and clearing organizations
|
— | 3,702 | 6,698 | 37 | — | 10,437 | ||||||||||||||||||||
|
Receivables from customers and counterparties
|
— | 39,008 | 25,698 | 2,997 | — | 67,703 | ||||||||||||||||||||
|
Financial instruments owned, at fair value
|
41,761 | — | 260,406 | 54,786 | — | 356,953 | ||||||||||||||||||||
|
Other assets
|
— | — | — | — | 28,059 | 28,059 | ||||||||||||||||||||
|
Total assets
|
$ | 182,341 | $ | 279,291 | $ | 363,723 | $ | 57,918 | $ | 28,059 | $ | 911,332 | ||||||||||||||
| 1. | Includes unencumbered cash, U.S. government obligations, U.S. agency obligations, highly liquid U.S. agency mortgage-backed obligations, and French, German, United Kingdom and Japanese government obligations. |
62
Table of Contents
Less Liquid Inventory Composition.
We seek to
maintain a liquid balance sheet comprised of assets that can be
readily funded on a secured basis. However, we do hold certain
financial instruments that may be more difficult to fund on a
secured basis, especially during times of market stress. We
focus on funding these assets with longer contractual maturities
to reduce the need to refinance in periods of market stress and
generally hold higher levels of total capital for these assets
than for more liquid types of financial instruments. The table
below presents our aggregate holdings in these categories of
financial instruments.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Mortgage and other
asset-backed
loans and securities
|
$ | 17,042 | $ | 14,277 | ||||||
|
Bank loans and bridge
loans
1
|
18,039 | 19,345 | ||||||||
|
Emerging market debt securities
|
3,931 | 2,957 | ||||||||
|
High-yield
and other debt obligations
|
11,553 | 12,028 | ||||||||
|
Private equity investments and real estate fund
investments
2
|
14,807 | 14,633 | ||||||||
|
Emerging market equity securities
|
5,784 | 5,193 | ||||||||
|
ICBC ordinary
shares
3
|
7,589 | 8,111 | ||||||||
|
SMFG convertible preferred
stock
4
|
— | 933 | ||||||||
|
Other restricted public equity securities
|
116 | 203 | ||||||||
|
Other investments in
funds
5
|
3,212 | 2,911 | ||||||||
| 1. | Includes funded commitments and inventory held in connection with our origination, investing and market-making activities. |
| 2. | Includes interests in funds that we manage. Such amounts exclude assets related to consolidated investment funds of $889 million and $919 million as of December 2010 and December 2009, respectively, for which Goldman Sachs does not bear economic exposure. Excludes $792 million as of December 2010, related to VIEs consolidated upon adoption of Accounting Standards Update No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” for which Goldman Sachs does not bear economic exposure. |
| 3. | Includes interests of $4.73 billion and $5.13 billion as of December 2010 and December 2009, respectively, held by investment funds managed by Goldman Sachs. |
| 4. | During the first quarter of 2010, we converted our remaining Sumitomo Mitsui Financial Group, Inc. (SMFG) preferred stock investment into common stock and delivered the common stock to close out our remaining hedge position. |
| 5. | Includes interests in other investment funds that we manage. |
See Notes 4 through 6 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about the financial instruments we hold.
Balance Sheet
Analysis and Metrics
As of December 2010, total assets on our consolidated
statement of financial condition were $911.33 billion, an
increase of $62.39 billion from December 2009. This
increase is primarily due to (i) an increase in
collateralized agreements of $20.44 billion and an increase
in cash and securities segregated for regulatory and other
purposes of $17.07 billion, both primarily due to an
increase in client-driven activity, and (ii) an increase in
financial instruments owned, at fair value of
$14.55 billion, primarily due to increases in physical
commodities and U.S. government and federal agency
obligations.
As of December 2010, total liabilities on our consolidated
statement of financial condition were $833.98 billion, an
increase of $55.75 billion from December 2009. This
increase is primarily due to (i) an increase in securities
sold under agreements to repurchase of $33.99 billion,
primarily due to an increase in secured funding of our financial
instruments owned, at fair value, and an increase in
client-driven activity, (ii) an increase in other secured
financings of $14.24 billion, primarily due to
client-driven
activity and (iii) an increase in financial instruments
sold, but not yet purchased, at fair value of
$11.70 billion, primarily due to increases in
non-U.S. government
obligations and equities and convertible debentures.
As of December 2010, our total securities sold under
agreements to repurchase, accounted for as collateralized
financings, were $162.35 billion, which was 2% higher and
10% higher than the daily average amount of repurchase
agreements during the quarter ended and year ended
December 2010, respectively. As of December 2010, the
increase in our repurchase agreements relative to the daily
average during the quarter and year was due to an increase in
client-driven
activity at the end of the year and an increase in firm
financing activities. As of December 2009 our total
securities sold under agreements to repurchase, accounted for as
collateralized financings, were $128.36 billion, which was
2% lower and 8% lower than the daily average amount of
repurchase agreements during the quarter ended and year ended
December 2009, respectively. The level of our repurchase
agreements fluctuates between and within periods, primarily due
to providing clients with access to highly liquid collateral,
such as U.S. government, federal agency and
investment-grade
sovereign obligations through collateralized financing
activities.
63
Table of Contents
The table below presents information on our assets,
shareholders’ equity and leverage ratios.
| As of December | ||||||||||
| $ in millions, except per share amounts | 2010 | 2009 | ||||||||
|
Total assets
|
$ | 911,332 | $ | 848,942 | ||||||
|
Adjusted assets
|
588,927 | 551,071 | ||||||||
|
Total shareholders’ equity
|
77,356 | 70,714 | ||||||||
|
Leverage ratio
|
11.8x | 12.0x | ||||||||
|
Adjusted leverage ratio
|
7.6x | 7.8x | ||||||||
|
Debt to equity ratio
|
2.3x | 2.6x | ||||||||
Adjusted assets.
Adjusted assets equals total
assets less
(i) low-risk
collateralized assets generally associated with our secured
client financing transactions and federal funds sold and
(ii) cash and securities we segregate for regulatory and
other purposes.
The table below presents the reconciliation of total assets to
adjusted assets.
| As of December | ||||||||||||
| in millions | 2010 | 2009 | ||||||||||
|
Total assets
|
$ | 911,332 | $ | 848,942 | ||||||||
|
Deduct:
|
Securities borrowed
|
(166,306 | ) | (189,939 | ) | |||||||
|
Securities purchased under agreements to resell and federal
funds sold
|
(188,355 | ) | (144,279 | ) | ||||||||
|
Add:
|
Financial instruments sold, but not yet purchased, at
|
|||||||||||
|
fair value
|
140,717 | 129,019 | ||||||||||
|
Less derivative liabilities
|
(54,730 | ) | (56,009 | ) | ||||||||
|
Subtotal
|
85,987 | 73,010 | ||||||||||
|
Deduct:
|
Cash and securities segregated for regulatory and other purposes
|
(53,731 | ) | (36,663 | ) | |||||||
|
Adjusted assets
|
$ | 588,927 | $ | 551,071 | ||||||||
Leverage ratio.
The leverage ratio equals
total assets divided by total shareholders’ equity and
measures the proportion of equity and debt the firm is using to
finance assets. This ratio is different from the Tier 1
leverage ratio included in “Equity
Capital — Consolidated
Regulatory Capital Ratios” below, and further described in
Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K.
Adjusted leverage ratio.
The adjusted leverage
ratio equals adjusted assets divided by total shareholders’
equity. 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.
Our adjusted leverage ratio decreased to 7.6x as of
December 2010 from 7.8x as of December 2009 primarily
because our total shareholders’ equity grew at a higher
rate than our adjusted assets. Although total assets increased
by 7% during the period, this growth was principally comprised
of increases in
low-risk
assets (primarily securities purchased under agreements to
resell and cash and securities segregated for regulatory and
other purposes), which do not impact our adjusted assets.
Debt to equity ratio.
The debt to equity ratio
equals unsecured
long-term
borrowings divided by total shareholders’ equity.
Funding
Sources
Our primary sources of funding are secured financings, unsecured
long-term
and
short-term
borrowings, and deposits. We seek to maintain broad and
diversified funding sources globally.
We raise funding through a number of different products,
including:
| • | collateralized financings, such as repurchase agreements, securities loaned and other secured financings; |
| • | long-term unsecured 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; |
| • | short-term unsecured debt through U.S. and non-U.S. commercial paper and promissory note issuances and other methods; and |
| • | demand and savings deposits through cash sweep programs and time deposits through internal and third-party broker networks. |
We generally distribute our funding sources through our own
sales force to a large, diverse creditor base in a variety of
markets in the Americas, Europe and Asia. 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 have imposed various internal guidelines to
monitor creditor concentration across our primary funding
programs.
64
Table of Contents
Secured Funding.
We fund a significant amount
of our inventory on a secured basis. We believe secured funding
is more stable than unsecured financing because it is less
sensitive to changes in our credit quality due to the nature of
the collateral we post to our lenders. However, because the
terms or availability of secured funding, particularly
short-dated
funding, can deteriorate rapidly in a difficult environment, we
generally do not rely on
short-dated
secured funding unless it is collateralized with highly liquid
securities such as government obligations.
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 GCE for
refinancing risk associated with all secured funding
transactions. We seek longer terms for secured funding
collateralized by lower-quality assets because these funding
transactions may pose greater refinancing risk.
The weighted average maturity of our secured funding, excluding
funding collateralized by highly liquid securities eligible for
inclusion in our GCE, exceeded 100 days as of
December 2010.
A majority of our secured funding for securities not eligible
for inclusion in the GCE is executed through term repurchase
agreements and securities lending contracts. We also raise
financing through other types of collateralized financings, such
as secured loans and notes.
Unsecured
Long-Term
Borrowings.
We issue unsecured
long-term
borrowings as a source of capital to meet our
long-term
financing requirements and to finance a portion of our GCE. We
issue in different tenors, currencies, and products to maximize
the diversification of our investor base. The table below
presents our quarterly unsecured
long-term
borrowings maturity profile through 2016 as of
December 2010.
Unsecured
Long-Term Borrowings Maturity Profile
($ in millions)
65
Table of Contents
The weighted average maturity of our unsecured
long-term
borrowings as of December 2010 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 enter into interest rate swaps to convert a
substantial portion of our
long-term
borrowings into floating-rate obligations in order to minimize
our exposure to interest rates.
Temporary Liquidity Guarantee Program
(TLGP).
As of December 2010, we had
$19.01 billion of senior unsecured debt outstanding
(comprised of $10.43 billion of
short-term
and $8.58 billion of
long-term)
guaranteed by the FDIC under the 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 has
expired for new issuances.
Unsecured
Short-Term
Borrowings.
A significant portion of our
short-term
borrowings were originally
long-term
debt that is scheduled to mature within one year of the
reporting date. We use
short-term
borrowings to finance liquid assets and for other cash
management purposes. We primarily issue commercial paper,
promissory notes, and other hybrid instruments. 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 2010, our unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings, were $47.84 billion. See Note 15 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for further information about our unsecured
short-term
borrowings.
Deposits.
As of December 2010, our bank
depository institution subsidiaries had $38.57 billion in
customer deposits, including $8.50 billion of certificates
of deposit and other time deposits with a weighted average
maturity of three years, and $30.07 billion of other
deposits, substantially all of which were from cash sweep
programs. We utilize deposits to finance lending activities in
our bank subsidiaries and to support potential outflows, such as
lending commitments.
Goldman Sachs Bank USA (GS Bank USA) has access to funding
through the Federal Reserve Bank discount window. While we do
not rely on this funding in our liquidity planning and stress
testing, we maintain policies and procedures necessary to access
this funding and test discount window borrowing procedures.
Equity
Capital
The level and composition of our equity capital are determined
by multiple factors including our consolidated regulatory
capital requirements and ICAAP, and may also be influenced by
other factors such as 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.
In addition, we maintain a contingency capital plan which
provides a framework for analyzing and responding to an actual
or perceived capital shortfall.
Our consolidated regulatory capital requirements are determined
by the Federal Reserve Board, as described below. Our ICAAP
incorporates an internal
risk-based
capital assessment 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. Our internal
risk-based
capital assessment is supplemented with the results of stress
tests.
As of December 2010, our total shareholders’ equity
was $77.36 billion (consisting of common shareholders’
equity of $70.40 billion and preferred stock of
$6.96 billion). 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). 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. See
“— Consolidated Regulatory Capital Ratios”
below for information regarding the impact of regulatory
developments.
66
Table of Contents
Consolidated
Regulatory Capital
The Federal Reserve Board is the primary regulator of
Group Inc., a bank holding company and a financial holding
company under the U.S. Bank Holding Company Act of 1956. As
a bank holding company, we are subject to consolidated
regulatory capital requirements that are computed in accordance
with the Federal Reserve Board’s capital adequacy
regulations currently applicable to bank holding companies
(Basel 1). These capital requirements, which are based on the
Capital Accord of the Basel Committee on Banking Supervision
(Basel Committee), are expressed as capital ratios that compare
measures of capital to
risk-weighted
assets (RWAs). See Note 20 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for additional information regarding the firm’s RWAs. The
firm’s capital levels are also subject to qualitative
judgments by its regulators about components, risk weightings
and other factors.
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%.
Consolidated
Regulatory Capital Ratios
The table below presents information about our regulatory
capital ratios.
| As of December | ||||||||||
| $ in millions | 2010 | 2009 | ||||||||
|
Common shareholders’ equity
|
$ | 70,399 | $ | 63,757 | ||||||
|
Less: Goodwill
|
(3,495 | ) | (3,543 | ) | ||||||
|
Less: Disallowable intangible assets
|
(2,027 | ) | (1,377 | ) | ||||||
|
Less: Other
deductions
1
|
(5,601 | ) | (6,152 | ) | ||||||
|
Tier 1 Common Capital
|
59,276 | 52,685 | ||||||||
|
Preferred stock
|
6,957 | 6,957 | ||||||||
|
Junior subordinated debt issued to trusts
|
5,000 | 5,000 | ||||||||
|
Tier 1 Capital
|
71,233 | 64,642 | ||||||||
|
Qualifying subordinated
debt
2
|
13,880 | 14,004 | ||||||||
|
Less: Other
deductions
1
|
(220 | ) | (176 | ) | ||||||
|
Tier 2 Capital
|
13,660 | 13,828 | ||||||||
|
Total Capital
|
$ | 84,893 | $ | 78,470 | ||||||
|
Risk-Weighted
Assets
3
|
$ | 444,290 | $ | 431,890 | ||||||
|
Tier 1 Capital Ratio
|
16.0% | 15.0% | ||||||||
|
Total Capital Ratio
|
19.1% | 18.2% | ||||||||
|
Tier 1 Leverage Ratio
3
|
8.0% | 7.6% | ||||||||
|
Tier 1 Common Ratio
4
|
13.3% | 12.2% | ||||||||
| 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 nonconsolidated entities. |
| 2. | Substantially all of our subordinated debt qualifies as Tier 2 capital for Basel 1 purposes. |
| 3. | See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information about the firm’s RWAs and Tier 1 leverage ratio. |
| 4. | The Tier 1 common ratio equals Tier 1 common capital 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. |
Our Tier 1 capital ratio increased to 16.0% as of
December 2010 from 15.0% as of December 2009. The
growth in our Tier 1 capital during the year ended
December 2010 was principally due to an increase in our
shareholders’ equity, which was partially offset by an
increase in our RWAs. Our Tier 1 leverage ratio increased
to 8.0% as of December 2010 from 7.6% as of
December 2009, reflecting an increase in our Tier 1
capital, principally due to an increase in our
shareholders’ equity, which was partially offset by an
increase in average adjusted total assets.
67
Table of Contents
We are currently working to implement the requirements set out
in the Federal Reserve Board’s Capital Adequacy Guidelines
for Bank Holding Companies: Internal Ratings-Based and Advanced
Measurement Approaches, which are based on the advanced
approaches under the Revised Framework for the International
Convergence of Capital Measurement and Capital Standards issued
by the Basel Committee as applicable to us as a bank holding
company (Basel 2). U.S. banking regulators have
incorporated the Basel 2 framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as us, transition to Basel 2
following the successful completion of a parallel run.
In addition, the Basel Committee has undertaken a program of
substantial revisions to its capital guidelines. In particular,
the changes in the “Basel 2.5” guidelines will result
in increased capital requirements for market risk; additionally,
the Basel 3 guidelines issued by the Basel Committee in
December 2010 revise the definition of Tier 1 capital,
introduce Tier 1 common equity as a regulatory metric, set
new minimum capital ratios (including a new “capital
conservation buffer,” which must be composed exclusively of
Tier 1 common equity and will be in addition to the other
capital ratios), introduce a Tier 1 leverage ratio within
international guidelines for the first time, and make
substantial revisions to the computation of RWAs for credit
exposures. Implementation of the new requirements is expected to
take place over an extended transition period, starting at the
end of 2011 (for Basel 2.5) and end of 2012 (for Basel 3).
Although the U.S. federal banking agencies have now issued
proposed rules that are intended to implement certain aspects of
the Basel 2.5 guidelines, they have not yet addressed all
aspects of those guidelines or the Basel 3 changes. In addition,
both the Basel Committee and U.S. banking regulators
implementing the Dodd-Frank Act have indicated that they will
impose more stringent capital standards on systemically
important financial institutions. Although the criteria for
treatment as a systemically important financial institution have
not yet been determined, it is probable that they will apply to
us. Therefore, the regulations ultimately applicable to us may
be substantially different from those that have been published
to date.
The Dodd-Frank Act will subject us at a firmwide level to the
same leverage and
risk-based
capital requirements that apply to depository institutions and
directs banking regulators to impose additional capital
requirements as disclosed above. The Federal Reserve Board will
be required to begin implementing the new leverage and
risk-based
capital regulation by January 2012. As a consequence of
these changes, Tier 1 capital treatment for our junior
subordinated debt issued to trusts and our cumulative preferred
stock will be phased out over a three-year period beginning on
January 1, 2013. The interaction between the
Dodd-Frank
Act and the Basel Committee’s proposed changes adds further
uncertainty to our future capital requirements.
A number of other governmental entities and regulators,
including the U.S. Treasury, the European Union and the
Financial Services Authority in the United Kingdom, have also
proposed or announced changes which will result in increased
capital requirements for financial institutions.
As a consequence of these developments, we expect minimum
capital ratios required to be maintained under Federal Reserve
Board regulations will be increased and changes in the
prescribed calculation methodology are expected to result in
higher RWAs and lower capital ratios than those currently
computed.
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for additional information about our regulatory capital ratios
and the related regulatory requirements.
Internal Capital
Adequacy Assessment Process
We perform an ICAAP with the objective of ensuring that the firm
is appropriately capitalized relative to the risks in our
business.
As part of our ICAAP, we perform an internal
risk-based
capital assessment. Our internal
risk-based
capital assessment incorporates market risk, credit risk and
operational risk. Market risk is calculated by using
Value-at-Risk
(VaR) calculations supplemented by
risk-based
add-ons which include risks related to rare events (tail risks).
Credit risk utilizes assumptions about our counterparties’
probability of default, the size of our losses in the event of a
default and the maturity of our counterparties’ contractual
obligations to us. Operational risk is calculated based on
scenarios incorporating multiple types of operational failures.
Backtesting is used to gauge the effectiveness of models at
capturing and measuring relevant risks.
68
Table of Contents
We evaluate capital adequacy based on the result of our internal
risk-based
capital assessment, supplemented with the results of stress
tests which measure the firm’s performance under various
market conditions. Our goal is to hold sufficient capital, under
our internal
risk-based
capital framework, to ensure we remain adequately capitalized
after experiencing a severe stress event. Our assessment of
capital adequacy is viewed in tandem with our assessment of
liquidity adequacy and integrated into the overall risk
management structure, governance and policy framework of the
firm.
We attribute capital usage to each of our businesses based upon
our internal
risk-based
capital and regulatory frameworks and manage the levels of usage
based upon the balance sheet and risk limits established.
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
long-term
issuer ratings 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 Risk — Credit
Ratings” for further information about our credit ratings.
Subsidiary
Capital Requirements
Many of our subsidiaries, including GS Bank USA and our
broker-dealer
subsidiaries, are subject to separate regulation and capital
requirements in jurisdictions throughout the world. For purposes
of assessing the adequacy of its capital, GS Bank USA has
established an ICAAP which is similar to that used by
Group Inc. GS Bank USA’s capital levels and
prompt corrective action classification are subject to
qualitative judgments by its regulators about components, risk
weightings and other factors.
We expect that the capital requirements of several of our
subsidiaries will be impacted in the future by the various
developments arising from the Basel Committee, the Dodd-Frank
Act, and other governmental entities and regulators.
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information about GS Bank USA’s capital ratios
under Basel 1 as implemented by the Federal Reserve Board, and
for further information about the capital requirements of our
other regulated subsidiaries and the potential impact of
regulatory reform.
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 2010 and December 2009,
Group Inc.’s equity investment in subsidiaries was
$71.30 billion and $65.74 billion, respectively,
compared with its total shareholders’ equity of
$77.36 billion and $70.71 billion, respectively.
Group Inc. has guaranteed the payment obligations of
GS&Co., GS Bank USA, Goldman Sachs Bank (Europe) PLC
and GSEC 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 derivatives and
non-U.S. denominated
debt.
69
Table of Contents
Preferred Stock.
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. Based on
our December 2010 average diluted common shares outstanding
and basic shares outstanding, the estimated impact to earnings
per common share and book value per common share would be a
reduction of approximately $2.80 and $3.00, respectively, in the
period in which the redemption occurs in the future.
Contingency
Capital Plan
Our contingency capital plan outlines the appropriate
communication procedures to follow during a crisis period,
including internal dissemination of information as well as
ensuring timely communication with external stakeholders. It
also provides a framework for analyzing and responding to a
perceived or actual capital deficiency, including, but not
limited to, identification of drivers of a capital deficiency,
as well as mitigants and potential actions.
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 and subject to
any regulatory approvals. We manage our capital requirements
principally by setting limits on balance sheet assets
and/or
limits on risk, in each case both at the consolidated and
business levels. We attribute capital usage to each of our
businesses based upon our internal
risk-based
capital and regulatory frameworks
and manage the levels of usage based upon the balance sheet and
risk limits established.
Share Repurchase Program.
We seek to use our
share repurchase program to substantially offset increases in
share count over time resulting from employee
share-based
compensation and to help maintain the appropriate level of
common equity. The repurchase program is effected primarily
through regular
open-market
purchases, the amounts and timing of which are determined
primarily by our issuance of shares resulting from employee
share-based
compensation as well as our current and projected capital
position (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.
As of December 2010, under the Board’s existing share
repurchase program, we can repurchase up to 35.6 million
additional shares of common stock; however, any such repurchases
are 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 19
to the consolidated financial statements in Part II,
Item 8 of this
Form 10-K
for additional information on our repurchase program.
See Notes 16 and 19 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about our preferred stock, junior
subordinated debt issued to trusts and other subordinated debt.
Other Capital
Metrics
The table below presents information on our shareholders’
equity and book value per common share.
| As of December | ||||||||||
| $ in millions, except per share amounts | 2010 | 2009 | ||||||||
|
Total shareholders’ equity
|
$ | 77,356 | $ | 70,714 | ||||||
|
Common shareholders’ equity
|
70,399 | 63,757 | ||||||||
|
Tangible common shareholders’ equity
|
64,877 | 58,837 | ||||||||
|
Book value per common share
|
128.72 | 117.48 | ||||||||
|
Tangible book value per common share
|
118.63 | 108.42 | ||||||||
70
Table of Contents
Tangible common shareholders’
equity.
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 and tangible book
value per common share are meaningful because they are measures
that we and investors use to assess capital adequacy.
The table below presents the reconciliation of total
shareholders’ equity to tangible common shareholders’
equity.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Total shareholders’ equity
|
$ | 77,356 | $ | 70,714 | ||||||
|
Deduct: Preferred stock
|
(6,957 | ) | (6,957 | ) | ||||||
|
Common shareholders’ equity
|
70,399 | 63,757 | ||||||||
|
Deduct: Goodwill and identifiable intangible assets
|
(5,522 | ) | (4,920 | ) | ||||||
|
Tangible common shareholders’ equity
|
$ | 64,877 | $ | 58,837 | ||||||
Book value and tangible book value per common
share.
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 546.9 million and 542.7 million as of
December 2010 and December 2009, respectively.
Off-Balance-Sheet
Arrangements
and Contractual Obligations
and Contractual Obligations
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 special purpose entities such as 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 securitizations. The securitization vehicles
that purchase mortgages, corporate bonds, and other types of
financial assets 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.
We also enter into these arrangements to underwrite client
securitization transactions; provide secondary market liquidity;
make investments in performing and nonperforming debt, equity,
real estate and other assets; provide investors with
credit-linked
and
asset-repackaged
notes; and receive or provide letters of credit to satisfy
margin requirements and to facilitate the clearance and
settlement 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.
When we transfer a security that has very little, if any,
default risk under an agreement to repurchase the security where
the maturity date of the repurchase agreement matches the
maturity date of the underlying security (such that we
effectively no longer have a repurchase obligation) and we have
relinquished control over the underlying security, we record
such transactions as sales. These transactions are referred to
as “repos to maturity.” We had no such transactions
outstanding as of December 2010 or December 2009.
71
Table of Contents
The table below presents where a discussion of our various
off-balance-sheet
arrangements may be found in Part II, Items 7 and 8 of
this
Form 10-K.
In addition, see Note 3 to the consolidated financial
statements in
Part II, Item 8 of this
Form 10-K
for a discussion of our consolidation policies and recent
accounting developments that affected these policies effective
January 1, 2010.
| Type of Off-Balance-Sheet Arrangement | Disclosure in Form 10-K | |
| Variable interests and other obligations, including contingent obligations, arising from variable interests in nonconsolidated VIEs | See Note 11 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. | |
| Leases, letters of credit, and lending and other commitments | See below and Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. | |
| Guarantees | See below and Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. | |
| Derivatives | See Notes 4, 5, 7 and 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. | |
72
Table of Contents
Contractual
Obligations
We have certain contractual obligations which require us to make
future cash payments. These contractual obligations include our
unsecured
long-term
borrowings, secured
long-term
financings, time deposits, contractual interest payments and
insurance agreements, all of which are included in our
consolidated statement of financial condition. Our obligations
to make future cash payments also
include certain
off-balance-sheet
contractual obligations such as purchase obligations, minimum
rental payments under noncancelable leases and commitments and
guarantees.
The table below presents our contractual obligations,
commitments and guarantees as of December 2010.
|
2016-
|
||||||||||||||||||||||
| in millions | 2011 | 2012-2013 | 2014-2015 | Thereafter | Total | |||||||||||||||||
|
Amounts related to on-balance-sheet obligations
|
||||||||||||||||||||||
|
Time
deposits
1
|
$ | — | $ | 3,000 | $ | 1,292 | $ | 1,437 | $ | 5,729 | ||||||||||||
|
Secured
long-term
financings
2
|
— | 8,994 | 2,791 | 2,063 | 13,848 | |||||||||||||||||
|
Unsecured
long-term
borrowings
3
|
— | 49,922 | 35,061 | 89,416 | 174,399 | |||||||||||||||||
|
Contractual interest
payments
4
|
6,807 | 12,287 | 9,107 | 30,115 | 58,316 | |||||||||||||||||
|
Insurance
liabilities
5
|
634 | 1,105 | 993 | 8,226 | 10,958 | |||||||||||||||||
|
Subordinated liabilities issued by consolidated VIEs
|
20 | 58 | 106 | 1,342 | 1,526 | |||||||||||||||||
|
Amounts related to
off-balance-sheet
arrangements
|
||||||||||||||||||||||
|
Commitments to extend credit
|
11,535 | 27,416 | 10,104 | 2,842 | 51,897 | |||||||||||||||||
|
Contingent and forward starting resale and securities borrowing
agreements
|
46,886 | — | — | — | 46,886 | |||||||||||||||||
|
Forward starting repurchase and securities lending agreements
|
12,509 | — | — | — | 12,509 | |||||||||||||||||
|
Underwriting commitments
|
835 | — | — | — | 835 | |||||||||||||||||
|
Letters of credit
|
1,992 | 218 | — | — | 2,210 | |||||||||||||||||
|
Investment commitments
|
2,583 | 5,877 | 1,860 | 773 | 11,093 | |||||||||||||||||
|
Minimum rental payments
|
528 | 752 | 590 | 1,520 | 3,390 | |||||||||||||||||
|
Purchase obligations
|
241 | 89 | 40 | 19 | 389 | |||||||||||||||||
|
Derivative guarantees
|
278,204 | 262,222 | 42,063 | 57,413 | 639,902 | |||||||||||||||||
|
Securities lending indemnifications
|
27,468 | — | — | — | 27,468 | |||||||||||||||||
|
Other financial guarantees
|
415 | 1,372 | 299 | 788 | 2,874 | |||||||||||||||||
| 1. | Excludes $2.78 billion of time deposits maturing within one year of our financial statement date. |
| 2. | The aggregate contractual principal amount of secured long-term financings for which the fair value option was elected, primarily consisting of debt raised through our William Street credit extension program, transfers of financial assets accounted for as financings rather than sales and certain other nonrecourse financings, exceeded their related fair value by $352 million. |
| 3. | Includes an increase of $8.86 billion to the carrying amount of certain of our unsecured long-term borrowings related to fair value hedges. In addition, the aggregate contractual principal amount of unsecured long-term borrowings (principal and non-principal protected) for which the fair value option was elected exceeded the related fair value by $349 million. |
| 4. | 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 2010. Includes stated coupons, if any, on structured notes. |
| 5. | 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. |
73
Table of Contents
In the table above:
| • | 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 and are treated as short-term obligations. |
| • | Obligations that are repayable prior to maturity at the option of Goldman Sachs are reflected at their contractual maturity dates and obligations that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. |
| • | Amounts included in the table do not necessarily reflect the actual future cash flow requirements for these arrangements because commitments and guarantees represent notional amounts and may expire unused or be reduced or cancelled at the counterparty’s request. |
| • | Due to the uncertainty of the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded. See Note 26 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unrecognized tax benefits. |
See Notes 15 and 18 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about our
short-term
borrowings, and commitments and guarantees.
As of December 2010, our unsecured
long-term
borrowings were $174.40 billion, with maturities extending
to 2060, and consisted principally of senior borrowings. See
Note 16 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information about our unsecured
long-term
borrowings.
As of December 2010, our future minimum rental payments net
of minimum sublease rentals under noncancelable leases were
$3.39 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 18 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information about our leases.
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. For the year ended
December 2010, total occupancy expenses for space
held in excess of our current requirements were
$130 million, which includes costs related to the
transition to our new headquarters in New York City. In
addition, in 2010, we incurred exit costs of $28 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.
Overview and
Structure of Risk Management
Overview
We believe that effective risk management is of primary
importance to the success of the firm. Accordingly, we have
comprehensive risk management processes through which we
monitor, evaluate and manage the risks we assume in conducting
our activities. These include market, credit, liquidity,
operational, legal, regulatory and reputational risk exposures.
Our risk management framework is built around three core
components: governance, processes and people.
Governance.
Risk management governance starts
with our Board, which plays an important role in reviewing and
approving risk management policies and practices, both directly
and through its Risk Committee, which consists of all of our
independent directors. The Board also receives periodic updates
on firmwide risks from our independent control and support
functions. Next, at the most senior levels of the firm, our
leaders are experienced risk managers, with a sophisticated and
detailed understanding of the risks we take. Our senior managers
lead and participate in
risk-oriented
committees, as do the leaders of our independent control and
support
functions — including
those in internal audit, compliance, controllers, credit risk
management, human capital management, legal, market risk
management, operations, operational risk management, tax,
technology and treasury.
The firm’s governance structure provides the protocol and
responsibility for decision-making on risk management issues and
ensures implementation of those decisions. We make extensive use
of
risk-related
committees that meet regularly and serve as an important means
to facilitate and foster ongoing discussions to identify, manage
and mitigate risks.
74
Table of Contents
We maintain strong communication about risk and we have a
culture of collaboration in decision-making among the
revenue-producing units, independent control and support
functions, committees and senior management. While we believe
that the first line of defense in managing risk rests with the
managers in our revenue-producing units, we dedicate extensive
resources to independent control and support functions in order
to ensure a strong oversight structure and an appropriate
segregation of duties.
Processes.
We maintain various processes and
procedures that are critical components of our risk management.
First and foremost is our daily discipline of marking
substantially all of the firm’s inventory to current market
levels. Goldman Sachs carries its inventory at fair value, with
changes in valuation reflected immediately in our risk
management systems and in net revenues. We do so because we
believe this discipline is one of the most effective tools for
assessing and managing risk and that it provides transparent and
realistic insight into our financial exposures.
We also apply a rigorous framework of limits to control risk
across multiple transactions, products, businesses and markets.
This includes setting credit and market risk limits at a variety
of levels and monitoring these limits on a daily basis. Limits
are typically set at levels that will be periodically exceeded,
rather than at levels which reflect our maximum risk appetite.
This fosters an ongoing dialogue on risk among
revenue-producing
units, independent control and support functions, committees and
senior management, as well as rapid escalation of
risk-related
matters. See “Market Risk Management” and “Credit
Risk Management” for further information on our risk limits.
Active management of our positions is another important process.
Proactive mitigation of our market and credit exposures
minimizes the risk that we will be required to take outsized
actions during periods of stress.
We also focus on the rigor and effectiveness of the firm’s
risk systems. The goal of our risk management technology is to
get the right information to the right people at the right time,
which requires systems that are comprehensive, reliable and
timely. We devote significant time and resources to our risk
management technology to ensure that it consistently provides us
with complete, accurate and timely information.
People.
Even the best technology serves only
as a tool for helping to make informed decisions in real time
about the risks we are taking. Ultimately, effective risk
management requires our people to make ongoing portfolio
interpretations and adjustments. In both our revenue-producing
units and our independent control and support functions, the
experience of our professionals, and their understanding of the
nuances and limitations of each risk measure, guide the firm in
assessing exposures and maintaining them within prudent levels.
Structure
Ultimate oversight of risk is the responsibility of the
firm’s Board. The Board oversees risk both directly and
through its Risk Committee. Within the firm, a series of
committees with specific risk management mandates have oversight
or decision-making responsibilities for risk management
activities. Committee membership generally consists of senior
managers from both our revenue-producing units and our
independent control and support functions. We have established
procedures for these committees to ensure that appropriate
information barriers are in place. Our primary risk committees,
most of which also have additional
sub-committees
or working groups, are described below. In addition to these
committees, we have other
risk-oriented
committees which provide oversight for different businesses,
activities, products, regions and legal entities.
Membership of the firm’s risk committees is reviewed
regularly and updated to reflect changes in the responsibilities
of the committee members. Accordingly, the length of time that
members serve on the respective committees varies as determined
by the relevant committee charter or the committee chairs, and
based on the responsibilities of the members within the firm.
In addition, independent control and support functions, which
report to the chief financial officer, general counsels, chief
administrative officer, or in the case of Internal Audit, to the
Audit Committee of the Board, are responsible for
day-to-day
oversight of risk, as discussed in greater detail in the
following sections.
75
Table of Contents
The chart below presents an overview of our risk management
governance structure, highlighting the oversight of our Board,
our key
risk-related
committees and the independence of our control and support
functions.
Management Committee.
The Management Committee
oversees the global activities of the firm, including all of the
firm’s independent control and support functions. It
provides this oversight directly and through authority delegated
to committees it has established. This committee is comprised of
the most senior leaders of the firm, and is chaired by the
firm’s chief executive officer. The Management Committee
has established various committees with delegated authority and
appoints the chairpersons of these committees (the chairpersons
then appoint the other members of the committees). All of these
committees (and other committees established by such committees)
report, directly or indirectly, to the Management Committee.
Most members of the Management Committee are also members of
other firmwide, divisional and regional committees. The
following are the committees established by the Management
Committee that are principally involved in firmwide risk
management.
Firmwide Client and Business Standards
Committee.
The Firmwide Client and Business
Standards Committee assesses and makes determinations regarding
business standards and practices, reputational risk management,
client relationships and client service, and is chaired by the
firm’s president and chief operating officer. This
committee also has responsibility for overseeing the
implementation of the recommendations of the Business Standards
Committee. This committee has established the following two
committees that report to it and is responsible for appointing
the chairpersons of these committees and other committee members:
| • | Firmwide New Activity Committee. The Firmwide New Activity Committee is responsible for reviewing new activities and establishing a process to identify and review previously approved activities that are significant and that have changed in complexity and/or structure or present different reputational and suitability concerns over time to consider whether these activities remain appropriate. This committee is co-chaired by the firm’s head of operations and the chief administrative officer of our Investment Management Division. |
76
Table of Contents
| • | Firmwide Suitability Committee. The Firmwide Suitability Committee is responsible for setting standards and policies for product, transaction and client suitability and providing a forum for consistency across divisions, regions and products on suitability assessments. This committee also reviews suitability matters escalated from other firm committees. This committee is co-chaired by the firm’s international general counsel and the chief operating officer of our Investment Management Division. |
Firmwide Risk Committee.
The Firmwide Risk
Committee is responsible for the ongoing monitoring and control
of the firm’s global financial risks. Through both direct
and delegated authority, the Firmwide Risk Committee approves
firmwide, product, divisional and business-level limits for both
market and credit risks, approves sovereign credit risk limits
and reviews results of stress tests and scenario analyses. This
committee is co-chaired by the firm’s chief financial
officer and a senior managing director from the firm’s
executive office. The Firmwide Risk Committee has established
the Securities Division Risk Committee, the Credit Policy
Committee and the Operational Risk Committee and the Management
Committee established the Firmwide Finance Committee. All four
of these committees report to the Firmwide Risk Committee, which
is responsible for appointing the chairperson of the four
committees, who then appoints the other committee members:
| • | Securities Division Risk Committee. The Securities Division Risk Committee sets market risk limits, subject to overall firmwide risk limits, for our Fixed Income, Currency and Commodities Client Execution and Equities Client Execution businesses based on a number of risk measures, including VaR, stress tests, scenario analyses, and inventory levels. This committee is chaired by the chief risk officer of our Securities Division. |
| • | Credit Policy Committee. The Credit Policy Committee establishes and reviews broad credit policies and parameters that are implemented by our Credit Risk Management department (Credit Risk Management). This committee is chaired by the firm’s chief credit officer. |
| • | 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. This committee is chaired by the chief risk officer of GS Bank USA. |
| • | Finance Committee. The Finance Committee has oversight of firmwide liquidity, the size and composition of our balance sheet and capital base, and our credit ratings. This 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. This committee is also responsible for reviewing and approving balance sheet limits and the size of our GCE. This committee is co-chaired by the firm’s chief financial officer and the firm’s global treasurer. |
The following committees report jointly to the Firmwide Risk
Committee and the Firmwide Client and Business Standards
Committee, which also appoint the chairpersons of these
committees (who then appoint the members of the committees).
| • | Firmwide Capital Committee. The Firmwide Capital Committee provides approval and oversight of debt-related underwriting transactions, including related commitments of the firm’s capital. This committee aims to ensure that business and reputational standards for underwritings and capital commitments are maintained on a global basis. This committee is chaired by the global head of the firm’s Financing Group and head of the firm’s independent control and support functions in Europe, Middle East and Africa. |
| • | Firmwide Commitments Committee. The Firmwide Commitments Committee reviews the firm’s underwriting and distribution activities with respect to equity and equity-related product offerings, and sets and maintains policies and procedures designed to ensure that legal, reputational, regulatory and business standards are maintained on a global basis. In addition to reviewing specific transactions, this committee periodically conducts general strategic reviews of sectors and products and establishes policies in connection with transaction practices. This committee is co-chaired by the head of our Latin America Group and the head of the firm’s independent control and support functions in Europe, Middle East and Africa. |
Investment Management Division Risk
Committee.
The Investment Management
Division Risk Committee is responsible for the ongoing
monitoring and control of global market, counterparty credit and
liquidity risks associated with the activities of our investment
management businesses. The head of Investment Management
Division risk management is the chair of this committee and
appoints the other members.
77
Table of Contents
Liquidity
Risk
Liquidity is of critical importance to financial institutions.
Most of the recent failures of financial institutions have
occurred in large part due to insufficient liquidity.
Accordingly, the firm has in place a comprehensive and
conservative set of liquidity and funding policies to address
both firm-specific and broader industry or market liquidity
events. Our principal objective is to be able to fund the firm
and to enable our core businesses to continue to generate
revenues, even under adverse circumstances.
We manage liquidity risk according to the following principles:
Excess Liquidity.
We maintain substantial
excess liquidity to meet a broad range of potential cash
outflows and collateral needs in a stressed environment.
Asset-Liability
Management.
We assess anticipated holding periods
for our assets and their potential illiquidity in a stressed
environment. We manage the maturities and diversity of our
funding across markets, products and counterparties; and seek to
maintain liabilities of appropriate tenor relative to our asset
base.
Contingency Funding Plan.
We maintain a
contingency funding plan to provide a framework for analyzing
and responding to a liquidity crisis situation or periods of
market stress. This framework sets forth the plan of action to
fund normal business activity in emergency and stress
situations. These principles are discussed in more detail below.
Excess
Liquidity
Our most important liquidity policy is to
pre-fund
our
estimated potential cash needs during a liquidity crisis and
hold this excess liquidity in the form of unencumbered, highly
liquid securities and cash instruments. We believe that this
global core excess would be readily convertible to cash in a
matter of days, through liquidation, by entering into repurchase
agreements or from maturities of reverse repurchase agreements,
and that this cash would allow us to meet immediate obligations
without needing to sell other
assets or depend on additional funding from
credit-sensitive
markets.
As of December 2010 and December 2009, the fair value
of the securities and certain overnight cash deposits included
in our GCE totaled $174.78 billion and
$170.69 billion, respectively. Based on the results of our
internal liquidity risk model, discussed below, as well as our
consideration of other factors including but not limited to a
qualitative assessment of the condition of the financial markets
and the firm, we believe our liquidity position as of
December 2010 was appropriate.
Beginning with the fourth quarter of 2010, our GCE, which was
previously reported at loan value, is now reported at fair
value. The differences between the loan value and fair value
were not material and prior periods are presented on a
comparable basis.
The table below presents the fair value of the securities and
certain overnight cash deposits that are included in our GCE.
|
Average for the
|
||||||||||
| Year Ended December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
U.S. dollar-denominated
|
$ | 130,072 | $ | 122,083 | ||||||
|
Non-U.S. dollar-denominated
|
37,942 | 45,987 | ||||||||
|
Total
|
$ | 168,014 | $ | 168,070 | ||||||
The
U.S. dollar-denominated
excess is composed of unencumbered U.S. government
obligations, U.S. agency obligations and highly liquid
U.S. agency
mortgage-backed
obligations, all of which are eligible as collateral in Federal
Reserve open market operations and certain overnight
U.S. dollar cash deposits. The
non-U.S. dollar-denominated
excess is composed of only unencumbered French, German, United
Kingdom and Japanese government obligations and certain
overnight cash deposits in highly liquid currencies. We strictly
limit our excess liquidity to this narrowly defined list of
securities and cash because they are highly liquid, even in a
difficult funding environment. We do not include other potential
sources of excess liquidity, such as lower-quality unencumbered
securities or committed credit facilities, in our GCE.
78
Table of Contents
The table below presents the fair value of our GCE by asset
class.
|
Average for the
|
||||||||||
| Year Ended December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Overnight cash deposits
|
$ | 25,040 | $ | 21,341 | ||||||
|
Federal funds sold
|
75 | 374 | ||||||||
|
U.S. government obligations
|
102,937 | 87,121 | ||||||||
|
U.S. federal agency obligations and highly liquid
U.S. federal agency
mortgage-backed
obligations
|
3,194 | 14,797 | ||||||||
|
French, German, United Kingdom and Japanese government
obligations
|
36,768 | 44,437 | ||||||||
|
Total
|
$ | 168,014 | $ | 168,070 | ||||||
The GCE is held at Group Inc. and our major
broker-dealer
and bank subsidiaries, as presented in the table below.
|
Average for the
|
||||||||||
| Year Ended December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Group Inc.
|
$ | 53,757 | $ | 55,185 | ||||||
|
Major
broker-dealer
subsidiaries
|
69,223 | 71,438 | ||||||||
|
Major bank subsidiaries
|
45,034 | 41,447 | ||||||||
|
Total
|
$ | 168,014 | $ | 168,070 | ||||||
Our GCE 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 liquidity needs are determined 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 (e.g., interest rates, collateral provisions and tenor) 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. |
We believe that our GCE provides us with a resilient source of
funds that would be available in advance of potential cash and
collateral outflows and gives us significant flexibility in
managing through a difficult funding environment.
In order to determine the appropriate size of our GCE, we use an
internal liquidity model, referred to as the Modeled Liquidity
Outflow, which captures and quantifies the firm’s liquidity
risks. We also consider other factors including but not limited
to a qualitative assessment of the condition of the financial
markets and the firm.
We distribute our GCE across subsidiaries, asset types, and
clearing agents to provide us with sufficient operating
liquidity to ensure timely settlement in all major markets, even
in a difficult funding environment.
We maintain our GCE to enable us to meet current and potential
liquidity requirements of our parent company, Group Inc.,
and our major
broker-dealer
and bank subsidiaries. The Modeled Liquidity Outflow
incorporates a consolidated requirement as well as a standalone
requirement for each of our major
broker-dealer
and bank subsidiaries. Liquidity held directly in each of these
subsidiaries is intended for use only by that subsidiary to meet
its liquidity requirements and is assumed not to be available to
Group Inc. unless (i) legally provided for and
(ii) there are no additional regulatory, tax or other
restrictions. We hold a portion of our GCE directly at
Group Inc. to support consolidated requirements not
accounted for in the major subsidiaries. In addition to the GCE
held at our major
broker-dealer
and bank subsidiaries, we maintain operating cash balances in
several of our other operating entities, primarily for use in
specific currencies, entities, or jurisdictions where we do not
have immediate access to parent company liquidity.
In addition to our GCE, we have a significant amount of other
unencumbered cash and financial instruments, including other
government obligations,
high-grade
money market securities, corporate obligations, marginable
equities, loans and cash deposits not included in our GCE. The
fair value of these assets averaged $72.98 billion and
$71.82 billion for the years ended December 2010 and
December 2009, respectively. We do not consider these
assets liquid enough to be eligible for our GCE liquidity pool
and therefore conservatively do not assume we will generate
liquidity from these assets in a
short-term
stress scenario.
79
Table of Contents
Modeled Liquidity Outflow.
Our Modeled
Liquidity Outflow is based on a scenario that includes both a
market-wide
stress and a firm-specific stress, characterized by some or all
of the following elements:
| • | Global recession, default by a medium-sized sovereign, low consumer and corporate confidence, and general financial instability. |
| • | Severely challenged market environment with material declines in equity markets and widening of credit spreads. |
| • | Damaging follow-on impacts to financial institutions leading to the failure of a large bank. |
| • | A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade. |
The following are the critical modeling parameters of the
Modeled Liquidity Outflow:
| • | Liquidity needs over a 30-day scenario. |
| • | A two-notch downgrade of the firm’s long-term senior unsecured credit ratings. |
| • | No support from government funding facilities. Although we have access to various central bank funding programs, we do not assume reliance on them as a source of funding in a liquidity crisis. |
| • | A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a crisis. |
| • | No diversification benefit across liquidity risks. We assume that liquidity risks are additive. |
| • | Maintenance of our normal business levels. We do not assume asset liquidation, other than the GCE. |
The Modeled Liquidity Outflow is calculated and reported to
senior management on a daily basis. We regularly refine our
model to reflect changes in market or economic conditions and
the firm’s business mix.
The potential contractual and contingent cash and collateral
outflows covered in our Modeled Liquidity Outflow include:
Unsecured
Funding
| • | Contractual: All upcoming maturities of unsecured long-term debt, commercial paper, promissory notes and other unsecured funding products. We assume that we will be unable to issue new unsecured debt or rollover any maturing debt. |
| • | Contingent: Repurchases of our outstanding long-term debt, commercial paper and hybrid financial instruments in the ordinary course of business as a market maker. |
Deposits
| • | Contractual: All upcoming maturities of term deposits. We assume that we will be unable to raise new term deposits or rollover any maturing term deposits. |
| • | Contingent: Withdrawals of bank deposits that have no contractual maturity. The withdrawal assumptions reflect, among other factors, the type of deposit, whether the deposit is insured or uninsured, and the firm’s relationship with the depositor. |
Secured
Funding
| • | Contractual: A portion of upcoming contractual maturities of secured funding trades due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral and counterparty concentration. |
| • | Contingent: A decline in value of financial assets pledged as collateral for financing transactions, which would necessitate additional collateral postings under those transactions. |
OTC
Derivatives
| • | Contingent: Collateral postings to counterparties due to adverse changes in the value of our OTC derivatives. |
| • | Contingent: Other outflows of cash or collateral related to OTC derivatives, including the impact of trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments required by a two-notch downgrade in our credit ratings, and collateral that has not been called by counterparties, but is available to them. |
Exchange-Traded
Derivatives
| • | Contingent: Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded derivatives. |
| • | Contingent: An increase in initial margin and guaranty fund requirements by derivative clearing houses. |
Customer Cash
and Securities
| • | Contingent: Liquidity outflows associated with our prime brokerage business, including withdrawals of customer credit balances, and a reduction in customer short positions, which serve as a funding source for long positions. |
80
Table of Contents
Unfunded
Commitments
| • | Contingent: Draws on our unfunded commitments. Draw assumptions reflect, among other things, the type of commitment and counterparty. |
Other
| • | Other upcoming large cash outflows, such as tax payments. |
Asset-Liability
Management
Our liquidity risk management policies are designed to ensure we
have a sufficient amount of financing, even when funding markets
experience persistent stress. We seek to maintain a
long-dated
and diversified funding profile, taking into consideration the
characteristics and liquidity profile of our assets.
Our approach to
asset-liability
management includes:
| • | Conservatively managing the overall characteristics of our funding book, with a focus on maintaining long-term, diversified sources of funding in excess of our current requirements. See “Balance Sheet and Funding Sources — Funding Sources” for additional details. |
| • | Actively managing and monitoring our asset base, with particular focus on the liquidity, holding period and our ability to fund assets on a secured basis. This enables us to determine the most appropriate funding products and tenors. Less liquid assets are more difficult to fund and therefore require funding that has longer tenors with a greater proportion of unsecured debt. For more detail on our balance sheet management process, please see “Balance Sheet and Funding Sources — Balance Sheet Management.” |
| • | Raising secured and unsecured financing that has a sufficiently longer term than the anticipated holding period of our assets. This reduces the risk that our liabilities will come due in advance of our ability to generate liquidity from the sale of our assets. Because we maintain a highly liquid balance sheet, the holding period of certain of our assets may be materially shorter than their contractual maturity dates. |
Our goal is to have sufficient total capital (unsecured
long-term
borrowings plus total shareholders’ equity) so that we can
avoid reliance on asset sales (other than our GCE). 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 the following
long-term
financing requirements:
| • | The portion of financial instruments owned, at fair value that we believe could not be funded on a secured basis in periods of market stress, assuming stressed fair 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. |
| • | Regulatory requirements to hold capital or other forms of financing in excess of what we would otherwise hold in regulated subsidiaries. |
Subsidiary Funding Policies.
The majority of
our unsecured funding is raised by Group Inc. which 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 are 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 assume that, unless legally
provided for, a subsidiary’s funds or securities are not
freely available 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 its obligations. Accordingly, we
assume that the capital provided to our regulated subsidiaries
is not available to Group Inc. or other subsidiaries and
any other financing provided to our regulated subsidiaries is
not available until the maturity of such financing.
81
Table of Contents
Group Inc. has provided substantial amounts of equity and
subordinated indebtedness, directly or indirectly, to its
regulated subsidiaries. For example, as of December 2010,
Group Inc. had $30.80 billion of equity and
subordinated indebtedness invested in GS&Co., its principal
U.S. registered
broker-dealer;
$22.67 billion invested in GSI, a regulated U.K.
broker-dealer;
$2.72 billion invested in Goldman Sachs
Execution & Clearing, L.P., a U.S. registered
broker-dealer;
$3.43 billion invested in Goldman Sachs Japan Co., Ltd., a
regulated Japanese
broker-dealer;
and $23.80 billion invested in GS Bank USA, a
regulated New York State-chartered bank. Group Inc. also
had $81.93 billion of unsubordinated loans and
$12.62 billion of collateral provided to these entities as
of December 2010 and significant amounts of capital
invested in and loans to its other regulated subsidiaries.
Contingency
Funding Plan
The Goldman Sachs contingency funding plan sets out the plan of
action we would use to fund business activity in crisis
situations and periods of market stress. The contingency funding
plan outlines a list of potential risk factors, key reports and
metrics that are reviewed on an ongoing basis to assist in
assessing the severity of, and managing through, a liquidity
crisis
and/or
market
dislocation. The contingency funding plan also describes in
detail the firm’s potential responses if our assessments
indicate that the firm has entered a liquidity crisis, which
include
pre-funding
for what we estimate will be our potential cash and collateral
needs as well as utilizing secondary sources of liquidity.
Mitigants and action items to address specific risks which may
arise are also described and assigned to individuals responsible
for execution.
The contingency funding plan identifies key groups of
individuals to foster effective coordination, control and
distribution of information, all of which are critical in the
management of a crisis or period of market stress. The
contingency funding plan also details the responsibilities of
these groups and individuals, which include making and
disseminating key decisions, coordinating all contingency
activities throughout the duration of the crisis or period of
market stress, implementing liquidity maintenance activities and
managing internal and external communication.
Credit
Ratings
The table below presents our unsecured credit ratings (excluding
debt guaranteed by the FDIC under the TLGP) and outlook as of
December 2010.
|
Short-Term
|
Long-Term
|
Subordinated
|
Trust
|
Preferred
|
Rating
|
|||||||||||||||||||||
| Debt | Debt | Debt | Preferred 1 | Stock 2 | Outlook | |||||||||||||||||||||
|
DBRS, Inc.
|
R-1 (middle | ) | A (high | ) | A | A | BBB | Stable | 5 | |||||||||||||||||
|
Fitch,
Inc.
3
|
F1+ | A+ | A | A- | A- | Negative | 6 | |||||||||||||||||||
|
Moody’s Investors
Service
4
|
P-1 | A1 | A2 | A3 | Baa2 | Negative | 7 | |||||||||||||||||||
|
Standard & Poor
’
s Ratings Services
|
A-1 | A | A- | BBB- | BBB- | Negative | 7 | |||||||||||||||||||
|
Rating and Investment Information, Inc.
|
a-1+ | AA- | A+ | Not Applicable | Not Applicable | Negative | 8 | |||||||||||||||||||
| 1. | Trust preferred securities issued by Goldman Sachs Capital I. |
| 2. | 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. |
| 3. | 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. |
| 4. | 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. |
| 5. | Applies to long-term and short-term ratings. |
| 6. | Applies to long-term issuer default ratings. |
| 7. | Applies to long-term ratings. |
| 8. | Applies to issuer rating. |
82
Table of Contents
We rely on the
short-term
and
long-term
debt capital markets to fund a significant portion of our
day-to-day
operations and the cost and availability of debt financing is
influenced by our credit ratings. Credit ratings are also
important when we are competing in certain markets, such as OTC
derivatives, and when we seek to engage in longer-term
transactions. See “Certain Risk Factors That May Affect Our
Businesses,” and “Risk Factors” in Part I,
Item 1A of this
Form 10-K
for a discussion of the risks associated with a reduction in our
credit ratings.
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 assumed level of government support. |
We allocate a portion of our GCE to ensure we would be able to
make the 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. The table below
presents the additional collateral or termination payments that
could have been called at the reporting date by counterparties
in the event of a
one-notch
and
two-notch
downgrade in our credit ratings.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Additional collateral or termination payments for a
one-notch
downgrade
|
$ | 1,353 | $ | 1,117 | ||||||
|
Additional collateral or termination payments for a
two-notch
downgrade
|
2,781 | 2,364 | ||||||||
The Basel Committee on Banking Supervision’s international
framework for liquidity risk measurement, standards and
monitoring calls for imposition of a liquidity coverage ratio,
designed to ensure that the banking entity maintains an adequate
level of unencumbered
high-quality
liquid assets based on expected cash outflows under an acute
liquidity stress scenario, and a net stable funding ratio,
designed to promote more medium- and
long-term
funding of the assets and activities of banking entities over a
one-year
time horizon. The liquidity coverage ratio would be implemented
subject to an observation period beginning in 2011, but would
not be introduced as a requirement until
January 1, 2015, and the net
stable funding ratio would not be introduced as a requirement
until January 1, 2018. While the principles behind the
new framework are broadly consistent with our current liquidity
management framework, it is possible that the implementation of
these standards could impact our liquidity and funding
requirements and practices.
Cash
Flows
As a global financial institution, our cash flows are complex
and bear little relation to our net earnings and net assets.
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 2010.
Our cash and
cash equivalents increased by $1.50 billion to
$39.79 billion at the end of 2010. We generated
$7.84 billion in net cash from financing activities
primarily from net proceeds from issuances of
short-term
secured financings. We used net cash of $6.34 billion for
operating and investing activities, primarily to fund an
increase in securities purchased under agreements to resell and
an increase in cash and securities segregated for regulatory and
other purposes, partially offset by cash generated from a
decrease in securities borrowed.
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.
83
Table of Contents
Market Risk
Management
Overview
Market risk is the risk of loss in the value of our inventory
due to changes in market prices. We hold inventory primarily for
market making for our clients and for our investing and lending
activities. Our inventory therefore changes based on client
demands and our investment opportunities. Our inventory is
accounted for at fair value and therefore fluctuates on a daily
basis. Categories of market risk include the following:
| • | Interest rate risk: primarily results from exposures to changes in the level, slope and curvature of yield curves, the volatilities of interest rates, mortgage prepayment speeds and credit spreads. |
| • | Equity price risk: results from exposures to changes in prices and volatilities of individual equities, baskets of equities and equity indices. |
| • | Currency rate risk: results from exposures to changes in spot prices, forward prices and volatilities of currency rates. |
| • | Commodity price risk: results 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. |
Market Risk
Management Process
We manage our market risk by diversifying exposures, controlling
position sizes and establishing economic hedges in related
securities or derivatives. This includes:
| • | accurate and timely exposure information incorporating multiple risk metrics; |
| • | a dynamic limit setting framework; and |
| • | constant communication among revenue-producing units, risk managers and senior management. |
Market Risk Management, which is independent of the
revenue-producing units and reports to the firm’s chief
risk officer, has primary responsibility for assessing,
monitoring and managing market risk at the firm. We monitor and
control risks through strong firmwide oversight and independent
control and support functions across the firm’s global
businesses.
Managers in revenue-producing units are accountable for managing
risk within prescribed limits. These managers have
in-depth
knowledge of their positions, of markets and the instruments
available to hedge their exposures.
Managers in revenue-producing units and Market Risk Management
discuss market information, positions and estimated risk and
loss scenarios on an ongoing basis.
Risk
Measures
Market Risk Management produces risk measures and monitors them
against market risk limits set by our firm’s risk
committees. These measures reflect an extensive range of
scenarios and the results are aggregated at trading desk,
business and firmwide levels.
We use a variety of risk measures to estimate the size of
potential losses for both moderate and more extreme market moves
over both
short-term
and
long-term
time horizons. Risk measures used for shorter-term periods
include VaR and sensitivity metrics. For longer-term horizons,
our primary risk measures are stress tests. Our risk reports
detail key risks, drivers and changes for each desk and
business, and are distributed daily to senior management of both
our revenue-producing units and our independent control and
support functions.
Systems
We have made a significant investment in technology to monitor
market risk including:
| • | an independent calculation of VaR and stress measures; |
| • | risk measures calculated at individual position levels; |
| • | attribution of risk measures to individual risk factors of each position; |
| • | the ability to report many different views of the risk measures (e.g., by desk, business, product type or legal entity); and |
| • | the ability to produce ad hoc analyses in a timely manner. |
84
Table of Contents
Value-at-Risk
VaR is the potential loss in value of inventory positions due to
adverse market movements over a defined time horizon with a
specified confidence level. We typically employ a
one-day
time
horizon with a 95% confidence level. Thus, we would expect to
see reductions in the fair value of inventory positions at least
as large as the reported VaR once per month. The VaR model
captures risks including interest rates, equity prices, currency
rates and commodity prices. As such, VaR facilitates comparison
across portfolios of different risk characteristics. VaR also
captures the diversification of aggregated risk at the firmwide
level.
Inherent limitations to VaR include:
| • | VaR does not estimate potential losses over longer time horizons where moves may be extreme. |
| • | VaR does not take account of the relative liquidity of different risk positions. |
| • | Previous moves in market risk factors may not produce accurate predictions of all future market moves. |
The historical data used in our VaR calculation is weighted to
give greater importance to more recent observations and reflect
current asset volatilities. This improves the accuracy of our
estimates of potential loss. As a result, even if our inventory
positions were unchanged, our VaR would increase with increasing
market volatility and vice versa.
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.
We evaluate the accuracy of our VaR model through daily
backtesting (i.e., comparing daily trading net revenues to
the VaR measure calculated as of the prior business day) at the
firmwide level and for each of our businesses and major
regulated subsidiaries.
VaR does not include:
| • | positions that are best measured and monitored using sensitivity measures; and |
| • | 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. |
Stress
Testing
We use stress testing to examine risks of specific portfolios as
well as the potential impact of significant risk exposures
across the firm. We use a variety of scenarios to calculate the
potential loss from a wide range of market moves on the
firm’s portfolios. These scenarios include the default of
single corporate or sovereign entities, the impact of a move in
a single risk factor across all positions (e.g., equity
prices or credit spreads) or a combination of two or more risk
factors.
Unlike VaR measures, which have an implied probability because
they are calculated at a specified confidence level, there is
generally no implied probability that our stress test scenarios
will occur. Instead, stress tests are used to model both
moderate and more extreme moves in underlying market factors.
When estimating potential loss, we generally assume that our
positions cannot be reduced or hedged (although experience
demonstrates that we are generally able to do so).
Stress test scenarios are conducted on a regular basis as part
of the firm’s routine risk management process and on an ad
hoc basis in response to market events or concerns. Stress
testing is an important part of the firm’s risk management
process because it allows us to highlight potential loss
concentrations, undertake risk/reward analysis, and assess and
mitigate our risk positions.
Limits
We use risk limits at various levels in the firm (including
firmwide, product and business) to govern risk appetite by
controlling the size of our exposures to market risk. Limits are
reviewed frequently and amended on a permanent or temporary
basis to reflect changing market conditions, business conditions
or tolerance for risk.
The Firmwide Risk Committee sets market risk limits at firmwide
and product levels and our Securities Division Risk
Committee sets
sub-limits
for
market-making
and investing activities at a business level. The purpose of the
firmwide limits is to assist senior management in controlling
the firm’s overall risk profile.
Sub-limits
set the desired maximum amount of exposure that may be managed
by any particular business on a
day-to-day
basis without additional levels of senior management approval,
effectively leaving
day-to-day
trading decisions to individual desk managers and traders.
Accordingly,
sub-limits
are a management tool designed to ensure appropriate escalation
rather than to establish maximum risk tolerance.
Sub-limits
also distribute risk among various businesses in a manner that
is consistent with their level of activity and client demand,
taking into account the relative performance of each area.
85
Table of Contents
Our market risk limits are monitored daily by Market Risk
Management, which is responsible for identifying and escalating,
on a timely basis, instances where limits have been exceeded.
The business-level limits that are set by the Securities
Division Risk Committee are subject to the same scrutiny
and limit escalation policy as the firmwide limits.
When a risk limit has been exceeded (e.g., due to changes
in market conditions, such as increased volatilities or changes
in correlations), it is reported to the appropriate risk
committee and a discussion takes place with the relevant desk
managers, after which either the risk position is reduced or the
risk limit is temporarily or permanently increased.
Metrics
We analyze VaR at the firmwide level and a variety of more
detailed levels, including by risk category, business, and
region. The tables below present average daily VaR and year-end
VaR by risk category.
Average Daily
VaR
| Year Ended | ||||||||||||||
|
in millions
|
December
|
December
|
November
|
|||||||||||
| Risk Categories | 2010 | 2009 | 2008 | |||||||||||
|
Interest rates
|
$ | 93 | $ | 176 | $ | 142 | ||||||||
|
Equity prices
|
68 | 66 | 72 | |||||||||||
|
Currency rates
|
32 | 36 | 30 | |||||||||||
|
Commodity prices
|
33 | 36 | 44 | |||||||||||
|
Diversification
effect
1
|
(92 | ) | (96 | ) | (108 | ) | ||||||||
|
Total
|
$ | 134 | $ | 218 | $ | 180 | ||||||||
| 1. | 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 decreased to $134 million in 2010
from $218 million in 2009, principally due to a decrease in
the interest rates category which was primarily due to reduced
exposures, lower levels of volatility and tighter spreads.
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
the interest rates category was primarily due to wider spreads.
The decrease in the commodity prices category was primarily due
to lower energy prices.
Year-End VaR and
High and Low VaR
|
Year Ended
|
||||||||||||||||||||
|
in millions
|
As of December | December 2010 | ||||||||||||||||||
| Risk Categories | 2010 | 2009 | High | Low | ||||||||||||||||
|
Interest rates
|
$ | 78 | $ | 122 | $ | 123 | $ | 76 | ||||||||||||
|
Equity prices
|
51 | 99 | 186 | 39 | ||||||||||||||||
|
Currency rates
|
27 | 21 | 62 | 14 | ||||||||||||||||
|
Commodity prices
|
25 | 33 | 62 | 18 | ||||||||||||||||
|
Diversification
effect
1
|
(70 | ) | (122 | ) | ||||||||||||||||
|
Total
|
$ | 111 | $ | 153 | $ | 223 | $ | 105 | ||||||||||||
| 1. | 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 $111 million as of
December 2010 from $153 million as of
December 2009, principally due to a decrease in the equity
prices and interest rates categories, partially offset by a
decrease in the diversification benefit across risk categories.
The decreases in the equity prices and interest rates categories
were primarily due to reduced exposures and lower levels of
volatility.
During the year ended December 2010, the firmwide VaR risk
limit was exceeded on one occasion in order to facilitate a
client transaction and was resolved by a reduction in the risk
position on the following day. Separately, during the year ended
December 2010, the firmwide VaR risk limit was reduced on
one occasion reflecting lower risk utilization.
During the year ended December 2009, the firmwide VaR risk
limit was exceeded on two successive days. It was resolved by a
reduction in the risk position without a permanent or temporary
VaR limit increase. Separately, during the year ended
December 2009, the firmwide VaR risk limit was raised on
one occasion and reduced on two occasions as a result of changes
in the risk utilization and the market environment.
86
Table of Contents
The chart below reflects the VaR over the last four quarters.
The chart below presents the frequency distribution of our daily
trading net revenues for substantially all
inventory positions included in VaR for the year ended
December 2010.
As noted above, 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 exceeded our 95%
one-day
VaR
on two
occasions during 2010. Trading losses incurred on a single day
did not exceed our 95%
one-day
VaR
during 2009.
87
Table of Contents
Sensitivity
Measures
As noted above, certain portfolios and individual positions are
not included in VaR because VaR is not the most appropriate risk
measure. The market risk of these positions is determined by
estimating the potential reduction in net revenues of a 10%
decline in asset value. The market risk related to our
investment
in the ordinary shares of ICBC excludes interests held by
investment funds managed by Goldman Sachs.
The table below presents market risk for positions that are not
included in VaR. These measures do not reflect diversification
benefits across asset categories and therefore have not been
aggregated.
| Asset Categories | 10% Sensitivity Measure | 10% Sensitivity | ||||||||||
| Amount as of December | ||||||||||||
| in millions | 2010 | 2009 | ||||||||||
|
ICBC
|
ICBC ordinary share price | $ | 286 | $ | 298 | |||||||
|
Equity (excluding
ICBC)
1
|
Underlying asset value | 2,529 | 2,307 | |||||||||
|
Debt
2
|
Underlying asset value | 1,655 | 1,579 | |||||||||
| 1. | Relates to private and restricted public equity securities, including interests in firm-sponsored funds that invest in corporate equities and real estate and interests in firm-sponsored hedge funds. |
| 2. | Relates to corporate bank debt, loans backed by commercial and residential real estate, and other corporate debt, including acquired portfolios of distressed loans and interests in our firm-sponsored funds that invest in corporate mezzanine and senior debt instruments. |
As noted above, 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
$5 million gain as of December 2010. 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 2010.
In addition to the positions included in VaR and the sensitivity
measures described above, as of December 2010, we held
$3.67 billion of securities accounted for as
available-for-sale,
primarily consisting of $1.69 billion of corporate debt
securities, the majority of which will mature after five years,
with an average yield of 6%, $670 million of mortgage and
other
asset-backed
loans and securities, which will mature after ten years with an
average yield of 11%, and $637 million of
U.S. government and federal agency obligations, the
majority of which will mature after ten years with an average
yield of 4%. As of December 2009, we held
$3.86 billion of securities accounted for as
available-for-sale,
primarily consisting of $1.64 billion of corporate debt
securities, the majority of which will mature after five years,
with an average yield of 6%, $950 million of
U.S. government and federal agency obligations, the
majority of which will mature after ten years with an average
yield of 4%, and $638 million of mortgage and other
asset-backed
loans and securities, the majority of which will mature after
ten years with an average yield of 15%.
In addition, as of December 2010, we held money market
instruments, commitments and loans under the William Street
credit extension program. See Note 18 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
for further information about our William Street credit
extension program.
Additionally, 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 this
Form 10-K
for information on “Other assets.”
88
Table of Contents
Credit Risk
Management
Overview
Credit risk represents the potential for loss due to the default
or deterioration in credit quality of a counterparty
(e.g., an OTC derivatives counterparty or a borrower) or an
issuer of securities or other instruments we hold. Our exposure
to credit risk comes mostly from client transactions in OTC
derivatives and loans and lending commitments. Credit risk also
comes from cash placed with banks, securities financing
transactions (i.e., resale and repurchase agreements and
securities borrowing and lending activities) and receivables
from brokers, dealers, clearing organizations, customers and
counterparties.
Credit Risk Management, which is independent of the
revenue-producing
units and reports to the firm’s chief risk officer, has
primary responsibility for assessing, monitoring and managing
credit risk at the firm. The Credit Policy Committee and the
Firmwide Risk Committee establish and review credit policies and
parameters. In addition, we hold other positions that give rise
to credit risk (e.g., bonds held in our inventory and
secondary bank loans). These credit risks are captured as a
component of market risk measures, which are monitored and
managed by Market Risk Management, consistent with other
inventory positions.
Policies authorized by the Firmwide Risk Committee and the
Credit Policy Committee prescribe the level of formal approval
required for the firm to assume credit exposure to a
counterparty across all product areas, taking into account any
enforceable netting provisions, collateral or other credit risk
mitigants.
Credit Risk
Management Process
Effective management of credit risk requires accurate and timely
information, a high level of communication and knowledge of
customers, countries, industries and products. Our process for
managing credit risk includes:
| • | approving transactions and setting and communicating credit exposure limits; |
| • | monitoring compliance with established credit exposure limits; |
| • | assessing the likelihood that a counterparty will default on its payment obligations; |
| • | measuring the firm’s current and potential credit exposure and losses resulting from counterparty default; |
| • | reporting of credit exposures to senior management, the Board and regulators; |
| • | use of credit risk mitigants, including collateral and hedging; and |
| • | communication and collaboration with other independent control and support functions such as operations, legal and compliance. |
As part of the risk assessment process, Credit Risk Management
performs credit reviews which include initial and ongoing
analyses of our counterparties. A credit review is an
independent judgment about the capacity and willingness of a
counterparty to meet its financial obligations. For
substantially all of our credit exposures, the core of our
process is an annual counterparty review. A counterparty review
is a written analysis of a counterparty’s business profile
and financial strength resulting in an internal credit rating
which represents the probability of default on financial
obligations to the firm. The determination of internal credit
ratings incorporates assumptions with respect to the
counterparty’s future business performance, the nature and
outlook for the counterparty’s industry, and the economic
environment. Senior personnel within Credit Risk Management,
with expertise in specific industries, inspect and approve
credit reviews and internal credit ratings.
Our global credit risk management systems capture credit
exposure to individual counterparties and on an aggregate basis
to counterparties and their subsidiaries (economic groups).
These systems also provide management with comprehensive
information on our aggregate credit risk by product, internal
credit rating, industry, country and region.
Risk Measures and
Limits
We measure our credit risk based on the potential loss in an
event of
non-payment
by a counterparty. For derivatives and securities financing
transactions, the primary measure is potential exposure, which
is our estimate of the future exposure that could arise over the
life of a transaction based on market movements within a
specified confidence level. Potential exposure takes into
account netting and collateral arrangements. For loans and
lending commitments, the primary measure is a function of the
notional amount of the position. We also monitor credit risk in
terms of current exposure, which is the amount presently owed to
the firm after taking into account applicable netting and
collateral.
89
Table of Contents
We use credit limits at various levels (counterparty, economic
group, industry, country) to control the size of our credit
exposures. Limits for counterparties and economic groups are
reviewed regularly and revised to reflect changing appetites for
a given counterparty or group of counterparties. Limits for
industries and countries are based on the firm’s risk
tolerance and are designed to allow for regular monitoring,
review, escalation and management of credit risk concentrations.
Stress
Tests/Scenario Analysis
We use regular stress tests to calculate the credit exposures,
including potential concentrations that would result from
applying shocks to counterparty credit ratings or credit risk
factors (e.g., currency rates, interest rates, equity
prices). These shocks include a wide range of moderate and more
extreme market movements. Some of our stress tests include
shocks to multiple risk factors, consistent with the occurrence
of a severe market or economic event. Unlike potential exposure,
which is calculated within a specified confidence level, with a
stress test there is generally no assumed probability of these
events occurring.
We run stress tests on a regular basis as part of our routine
risk management processes and conduct tailored stress tests on
an ad hoc basis in response to market developments. Stress tests
are regularly conducted jointly with the firm’s market and
liquidity risk functions.
Risk
Mitigants
To reduce our credit exposures on derivatives and securities
financing transactions, we may enter into netting agreements
with counterparties that permit us to offset receivables and
payables with such counterparties. We may also reduce credit
risk with counterparties by entering into agreements that enable
us to obtain collateral from them on an upfront or contingent
basis
and/or
to terminate transactions if the counterparty’s credit
rating falls below a specified level.
For loans and lending commitments, we typically employ a variety
of potential risk mitigants, depending on the credit quality of
the borrower and other characteristics of the transaction. Risk
mitigants include: collateral provisions, guarantees, covenants,
structural seniority of the bank loan claims and, for certain
lending commitments, provisions in the legal documentation that
allow the firm to adjust loan amounts, pricing, structure and
other terms as market conditions change. The type and structure
of risk mitigants employed can significantly influence the
degree of credit risk involved in a loan.
When we do not have sufficient visibility into a
counterparty’s financial strength or when we believe a
counterparty requires support from its parent company, we may
obtain
third-party
guarantees of the counterparty’s obligations. We may also
mitigate our credit risk using credit derivatives or
participation agreements.
Credit
Exposures
The firm’s credit exposures are described further below.
Cash and Cash Equivalents.
Cash and cash
equivalents include both interest-bearing and
non-interest
bearing deposits. To mitigate the risk of credit loss, we place
substantially all of our deposits with highly rated banks and
central banks.
OTC Derivatives.
Derivatives are reported on a
net-by-counterparty
basis (i.e., the net payable or receivable for derivative
assets and liabilities for a given counterparty) when a legal
right of setoff exists under an enforceable netting agreement.
Derivatives are accounted for at fair value net of cash
collateral received or posted under credit support agreements.
As credit risk is an essential component of fair value, the firm
includes a credit valuation adjustment (CVA) in the fair value
of derivatives to reflect counterparty credit risk, as described
in Note 7 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K.
CVA is a function of the present value of expected exposure, the
probability of counterparty default and the assumed recovery
upon default.
90
Table of Contents
The tables below present the distribution of our exposure to OTC
derivatives by tenor, based on expected duration for
mortgage-related
credit derivatives and generally on remaining contractual
maturity for other derivatives, both before and after the effect
of collateral and netting agreements. The categories shown
reflect our internally determined public rating agency
equivalents.
| in millions | As of December 2010 | |||||||||||||||||||||||||||||
|
5 Years
|
Exposure
|
|||||||||||||||||||||||||||||
|
0-12
|
1-5
|
or
|
Net of
|
|||||||||||||||||||||||||||
| Credit Rating Equivalent | Months | Years | Greater | Total | Netting 1 | Exposure | Collateral | |||||||||||||||||||||||
|
AAA/Aaa
|
$ | 504 | $ | 728 | $ | 2,597 | $ | 3,829 | $ | (491 | ) | $ | 3,338 | $ | 3,088 | |||||||||||||||
|
AA/Aa2
|
5,234 | 8,875 | 15,579 | 29,688 | (18,167 | ) | 11,521 | 6,935 | ||||||||||||||||||||||
|
A/A2
|
13,556 | 38,522 | 49,568 | 101,646 | (74,650 | ) | 26,996 | 16,839 | ||||||||||||||||||||||
|
BBB/Baa2
|
3,818 | 18,062 | 19,625 | 41,505 | (27,832 | ) | 13,673 | 8,182 | ||||||||||||||||||||||
|
BB/Ba2 or lower
|
3,583 | 5,382 | 3,650 | 12,615 | (4,553 | ) | 8,062 | 5,439 | ||||||||||||||||||||||
|
Unrated
|
709 | 1,081 | 332 | 2,122 | (20 | ) | 2,102 | 1,539 | ||||||||||||||||||||||
|
Total
|
$ | 27,404 | $ | 72,650 | $ | 91,351 | $ | 191,405 | $ | (125,713 | ) | $ | 65,692 | $ | 42,022 | |||||||||||||||
| in millions | As of December 2009 | |||||||||||||||||||||||||||||
|
5 Years
|
Exposure
|
|||||||||||||||||||||||||||||
|
0-12
|
1-5
|
or
|
Net of
|
|||||||||||||||||||||||||||
| Credit Rating Equivalent | Months | Years | Greater | Total | Netting 1 | Exposure | Collateral | |||||||||||||||||||||||
|
AAA/Aaa
|
$ | 2,020 | $ | 3,157 | $ | 5,917 | $ | 11,094 | $ | (5,446 | ) | $ | 5,648 | $ | 5,109 | |||||||||||||||
|
AA/Aa2
|
5,285 | 10,745 | 14,686 | 30,716 | (18,295 | ) | 12,421 | 8,735 | ||||||||||||||||||||||
|
A/A2
|
22,707 | 47,891 | 58,332 | 128,930 | (104,804 | ) | 24,126 | 20,111 | ||||||||||||||||||||||
|
BBB/Baa2
|
4,402 | 8,300 | 10,231 | 22,933 | (10,441 | ) | 12,492 | 6,202 | ||||||||||||||||||||||
|
BB/Ba2 or lower
|
4,444 | 9,438 | 2,979 | 16,861 | (4,804 | ) | 12,057 | 7,381 | ||||||||||||||||||||||
|
Unrated
|
484 | 977 | 327 | 1,788 | (110 | ) | 1,678 | 1,161 | ||||||||||||||||||||||
|
Total
|
$ | 39,342 | $ | 80,508 | $ | 92,472 | $ | 212,322 | $ | (143,900 | ) | $ | 68,422 | $ | 48,699 | |||||||||||||||
| 1. | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories under enforceable netting agreements, and the netting of cash collateral received under credit support agreements. Receivable and payable balances with the same counterparty in the same tenor category are netted within such tenor category. |
91
Table of Contents
Lending Activities.
We manage the firm’s
traditional credit origination activities, including funded
loans, lending commitments and the William Street credit
extension program, using the credit risk process, measures and
limits described above. Other lending positions, including
secondary trading positions, are
risk-managed
as a component of market risk.
Resale Agreements and Securities Borrowed.
The
firm bears credit risk related to resale agreements and
securities borrowed only to the extent that cash advanced to the
counterparty exceeds the value of the collateral received.
Therefore, the firm’s credit exposure on these transactions
is significantly lower than the amounts recorded on the
consolidated statement of financial condition (which represent
fair value or contractual value before consideration of
collateral received). The firm also has credit exposure on
repurchase agreements and securities loaned, which are
liabilities on our consolidated statement of financial
condition, to the extent that the value of collateral pledged to
the counterparty for these transactions exceeds the amount of
cash received.
Other Credit Exposures.
The firm is exposed to
credit risk from its receivables from brokers, dealers and
clearing organizations and customers and counterparties.
Receivables from brokers, dealers and clearing organizations are
primarily comprised of initial margin placed with clearing
organizations and receivables related to sales of securities
which have traded, but not yet settled. These receivables have
minimal credit risk due to the low probability of clearing
organization default and the
short-term
nature of receivables related to securities settlements.
Receivables from customers and counterparties are generally
comprised of collateralized receivables related to customer
securities transactions and have minimal credit risk due to both
the value of the collateral received and the
short-term
nature of these receivables.
Credit
Exposures
The tables below present the firm’s credit exposures
related to cash, OTC derivatives, loans and lending commitments
associated with traditional credit origination activities, and
securities financing transactions, broken down by industry,
region and internal credit rating.
During the year ended December 2010, total credit exposures
increased by $10.51 billion reflecting an increase in loans
and lending commitments. This increase was primarily
attributable to an increase in lending activity and a modest
increase in average commitment size. During the year ended
December 2010, incidence of counterparty default and the
associated credit losses have declined compared with the year
ended December 2009. The credit quality of the overall
portfolio as of December 2010 is relatively unchanged
although OTC derivative exposure to
non-investment-grade
counterparties declined approximately 25% from
December 2009.
92
Table of Contents
|
Credit Exposure by Industry
|
||||||||||||||||||||||||||||||||||||||||||
|
Loans and
|
Securities
|
|||||||||||||||||||||||||||||||||||||||||
|
Lending
|
Financing
|
|||||||||||||||||||||||||||||||||||||||||
| Cash | OTC Derivatives | Commitments 1 | Transactions 2 | Total | ||||||||||||||||||||||||||||||||||||||
| As of December | As of December | As of December | As of December | As of December | ||||||||||||||||||||||||||||||||||||||
| in millions | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||
|
Asset Managers & Funds
|
$ | — | $ | — | $ | 8,760 | $ | 8,994 | $ | 1,317 | $ | 508 | $ | 4,999 | $ | 5,074 | $ | 15,076 | $ | 14,576 | ||||||||||||||||||||||
|
Banks, Brokers & Other Financial Institutions
|
11,020 | 9,516 | 23,255 | 18,484 | 3,485 | 1,984 | 5,592 | 3,923 | 43,352 | 33,907 | ||||||||||||||||||||||||||||||||
|
Consumer Products,
Non-Durables,
and Retail
|
— | — | 1,082 | 1,083 | 8,141 | 7,440 | — | — | 9,223 | 8,523 | ||||||||||||||||||||||||||||||||
|
Government & Central Banks
|
28,766 | 28,696 | 11,705 | 14,373 | 1,370 | 349 | 2,401 | 1,724 | 44,242 | 45,142 | ||||||||||||||||||||||||||||||||
|
Healthcare & Education
|
— | — | 2,161 | 1,851 | 5,754 | 5,053 | 199 | 181 | 8,114 | 7,085 | ||||||||||||||||||||||||||||||||
|
Insurance
|
1 | — | 2,462 | 4,182 | 3,054 | 3,473 | 521 | 434 | 6,038 | 8,089 | ||||||||||||||||||||||||||||||||
|
Natural Resources & Utilities
|
— | — | 5,259 | 6,885 | 11,021 | 8,780 | 5 | 5 | 16,285 | 15,670 | ||||||||||||||||||||||||||||||||
|
Real Estate
|
— | — | 528 | 590 | 1,523 | 1,028 | 3 | — | 2,054 | 1,618 | ||||||||||||||||||||||||||||||||
|
Technology, Media, Telecommunications & Services
|
1 | — | 1,694 | 1,108 | 7,690 | 7,145 | 13 | 11 | 9,398 | 8,264 | ||||||||||||||||||||||||||||||||
|
Transportation
|
— | — | 962 | 1,187 | 3,822 | 3,266 | 2 | 1 | 4,786 | 4,454 | ||||||||||||||||||||||||||||||||
|
Other
|
— | 79 | 7,824 | 9,685 | 6,007 | 4,837 | 59 | 23 | 13,890 | 14,624 | ||||||||||||||||||||||||||||||||
|
Total
|
$ | 39,788 | $ | 38,291 | $ | 65,692 | $ | 68,422 | $ | 53,184 | $ | 43,863 | $ | 13,794 | $ | 11,376 | $ | 172,458 | $ | 161,952 | ||||||||||||||||||||||
|
Credit Exposure by Region
|
||||||||||||||||||||||||||||||||||||||||||
|
Loans and
|
Securities
|
|||||||||||||||||||||||||||||||||||||||||
|
Lending
|
Financing
|
|||||||||||||||||||||||||||||||||||||||||
| Cash | OTC Derivatives | Commitments 1 | Transactions 2 | Total | ||||||||||||||||||||||||||||||||||||||
| As of December | As of December | As of December | As of December | As of December | ||||||||||||||||||||||||||||||||||||||
| in millions | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||
|
Americas
|
$ | 34,528 | $ | 32,120 | $ | 34,468 | $ | 31,798 | $ | 38,151 | $ | 32,357 | $ | 7,634 | $ | 6,119 | $ | 114,781 | $ | 102,394 | ||||||||||||||||||||||
|
EMEA
3
|
810 | 846 | 23,396 | 28,983 | 14,451 | 10,723 | 4,953 | 4,517 | 43,610 | 45,069 | ||||||||||||||||||||||||||||||||
|
Asia
|
4,450 | 5,325 | 7,828 | 7,641 | 582 | 783 | 1,207 | 740 | 14,067 | 14,489 | ||||||||||||||||||||||||||||||||
|
Total
|
$ | 39,788 | $ | 38,291 | $ | 65,692 | $ | 68,422 | $ | 53,184 | $ | 43,863 | $ | 13,794 | $ | 11,376 | $ | 172,458 | $ | 161,952 | ||||||||||||||||||||||
|
Credit Exposure by Credit
Quality
|
||||||||||||||||||||||||||||||||||||||||||
|
Loans and
|
Securities
|
|||||||||||||||||||||||||||||||||||||||||
|
Lending
|
Financing
|
|||||||||||||||||||||||||||||||||||||||||
| Cash | OTC Derivatives | Commitments 1 | Transactions 2 | Total | ||||||||||||||||||||||||||||||||||||||
| As of December | As of December | As of December | As of December | As of December | ||||||||||||||||||||||||||||||||||||||
| in millions | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||||||
|
Credit Rating
|
||||||||||||||||||||||||||||||||||||||||||
|
Equivalent
|
||||||||||||||||||||||||||||||||||||||||||
|
AAA/Aaa
|
$ | 27,851 | $ | 25,734 | $ | 3,338 | $ | 5,648 | $ | 1,783 | $ | 1,859 | $ | 877 | $ | 591 | $ | 33,849 | $ | 33,832 | ||||||||||||||||||||||
|
AA/Aa2
|
4,547 | 5,794 | 11,521 | 12,421 | 5,273 | 4,023 | 2,510 | 3,049 | 23,851 | 25,287 | ||||||||||||||||||||||||||||||||
|
A/A2
|
5,603 | 6,343 | 26,996 | 24,126 | 15,766 | 12,889 | 8,771 | 6,821 | 57,136 | 50,179 | ||||||||||||||||||||||||||||||||
|
BBB/Baa2
|
1,007 | 130 | 13,673 | 12,492 | 17,544 | 16,768 | 1,466 | 782 | 33,690 | 30,172 | ||||||||||||||||||||||||||||||||
|
BB/Ba2 or lower
|
764 | 211 | 8,062 | 12,057 | 12,774 | 8,248 | 130 | 123 | 21,730 | 20,639 | ||||||||||||||||||||||||||||||||
|
Unrated
|
16 | 79 | 2,102 | 1,678 | 44 | 76 | 40 | 10 | 2,202 | 1,843 | ||||||||||||||||||||||||||||||||
|
Total
|
$ | 39,788 | $ | 38,291 | $ | 65,692 | $ | 68,422 | $ | 53,184 | $ | 43,863 | $ | 13,794 | $ | 11,376 | $ | 172,458 | $ | 161,952 | ||||||||||||||||||||||
| 1. | Includes approximately $4 billion and $5 billion of loans and approximately $49 billion and $39 billion of lending commitments as of December 2010 and December 2009, respectively. Excludes approximately $14 billion of loans as of both December 2010 and December 2009, and lending commitments with a total notional value of approximately $3 billion and $6 billion as of December 2010 and December 2009, respectively, that are risk managed as part of market risk using VaR and sensitivity measures. |
| 2. | Represents credit exposure, net of securities collateral received on resale agreements and securities borrowed and net of cash received on repurchase agreements and securities loaned. These amounts are significantly lower than the amounts recorded on the consolidated statements of financial condition, which represent fair value or contractual value before consideration of collateral received. |
| 3. | EMEA (Europe, Middle East and Africa). |
93
Table of Contents
Operational
Risk
Overview
Operational risk is the risk of loss resulting from inadequate
or failed internal processes, people and systems or from
external events. Our exposure to operational risk arises from
routine processing errors as well as extraordinary incidents,
such as major systems failures. Potential types of loss events
related to internal and external operational risk include:
| • | clients, products and business practices; |
| • | execution, delivery and process management; |
| • | business disruption and system failures; |
| • | employment practices and workplace safety; |
| • | damage to physical assets; |
| • | internal fraud; and |
| • | external fraud. |
The firm maintains a comprehensive control framework designed to
provide a well-controlled environment to minimize operational
risks. The Firmwide Operational Risk Committee provides
oversight of the ongoing development and implementation of our
operational risk policies and framework. Our Operational Risk
Management department (Operational Risk Management) is a risk
management function independent of our
revenue-producing
units and is responsible for developing and implementing
policies, methodologies and a formalized framework for
operational risk management with the goal of minimizing our
exposure to operational risk.
Operational Risk
Management
Managing operational risk requires timely and accurate
information as well as a strong control culture. We seek to
manage our operational risk through:
| • | the training, supervision and development of our people; |
| • | the active participation of senior management in identifying and mitigating key operational risks across the firm; |
| • | independent control and support functions that monitor operational risk on a daily basis and have instituted extensive policies and procedures and implemented controls designed to prevent the occurrence of operational risk events; |
| • | proactive communication between our revenue-producing units and our independent control and support functions; and |
| • | a network of systems throughout the firm to facilitate the collection of data used to analyze and assess our operational risk exposure. |
We combine top-down and
bottom-up
approaches to manage and measure operational risk. From a
top-down
perspective, the firm’s senior management assesses firmwide
and business level operational risk profiles. From a
bottom-up
perspective,
revenue-producing
units and independent control and support functions are
responsible for risk management on a
day-to-day
basis, including identifying, mitigating, and escalating
operational risks to senior management.
Our operational risk framework is in part designed to comply
with the operational risk measurement rules under Basel 2 and
has evolved based on the changing needs of our businesses and
regulatory guidance. Our framework includes the following
practices:
| • | Risk identification and reporting; |
| • | Risk measurement; and |
| • | Risk monitoring. |
Internal Audit performs a review of our operational risk
framework, including our key controls, processes and
applications, on an annual basis to ensure the effectiveness of
our framework.
Risk
Identification and Reporting
The core of our operational risk management framework is risk
identification and reporting. We have a comprehensive data
collection process, including firmwide policies and procedures,
for operational risk events.
We have established policies that require managers in our
revenue-producing units and our independent control and support
functions to escalate operational risk events. When operational
risk events are identified, our policies require that the events
be documented and analyzed to determine whether changes are
required in the firm’s systems
and/or
processes to further mitigate the risk of future events.
In addition, our firmwide systems capture internal operational
risk event data, key metrics such as transaction volumes, and
statistical information such as performance trends. We use an
internally-developed
operational risk management application to aggregate and
organize this information. Managers from both revenue-producing
units and independent control and support functions analyze the
information to evaluate operational risk exposures and identify
businesses, activities or products with heightened levels of
operational risk. We also provide operational risk reports to
senior management, risk committees and the Board periodically.
94
Table of Contents
Risk
Measurement
We measure the firm’s operational risk exposure over a
twelve-month time horizon using scenario analyses, together with
qualitative assessments of the potential frequency and extent of
potential operational risk losses, for each of the firm’s
businesses. Operational risk measurement incorporates
qualitative and quantitative assessments of factors including:
| • | internal and external operational risk event data; |
| • | assessments of the firm’s internal controls; |
| • | evaluations of the complexity of the firm’s business activities; |
| • | the degree of and potential for automation in the firm’s processes; |
| • | new product information; |
| • | the legal and regulatory environment; |
| • | changes in the markets for the firm’s products and services, including the diversity and sophistication of the firm’s customers and counterparties; and |
| • | the liquidity of the capital markets and the reliability of the infrastructure that supports the capital markets. |
The results from these scenario analyses are used to monitor
changes in operational risk and to determine business lines that
may have heightened exposure to operational risk. These analyses
ultimately are used to determine the appropriate level of
operational risk capital to hold.
Risk
Monitoring
We evaluate changes in the operational risk profile of the firm
and its businesses, including changes in business mix or
jurisdictions in which the firm operates, by monitoring these
factors at a firmwide, entity and business level. The firm has
both detective and preventive internal controls, which are
designed to reduce the frequency and severity of operational
risk losses and the probability of operational risk events. We
monitor the results of assessments and independent internal
audits of these internal controls.
Recent Accounting
Developments
See Note 3 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information about Recent Accounting Developments.
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 “Overview and Structure of Risk
Management.” A summary of the more important factors that
could affect our businesses follows. For a further discussion of
these and other important factors that could affect our
businesses, financial condition, results of operations, cash
flows and liquidity, see “Risk Factors” in
Part I, Item 1A of this
Form 10-K.
| • | Our businesses have been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally. |
| • | Our businesses have been and may be adversely affected by declining asset values. This is particularly true for those businesses in which we have net “long” positions, receive fees based on the value of assets managed, or receive or post 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. |
| • | Our market-making activities have been and may be affected by changes in the levels of market volatility. |
| • | Our investment banking, client execution and investment management 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 management business may be affected by the poor investment performance of our investment products. |
| • | We may incur losses as a result of ineffective risk management processes and strategies. |
| • | 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. |
| • | Conflicts of interest are increasing and a failure to appropriately identify and address conflicts of interest could adversely affect our businesses. |
95
Table of Contents
| • | Group Inc. is a holding company and is dependent for liquidity on payments from its subsidiaries, many of which are subject to restrictions. |
| • | 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. |
| • | Concentration of risk increases the potential for significant losses in our market-making, underwriting, investing and lending activities. |
| • | The financial services industry is highly competitive. |
| • | 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. |
| • | Derivative transactions and delayed settlements may expose us to unexpected risk and potential losses. |
| • | Our businesses may be adversely affected if we are unable to hire and retain qualified employees. |
| • | Our businesses and those of our clients are subject to extensive and pervasive regulation around the world. |
| • | We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity. |
| • | 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. |
| • | 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. |
| • | The growth of electronic trading and the introduction of new trading technology may adversely affect our business and may increase competition. |
| • | Our commodities activities, particularly our power generation interests and our physical commodities activities, subject us to extensive regulation, potential catastrophic events and environmental, reputational and other risks that may expose us to significant liabilities and costs. |
| • | 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. |
| • | We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters. |
Quantitative and qualitative disclosures about market risk are
set forth under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Overview and Structure of Risk Management” in Part II,
Item 7 of this
Form 10-K.
96
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
INDEX
| Page No. | ||||
| 98 | ||||
| 99 | ||||
|
Consolidated Financial Statements
|
||||
| 100 | ||||
| 101 | ||||
| 102 | ||||
| 103 | ||||
| 104 | ||||
| 105 | ||||
| 106 | ||||
| 106 | ||||
| 107 | ||||
| 111 | ||||
| 112 | ||||
| 119 | ||||
| 126 | ||||
| 138 | ||||
| 142 | ||||
| 145 | ||||
| 148 | ||||
| 152 | ||||
| 153 | ||||
| 156 | ||||
| 156 | ||||
| 157 | ||||
| 161 | ||||
| 162 | ||||
| 168 | ||||
| 171 | ||||
| 175 | ||||
| 176 | ||||
| 177 | ||||
| 178 | ||||
| 179 | ||||
| 182 | ||||
| 185 | ||||
| 189 | ||||
| 190 | ||||
| 191 | ||||
| 202 | ||||
| 202 | ||||
| 203 | ||||
| 204 | ||||
| 205 | ||||
97
Table of Contents
Management’s
Report on Internal Control over 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 2010 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, 2010 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, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report appearing on
page 99, which expresses an unqualified opinion on the
effectiveness of the firm’s internal control over financial
reporting as of December 31, 2010.
98
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, 2010 and
December 31, 2009, and the results of its operations
and its cash flows for the fiscal years ended
December 31, 2010, December 31, 2009 and
November 28, 2008 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, 2010, 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 98. 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 28, 2011
99
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||||
|
December
|
December
|
November
|
||||||||||||
| in millions, except per share amounts | 2010 | 2009 | 2008 | |||||||||||
|
Revenues
|
||||||||||||||
|
Investment banking
|
$ | 4,810 | $ | 4,984 | $ | 5,447 | ||||||||
|
Investment management
|
4,669 | 4,233 | 4,855 | |||||||||||
|
Commissions and fees
|
3,569 | 3,840 | 4,998 | |||||||||||
|
Market making
|
13,678 | 22,088 | 12,694 | |||||||||||
|
Other principal transactions
|
6,932 | 2,621 | (10,048 | ) | ||||||||||
|
Total
non-interest
revenues
|
33,658 | 37,766 | 17,946 | |||||||||||
|
Interest income
|
12,309 | 13,907 | 35,633 | |||||||||||
|
Interest expense
|
6,806 | 6,500 | 31,357 | |||||||||||
|
Net interest income
|
5,503 | 7,407 | 4,276 | |||||||||||
|
Net revenues, including net interest income
|
39,161 | 45,173 | 22,222 | |||||||||||
|
Operating expenses
|
||||||||||||||
|
Compensation and benefits
|
15,376 | 16,193 | 10,934 | |||||||||||
|
U.K. bank payroll tax
|
465 | — | — | |||||||||||
|
Brokerage, clearing, exchange and distribution fees
|
2,281 | 2,298 | 2,998 | |||||||||||
|
Market development
|
530 | 342 | 485 | |||||||||||
|
Communications and technology
|
758 | 709 | 759 | |||||||||||
|
Depreciation and amortization
|
1,889 | 1,734 | 1,262 | |||||||||||
|
Occupancy
|
1,086 | 950 | 960 | |||||||||||
|
Professional fees
|
927 | 678 | 779 | |||||||||||
|
Other expenses
|
2,957 | 2,440 | 1,709 | |||||||||||
|
Total
non-compensation
expenses
|
10,428 | 9,151 | 8,952 | |||||||||||
|
Total operating expenses
|
26,269 | 25,344 | 19,886 | |||||||||||
|
Pre-tax
earnings
|
12,892 | 19,829 | 2,336 | |||||||||||
|
Provision for taxes
|
4,538 | 6,444 | 14 | |||||||||||
|
Net earnings
|
8,354 | 13,385 | 2,322 | |||||||||||
|
Preferred stock dividends
|
641 | 1,193 | 281 | |||||||||||
|
Net earnings applicable to common shareholders
|
$ | 7,713 | $ | 12,192 | $ | 2,041 | ||||||||
|
Earnings per common share
|
||||||||||||||
|
Basic
|
$ | 14.15 | $ | 23.74 | $ | 4.67 | ||||||||
|
Diluted
|
13.18 | 22.13 | 4.47 | |||||||||||
|
Average common shares outstanding
|
||||||||||||||
|
Basic
|
542.0 | 512.3 | 437.0 | |||||||||||
|
Diluted
|
585.3 | 550.9 | 456.2 | |||||||||||
See page 105 for consolidated financial statements for the
one month ended December 2008.
The accompanying notes are an integral part of these
consolidated financial statements.
100
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| As of December | ||||||||||
| in millions, except share and per share amounts | 2010 | 2009 | ||||||||
|
Assets
|
||||||||||
|
Cash and cash equivalents
|
$ | 39,788 | $ | 38,291 | ||||||
|
Cash and securities segregated for regulatory and other purposes
(includes $36,182 and $18,853 at fair value as of
December 2010 and December 2009, respectively)
|
53,731 | 36,663 | ||||||||
|
Collateralized agreements:
|
||||||||||
|
Securities purchased under agreements to resell and federal
funds sold (includes $188,355 and $144,279 at fair value as of
December 2010 and December 2009, respectively)
|
188,355 | 144,279 | ||||||||
|
Securities borrowed (includes $48,822 and $66,329 at fair value
as of December 2010 and December 2009, respectively)
|
166,306 | 189,939 | ||||||||
|
Receivables from brokers, dealers and clearing organizations
|
10,437 | 12,597 | ||||||||
|
Receivables from customers and counterparties (includes $7,202
and $1,925 at fair value as of December 2010 and
December 2009, respectively)
|
67,703 | 55,303 | ||||||||
|
Financial instruments owned, at fair value (includes $51,010 and
$31,485 pledged as collateral as of December 2010 and
December 2009, respectively)
|
356,953 | 342,402 | ||||||||
|
Other assets
|
28,059 | 29,468 | ||||||||
|
Total assets
|
$ | 911,332 | $ | 848,942 | ||||||
|
Liabilities and shareholders’ equity
|
||||||||||
|
Deposits (includes $1,975 and $1,947 at fair value as of
December 2010 and December 2009, respectively)
|
$ | 38,569 | $ | 39,418 | ||||||
|
Collateralized financings:
|
||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
162,345 | 128,360 | ||||||||
|
Securities loaned (includes $1,514 and $6,194 at fair value as
of December 2010 and December 2009, respectively)
|
11,212 | 15,207 | ||||||||
|
Other secured financings (includes $31,794 and $15,228 at fair
value as of December 2010 and December 2009,
respectively)
|
38,377 | 24,134 | ||||||||
|
Payables to brokers, dealers and clearing organizations
|
3,234 | 5,242 | ||||||||
|
Payables to customers and counterparties
|
187,270 | 180,392 | ||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
140,717 | 129,019 | ||||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings (includes $22,116 and $18,403 at fair value as of
December 2010 and December 2009, respectively)
|
47,842 | 37,516 | ||||||||
|
Unsecured
long-term
borrowings (includes $18,171 and $21,392 at fair value as of
December 2010 and December 2009, respectively)
|
174,399 | 185,085 | ||||||||
|
Other liabilities and accrued expenses (includes $2,972 and
$2,054 at fair value as of December 2010 and
December 2009, respectively)
|
30,011 | 33,855 | ||||||||
|
Total liabilities
|
833,976 | 778,228 | ||||||||
|
Commitments, contingencies and guarantees
|
||||||||||
|
Shareholders’ equity
|
||||||||||
|
Preferred stock, par value $0.01 per share; aggregate
liquidation preference of $8,100 as of both December 2010
and December 2009
|
6,957 | 6,957 | ||||||||
|
Common stock, par value $0.01 per share;
4,000,000,000 shares authorized, 770,949,268 and
753,412,247 shares issued as of December 2010 and
December 2009, respectively, and 507,530,772 and
515,113,890 shares outstanding as of December 2010 and
December 2009, respectively
|
8 | 8 | ||||||||
|
Restricted stock units and employee stock options
|
7,706 | 6,245 | ||||||||
|
Nonvoting common stock, par value $0.01 per share;
200,000,000 shares authorized, no shares issued and
outstanding
|
— | — | ||||||||
|
Additional
paid-in
capital
|
42,103 | 39,770 | ||||||||
|
Retained earnings
|
57,163 | 50,252 | ||||||||
|
Accumulated other comprehensive loss
|
(286 | ) | (362 | ) | ||||||
|
Stock held in treasury, at cost, par value $0.01 per share;
263,418,498 and 238,298,357 shares as of December 2010
and December 2009, respectively
|
(36,295 | ) | (32,156 | ) | ||||||
|
Total shareholders’ equity
|
77,356 | 70,714 | ||||||||
|
Total liabilities and shareholders’ equity
|
$ | 911,332 | $ | 848,942 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
101
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||||
|
December
|
December
|
November
|
||||||||||||
| in millions | 2010 | 2009 1 | 2008 | |||||||||||
|
Preferred stock
|
||||||||||||||
|
Balance, beginning of year
|
$ | 6,957 | $ | 16,483 | $ | 3,100 | ||||||||
|
Issued
|
— | — | 13,367 | |||||||||||
|
Accretion
|
— | 48 | 4 | |||||||||||
|
Repurchased
|
— | (9,574 | ) | — | ||||||||||
|
Balance, end of year
|
6,957 | 6,957 | 16,471 | |||||||||||
|
Common stock
|
||||||||||||||
|
Balance, beginning of year
|
8 | 7 | 6 | |||||||||||
|
Issued
|
— | 1 | 1 | |||||||||||
|
Balance, end of year
|
8 | 8 | 7 | |||||||||||
|
Restricted stock units and employee stock options
|
||||||||||||||
|
Balance, beginning of year
|
6,245 | 9,463 | 9,302 | |||||||||||
|
Issuance and amortization of restricted stock units and employee
stock options
|
4,137 | 2,064 | 2,254 | |||||||||||
|
Delivery of common stock underlying restricted stock units
|
(2,521 | ) | (5,206 | ) | (1,995 | ) | ||||||||
|
Forfeiture of restricted stock units and employee stock options
|
(149 | ) | (73 | ) | (274 | ) | ||||||||
|
Exercise of employee stock options
|
(6 | ) | (3 | ) | (3 | ) | ||||||||
|
Balance, end of year
|
7,706 | 6,245 | 9,284 | |||||||||||
|
Additional
paid-in
capital
|
||||||||||||||
|
Balance, beginning of year
|
39,770 | 31,070 | 22,027 | |||||||||||
|
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
|
3,067 | 5,708 | 2,331 | |||||||||||
|
Cancellation of restricted stock units in satisfaction of
withholding tax requirements
|
(972 | ) | (863 | ) | (1,314 | ) | ||||||||
|
Preferred and common stock issuance costs
|
— | — | (1 | ) | ||||||||||
|
Excess net tax benefit/(provision) related to
share-based
compensation
|
239 | (793 | ) | 645 | ||||||||||
|
Cash settlement of
share-based
compensation
|
(1 | ) | (2 | ) | — | |||||||||
|
Balance, end of year
|
42,103 | 39,770 | 31,071 | |||||||||||
|
Retained earnings
|
||||||||||||||
|
Balance, beginning of year
|
50,252 | 38,579 | 38,642 | |||||||||||
|
Cumulative effect from adoption of amended principles related to
accounting for uncertainty in income taxes
|
— | — | (201 | ) | ||||||||||
|
Balance, beginning of year, after cumulative effect of adjustment
|
50,252 | 38,579 | 38,441 | |||||||||||
|
Net earnings
|
8,354 | 13,385 | 2,322 | |||||||||||
|
Dividends and dividend equivalents declared on common stock and
restricted stock units
|
(802 | ) | (588 | ) | (642 | ) | ||||||||
|
Dividends declared on preferred stock
|
(641 | ) | (1,076 | ) | (204 | ) | ||||||||
|
Preferred stock accretion
|
— | (48 | ) | (4 | ) | |||||||||
|
Balance, end of year
|
57,163 | 50,252 | 39,913 | |||||||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||||||||
|
Balance, beginning of year
|
(362 | ) | (372 | ) | (118 | ) | ||||||||
|
Currency translation adjustment, net of tax
|
(38 | ) | (70 | ) | (98 | ) | ||||||||
|
Pension and postretirement liability adjustments, net of tax
|
88 | (17 | ) | 69 | ||||||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
26 | 97 | (55 | ) | ||||||||||
|
Balance, end of year
|
(286 | ) | (362 | ) | (202 | ) | ||||||||
|
Stock held in treasury, at cost
|
||||||||||||||
|
Balance, beginning of year
|
(32,156 | ) | (32,176 | ) | (30,159 | ) | ||||||||
|
Repurchased
|
(4,185 | ) | (2 | ) 2 | (2,037 | ) | ||||||||
|
Reissued
|
46 | 22 | 21 | |||||||||||
|
Balance, end of year
|
(36,295 | ) | (32,156 | ) | (32,175 | ) | ||||||||
|
Total shareholders’ equity
|
$ | 77,356 | $ | 70,714 | $ | 64,369 | ||||||||
| 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.
102
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||||
|
December
|
December
|
November
|
||||||||||||
| in millions | 2010 | 2009 | 2008 | |||||||||||
|
Cash flows from operating activities
|
||||||||||||||
|
Net earnings
|
$ | 8,354 | $ | 13,385 | $ | 2,322 | ||||||||
|
Non-cash
items included in net earnings
|
||||||||||||||
|
Depreciation and amortization
|
1,904 | 1,943 | 1,625 | |||||||||||
|
Deferred income taxes
|
1,339 | (431 | ) | (1,763 | ) | |||||||||
|
Share-based
compensation
|
4,035 | 2,009 | 1,611 | |||||||||||
|
Changes in operating assets and liabilities
|
||||||||||||||
|
Cash and securities segregated for regulatory and other purposes
|
(17,094 | ) | 76,531 | 12,995 | ||||||||||
|
Net receivables from brokers, dealers and clearing organizations
|
201 | 6,265 | (6,587 | ) | ||||||||||
|
Net payables to customers and counterparties
|
(5,437 | ) | (47,414 | ) | (50 | ) | ||||||||
|
Securities borrowed, net of securities loaned
|
19,638 | 7,033 | 85,054 | |||||||||||
|
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell and federal
funds sold
|
(10,092 | ) | (146,807 | ) | (130,999 | ) | ||||||||
|
Financial instruments owned, at fair value
|
(9,231 | ) | 186,295 | 97,723 | ||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
11,602 | (57,010 | ) | (39,051 | ) | |||||||||
|
Other, net
|
(11,376 | ) | 7,076 | (20,986 | ) | |||||||||
|
Net cash provided by/(used for) operating activities
|
(6,157 | ) | 48,875 | 1,894 | ||||||||||
|
Cash flows from investing activities
|
||||||||||||||
|
Purchase of property, leasehold improvements and equipment
|
(1,227 | ) | (1,556 | ) | (2,027 | ) | ||||||||
|
Proceeds from sales of property, leasehold improvements and
equipment
|
72 | 82 | 121 | |||||||||||
|
Business acquisitions, net of cash acquired
|
(804 | ) | (221 | ) | (2,613 | ) | ||||||||
|
Proceeds from sales of investments
|
1,371 | 303 | 624 | |||||||||||
|
Purchase of
available-for-sale
securities
|
(1,885 | ) | (2,722 | ) | (3,851 | ) | ||||||||
|
Proceeds from sales of
available-for-sale
securities
|
2,288 | 2,553 | 3,409 | |||||||||||
|
Net cash used for investing activities
|
(185 | ) | (1,561 | ) | (4,337 | ) | ||||||||
|
Cash flows from financing activities
|
||||||||||||||
|
Unsecured
short-term
borrowings, net
|
1,196 | (9,790 | ) | (19,295 | ) | |||||||||
|
Other secured financings
(short-term),
net
|
12,689 | (10,451 | ) | (8,727 | ) | |||||||||
|
Proceeds from issuance of other secured financings
(long-term)
|
5,500 | 4,767 | 12,509 | |||||||||||
|
Repayment of other secured financings
(long-term),
including the current portion
|
(4,849 | ) | (6,667 | ) | (20,653 | ) | ||||||||
|
Proceeds from issuance of unsecured
long-term
borrowings
|
20,231 | 25,363 | 37,758 | |||||||||||
|
Repayment of unsecured
long-term
borrowings, including the current portion
|
(22,607 | ) | (29,018 | ) | (25,579 | ) | ||||||||
|
Preferred stock repurchased
|
— | (9,574 | ) | — | ||||||||||
|
Repurchase of common stock warrants
|
— | (1,100 | ) | — | ||||||||||
|
Derivative contracts with a financing element, net
|
1,222 | 2,168 | 781 | |||||||||||
|
Deposits, net
|
(849 | ) | 7,288 | 12,273 | ||||||||||
|
Common stock repurchased
|
(4,183 | ) | (2 | ) | (2,034 | ) | ||||||||
|
Dividends and dividend equivalents paid on common stock,
preferred stock and restricted stock units
|
(1,443 | ) | (2,205 | ) | (850 | ) | ||||||||
|
Proceeds from issuance of common stock, including stock option
exercises
|
581 | 6,260 | 6,105 | |||||||||||
|
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
|
352 | 135 | 614 | |||||||||||
|
Cash settlement of
share-based
compensation
|
(1 | ) | (2 | ) | — | |||||||||
|
Net cash provided by/(used for) financing activities
|
7,839 | (22,828 | ) | 7,901 | ||||||||||
|
Net increase in cash and cash equivalents
|
1,497 | 24,486 | 5,458 | |||||||||||
|
Cash and cash equivalents, beginning of year
|
38,291 | 13,805 | 10,282 | |||||||||||
|
Cash and cash equivalents, end of year
|
$ | 39,788 | $ | 38,291 | $ | 15,740 | ||||||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of capitalized interest, were
$6.74 billion, $7.32 billion and $32.37 billion
for the years ended December 2010, December 2009 and
November 2008, respectively.
Cash payments for income taxes, net of refunds, were
$4.48 billion, $4.78 billion and $3.47 billion
for the years ended December 2010, December 2009 and
November 2008, respectively.
Non-cash
activities:
The firm assumed $90 million, $16 million and
$790 million of debt in connection with business
acquisitions for the years ended December 2010,
December 2009 and November 2008, respectively. In
addition, in the first quarter of 2010, the firm recorded an
increase of approximately $3 billion in both assets
(primarily financial instruments owned, at fair value) and
liabilities (primarily unsecured
short-term
borrowings and other liabilities) upon adoption of Accounting
Standards Update (ASU)
No. 2009-17,
“Consolidations (Topic 810) — Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities.”
See page 105 for consolidated financial statements for the
one month ended December 2008.
The accompanying notes are an integral part of these
consolidated financial statements.
103
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
| Year Ended | ||||||||||||||
|
December
|
December
|
November
|
||||||||||||
| in millions | 2010 | 2009 | 2008 | |||||||||||
|
Net earnings
|
$ | 8,354 | $ | 13,385 | $ | 2,322 | ||||||||
|
Currency translation adjustment, net of tax
|
(38 | ) | (70 | ) | (98 | ) | ||||||||
|
Pension and postretirement liability adjustments, net of tax
|
88 | (17 | ) | 69 | ||||||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
26 | 97 | (55 | ) | ||||||||||
|
Comprehensive income
|
$ | 8,430 | $ | 13,395 | $ | 2,238 | ||||||||
See page 105 for consolidated financial statements for the
one month ended December 2008.
The accompanying notes are an integral part of these
consolidated financial statements.
104
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
|
$ | 138 | ||||
|
Investment management
|
328 | |||||
|
Commissions and fees
|
250 | |||||
|
Market making
|
338 | |||||
|
Other principal transactions
|
(1,556 | ) | ||||
|
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 | |||||
|
Financial instruments owned, at fair value
|
(192,883 | ) | ||||
|
Financial instruments sold, but not yet purchased, 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.
105
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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 all major financial centers around
the world.
In the fourth quarter of 2010, consistent with management’s
view of the firm’s activities, the firm reorganized its
three previous business segments into four new business
segments: Investment Banking, Institutional Client Services,
Investing & Lending and Investment Management. Prior
periods are presented on a comparable basis.
Investment
Banking
The firm provides a broad range of investment banking services
to a diverse group of corporations, financial institutions,
investment funds and governments. Services include advisory
assignments with respect to mergers and acquisitions,
divestitures, corporate defense activities, risk management,
restructurings and
spin-offs,
and debt and equity underwriting of public offerings and private
placements, as well as derivative transactions directly related
to these activities.
Institutional
Client Services
The firm facilitates client transactions and makes markets in
fixed income, equity, currency and commodity products, primarily
with institutional clients such as corporates, financial
institutions, investment funds and governments. The firm also
makes markets and clears client transactions on major stock,
options and futures exchanges worldwide and provides financing,
securities lending and prime brokerage services to institutional
clients.
Investing &
Lending
The firm invests in and originates loans to provide financing to
clients. These investments and loans are typically longer-term
in nature. The firm makes investments, directly and indirectly
through funds that the firm manages, in debt securities, loans,
public and private equity securities, real estate, consolidated
investment entities and power generation facilities.
Investment
Management
The firm provides investment 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 to a
diverse set of institutional and individual clients. The firm
also offers wealth advisory services, including portfolio
management and financial counseling, and brokerage and other
transaction services to
high-net-worth
individuals and families.
These consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States (U.S. GAAP) and include the accounts of
Group Inc. and all other entities in which the firm has a
controlling financial interest. Intercompany transactions and
balances have been eliminated.
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 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 2010, 2009 and 2008, unless specifically
stated otherwise, refer to the firm’s fiscal years ended,
or the dates, as the context requires,
December 31, 2010, December 31, 2009 and
November 28, 2008, respectively. 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.
106
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm’s significant accounting policies include when and
how to measure the fair value of assets and liabilities,
accounting for goodwill and identifiable intangible assets, and
when to consolidate an entity. See Notes 5 through 8 for
policies on fair value measurements, Note 13 for policies
on goodwill and identifiable intangible assets, and below and
Note 11 for policies on consolidation accounting. All other
significant accounting policies are either discussed below or
included in the following footnotes:
| Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value | Note 4 | |
|
Fair Value Measurements
|
Note 5 | |
|
Cash Instruments
|
Note 6 | |
|
Derivatives and Hedging Activities
|
Note 7 | |
|
Fair Value Option
|
Note 8 | |
|
Collateralized Agreements and Financings
|
Note 9 | |
|
Securitization Activities
|
Note 10 | |
|
Variable Interest Entities
|
Note 11 | |
|
Other Assets
|
Note 12 | |
|
Goodwill and Identifiable Intangible Assets
|
Note 13 | |
|
Deposits
|
Note 14 | |
|
Short-Term
Borrowings
|
Note 15 | |
|
Long-Term
Borrowings
|
Note 16 | |
|
Other Liabilities and Accrued Expenses
|
Note 17 | |
|
Commitments, Contingencies and Guarantees
|
Note 18 | |
|
Shareholders’ Equity
|
Note 19 | |
|
Regulation and Capital Adequacy
|
Note 20 | |
|
Earnings Per Common Share
|
Note 21 | |
|
Transactions with Affiliated Funds
|
Note 22 | |
|
Interest Income and Interest Expense
|
Note 23 | |
|
Employee Benefit Plans
|
Note 24 | |
|
Employee Incentive Plans
|
Note 25 | |
|
Income Taxes
|
Note 26 | |
|
Business Segments
|
Note 27 | |
|
Credit Concentrations
|
Note 28 | |
|
Parent Company
|
Note 29 | |
|
Legal Proceedings
|
Note 30 |
Consolidation
The firm consolidates entities in which the firm has a
controlling financial interest. The firm determines whether it
has a controlling financial interest in an entity by first
evaluating whether the entity is a voting interest entity or a
variable interest entity.
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 power to direct the activities of the entity that most
significantly impact its economic performance, the obligation to
absorb the losses of the entity and the right to receive the
residual returns of the entity. The usual condition for a
controlling financial interest in a voting interest entity is
ownership of a majority voting interest. If the firm has a
majority voting interest in a voting interest entity, the entity
is consolidated.
Variable Interest Entities (VIE).
A VIE is an
entity that lacks one or more of the characteristics of a voting
interest entity. The firm has a controlling financial interest
in a VIE when the firm has a variable interest or interests that
provide it with (i) the power to direct the activities of
the VIE that most significantly impact the VIE’s economic
performance and (ii) the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE that could
potentially be significant to the VIE. See Note 11 for
further information about VIEs.
Equity-Method
Investments.
When the firm does not have a
controlling financial interest in an entity but can exert
significant influence over the entity’s operating and
financial policies, the investment is accounted for either
(i) under the equity method of accounting or (ii) at
fair value by electing the fair value option available under
U.S. GAAP. Significant influence generally exists when the
firm owns 20% to 50% of the entity’s common stock or
in-substance
common stock.
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, when the firm has a
significant degree of involvement in the cash flows or
operations of the investee or when
cost-benefit
considerations are less significant. See Note 12 for
further information about
equity-method
investments.
107
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investment Funds.
The firm has formed numerous
investment funds with
third-party
investors. These funds are typically organized as limited
partnerships or limited liability companies for which the firm
acts as general partner or manager. Generally, the firm does not
hold a majority of the economic interests in these funds. These
funds are usually voting interest entities and generally are not
consolidated because
third-party
investors typically have rights to terminate the funds or to
remove the firm as general partner or manager. Investments in
these funds are included in “Financial instruments owned,
at fair value.” See Notes 6, 18 and 22 for further
information about investments in funds.
Use of
Estimates
Preparation of these consolidated financial statements requires
management to make certain estimates and assumptions, the most
important of which relate to fair value measurements, accounting
for goodwill and identifiable intangible assets and the
provision for losses that may arise from litigation, regulatory
proceedings and tax audits. These estimates and assumptions are
based on the best available information but actual results could
be materially different.
Revenue
Recognition
Financial Assets and Financial Liabilities at Fair
Value.
Financial instruments owned, at fair value
and Financial instruments sold, but not yet purchased, at fair
value are recorded at fair value either under the fair value
option or in accordance with other U.S. GAAP. In addition, the
firm has elected to account for certain of its other financial
assets and financial liabilities at fair value by electing the
fair value option. 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. Financial assets are
marked to bid prices and financial liabilities are marked to
offer prices. Fair value measurements do not include transaction
costs. Fair value gains or losses are generally included in
“Market making” for positions in Institutional Client
Services and “Other principal transactions” for
positions in Investing & Lending. See Notes 5
through 8 for further information about fair value measurements.
Investment Banking.
Fees from financial
advisory assignments and underwriting revenues are recognized in
earnings when the services related to the underlying transaction
are completed under the
terms of the assignment. Expenses associated with such
transactions are deferred until the related revenue is
recognized or the assignment is otherwise concluded. Expenses
associated with financial advisory assignments are recorded as
non-compensation
expenses, net of client reimbursements. Underwriting revenues
are presented net of related expenses.
Investment Management.
The firm earns
management fees and incentive fees for investment management
services. Management fees are calculated as a percentage of net
asset value, invested capital or commitments, and are recognized
over the period that the related service is provided. Incentive
fees are calculated as a percentage of a fund’s or
separately managed account’s return, or excess return above
a specified benchmark or other performance target. Incentive
fees are generally based on investment performance over a
12-month
period or over the life of a fund. Fees that are based on
performance over a
12-month
period are subject to adjustment prior to the end of the
measurement period. For fees that are based on investment
performance over the life of the fund, future investment
underperformance may require fees previously distributed to the
firm to be returned to the fund. Incentive fees are recognized
only when all material contingencies have been resolved.
Management and incentive fee revenues are included in
“Investment management” revenues.
Commissions and Fees.
The firm earns
“Commissions and fees” from executing and clearing
client transactions on stock, options and futures markets.
Commissions and fees are recognized on the day the trade is
executed.
Transfers of Assets
Transfers of assets are accounted for as sales when the firm has
relinquished control over the assets transferred. For transfers
of assets accounted for as sales, any related gains or losses
are recognized in net revenues. Assets or liabilities that arise
from the firm’s continuing involvement with transferred
assets are measured at fair value. For transfers of assets that
are not accounted for as sales, the assets remain in
“Financial instruments owned, at fair value” and the
transfer is accounted for as a collateralized financing, with
the related interest expense recognized over the life of the
transaction. See Note 9 for further information about
transfers of assets accounted for as collateralized financings
and Note 10 for further information about transfers of
assets accounted for as sales.
108
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables from
Customers and Counterparties
Receivables from customers and counterparties generally consist
of collateralized receivables, primarily customer margin loans,
related to client transactions. Certain of the firm’s
receivables from customers and counterparties are accounted for
at fair value under the fair value option, with changes in fair
value generally included in “Market making” revenues.
See Note 8 for further information about the fair values of
these receivables. Receivables from customers and counterparties
not accounted for at fair value are accounted for at amortized
cost net of estimated uncollectible amounts, which generally
approximates fair value. Interest on receivables from customers
and counterparties is recognized over the life of the
transaction and included in “Interest income.”
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 “Market making”
revenues. See Note 8 for further information about the fair
values of these insurance and reinsurance contracts.
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. These revenues are recognized in earnings over the
period that services are provided and are included in
“Market making” revenues. Interest credited to
variable annuity and life insurance and reinsurance contract
account balances and changes in reserves are recognized in
“Other expenses.”
Premiums earned for underwriting property catastrophe
reinsurance are recognized in earnings over the coverage period,
net of premiums ceded for the cost of reinsurance, and are
included in “Market making” revenues. Expenses for
liabilities related to property catastrophe reinsurance claims,
including estimates of losses that have been incurred but not
reported, are included in “Other expenses.”
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. Foreign currency remeasurement gains or losses on
transactions in nonfunctional currencies are recognized in
earnings. 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.
Cash and Cash
Equivalents
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business. As of
December 2010 and December 2009, “Cash and cash
equivalents” included $5.75 billion and
$4.45 billion, respectively, of cash and due from banks and
$34.04 billion and $33.84 billion, respectively, of
interest-bearing deposits with banks.
109
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Accounting
Developments
Transfers of Financial Assets and Interests in Variable
Interest Entities (Accounting Standards Codification (ASC) 860
and 810).
In June 2009, the FASB issued
amended accounting principles that changed the accounting for
securitizations and VIEs. These principles were codified as 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 qualifying
special-purpose
entity (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 accounting and requires additional disclosures for
VIEs. 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. 2009-17
also requires entities previously classified as QSPEs to be
evaluated for consolidation and disclosure as VIEs.
ASU Nos.
2009-16
and
2009-17
were
effective for fiscal years beginning after
November 15, 2009. In February 2010, the FASB
issued ASU
No. 2010-10,
“Consolidations (Topic 810) — Amendments For
Certain Investment Funds,” which defers the requirements of
ASU
No. 2009-17
for certain interests in investment funds and certain similar
entities.
The firm adopted these amendments as of
January 1, 2010 and reassessed whether it was the
primary beneficiary of any VIEs in which it had variable
interests (including VIEs that were formerly QSPEs) as of that
date. Adoption resulted in an increase to the firm’s total
assets of approximately $3 billion as of
March 31, 2010, principally in “Financial
instruments owned, at fair value.” In addition, “Other
assets” increased by $545 million as of
March 31, 2010, with a corresponding decrease in
“Financial instruments owned, at fair value,” as a
result of the consolidation of an entity which holds intangible
assets. See Note 13 for further information about
intangible assets.
Upon adoption, the firm elected the fair value option for all
eligible assets and liabilities of newly consolidated VIEs,
except for (i) those VIEs where the financial assets and
financial liabilities are accounted for either at fair value or
in a manner that approximates fair value under other
U.S. GAAP, and (ii) those VIEs where the election
would have caused volatility in earnings as a result of using
different measurement attributes for financial instruments and
nonfinancial assets. Adoption did not have a material impact on
the firm’s 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. Certain of these disclosure requirements were
effective for the firm beginning in the first quarter of 2010,
while others are effective for financial statements issued for
reporting periods beginning after December 15, 2010.
Since these amended principles require only additional
disclosures concerning fair value measurements, adoption did not
and will not affect the firm’s financial condition, results
of operations or cash flows.
110
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial instruments owned, at fair value and financial
instruments sold, but not yet purchased, at fair value are
accounted for at fair value either under the fair value option
or in accordance with other U.S. GAAP. See Note 8 for
further information about the fair value option. The table below
presents the firm’s financial instruments owned, at fair
value, including those
pledged as collateral, and financial instruments sold, but not
yet purchased, at fair value. Financial instruments owned, at
fair value included $3.67 billion and $3.86 billion as
of December 2010 and December 2009, respectively, of
securities accounted for as
available-for-sale,
substantially all of which are held in the firm’s insurance
subsidiaries.
| As of December 2010 | As of December 2009 | |||||||||||||||||
|
Financial
|
Financial
|
|||||||||||||||||
|
Instruments
|
Instruments
|
|||||||||||||||||
|
Financial
|
Sold, But
|
Financial
|
Sold, But
|
|||||||||||||||
|
Instruments
|
Not Yet
|
Instruments
|
Not Yet
|
|||||||||||||||
| in millions | Owned | Purchased | Owned | Purchased | ||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 11,262 | 2 | $ | — | $ | 9,111 | 2 | $ | — | ||||||||
|
U.S. government and federal agency obligations
|
84,928 | 23,264 | 78,336 | 20,982 | ||||||||||||||
|
Non-U.S. government
obligations
|
40,675 | 29,009 | 38,858 | 23,843 | ||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
6,200 | 5 | 6,203 | 29 | ||||||||||||||
|
Loans and securities backed by residential real estate
|
9,404 | 6 | 6,704 | 74 | ||||||||||||||
|
Loan portfolios
|
1,438 | 3 | — | 1,370 | 3 | — | ||||||||||||
|
Bank loans and bridge loans
|
18,039 | 1,487 | 4 | 19,345 | 1,541 | 4 | ||||||||||||
|
Corporate debt securities
|
24,719 | 7,219 | 26,368 | 6,229 | ||||||||||||||
|
State and municipal obligations
|
2,792 | — | 2,759 | 36 | ||||||||||||||
|
Other debt obligations
|
3,232 | — | 2,914 | — | ||||||||||||||
|
Equities and convertible debentures
|
67,833 | 24,988 | 71,474 | 20,253 | ||||||||||||||
|
Commodities
|
13,138 | 9 | 3,707 | 23 | ||||||||||||||
|
Derivatives
1
|
73,293 | 54,730 | 75,253 | 56,009 | ||||||||||||||
|
Total
|
$ | 356,953 | $ | 140,717 | $ | 342,402 | $ | 129,019 | ||||||||||
| 1. | Net of cash collateral received or posted under credit support agreements and reported on a net-by-counterparty basis when a legal right of setoff exists under an enforceable netting agreement. |
| 2. | Includes $4.06 billion and $4.31 billion as of December 2010 and December 2009, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 18 for further information about the William Street credit extension program. |
| 3. | Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate. |
| 4. | Includes the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is primarily included in “Financial instruments owned, at fair value.” |
111
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gains and Losses
from Market Making and
Other Principal Transactions
Other Principal Transactions
The table below presents, by major product type, the firm’s
“Market making” and “Other principal
transactions” revenues. These gains/(losses) are primarily
related to the firm’s financial instruments owned, at fair
value and financial instruments sold, but not yet purchased, at
fair value, including both derivative and nonderivative
financial instruments. These gains/(losses) exclude related
interest income and interest expense. See Note 23 for
further information about interest income and interest expense.
The gains/(losses) in the table are not representative of the
manner in which the firm manages its business activities because
many of the firm’s market making, client facilitation, and
investing and lending 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 derivatives 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 instruments and derivatives has
exposure to foreign currencies and may be economically hedged
with foreign currency contracts.
|
Year Ended
|
One Month
Ended
|
|||||||||||||
| December | December | |||||||||||||
| in millions | 2010 | 2009 | 2008 | |||||||||||
|
Interest rates
|
$ | (2,042 | ) | $ | 6,540 | $ | 2,230 | |||||||
|
Credit
|
8,679 | 6,691 | (1,558 | ) | ||||||||||
|
Currencies
|
3,219 | (817 | ) | (2,341 | ) | |||||||||
|
Equities
|
6,862 | 6,128 | (518 | ) | ||||||||||
|
Commodities
|
1,567 | 4,591 | 759 | |||||||||||
|
Other
|
2,325 | 1,576 | 210 | |||||||||||
|
Total
|
$ | 20,610 | $ | 24,709 | $ | (1,218 | ) | |||||||
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. Financial assets are marked to bid
prices and financial liabilities are marked to offer prices.
Fair value measurements do not include transaction costs.
The best evidence of fair value is a quoted price in an active
market. If listed prices or quotations are not available, fair
value is determined by reference to prices for similar
instruments, quoted prices or recent transactions in less active
markets, or internally developed models that primarily use, as
inputs,
market-based
or independently sourced parameters, including but not limited
to interest rates, volatilities, equity or debt prices, foreign
exchange rates, commodities prices and credit curves.
U.S. GAAP has a three-level fair value hierarchy for
disclosure of fair value measurements. The fair value hierarchy
prioritizes inputs to the valuation techniques used to measure
fair value, giving the highest priority to level 1 inputs
and the lowest priority to level 3 inputs. A financial
instrument’s level in the fair value hierarchy is based on
the lowest level of any input that is significant to its fair
value measurement.
The fair value hierarchy is as follows:
Level 1.
Inputs are unadjusted quoted
prices in active markets to which the firm had access at the
measurement date for identical, unrestricted assets or
liabilities.
Level 2.
Inputs to valuation techniques
are observable, either directly or indirectly.
Level 3.
One or more inputs to valuation
techniques are significant and unobservable.
See Notes 6 and 7 for further information about fair value
measurements of cash instruments and derivatives, respectively.
The fair value of certain level 2 and level 3
financial assets and financial liabilities may include valuation
adjustments for counterparty and the firm’s credit quality,
transfer restrictions, large
and/or
concentrated positions, illiquidity and bid/offer inputs. See
Notes 6 and 7 for further information about valuation
adjustments.
112
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 3 financial assets are summarized below.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Total level 3 assets
|
$ | 45,377 | $ | 46,475 | ||||||
|
Total assets
|
$ | 911,332 | $ | 848,942 | ||||||
|
Total financial assets at fair value
|
$ | 637,514 | $ | 573,788 | ||||||
|
Total level 3 assets as a percentage of Total assets
|
5.0% | 5.5% | ||||||||
|
Total level 3 assets as a percentage of Total financial
assets at fair value
|
7.1% | 8.1% | ||||||||
Financial Assets
and Financial Liabilities by Level
The tables below present, by level within the fair value
hierarchy, financial instruments owned, at fair value and
financial instruments sold, but not yet purchased, at fair
value, and other financial assets and financial liabilities
accounted for at fair value under the fair value option. See
Notes 6 and 7 for further information on the assets
and liabilities included in cash instruments and derivatives,
respectively, and their valuation methodologies and inputs. See
Note 8 for the valuation methodologies and inputs for other
financial assets and financial liabilities accounted for at fair
value under the fair value option.
| Financial Assets at Fair Value as of December 2010 | ||||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Collateral | Total | |||||||||||||||||
|
Total cash instruments
|
$ | 117,800 | $ | 133,653 | $ | 32,207 | $ | − | $ | 283,660 | ||||||||||||
|
Total derivatives
|
93 | 172,513 | 12,772 | (112,085 | ) 3 | 73,293 | ||||||||||||||||
|
Financial instruments owned, at fair value
|
117,893 | 306,166 | 44,979 | (112,085 | ) | 356,953 | ||||||||||||||||
|
Securities segregated for regulatory and other purposes
|
19,794 | 1 | 16,388 | 2 | − | − | 36,182 | |||||||||||||||
|
Securities purchased under agreements to resell
|
− | 188,255 | 100 | − | 188,355 | |||||||||||||||||
|
Securities borrowed
|
− | 48,822 | − | − | 48,822 | |||||||||||||||||
|
Receivables from customers and counterparties
|
− | 6,904 | 298 | − | 7,202 | |||||||||||||||||
|
Total
|
$ | 137,687 | $ | 566,535 | $ | 45,377 | $ | (112,085 | ) | $ | 637,514 | |||||||||||
| Financial Liabilities at Fair Value as of December 2010 | ||||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Collateral | Total | |||||||||||||||||
|
Total cash instruments
|
$ | 75,668 | $ | 9,873 | $ | 446 | $ | − | $ | 85,987 | ||||||||||||
|
Total derivatives
|
45 | 66,963 | 5,210 | (17,488 | ) 3 | 54,730 | ||||||||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
75,713 | 76,836 | 5,656 | (17,488 | ) | 140,717 | ||||||||||||||||
|
Deposits
|
− | 1,975 | − | − | 1,975 | |||||||||||||||||
|
Securities sold under agreements to repurchase
|
− | 160,285 | 2,060 | − | 162,345 | |||||||||||||||||
|
Securities loaned
|
− | 1,514 | − | − | 1,514 | |||||||||||||||||
|
Other secured financings
|
− | 23,445 | 8,349 | − | 31,794 | |||||||||||||||||
|
Unsecured
short-term
borrowings
|
− | 18,640 | 3,476 | − | 22,116 | |||||||||||||||||
|
Unsecured
long-term
borrowings
|
− | 16,067 | 2,104 | − | 18,171 | |||||||||||||||||
|
Other liabilities and accrued expenses
|
− | 563 | 2,409 | − | 2,972 | |||||||||||||||||
|
Total
|
$ | 75,713 | $ | 299,325 | $ | 24,054 | 4 | $ | (17,488 | ) | $ | 381,604 | ||||||||||
| 1. | 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. |
| 2. | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| 3. | Represents cash collateral and the impact of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level. |
| 4. | Level 3 liabilities were 6.3% of total financial liabilities at fair value. |
113
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Financial Assets at Fair Value as of December 2009 | ||||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Collateral | Total | |||||||||||||||||
|
Total cash instruments
|
$ | 112,565 | $ | 119,705 | $ | 34,879 | $ | − | $ | 267,149 | ||||||||||||
|
Total derivatives
|
161 | 190,816 | 11,596 | (127,320 | ) 3 | 75,253 | ||||||||||||||||
|
Financial instruments owned, at fair value
|
112,726 | 310,521 | 46,475 | (127,320 | ) | 342,402 | ||||||||||||||||
|
Securities segregated for regulatory and other purposes
|
14,381 | 1 | 4,472 | 2 | − | − | 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
|
$ | 127,107 | $ | 527,526 | $ | 46,475 | $ | (127,320 | ) | $ | 573,788 | |||||||||||
| Financial Liabilities at Fair Value as of December 2009 | ||||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Collateral | Total | |||||||||||||||||
|
Total cash instruments
|
$ | 63,383 | $ | 9,055 | $ | 572 | $ | − | $ | 73,010 | ||||||||||||
|
Total derivatives
|
126 | 66,943 | 6,400 | (17,460 | ) 3 | 56,009 | ||||||||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
63,509 | 75,998 | 6,972 | (17,460 | ) | 129,019 | ||||||||||||||||
|
Deposits
|
− | 1,947 | − | − | 1,947 | |||||||||||||||||
|
Securities sold under agreements to repurchase
|
− | 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
|
$ | 63,627 | $ | 255,008 | $ | 21,422 | 4 | $ | (17,460 | ) | $ | 322,597 | ||||||||||
| 1. | Principally consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value. |
| 2. | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| 3. | Represents cash collateral and the impact of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level. |
| 4. | Level 3 liabilities were 6.6% of total financial liabilities at fair value. |
114
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 3
Unrealized Gains/(Losses)
Cash Instruments.
Level 3 cash
instruments are frequently economically hedged with level 1
and level 2 cash instruments
and/or
level 1, level 2 and level 3 derivatives.
Accordingly, gains or losses that are reported in level 3
can be partially offset by gains or losses attributable to
level 1 or level 2 cash instruments
and/or
level 1, level 2 and level 3 derivatives.
Derivatives.
Gains and losses on level 3
derivatives should be considered in the context of the following:
| • | A derivative with level 1 and/or level 2 inputs is classified in level 3 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 inputs) is 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 level 1 or level 2 derivatives and/or level 1, level 2 and level 3 cash instruments. |
The table below presents the unrealized gains/(losses) on
level 3 financial assets and financial liabilities at fair
value still held at the period-end. See Notes 6 and 7 for
further information about level 3 cash instruments and
derivatives, respectively. See Note 8 for further
information about other financial assets and financial
liabilities at fair value under the fair value option.
| Level 3 Unrealized Gains/(Losses) | ||||||||||||||||||
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Cash instruments — assets
|
$ | 1,657 | $ | (4,781 | ) | $ | (11,485 | ) | $ | (3,116 | ) | |||||||
|
Cash instruments — liabilities
|
17 | 474 | (871 | ) | (78 | ) | ||||||||||||
|
Net unrealized gains/(losses) on level 3 cash instruments
|
1,674 | (4,307 | ) | (12,356 | ) | (3,194 | ) | |||||||||||
|
Derivatives — net
|
5,184 | (1,018 | ) | 5,577 | (210 | ) | ||||||||||||
|
Receivables from customers and counterparties
|
(58 | ) | — | — | — | |||||||||||||
|
Other secured financings
|
(25 | ) | (812 | ) | 838 | (1 | ) | |||||||||||
|
Unsecured
short-term
borrowings
|
(35 | ) | (81 | ) | 737 | (70 | ) | |||||||||||
|
Unsecured
long-term
borrowings
|
(41 | ) | (291 | ) | 657 | (127 | ) | |||||||||||
|
Other liabilities and accrued expenses
|
(54 | ) | 53 | — | — | |||||||||||||
|
Total
|
$ | 6,645 | $ | (6,456 | ) | $ | (4,547 | ) | $ | (3,602 | ) | |||||||
115
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Gains and losses in the table above include:
Year Ended
December 2010
| • | A net unrealized gain on cash instruments of $1.67 billion primarily consisting of unrealized gains on private equity investments, bank loans and bridge loans and corporate debt securities, where prices were generally corroborated through sales and partial sales of similar assets in these asset classes during the period. |
| • | A net unrealized gain on derivatives of $5.18 billion primarily attributable to lower interest rates, which are level 2 inputs, underlying certain credit derivatives. These unrealized gains were substantially offset by unrealized losses on currency, interest rate and credit derivatives categorized in level 2, which economically hedge level 3 derivatives. |
Year Ended
December 2009
| • | A net unrealized loss on cash instruments of $4.31 billion, primarily consisting of unrealized losses on private equity investments and real estate fund investments, and loans and securities backed by commercial real estate, reflecting weakness in the markets for these less liquid asset classes. |
| • | A net unrealized loss on derivatives of $1.02 billion, primarily attributable to tighter credit spreads on the underlying instruments and increases in underlying equity index prices. These losses were partially offset by increases in commodities prices. All of these inputs are level 2 observable inputs. |
Year Ended
November 2008
| • | A net unrealized loss on cash instruments of $12.36 billion, primarily consisting 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. |
| • | A net unrealized gain on derivatives of $5.58 billion, primarily attributable to changes in observable credit spreads (which are level 2 inputs) on the underlying instruments. |
One Month Ended
December 2008
| • | A net unrealized loss on cash instruments of $3.19 billion, primarily consisting 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. |
| • | A net unrealized loss on derivatives of $210 million, primarily attributable to changes in observable prices on the underlying instruments (which are level 2 inputs). |
Level 3
Rollforward
If a financial asset or financial liability was transferred to
level 3 during a reporting period, its entire gain or loss
for the period is included in level 3. Transfers between
levels are recognized at the beginning of the reporting period
in which they occur. Accordingly, the tables do not include
gains or losses that were reported in level 3 in prior
periods for financial instruments that were transferred out of
level 3 prior to the end of the period.
See Notes 6 and 7 for further information about cash
instruments and derivatives included in level 3,
respectively. See Note 8 for other financial assets and
financial liabilities at fair value under the fair value option.
116
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables below present changes in fair value for all financial
assets and financial liabilities categorized as
level 3 as of the end of the period.
| Level 3 Financial Assets at Fair Value for the Year Ended December 2010 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
gains/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | (losses) | end | settlements | level 3 | year | ||||||||||||||||||||
|
Total cash instruments — assets
|
$ | 34,879 | $ | 1,467 | 1 | $ | 1,657 | 1 | $ | (2,922 | ) | $ | (2,874 | ) | $ | 32,207 | ||||||||||
|
Total derivatives — net
|
5,196 | (144 | ) 2 | 5,184 | 2, 3 | (2,595 | ) | (79 | ) | 7,562 | ||||||||||||||||
|
Securities purchased under agreements to resell
|
— | 3 | — | 97 | — | 100 | ||||||||||||||||||||
|
Receivables from customers and counterparties
|
— | 22 | (58 | ) | — | 334 | 298 | |||||||||||||||||||
| 1. | The aggregate amounts include approximately $1.86 billion and $1.26 billion reported in “Non-interest revenues” (“Market making” and “Other principal transactions”) and “Interest income,” respectively, in the consolidated statement of earnings for the year ended December 2010. |
| 2. | Substantially all is reported in “Non-interest revenues” (“Market making” and “Other principal transactions”) in the consolidated statement of earnings. |
| 3. | Principally resulted from changes in level 2 inputs. |
| Level 3 Financial Liabilities at Fair Value for the Year Ended December 2010 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
(gains)/losses
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
(gains)/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | losses | end | settlements | level 3 | year | ||||||||||||||||||||
|
Total cash instruments — liabilities
|
$ | 572 | $ | 5 | $ | (17 | ) | $ | (97 | ) | $ | (17 | ) | $ | 446 | |||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
394 | — | — | 1,666 | — | 2,060 | ||||||||||||||||||||
|
Other secured financings
|
6,756 | (1 | ) | 25 | 1,605 | (36 | ) | 8,349 | ||||||||||||||||||
|
Unsecured
short-term
borrowings
|
2,310 | 91 | 35 | (300 | ) | 1,340 | 3,476 | |||||||||||||||||||
|
Unsecured
long-term
borrowings
|
3,077 | 23 | 41 | 216 | (1,253 | ) | 2,104 | |||||||||||||||||||
|
Other liabilities and accrued expenses
|
1,913 | 10 | 54 | (155 | ) | 587 | 2,409 | |||||||||||||||||||
Significant transfers in and out of level 3 during the year
ended December 2010, which were principally due to the
consolidation of certain VIEs upon adoption of ASU
No. 2009-17
as of January 1, 2010, included:
| • | Unsecured short-term borrowings: net transfer into level 3 of $1.34 billion, principally due to the consolidation of certain VIEs. |
| • | Unsecured long-term borrowings: net transfer out of level 3 of $1.25 billion, principally due to the consolidation of certain VIEs which caused the firm’s borrowings from these VIEs to become intercompany borrowings which were eliminated in consolidation. Substantially all of these borrowings were level 3. |
| • | Other liabilities and accrued expenses: net transfer into level 3 of $587 million, principally due to an increase in subordinated liabilities issued by certain consolidated VIEs. |
117
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Level 3 Financial Assets at Fair Value for the Year Ended December 2009 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
gains/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | (losses) | end | settlements | level 3 | year | ||||||||||||||||||||
|
Total cash instruments — assets
|
$ | 49,652 | $ | 1,736 | 1 | $ | (4,781 | ) 1 | $ | (8,627 | ) | $ | (3,101 | ) | $ | 34,879 | ||||||||||
|
Total derivatives — net
|
3,315 | 759 | 2 | (1,018 | ) 2, 3 | 2,333 | (193 | ) | 5,196 | |||||||||||||||||
| 1. | The aggregate amounts include approximately $(4.69) billion and $1.64 billion reported in “Non-interest revenues” (“Market making” and “Other principal transactions”) and “Interest income,” respectively, in the consolidated statements of earnings for the year ended December 2009. |
| 2. | Substantially all is reported in “Non-interest revenues” (“Market making” and “Other principal transactions”) in the consolidated statement of earnings. |
| 3. | Principally resulted from changes in level 2 inputs. |
| Level 3 Financial Liabilities at Fair Value for the Year Ended December 2009 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
(gains)/losses
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
(gains)/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | losses | end | settlements | level 3 | year | ||||||||||||||||||||
|
Total cash instruments — liabilities
|
$ | 1,727 | $ | (38 | ) | $ | (474 | ) | $ | (463 | ) | $ | (180 | ) | $ | 572 | ||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | — | — | 394 | — | 394 | ||||||||||||||||||||
|
Other secured financings
|
4,039 | (19 | ) | 812 | (804 | ) | 2,728 | 6,756 | ||||||||||||||||||
|
Unsecured
short-term
borrowings
|
4,712 | 126 | 81 | 1,419 | (4,028 | ) | 2,310 | |||||||||||||||||||
|
Unsecured
long-term
borrowings
|
1,689 | 92 | 291 | (726 | ) | 1,731 | 3,077 | |||||||||||||||||||
|
Other liabilities and accrued expenses
|
— | 22 | (53 | ) | 991 | 953 | 1,913 | |||||||||||||||||||
Significant transfers in and out of level 3 during the year
ended December 2009 included:
| • | Other secured financings, Unsecured short-term borrowings and Unsecured long-term borrowings: net transfer in of $2.73 billion, transfer out of $4.03 billion and transfer in of $1.73 billion, respectively, principally due to 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 of these borrowings. |
| • | Other liabilities and accrued expenses: net transfer into level 3 of $953 million, principally due to transfers of certain insurance contracts from level 2 due to reduced transparency of mortality curve valuation inputs as a result of less observable trading activity. |
118
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash instruments include U.S. government and federal agency
obligations,
non-U.S. government
obligations, bank loans and bridge loans, corporate debt
securities, equities and convertible debentures, and other
non-derivative
financial instruments owned and financial instruments sold, but
not yet purchased. See below for the types of cash instruments
included in each level of the fair value hierarchy and the
valuation techniques and significant inputs used to determine
their fair values. See Note 5 for an overview of the
firm’s fair value measurement policies and the fair value
hierarchy.
Level 1 Cash
Instruments
Level 1 cash instruments include U.S. government
obligations and most
non-U.S. government
obligations, actively traded listed equities and certain money
market instruments. These instruments are valued using quoted
prices for identical unrestricted instruments in active markets.
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.
The fair value of a level 1 instrument is calculated as
quantity held multiplied by quoted market price. U.S. GAAP
prohibits valuation adjustments being applied to level 1
instruments even in situations where the firm holds a large
position and a sale could impact the quoted price.
Level 2 Cash
Instruments
Level 2 cash instruments include commercial paper,
certificates of deposit, time deposits, most government agency
obligations, most corporate debt securities, commodities,
certain
mortgage-backed
loans and securities, certain bank loans and bridge loans, less
liquid publicly listed equities, certain state and municipal
obligations and certain money market instruments and lending
commitments.
Valuations of level 2 cash instruments can be verified to
quoted prices, recent trading activity for identical or similar
instruments, broker or dealer quotations or alternative pricing
sources with reasonable levels of price transparency.
Consideration is given to the nature of the quotations
(e.g., indicative or firm) and the relationship of recent
market activity to the prices provided from alternative pricing
sources.
Valuation adjustments are typically made to level 2 cash
instruments (i) if the cash instrument is subject to
transfer restrictions,
and/or
(ii) for other premiums and discounts that a market
participant would require to arrive at fair value. Valuation
adjustments are generally based on market evidence.
Level 3 Cash
Instruments
Level 3 cash instruments have one or more significant
valuation inputs that are not observable. Absent evidence to the
contrary, level 3 cash instruments are initially valued at
transaction price, which is considered to be the best initial
estimate of fair value. Subsequently, the firm uses other
methodologies to determine fair value, which vary based on the
type of instrument. Valuation inputs and assumptions are changed
when corroborated by substantive observable evidence, including
values realized on sales of level 3 assets.
The table below presents the valuation techniques and the nature
of significant inputs generally used to determine the fair
values of each class of level 3 cash instrument.
119
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Level 3 Cash Instrument | Valuation Techniques and Significant Inputs | ||
|
Loans and securities backed by commercial real estate
• Collateralized by a single commercial real estate property or a portfolio of properties
• May include tranches of varying levels of subordination
|
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs for these valuations include:
• Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral
• Current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds)
• Market yields implied by transactions of similar or related assets
• Current performance of the underlying collateral
• Capitalization rates and multiples
|
||
|
Loans and securities backed by residential real estate
• Collateralized by portfolios of residential real estate
• May include tranches of varying levels of subordination
|
Valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof.
Significant 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 (an index that tracks the performance of subprime residential mortgage bonds). Significant inputs include:
• Home price projections, residential property liquidation timelines and related costs
• Underlying loan prepayment, default and cumulative loss expectations
• Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral
• Market yields implied by transactions of similar or related assets
|
||
|
Loan portfolios
• Acquired portfolios of distressed loans
• Primarily backed by commercial and residential real estate collateral
|
Valuations are based on discounted cash flow techniques.
Significant inputs are determined based on relative value analyses which incorporate comparisons to recent auction data for other similar loan portfolios. Significant inputs include:
• Amount and timing of expected future cash flows
• Market yields implied by transactions of similar or related assets
|
||
|
Bank loans and bridge loans
Corporate debt securities State and municipal obligations Other debt obligations |
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:
• Amount and timing of expected future cash flows
• Current levels and trends of market indices such as CDX, LCDX and MCDX (indices that track the performance of corporate credit, loans and municipal obligations, respectively)
• Market yields implied by transactions of similar or related assets
• Current performance and recovery assumptions and, where we use credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation
|
||
|
Equities and convertible debentures
• Private equity investments |
Recent third-party investments or pending transactions are
considered to be the best evidence for any change in fair
value. When these are not available, the following valuation
methodologies are used, as appropriate and available:
• Transactions in similar instruments • Discounted cash flow techniques • Third-party appraisals • Industry multiples and public comparables Evidence includes recent or pending reorganizations (e.g., merger proposals, tender offers, debt restructurings) and significant changes in financial metrics, such as: • Current financial performance as compared to projected performance • Capitalization rates and multiples • Market yields implied by transactions of similar or related assets |
||
120
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Instruments
by Level
The tables below present, by level within the fair value
hierarchy, cash instrument assets and liabilities, at fair
value. Cash instrument assets and liabilities are
included in “Financial instruments owned, at fair
value” and “Financial instruments sold, but not yet
purchased, at fair value,” respectively.
| Cash Instrument Assets at Fair Value as of December 2010 | ||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 4,344 | $ | 6,918 | $ | — | $ | 11,262 | ||||||||||
|
U.S. government and federal agency obligations
|
36,184 | 48,744 | — | 84,928 | ||||||||||||||
|
Non-U.S. government
obligations
|
35,504 | 5,171 | — | 40,675 | ||||||||||||||
|
Mortgage and other
asset-backed
loans and
securities
1
:
|
||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 3,381 | 2,819 | 6,200 | ||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 7,031 | 2,373 | 9,404 | ||||||||||||||
|
Loan portfolios
|
— | 153 | 1,285 | 1,438 | ||||||||||||||
|
Bank loans and bridge loans
|
— | 8,134 | 9,905 | 18,039 | ||||||||||||||
|
Corporate debt
securities
2
|
108 | 21,874 | 2,737 | 24,719 | ||||||||||||||
|
State and municipal obligations
|
— | 2,038 | 754 | 2,792 | ||||||||||||||
|
Other debt obligations
|
— | 1,958 | 1,274 | 3,232 | ||||||||||||||
|
Equities and convertible debentures
|
41,660 | 3 | 15,113 | 4 | 11,060 | 5 | 67,833 | |||||||||||
|
Commodities
|
— | 13,138 | — | 13,138 | ||||||||||||||
|
Total
|
$ | 117,800 | $ | 133,653 | $ | 32,207 | $ | 283,660 | ||||||||||
| Cash Instrument Liabilities at Fair Value as of December 2010 | ||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 23,191 | $ | 73 | $ | — | $ | 23,264 | ||||||||||
|
Non-U.S. government
obligations
|
28,168 | 841 | — | 29,009 | ||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 5 | — | 5 | ||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 6 | — | 6 | ||||||||||||||
|
Bank loans and bridge loans
|
— | 1,107 | 380 | 1,487 | ||||||||||||||
|
Corporate debt
securities
6
|
26 | 7,133 | 60 | 7,219 | ||||||||||||||
|
Equities and convertible
debentures
7
|
24,283 | 699 | 6 | 24,988 | ||||||||||||||
|
Commodities
|
— | 9 | — | 9 | ||||||||||||||
|
Total
|
$ | 75,668 | $ | 9,873 | $ | 446 | $ | 85,987 | ||||||||||
| 1. | Includes $212 million and $565 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively. |
| 2. | Includes $368 million and $1.07 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively. |
| 3. | Consists of publicly listed equity securities. Includes the firm’s $7.59 billion investment in the ordinary shares of Industrial and Commercial Bank of China Limited, which was transferred from level 2 upon expiration of transfer restrictions in April 2010. |
| 4. | Substantially all consists of restricted and less liquid publicly listed securities. |
| 5. | Includes $10.03 billion of private equity investments, $874 million of real estate investments and $156 million of convertible debentures. |
| 6. | Includes $35 million of CDOs and CLOs backed by corporate obligations in level 3. |
| 7. | Substantially all consists of publicly listed equity securities. |
121
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Cash Instrument Assets at Fair Value as of December 2009 | ||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
|
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
|
— | 6 | 1,364 | 1,370 | ||||||||||||||
|
Bank loans and bridge loans
|
— | 9,785 | 9,560 | 19,345 | ||||||||||||||
|
Corporate debt
securities
2
|
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 | 3 | 22,500 | 4 | 11,871 | 5 | 71,474 | |||||||||||
|
Commodities
|
— | 3,707 | — | 3,707 | ||||||||||||||
|
Total
|
$ | 112,565 | $ | 119,705 | $ | 34,879 | $ | 267,149 | ||||||||||
| Cash Instrument Liabilities at Fair Value as of December 2009 | ||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
|
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
6
|
65 | 6,018 | 146 | 6,229 | ||||||||||||||
|
State and municipal obligations
|
— | 36 | — | 36 | ||||||||||||||
|
Equities and convertible
debentures
3
|
19,072 | 1,168 | 13 | 20,253 | ||||||||||||||
|
Commodities
|
— | 23 | — | 23 | ||||||||||||||
|
Total
|
$ | 63,383 | $ | 9,055 | $ | 572 | $ | 73,010 | ||||||||||
| 1. | Includes $291 million and $311 million of CDOs and CLOs backed by real estate in level 2 and level 3, respectively. |
| 2. | Includes $338 million and $741 million of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively. |
| 3. | Substantially all consists of publicly listed equity securities. |
| 4. | Substantially all consists of less liquid publicly listed securities. |
| 5. | Includes $10.56 billion of private equity investments, $1.23 billion of real estate investments and $79 million of convertible debentures. |
| 6. | Includes $45 million of CDOs and CLOs backed by corporate obligations in level 3. |
122
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 3
Rollforward
If a cash instrument was transferred to level 3 during a
reporting period, its entire gain or loss for the period is
included in level 3. Transfers between levels are reported
at the beginning of the reporting period in which they occur.
Accordingly, the tables do not include gains or losses that were
reported in level 3
in prior periods for cash instruments that were transferred out
of level 3 prior to the end of the period.
The tables below present changes in fair value for all cash
instrument assets and liabilities categorized as level 3 as
of the end of the period.
| Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2010 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
gains/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | (losses) | end | settlements | level 3 | year | ||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
$ | 4,620 | $ | 157 | $ | 193 | $ | (1,307 | ) | $ | (844 | ) | $ | 2,819 | ||||||||||||
|
Loans and securities backed by residential real estate
|
1,880 | 167 | 49 | 226 | 51 | 2,373 | ||||||||||||||||||||
|
Loan portfolios
|
1,364 | 93 | (97 | ) | (91 | ) | 16 | 1,285 | ||||||||||||||||||
|
Bank loans and bridge loans
|
9,560 | 687 | 482 | (735 | ) | (89 | ) | 9,905 | ||||||||||||||||||
|
Corporate debt securities
|
2,235 | 239 | 348 | 488 | (573 | ) | 2,737 | |||||||||||||||||||
|
State and municipal obligations
|
1,114 | 1 | (25 | ) | (393 | ) | 57 | 754 | ||||||||||||||||||
|
Other debt obligations
|
2,235 | 4 | 159 | (263 | ) | (861 | ) | 1,274 | ||||||||||||||||||
|
Equities and convertible debentures
|
11,871 | 119 | 548 | (847 | ) | (631 | ) | 11,060 | ||||||||||||||||||
|
Total
|
$ | 34,879 | $ | 1,467 | $ | 1,657 | $ | (2,922 | ) | $ | (2,874 | ) | $ | 32,207 | ||||||||||||
| Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2010 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
(gains)/losses
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
(gains)/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | losses | end | settlements | level 3 | year | ||||||||||||||||||||
|
Total
|
$ | 572 | $ | 5 | $ | (17 | ) | $ | (97 | ) | $ | (17 | ) | $ | 446 | |||||||||||
123
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Significant transfers in and out of level 3 during the year
ended December 2010 included:
| • | Loans and securities backed by commercial real estate: net transfer out of level 3 of $844 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of partial sales. |
| • | Corporate debt securities: net transfer out of level 3 of $573 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE which holds intangible assets. |
| • | Other debt obligations: net transfer out of level 3 of $861 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE. The VIE holds real estate assets which are included in “Other assets.” |
| • | Equities and convertible debentures: net transfer out of level 3 of $631 million, principally due to transfers to level 2 of certain private equity investments due to improved transparency of market prices as a result of partial sales and initial public offerings. |
| Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2009 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
gains/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | (losses) | end | settlements | level 3 | year | ||||||||||||||||||||
|
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 | ) | 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 | ) | 11,871 | ||||||||||||||||||
|
Total
|
$ | 49,652 | $ | 1,736 | $ | (4,781 | ) | $ | (8,627 | ) | $ | (3,101 | ) | $ | 34,879 | |||||||||||
| Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2009 | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
(gains)/losses
|
Net
|
Net
|
||||||||||||||||||||||||
|
Net
|
relating to
|
purchases,
|
transfers
|
|||||||||||||||||||||||
|
Balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
Balance,
|
|||||||||||||||||||||
|
beginning
|
(gains)/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | losses | end | settlements | level 3 | year | ||||||||||||||||||||
|
Total
|
$ | 1,727 | $ | (38 | ) | $ | (474 | ) | $ | (463 | ) | $ | (180 | ) | $ | 572 | ||||||||||
Significant transfers in and out of level 3 during the year
ended December 2009 included:
| • | Loan portfolios: net transfer out of level 3 of $1.55 billion, principally due to the deconsolidation of certain loan portfolios for which the firm did not bear economic exposure. |
| • |
Equities and convertible debentures: net transfer out of
level 3 of $978 million, principally due to transfers
to level 2 of certain private equity investments due to
improved transparency of market prices which are used to value
these financial instruments.
|
124
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Investments in
Funds That Calculate
Net Asset Value Per Share
Cash instruments at fair value include investments in funds that
are valued based on the net asset value per share (NAV) of the
investment fund. The firm uses NAV as its measure of fair value
for fund investments when (i) the fund investment does not
have a readily determinable fair value and (ii) the NAV of
the investment fund is calculated in a manner consistent with
the measurement principles of investment company accounting,
including measurement of the underlying investments at fair
value.
The firm’s investments in funds that calculate NAV
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 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 table below presents the fair value of the firm’s
investments in, and unfunded commitments to, funds that
calculate NAV.
| As of December 2010 | As of December 2009 | |||||||||||||||||
|
Fair Value of
|
Unfunded
|
Fair Value of
|
Unfunded
|
|||||||||||||||
| in millions | Investments | Commitments | Investments | Commitments | ||||||||||||||
|
Private equity
funds
1
|
$ | 7,911 | $ | 4,816 | $ | 8,229 | $ | 5,722 | ||||||||||
|
Private debt
funds
2
|
4,267 | 3,721 | 3,628 | 4,048 | ||||||||||||||
|
Hedge
funds
3
|
3,169 | — | 3,133 | — | ||||||||||||||
|
Real estate and other
funds
4
|
1,246 | 1,884 | 939 | 2,398 | ||||||||||||||
|
Total
|
$ | 16,593 | $ | 10,421 | $ | 15,929 | $ | 12,168 | ||||||||||
| 1. | These funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations and growth investments. |
| 2. | These funds generally invest in loans and other fixed income instruments 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. |
125
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivative
Activities
Derivatives are instruments that derive their value from
underlying asset prices, indices, reference rates and other
inputs, or a combination of these factors. Derivatives may be
privately negotiated contracts, which are usually referred to as
over-the-counter
(OTC) derivatives, or they may be listed and traded on an
exchange
(exchange-traded).
Market-Making.
As
a market maker, the firm enters into derivative transactions
with clients and other market participants to provide liquidity
and to facilitate the transfer and hedging of risk. In this
capacity, the firm typically acts as principal and is
consequently required to commit capital to provide execution. As
a market maker, it is essential to maintain an inventory of
financial instruments sufficient to meet expected client and
market demands.
Risk Management.
The firm also enters into
derivatives to actively manage risk exposures that arise from
market-making
and investing and lending activities in derivative and cash
instruments. In addition, the firm may enter into derivatives
designated as hedges under U.S. GAAP. These derivatives are
used to manage foreign currency exposure on the net investment
in certain
non-U.S. operations
and to manage interest rate exposure in certain fixed-rate
unsecured
long-term
and
short-term
borrowings, and certificates of deposit.
The firm enters into various types of derivatives, including:
| • | Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future. |
| • | Swaps. Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices. |
| • | Options. Contracts in which the option purchaser has the right but not the obligation to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price. |
Derivatives are accounted for at fair value, net of cash
collateral received or posted under credit support agreements.
Derivatives are reported on a
net-by-counterparty
basis (i.e., the net payable or receivable for derivative
assets and liabilities for a given counterparty) when a legal
right of setoff exists under an enforceable netting agreement.
Derivative assets and liabilities are included in
“Financial instruments owned, at fair value” and
“Financial instruments sold, but not yet purchased, at fair
value,” respectively.
Substantially all gains and losses on derivatives not designated
as hedges under U.S. GAAP, are included in “Market
making” and “Other principal transactions.”
126
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents the fair value of
exchange-traded
and OTC derivatives on a
net-by-counterparty
basis.
| As of December 2010 | As of December 2009 | |||||||||||||||||
|
Derivative
|
Derivative
|
Derivative
|
Derivative
|
|||||||||||||||
| in millions | Assets | Liabilities | Assets | Liabilities | ||||||||||||||
|
Exchange-traded
|
$ | 7,601 | $ | 2,794 | $ | 6,831 | $ | 2,548 | ||||||||||
|
Over-the-counter
|
65,692 | 51,936 | 68,422 | 53,461 | ||||||||||||||
|
Total
|
$ | 73,293 | $ | 54,730 | $ | 75,253 | $ | 56,009 | ||||||||||
The table below presents the fair value, and the number, of
derivative contracts by major product type on a gross basis.
Gross fair values in the table below
exclude the effects of both netting under enforceable
netting agreements and netting of cash collateral received or
posted under credit support agreements, and therefore are not
representative of the firm’s exposure.
| As of December 2010 | As of December 2009 | |||||||||||||||||||||||||
|
Number
|
Number
|
|||||||||||||||||||||||||
|
Derivative
|
Derivative
|
of
|
Derivative
|
Derivative
|
of
|
|||||||||||||||||||||
| in millions, except number of contracts | Assets | Liabilities | Contracts | Assets | Liabilities | Contracts | ||||||||||||||||||||
|
Derivatives not accounted for as hedges
|
||||||||||||||||||||||||||
|
Interest rates
|
$ | 463,145 | $ | 422,514 | 272,279 | $ | 458,614 | $ | 407,125 | 270,707 | ||||||||||||||||
|
Credit
|
127,153 | 104,407 | 367,779 | 164,669 | 134,810 | 443,450 | ||||||||||||||||||||
|
Currencies
|
87,959 | 70,273 | 222,706 | 77,223 | 62,413 | 171,760 | ||||||||||||||||||||
|
Commodities
|
36,689 | 41,666 | 70,890 | 47,234 | 48,163 | 73,010 | ||||||||||||||||||||
|
Equities
|
65,815 | 51,948 | 289,059 | 67,559 | 53,207 | 237,625 | ||||||||||||||||||||
|
Subtotal
|
$ | 780,761 | $ | 690,808 | 1,222,713 | $ | 815,299 | $ | 705,718 | 1,196,552 | ||||||||||||||||
|
Derivatives accounted for as hedges
|
||||||||||||||||||||||||||
|
Interest rates
|
$ | 23,396 | $ | 33 | 997 | $ | 19,563 | $ | 1 | 806 | ||||||||||||||||
|
Currencies
|
6 | 162 | 72 | 8 | 47 | 58 | ||||||||||||||||||||
|
Subtotal
|
$ | 23,402 | $ | 195 | 1,069 | $ | 19,571 | $ | 48 | 864 | ||||||||||||||||
|
Gross fair value of derivatives
|
$ | 804,163 | $ | 691,003 | 1,223,782 | $ | 834,870 | $ | 705,766 | 1,197,416 | ||||||||||||||||
|
Counterparty
netting
1
|
(620,553 | ) | (620,553 | ) | (635,014 | ) | (635,014 | ) | ||||||||||||||||||
|
Cash collateral
netting
2
|
(110,317 | ) | (15,720 | ) | (124,603 | ) | (14,743 | ) | ||||||||||||||||||
|
Fair value included in financial instruments owned
|
$ | 73,293 | $ | 75,253 | ||||||||||||||||||||||
|
Fair value included in financial instruments sold, but not
yet purchased
|
$ | 54,730 | $ | 56,009 | ||||||||||||||||||||||
| 1. | Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements. |
| 2. | Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements. |
127
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation
Techniques for Derivatives
See Note 5 for an overview of the firm’s fair value
measurement policies and the fair value hierarchy.
Level 1
Derivatives
Exchange-traded
derivatives fall within level 1 if they are actively traded
and are valued at their quoted market price.
Level 2
Derivatives
Level 2 derivatives include
exchange-traded
derivatives that are not actively traded and OTC derivatives for
which all significant valuation inputs are corroborated by
market evidence.
Level 2 exchange-traded derivatives are valued using models
that calibrate to market-clearing levels of OTC derivatives.
Inputs to the valuations of level 2 OTC derivatives can be
verified to
market-clearing
transactions, broker or dealer quotations or other alternative
pricing sources with reasonable levels of price transparency.
Consideration is given to the nature of the quotations
(e.g., indicative or firm) and the relationship of recent
market activity to the prices provided from alternative pricing
sources.
Where models are used, the selection of a particular model to
value an OTC derivative depends on the contractual terms of and
specific risks inherent in the instrument, as well as the
availability of pricing information in the market. Valuation
models require a variety of inputs, including contractual terms,
market prices, yield curves, credit curves, measures of
volatility, prepayment rates, loss severity rates and
correlations of such inputs. For OTC derivatives that trade in
liquid markets, model selection does not involve significant
management judgment because outputs of models can be calibrated
to
market-clearing
levels.
Price transparency of OTC derivatives can generally be
characterized by product type.
Interest Rate.
In general, the prices and
other inputs used to value interest rate derivatives are
transparent, even for
long-dated
contracts. Interest rate swaps and options denominated in the
currencies of leading industrialized nations are characterized
by high
trading volumes and tight bid/offer spreads. Interest rate
derivatives that reference indices, such as an inflation index,
or the shape of the yield curve
(e.g., 10-year
swap rate vs.
2-year
swap
rate), are more complex and are therefore less transparent, but
the prices and other inputs are generally observable.
Credit.
Price transparency for credit default
swaps, including both single names and baskets of credits,
varies by market and underlying reference entity or obligation.
Credit default swaps that reference indices, large corporates
and major sovereigns generally exhibit the most price
transparency. For credit default swaps with other underliers,
price transparency varies based on credit rating, the cost of
borrowing the underlying reference obligations, and the
availability of the underlying reference obligations for
delivery upon the default of the issuer. Credit default swaps
that reference loans,
asset-backed
securities and emerging market debt instruments tend to be less
transparent than those that reference corporate bonds. In
addition, more complex credit derivatives, such as those
sensitive to the correlation between two or more underlying
reference obligations, generally have less price transparency.
Currency.
Prices for currency derivatives
based on the exchange rates of leading industrialized nations,
including those with longer tenors, are generally transparent.
The primary difference between the transparency of developed and
emerging market currency derivatives is that emerging markets
tend to be observable for contracts with shorter tenors.
Commodity.
Commodity derivatives include
transactions referenced to energy (e.g., oil and natural
gas), metals (e.g., precious and base) and soft commodities
(e.g., agricultural). Price transparency varies based on
the underlying commodity, delivery location, tenor and product
quality (e.g., diesel fuel compared to unleaded gasoline).
In general, price transparency for commodity derivatives is
greater for contracts with shorter tenors and contracts that are
more closely aligned with major
and/or
benchmark commodity indices.
128
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity.
Price transparency for equity
derivatives varies by market and underlier. Options on indices
and the common stock of corporates included in major equity
indices exhibit the most price transparency.
Exchange-traded
and OTC equity derivatives generally have observable market
prices, except for contracts with long tenors or reference
prices that differ significantly from current market prices.
More complex equity derivatives, such as those sensitive to the
correlation between two or more individual stocks, generally
have less price transparency.
Liquidity is essential to observability of all product types. If
transaction volumes decline, previously transparent prices and
other inputs may become unobservable. Conversely, even highly
structured products may at times have trading volumes large
enough to provide observability of prices and other inputs.
Level 3
Derivatives
Level 3 OTC derivatives are valued using models which
utilize observable level 1
and/or
level 2 inputs, as well as unobservable level 3 inputs.
| • | For the majority of the firm’s interest rate and currency derivatives classified within level 3, the significant unobservable inputs are correlations of certain currencies and interest rates (e.g., the correlation of Japanese yen foreign exchange rates to U.S. dollar interest rates). |
| • | For credit derivatives classified within level 3, significant level 3 inputs include long-dated credit |
| and funding spreads as well as certain correlation inputs required to value credit and mortgage derivatives (e.g., the likelihood of default of the underlying reference obligations relative to one another). | |
| • | For level 3 equity derivatives, significant level 3 inputs generally include equity volatility inputs for options that are very long-dated and/or have strike prices that differ significantly from current market prices. In addition, the valuation of certain structured trades requires the use of level 3 inputs for the correlation of the price performance for two or more individual stocks. |
| • | For level 3 commodity derivatives, significant level 3 inputs include volatilities for options with strike prices that differ significantly from current market prices and prices for certain products for which the product quality is not aligned with benchmark indices. |
Subsequent to the initial valuation of a level 3 OTC
derivative, the firm updates the level 1 and level 2
inputs to reflect observable market changes and any resulting
gains and losses are recorded in level 3. Level 3
inputs are 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 by
reference to market transactions, it is possible that a
different valuation model could produce a materially different
estimate of fair value.
129
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Valuation
Adjustments
Valuation adjustments are integral to determining the fair value
of derivatives and are used to adjust the mid-market valuations,
produced by derivative pricing models, to the appropriate exit
price valuation. These adjustments incorporate bid/offer
spreads, the cost of liquidity on large or illiquid positions
and credit valuation adjustments (CVA) which account for the
credit risk inherent in derivative portfolios. Market-based
inputs are generally used when calibrating valuation adjustments
to
market-clearing
levels.
In addition, for derivatives that include significant
unobservable inputs, the firm makes model or exit
price adjustments to account for the valuation uncertainty
present in the transaction.
Fair Value of
Derivatives by Level
The tables below present the fair value of derivatives on a
gross basis by level and major product type. Gross fair values
in the tables below exclude the effects of both netting under
enforceable netting agreements and netting of cash received or
posted under credit support agreements both in and across levels
of the fair value hierarchy, and therefore are not
representative of the firm’s exposure.
| Derivative Assets at Fair Value as of December 2010 | ||||||||||||||||||||||
|
Cross-Level
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Netting | Total | |||||||||||||||||
|
Interest rates
|
$ | 49 | $ | 486,037 | $ | 455 | $ | — | $ | 486,541 | ||||||||||||
|
Credit
|
— | 115,519 | 11,634 | — | 127,153 | |||||||||||||||||
|
Currencies
|
— | 86,158 | 1,807 | — | 87,965 | |||||||||||||||||
|
Commodities
|
— | 34,511 | 2,178 | — | 36,689 | |||||||||||||||||
|
Equities
|
44 | 64,267 | 1,504 | — | 65,815 | |||||||||||||||||
|
Gross fair value of derivative assets
|
$ | 93 | $ | 786,492 | $ | 17,578 | — | $ | 804,163 | |||||||||||||
|
Counterparty
netting
1
|
— | (613,979 | ) | (4,806 | ) | (1,768 | ) 3 | (620,553 | ) | |||||||||||||
|
Subtotal
|
$ | 93 | $ | 172,513 | $ | 12,772 | $ | (1,768 | ) | $ | 183,610 | |||||||||||
|
Cash collateral
netting
2
|
(110,317 | ) | ||||||||||||||||||||
|
Fair value included in financial instruments owned
|
$ | 73,293 | ||||||||||||||||||||
| Derivative Liabilities at Fair Value as of December 2010 | ||||||||||||||||||||||
|
Cross-Level
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Netting | Total | |||||||||||||||||
|
Interest rates
|
$ | 18 | $ | 422,267 | $ | 262 | $ | — | $ | 422,547 | ||||||||||||
|
Credit
|
— | 99,813 | 4,594 | — | 104,407 | |||||||||||||||||
|
Currencies
|
— | 69,726 | 709 | — | 70,435 | |||||||||||||||||
|
Commodities
|
— | 39,709 | 1,957 | — | 41,666 | |||||||||||||||||
|
Equities
|
27 | 49,427 | 2,494 | — | 51,948 | |||||||||||||||||
|
Gross fair value of derivative liabilities
|
$ | 45 | $ | 680,942 | $ | 10,016 | — | $ | 691,003 | |||||||||||||
|
Counterparty
netting
1
|
— | (613,979 | ) | (4,806 | ) | (1,768 | ) 3 | (620,553 | ) | |||||||||||||
|
Subtotal
|
$ | 45 | $ | 66,963 | $ | 5,210 | $ | (1,768 | ) | $ | 70,450 | |||||||||||
|
Cash collateral
netting
2
|
(15,720 | ) | ||||||||||||||||||||
|
Fair value included in financial instruments sold, but not
yet purchased
|
$ | 54,730 | ||||||||||||||||||||
| 1. | Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements. |
| 2. | Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements. |
| 3. | Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements. |
130
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Derivative Assets at Fair Value as of December 2009 | ||||||||||||||||||||||
|
Cross-Level
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Netting | Total | |||||||||||||||||
|
Interest rates
|
$ | — | $ | 477,767 | $ | 410 | $ | — | $ | 478,177 | ||||||||||||
|
Credit
|
— | 151,503 | 13,166 | — | 164,669 | |||||||||||||||||
|
Currencies
|
— | 76,693 | 538 | — | 77,231 | |||||||||||||||||
|
Commodities
|
— | 45,229 | 2,005 | — | 47,234 | |||||||||||||||||
|
Equities
|
161 | 65,687 | 1,711 | — | 67,559 | |||||||||||||||||
|
Gross fair value of derivative assets
|
$ | 161 | $ | 816,879 | $ | 17,830 | — | $ | 834,870 | |||||||||||||
|
Counterparty
netting
1
|
— | (626,063 | ) | (6,234 | ) | (2,717 | ) 3 | (635,014 | ) | |||||||||||||
|
Subtotal
|
$ | 161 | $ | 190,816 | $ | 11,596 | $ | (2,717 | ) | $ | 199,856 | |||||||||||
|
Cash collateral
netting
2
|
(124,603 | ) | ||||||||||||||||||||
|
Fair value included in financial instruments owned
|
$ | 75,253 | ||||||||||||||||||||
| Derivative Liabilities at Fair Value as of December 2009 | ||||||||||||||||||||||
|
Cross-Level
|
||||||||||||||||||||||
| in millions | Level 1 | Level 2 | Level 3 | Netting | Total | |||||||||||||||||
|
Interest rates
|
$ | — | $ | 406,639 | $ | 487 | $ | — | $ | 407,126 | ||||||||||||
|
Credit
|
— | 128,026 | 6,784 | — | 134,810 | |||||||||||||||||
|
Currencies
|
— | 62,132 | 328 | — | 62,460 | |||||||||||||||||
|
Commodities
|
— | 46,062 | 2,101 | — | 48,163 | |||||||||||||||||
|
Equities
|
126 | 50,147 | 2,934 | — | 53,207 | |||||||||||||||||
|
Gross fair value of derivative liabilities
|
$ | 126 | $ | 693,006 | $ | 12,634 | — | $ | 705,766 | |||||||||||||
|
Counterparty
netting
1
|
— | (626,063 | ) | (6,234 | ) | (2,717 | ) 3 | (635,014 | ) | |||||||||||||
|
Subtotal
|
$ | 126 | $ | 66,943 | $ | 6,400 | $ | (2,717 | ) | $ | 70,752 | |||||||||||
|
Cash collateral
netting
2
|
(14,743 | ) | ||||||||||||||||||||
|
Fair value included in financial instruments sold, but not
yet purchased
|
$ | 56,009 | ||||||||||||||||||||
| 1. | Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements. |
| 2. | Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements. |
| 3. | Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements. |
131
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Level 3
Rollforward
If a derivative was transferred to level 3 during a
reporting period, its entire gain or loss for the period is
included in level 3. Transfers between levels are reported
at the beginning of the reporting period in which they occur.
Accordingly, the table does not include gains or losses that
were reported in level 3
in prior periods for derivatives that were transferred out of
level 3 prior to the end of the period.
The table below presents changes in fair value for all
derivatives categorized as level 3 as of the end of the
period.
| Level 3 Derivative Assets and Liabilities at Fair Value | ||||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||||
|
Asset/
|
gains/(losses)
|
Net
|
Net
|
Asset/
|
||||||||||||||||||||||
|
(liability)
|
Net
|
relating to
|
purchases,
|
transfers
|
(liability)
|
|||||||||||||||||||||
|
balance,
|
realized
|
instruments
|
issuances
|
in
and/or
|
balance,
|
|||||||||||||||||||||
|
beginning
|
gains/
|
still held at year
|
and
|
(out) of
|
end of
|
|||||||||||||||||||||
| in millions | of year | (losses) | end | settlements | level 3 | year | ||||||||||||||||||||
|
Year Ended December 2010
|
||||||||||||||||||||||||||
|
Interest rates − net
|
$ | (71 | ) | $ | (79 | ) | $ | 156 | $ | (118 | ) | $ | 306 | $ | 194 | |||||||||||
|
Credit − net
|
6,366 | 8 | 4,393 | 1 | (2,663 | ) | (1,064 | ) | 7,040 | |||||||||||||||||
|
Currencies − net
|
215 | (83 | ) | 317 | 110 | 539 | 1,098 | |||||||||||||||||||
|
Commodities − net
|
(90 | ) | 48 | 312 | 33 | (83 | ) | 220 | ||||||||||||||||||
|
Equities − net
|
(1,224 | ) | (38 | ) | 6 | 43 | 223 | (990 | ) | |||||||||||||||||
|
Total derivatives − net
|
$ | 5,196 | $ | (144 | ) | $ | 5,184 | $ | (2,595 | ) | $ | (79 | ) | $ | 7,562 | |||||||||||
|
Year Ended December 2009
|
||||||||||||||||||||||||||
|
Total derivatives − net
|
$ | 3,315 | $ | 759 | $ | (1,018 | ) | $ | 2,333 | $ | (193 | ) | $ | 5,196 | ||||||||||||
| 1. | Primarily attributable to lower interest rates, which are level 2 inputs, underlying certain credit derivatives. These unrealized gains were substantially offset by unrealized losses on currency, interest rate and credit derivatives categorized in level 2, which economically hedge level 3 derivatives. |
Significant transfers in and out of level 3 during the year
ended December 2010 included:
| • | Interest rates — net and Currencies — net: net transfer into level 3 of $306 million and $539 million, respectively, principally due to reduced transparency of the correlation inputs used to value these financial instruments. |
| • | Credit — net: net transfer out of level 3 of $1.06 billion, principally due to improved transparency of correlation inputs used to value certain mortgage derivatives. |
There were no significant transfers in and out of level 3
during the year ended December 2009.
Impact of Credit
Spreads on Derivatives
On an ongoing basis, the firm realizes gains or losses relating
to changes in credit risk on derivatives 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 derivatives
were $68 million, $572 million, $(137) million,
and $(188) million for the years ended December 2010,
December 2009, November 2008 and one month ended
December 2008, respectively.
Bifurcated
Embedded Derivatives
The table below presents derivatives, primarily equity and
interest rate products, that have been bifurcated from their
related borrowings. These derivatives are recorded at fair value
and included in “Unsecured
short-term
borrowings” and “Unsecured
long-term
borrowings.” See Note 8 for further information.
| As of December | ||||||||||
| in millions, except number of contracts | 2010 | 2009 | ||||||||
|
Fair value of assets
|
$ | 383 | $ | 478 | ||||||
|
Fair value of liabilities
|
267 | 382 | ||||||||
|
Net
|
$ | 116 | $ | 96 | ||||||
|
Number of contracts
|
338 | 297 | ||||||||
132
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OTC
Derivatives
The following tables present the fair values of OTC derivative
assets and liabilities by tenor and by product type. In the
following tables, tenor is based
on expected duration for
mortgage-related
credit derivatives and generally on remaining contractual
maturity for other derivatives.
| in millions | OTC Derivatives as of December 2010 | |||||||||||||||||
|
Assets
|
0 - 12
|
1 - 5
|
5 Years or
|
|||||||||||||||
| Product Type | Months | Years | Greater | Total | ||||||||||||||
|
Interest rates
|
$ | 7,137 | $ | 34,384 | $ | 60,750 | $ | 102,271 | ||||||||||
|
Credit
|
2,777 | 16,145 | 13,525 | 32,447 | ||||||||||||||
|
Currencies
|
9,968 | 10,696 | 14,868 | 35,532 | ||||||||||||||
|
Commodities
|
5,664 | 5,996 | 248 | 11,908 | ||||||||||||||
|
Equities
|
4,795 | 10,942 | 7,037 | 22,774 | ||||||||||||||
|
Netting across product
types
1
|
(2,937 | ) | (5,513 | ) | (5,077 | ) | (13,527 | ) | ||||||||||
|
Subtotal
|
$ | 27,404 | $ | 72,650 | $ | 91,351 | $ | 191,405 | ||||||||||
|
Cross maturity
netting
2
|
(15,396 | ) | ||||||||||||||||
|
Cash collateral
netting
3
|
(110,317 | ) | ||||||||||||||||
|
Total
|
$ | 65,692 | ||||||||||||||||
|
Liabilities
|
0 - 12
|
1 - 5
|
5 Years or
|
|||||||||||||||
| Product Type | Months | Years | Greater | Total | ||||||||||||||
|
Interest rates
|
$ | 4,470 | $ | 14,072 | $ | 19,760 | $ | 38,302 | ||||||||||
|
Credit
|
1,024 | 4,862 | 3,816 | 9,702 | ||||||||||||||
|
Currencies
|
8,036 | 5,219 | 4,986 | 18,241 | ||||||||||||||
|
Commodities
|
7,279 | 7,838 | 2,528 | 17,645 | ||||||||||||||
|
Equities
|
3,962 | 4,977 | 3,750 | 12,689 | ||||||||||||||
|
Netting across product
types
1
|
(2,937 | ) | (5,513 | ) | (5,077 | ) | (13,527 | ) | ||||||||||
|
Subtotal
|
$ | 21,834 | $ | 31,455 | $ | 29,763 | $ | 83,052 | ||||||||||
|
Cross maturity
netting
2
|
(15,396 | ) | ||||||||||||||||
|
Cash collateral
netting
3
|
(15,720 | ) | ||||||||||||||||
|
Total
|
$ | 51,936 | ||||||||||||||||
| 1. | Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category under 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. |
| 2. | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories under enforceable netting agreements. |
| 3. | Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements. |
133
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| in millions | OTC Derivatives as of December 2009 | |||||||||||||||||
|
Assets
|
0 - 12
|
1 - 5
|
5 Years or
|
|||||||||||||||
| Product Type | Months | Years | Greater | Total | ||||||||||||||
|
Interest rates
|
$ | 14,266 | $ | 37,146 | $ | 58,404 | $ | 109,816 | ||||||||||
|
Credit
|
5,743 | 20,465 | 17,419 | 43,627 | ||||||||||||||
|
Currencies
|
9,870 | 12,789 | 12,650 | 35,309 | ||||||||||||||
|
Commodities
|
6,201 | 7,546 | 555 | 14,302 | ||||||||||||||
|
Equities
|
6,742 | 8,818 | 7,115 | 22,675 | ||||||||||||||
|
Netting across product
types
1
|
(3,480 | ) | (6,256 | ) | (3,671 | ) | (13,407 | ) | ||||||||||
|
Subtotal
|
$ | 39,342 | $ | 80,508 | $ | 92,472 | $ | 212,322 | ||||||||||
|
Cross maturity
netting
2
|
(19,297 | ) | ||||||||||||||||
|
Cash collateral
netting
3
|
(124,603 | ) | ||||||||||||||||
|
Total
|
$ | 68,422 | ||||||||||||||||
|
Liabilities
|
0 - 12
|
1 - 5
|
5 Years or
|
|||||||||||||||
| Product Type | Months | Years | Greater | Total | ||||||||||||||
|
Interest rates
|
$ | 7,042 | $ | 12,831 | $ | 19,014 | $ | 38,887 | ||||||||||
|
Credit
|
2,487 | 7,168 | 4,113 | 13,768 | ||||||||||||||
|
Currencies
|
12,202 | 4,003 | 4,208 | 20,413 | ||||||||||||||
|
Commodities
|
6,922 | 7,161 | 1,996 | 16,079 | ||||||||||||||
|
Equities
|
4,213 | 3,746 | 3,802 | 11,761 | ||||||||||||||
|
Netting across product
types
1
|
(3,480 | ) | (6,256 | ) | (3,671 | ) | (13,407 | ) | ||||||||||
|
Subtotal
|
$ | 29,386 | $ | 28,653 | $ | 29,462 | $ | 87,501 | ||||||||||
|
Cross maturity
netting
2
|
(19,297 | ) | ||||||||||||||||
|
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 under 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. |
| 2. | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories under enforceable netting agreements. |
| 3. | Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements. |
134
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Derivatives with
Credit-Related
Contingent Features
Contingent Features
Certain of the firm’s derivatives have been transacted
under bilateral agreements with counterparties who may require
the firm to post collateral or terminate the transactions based
on changes in the firm’s credit ratings. The table below
presents the aggregate fair value of net derivative liabilities
under such agreements (excluding application of collateral
posted to reduce these liabilities), the related aggregate fair
value of the assets posted as collateral, and the additional
collateral or termination payments that could have been called
at the reporting date by counterparties in the event of a
one-notch
and
two-notch
downgrade in the firm’s credit ratings.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Net derivative liabilities under bilateral agreements
|
$ | 23,843 | $ | 20,848 | ||||||
|
Collateral posted
|
16,640 | 14,475 | ||||||||
|
Additional collateral or termination payments for a
one-notch
downgrade
|
1,353 | 1,117 | ||||||||
|
Additional collateral or termination payments for a
two-notch
downgrade
|
2,781 | 2,364 | ||||||||
Credit
Derivatives
The firm enters into a broad array of credit derivatives in
locations around the world to facilitate client transactions and
to manage the credit risk associated with market-making and
investing and lending activities. Credit derivatives are
actively managed based on the firm’s net risk position.
Credit derivatives are individually negotiated contracts and can
have various settlement and payment conventions. Credit events
include failure to pay, bankruptcy, acceleration of
indebtedness, restructuring, repudiation and dissolution of the
reference 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 the issuer (reference entity) of the reference
obligations suffers a credit event. The buyer of protection pays
an initial or periodic premium to the seller and receives
protection for the period of the contract. If there is no credit
event, as defined in the contract, the seller of protection
makes no payments to the buyer of protection. However, if a
credit event occurs, the seller of protection is required to
make a payment, which is calculated in accordance with the terms
of the contract, to the buyer of protection.
Credit Indices, Baskets and Tranches.
Credit
derivatives may reference a basket of single-name credit default
swaps or a
broad-based
index. If a credit event occurs in one of the underlying
reference obligations, the protection seller pays the protection
buyer. The payment is typically a
pro-rata
portion of the transaction’s total notional amount based on
the underlying defaulted reference obligation. In certain
transactions, the credit risk of a basket or index is separated
into various portions (tranches) each having different levels of
subordination. The most junior tranches cover initial defaults
and once losses exceed the notional amount of these junior
tranches, any excess loss 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.
135
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 but not the obligation 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.
The firm economically hedges its exposure to written credit
derivatives primarily by entering into offsetting purchased
credit derivatives with identical underlyings. Substantially all
of the firm’s purchased credit derivative transactions are
with financial institutions and are subject to stringent
collateral thresholds. 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 2010, written and purchased credit
derivatives had total gross notional amounts of
$2.05 trillion and $2.19 trillion, respectively, for
total
net notional purchased protection of $140.63 billion. As of
December 2009, written and purchased credit derivatives had
total gross notional amounts of $2.54 trillion and
$2.71 trillion, respectively, for total net notional
purchased protection of $164.13 billion.
The table below presents certain information about credit
derivatives. In the table below:
| • | Fair values exclude the effects of both netting under enforceable netting agreements and netting of cash received or posted under credit support agreements, and therefore are not representative of the firm’s exposure; |
| • | Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives; and |
| • | The credit spread on the underlying, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower. |
|
Maximum Payout/Notional
|
||||||||||||||||||||||||||||||||||||||
|
Maximum Payout/Notional Amount
|
Amount of Purchased
|
Fair Value of
|
||||||||||||||||||||||||||||||||||||
| of Written Credit Derivatives by Tenor | Credit Derivatives | Written Credit Derivatives | ||||||||||||||||||||||||||||||||||||
|
Offsetting
|
Other
|
|||||||||||||||||||||||||||||||||||||
|
5 Years
|
Purchased
|
Purchased
|
Net
|
|||||||||||||||||||||||||||||||||||
|
0 – 12
|
1 – 5
|
or
|
Credit
|
Credit
|
Asset/
|
|||||||||||||||||||||||||||||||||
| $ in millions | Months | Years | Greater | Total | Derivatives 1 | Derivatives 2 | Asset | Liability | (Liability) | |||||||||||||||||||||||||||||
|
As of December 2010
|
||||||||||||||||||||||||||||||||||||||
|
Credit spread on
underlying (basis points) |
||||||||||||||||||||||||||||||||||||||
|
0-250
|
$ | 235,798 | $ | 1,094,308 | $ | 288,851 | $ | 1,618,957 | $ | 1,511,113 | $ | 232,506 | $ | 32,071 | $ | 14,780 | $ | 17,291 | ||||||||||||||||||||
|
251-500
|
14,412 | 144,448 | 52,072 | 210,932 | 183,613 | 36,713 | 7,368 | 7,739 | (371 | ) | ||||||||||||||||||||||||||||
|
501-1,000
|
6,384 | 89,212 | 33,553 | 129,149 | 110,019 | 18,686 | 2,571 | 11,256 | (8,685 | ) | ||||||||||||||||||||||||||||
|
Greater than 1,000
|
11,721 | 63,982 | 12,022 | 87,725 | 70,945 | 23,795 | 483 | 33,670 | (33,187 | ) | ||||||||||||||||||||||||||||
|
Total
|
$ | 268,315 | $ | 1,391,950 | $ | 386,498 | $ | 2,046,763 | $ | 1,875,690 | $ | 311,700 | $ | 42,493 | $ | 67,445 | $ | (24,952 | ) | |||||||||||||||||||
|
As of December 2009
|
||||||||||||||||||||||||||||||||||||||
|
Credit spread on
underlying (basis points) |
||||||||||||||||||||||||||||||||||||||
|
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 | ) | |||||||||||||||||||
| 1. | Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent they economically hedge written credit derivatives with identical underlyings. |
| 2. | 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. |
136
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hedge
Accounting
The firm applies hedge accounting for (i) certain interest
rate swaps used to manage the interest rate exposure of certain
fixed-rate unsecured
long-term
and
short-term
borrowings and certain fixed-rate certificates of deposit and
(ii) certain foreign currency forward contracts and foreign
currency-denominated
debt used to manage foreign currency exposures on the
firm’s net investment in certain
non-U.S. operations.
To qualify for hedge accounting, the derivative hedge must be
highly effective at reducing the risk from the exposure being
hedged. Additionally, the firm must formally document the
hedging relationship at inception and test the hedging
relationship at least on a quarterly basis to ensure the
derivative hedge continues to be highly effective over the life
of the hedging relationship.
Interest Rate
Hedges
The firm designates certain interest rate swaps as fair value
hedges. These interest rate swaps hedge changes in fair value
attributable to the relevant benchmark interest rate
(e.g., London Interbank Offered Rate (LIBOR)), effectively
converting a substantial portion of fixed-rate obligations into
floating-rate obligations.
The firm applies the
“long-haul
method” in assessing the effectiveness of its fair value
hedging relationships in achieving offsetting changes in the
fair values of the hedging instrument and the risk being hedged
(i.e., interest rate risk).
During the three months ended March 2010, the firm changed
its method of prospectively and retrospectively assessing the
effectiveness of all of its fair value hedging relationships
from a
dollar-offset
method, which is a
non-statistical
method, to regression analysis, which is a statistical method.
An interest rate swap is considered highly effective in
offsetting changes in fair value attributable to changes in the
hedged risk when the regression analysis results in a
coefficient of determination of 80% or greater and a slope
between 80% and 125%.
The
dollar-offset
method compared 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. The prospective
dollar-offset
assessment used scenario analyses to test hedge effectiveness
through simulations of numerous parallel and slope shifts of the
relevant yield curve. Parallel shifts changed the interest rate
of all maturities by identical amounts. Slope shifts changed 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
was considered effective if the fair value of the hedging
instrument and the hedged item changed inversely within a range
of 80% to 125%.
For qualifying fair value hedges, gains or losses on derivatives
are included in “Interest expense.” 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 resulting from hedge ineffectiveness are
included in “Interest expense.” See Note 23 for
further information about interest income and interest expense.
For the years ended December 2010 and December 2009
and one month ended December 2008, the gain/(loss)
recognized on interest rate derivatives accounted for as hedges
was $1.62 billion, $(10.07) billion and
$3.59 billion, respectively, and the related gain/(loss)
recognized on the hedged borrowings and bank deposits was
$(3.45) billion, $9.95 billion and
$(3.53) billion, respectively. The hedge ineffectiveness
recognized on these derivatives for the year ended
December 2010 was a loss of $1.84 billion. This loss
consisted primarily of the amortization of prepaid credit
spreads, and was not material for the year ended
December 2009 and one month ended December 2008. The
gain/(loss) excluded from the assessment of hedge effectiveness
was not material for the year ended December 2010 and one
month ended December 2008 and was a loss of
$1.23 billion for the year ended December 2009.
137
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net Investment
Hedges
The firm seeks to reduce the impact of fluctuations in foreign
exchange rates on its net investment in certain
non-U.S. operations
through the use of foreign currency forward contracts and
foreign
currency-denominated
debt. For foreign currency forward contracts designated as
hedges, the effectiveness of the hedge is assessed based on the
overall changes in the fair value of the forward contracts
(i.e., based on changes in forward rates). For foreign
currency-denominated
debt designated as a hedge, the effectiveness of the hedge is
assessed based on changes in spot rates.
For qualifying net investment hedges, the gains or losses on the
hedging instruments, to the extent effective, are included in
the consolidated statements of comprehensive income.
The table below presents the gains/(losses) from net investment
hedging. The gains/(losses) below are included in “Currency
translation adjustment, net of tax” in the consolidated
statements of comprehensive income/(loss).
|
One Month
|
||||||||||||||
| Year Ended December | Ended | |||||||||||||
| in millions | 2010 | 2009 | December 2008 | |||||||||||
|
Currency hedges
|
$ | (261 | ) | $ | (495 | ) | $ | (212 | ) | |||||
|
Foreign currency-
denominated debt |
(498 | ) | 106 | (186 | ) | |||||||||
The gain/(loss) related to ineffectiveness and the gain/(loss)
reclassified to earnings from accumulated other comprehensive
income was not material for the years ended December 2010
and December 2009 and one month ended December 2008.
As of December 2010 and December 2009, the firm had
designated $3.88 billion and $3.38 billion,
respectively, of foreign
currency-denominated
debt, included in “Unsecured
long-term
borrowings” and “Unsecured
short-term
borrowings,” as hedges of net investments in
non-U.S. subsidiaries.
Other Financial
Assets and Financial
Liabilities at Fair Value
Liabilities at Fair Value
In addition to all cash and derivative instruments included in
“Financial instruments owned, at fair value” and
“Financial instruments sold, but not yet purchased, at fair
value,” the firm has elected to account for certain of its
other financial assets and financial liabilities at fair value
under the fair value option.
The primary reasons for electing the fair value option are to:
| • | reflect economic events in earnings on a timely basis; |
| • | mitigate volatility in earnings from using different measurement attributes (e.g., transfers of financial instruments owned accounted for as financings are recorded at fair value whereas the related secured financing would be recorded on an accrual basis absent electing the fair value option); and |
| • | address simplification and cost-benefit considerations (e.g., accounting for hybrid financial instruments at fair value in their entirety versus bifurcation of embedded derivatives and hedge accounting for debt hosts). |
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, the
derivative 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 hedges. If the firm does not elect to
bifurcate, the entire hybrid financial instrument is accounted
for at fair value under the fair value option.
138
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other financial assets and financial liabilities accounted for
at fair value under the fair value option include:
| • | resale and repurchase agreements; |
| • | securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution; |
| • | certain other secured financings, primarily transfers of assets 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 short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; |
| • | certain unsecured long-term borrowings, including prepaid commodity transactions and certain hybrid financial instruments; |
| • | certain receivables from customers and counterparties, including certain margin loans, transfers of assets accounted for as secured loans rather than purchases and prepaid variable share forwards; |
| • | certain insurance and reinsurance contract assets and liabilities and certain guarantees; |
| • | certain deposits issued by the firm’s bank subsidiaries, as well as securities held by Goldman Sachs Bank USA (GS Bank USA); |
| • | certain subordinated liabilities issued by consolidated VIEs; 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. |
These financial assets and financial liabilities at fair value
are generally valued based on discounted cash flow techniques,
which incorporate inputs with reasonable levels of price
transparency, and are generally classified as level 2
because the inputs are observable. Valuation adjustments may be
made for counterparty and the firm’s credit quality.
Significant inputs for each category of other financial assets
and financial liabilities at fair value are as follows:
Resale and Repurchase Agreements and Securities Borrowed and
Loaned.
The significant inputs to the valuation
of resale and repurchase agreements and securities borrowed and
loaned are the amount and timing of expected future cash flows,
interest rates and collateral funding spreads. See Note 9
for further information.
Other Secured Financings.
The significant
inputs to the valuation of other secured financings at fair
value are the amount and timing of expected future cash flows,
interest rates, the fair value of the collateral delivered by
the firm (which is determined using the amount and timing of
expected future cash flows, market yields and recovery
assumptions), the frequency of additional collateral calls and
the credit spreads of the firm. See Note 9 for further
information.
Unsecured
Short-term
and
Long-term
Borrowings.
The significant inputs to the
valuation of unsecured
short-term
and
long-term
borrowings at fair value are the amount and timing of expected
future cash flows, interest rates, the credit spreads of the
firm, as well as commodity prices in the case of prepaid
commodity transactions and, for certain hybrid financial
instruments, equity prices, inflation rates and index levels.
See Notes 15 and 16 for further information.
Receivables from Customers and
Counterparties.
The significant inputs to the
valuation of certain receivables from customers and
counterparties are commodity prices, interest rates and the
amount and timing of expected future cash flows.
Insurance and Reinsurance Contracts.
Insurance
and reinsurance contracts at fair value are included in
“Receivables from customers and counterparties” and
“Other liabilities and accrued expenses.” These
contracts are valued using market transactions and other market
evidence where possible, including
market-based
inputs to models, calibration to
market-clearing
transactions or other alternative pricing sources with
reasonable levels of price transparency. Significant
level 2 inputs typically include interest rates and
inflation risk. Significant level 3 inputs typically
include mortality or funding benefit assumptions. When
unobservable inputs to a valuation model are significant to the
fair value measurement of an instrument, the instrument is
classified in level 3.
139
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deposits.
The significant inputs to the
valuation of deposits are interest rates.
Gains and Losses
on Other Financial Assets and Financial Liabilities at Fair
Value
The “Fair Value Option” columns in the table below
present the gains and losses recognized as a result of the firm
electing to apply the fair value option to certain financial
assets and financial liabilities. These gains and losses are
included in “Market making” and “Other principal
transactions” revenues.
The amounts in the table exclude contractual interest, which is
included in “Interest income” and “Interest
expense,” for all instruments other than hybrid financial
instruments. See Note 23 for further information about
interest income and interest expense. The table also excludes
gains and losses related to financial instruments owned, at fair
value and financial instruments sold, but not yet purchased, at
fair value.
Included in the “Other” columns in the table below are:
| • | Gains and losses on the embedded derivative component of hybrid financial instruments included |
| in unsecured short-term borrowings and unsecured long-term borrowings. These gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account for the entire hybrid instrument at fair value. | |
| • | Gains and losses on secured financings related to transfers of assets accounted for as financings rather than sales. These gains and losses are offset by gains and losses on the related instruments included in “Financial instruments owned, at fair value” and “Receivables from customers and counterparties.” |
| • | Gains and losses on receivables from customers and counterparties related to transfers of assets accounted for as receivables rather than purchases. These gains and losses are offset by gains and losses on the related financial instruments included in “Other secured financings.” |
| • | Gains and losses on subordinated liabilities issued by consolidated VIEs. These gains and losses are offset by gains and losses on the financial assets held by the consolidated VIEs. |
| Gains/(Losses) on Financial Assets and Financial Liabilities at Fair Value | ||||||||||||||||||||||||||||||||||
| Year Ended | One Month Ended | |||||||||||||||||||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2008 | |||||||||||||||||||||||||||||||
|
Fair
|
Fair
|
Fair
|
Fair
|
|||||||||||||||||||||||||||||||
|
Value
|
Value
|
Value
|
Value
|
|||||||||||||||||||||||||||||||
| in millions | Option | Other | Option | Other | Option | Other | Option | Other | ||||||||||||||||||||||||||
|
Receivables from
customers and counterparties 1 |
$ | (106 | ) | $ | 558 | $ | 255 | $ | — | $ | (68 | ) | $ | — | $ | (41 | ) | $ | — | |||||||||||||||
|
Other secured financings
|
(35 | ) | (996 | ) | (822 | ) | 48 | 894 | 1,290 | (2 | ) | — | ||||||||||||||||||||||
|
Unsecured
short-term
borrowings
|
33 | (1,488 | ) | (182 | ) | (3,150 | ) | 266 | 6,370 | (9 | ) | 92 | ||||||||||||||||||||||
|
Unsecured
long-term
borrowings
|
152 | (1,321 | ) | (884 | ) | (4,150 | ) | 915 | 2,420 | (104 | ) | (623 | ) | |||||||||||||||||||||
|
Other liabilities and
accrued expenses 2 |
(88 | ) | 138 | (214 | ) | — | 131 | — | 7 | — | ||||||||||||||||||||||||
|
Other
3
|
(10 | ) | — | 79 | — | (83 | ) | — | (60 | ) | — | |||||||||||||||||||||||
|
Total
|
$ | (54 | ) | $ | (3,109 | ) | $ | (1,768 | ) | $ | (7,252 | ) | $ | 2,055 | $ | 10,080 | $ | (209 | ) | $ | (531 | ) | ||||||||||||
| 1. | Primarily consists of gains/(losses) on certain transfers accounted for as receivables rather than purchases and certain reinsurance contracts. |
| 2. | Primarily consists of gains/(losses) on certain insurance and reinsurance contracts. |
| 3. | Primarily consists of gains/(losses) on resale and repurchase agreements, securities borrowed and loaned and deposits. |
140
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Excluding the gains and losses on the instruments accounted for
under the fair value option described above, “Market
making” and “Other principal transactions” in the
consolidated statements of earnings primarily represents gains
and losses on “Financial instruments owned, at fair
value” and “Financial instruments sold, but not yet
purchased, at fair value.”
Loans and Lending
Commitments
The table below presents the difference between the aggregate
fair value and the aggregate contractual principal amount for
loans and
long-term
receivables for which the fair value option was elected.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Aggregate contractual principal amount of performing loans and
long-term receivables in excess of the related fair value |
$ | 3,090 | $ | 5,660 | ||||||
|
Aggregate contractual principal amount of loans on nonaccrual
status
and/or more than 90 days past due in excess of the related fair value |
26,653 | 36,298 | ||||||||
|
Total
1
|
$ | 29,743 | $ | 41,958 | ||||||
|
Aggregate fair value of loans on nonaccrual status
and/or more than 90 days past due |
$ | 3,994 | $ | 4,278 | ||||||
| 1. | 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 2010 and December 2009, the fair value
of unfunded lending commitments for which the fair value option
was elected was a liability of $1.26 billion and
$879 million, respectively, and the related total
contractual amount of these lending commitments was
$51.20 billion and $44.05 billion, respectively.
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 $701 million and
$752 million as of December 2010 and
December 2009, respectively. Of these amounts,
$349 million and $672 million as of December 2010
and December 2009, respectively, related to unsecured
long-term
borrowings and the remainder related to
long-term
other secured financings.
Impact of Credit
Spreads on Loans and
Lending Commitments
Lending Commitments
The net gains/(losses) attributable to changes in
instrument-specific credit spreads on loans and lending
commitments for which the fair value option was elected were
$1.85 billion, $1.65 billion, $(4.61) billion and
$(2.06) billion for the years ended December 2010,
December 2009 and November 2008 and one month ended
December 2008, respectively. Changes in the fair value of
floating-rate loans and lending commitments are attributable to
changes in instrument-specific credit spreads. For fixed-rate
loans and lending commitments the firm allocates changes in fair
value between interest rate-related changes and credit
spread-related changes based on changes in interest rates.
Impact of Credit
Spreads on Borrowings
The table below presents 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 credit
spreads.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Net gains/(losses) including hedges
|
$ | 198 | $ | (1,103 | ) | $ | 1,127 | $ | (113 | ) | ||||||||
|
Net gains/(losses) excluding hedges
|
199 | (1,116 | ) | 1,196 | (114 | ) | ||||||||||||
141
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Collateralized agreements are securities purchased under
agreements to resell (resale agreements or reverse repurchase
agreements) and securities borrowed. Collateralized financings
are securities sold under agreements to repurchase (repurchase
agreements), securities loaned and other secured financings. The
firm enters into these transactions in order to, among other
things, facilitate client activities, invest excess cash,
acquire securities to cover short positions and finance certain
firm activities.
Collateralized agreements and financings are presented on a
net-by-counterparty
basis when a legal right of setoff exists. Interest on
collateralized agreements and collateralized financings is
recognized over the life of the transaction and included in
“Interest income” and “Interest expense,”
respectively. See Note 23 for further information about
interest income and interest expense.
The table below presents the carrying value of resale and
repurchase agreements and securities borrowed and loaned
transactions.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Securities purchased under agreements to
resell
1
|
$ | 188,355 | $ | 144,279 | ||||||
|
Securities
borrowed
2
|
166,306 | 189,939 | ||||||||
|
Securities sold under agreements to
repurchase
1
|
162,345 | 128,360 | ||||||||
|
Securities
loaned
2
|
11,212 | 15,207 | ||||||||
| 1. | Resale and repurchase agreements are carried at fair value under the fair value option. See Note 8 for further information about the valuation techniques and significant inputs used to determine fair value. |
| 2. | As of December 2010 and December 2009, $48.82 billion and $66.33 billion of securities borrowed and $1.51 billion and $6.19 billion of securities loaned were at fair value, respectively. |
Resale and
Repurchase Agreements
A resale agreement is a transaction in which the firm purchases
financial instruments from a seller, typically in exchange for
cash, and simultaneously enters into an agreement to resell the
same or substantially the same financial instruments to the
seller at a stated price plus accrued interest at a future date.
A repurchase agreement is a transaction in which the firm sells
financial instruments to a buyer, typically in exchange for
cash, and simultaneously enters into an agreement to repurchase
the same or substantially the same financial instruments from
the buyer at a stated price plus accrued interest at a future
date.
The financial instruments purchased or sold in resale and
repurchase agreements typically include U.S. government and
federal agency, and
investment-grade
sovereign obligations.
The firm receives financial instruments purchased under resale
agreements, makes delivery of financial instruments sold under
repurchase agreements, monitors the market value of these
financial instruments on a daily basis, and delivers or obtains
additional collateral due to changes in the market value of the
financial instruments, as appropriate. For resale agreements,
the firm typically requires delivery of collateral with a fair
value approximately equal to the carrying value of the relevant
assets in the consolidated statements of financial condition.
Even though repurchase and resale agreements involve the legal
transfer of ownership of financial instruments, they are
accounted for as financing arrangements because they require the
financial instruments to be repurchased or resold at the
maturity of the agreement. However, “repos to
maturity” are accounted for as sales. A repo to maturity is
a transaction in which the firm transfers a security that has
very little, if any, default risk under an agreement to
repurchase the security where the maturity date of the
repurchase agreement matches the maturity date of the underlying
security. Therefore, the firm effectively no longer has a
repurchase obligation and has relinquished control over the
underlying security and, accordingly, accounts for the
transaction as a sale.
The firm had no such
transactions outstanding as of December 2010 or
December 2009.
142
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Securities
Borrowed and Loaned Transactions
In a securities borrowed transaction, the firm borrows
securities from a counterparty in exchange for cash. When the
firm returns the securities, the counterparty returns the cash.
Interest is generally paid periodically over the life of the
transaction.
In a securities loaned transaction, the firm lends securities to
a counterparty typically in exchange for cash or securities, or
a letter of credit. When the counterparty returns the
securities, the firm returns the cash or securities posted as
collateral. Interest is generally paid periodically over the
life of the transaction.
The firm receives securities borrowed, makes delivery of
securities loaned, monitors the market value of these securities
on a daily basis, and delivers or obtains additional collateral
due to changes in the market value of the securities, as
appropriate. For securities borrowed transactions, the firm
typically requires delivery of collateral with a fair value
approximately equal to the carrying value of the securities
borrowed transaction.
Securities borrowed and loaned within Fixed Income, Currency and
Commodities Client Execution, are recorded at fair value under
the fair value option.
Securities borrowed and loaned within Securities Services 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 of December 2010 and December 2009, the firm had
$12.86 billion and $3.95 billion, respectively, of
securities received under resale agreements and securities
borrowed transactions that were segregated to satisfy certain
regulatory requirements. These securities are included in
“Cash and securities segregated for regulatory and other
purposes.”
Other Secured
Financings
In addition to repurchase agreements and securities lending
transactions, the firm funds certain assets through the use of
other secured financings and pledges financial instruments and
other assets as collateral in these transactions. These other
secured financings consist of:
| • | debt raised through the firm’s William Street credit extension program; |
| • | liabilities of consolidated VIEs; |
| • | transfers of assets accounted for as financings rather than sales (primarily collateralized central bank financings, pledged commodities, bank loans and mortgage whole loans); and |
| • | other structured financing arrangements. |
Other secured financings include arrangements that are
nonrecourse. As of December 2010 and December 2009,
nonrecourse other secured financings were $8.42 billion and
$10.63 billion, respectively.
The firm has elected to apply the fair value option to the
following other secured financings because the use of fair value
eliminates
non-economic
volatility in earnings that would arise from using different
measurement attributes:
| • | debt raised through the firm’s William Street credit extension program; |
| • | transfers of assets accounted for as financings rather than sales; and |
| • | certain other nonrecourse financings. |
See Note 8 for further information about other secured
financings that are accounted for at fair value. Other secured
financings that are not recorded at fair value are recorded
based on the amount of cash received plus accrued interest,
which generally approximates fair value.
143
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents information about other secured
financings. In the table below:
| • | short-term secured financings include financings maturing within one year of the financial statement date and financings that are redeemable within one year of the financial statement date at the option of the holder; |
| • | long-term secured financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates; and |
| • | long-term secured financings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. |
| As of December 2010 | As of December 2009 | |||||||||||||||||||||||||
|
U.S.
|
Non-U.S.
|
U.S.
|
Non-U.S.
|
|||||||||||||||||||||||
| in millions | Dollar | Dollar | Total | Dollar | Dollar | Total | ||||||||||||||||||||
|
Other secured financings
(short-term):
|
||||||||||||||||||||||||||
|
At fair value
|
$ | 16,404 | $ | 3,684 | $ | 20,088 | $ | 6,152 | $ | 1,077 | $ | 7,229 | ||||||||||||||
|
At amortized cost
|
99 | 4,342 | 4,441 | 321 | 5,381 | 5,702 | ||||||||||||||||||||
|
Interest
rates
1
|
2.96% | 0.71% | 3.44% | 1.57% | ||||||||||||||||||||||
|
Other secured financings
(long-term):
|
||||||||||||||||||||||||||
|
At fair value
|
9,594 | 2,112 | 11,706 | 5,899 | 2,100 | 7,999 | ||||||||||||||||||||
|
At amortized cost
|
1,565 | 577 | 2,142 | 1,383 | 1,821 | 3,204 | ||||||||||||||||||||
|
Interest
rates
1
|
2.14% | 1.94% | 1.83% | 2.30% | ||||||||||||||||||||||
|
Total
2
|
$ | 27,662 | $ | 10,715 | $ | 38,377 | $ | 13,755 | $ | 10,379 | $ | 24,134 | ||||||||||||||
|
Amount of other secured financings collateralized by:
|
||||||||||||||||||||||||||
|
Financial
instruments
3
|
$ | 27,014 | $ | 8,760 | $ | 35,774 | $ | 11,984 | $ | 6,270 | $ | 18,254 | ||||||||||||||
|
Other
assets
4
|
648 | 1,955 | 2,603 | 1,771 | 4,109 | 5,880 | ||||||||||||||||||||
| 1. | The weighted average interest rates exclude secured financings at fair value and include the effect of hedging activities. See Note 7 for further information about hedging activities. |
| 2. | Includes $8.32 billion and $9.51 billion related to transfers of assets accounted for as financings rather than sales as of December 2010 and December 2009, respectively. Such financings were collateralized by financial assets included in “Financial instruments owned, at fair value” of $8.53 billion and $9.78 billion as of December 2010 and December 2009, respectively. |
| 3. | Includes $25.63 billion and $15.89 billion of other secured financings collateralized by financial instruments owned and $10.14 billion and $2.36 billion of other secured financings collateralized by financial instruments received as collateral and repledged as of December 2010 and December 2009, respectively. |
| 4. | Primarily real estate and cash. |
The table below presents other secured financings by maturity.
|
As of
|
||||||
| in millions | December 2010 | |||||
|
Other secured financings
(short-term)
|
$ | 24,529 | ||||
|
Other secured financings
(long-term):
|
||||||
|
2012
|
7,270 | |||||
|
2013
|
1,724 | |||||
|
2014
|
2,181 | |||||
|
2015
|
610 | |||||
|
2016-thereafter
|
2,063 | |||||
|
Total other secured financings
(long-term)
|
13,848 | |||||
|
Total other secured financings
|
$ | 38,377 | ||||
The aggregate contractual principal amount of other secured
financings
(long-term)
for which the fair value option was elected exceeded the related
fair value by $352 million and $80 million as of
December 2010 and December 2009, respectively.
Collateral
Received and Pledged
The firm receives financial instruments (e.g., U.S.
government and federal agency, other sovereign and corporate
obligations, as well as equities and convertible debentures) as
collateral, primarily in connection with resale agreements,
securities borrowed, derivative transactions and customer margin
loans.
144
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In many cases, the firm is permitted to deliver or repledge
these financial instruments when entering into repurchase
agreements, securities lending agreements and other secured
financings, collateralizing derivative transactions and meeting
firm or customer settlement requirements.
The table below presents financial instruments at fair value
received as collateral that were available to be delivered or
repledged and were delivered or repledged by the firm.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Collateral available to be delivered or repledged
|
$ | 618,423 | $ | 561,766 | ||||||
|
Collateral that was delivered or repledged
|
447,882 | 392,892 | ||||||||
The firm also pledges certain financial instruments owned, at
fair value in connection with repurchase agreements, securities
lending agreements and other secured financings, and other
assets (primarily real estate and cash) in connection with other
secured financings to counterparties who may or may not have the
right to deliver or repledge them. The table below presents
information about assets pledged by the firm.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Financial instruments owned, at fair value pledged to
counterparties that:
|
||||||||||
|
Had the right to deliver or repledge
|
$ | 51,010 | $ | 31,485 | ||||||
|
Did not have the right to deliver or repledge
|
112,750 | 109,114 | ||||||||
|
Other assets pledged to counterparties that:
|
||||||||||
|
Did not have the right to deliver or repledge
|
4,482 | 7,934 | ||||||||
The firm securitizes residential and commercial mortgages,
corporate bonds, loans and other types of financial assets by
selling these assets to securitization vehicles
(e.g., trusts, corporate entities, and limited liability
companies) and acts as underwriter of the beneficial interests
that are sold to investors. The firm’s residential mortgage
securitizations are substantially all in connection with
government agency securitizations.
Beneficial interests issued by securitization entities are debt
or equity securities that give the investors rights to receive
all or portions of specified cash inflows to a securitization
vehicle and include senior and subordinated shares of principal,
interest
and/or
other
cash inflows. The proceeds from the sale of beneficial interests
are used to pay the transferor for the financial assets sold to
the securitization vehicle or to purchase securities which serve
as collateral.
The firm accounts for a securitization as a sale when it has
relinquished control over the transferred assets. Prior to
securitization, the firm accounts for assets pending transfer at
fair value and therefore does not typically recognize gains or
losses upon the transfer of assets. Net revenues from
underwriting activities are recognized in connection with the
sales of the underlying beneficial interests to investors.
For transfers of assets that are not accounted for as sales, the
assets remain in “Financial instruments owned, at fair
value” and the transfer is accounted for as a
collateralized financing, with the related interest expense
recognized over the life of the transaction. See Notes 9
and 23 for further information about collateralized financings
and interest expense, respectively.
The firm generally receives cash in exchange for the transferred
assets but may also have continuing involvement with transferred
assets, including beneficial interests in securitized financial
assets, primarily in the form of senior or subordinated
securities, and servicing rights that the firm retains at the
time of securitization. The firm may also purchase senior or
subordinated securities issued by securitization vehicles (which
are typically VIEs) in connection with secondary
market-making
activities.
145
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Beneficial interests and other interests from the firm’s
continuing involvement with securitization vehicles are
accounted for at fair value and are included in “Financial
instruments owned, at fair value” and are generally
classified in level 2 of the fair value hierarchy. See
Notes 5 through 8 for further information about fair value
measurements.
The table below presents the amount of financial assets
securitized and the cash flows received on retained interests in
securitization entities in which the firm had continuing
involvement.
| Year Ended December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Residential mortgages
|
$ | 47,803 | $ | 45,846 | ||||||
|
Commercial mortgages
|
1,451 | — | ||||||||
|
Other financial assets
|
12 | 691 | ||||||||
|
Total
|
$ | 49,266 | $ | 46,537 | ||||||
|
Cash flows on retained interests
|
$ | 517 | $ | 507 | ||||||
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 2008, cash flows received on retained
interests were $505 million.
During the one month ended December 2008, the firm
securitized $604 million of financial assets in which the
firm had continuing involvement, including $557 million of
residential mortgages and $47 million of other financial
assets. During the one month ended December 2008, cash
flows received on retained interests were $26 million.
The table below presents the firm’s continuing involvement
in nonconsolidated 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. In this table:
| • | the outstanding principal amount 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; and |
| • | purchased interests represent senior and subordinated interests, purchased in connection with secondary market-making activities, in securitization entities in which the firm also holds retained interests. |
| As of December 2010 | As of December 2009 | |||||||||||||||||||||||||
|
Outstanding
|
Fair Value of
|
Fair Value of
|
Outstanding
|
Fair Value of
|
Fair Value of
|
|||||||||||||||||||||
|
Principal
|
Retained
|
Purchased
|
Principal
|
Retained
|
Purchased
|
|||||||||||||||||||||
| in millions | Amount | Interests | Interests | Amount | Interests | Interests | ||||||||||||||||||||
|
Residential
mortgage-backed
|
$ | 73,670 | $ | 6,054 | $ | 5 | $ | 59,410 | $ | 3,956 | $ | 17 | ||||||||||||||
|
Commercial
mortgage-backed
|
5,040 | 849 | 82 | 11,643 | 56 | 96 | ||||||||||||||||||||
|
CDOs, CLOs and other
|
12,872 | 62 | 229 | 17,768 | 93 | 54 | ||||||||||||||||||||
|
Total
1
|
$ | 91,582 | $ | 6,965 | $ | 316 | $ | 88,821 | $ | 4,105 | $ | 167 | ||||||||||||||
| 1. | Includes $7.64 billion of outstanding principal amount and $16 million of fair value of retained interests as of December 2010 related to securitization entities in which the firm’s only continuing involvement is retained servicing which is not a variable interest. |
146
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition to the interests in the table above, the firm had
other continuing involvement in the form of derivative
transactions and guarantees with certain nonconsolidated VIEs.
The carrying value of these derivatives and guarantees was a net
liability of $98 million and $87 million as of
December 2010 and December 2009, respectively. The
notional amounts of these derivatives and guarantees are
included in
maximum exposure to loss in the nonconsolidated VIE tables in
Note 11.
The table below presents the weighted average key economic
assumptions used in measuring the fair value of retained
interests and the sensitivity of this fair value to immediate
adverse changes of 10% and 20% in those assumptions.
| As of December 2010 | As of December 2009 | |||||||||||||||||
| Type of Retained Interests | Type of Retained Interests | |||||||||||||||||
| $ in millions | Mortgage-Backed | Other 1 | Mortgage-Backed | Other 1 | ||||||||||||||
|
Fair value of retained interests
|
$ | 6,903 | $ | 62 | $ | 4,012 | $ | 93 | ||||||||||
|
Weighted average life (years)
|
7.4 | 4.2 | 4.4 | 4.4 | ||||||||||||||
|
Constant prepayment
rate
2
|
11.6% | N.M. | 23.5% | N.M. | ||||||||||||||
|
Impact of 10% adverse
change
2
|
$ | (62 | ) | N.M. | $ | (44 | ) | N.M. | ||||||||||
|
Impact of 20% adverse
change
2
|
(128 | ) | N.M. | (92 | ) | N.M. | ||||||||||||
|
Discount
rate
3
|
5.3% | N.M. | 8.4% | N.M. | ||||||||||||||
|
Impact of 10% adverse change
|
$ | (175 | ) | N.M. | $ | (76 | ) | N.M. | ||||||||||
|
Impact of 20% adverse change
|
(341 | ) | N.M. | (147 | ) | N.M. | ||||||||||||
| 1. | 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 2010 and December 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the carrying value of $62 million and $93 million as of December 2010 and December 2009, respectively. |
| 2. | Constant prepayment rate is included only for positions for which constant prepayment rate is a key assumption in the determination of fair value. |
| 3. | The majority of 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 retained interests, the expected credit loss assumptions are reflected in the discount rate. |
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 in the preceding table is calculated independently of
changes in any other assumption. In practice, simultaneous
changes in assumptions might magnify or counteract the
sensitivities disclosed above.
147
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
VIEs generally finance the purchase of assets by issuing debt
and equity securities that are either collateralized by or
indexed to the assets held by the VIE. The debt and equity
securities issued by a VIE may include tranches of varying
levels of subordination. The firm’s involvement with VIEs
includes securitization of financial assets, as described in
Note 10, and investments in and loans to other types of
VIEs, as described below. See Note 10 for additional
information about securitization activities, including the
definition of beneficial interests. See Note 3 for the
firm’s consolidation policies, including the definition of
a VIE.
The firm is principally involved with VIEs through the following
business activities:
Mortgage-Backed
VIEs and Corporate CDO and CLO VIEs.
The firm
sells residential and commercial mortgage loans and securities
to
mortgage-backed
VIEs and corporate bonds and loans to corporate CDO and CLO VIEs
and may retain beneficial interests in the assets sold to these
VIEs. The firm purchases and sells beneficial interests issued
by
mortgage-backed
and corporate CDO and CLO VIEs in connection with
market-making
activities. In addition, the firm may enter into derivatives
with certain of these VIEs, primarily interest rate swaps, which
are typically not variable interests. The firm generally enters
into derivatives with other counterparties to mitigate its risk
from derivatives with these VIEs.
Certain
mortgage-backed
and corporate CDO and CLO VIEs, usually referred to as synthetic
CDOs or
credit-linked
note VIEs, synthetically create the exposure for the
beneficial interests they issue by entering into credit
derivatives, rather than purchasing the underlying assets. These
credit derivatives may reference a single asset, an index, or a
portfolio/basket of assets or indices. See Note 7 for
further information on credit derivatives. These VIEs use the
funds from the sale of beneficial interests and the premiums
received from credit derivative counterparties to purchase
securities which serve to collateralize the beneficial interest
holders
and/or
the
credit derivative counterparty. These VIEs may enter into other
derivatives, primarily interest rate swaps, which are typically
not variable interests. The firm may be a counterparty to
derivatives with these VIEs and generally enters into
derivatives with other counterparties to mitigate its risk.
Real Estate,
Credit-Related
and Other Investing VIEs.
The firm purchases
equity and debt securities issued by and makes loans to VIEs
that hold real estate, performing and nonperforming debt,
distressed loans and equity securities.
Other
Asset-Backed
VIEs.
The firm structures VIEs that issue notes
to clients and purchases and sells beneficial interests issued
by other
asset-backed
VIEs in connection with
market-making
activities. In addition, the firm may enter into derivatives
with certain other
asset-backed
VIEs, primarily total return swaps on the collateral assets held
by these VIEs under which the firm pays the VIE the return due
to the note holders and receives the return on the collateral
assets owned by the VIE. The firm generally can be removed as
the total return swap counterparty. The firm generally enters
into derivatives with other counterparties to mitigate its risk
from derivatives with these VIEs. The firm typically does not
sell assets to the other
asset-backed
VIEs it structures.
Power-Related VIEs.
The firm purchases debt
and equity securities issued by and may provide guarantees to
VIEs that hold power-related assets. The firm typically does not
sell assets to or enter into derivatives with these VIEs.
Investment Funds.
The firm purchases equity
securities issued by and may provide guarantees to certain of
the investment funds it manages. The firm typically does not
sell assets to or enter into derivatives with these VIEs.
Principal-Protected Note VIEs.
The firm
structures VIEs that issue principal-protected notes to clients.
These VIEs own portfolios of assets, principally with exposure
to hedge funds. Substantially all of the principal protection on
the notes issued by these VIEs is provided by the asset
portfolio rebalancing that is required under the terms of the
notes. The firm enters into total return swaps with these VIEs
under which the firm pays the VIE the return due to the
principal-protected note holders and receives the return on the
assets owned by the VIE. The firm may enter into derivatives
with other counterparties to mitigate the risk it has from the
derivatives it enters into with these VIEs. The firm also
obtains funding through these VIEs. These VIEs were consolidated
by the firm upon adoption of changes to U.S. GAAP on
January 1, 2010. See “Recent Accounting
Developments” in Note 3 for further information.
148
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Municipal Bond Securitizations.
The firm sells
municipal securities to VIEs that issue
short-term
qualifying
tax-exempt
securities. The firm consolidates these VIEs because it owns the
residual interests, which allows the firm to make decisions that
significantly impact the economic performance of these VIEs.
VIE Consolidation
Analysis
A variable interest in a VIE is an investment (e.g., debt
or equity securities) or other interest (e.g., derivatives
or loans and lending commitments) in a VIE that will absorb
portions of the VIE’s expected losses or receive portions
of the VIE’s expected residual returns.
The firm’s variable interests in VIEs include senior and
subordinated debt in residential and commercial
mortgage-backed
and other
asset-backed
securitization entities, CDOs and CLOs; loans and lending
commitments; limited and general partnership interests;
preferred and common equity; derivatives that may include
foreign currency, equity
and/or
credit risk; guarantees; and certain of the fees the firm
receives from investment funds. Certain interest rate, foreign
currency and credit derivatives the firm enters into with VIEs
are not variable interests because they create rather than
absorb risk.
The enterprise with a controlling financial interest in a VIE is
known as the primary beneficiary and consolidates the VIE. The
firm determines whether it is the primary beneficiary of a VIE
by performing an analysis that principally considers:
| • | which variable interest holder has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; |
| • | which variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; |
| • | the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; |
| • | the VIE’s capital structure; |
| • | the terms between the VIE and its variable interest holders and other parties involved with the VIE; and |
| • | related party relationships. |
The firm reassesses its initial evaluation of whether an entity
is a VIE when certain reconsideration events occur. The firm
reassesses its determination of whether it is the primary
beneficiary of a VIE on an ongoing basis based on current facts
and circumstances.
Nonconsolidated
VIEs
The firm’s exposure to the obligations of VIEs is generally
limited to its interests in these entities. In certain
instances, the firm provides guarantees, including derivative
guarantees, to VIEs or holders of variable interests in VIEs.
The tables below present information about nonconsolidated VIEs
in which the firm holds variable interests. Nonconsolidated VIEs
are aggregated based on principal business activity. The nature
of the firm’s variable interests can take different forms,
as described in the rows under maximum exposure to loss. In the
tables below:
| • | The maximum exposure to loss excludes the benefit of offsetting financial instruments that are held to mitigate the risks associated with these variable interests. |
| • | For retained and purchased interests and loans and investments, the maximum exposure to loss is the carrying value of these interests. |
| • | For commitments and guarantees, and derivatives, the maximum exposure to loss is the notional amount, which does not represent anticipated losses and also has not been reduced by unrealized losses already recorded. As a result, the maximum exposure to loss exceeds liabilities recorded for commitments and guarantees, and derivatives provided to VIEs. |
For December 2010, the table includes nonconsolidated VIEs
in which the firm holds variable interests (and to which the
firm sold assets and has continuing involvement as of
December 2010) that were formerly considered to be
QSPEs prior to the changes in U.S. GAAP on
January 1, 2010. See “Recent Accounting
Developments” in Note 3 for further information.
The carrying values of the firm’s variable interests in
nonconsolidated VIEs are included in the consolidated statement
of financial condition as follows:
| • | Substantially all assets and liabilities held by the firm related to mortgage-backed, corporate CDO and CLO and other asset-backed VIEs and investment funds are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively. |
| • | Assets and liabilities held by the firm related to real estate, credit-related and other investing VIEs are primarily included in “Financial instruments owned, at fair value” and “Payables to customers and counterparties” and “Other liabilities and accrued expenses,” respectively. |
149
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| • | Assets and liabilities held by the firm related to power-related VIEs are primarily included in “Other |
| assets” and “Other liabilities and accrued expenses,” respectively. |
| Nonconsolidated VIEs | ||||||||||||||||||||||||||||||
| As of December 2010 | ||||||||||||||||||||||||||||||
|
Corporate
|
Real estate, credit-
|
Other
|
||||||||||||||||||||||||||||
|
Mortgage-
|
CDOs and
|
related and
|
asset-
|
Power-
|
Investment
|
|||||||||||||||||||||||||
| in millions | backed | CLOs | other investing | backed | related | funds | Total | |||||||||||||||||||||||
|
Assets in VIE
|
$ | 88,755 | 2 | $ | 21,644 | $ | 12,568 | $ | 5,513 | $ | 552 | $ | 2,330 | $ | 131,362 | |||||||||||||||
|
Carrying Value of the Firm’s Variable Interests
|
||||||||||||||||||||||||||||||
| Assets | $ | 8,076 | $ | 909 | $ | 1,063 | $ | 266 | $ | 239 | $ | 5 | $ | 10,558 | ||||||||||||||||
| Liabilities | — | 114 | 1 | 19 | 14 | — | 148 | |||||||||||||||||||||||
|
Maximum Exposure to Loss in Nonconsolidated VIEs
|
||||||||||||||||||||||||||||||
| Retained interests | $ | 6,887 | $ | 50 | $ | — | $ | 12 | $ | — | $ | — | $ | 6,949 | ||||||||||||||||
| Purchased interests | 839 | 353 | — | 247 | — | — | 1,439 | |||||||||||||||||||||||
| Commitments and guarantees 1 | — | 1 | 125 | — | 69 | — | 195 | |||||||||||||||||||||||
| Derivatives 1 | 3,128 | 7,593 | — | 1,105 | — | — | 11,826 | |||||||||||||||||||||||
| Loans and investments | 104 | — | 1,063 | — | 239 | 5 | 1,411 | |||||||||||||||||||||||
|
Total
|
$ | 10,958 | 2 | $ | 7,997 | $ | 1,188 | $ | 1,364 | $ | 308 | $ | 5 | $ | 21,820 | |||||||||||||||
| Nonconsolidated VIEs | ||||||||||||||||||||||||||||||
| As of December 2009 | ||||||||||||||||||||||||||||||
|
Corporate
|
Real estate, credit-
|
Other
|
Principal-
|
|||||||||||||||||||||||||||
|
Mortgage
|
CDOs and
|
related and
|
asset-
|
Power-
|
protected
|
|||||||||||||||||||||||||
| in millions | CDOs | CLOs | other investing | backed | related | notes 3 | Total | |||||||||||||||||||||||
|
Assets in VIE
|
$ | 9,114 | $ | 32,490 | $ | 22,618 | $ | 497 | $ | 592 | $ | 2,209 | $ | 67,520 | ||||||||||||||||
|
Carrying Value of the Firm’s Variable Interests
|
||||||||||||||||||||||||||||||
|
Assets
|
$ | 182 | $ | 834 | $ | 2,386 | $ | 16 | $ | 224 | $ | 12 | $ | 3,654 | ||||||||||||||||
|
Liabilities
|
10 | 400 | 204 | 12 | 3 | 1,357 | 1,986 | |||||||||||||||||||||||
|
Maximum Exposure to Loss in Nonconsolidated VIEs
|
||||||||||||||||||||||||||||||
|
Retained and purchased interests
|
$ | 135 | $ | 259 | $ | — | $ | — | $ | — | $ | — | $ | 394 | ||||||||||||||||
|
Commitments and
guarantees
1
|
— | 3 | 397 | — | 37 | — | 437 | |||||||||||||||||||||||
|
Derivatives
1
|
4,111 | 7,577 | — | 497 | — | 2,512 | 14,697 | |||||||||||||||||||||||
|
Loans and investments
|
— | — | 2,425 | — | 224 | — | 2,649 | |||||||||||||||||||||||
|
Total
|
$ | 4,246 | $ | 7,839 | $ | 2,822 | $ | 497 | $ | 261 | $ | 2,512 | $ | 18,177 | ||||||||||||||||
| 1. | The aggregate amounts include $4.52 billion and $4.66 billion as of December 2010 and December 2009, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets. |
| 2. | Assets in VIE and maximum exposure to loss include $6.14 billion and $3.25 billion, respectively, related to CDOs backed by mortgage obligations as of December 2010. |
| 3. | Assets in VIE, carrying value of liabilities and maximum exposure to loss exclude $3.97 billion associated with guarantees related to the firm’s performance under borrowings from these VIEs, which are recorded as liabilities. Substantially all of the $1.36 billion of liabilities relate to additional borrowings from these VIEs. |
150
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consolidated
VIEs
The tables below present the carrying amount and classification
of assets and liabilities in consolidated VIEs, excluding the
benefit of offsetting financial instruments that are held to
mitigate the risks associated with the firm’s variable
interests. Consolidated VIEs are aggregated based on principal
business activity and their assets and liabilities are presented
net of intercompany eliminations. The majority of the assets in
principal-protected notes VIEs are intercompany and are
eliminated in consolidation.
Substantially all the assets in consolidated VIEs can only be
used to settle obligations of the VIE.
For December 2010, the table below excludes VIEs in which
the firm holds a majority voting interest if (i) the VIE
meets the definition of a business and (ii) the VIE’s
assets can be used for purposes other than the
settlement of its obligations. For December 2009, prior to
the changes in U.S. GAAP, the table below 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. The increase
in total assets of consolidated VIEs from December 2009 to
December 2010 is primarily related to (i) VIEs that
are required to be disclosed in accordance with ASU
No. 2009-17
but that were not required to be disclosed under previous
U.S. GAAP, and (ii) VIEs that were consolidated by the
firm upon adoption of changes in U.S. GAAP. See
“Recent Accounting Developments” in Note 3 for
further information. The liabilities of real estate,
credit-related
and other investing VIEs and CDOs,
mortgage-backed
and other
asset-backed
VIEs do not have recourse to the general credit of the firm.
| Consolidated VIEs | ||||||||||||||||||||||
| As of December 2010 | ||||||||||||||||||||||
|
CDOs,
|
||||||||||||||||||||||
|
Real estate,
|
mortgage-
|
|||||||||||||||||||||
|
credit-related
|
Municipal
|
backed and
|
Principal-
|
|||||||||||||||||||
|
and other
|
bond
|
other asset-
|
protected
|
|||||||||||||||||||
| in millions | investing | securitizations | backed | notes | Total | |||||||||||||||||
|
Assets
|
||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 248 | $ | — | $ | 39 | $ | 52 | $ | 339 | ||||||||||||
|
Cash and securities segregated for regulatory and other purposes
|
205 | — | — | — | 205 | |||||||||||||||||
|
Receivables from brokers, dealers and clearing organizations
|
4 | — | — | — | 4 | |||||||||||||||||
|
Receivables from customers and counterparties
|
1 | — | 27 | — | 28 | |||||||||||||||||
|
Financial instruments owned, at fair value
|
2,531 | 547 | 550 | 648 | 4,276 | |||||||||||||||||
|
Other assets
|
3,369 | — | 499 | — | 3,868 | |||||||||||||||||
|
Total
|
$ | 6,358 | $ | 547 | $ | 1,115 | $ | 700 | $ | 8,720 | ||||||||||||
|
Liabilities
|
||||||||||||||||||||||
|
Other secured financings
|
$ | 2,434 | $ | 630 | $ | 417 | $ | 3,224 | $ | 6,705 | ||||||||||||
|
Payables to customers and counterparties
|
— | — | 12 | — | 12 | |||||||||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
— | — | 55 | — | 55 | |||||||||||||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings
|
302 | — | — | 2,359 | 2,661 | |||||||||||||||||
|
Unsecured
long-term
borrowings
|
6 | — | — | — | 6 | |||||||||||||||||
|
Other liabilities and accrued expenses
|
2,004 | — | 32 | — | 2,036 | |||||||||||||||||
|
Total
|
$ | 4,746 | $ | 630 | $ | 516 | $ | 5,583 | $ | 11,475 | ||||||||||||
151
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Consolidated VIEs | ||||||||||||||||||||||||||
| As of December 2009 | ||||||||||||||||||||||||||
|
CDOs,
|
||||||||||||||||||||||||||
|
Real estate,
|
mortgage-
|
|||||||||||||||||||||||||
|
credit-related
|
Municipal
|
backed and
|
Principal-
|
Foreign
|
||||||||||||||||||||||
|
and other
|
bond
|
other asset-
|
protected
|
exchange and
|
||||||||||||||||||||||
| in millions | investing | securitizations | backed | notes | commodities | Total | ||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 13 | $ | — | $ | — | $ | — | $ | 13 | $ | 26 | ||||||||||||||
|
Receivables from customers and counterparties
|
1 | — | — | — | — | 1 | ||||||||||||||||||||
|
Financial instruments owned, at fair value
|
721 | 679 | 639 | 214 | 134 | 2,387 | ||||||||||||||||||||
|
Other assets
|
207 | — | — | — | 80 | 287 | ||||||||||||||||||||
|
Total
|
$ | 942 | $ | 679 | $ | 639 | $ | 214 | $ | 227 | $ | 2,701 | ||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
$ | — | $ | — | $ | 432 | $ | — | $ | — | $ | 432 | ||||||||||||||
|
Other secured financings
|
620 | 782 | 151 | — | — | 1,553 | ||||||||||||||||||||
|
Payables to customers and counterparties
|
1 | — | — | — | — | 1 | ||||||||||||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
— | — | — | — | 169 | 169 | ||||||||||||||||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings
|
— | — | — | 214 | — | 214 | ||||||||||||||||||||
|
Other liabilities and accrued expenses
|
59 | — | — | — | 10 | 69 | ||||||||||||||||||||
|
Total
|
$ | 680 | $ | 782 | $ | 583 | $ | 214 | $ | 179 | $ | 2,438 | ||||||||||||||
Other assets are generally less liquid,
non-financial
assets. The table below presents other assets by type.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Property, leasehold improvements and
equipment
1
|
$ | 11,106 | $ | 11,380 | ||||||
|
Goodwill and identifiable intangible
assets
2
|
5,522 | 4,920 | ||||||||
|
Income tax-related
assets
3
|
6,239 | 7,937 | ||||||||
|
Equity-method
investments
4
|
1,445 | 1,484 | ||||||||
|
Miscellaneous receivables and other
|
3,747 | 3,747 | ||||||||
|
Total
|
$ | 28,059 | $ | 29,468 | ||||||
| 1. | Net of accumulated depreciation and amortization of $7.87 billion and $7.28 billion as of December 2010 and December 2009, respectively. |
| 2. | See Note 13 for further information about goodwill and identifiable intangible assets. |
| 3. | See Note 26 for further information about income taxes. |
| 4. | Excludes investments of $3.77 billion and $2.95 billion accounted for at fair value under the fair value option as of December 2010 and December 2009, respectively, which are included in “Financial instruments owned, at fair value.” See Note 8 for further information. |
Property,
Leasehold Improvements and Equipment
Property, leasehold improvements and equipment included
$6.44 billion and $5.90 billion as of
December 2010 and December 2009, respectively, related
to property, leasehold improvements and equipment that the firm
uses in connection with its operations. The remainder is held by
investment entities, including VIEs, consolidated by the firm.
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.
152
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The firm’s policy for impairment
testing of property, leasehold improvements and equipment is the
same as is used for identifiable intangible assets with finite
lives. See Note 13 for further information.
The tables below present, by operating segment, the carrying
values of goodwill and identifiable intangible assets, which are
included in “Other assets.”
| Goodwill | ||||||||||
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Investment Banking:
|
||||||||||
|
Underwriting
|
$ | 125 | $ | 125 | ||||||
|
Institutional Client Services:
|
||||||||||
|
Fixed Income, Currency and Commodities Client Execution
|
159 | 159 | ||||||||
|
Equities Client Execution
|
2,361 | 2,361 | ||||||||
|
Securities Services
|
117 | 117 | ||||||||
|
Investing & Lending
|
172 | 218 | ||||||||
|
Investment Management
|
561 | 563 | ||||||||
|
Total
|
$ | 3,495 | $ | 3,543 | ||||||
|
Identifiable Intangible
|
||||||||||
| Assets | ||||||||||
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Institutional Client Services:
|
||||||||||
|
Fixed Income, Currency and Commodities Client Execution
|
$ | 608 | $ | 21 | ||||||
|
Equities Client Execution
|
718 | 1,120 | ||||||||
|
Investing & Lending
|
579 | 99 | ||||||||
|
Investment Management
|
122 | 137 | ||||||||
|
Total
|
$ | 2,027 | $ | 1,377 | ||||||
Goodwill
Goodwill is the cost of acquired companies in excess of the fair
value of identifiable net assets at acquisition date.
The reorganization of the firm’s segments in 2010 resulted
in the reallocation of assets, including goodwill, and
liabilities across reporting units. See Note 27 for further
information on segments.
Goodwill is tested annually for impairment or more frequently if
events occur or circumstances change that indicate an impairment
may exist.
The goodwill impairment test consists of two steps.
| • | The first step compares the fair value of each reporting unit with its estimated net book value (including goodwill and identified intangible assets). If the reporting unit’s fair value exceeds its estimated net book value, goodwill is not impaired. |
| • | If the estimated fair value of a reporting unit is less than its estimated net book value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. An impairment loss is equal to the excess of the carrying amount of goodwill over its fair value. |
Goodwill was tested for impairment during the fourth quarter of
2010 and no impairment was identified.
To estimate the fair value of each reporting unit, both relative
value and residual income valuation techniques are used because
the firm believes market participants would use these techniques
to value the firm’s reporting units.
Relative value techniques apply average observable
price-to-earnings
multiples of comparable competitors to certain reporting
units’ net earnings. For other reporting units, fair value
is estimated using
price-to-book
multiples based on residual income techniques, which compare
excess reporting unit returns on equity to the firm’s cost
of equity capital over a
long-term
stable growth period. The net book value of each reporting unit
reflects the estimated amount of shareholders’ equity
required to support the activities of the reporting unit.
153
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Identifiable
Intangible Assets
The table below presents the gross carrying amount, accumulated
amortization and net carrying amount of
identifiable intangible assets and their weighted average
remaining lives.
| As of December | ||||||||||||||
|
Weighted-Average
|
||||||||||||||
| $ in millions | 2010 | Remaining Lives | 2009 | |||||||||||
|
Customer lists
|
Gross carrying amount | $ | 1,104 | $ | 1,117 | |||||||||
| Accumulated amortization | (529 | ) | (472 | ) | ||||||||||
| Net carrying amount | $ | 575 | 10 | $ | 645 | |||||||||
|
Broadcast
royalties
1
|
Gross carrying amount | $ | 560 | $ | — | |||||||||
| Accumulated amortization | (61 | ) | — | |||||||||||
| Net carrying amount | $ | 499 | 8 | $ | — | |||||||||
|
Commodities-related
intangibles
2
|
Gross carrying amount | $ | 667 | $ | 40 | |||||||||
| Accumulated amortization | (52 | ) | (10 | ) | ||||||||||
| Net carrying amount | $ | 615 | 18 | $ | 30 | |||||||||
|
Insurance-related
intangibles
3
|
Gross carrying amount | $ | 292 | $ | 292 | |||||||||
| Accumulated amortization | (146 | ) | (142 | ) | ||||||||||
| Net carrying amount | $ | 146 | 6 | $ | 150 | |||||||||
|
Exchange-traded
fund (ETF) lead market
|
Gross carrying amount | $ | 138 | $ | 138 | |||||||||
|
maker rights
|
Accumulated amortization | (53 | ) | (48 | ) | |||||||||
| Net carrying amount | $ | 85 | 17 | $ | 90 | |||||||||
|
NYSE DMM rights
|
Gross carrying amount | $ | 714 | $ | 714 | |||||||||
| Accumulated amortization | (638 | ) | (294 | ) | ||||||||||
| Net carrying amount | $ | 76 | 11 | $ | 420 | |||||||||
|
Other
|
Gross carrying amount | $ | 101 | $ | 130 | |||||||||
| Accumulated amortization | (70 | ) | (88 | ) | ||||||||||
| Net carrying amount | $ | 31 | 4 | $ | 42 | |||||||||
|
Total
|
Gross carrying amount | $ | 3,576 | $ | 2,431 | |||||||||
| Accumulated amortization | (1,549 | ) | (1,054 | ) | ||||||||||
| Net carrying amount | $ | 2,027 | 12 | $ | 1,377 | |||||||||
| 1. | Represents television broadcast royalties held by a VIE consolidated upon adoption of ASU No. 2009-17. |
| 2. | Primarily includes commodity-related customer contracts and relationships, permits and access rights acquired during the first quarter of 2010. |
| 3. | Represents value of business acquired related to the firm’s insurance businesses. |
154
Table of Contents
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 or, in the case of insurance
contracts, in proportion to estimated gross profits or premium
revenues. Amortization expense for identifiable intangible
assets is included in “Depreciation and amortization.”
The table below presents amortization expense for identifiable
intangible assets for the periods presented, and the estimated
future amortization expense through 2015 for identifiable
intangible assets as of December 2010.
| in millions | ||||||
|
Amortization expense:
|
||||||
|
One month ended December 2008
|
$ | 39 | ||||
|
2008
|
240 | |||||
|
2009
|
96 | |||||
|
2010
1
|
520 | |||||
|
Estimated future amortization expense
:
|
||||||
|
2011
|
258 | |||||
|
2012
|
246 | |||||
|
2013
|
231 | |||||
|
2014
|
202 | |||||
|
2015
|
169 | |||||
| 1. | Includes an impairment loss of $305 million on the firm’s NYSE DMM rights. |
Identifiable intangible assets are tested for recoverability
whenever events or changes in circumstances indicate that an
asset’s or asset group’s carrying value may not be
recoverable.
If a recoverability test is necessary, the carrying value of an
asset or asset group is compared to the total of the
undiscounted cash flows expected to be received over the
remaining useful life and from the disposition of the asset or
asset group.
| • | If the total of the undiscounted cash flows exceeds the carrying value, the asset or asset group is not impaired. |
| • | If the total of the undiscounted cash flows is less than the carrying value, the asset or asset group is not fully recoverable and an impairment loss is recognized as the difference between the carrying amount of the asset or asset group and its estimated fair value. |
During the fourth quarter of 2010, as a result of continuing
weak operating results in the firm’s NYSE DMM business, the
firm tested its NYSE DMM rights for impairment in accordance
with ASC 360. Because the carrying value of the firm’s NYSE
DMM rights exceeded the projected undiscounted cash flows over
the estimated remaining useful life of the firm’s NYSE DMM
rights, the firm determined that the rights were impaired. The
firm recorded an impairment loss of $305 million, which was
included in “Depreciation and amortization” in the
firm’s Institutional Client Services segment in the fourth
quarter of 2010. This impairment loss represented the excess of
the carrying value of the firm’s NYSE DMM rights over their
estimated fair value. The firm estimated this fair value, which
is a level 3 measurement, using a relative value analysis
which incorporated a comparison to another DMM portfolio that
was transacted between third parties.
155
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tables below present deposits held in U.S. and
non-U.S. offices
and the maturities of time deposits. Substantially all
U.S. deposits were held at GS Bank USA and were
interest-bearing and substantially all
non-U.S. deposits
were held at Goldman Sachs Bank (Europe) PLC (GS Bank
Europe) and were
interest-bearing.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
U.S. offices
|
$ | 32,353 | $ | 32,797 | ||||||
|
Non-U.S. offices
|
6,216 | 6,621 | ||||||||
|
Total
|
$ | 38,569 | $ | 39,418 | ||||||
| As of December 2010 | ||||||||||||||
| in millions | U.S. | Non-U.S. | Total | |||||||||||
|
2011
|
$ | 1,791 | $ | 984 | $ | 2,775 | ||||||||
|
2012
|
1,018 | — | 1,018 | |||||||||||
|
2013
|
1,982 | — | 1,982 | |||||||||||
|
2014
|
497 | — | 497 | |||||||||||
|
2015
|
795 | — | 795 | |||||||||||
|
2016 − thereafter
|
1,437 | — | 1,437 | |||||||||||
|
Total
|
$ | 7,520 | 1 | $ | 984 | 2 | $ | 8,504 | ||||||
| 1. | Includes $106 million greater than $100,000, of which $13 million matures within three months, $4 million matures within three to six months, $32 million matures within six to twelve months, and $57 million matures after twelve months. |
| 2. | Substantially all were greater than $100,000. |
Short-term
borrowings were comprised of the following:
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Other secured financings
(short-term)
|
$ | 24,529 | $ | 12,931 | ||||||
|
Unsecured
short-term
borrowings
|
47,842 | 37,516 | ||||||||
|
Total
|
$ | 72,371 | $ | 50,447 | ||||||
See Note 9 for further information about 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. See Note 8 for further information about
unsecured
short-term
borrowings that are accounted for at fair value.
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.
156
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents unsecured
short-term
borrowings.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Current portion of unsecured
long-term
borrowings
1,
2
|
$ | 25,396 | $ | 17,928 | ||||||
|
Hybrid financial instruments
|
13,223 | 10,741 | ||||||||
|
Promissory notes
|
3,265 | 2,119 | ||||||||
|
Commercial paper
|
1,306 | 1,660 | ||||||||
|
Other
short-term
borrowings
|
4,652 | 5,068 | ||||||||
|
Total
|
$ | 47,842 | $ | 37,516 | ||||||
|
Weighted average interest
rate
3
|
1.77% | 1.31% | ||||||||
| 1. | Includes $10.43 billion and $1.73 billion as of December 2010 and December 2009, respectively, issued by Group Inc. and guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). |
| 2. | Includes $24.46 billion and $17.05 billion as of December 2010 and December 2009, respectively, issued by Group Inc. |
| 3. | The weighted average interest rates for these borrowings include the effect of hedging activities and exclude financial instruments accounted for at fair value under the fair value option. See Note 7 for further information about hedging activities. |
Long-term
borrowings were comprised of the following:
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Other secured financings
(long-term)
|
$ | 13,848 | $ | 11,203 | ||||||
|
Unsecured
long-term
borrowings
|
174,399 | 185,085 | ||||||||
|
Total
|
$ | 188,247 | $ | 196,288 | ||||||
See Note 9 for further information about other secured
financings. The table below presents unsecured
long-term
borrowings extending through 2060 and consisting principally of
senior borrowings.
| As of December 2010 | As of December 2009 | |||||||||||||||||||||||||
|
U.S.
|
Non-U.S.
|
U.S.
|
Non-U.S.
|
|||||||||||||||||||||||
| in millions | Dollar | Dollar | Total | Dollar | Dollar | Total | ||||||||||||||||||||
|
Fixed-rate
obligations
1
|
||||||||||||||||||||||||||
|
Group Inc.
|
$ | 81,192 | $ | 35,353 | $ | 116,545 | $ | 77,487 | $ | 37,208 | $ | 114,695 | ||||||||||||||
|
Subsidiaries
|
1,622 | 532 | 2,154 | 1,630 | 1,088 | 2,718 | ||||||||||||||||||||
|
Floating-rate
obligations
2
|
||||||||||||||||||||||||||
|
Group Inc.
|
23,700 | 27,374 | 51,074 | 27,132 | 33,258 | 60,390 | ||||||||||||||||||||
|
Subsidiaries
|
3,616 | 1,010 | 4,626 | 5,132 | 2,150 | 7,282 | ||||||||||||||||||||
|
Total
3
|
$ | 110,130 | $ | 64,269 | $ | 174,399 | $ | 111,381 | $ | 73,704 | $ | 185,085 | ||||||||||||||
| 1. | Interest rates on U.S. dollar-denominated debt ranged from 0.20% to 10.04% (with a weighted average rate of 5.52%) and 0.25% to 10.04% (with a weighted average rate of 5.35%) as of December 2010 and December 2009, respectively. Interest rates on non-U.S. dollar-denominated debt ranged from 0.85% to 14.85% (with a weighted average rate of 4.65%) and 0.80% to 13.00% (with a weighted average rate of 4.49%) as of December 2010 and December 2009, respectively. |
| 2. | 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 $8.58 billion and $19.03 billion as of December 2010 and December 2009, respectively, issued by Group Inc. and guaranteed by the FDIC under the TLGP. |
157
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents unsecured
long-term
borrowings by maturity date. In the table below:
| • | 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; |
| • | unsecured long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates; and |
| • | unsecured long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. |
The aggregate contractual principal amount of unsecured
long-term
borrowings (principal and
non-principal
protected) for which the fair value option was elected exceeded
the related fair value by $349 million and
$672 million as of December 2010 and
December 2009, respectively.
| As of December 2010 | ||||||||||||||
| in millions | Group Inc. | Subsidiaries | Total | |||||||||||
|
2012
|
$ | 26,130 | $ | 192 | $ | 26,322 | ||||||||
|
2013
|
23,546 | 54 | 23,600 | |||||||||||
|
2014
|
17,878 | 30 | 17,908 | |||||||||||
|
2015
|
16,609 | 544 | 17,153 | |||||||||||
|
2016 − thereafter
|
83,456 | 5,960 | 89,416 | |||||||||||
|
Total
1
|
$ | 167,619 | $ | 6,780 | $ | 174,399 | ||||||||
| 1. | Amount includes an increase of $8.86 billion to the carrying amount of certain unsecured long-term borrowings related to hedge accounting. The amounts related to the carrying value of unsecured long-term borrowings associated with the effect of hedge accounting by year of maturity are as follows: $532 million in 2012, $750 million in 2013, $839 million in 2014, $382 million in 2015, $6.36 billion in 2016 and thereafter. |
The firm designates certain derivatives as fair value hedges to
effectively convert a substantial portion of its fixed-rate
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 2010 and
December 2009. For unsecured
long-term
borrowings for which the firm did not elect the fair value
option, the
cumulative impact due to changes in the firm’s own credit
spreads would be a reduction in the carrying value of total
unsecured
long-term
borrowings of less than 1% as of both December 2010 and
December 2009. See Note 7 for further information
about hedging activities.
The table below presents unsecured
long-term
borrowings, after giving effect to hedging activities that
converted a substantial portion of fixed-rate obligations to
floating-rate obligations.
| As of December 2010 | As of December 2009 | |||||||||||||||||||||||||
| in millions | Group Inc. | Subsidiaries | Total | Group Inc. | Subsidiaries | Total | ||||||||||||||||||||
|
Fixed-rate obligations
|
||||||||||||||||||||||||||
|
At fair value
|
$ | 16 | $ | 6 | $ | 22 | $ | — | $ | 754 | $ | 754 | ||||||||||||||
|
At amortized
cost
1
|
3,956 | 1,921 | 5,877 | 1,896 | 1,670 | 3,566 | ||||||||||||||||||||
|
Floating-rate obligations
|
||||||||||||||||||||||||||
|
At fair value
|
13,428 | 4,720 | 18,148 | 13,668 | 6,969 | 20,637 | ||||||||||||||||||||
|
At amortized
cost
1
|
150,219 | 133 | 150,352 | 159,521 | 607 | 160,128 | ||||||||||||||||||||
|
Total
|
$ | 167,619 | $ | 6,780 | $ | 174,399 | $ | 175,085 | $ | 10,000 | $ | 185,085 | ||||||||||||||
| 1. | The weighted average interest rates on the aggregate amounts were 1.90% (5.69% related to fixed-rate obligations and 1.74% related to floating-rate obligations) and 1.42% (5.49% related to fixed-rate obligations and 1.32% related to floating-rate obligations) as of December 2010 and December 2009, respectively. These rates exclude financial instruments accounted for at fair value under the fair value option. |
158
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Subordinated
Borrowings
Unsecured
long-term
borrowings include subordinated debt and junior subordinated
debt. Junior subordinated debt is junior in right of payment to
other subordinated borrowings, which are junior to senior
borrowings. As of
December 2010 and December 2009, subordinated debt had
maturities ranging from 2012 to 2038 and 2017 to 2038,
respectively. The table below presents subordinated borrowings.
| As of December 2010 | As of December 2009 | |||||||||||||||||||||||||
|
Par
|
Carrying
|
Par
|
Carrying
|
|||||||||||||||||||||||
| in millions | Amount | Amount | Rate 1 | Amount | Amount | Rate 1 | ||||||||||||||||||||
|
Subordinated
debt
2
|
$ | 14,345 | $ | 16,977 | 1.19 | % | $ | 14,077 | $ | 15,593 | 1.51 | % | ||||||||||||||
|
Junior subordinated debt
|
5,082 | 5,716 | 2.50 | 5,085 | 5,398 | 2.65 | ||||||||||||||||||||
|
Total subordinated borrowings
|
$ | 19,427 | $ | 22,693 | 1.54 | % | $ | 19,162 | $ | 20,991 | 1.82 | % | ||||||||||||||
| 1. | Weighted average interest rate after giving effect to fair value hedges used to convert these fixed-rate obligations into floating-rate obligations. See Note 7 for further information about hedging activities. See below for information about interest rates on junior subordinated debt. |
| 2. | As of December 2010, the par amount and carrying amount include $13.81 billion and $16.44 billion, respectively, of subordinated debt issued by Group Inc. As of December 2009, the par amount and carrying amount include $13.78 billion and $15.30 billion, respectively, of subordinated debt issued by Group Inc. |
Junior
Subordinated Debt
Junior Subordinated Debt Issued to APEX
Trusts.
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. The
APEX Trusts 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 Group Inc.
perpetual
non-cumulative
preferred stock (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 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 19 for information
on the preferred stock that Group Inc. will issue in
connection with the stock purchase contracts.
The firm pays interest
semi-annually
on $1.75 billion of junior subordinated debt issued to
Goldman Sachs Capital II at a fixed annual rate of 5.59%
and the debt matures on June 1, 2043. The firm pays
interest quarterly on $500 million of junior subordinated
debt issued to Goldman Sachs Capital III at a rate per
annum equal to
three-month
LIBOR plus 0.57% and the debt matures on
September 1, 2043. In addition, the firm makes
contract payments at a rate of 0.20% per annum on the stock
purchase contracts held by the APEX Trusts.
The firm has the right to defer payments on the junior
subordinated debt and the stock purchase contracts, subject to
limitations, and therefore cause payment on the APEX to be
deferred. During any such extension period, the firm will not be
permitted to, among other things, pay dividends on or make
certain repurchases of its common or preferred stock.
159
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the APEX issuance, the firm covenanted in
favor of certain of its debtholders, who were initially and are
currently 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 perpetual
Non-Cumulative
Preferred Stock, Series E (Series E Preferred Stock)
or perpetual
Non-Cumulative
Preferred Stock, Series F (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.
Junior Subordinated Debt Issued 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. The Trust issued $2.75 billion of
guaranteed preferred beneficial interests to third
parties and $85 million of common beneficial interests to
Group Inc. and used the proceeds from the issuances to
purchase the junior subordinated debentures from 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 the 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 for 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.
160
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents other liabilities and accrued expenses
by type.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Compensation and benefits
|
$ | 9,089 | $ | 11,170 | ||||||
|
Insurance-related liabilities
|
11,381 | 11,832 | ||||||||
|
Noncontrolling
interests
1
|
872 | 960 | ||||||||
|
Income tax-related
liabilities
2
|
2,042 | 4,022 | ||||||||
|
Employee interests in consolidated funds
|
451 | 416 | ||||||||
|
Subordinated liabilities issued by consolidated
VIEs
3
|
1,526 | 612 | ||||||||
|
Accrued expenses and other
|
4,650 | 4,843 | ||||||||
|
Total
|
$ | 30,011 | $ | 33,855 | ||||||
| 1. | Includes $593 million and $598 million related to consolidated investment funds as of December 2010 and December 2009, respectively. |
| 2. | See Note 26 for further information about income taxes. |
| 3. | Includes $909 million related to entities consolidated upon adoption of ASU No. 2009-17. |
The table below presents insurance-related liabilities by type.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Separate account liabilities
|
$ | 4,024 | $ | 4,186 | ||||||
|
Liabilities for future benefits and unpaid claims
|
6,308 | 6,484 | ||||||||
|
Contract holder account balances
|
801 | 874 | ||||||||
|
Reserves for guaranteed minimum death and income benefits
|
248 | 288 | ||||||||
|
Total
|
$ | 11,381 | $ | 11,832 | ||||||
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.”
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 $1.26 billion
and $1.29 billion as of December 2010 and
December 2009, respectively, related to such reinsurance
contracts, which is reported in “Receivables from customers
and counterparties.” 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
$839 million and $870 million as of December 2010
and December 2009,
respectively, related to such reinsurance contracts, which is
reported in “Receivables from customers and
counterparties.” Contracts to cede risks to reinsurers do
not relieve the firm of its obligations to contract holders.
Liabilities for future benefits and unpaid claims include
$2.05 billion and $1.84 billion carried at fair value
under the fair value option as of December 2010 and
December 2009, 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.
161
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commitments
The table below presents the firm’s commitments.
|
Commitment Amount by Period
|
||||||||||||||||||||||||||
| of Expiration as of December 2010 | Total Commitments as of | |||||||||||||||||||||||||
|
2012-
|
2014-
|
2016-
|
December
|
December
|
||||||||||||||||||||||
| in millions | 2011 | 2013 | 2015 | Thereafter | 2010 | 2009 | ||||||||||||||||||||
|
Commitments to extend
credit
1
|
||||||||||||||||||||||||||
|
Commercial lending:
|
||||||||||||||||||||||||||
|
Investment-grade
|
$ | 4,390 | $ | 6,142 | $ | 1,730 | $ | 68 | $ | 12,330 | $ | 11,415 | ||||||||||||||
|
Non-investment-grade
|
1,595 | 4,935 | 2,899 | 2,490 | 11,919 | 8,153 | ||||||||||||||||||||
|
William Street credit extension program
|
5,430 | 16,194 | 5,475 | 284 | 27,383 | 25,218 | ||||||||||||||||||||
|
Warehouse financing
|
120 | 145 | — | — | 265 | 12 | ||||||||||||||||||||
|
Total commitments to extend credit
|
11,535 | 27,416 | 10,104 | 2,842 | 51,897 | 44,798 | ||||||||||||||||||||
|
Contingent and forward starting resale and securities borrowing
agreements
2
|
46,886 | — | — | — | 46,886 | 34,844 | ||||||||||||||||||||
|
Forward starting repurchase and securities lending
agreements
2
|
12,509 | — | — | — | 12,509 | 10,545 | ||||||||||||||||||||
|
Underwriting commitments
|
835 | — | — | — | 835 | 1,811 | ||||||||||||||||||||
|
Letters of
credit
3
|
1,992 | 218 | — | — | 2,210 | 1,804 | ||||||||||||||||||||
|
Investment commitments
|
2,583 | 5,877 | 1,860 | 773 | 11,093 | 13,240 | ||||||||||||||||||||
|
Other
|
241 | 89 | 40 | 19 | 389 | 380 | ||||||||||||||||||||
|
Total commitments
|
$ | 76,581 | $ | 33,600 | $ | 12,004 | $ | 3,634 | $ | 125,819 | $ | 107,422 | ||||||||||||||
| 1. | Commitments to extend credit are presented net of amounts syndicated to third parties. |
| 2. | These agreements generally settle within three business days. |
| 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. |
Commitments to
Extend Credit
The firm’s commitments to extend credit are agreements to
lend with fixed termination dates and depend on the satisfaction
of all contractual conditions to borrowing. The total commitment
amount does not necessarily reflect actual future cash flows
because the firm may syndicate all or substantial portions of
these commitments and commitments can expire unused or be
reduced or cancelled at the counterparty’s request.
The firm generally accounts for commitments to extend credit at
fair value. Losses, if any, are generally recorded, net of any
fees in “Other principal transactions.”
Commercial Lending.
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. 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.
162
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, with respect
to most of the William Street commitments. 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 2010 and
December 2009. 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 to clients who warehouse financial assets. These
arrangements are secured by the warehoused assets, primarily
consisting of residential and commercial mortgages.
Contingent and
Forward Starting Resale and Securities Borrowing
Agreements/Forward Starting Repurchase and Securities Lending
Agreements
The firm enters into resale and securities borrowing agreements
and repurchase and securities lending agreements that settle at
a future date. The firm also enters into commitments to provide
contingent financing to its clients through resale agreements.
The firm’s funding of these commitments depends on the
satisfaction of all contractual conditions to the resale
agreement and these commitments can expire unused.
Investment
Commitments
The firm’s investment commitments consist of commitments to
invest in private equity, real estate and other assets directly
and through funds that the firm raises and manages. These
commitments include $1.97 billion and $2.46 billion as
of December 2010 and December 2009, respectively,
related to real estate private investments and
$9.12 billion and $10.78 billion as of
December 2010 and December 2009, respectively, related
to corporate and other private investments. Of these amounts,
$10.10 billion and $11.38 billion as of
December 2010 and December 2009, respectively, relate
to commitments to invest in funds managed by the firm, which
will be funded at market value on the date of investment.
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. The table below presents future
minimum rental payments, net of minimum sublease rentals.
|
As of
|
||||||
| in millions | December 2010 | |||||
|
2011
|
$ | 528 | ||||
|
2012
|
412 | |||||
|
2013
|
340 | |||||
|
2014
|
311 | |||||
|
2015
|
279 | |||||
|
2016-thereafter
|
1,520 | |||||
|
Total
|
$ | 3,390 | ||||
Rent charged to operating expense for the years ended
December 2010, December 2009 and December 2008
was $508 million, $434 million and $438 million,
respectively.
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 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 on termination.
163
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contingencies
Legal Proceedings.
See Note 30 for
information on legal proceedings, including certain
mortgage-related
matters.
Certain
Mortgage-Related
Contingencies.
There are multiple areas of focus
by regulators, governmental agencies and others within the
mortgage market that may impact originators, issuers, servicers
and investors. There remains significant uncertainty surrounding
the nature and extent of any potential exposure for participants
in this market.
| • | Representations and Warranties. The firm was not a significant originator of residential mortgage loans. The firm did purchase loans originated by others and generally received loan-level representations of the type described below from the originators. During the period 2005 through 2008, the firm sold approximately $10 billion of loans to government-sponsored enterprises and approximately $11 billion of loans to other third parties. In addition, the firm transferred loans to trusts and other mortgage securitization vehicles. As of December 2010, the outstanding balance of the loans transferred to trusts and other mortgage securitization vehicles during the period 2005 through 2008 was approximately $49 billion. This amount reflects paydowns and cumulative losses of approximately $76 billion ($14 billion of which are cumulative losses). A small number of these Goldman Sachs-issued securitizations with an outstanding principal balance of $739 million and total paydowns and cumulative losses of $1.32 billion ($410 million of which are cumulative losses) were structured with credit protection obtained from monoline insurers. In connection with both sales of loans and securitizations, the firm provided loan level representations of the type described below and/or assigned the loan level representations from the party from whom the firm purchased the loans. |
The loan level representations made in connection with the sale
or securitization of mortgage loans varied among transactions
but were generally detailed representations applicable to each
loan in the portfolio and addressed matters relating to the
property, the borrower and the note. These representations
generally included, but were not limited to, the following:
(i) certain attributes of the borrower’s financial
status;
(ii) loan-to-value
ratios,
owner occupancy status and certain other characteristics of the
property; (iii) the lien position; (iv) the fact that
the loan was originated in compliance with law; and
(v) completeness of the loan documentation.
To date, repurchase claims and actual repurchases of residential
mortgage loans based upon alleged breaches of representations
have not been significant and have mainly involved
government-sponsored
enterprises. During the year ended December 2010, the firm
incurred an immaterial loss on the repurchase of less than
$50 million of loans. As of December 2010, outstanding
repurchase claims were not material.
Ultimately, the firm’s exposure to claims for repurchase of
residential mortgage loans based on alleged breaches of
representations will depend on a number of factors including the
following: (i) the extent to which these claims are
actually made; (ii) the extent to which there are
underlying breaches of representations that give rise to valid
claims for repurchase; (iii) in the case of loans
originated by others, the extent to which the firm could be held
liable and, if it is, the firm’s ability to pursue and
collect on any claims against the parties who made
representations to the firm;
(iv) macro-economic
factors, including developments in the residential real estate
market; and (v) legal and regulatory developments.
Based upon the large number of defaults in residential
mortgages, including those sold or securitized by the firm,
there is a potential for increasing claims for repurchases.
However, the firm is not in a position to make a meaningful
estimate of that exposure at this time.
| • | Foreclosure and Other Mortgage Loan Servicing Practices and Procedures. The firm has received a number of requests for information from regulators and other agencies, including state attorneys general and banking regulators, as part of an industry-wide focus on the practices of lenders and servicers in connection with foreclosure proceedings and other aspects of mortgage loan servicing practices and procedures. The requests seek information about the foreclosure and servicing protocols and activities of Litton Loan Servicing LP (Litton), the firm’s residential mortgage servicing subsidiary, and any deviations therefrom. The firm is cooperating with the requests and is reviewing |
164
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Litton’s practices in this area. These inquiries may result in the imposition of fines or other regulatory action. Litton temporarily suspended evictions and foreclosure and real estate owned sales in a number of states, including those with judicial foreclosure procedures. Litton has recently resumed some of these activities. As of the date of this filing, the firm is not aware of foreclosures where the underlying foreclosure decision was not warranted. As of December 2010, the value of the firm’s mortgage servicing rights was not material and any impact on their value would not be material to the firm. Similarly, at this time the firm does not expect the suspension of evictions and foreclosure and real estate owned sales to lead to a material increase in its mortgage servicing-related advances. |
Guaranteed Minimum Death and Income
Benefits.
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 $6.11 billion and
$6.35 billion of contract holder account balances as of
December 2010 and December 2009, respectively, for
such benefits. The weighted average attained age of these
contract holders was 69 years and 68 years as of
December 2010 and December 2009, respectively.
The net amount at risk, representing guaranteed minimum death
and income benefits in excess of contract holder account
balances, was $1.60 billion and $1.96 billion as of
December 2010 and December 2009, respectively. See
Note 17 for further information about insurance liabilities.
Guarantees
The firm enters into various derivatives that meet the
definition of a guarantee under U.S. GAAP, including
written equity and commodity put options, written currency
contracts and interest rate caps, floors and swaptions.
Disclosures about derivatives are not required if they may be
cash settled and the firm has
no basis to conclude it is probable that the counterparties held
the underlying instruments at inception of the contract. 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
table below.
The firm, in its capacity as an agency lender, indemnifies most
of its securities lending customers against losses incurred in
the event that borrowers do not return securities and the
collateral held is insufficient to cover the market value of the
securities borrowed.
In the ordinary course of business, the firm provides other
financial guarantees of the obligations of third parties
(e.g., standby letters of credit and other guarantees to
enable clients to complete transactions and 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 table below presents certain information about derivatives
that meet the definition of a guarantee and certain other
guarantees. The maximum payout in the table below is based on
the notional amount of the contract and therefore does not
represent anticipated losses. See Note 7 for further
information about credit derivatives that meet the definition of
a guarantee which are not included below.
Because derivatives are accounted for at fair value, carrying
value is considered the best indication of payment/performance
risk for individual contracts. However, the carrying values
below exclude the effect of a legal right of setoff that may
exist under an enforceable netting agreement and the effect of
netting of cash collateral posted under credit support
agreements.
165
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Maximum Payout/Notional Amount by Period of Expiration | ||||||||||||||||||||||||||
| As of December 2010 | ||||||||||||||||||||||||||
|
Carrying
|
||||||||||||||||||||||||||
|
Value of
|
2012-
|
2014-
|
2016-
|
|||||||||||||||||||||||
| in millions | Net Liability | 2011 | 2013 | 2015 | Thereafter | Total | ||||||||||||||||||||
|
Derivatives
1
|
$ | 8,264 | $ | 278,204 | $ | 262,222 | $ | 42,063 | $ | 57,413 | $ | 639,902 | ||||||||||||||
|
Securities lending
indemnifications
2
|
— | 27,468 | — | — | — | 27,468 | ||||||||||||||||||||
|
Other financial
guarantees
3
|
28 | 415 | 1,372 | 299 | 788 | 2,874 | ||||||||||||||||||||
| 1. | These derivatives are risk managed together with derivatives that do not meet the definition of a guarantee and, therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities. |
| 2. | Collateral held by the lenders in connection with securities lending indemnifications was $28.21 billion as of December 2010. Because the contractual nature of these arrangements requires the firm to obtain collateral with a market value that exceeds the value of the securities lent to the borrower, there is minimal performance risk associated with these guarantees. |
| 3. | Other financial guarantees excludes certain commitments to issue standby letters of credit that are included in “Commitments to extend credit.” See table in “Commitments” above for a summary of the firm’s commitments. |
As of December 2009, the carrying value of the net
liability related to derivative guarantees and other financial
guarantees was $7.22 billion and $207 million,
respectively.
Guarantees of Securities Issued by Trusts.
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. The
firm does not consolidate these entities. See Note 16 for
further information about 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. 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.
Indemnities and Guarantees of Service
Providers.
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.
166
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 material
liabilities related to these guarantees and indemnifications
have been recognized in the consolidated statements of financial
condition as of December 2010 and December 2009.
Other Representations, Warranties and
Indemnifications.
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 material liabilities
related to these arrangements have been recognized in the
consolidated statements of financial condition as of
December 2010 and December 2009.
Guarantees of Subsidiaries.
Group Inc.
fully and unconditionally guarantees the securities issued by GS
Finance Corp., a wholly owned finance subsidiary of the firm.
Group Inc. has guaranteed the payment obligations of
Goldman, Sachs & Co. (GS&Co.), GS Bank USA,
GS Bank Europe and Goldman Sachs Execution &
Clearing, L.P. (GSEC), 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.
167
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Common
Equity
Dividends declared per common share were $1.40 in 2010, $1.05 in
2009 and $1.40 in 2008. On January 18, 2011,
Group Inc. declared a dividend of $0.35 per common share to
be paid on March 30, 2011 to common shareholders of
record on March 2, 2011. 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 2010 and 2009, the firm repurchased 25.3 million and
19,578 shares of its common stock at an average cost per
share of $164.48 and $80.83, for a total cost of
$4.16 billion and $2 million, respectively. In
addition, to satisfy minimum statutory employee tax withholding
requirements related to the delivery of common stock underlying
restricted stock units (RSUs), the firm cancelled
6.2 million and 11.2 million of RSUs with a total
value of $972 million and $863 million in 2010 and
2009, respectively.
The firm’s share repurchase program is intended to
substantially offset increases in share count over time
resulting from employee
share-based
compensation and to help maintain the appropriate level of
common equity. The repurchase program is effected primarily
through regular
open-market
purchases, the amounts and timing of which are determined
primarily by the firm’s issuance of shares resulting from
employee
share-based
compensation as well as its current and projected capital
position (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).
Preferred
Equity
The table below presents perpetual preferred stock issued and
outstanding.
|
Redemption
|
||||||||||||||||||
|
Shares
|
Shares
|
Shares
|
Earliest
|
Value
|
||||||||||||||
| Series | Authorized | Issued | Outstanding | Dividend Rate | Redemption Date | in millions | ||||||||||||
|
A
|
50,000 | 30,000 | 29,999 |
3 month LIBOR + 0.75%,
with floor of 3.75% per annum |
April 25, 2010 | $ | 750 | |||||||||||
|
B
|
50,000 | 32,000 | 32,000 | 6.20% per annum | October 31, 2010 | 800 | ||||||||||||
|
C
|
25,000 | 8,000 | 8,000 |
3 month LIBOR + 0.75%,
with floor of 4.00% per annum |
October 31, 2010 | 200 | ||||||||||||
|
D
|
60,000 | 54,000 | 53,999 |
3 month LIBOR + 0.67%,
with floor of 4.00% per annum |
May 24, 2011 | 1,350 | ||||||||||||
|
G
|
50,000 | 50,000 | 50,000 | 10.00% per annum | October 1, 2008 | 5,500 | ||||||||||||
| 235,000 | 174,000 | 173,998 | $ | 8,600 | ||||||||||||||
168
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Each share of
non-cumulative
Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D 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 on 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
Series E Preferred Stock, and 5,000.1 shares of
Series F Preferred Stock, in connection with the APEX
Trusts. See Note 16 for further information.
Under the stock purchase contracts with the APEX Trusts,
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
approval from the Federal Reserve Board 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.
In June 2009, Group Inc. repurchased from the
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.
On January 18, 2011, Group Inc. 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, 2011 to
preferred shareholders of record on January 26, 2011.
In addition, Group Inc. declared a dividend of $2,500 per
share of Series G Preferred Stock to be paid on
February 10, 2011 to preferred shareholders of record
on January 26, 2011.
169
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below presents preferred dividends declared on
preferred stock.
| Year Ended | One Month Ended | |||||||||||||||||||||||||||||||||
| December 2010 | December 2009 | November 2008 | December 2008 | |||||||||||||||||||||||||||||||
| per share | in millions | per share | in millions | per share | in millions | per share | in millions | |||||||||||||||||||||||||||
|
Series A
|
$ | 950.51 | $ | 28 | $ | 710.94 | $ | 21 | $ | 1,068.86 | $ | 32 | $ | 239.58 | $ | 7 | ||||||||||||||||||
|
Series B
|
1,550.00 | 50 | 1,162.50 | 38 | 1,550.00 | 50 | 387.50 | 12 | ||||||||||||||||||||||||||
|
Series C
|
1,013.90 | 8 | 758.34 | 6 | 1,110.18 | 9 | 255.56 | 2 | ||||||||||||||||||||||||||
|
Series D
|
1,013.90 | 55 | 758.34 | 41 | 1,105.18 | 59 | 255.56 | 14 | ||||||||||||||||||||||||||
|
Series G
|
10,000.00 | 500 | 7,500.00 | 375 | 1,083.33 | 54 | 2,500.00 | 125 | ||||||||||||||||||||||||||
|
Series H
1
|
— | — | 12.50 | 125 | — | — | 14.86 | 149 | ||||||||||||||||||||||||||
|
Total
|
$ | 641 | $ | 606 | $ | 204 | $ | 309 | ||||||||||||||||||||||||||
| 1. | Amounts for the year ended December 2009 exclude 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 on repurchase of the Series H Preferred Stock. |
Accumulated Other
Comprehensive Income/(Loss)
The table below presents accumulated other comprehensive
income/(loss) by type.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Currency translation adjustment, net of tax
|
$ | (170 | ) | $ | (132 | ) | ||||
|
Pension and postretirement liability adjustments, net of tax
|
(229 | ) | (317 | ) | ||||||
|
Net unrealized gains on
available-for-sale
securities, net of
tax
1
|
113 | 87 | ||||||||
|
Total accumulated other comprehensive loss, net of tax
|
$ | (286 | ) | $ | (362 | ) | ||||
| 1. | Substantially all consists of net unrealized gains on available-for-sale securities held by the firm’s insurance subsidiaries as of both December 2010 and December 2009. |
170
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Federal Reserve Board is the primary regulator of
Group Inc., a bank holding company and a financial holding
company under the U.S. Bank Holding Company Act of 1956. As
a bank holding company, the firm is subject to consolidated
regulatory capital requirements that are computed in accordance
with the Federal Reserve Board’s capital adequacy
regulations currently applicable to bank holding companies
(Basel 1). These capital requirements, which are based on the
Capital Accord of the Basel Committee on Banking Supervision
(Basel Committee), are expressed as capital ratios that compare
measures of capital to
risk-weighted
assets (RWAs). 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 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 prompt
corrective action 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.
Group Inc.
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 on 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 table below presents information regarding
Group Inc.’s regulatory capital ratios.
| As of December | ||||||||||
| $ in millions | 2010 | 2009 | ||||||||
|
Tier 1 capital
|
$ | 71,233 | $ | 64,642 | ||||||
|
Tier 2 capital
|
13,660 | 13,828 | ||||||||
|
Total capital
|
84,893 | 78,470 | ||||||||
|
Risk-weighted
assets
|
444,290 | 431,890 | ||||||||
|
Tier 1 capital ratio
|
16.0% | 15.0% | ||||||||
|
Total capital ratio
|
19.1% | 18.2% | ||||||||
|
Tier 1 leverage ratio
|
8.0% | 7.6% | ||||||||
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 are determined by
reference to the firm’s Value-at-Risk (VaR) models,
supplemented by other measures to capture risks not reflected in
VaR models. 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 amount 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).
Tier 1 leverage ratio is defined as Tier 1 capital
under Basel 1 divided by average adjusted total assets (which
includes adjustments for disallowed goodwill and intangible
assets, and the carrying value of equity investments in
non-financial
companies that are subject to deductions from Tier 1
capital).
171
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Regulatory
Reform
The firm is currently working to implement the requirements set
out in the Federal Reserve Board’s Capital Adequacy
Guidelines for Bank Holding Companies: Internal-Ratings-Based
and Advanced Measurement Approaches, which are based on the
advanced approaches under the Revised Framework for the
International Convergence of Capital Measurement and Capital
Standards issued by the Basel Committee as applicable to
Group Inc. as a bank holding company (Basel 2).
U.S. banking regulators have incorporated the Basel 2
framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as Group Inc., transition to
Basel 2 following the successful completion of a parallel run.
In addition, the Basel Committee has undertaken a program of
substantial revisions to its capital guidelines. In particular,
the changes in the “Basel 2.5” guidelines will
result in increased capital requirements for market risk;
additionally, the Basel 3 guidelines issued by the Basel
Committee in December 2010 revise the definition of
Tier 1 capital, introduce Tier 1 common equity as a
regulatory metric, set new minimum capital ratios (including a
new “capital conservation buffer,” which must be
composed exclusively of Tier 1 common equity and will be in
addition to the other capital ratios), introduce a Tier 1
leverage ratio within international guidelines for the first
time, and make substantial revisions to the computation of
risk-weighted
assets for credit exposures. Implementation of the new
requirements is expected to take place over an extended
transition period, starting at the end of 2011 (for Basel 2.5)
and end of 2012 (for Basel 3). Although the U.S. federal
banking agencies have now issued proposed rules that are
intended to implement certain aspects of the Basel 2.5
guidelines, they have not yet addressed all aspects of those
guidelines or the Basel 3 changes. In addition, both the Basel
Committee and U.S. banking regulators implementing the
Dodd-Frank Act have indicated that they will impose more
stringent capital standards on systemically important financial
institutions. Although the criteria for treatment as a
systemically important financial institution have not yet been
determined, it is probable that they will apply to the firm.
Therefore, the regulations ultimately applicable to the firm may
be substantially different from those that have been published
to date.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(Dodd-Frank Act) will subject the firm at a firmwide level to
the same leverage and
risk-based
capital requirements that apply to depository institutions and
directs banking regulators to impose additional capital
requirements as disclosed above. The Federal Reserve Board will
be required to begin implementing the new leverage and
risk-based
capital regulation by January 2012. As a consequence of
these changes, Tier 1 capital treatment for the firm’s
junior subordinated debt issued to trusts and the firm’s
cumulative preferred stock will be phased out over a three-year
period beginning on January 1, 2013. The interaction
between the Dodd-Frank Act and the Basel Committee’s
proposed changes adds further uncertainty to the firm’s
future capital requirements.
A number of other governmental entities and regulators,
including the U.S. Treasury, the European Union and the
U.K.’s Financial Services Authority (FSA), have also
proposed or announced changes which will result in increased
capital requirements for financial institutions.
As a consequence of these developments, the firm expects minimum
capital ratios required to be maintained under Federal Reserve
Board regulations will be increased and changes in the
prescribed calculation methodology are expected to result in
higher RWAs and lower capital ratios than those currently
computed.
The capital requirements of several of the firm’s
subsidiaries will also be impacted in the future by the various
proposals from the Basel Committee, the
Dodd-Frank
Act, and other governmental entities and regulators.
172
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Bank
Subsidiaries
GS Bank USA, an FDIC-insured, 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 (described further below) that are calculated in a
manner 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 1 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 table below presents information regarding GS Bank
USA’s regulatory capital ratios under Basel 1 as
implemented by the Federal Reserve Board.
| As of December | ||||||||||
| 2010 | 2009 | |||||||||
|
Tier 1 capital ratio
|
18.8% | 14.9% | ||||||||
|
Total capital ratio
|
23.9% | 19.3% | ||||||||
|
Tier 1 leverage ratio
|
19.5% | 15.4% | ||||||||
Effective January 18, 2011, upon receiving regulatory
approval, GS Bank USA declared a dividend of $1.00 billion
to Group, Inc. In conjunction with the approval of this
dividend, GS Bank USA also received approval to repay
$4.00 billion in subordinated debt to Group, Inc. The
dividend and subordinated debt repayments took place on
February 1, 2011, and would have reduced GS Bank USA’s
Tier 1 and total capital ratios as of December 2010 by
1.0% and 5.1%, respectively.
GS Bank USA is currently working to implement the Basel 2
framework. Similar to the firm’s requirement as a bank
holding company, GS Bank USA is required to transition to
Basel 2 following the successful completion
of a parallel run. In addition, the capital requirements for
GS Bank USA are expected to be impacted by changes to the
Basel Committee’s capital guidelines and by the Dodd-Frank
Act, as outlined above.
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 $28.12 billion and $27.43 billion as of
December 2010 and December 2009, respectively, which
exceeded required reserve amounts by $27.45 billion and
$25.86 billion as of December 2010 and
December 2009, respectively. GS Bank Europe, a wholly
owned credit institution, is regulated by the Central Bank of
Ireland and is subject to minimum capital requirements. As of
December 2010 and December 2009, 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
arm’s-length basis.
Broker-Dealer
Subsidiaries
The firm’s U.S. regulated
broker-dealer
subsidiaries include GS&Co. and GSEC. GS&Co. and GSEC
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, Chicago Mercantile
Exchange, the Financial Industry Regulatory Authority, Inc.
(FINRA) and the National Futures Association.
Rule 15c3-1
of the SEC and Rule 1.17 of the Commodity Futures Trading
Commission 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.
173
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 2010, GS&Co. had regulatory net
capital, as defined by
Rule 15c3-1,
of $11.14 billion, which exceeded the amount required by
$9.21 billion. As of December 2010, GSEC had
regulatory net capital, as defined by
Rule 15c3-1,
of $1.96 billion, which exceeded the amount required by
$1.83 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 2010 and December 2009, GS&Co. had
tentative net capital and net capital in excess of both the
minimum and the notification requirements.
Insurance
Subsidiaries
The firm has U.S. insurance subsidiaries that are subject
to state insurance regulation and oversight in the states in
which they are domiciled and in the other states in which they
are licensed. In addition, certain of the firm’s insurance
subsidiaries outside of the U.S. are regulated by the 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 2010 and
December 2009.
Other
Non-U.S. Regulated
Subsidiaries
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 2010 and
December 2009, 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 2010 and December 2009, these
subsidiaries were in compliance with their local capital
adequacy requirements.
Restrictions on
Payments
The regulatory requirements referred to above restrict
Group Inc.’s ability to withdraw capital from its
regulated subsidiaries. As of December 2010 and
December 2009, approximately $24.70 billion and
$23.49 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 New York State Banking Department 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.
174
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 for stock warrants and options and for 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 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 EPS.
The table below presents the computations of basic and diluted
EPS.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions, except per share amounts | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Numerator for basic and diluted EPS — net
earnings/(loss) applicable to common shareholders
|
$ | 7,713 | $ | 12,192 | $ | 2,041 | $ | (1,028 | ) | |||||||||
|
Denominator for basic EPS — weighted average number of
common shares
|
542.0 | 512.3 | 437.0 | 485.5 | ||||||||||||||
|
Effect of dilutive securities:
|
||||||||||||||||||
|
RSUs
|
15.0 | 15.7 | 10.2 | — | ||||||||||||||
|
Stock options and warrants
|
28.3 | 22.9 | 9.0 | — | ||||||||||||||
|
Dilutive potential common shares
|
43.3 | 38.6 | 19.2 | — | ||||||||||||||
|
Denominator for diluted EPS — weighted average
number of common shares and dilutive potential common shares
|
585.3 | 550.9 | 456.2 | 485.5 | ||||||||||||||
|
Basic EPS
|
$ | 14.15 | $ | 23.74 | $ | 4.67 | $ | (2.15 | ) | |||||||||
|
Diluted EPS
|
13.18 | 22.13 | 4.47 | (2.15 | ) | |||||||||||||
The diluted EPS computations in the table above do not include
the antidilutive effect as follows:
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Number of antidilutive RSUs and common shares underlying
antidilutive stock options and warrants
|
6.2 | 24.7 | 60.5 | 157.2 | ||||||||||||||
In the table above, unvested
share-based
payment awards that have
non-forfeitable
rights to dividends or dividend equivalents are treated as a
separate class of securities in calculating EPS. The impact of
applying this methodology was a reduction to basic EPS of $0.08
and $0.06 for the years ended December 2010 and
December 2009, respectively, and an increase in basic and
diluted loss per common share of $0.03 for the one month ended
December 2008. EPS for the year ended November 2008
has not been restated due to immateriality.
175
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 or incentive fees from
these funds. Additionally, the firm invests alongside the
third-party
investors in certain funds.
The tables below present fees earned from affiliated funds, fees
receivable from affiliated funds and the aggregate carrying
value of the firm’s interests in affiliated funds.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Fees earned from affiliated funds
|
$ | 3,126 | $ | 2,517 | $ | 3,137 | $ | 206 | ||||||||||
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Fees receivable from funds
|
$ | 886 | $ | 1,044 | ||||||
|
Aggregate carrying value of interests in funds
|
14,773 | 13,837 | ||||||||
The firm has provided voluntary financial support to certain of
its funds that have experienced significant reductions in
capital and liquidity or had limited access to the debt markets
during the financial crisis. As of December 2010, the firm
had exposure to these funds in the form of loans and guarantees
of $253 million, primarily related to certain real estate
funds. In addition, as of December 2010, the firm had
outstanding commitments to extend credit to these funds of
$160 million.
The firm may provide additional voluntary financial support to
these funds if they were to experience significant financial
distress; however, such amounts are not expected to be material
to the firm. In the ordinary course of business, the firm may
also engage in other activities with these funds, including,
among others, securities lending, trade execution, market
making, custody, and acquisition and bridge financing. See
Note 18 for the firm’s investment commitments related
to these funds.
176
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest income is recorded on an accrual basis based on
contractual interest rates. The table below presents
the sources of interest income and interest expense.
| Year Ended |
One Month
Ended
|
|||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Interest income
|
||||||||||||||||||
|
Deposits with banks
|
$ | 86 | $ | 65 | $ | 188 | $ | 2 | ||||||||||
|
Securities borrowed, securities purchased under agreements to
resell and federal funds sold
|
540 | 951 | 11,746 | 301 | ||||||||||||||
|
Financial instruments owned, at fair value
|
10,346 | 11,106 | 13,150 | 1,172 | ||||||||||||||
|
Other
interest
1
|
1,337 | 1,785 | 10,549 | 212 | ||||||||||||||
|
Total interest income
|
$ | 12,309 | $ | 13,907 | $ | 35,633 | $ | 1,687 | ||||||||||
|
Interest expense
|
||||||||||||||||||
|
Deposits
|
$ | 304 | $ | 415 | $ | 756 | $ | 51 | ||||||||||
|
Securities loaned and securities sold under agreements to
repurchase
|
708 | 1,317 | 7,414 | 229 | ||||||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
1,859 | 1,854 | 2,789 | 174 | ||||||||||||||
|
Short-term
borrowings
2
|
453 | 623 | 1,864 | 107 | ||||||||||||||
|
Long-term
borrowings
2
|
3,155 | 2,585 | 6,975 | 297 | ||||||||||||||
|
Other
interest
3
|
327 | (294 | ) | 11,559 | 144 | |||||||||||||
|
Total interest expense
|
$ | 6,806 | $ | 6,500 | $ | 31,357 | $ | 1,002 | ||||||||||
|
Net interest income
|
$ | 5,503 | $ | 7,407 | $ | 4,276 | $ | 685 | ||||||||||
| 1. | Primarily includes interest income on customer debit balances and other interest-earning assets. |
| 2. | Includes interest on unsecured borrowings and other secured financings. |
| 3. | Primarily includes interest expense on customer credit balances and other interest-bearing liabilities. |
177
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. These plans do not
have a material impact on the firm’s consolidated results
of operations.
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. These plans do not have a material impact
on the firm’s consolidated results of operations.
The firm recognizes 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, in the consolidated statements of financial
condition. As of December 2010, “Other assets”
and “Other liabilities and accrued expenses” included
$164 million (related to an overfunded pension plan) and
$641 million, respectively, related to these plans. As of
December 2009, “Other liabilities and accrued
expenses” included $769 million related to these plans.
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 $193 million, $178 million and $208 million
for the years ended December 2010, December 2009 and
November 2008, respectively.
178
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The cost of employee services received in exchange for a
share-based
award is generally measured based on the grant-date fair value
of the award.
Share-based
awards that do not require future service (i.e., vested
awards, including awards granted to retirement-eligible
employees) are expensed immediately.
Share-based
employee awards that require future service are amortized over
the relevant service period. Expected forfeitures are included
in determining
share-based
employee compensation expense.
The firm pays cash dividend equivalents on outstanding 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. 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.
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.
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. The SIP 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 the
2008 fiscal year could not exceed 250 million shares. The
total number of shares of common stock that may be delivered for
awards granted under the SIP in the 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 2010 and December 2009, 139.2 million
and 140.6 million shares, respectively, were available for
grant under the SIP.
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. Employee RSU agreements generally provide that
vesting is accelerated in certain circumstances, such as on
retirement, death and extended absence. 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 table below presents the activity
related to RSUs.
179
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Weighted Average Grant-Date
|
||||||||||||||||||
|
Restricted Stock
|
Fair Value of Restricted
|
|||||||||||||||||
| Units Outstanding | Stock Units Outstanding | |||||||||||||||||
|
No Future
|
No Future
|
|||||||||||||||||
|
Future Service
|
Service
|
Future Service
|
Service
|
|||||||||||||||
| Required | Required | Required | Required | |||||||||||||||
|
Outstanding, December 2009
|
16,655,194 | 28,065,587 | $ | 121.50 | $ | 158.91 | ||||||||||||
|
Granted
1,
2
|
18,808,320 | 16,703,719 | 135.42 | 129.52 | ||||||||||||||
|
Forfeited
|
(1,460,512 | ) | (303,582 | ) | 117.42 | 160.75 | ||||||||||||
|
Delivered
3
|
(17,475,516 | ) | 147.13 | |||||||||||||||
|
Vested
2
|
(12,547,209 | ) | 12,547,209 | 138.27 | 138.27 | |||||||||||||
|
Outstanding, December 2010
|
21,455,793 | 39,537,417 | $ | 124.17 | $ | 145.13 | ||||||||||||
| 1. | The weighted average grant-date fair value of RSUs granted during the years ended December 2010, December 2009, November 2008 and one month ended December 2008 was $132.64, $151.31, $154.31, and $67.60, respectively. The fair value of the RSUs granted during the year ended December 2010 and one month ended December 2008 includes a liquidity discount of 13.2% and 14.3%, respectively, 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 2010, December 2009, November 2008 and one month ended December 2008 was $4.07 billion, $2.18 billion, $1.03 billion and $41 million, respectively. |
| 3. | Includes RSUs that were cash settled. |
In January 2011, the firm granted to its employees
15.3 million year-end RSUs, of which 8.4 million RSUs
require future service as a condition of delivery. These awards
are subject to additional conditions as outlined in the award
agreements. Generally, shares underlying these awards, net of
required withholding tax, deliver over a three-year period but
are subject to post-vesting transfer restrictions through
January 2016. These grants are not included in the above
table.
Stock
Options
Stock options generally vest as outlined in the applicable stock
option agreement. Options granted in February 2010 will
generally become exercisable in
one-third
installments in January 2011, January 2012
and January 2013 and will expire in February 2014.
Employee stock option agreements provide that vesting is
accelerated in certain circumstances, such as on retirement,
death and extended absence. In general, options granted prior to
February 2010 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”
in the consolidated statements of earnings. See Note 21 for
further information on EPS.
The table below presents the activity related to stock options.
|
Weighted
|
||||||||||||||||||
|
Weighted
|
Aggregate
|
Average
|
||||||||||||||||
|
Options
|
Average
|
Intrinsic Value
|
Remaining
|
|||||||||||||||
| Outstanding | Exercise Price | (in millions) | Life (years) | |||||||||||||||
|
Outstanding, December 2009
|
62,272,097 | $ | 95.27 | $ | 4,781 | 6.64 | ||||||||||||
|
Granted
|
75,000 | 154.16 | ||||||||||||||||
|
Exercised
|
(6,834,743 | ) | 84.93 | |||||||||||||||
|
Forfeited
|
(264,489 | ) | 78.82 | |||||||||||||||
|
Outstanding, December 2010
|
55,247,865 | $ | 96.71 | $ | 4,152 | 6.25 | ||||||||||||
|
Exercisable, December 2010
|
28,638,606 | $ | 98.52 | $ | 2,078 | 4.76 | ||||||||||||
The total intrinsic value of options exercised during the years
ended December 2010, December 2009 and
November 2008 and one month ended
December 2008 was $510 million, $484 million,
$433 million and $1 million, respectively. The table
below presents options outstanding.
180
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
Weighted
|
||||||||||||||||||||||||||
|
Weighted
|
Average
|
|||||||||||||||||||||||||
|
Options
|
Average
|
Remaining
|
||||||||||||||||||||||||
| Exercise Price | Outstanding | Exercise Price | Life (years) | |||||||||||||||||||||||
| $ | 75.00 | - | $ | 89.99 | 38,868,442 | $ | 78.80 | 7.33 | ||||||||||||||||||
| 90.00 | - | 104.99 | 7,531,799 | 91.79 | 1.00 | |||||||||||||||||||||
| 105.00 | - | 119.99 | — | — | — | |||||||||||||||||||||
| 120.00 | - | 134.99 | 2,791,500 | 131.64 | 4.92 | |||||||||||||||||||||
| 135.00 | - | 149.99 | — | — | — | |||||||||||||||||||||
| 150.00 | - | 164.99 | 75,000 | 154.16 | 3.17 | |||||||||||||||||||||
| 165.00 | - | 194.99 | — | — | — | |||||||||||||||||||||
| 195.00 | - | 209.99 | 5,981,124 | 202.27 | 6.48 | |||||||||||||||||||||
| Outstanding, December 2010 | 55,247,865 | |||||||||||||||||||||||||
The weighted average fair value of options granted in the year
ended December 2010 and in the one month ended
December 2008 was $37.58 and $14.08 per option,
respectively.
The table below presents the primary weighted average
assumptions used to estimate fair value as of the grant date
based on a Black-Scholes
option-pricing
model.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| 2010 | 2009 | 2008 | 2008 | |||||||||||||||
|
Risk-free
interest rate
|
1.6% | N/A | N/A | 1.1% | ||||||||||||||
|
Expected volatility
|
32.5 | N/A | N/A | 50.1 | ||||||||||||||
|
Annual dividend per share
|
$1.40 | N/A | N/A | $1.40 | ||||||||||||||
|
Expected life
|
3.75 years | N/A | N/A | 4.0 years | ||||||||||||||
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 in the one month ended
December 2008 reflects a liquidity discount of 26.7%, as a
result of these transfer restrictions. The liquidity discount
was based on the
firm’s
pre-determined
written liquidity discount policy, which is consistently applied
to all financial instruments with transfer restrictions.
The table below presents
share-based
compensation and the related tax benefit.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Share-based
compensation
|
$ | 4,070 | $ | 2,030 | $ | 1,587 | $ | 180 | ||||||||||
|
Excess tax benefit related to options exercised
|
183 | 166 | 144 | — | ||||||||||||||
|
Excess tax benefit/(provision) related to
share-based
compensation
1
|
239 | (793 | ) | 645 | — | |||||||||||||
| 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 2010, there was $1.50 billion of total
unrecognized compensation cost related to non-vested
share-based
compensation arrangements.
This cost is expected to be recognized over a weighted average
period of 1.61 years.
181
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Provision for
Income Taxes
Income taxes are provided for using the asset and liability
method under which deferred tax assets and liabilities are
recognized for temporary differences between the financial
reporting and tax bases of assets and liabilities. 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.”
The tables below present the components of the
provision/(benefit) for taxes and a reconciliation of the
U.S. federal statutory income tax rate to the firm’s
effective income tax rate.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Current taxes
|
||||||||||||||||||
|
U.S. federal
|
$ | 1,791 | $ | 4,039 | $ | (278 | ) | $ | 157 | |||||||||
|
State and local
|
325 | 594 | 91 | 10 | ||||||||||||||
|
Non-U.S.
|
1,083 | 2,242 | 1,964 | 287 | ||||||||||||||
|
Total current tax expense
|
3,199 | 6,875 | 1,777 | 454 | ||||||||||||||
|
Deferred taxes
|
||||||||||||||||||
|
U.S. federal
|
1,516 | (763 | ) | (880 | ) | (857 | ) | |||||||||||
|
State and local
|
162 | (130 | ) | (92 | ) | (26 | ) | |||||||||||
|
Non-U.S.
|
(339 | ) | 462 | (791 | ) | (49 | ) | |||||||||||
|
Total deferred tax (benefit)/expense
|
1,339 | (431 | ) | (1,763 | ) | (932 | ) | |||||||||||
|
Provision/(benefit) for taxes
|
$ | 4,538 | $ | 6,444 | $ | 14 | $ | (478 | ) | |||||||||
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| 2010 | 2009 | 2008 | 2008 | |||||||||||||||
|
U.S. federal statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||
|
State and local taxes, net of U.S. federal income tax
effects
|
2.5 | 1.5 | — | 0.8 | ||||||||||||||
|
Tax credits
|
(0.7 | ) | (0.3 | ) | (4.3 | ) | 0.8 | |||||||||||
|
Non-U.S. operations
|
(2.3 | ) | (3.5 | ) | (29.8 | ) | 4.3 | |||||||||||
|
Tax-exempt
income, including dividends
|
(1.0 | ) | (0.4 | ) | (5.9 | ) | 1.0 | |||||||||||
|
Other
|
1.7 | 1 | 0.2 | 5.6 | 2 | (3.9 | ) | |||||||||||
|
Effective income tax rate
|
35.2 | % | 32.5 | % | 0.6 | % | 38.0 | % | ||||||||||
| 1. | Primarily includes the effect of the SEC settlement of $550 million, substantially all of which is non-deductible. |
| 2. | Primarily includes the effect of the liability increase as a result of adopting amended principles related to accounting for uncertainty in income taxes. |
182
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Deferred Income
Taxes
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. Valuation allowances are
established to reduce deferred tax assets to the
amount that more likely than not will be realized. Tax assets
and liabilities are presented as a component of “Other
assets” and “Other liabilities and accrued
expenses,” respectively. See Notes 12 and 17 for
further information.
The table below presents the significant components of deferred
tax assets and liabilities.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Deferred tax assets
|
||||||||||
|
Compensation and benefits
|
$ | 3,397 | $ | 3,338 | ||||||
|
Unrealized losses
|
731 | 1,754 | ||||||||
|
ASC 740 asset related to unrecognized tax benefits
|
972 | 1,004 | ||||||||
|
Non-U.S. operations
|
652 | 807 | ||||||||
|
Foreign tax credits
|
11 | 277 | ||||||||
|
Net operating losses
|
250 | 184 | ||||||||
|
Occupancy-related
|
129 | 159 | ||||||||
|
Other, net
|
411 | 427 | ||||||||
| 6,553 | 7,950 | |||||||||
|
Valuation
allowance
1
|
(50 | ) | (74 | ) | ||||||
|
Total deferred tax
assets
2
|
$ | 6,503 | $ | 7,876 | ||||||
|
Total deferred tax
liabilities
2,
3
|
$ | 1,647 | $ | 1,611 | ||||||
| 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. |
The firm has recorded deferred tax assets of $250 million
and $184 million as of December 2010 and
December 2009, respectively, in connection with
U.S. federal, state and local and foreign net operating
loss carryforwards. The firm also recorded a valuation allowance
of $42 million and $46 million as of
December 2010 and December 2009, respectively, related
to these net operating loss carryforwards. As of
December 2010, the U.S. federal, state and local, and
foreign net operating loss carryforwards were $341 million,
$1.54 billion and $240 million, respectively. If not
utilized, the U.S. federal net operating loss carryforward
will begin to expire in 2016 and the state and local net
operating loss carryforwards will begin to expire in 2012. The
foreign net operating loss carryforwards can be carried forward
indefinitely.
The firm had foreign tax credit carryforwards of
$11 million and $277 million as of December 2010
and December 2009, respectively. The firm recorded a
related net deferred income tax asset of $5 million and
$271 million as of December 2010 and
December 2009, respectively. These carryforwards will begin
to expire in 2013.
The firm had capital loss carryforwards of $12 million and
$99 million as of December 2010 and
December 2009, respectively. The firm recorded a related
net deferred income tax asset of $2 million and
$35 million as of December 2010 and
December 2009, respectively. These carryforwards expire in
2014.
During 2010 and 2009, the valuation allowance was decreased by
$24 million and $19 million, respectively, primarily
due to the utilization of losses previously considered more
likely than not to expire unused.
183
Table of Contents
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 2010 and December 2009,
this policy resulted in an unrecognized net deferred tax
liability of $2.67 billion and $2.34 billion,
respectively, attributable to reinvested earnings of
$17.70 billion and $16.21 billion, respectively.
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.
Unrecognized Tax
Benefits
The firm recognizes tax positions in the financial statements
only when it is more likely than not that the position will be
sustained on 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 on settlement. A liability
is established for differences between positions taken in a tax
return and amounts recognized in the financial statements.
The table below presents the changes in the liability for
unrecognized tax benefits, which is recorded in “Other
liabilities and accrued expenses.” See Note 17 for
further information.
| As of | ||||||||||||||
|
December
|
December
|
November
|
||||||||||||
| in millions | 2010 | 2009 | 2008 | |||||||||||
|
Balance, beginning of year
|
$ | 1,925 | $ | 1,548 | 3 | $ | 1,042 | |||||||
|
Increases based on tax positions related to the current year
|
171 | 143 | 172 | |||||||||||
|
Increases based on tax positions related to prior years
|
162 | 379 | 264 | |||||||||||
|
Decreases related to tax positions of prior years
|
(104 | ) | (19 | ) | (67 | ) | ||||||||
|
Decreases related to settlements
|
(128 | ) | (91 | ) | (38 | ) | ||||||||
|
Acquisitions/(dispositions)
|
56 | — | — | |||||||||||
|
Exchange rate fluctuations
|
(1 | ) | (35 | ) | — | |||||||||
|
Balance, end of year
|
$ | 2,081 | $ | 1,925 | $ | 1,373 | ||||||||
|
Related deferred income tax
asset
1
|
$ | 972 | $ | 1,004 | $ | 625 | ||||||||
|
Net unrecognized tax
benefit
2
|
1,109 | 921 | 748 | |||||||||||
| 1. | Included in “Other assets.” See Note 12. |
| 2. | If recognized, the net tax benefit would reduce the firm’s effective income tax rate. |
| 3. | Includes $175 million recorded in the one month ended December 2008. |
184
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 2010 and December 2009, the accrued
liability for interest expense related to income tax matters and
income tax penalties was $213 million and
$194 million, respectively. The firm recognized
$28 million, $62 million, $37 million and
$3 million of interest and income tax penalties for the
years ended December 2010, December 2009,
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 2010 due to potential audit
settlements. 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.
Regulatory Tax
Examinations
The firm is subject to examination by the U.S. Internal
Revenue Service (IRS) and other taxing authorities in
jurisdictions where the firm has significant business
operations, such as the United Kingdom, Japan, Hong Kong, Korea
and various states, such as New York. The tax years under
examination vary by jurisdiction. The firm believes that during
2011, certain audits have a reasonable possibility of being
completed. The firm does not expect completion of these audits
to have a material impact on the firm’s financial condition
but it may be material to operating results for a particular
period, depending, in part, on the operating results for that
period.
The table below presents the earliest tax years that remain
subject to examination by major jurisdiction.
|
As of
|
||||||
| Jurisdiction | December 2010 | |||||
|
U.S. Federal
1
|
2005 | |||||
|
New York State and
City
2
|
2004 | |||||
|
United Kingdom
|
2007 | |||||
|
Japan
3
|
2005 | |||||
|
Hong Kong
|
2004 | |||||
|
Korea
|
2008 | |||||
| 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. |
| 3. | Japan National Tax Agency examination of fiscal 2005 through 2009 began during the first quarter of 2010. |
All years subsequent to the above 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.
In the fourth quarter of 2010, the firm reorganized its three
previous reportable business segments into four new reportable
business segments: Investment Banking, Institutional Client
Services, Investing & Lending and Investment
Management. Prior periods are presented on a comparable basis.
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 in the firm’s segments
reflect, among other factors, the overall performance of the
firm as well as the performance of individual businesses.
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 four
reportable business segments. Due to the integrated nature of
these segments, estimates and judgments are 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.
185
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 in 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. |
Management believes that the following information provides a
reasonable representation of each segment’s contribution to
consolidated
pre-tax
earnings/(loss) and total assets.
| For the or as of | ||||||||||||||||||||
| in millions Year Ended | One Month Ended | |||||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||||
| 2010 | 2009 | 2008 | 2008 | |||||||||||||||||
|
Investment Banking
|
Net revenues | $ | 4,810 | $ | 4,984 | $ | 5,453 | $ | 138 | |||||||||||
| Operating expenses | 3,511 | 3,482 | 3,269 | 170 | ||||||||||||||||
| Pre-tax earnings/(loss) | $ | 1,299 | $ | 1,502 | $ | 2,184 | $ | (32 | ) | |||||||||||
| Segment assets | $ | 1,870 | $ | 1,759 | $ | 1,945 | $ | 1,733 | ||||||||||||
|
Institutional Client Services
|
Net revenues 1 | $ | 21,796 | $ | 32,719 | $ | 22,345 | $ | 1,332 | |||||||||||
| Operating expenses | 14,291 | 13,691 | 10,294 | 736 | ||||||||||||||||
| Pre-tax earnings | $ | 7,505 | $ | 19,028 | $ | 12,051 | $ | 596 | ||||||||||||
| Segment assets | $ | 819,765 | $ | 751,851 | $ | 782,235 | $ | 1,012,744 | ||||||||||||
|
Investing & Lending
|
Net revenues | $ | 7,541 | $ | 2,863 | $ | (10,821 | ) | $ | (1,630 | ) | |||||||||
| Operating expenses | 3,361 | 3,523 | 2,719 | 204 | ||||||||||||||||
| Pre-tax earnings/(loss) | $ | 4,180 | $ | (660 | ) | $ | (13,540 | ) | $ | (1,834 | ) | |||||||||
| Segment assets | $ | 78,771 | $ | 83,851 | $ | 88,443 | $ | 85,488 | ||||||||||||
|
Investment Management
|
Net revenues | $ | 5,014 | $ | 4,607 | $ | 5,245 | $ | 343 | |||||||||||
| Operating expenses | 4,051 | 3,673 | 3,528 | 263 | ||||||||||||||||
| Pre-tax earnings | $ | 963 | $ | 934 | $ | 1,717 | $ | 80 | ||||||||||||
| Segment assets | $ | 10,926 | $ | 11,481 | $ | 11,924 | $ | 12,260 | ||||||||||||
|
Total
|
Net revenues | $ | 39,161 | $ | 45,173 | $ | 22,222 | $ | 183 | |||||||||||
| Operating expenses | 26,269 | 25,344 | 19,886 | 1,441 | ||||||||||||||||
| Pre-tax earnings/(loss) | $ | 12,892 | $ | 19,829 | $ | 2,336 | $ | (1,258 | ) | |||||||||||
| Total assets | $ | 911,332 | $ | 848,942 | $ | 884,547 | $ | 1,112,225 | ||||||||||||
| 1. | Includes $111 million, $36 million, $(61) million and $(2) million for the years ended December 2010, December 2009 and November 2008 and one month ended December 2008, respectively, of realized gains/(losses) on securities held in the firm’s insurance subsidiaries which are accounted for as available-for-sale. |
186
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Operating expenses in the table above include the following
expenses that have not been allocated to the firm’s
segments:
| • | charitable contributions of $345 million and $810 million for the years ended December 2010 and December 2009, respectively; |
| • | net provisions for a number of litigation and regulatory proceedings of $682 million, $104 million, $(4) million and $68 million for the years ended December 2010, December 2009 and November 2008 and one month ended December 2008, respectively; and |
| • | real estate-related exit costs of $28 million, $61 million and $80 million for the years ended December 2010, December 2009 and November 2008, respectively. |
The table below presents the amounts of net interest income
included in net revenues.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Investment Banking
|
$ | — | $ | — | $ | 6 | $ | — | ||||||||||
|
Institutional Client Services
|
4,692 | 6,951 | 4,825 | 755 | ||||||||||||||
|
Investing & Lending
|
609 | 242 | (773 | ) | (74 | ) | ||||||||||||
|
Investment Management
|
202 | 214 | 218 | 4 | ||||||||||||||
|
Total net interest
|
$ | 5,503 | $ | 7,407 | $ | 4,276 | $ | 685 | ||||||||||
The table below presents the amounts of depreciation and
amortization expense included in
pre-tax
earnings.
| Year Ended | One Month Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Investment Banking
|
$ | 172 | $ | 156 | $ | 185 | $ | 13 | ||||||||||
|
Institutional Client Services
|
1,109 | 775 | 772 | 78 | ||||||||||||||
|
Investing & Lending
|
422 | 793 | 440 | 29 | ||||||||||||||
|
Investment Management
|
200 | 214 | 228 | 23 | ||||||||||||||
|
Total depreciation and amortization
1
|
$ | 1,904 | $ | 1,943 | $ | 1,625 | $ | 143 | ||||||||||
| 1. | Includes real estate-related exit costs of $1 million and $5 million for the years ended December 2010 and December 2009, respectively, that have not been allocated to the firm’s segments. |
187
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The methodology for
allocating profitability to geographic regions is dependent on
estimates and management judgment because a significant portion
of the firm’s activities require cross-border coordination
in order to facilitate the needs of the firm’s clients.
Geographic results are generally allocated as follows:
| • | Investment Banking: location of the client and investment banking team. |
| • | Institutional Client Services: Fixed Income, Currency and Commodities Client Execution, and Equities (excluding Securities Services): location of |
| the market-making desk; Securities Services: location of the primary market for the underlying security. | |
| • | Investing & Lending: Investing: location of the investment; Lending: location of the client. |
| • | Investment Management: location of the sales team. |
The table below presents 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 (excluding Corporate) and net earnings (excluding
Corporate) for each geographic region.
| Year Ended | One Month Ended | |||||||||||||||||||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||||||||||||||||||
| $ in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||||||||||||||||||
|
Net revenues
|
||||||||||||||||||||||||||||||||||
|
Americas
1
|
$ | 21,564 | 55 | % | $ | 25,313 | 56 | % | $ | 15,485 | 70 | % | $ | 197 | N.M. | |||||||||||||||||||
|
EMEA
2
|
10,449 | 27 | 11,595 | 26 | 5,910 | 26 | (440 | ) | N.M. | |||||||||||||||||||||||||
|
Asia
|
7,148 | 18 | 8,265 | 18 | 827 | 4 | 426 | N.M. | ||||||||||||||||||||||||||
|
Total net revenues
|
$ | 39,161 | 100 | % | $ | 45,173 | 100 | % | $ | 22,222 | 100 | % | $ | 183 | 100 | % | ||||||||||||||||||
|
Pre-tax
earnings/(loss)
|
||||||||||||||||||||||||||||||||||
|
Americas
1
|
$ | 7,934 | 57 | % | $ | 11,461 | 56 | % | $ | 4,947 | N.M. | $ | (555 | ) | N.M. | |||||||||||||||||||
|
EMEA
2
|
3,080 | 22 | 5,508 | 26 | 181 | N.M. | (806 | ) | N.M. | |||||||||||||||||||||||||
|
Asia
|
2,933 | 21 | 3,835 | 18 | (2,716 | ) | N.M. | 171 | N.M. | |||||||||||||||||||||||||
|
Subtotal
|
13,947 | 100 | % | 20,804 | 100 | % | 2,412 | 100 | % | (1,190 | ) | 100 | % | |||||||||||||||||||||
|
Corporate
3
|
(1,055 | ) | (975 | ) | (76 | ) | (68 | ) | ||||||||||||||||||||||||||
|
Total
pre-tax
earnings/(loss)
|
$ | 12,892 | $ | 19,829 | $ | 2,336 | $ | (1,258 | ) | |||||||||||||||||||||||||
|
Net earnings/(loss)
|
||||||||||||||||||||||||||||||||||
|
Americas
1
|
$ | 4,917 | 53 | % | $ | 7,120 | 51 | % | $ | 3,417 | N.M. | $ | (366 | ) | N.M. | |||||||||||||||||||
|
EMEA
2
|
2,236 | 24 | 4,201 | 30 | 703 | N.M. | (498 | ) | N.M. | |||||||||||||||||||||||||
|
Asia
|
2,083 | 23 | 2,689 | 19 | (1,746 | ) | N.M. | 130 | N.M. | |||||||||||||||||||||||||
|
Subtotal
|
9,236 | 100 | % | 14,010 | 100 | % | 2,374 | 100 | % | (734 | ) | 100 | % | |||||||||||||||||||||
|
Corporate
|
(882 | ) | (625 | ) | (52 | ) | (46 | ) | ||||||||||||||||||||||||||
|
Total net earnings/(loss)
|
$ | 8,354 | $ | 13,385 | $ | 2,322 | $ | (780 | ) | |||||||||||||||||||||||||
| 1. | Substantially all relates to the U.S. |
| 2. | EMEA (Europe, Middle East and Africa). Pre-tax earnings and net earnings include the impact of the U.K. bank payroll tax for the year ended December 2010. |
| 3. | Consists of net provisions for a number of litigation and regulatory proceedings of $682 million, $104 million, $(4) million and $68 million for the years ended December 2010, December 2009 and November 2008 and one month ended December 2008, respectively; charitable contributions of $345 million and $810 million for the years ended December 2010 and December 2009, respectively; and real estate-related exit costs of $28 million, $61 million and $80 million for the years ended December 2010, December 2009 and November 2008, respectively. |
188
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit concentrations may arise from market making, client
facilitation, investing, underwriting, lending and
collateralized transactions 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 from counterparties 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 asset managers, investment
funds, commercial banks,
brokers and dealers, clearing houses and exchanges, which
results in significant credit concentrations.
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.
The table below presents the credit concentrations in assets
held by the firm. As of December 2010 and
December 2009, the firm did not have credit exposure to any
other counterparty that exceeded 2% of total assets.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
U.S. government and federal agency
obligations
1
|
$ | 96,350 | $ | 83,827 | ||||||
|
% of total assets
|
10.6% | 9.9% | ||||||||
|
Other sovereign
obligations
2
|
$ | 40,379 | $ | 38,607 | ||||||
|
% of total assets
|
4.4% | 4.5% | ||||||||
| 1. | Included in “Financial instruments owned, at fair value” and “Cash and securities segregated for regulatory and other purposes.” |
| 2. | Principally consisting of securities issued by the governments of the United Kingdom, Japan and France as of December 2010, and the United Kingdom and Japan as of December 2009. |
The table below presents collateral posted to the firm by
counterparties to resale agreements and securities borrowed
transactions (including those in “Cash and
securities segregated for regulatory and other purposes”).
See Note 9 for further information about collateralized
agreements and financings.
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
U.S. government and federal agency obligations
|
$ | 121,366 | $ | 87,625 | ||||||
|
Other sovereign
obligations
1
|
73,357 | 77,989 | ||||||||
| 1. | Principally consisting of securities issued by the governments of France and Germany as of December 2010, and Germany, the United Kingdom and Japan as of December 2009. |
189
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Group Inc. — Condensed
Statements of Earnings
|
One Month
|
||||||||||||||||||
| Year Ended | Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Revenues
|
||||||||||||||||||
|
Dividends from bank subsidiary
|
$ | — | $ | — | $ | 2,922 | $ | 5 | ||||||||||
|
Dividends from nonbank subsidiaries
|
6,032 | 8,793 | 3,716 | 130 | ||||||||||||||
|
Undistributed earnings/(loss) of subsidiaries
|
2,884 | 5,884 | (3,971 | ) | (1,115 | ) | ||||||||||||
|
Other revenues
|
964 | (1,018 | ) | (2,886 | ) | (1,004 | ) | |||||||||||
|
Total
non-interest
revenues
|
9,880 | 13,659 | (219 | ) | (1,984 | ) | ||||||||||||
|
Interest income
|
4,153 | 4,565 | 7,167 | 462 | ||||||||||||||
|
Interest expense
|
3,429 | 3,112 | 8,229 | 448 | ||||||||||||||
|
Net interest income
|
724 | 1,453 | (1,062 | ) | 14 | |||||||||||||
|
Net revenues, including net interest income
|
10,604 | 15,112 | (1,281 | ) | (1,970 | ) | ||||||||||||
|
Operating expenses
|
||||||||||||||||||
|
Compensation and benefits
|
423 | 637 | 122 | (94 | ) | |||||||||||||
|
Other expenses
|
238 | 1,034 | 471 | 32 | ||||||||||||||
|
Total operating expenses
|
661 | 1,671 | 593 | (62 | ) | |||||||||||||
|
Pre-tax
earnings/(loss)
|
9,943 | 13,441 | (1,874 | ) | (1,908 | ) | ||||||||||||
|
Provision/(benefit) for taxes
|
1,589 | 56 | (4,196 | ) | (1,128 | ) | ||||||||||||
|
Net earnings/(loss)
|
8,354 | 13,385 | 2,322 | (780 | ) | |||||||||||||
|
Preferred stock dividends
|
641 | 1,193 | 281 | 248 | ||||||||||||||
|
Net earnings/(loss) applicable to common shareholders
|
$ | 7,713 | $ | 12,192 | $ | 2,041 | $ | (1,028 | ) | |||||||||
Group Inc. — Condensed
Statements of Financial Condition
| As of December | ||||||||||
| in millions | 2010 | 2009 | ||||||||
|
Assets
|
||||||||||
|
Cash and cash equivalents
|
$ | 7 | $ | 1,140 | ||||||
|
Loans to and receivables from subsidiaries
|
||||||||||
|
Bank subsidiary
|
5,050 | 5,564 | ||||||||
|
Nonbank subsidiaries
|
182,316 | 177,952 | ||||||||
|
Investments in subsidiaries and other affiliates
|
||||||||||
|
Bank subsidiary
|
18,807 | 17,318 | ||||||||
|
Nonbank subsidiaries and other affiliates
|
52,498 | 48,421 | ||||||||
|
Financial instruments owned, at fair value
|
24,153 | 23,977 | ||||||||
|
Other assets
|
8,612 | 11,254 | ||||||||
|
Total assets
|
$ | 291,443 | $ | 285,626 | ||||||
|
Liabilities and shareholders’ equity
|
||||||||||
|
Unsecured
short-term
borrowings
1
|
||||||||||
|
With third parties
|
$ | 32,299 | $ | 24,604 | ||||||
|
With subsidiaries
|
5,483 | 4,208 | ||||||||
|
Payables to subsidiaries
|
358 | 509 | ||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
935 | 1,907 | ||||||||
|
Other liabilities
|
6,230 | 6,682 | ||||||||
|
Unsecured
long-term
borrowings
2
|
||||||||||
|
With third parties
|
167,782 | 175,300 | ||||||||
|
With
subsidiaries
3
|
1,000 | 1,702 | ||||||||
|
Total liabilities
|
214,087 | 214,912 | ||||||||
|
Commitments, contingencies and guarantees
|
||||||||||
|
Shareholders’ equity
|
||||||||||
|
Preferred stock
|
6,957 | 6,957 | ||||||||
|
Common stock
|
8 | 8 | ||||||||
|
Restricted stock units and employee stock options
|
7,706 | 6,245 | ||||||||
|
Additional
paid-in
capital
|
42,103 | 39,770 | ||||||||
|
Retained earnings
|
57,163 | 50,252 | ||||||||
|
Accumulated other comprehensive loss
|
(286 | ) | (362 | ) | ||||||
|
Stock held in treasury, at cost
|
(36,295 | ) | (32,156 | ) | ||||||
|
Total shareholders’ equity
|
77,356 | 70,714 | ||||||||
|
Total liabilities and shareholders’ equity
|
$ | 291,443 | $ | 285,626 | ||||||
Group Inc. — Condensed
Statements of Cash Flows
|
One Month
|
||||||||||||||||||
| Year Ended | Ended | |||||||||||||||||
|
December
|
December
|
November
|
December
|
|||||||||||||||
| in millions | 2010 | 2009 | 2008 | 2008 | ||||||||||||||
|
Cash flows from operating activities
|
||||||||||||||||||
|
Net earnings/(loss)
|
$ | 8,354 | $ | 13,385 | $ | 2,322 | $ | (780 | ) | |||||||||
|
Non-cash
items included in net earnings
|
||||||||||||||||||
|
Undistributed (earnings)/loss of subsidiaries
|
(2,884 | ) | (5,884 | ) | 3,971 | 1,115 | ||||||||||||
|
Depreciation and amortization
|
18 | 39 | 36 | 3 | ||||||||||||||
|
Deferred income taxes
|
214 | (3,347 | ) | (2,178 | ) | (847 | ) | |||||||||||
|
Share-based
compensation
|
393 | 100 | 40 | — | ||||||||||||||
|
Changes in operating assets and liabilities
|
||||||||||||||||||
|
Financial instruments owned, at fair value
|
(176 | ) | 24,382 | (4,661 | ) | (8,188 | ) | |||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
(1,091 | ) | (1,032 | ) | 1,559 | (557 | ) | |||||||||||
|
Other, net
|
10,852 | 10,081 | (12,162 | ) | 4,091 | |||||||||||||
|
Net cash provided by/(used for) operating activities
|
15,680 | 37,724 | (11,073 | ) | (5,163 | ) | ||||||||||||
|
Cash flows from investing activities
|
||||||||||||||||||
|
Purchase of property, leasehold improvements and equipment
|
(15 | ) | (5 | ) | (49 | ) | — | |||||||||||
|
Issuance of short-term loans to subsidiaries. net of repayments
|
(9,923 | ) | (6,335 | ) | 3,701 | 1,923 | ||||||||||||
|
Issuance of term loans to subsidiaries
|
(5,532 | ) | (13,823 | ) | (14,242 | ) | (1,687 | ) | ||||||||||
|
Repayments of term loans by subsidiaries
|
1,992 | 9,601 | 24,925 | 714 | ||||||||||||||
|
Capital contributions to subsidiaries, net
|
(1,038 | ) | (2,781 | ) | (22,245 | ) | (6,179 | ) | ||||||||||
|
Net cash used for investing activities
|
(14,516 | ) | (13,343 | ) | (7,910 | ) | (5,229 | ) | ||||||||||
|
Cash flows from financing activities
|
||||||||||||||||||
|
Unsecured
short-term
borrowings, net
|
3,137 | (13,266 | ) | (10,564 | ) | 4,616 | ||||||||||||
|
Proceeds from issuance of
long-term
borrowings
|
21,098 | 22,814 | 35,645 | 9,171 | ||||||||||||||
|
Repayment of
long-term
borrowings, including the current portion
|
(21,838 | ) | (27,374 | ) | (23,959 | ) | (3,358 | ) | ||||||||||
|
Common stock repurchased
|
(4,183 | ) | (2 | ) | (2,034 | ) | (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
|
(1,443 | ) | (2,205 | ) | (850 | ) | — | |||||||||||
|
Proceeds from issuance of common stock, including stock option
exercises
|
581 | 6,260 | 6,105 | 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
|
352 | 135 | 614 | — | ||||||||||||||
|
Cash settlement of
share-based
compensation
|
(1 | ) | (2 | ) | — | — | ||||||||||||
|
Net cash provided by/(used for) financing activities
|
(2,297 | ) | (24,314 | ) | 19,956 | 10,430 | ||||||||||||
|
Net increase/(decrease) in cash and cash equivalents
|
(1,133 | ) | 67 | 973 | 38 | |||||||||||||
|
Cash and cash equivalents, beginning of year
|
1,140 | 1,073 | 62 | 1,035 | ||||||||||||||
|
Cash and cash equivalents, end of year
|
$ | 7 | $ | 1,140 | $ | 1,035 | $ | 1,073 | ||||||||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for
third-party
interest, net of capitalized interest, were $3.07 billion,
$2.77 billion, $7.18 billion and $248 million for
the years ended December 2010, December 2009 and
November 2008 and one month ended December 2008,
respectively.
Cash payments for income taxes, net of refunds, were
$2.05 billion, $2.77 billion, $991 million and
$1 million for the years ended December 2010,
December 2009 and November 2008 and one month ended
December 2008, respectively.
| 1. | Includes $7.82 billion and $6.57 billion at fair value as of December 2010 and December 2009, respectively. |
| 2. | Includes $13.44 billion and $13.67 billion at fair value as of December 2010 and December 2009, respectively. |
| 3. | Unsecured long-term borrowings with subsidiaries by maturity date are $306 million in 2012, $200 million in 2013, $119 million in 2014, $94 million in 2015 and $281 million in 2016-thereafter. |
190
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The firm is involved in a number of judicial, regulatory and
arbitration proceedings (including those described below)
concerning matters arising in connection with the conduct of the
firm’s businesses. Many of these proceedings are at
preliminary stages, and many of these cases seek an
indeterminate amount of damages.
With respect to matters described below, management has
estimated the upper end of the range of reasonably possible loss
as being equal to (i) the amount of money damages claimed,
where applicable, (ii) the amount of securities that the
firm sold in cases involving underwritings where the firm is
being sued by purchasers and is not being indemnified by a party
that the firm believes will pay any judgment, or (iii) in
cases where the purchasers are demanding that the firm
repurchase securities, the price that purchasers paid for the
securities less the estimated value, if any, as of
December 2010 of the relevant securities. As of
December 2010, the firm has estimated the aggregate amount
of reasonably possible losses for these matters to be
approximately $3.4 billion.
Under ASC 450 an event is “reasonably possible”
if “the chance of the future event or events occurring is
more than remote but less than likely” and an event is
“remote” if “the chance of the future event or
events occurring is slight”. Thus, references to the upper
end of the range of reasonably possible loss for cases in which
the firm is able to estimate a range of reasonably possible loss
mean the upper end of the range of loss for cases for which the
firm believes the risk of loss is more than slight. The amounts
reserved against such matters are not significant as compared to
the upper end of the range of reasonably possible loss.
Management is unable to estimate a range of reasonably possible
loss for cases described below in which damages have not been
specified and (i) the proceedings are in early stages,
(ii) there is uncertainty as to the likelihood of a class
being certified or the ultimate size of the class,
(iii) there is uncertainty as to the outcome of pending
appeals or motions, (iv) there are significant factual
issues to be resolved, and/or (v) there are novel legal
issues presented. However, for these cases, management does not
believe, based on currently available information, that the
outcomes of these proceedings will have a material adverse
effect on the firm’s financial condition, though the
outcomes could be material to the firm’s operating results
for any particular period, depending, in part, upon the
operating results for such period.
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 October 5, 2009, the
district court approved a settlement agreement entered into by
the parties. The firm has paid into a settlement fund the full
amount that GS&Co. would contribute in 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 appealed certain aspects of the
settlement’s approval. Certain of the appeals have been
withdrawn, and on December 8, 2010,
January 14, 2011 and February 3, 2011,
plaintiffs moved to dismiss the remaining appeals.
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
Section 16 of the Exchange Act in connection with offerings
of securities for 15 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. The
district court granted defendants’ motions to dismiss by a
decision dated March 12, 2009. On
December 2, 2010, the appellate court affirmed in part
and reversed in part, upholding the dismissal of
191
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
seven of the actions in which GS&Co. is a defendant but
remanding the remaining eight actions in which GS&Co. is a
defendant for consideration of other bases for dismissal. On
December 16, 2010, the underwriters and the plaintiff
filed petitions for rehearing
and/or
rehearing en banc, which were denied on
January 18, 2011. The issuance of the mandate has been
stayed to permit the parties to seek Supreme Court review.
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. On November 8, 2010, GS&Co.’s motion
for summary judgment was granted by the lower court; plaintiff
has appealed.
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, 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. On November 18, 2010, the parties reached
a settlement in principle, subject to documentation, pursuant to
which GSI will contribute up to €48 million to a
settlement fund. The firm has reserved the full amount of
GSI’s proposed contribution to the settlement.
Research 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
.
One such action,
relating to coverage of RSL Communications, Inc., commenced on
July 15, 2003. The parties entered into a settlement
agreement on August 23, 2010, which received final
court approval on February 23, 2011. Under the settlement
agreement, GS&Co. paid approximately $3.38 million.
Group Inc. and GS&Co. were 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 in the U.S. District Court for the Southern
District of New York, alleged that defendants breached their
fiduciary duties and violated the federal securities laws in
connection with the firm’s research activities and sought,
among other things, unspecified compensatory damages and/or
rescission. On July 12, 2010, the parties entered into
a settlement agreement pursuant to which the settlement has
192
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
been funded by the firm’s insurers. The settlement received
court approval on December 15, 2010 and has become
final.
Group Inc. and certain of its affiliates are subject to a
number of investigations and reviews by various governmental and
regulatory bodies and
self-regulatory
organizations relating to research practices, including
communications among research analysts, sales and trading
personnel and clients. Goldman Sachs is cooperating with the
investigations and reviews.
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 June 15, 2009, the district court required
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. On March 2, 2010, GS&Co.
moved for summary judgment.
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 (vi) SLKS’ retention of an independent consultant
to review and evaluate 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, which have been consolidated, seek
unspecified compensatory damages, restitution and disgorgement
on behalf of purchasers and sellers of unspecified securities
between October 17, 1998 and
October 15, 2003. By a decision dated
March 14, 2009, the district court granted
plaintiffs’ motion for class certification. The
defendants’ petition with the U.S. Court of Appeals
for the Second Circuit seeking review of the certification
ruling was denied by an order dated October 1, 2009.
The specialist defendants’ petition for a rehearing
and/or
rehearing en banc was denied on February 24, 2010.
193
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Treasury Matters.
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 a forthcoming Treasury 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 the district court granted the motion but only
insofar as the claim relates to the trading of treasury bonds.
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 district court’s prior denial of class
certification, and GS&Co. moved to dismiss the appeal on
January 25, 2010. By an order dated
April 13, 2010, the U.S. Court of Appeals for the
Seventh Circuit ruled that GS&Co.’s motion would be
entertained together with the merits of the appeal.
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 26.5 million 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. On April 20, 2010, certain
underwriting defendants including GS&Co. entered into a
settlement of the action, pursuant to which they will contribute
$49.5 million to a settlement fund. The settlement received
court approval on October 27, 2010 and has become
final.
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. has cooperated with those requests.
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 complaint does not specify a dollar amount of
damages. 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
194
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
Beginning in September 2006, Group Inc.
and/or
GS&Co. were 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 district court
dismissed the remaining three actions on
July 28, 2010. The plaintiffs filed motions for
reconsideration, which were denied on
October 22, 2010, and have revised their notices of
appeal in these actions.
Compensation-Related Litigation.
On
January 17, 2008, Group Inc., its Board,
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 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, and plaintiff’s appeal
from this denial was dismissed. 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. The plaintiff
filed a further amended complaint on March 24, 2010,
and the defendants’ motion to dismiss this further amended
complaint was granted on September 30, 2010. On
October 22, 2010, the plaintiff filed a notice of
appeal from the dismissal of his complaint.
On March 24, 2009, the same plaintiff filed an action
in New York Supreme Court, New York County against
Group Inc., its directors and certain senior executives
alleging violation of Delaware statutory and common law in
connection with substantively similar allegations regarding
stock option awards. On April 14, 2009,
Group Inc. removed the action to the U.S. District
Court for the Southern District of New York and has moved to
transfer to the district court judge presiding over the other
actions described in this section and to dismiss. The action was
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, and this
motion was granted on July 29, 2010. On
January 7, 2011, the plaintiff filed an amended
complaint.
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
the Board 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., the Board and certain senior executives. The
complaints seek,
inter alia
, unspecified damages,
restitution of certain compensation paid, and an order requiring
the firm to adopt corporate reforms. In the actions in New York
state court, on April 8, 2010, the plaintiffs filed a
motion indicating that they no longer intend to pursue their
claims but are seeking an award of attorney’s fees in
connection with bringing the suit, which the defendants have
opposed. In the actions brought in the Delaware Court of
Chancery, the defendants moved to dismiss on
March 9, 2010, and the plaintiffs amended their
complaint on April 28, 2010 to include, among other
things, the allegations included in the SEC’s action
described in the
“Mortgage-Related
Matters” section below. The defendants moved to dismiss
this amended complaint on May 12, 2010. In lieu of
responding to defendants’ motion, plaintiffs moved on
December 8, 2010 for permission to file a further
195
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amended complaint, which the defendants had opposed. The court
granted plaintiffs’ motion to amend on
January 19, 2011, and the defendants moved to dismiss
the second amended complaint on February 4, 2011.
Group Inc. and certain of its affiliates are subject to a
number of investigations and reviews from various governmental
agencies and self-regulatory organizations regarding the
firm’s compensation processes. The firm is cooperating with
the investigations and reviews.
Mortgage-Related
Matters.
On April 16, 2010, the SEC
brought an action (SEC Action) under the U.S. federal
securities laws in the U.S. District Court for the Southern
District of New York against GS&Co. and Fabrice Tourre, one
of its employees, in connection with a CDO offering made in
early 2007 (ABACUS
2007-AC1
transaction), alleging that the defendants made materially false
and misleading statements to investors and seeking, among other
things, unspecified monetary penalties. Investigations of
GS&Co. by FINRA and of GSI by the U.K. Financial Services
Authority (FSA) were subsequently initiated, and Group Inc.
and certain of its affiliates have received requests for
information from other regulators, regarding CDO offerings,
including the ABACUS
2007-AC1
transaction, and related matters.
On July 14, 2010, GS&Co. entered into a consent
agreement with the SEC, settling all claims made against
GS&Co. in the SEC Action (SEC Settlement), pursuant to
which, GS&Co. paid $550 million of disgorgement and
civil penalties, and which was approved by the U.S. District
Court for the Southern District of New York on July 20,
2010.
On September 9, 2010, the FSA announced a settlement
with GSI pursuant to which the FSA found that GSI violated
certain FSA principles by failing to (i) provide
notification about the SEC Wells Notice issued to
Mr. Tourre (who worked on the ABACUS
2007-AC1
transaction but subsequently transferred to GSI and became
registered with the FSA) and (ii) have procedures and
controls to ensure that GSI’s Compliance Department would
be alerted to various aspects of the SEC investigation so as to
be in a position to determine whether any aspects were
reportable to the FSA. The FSA assessed a fine of
£17.5 million.
On November 9, 2010, FINRA announced a settlement with
GS&Co. relating to GS&Co.’s failure to file
Form U4 updates within 30 days of learning of the
receipt of Wells
Notices by Mr. Tourre and another employee as well as
deficiencies in the firm’s systems and controls for such
filings. FINRA assessed a fine of $650,000 and GS&Co.
agreed to undertake a review and remediation of the applicable
systems and controls.
On January 6, 2011, ACA Financial Guaranty
Corp. filed an action against GS&Co. in respect
of the ABACUS
2007-AC1
transaction in New York Supreme Court, New York County. The
complaint includes allegations of fraudulent inducement,
fraudulent concealment and unjust enrichment and seeks at least
$30 million in compensatory damages, at least
$90 million in punitive damages and unspecified
disgorgement.
Since April 22, 2010, a number of putative shareholder
derivative actions have been filed in New York Supreme Court,
New York County, and the U.S. District Court for the
Southern District of New York against Group Inc., the Board
and certain officers and employees of Group Inc. and its
affiliates in connection with
mortgage-related
matters between 2004 and 2007, including the ABACUS
2007-AC1
transaction and other CDO offerings. These derivative complaints
generally include allegations of breach of fiduciary duty,
corporate waste, abuse of control, mismanagement, unjust
enrichment, misappropriation of information, securities fraud
and insider trading, and challenge the accuracy and adequacy of
Group Inc.’s disclosure. These derivative complaints
seek, among other things, declaratory relief, unspecified
compensatory damages, restitution and certain corporate
governance reforms. The New York Supreme Court has consolidated
the two actions pending in that court. Certain plaintiffs in the
federal court cases have moved to consolidate these actions and
to appoint lead plaintiff and lead counsel. In addition, as
described in the “Compensation-Related Litigation”
section above, the plaintiffs in the compensation-related
Delaware Court of Chancery actions have amended their complaint
to assert, among other things, allegations similar to those in
the derivative claims referred to above, the defendants moved to
dismiss this amended complaint, and the plaintiffs then sought
permission to amend further, which the court granted on
January 19, 2011. The defendants moved to dismiss the
second amended complaint on February 4, 2011.
196
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Since April 23, 2010, the Board has received letters
from shareholders demanding that the Board take action to
address alleged misconduct by GS&Co., the Board and certain
officers and employees of Group Inc. and its affiliates.
The demands generally allege misconduct in connection with the
ABACUS
2007-AC1
transaction, the alleged failure by Group Inc. to
adequately disclose the SEC investigation that led to the SEC
Action, and Group Inc.’s 2009 compensation practices.
The demands include a letter from a Group Inc. shareholder,
which previously made a demand that the Board investigate and
take action in connection with auction products matters, and has
now expanded its demand to address the foregoing matters. The
Board previously rejected the demands relating to auction
products matters.
In addition, beginning April 26, 2010, a number of
purported securities law class actions have been filed in the
U.S. District Court for the Southern District of New York
challenging the adequacy of Group Inc.’s public
disclosure of, among other things, the firm’s activities in
the CDO market and the SEC investigation that led to the SEC
Action. The purported class action complaints, which name as
defendants Group Inc. and certain officers and employees of
Group Inc. and its affiliates, generally allege violations
of Sections 10(b) and 20(a) of the Exchange Act and seek
unspecified damages. On June 25, 2010, certain
shareholders and groups of shareholders moved to consolidate
these actions and to appoint lead plaintiffs and lead counsel.
GS&Co., Goldman Sachs Mortgage Company and GS Mortgage
Securities Corp. and three current or former Goldman Sachs
employees are defendants in a putative 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. Defendants’ motion to dismiss the
second amended complaint was granted on
January 28, 2010 with leave to replead certain claims.
On March 31, 2010, the plaintiff filed a third amended
complaint relating to two offerings, which the defendants moved
to dismiss on June 22, 2010. This motion to dismiss
was denied as
to the plaintiff’s Section 12(a)(2) claims on
September 22, 2010, and granted as to the
plaintiff’s Section 11 claims on
October 15, 2010, and the plaintiff’s motion for
reconsideration was denied on November 17, 2010. On
December 9, 2010, the plaintiff filed a motion for
entry of final judgment or certification of an interlocutory
appeal as to plaintiff’s Section 11 claims, which was
denied on January 11, 2011. On June 3, 2010,
another investor (who had unsuccessfully sought to intervene in
the action) filed a separate putative class action asserting
substantively similar allegations relating to an additional
offering pursuant to the 2007 registration statement. The
defendants moved to dismiss this separate action on
November 1, 2010. GS&Co. underwrote approximately
$951 million principal amount of certificates to all
purchasers in the offerings at issue in the complaint (excluding
those offerings for which the claims have been dismissed).
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. Defendants
moved to dismiss the second amended complaint. On
January 12, 2011, the district court granted the
motion to dismiss with respect to offerings in which plaintiff
had not purchased securities, but denied the motion to dismiss
with respect to a single offering in which the plaintiff
allegedly purchased securities. GS&Co. underwrote
approximately $698 million principal amount of certificates
to all purchasers in the offerings at issue in the complaint
(excluding those offerings for which the claims have been
dismissed).
On September 30, 2010, a putative class action was
filed in the U.S. District Court for the Southern District
of New York against GS&Co., Group Inc. and two former
GS&Co. employees on behalf of investors in notes issued in
2006 and 2007 by two synthetic CDOs (Hudson Mezzanine
2006-1
and
2006-2).
The
197
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
complaint, which was amended on February 4, 2011, asserts
federal securities law and common law claims, and seeks
unspecified compensatory, punitive and other damages.
Various alleged purchasers of, and counterparties involved in
transactions relating to, mortgage
pass-through
certificates, CDOs and other
mortgage-related
products (including the Federal Home Loan Banks of Seattle,
Chicago and Indianapolis, the Charles Schwab Corporation,
Cambridge Place Investment Management Inc., Basis Yield Alpha
Fund (Master) and Landesbank
Baden-Württemberg,
among others) have filed complaints in state and federal court
against firm affiliates, generally alleging that the offering
documents for the securities that they purchased contained
untrue statements of material facts and material omissions and
generally seeking rescission and damages. Certain of these
complaints also name other firms as defendants. Additionally,
the National Credit Union Administration (NCUA) has stated that
it intends to pursue similar claims on behalf of certain credit
unions for which it acts as conservator, and the firm and the
NCUA have entered into an agreement tolling the relevant
statutes of limitation. A number of other entities have
threatened to assert claims against the firm in connection with
various mortgage-related offerings, and the firm has entered
into agreements with a number of these entities to toll the
relevant statute of limitations. The firm estimates, based on
currently available information, that the aggregate cumulative
losses experienced by the plaintiffs with respect to the
securities at issue in active cases brought against the firm
where purchasers are seeking rescission of mortgage-related
securities was approximately $457 million as of
December 2010. This amount was calculated as the aggregate
amount by which the initial purchase price for the securities
allegedly purchased by the plaintiffs exceeds the estimated
December 2010 value of those securities. This estimate does
not include the potential NCUA claims or any claims by other
purchasers in the same or other mortgage-related offerings that
have not actually brought claims against the firm.
The firm has also received requests for information from
regulators relating to the
mortgage-related
securitization process, subprime mortgages, CDOs, synthetic
mortgage-related
products, particular transactions, and servicing and foreclosure
activities, and is cooperating with the requests.
The firm expects to be the subject of additional putative
shareholder derivative actions, purported class actions,
rescission and “put back” claims and other litigation,
additional investor and shareholder demands, and additional
regulatory and other investigations and actions with respect to
mortgage-related
offerings, loan sales, CDOs, and servicing and foreclosure
activities. See Note 18 for further information regarding
mortgage-related
contingencies.
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. The appellate court affirmed the
complaint’s dismissal by a decision dated
July 27, 2010 and, on October 14, 2010,
denied the City’s petition for rehearing en banc. On
January 12, 2011, the City filed a petition for writ
of certiorari with the U.S. Supreme Court.
Auction Products Matters.
On
August 21, 2008, GS&Co. entered into a settlement
in principle with the Office of the 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. 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 is subject to definitive
documentation and approval by the various states. On
June 2, 2009, GS&Co. entered into an Assurance of
Discontinuance with the New York State Attorney General. On
March 19, 2010, GS&Co. entered into an
Administrative Consent Order with the Illinois Secretary of
State, Securities Department, which had conducted an
investigation on behalf of states other than New York.
GS&Co has entered into similar consent orders with most
states and is in the process of doing so with the remaining
states.
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., the Board, and certain senior officers. The
complaint alleges generally that the Board breached its
198
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the
Board a letter demanding that the Board investigate the
allegations set forth in the complaint, and the Board ultimately
rejected the demand.
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 in an unspecified amount.
Defendants’ motion to dismiss was granted on
January 26, 2010. On March 1, 2010, the
plaintiffs filed a notice of appeal from the dismissal of their
complaints.
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. The
complaint seeks, among other things, treble damages in an
unspecified amount. Defendants moved to dismiss on
August 27, 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. On
April 26, 2010, the plaintiffs moved for leave to
proceed with a second phase of discovery encompassing additional
transactions. On August 18, 2010, the court permitted
discovery on eight additional transactions, and the plaintiffs
filed a fourth amended complaint on October 7, 2010.
The defendants filed a motion to dismiss certain aspects of the
fourth amended complaint on October 21, 2010, and the
court granted that motion on January 13, 2011.
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 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. On
October 12, 2010, the court granted class
certification (except as to one transaction). On
December 1, 2010, the defendants moved for partial
judgment on the pleadings as to two of the offerings. By a
decision dated January 28, 2011, the district court
denied the defendants’ motion for partial judgment on the
pleadings.
GS&Co. underwrote approximately $520 million principal
amount of securities to all purchasers in the offerings at issue
in the complaint (excluding those offerings for which the claims
have been dismissed).
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.
199
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
By a decision dated June 21, 2010, the district court
formally dismissed all claims relating to offerings in which no
named plaintiff purchased certificates (including all offerings
underwritten by GS&Co.), and both granted and denied the
defendants’ motions to dismiss in various other respects.
On May 17, 2010, four additional investors filed a
motion seeking to intervene in order to assert claims based on
additional offerings (including two underwritten by
GS&Co.). On July 6, 2010, another additional
investor filed a motion to intervene in order to assert claims
based on additional offerings (none of which were underwritten
by GS&Co.).
GS&Co. underwrote approximately $751 million principal
amount of securities to all purchasers in the offerings at issue
in the May 2010 motion to intervene. On
July 11, 2008, IndyMac Bank was placed under an FDIC
receivership, and on July 31, 2008, IndyMac Bancorp,
Inc. filed for Chapter 7 bankruptcy in the
U.S. Bankruptcy Court in Los Angeles, California.
Employment-Related Matters.
On
May 27, 2010, a putative class action was filed in the
U.S. District Court for the Southern District of New York
by several contingent technology workers who were employees of
third-party
vendors. The plaintiffs are seeking overtime pay for alleged
hours worked in excess of 40 per work week. The complaint
alleges that the plaintiffs were de facto employees of
GS&Co. and that GS&Co. is responsible for the overtime
pay under federal and state overtime laws. The complaint seeks
class action status and unspecified damages.
On September 15, 2010, a putative class action was
filed in the U.S. District for the Southern District of New
York by three former female employees alleging that
Group Inc. and GS&Co. have systematically
discriminated against female employees in respect of
compensation, promotion, assignments, mentoring and performance
evaluations. The complaint alleges a class consisting of all
female employees employed at specified levels by Group Inc.
and GS&Co. since July 2002, and asserts claims under
federal and New York City discrimination laws. The complaint
seeks class action status, injunctive relief and unspecified
amounts of compensatory, punitive and other damages. On
November 22, 2010, Group Inc. and GS&Co.
filed a motion to stay the claims of one of the named plaintiffs
and to compel individual arbitration with that individual, based
on an arbitration provision contained in an employment agreement
between Group Inc. and the individual.
Transactions with the Hellenic Republic
(Greece).
Group Inc. and certain of its
affiliates are subject to a number of investigations and reviews
by various governmental and regulatory bodies and
self-regulatory organizations
in connection with the firm’s transactions with the
Hellenic Republic (Greece), including financing and swap
transactions. Goldman Sachs is cooperating with the
investigations and reviews.
Sales, Trading and Clearance
Practices.
Group Inc. and certain of its
affiliates are subject to a number of investigations and reviews
by various governmental and regulatory bodies and
self-regulatory
organizations relating to the sales, trading and clearance of
corporate and government securities and other financial
products, including compliance with the SEC’s short sale
rule, algorithmic and quantitative trading, futures trading,
securities lending practices, trading of credit derivative
instruments, commodities trading and the effectiveness of
insider trading controls and internal information barriers.
Goldman Sachs is cooperating with the investigations and reviews.
200
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Municipal Securities Matters.
Group Inc.
and certain of its affiliates are subject to a number of
investigations and reviews by various governmental and
regulatory bodies and self-regulatory organizations relating to
transactions involving municipal securities, including
wall-cross procedures and conflict of interest disclosure with
respect to state and municipal clients, the trading of municipal
derivative instruments in connection with municipal offerings,
political contribution rules and the possible impact of credit
default swap transactions on municipal issuers. Goldman Sachs is
cooperating with the investigations and reviews.
Group Inc., Goldman Sachs Mitsui Marine Derivative
Products, L.P. (GSMMDP) and GS Bank USA are among numerous
financial services firms that have been named as defendants in
numerous substantially identical individual antitrust actions
filed beginning on November 12, 2009 that have been
coordinated with related antitrust class action litigation and
individual actions, in which no Goldman Sachs affiliate is
named, for
pre-trial
proceedings in the U.S. District Court for the Southern
District of New York. The plaintiffs include individual
California municipal entities and three New York
non-profit
entities. On April 26, 2010, the Goldman Sachs
defendants’ motion to dismiss complaints filed by
several individual California municipal plaintiffs was denied.
All of these complaints against Group Inc., GSMMDP and
GS Bank USA generally allege that the Goldman Sachs
defendants participated in a conspiracy to arrange bids, fix
prices and divide up the market for derivatives used by
municipalities in refinancing and hedging transactions from 1992
to 2008. The complaints assert claims under the federal
antitrust laws and either California’s Cartwright Act or
New York’s Donnelly Act, and seek, among other things,
treble damages under the antitrust laws in an unspecified amount
and injunctive relief.
Financial Crisis-Related
Matters.
Group Inc. and certain of its
affiliates are subject to a number of investigations and reviews
by various governmental and regulatory bodies and
self-regulatory organizations relating to the 2008 financial
crisis, including the establishment and unwind of credit default
swaps between Goldman Sachs and American International Group,
Inc. (AIG) and other transactions with, and in the securities
of, AIG, The Bear Stearns Companies Inc., Lehman Brothers
Holdings Inc. and other firms. Goldman Sachs is cooperating with
the investigations and reviews.
201
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Quarterly Results (unaudited)
The following represents the firm’s unaudited quarterly
results for the fiscal years ended December 2010 and
December 2009. 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 | ||||||||||||||||||
|
December
|
September
|
June
|
March
|
|||||||||||||||
| in millions, except per share data | 2010 | 2010 | 2010 | 2010 | ||||||||||||||
|
Total
non-interest
revenues
|
$ | 7,304 | $ | 7,775 | $ | 7,222 | $ | 11,357 | ||||||||||
|
Interest income
|
3,069 | 2,937 | 3,302 | 3,001 | ||||||||||||||
|
Interest expense
|
1,731 | 1,809 | 1,683 | 1,583 | ||||||||||||||
|
Net interest income
|
1,338 | 1,128 | 1,619 | 1,418 | ||||||||||||||
|
Net revenues, including net interest income
|
8,642 | 8,903 | 8,841 | 12,775 | ||||||||||||||
|
Operating
expenses
1
|
5,168 | 6,092 | 7,393 | 7,616 | ||||||||||||||
|
Pre-tax
earnings
|
3,474 | 2,811 | 1,448 | 5,159 | ||||||||||||||
|
Provision for taxes
|
1,087 | 913 | 835 | 1,703 | ||||||||||||||
|
Net earnings
|
2,387 | 1,898 | 613 | 3,456 | ||||||||||||||
|
Preferred stock dividends
|
160 | 161 | 160 | 160 | ||||||||||||||
|
Net earnings applicable to common shareholders
|
$ | 2,227 | $ | 1,737 | $ | 453 | $ | 3,296 | ||||||||||
|
Earnings per common share
|
||||||||||||||||||
|
Basic
|
$ | 4.10 | $ | 3.19 | $ | 0.82 | $ | 6.02 | ||||||||||
|
Diluted
|
3.79 | 2.98 | 0.78 | 5.59 | ||||||||||||||
|
Dividends declared per common share
|
0.35 | 0.35 | 0.35 | 0.35 | ||||||||||||||
| Three Months Ended | ||||||||||||||||||
|
December
|
September
|
June
|
March
|
|||||||||||||||
| in millions, except per share data | 2009 | 2009 | 2009 | 2009 | ||||||||||||||
|
Total
non-interest
revenues
|
$ | 7,847 | $ | 10,682 | $ | 11,719 | $ | 7,518 | ||||||||||
|
Interest income
|
3,075 | 3,000 | 3,470 | 4,362 | ||||||||||||||
|
Interest expense
|
1,307 | 1,310 | 1,428 | 2,455 | ||||||||||||||
|
Net interest income
|
1,768 | 1,690 | 2,042 | 1,907 | ||||||||||||||
|
Net revenues, including net interest income
|
9,615 | 12,372 | 13,761 | 9,425 | ||||||||||||||
|
Operating
expenses
1
|
2,238 | 7,578 | 8,732 | 6,796 | ||||||||||||||
|
Pre-tax
earnings
|
7,377 | 4,794 | 5,029 | 2,629 | ||||||||||||||
|
Provision for taxes
|
2,429 | 1,606 | 1,594 | 815 | ||||||||||||||
|
Net earnings
|
4,948 | 3,188 | 3,435 | 1,814 | ||||||||||||||
|
Preferred stock dividends
|
161 | 160 | 717 | 155 | ||||||||||||||
|
Net earnings applicable to common shareholders
|
$ | 4,787 | $ | 3,028 | $ | 2,718 | $ | 1,659 | ||||||||||
|
Earnings per common share
|
||||||||||||||||||
|
Basic
|
$ | 9.01 | $ | 5.74 | $ | 5.27 | $ | 3.48 | ||||||||||
|
Diluted
|
8.20 | 5.25 | 4.93 | 3.39 | ||||||||||||||
|
Dividends declared per common share
|
0.35 | 0.35 | 0.35 | — | ||||||||||||||
| 1. | The timing and magnitude of changes in the firm’s discretionary compensation accruals can have a significant effect on results in a given quarter. |
202
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Common Stock
Price Range
The table below presents the high and low sales prices per share
of the firm’s common stock.
| Year Ended | ||||||||||||||||||||||||||
| December 2010 | December 2009 | November 2008 | ||||||||||||||||||||||||
| High | Low | High | Low | High | Low | |||||||||||||||||||||
|
First quarter
|
$ | 178.75 | $ | 147.81 | $ | 115.65 | $ | 59.13 | $ | 229.35 | $ | 169.00 | ||||||||||||||
|
Second quarter
|
186.41 | 131.02 | 151.17 | 100.46 | 203.39 | 140.27 | ||||||||||||||||||||
|
Third quarter
|
157.25 | 129.50 | 188.00 | 135.23 | 190.04 | 152.25 | ||||||||||||||||||||
|
Fourth quarter
|
171.61 | 144.70 | 193.60 | 160.20 | 172.45 | 47.41 | ||||||||||||||||||||
As of February 11, 2011, there were 12,165 holders of
record of the firm’s common stock.
On February 11, 2011, the last reported sales price for the
firm’s common stock on the New York Stock Exchange was
$166.66 per share.
203
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Selected
Financial Data
| As of or for the | ||||||||||||||||||||||||||
| Year Ended |
One Month
Ended
|
|||||||||||||||||||||||||
|
December
|
December
|
November
|
November
|
November
|
December
|
|||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | 2008 | |||||||||||||||||||||
|
Income statement data
(in millions)
|
||||||||||||||||||||||||||
|
Total
non-interest
revenues
|
$ | 33,658 | $ | 37,766 | $ | 17,946 | $ | 42,000 | $ | 34,167 | $ | (502 | ) | |||||||||||||
|
Interest income
|
12,309 | 13,907 | 35,633 | 45,968 | 35,186 | 1,687 | ||||||||||||||||||||
|
Interest expense
|
6,806 | 6,500 | 31,357 | 41,981 | 31,688 | 1,002 | ||||||||||||||||||||
|
Net interest income
|
5,503 | 7,407 | 4,276 | 3,987 | 3,498 | 685 | ||||||||||||||||||||
|
Net revenues, including net interest income
|
39,161 | 45,173 | 22,222 | 45,987 | 37,665 | 183 | ||||||||||||||||||||
|
Compensation and benefits
|
15,376 | 16,193 | 10,934 | 20,190 | 16,457 | 744 | ||||||||||||||||||||
|
U.K. bank payroll tax
|
465 | — | — | — | — | — | ||||||||||||||||||||
|
Other operating expenses
|
10,428 | 9,151 | 8,952 | 8,193 | 6,648 | 697 | ||||||||||||||||||||
|
Pre-tax
earnings/(loss)
|
$ | 12,892 | $ | 19,829 | $ | 2,336 | $ | 17,604 | $ | 14,560 | $ | (1,258 | ) | |||||||||||||
|
Balance sheet data
(in millions)
|
||||||||||||||||||||||||||
|
Total assets
|
$ | 911,332 | $ | 848,942 | $ | 884,547 | $ | 1,119,796 | $ | 838,201 | $ | 1,112,225 | ||||||||||||||
|
Other secured financings
(long-term)
|
13,848 | 11,203 | 17,458 | 33,300 | 26,134 | 18,413 | ||||||||||||||||||||
|
Unsecured
long-term
borrowings
|
174,399 | 185,085 | 168,220 | 164,174 | 122,842 | 185,564 | ||||||||||||||||||||
|
Total liabilities
|
833,976 | 778,228 | 820,178 | 1,076,996 | 802,415 | 1,049,171 | ||||||||||||||||||||
|
Total shareholders’ equity
|
77,356 | 70,714 | 64,369 | 42,800 | 35,786 | 63,054 | ||||||||||||||||||||
|
Common share data
(in millions, except per share amounts)
|
||||||||||||||||||||||||||
|
Earnings/(loss) per common share
|
||||||||||||||||||||||||||
|
Basic
|
$ | 14.15 | $ | 23.74 | $ | 4.67 | $ | 26.34 | $ | 20.93 | $ | (2.15 | ) | |||||||||||||
|
Diluted
|
13.18 | 22.13 | 4.47 | 24.73 | 19.69 | (2.15 | ) | |||||||||||||||||||
|
Dividends declared per common share
|
1.40 | 1.05 | 1.40 | 1.40 | 1.30 | 0.47 | 5 | |||||||||||||||||||
|
Book value per common
share
1
|
128.72 | 117.48 | 98.68 | 90.43 | 72.62 | 95.84 | ||||||||||||||||||||
|
Average common shares outstanding
|
||||||||||||||||||||||||||
|
Basic
|
542.0 | 512.3 | 437.0 | 433.0 | 449.0 | 485.5 | ||||||||||||||||||||
|
Diluted
|
585.3 | 550.9 | 456.2 | 461.2 | 477.4 | 485.5 | ||||||||||||||||||||
|
Selected data (unaudited)
|
||||||||||||||||||||||||||
|
Total staff
|
||||||||||||||||||||||||||
|
Americas
|
19,900 | 18,900 | 19,700 | 20,100 | 18,100 | 19,200 | ||||||||||||||||||||
|
Non-Americas
|
15,800 | 13,600 | 14,800 | 15,400 | 12,800 | 14,100 | ||||||||||||||||||||
|
Total
staff
2
|
35,700 | 32,500 | 34,500 | 35,500 | 30,900 | 33,300 | ||||||||||||||||||||
|
Total staff, including consolidated entities held for investment
purposes
|
38,700 | 36,200 | 39,200 | 40,000 | 34,700 | 38,000 | ||||||||||||||||||||
|
Assets under management
(in
billions)
3
|
||||||||||||||||||||||||||
|
Asset class
|
||||||||||||||||||||||||||
|
Alternative
investments
4
|
$ | 148 | $ | 146 | $ | 146 | $ | 151 | $ | 145 | $ | 145 | ||||||||||||||
|
Equity
|
144 | 146 | 112 | 255 | 215 | 114 | ||||||||||||||||||||
|
Fixed income
|
340 | 315 | 248 | 256 | 198 | 253 | ||||||||||||||||||||
|
Total
non-money
market assets
|
632 | 607 | 506 | 662 | 558 | 512 | ||||||||||||||||||||
|
Money markets
|
208 | 264 | 273 | 206 | 118 | 286 | ||||||||||||||||||||
|
Total assets under management
|
$ | 840 | $ | 871 | $ | 779 | $ | 868 | $ | 676 | $ | 798 | ||||||||||||||
| 1. | Book value per common share is based on common shares outstanding, including RSUs granted to employees with no future service requirements, of 546.9 million, 542.7 million, 485.4 million, 439.0 million, 450.1 million and 485.9 million as of December 2010, December 2009, November 2008, November 2007, November 2006 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. |
204
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Statistical
Disclosures
Distribution of
Assets, Liabilities and Shareholders’ Equity
The table below presents a summary of consolidated average
balances and interest rates.
| For the Year Ended | ||||||||||||||||||||||||||||||||||||||
| December 2010 | December 2009 | November 2008 | ||||||||||||||||||||||||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||||||
| in millions, except rates | balance | Interest | rate | balance | Interest | rate | balance | Interest | rate | |||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||||
|
Deposits with banks
|
$ | 29,371 | $ | 86 | 0.29 | % | $ | 22,108 | $ | 65 | 0.29 | % | $ | 5,887 | $ | 188 | 3.19 | % | ||||||||||||||||||||
|
U.S.
|
24,988 | 67 | 0.27 | 18,134 | 45 | 0.25 | 1,541 | 41 | 2.66 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
4,383 | 19 | 0.43 | 3,974 | 20 | 0.50 | 4,346 | 147 | 3.38 | |||||||||||||||||||||||||||||
|
Securities borrowed, securities purchased under agreements to
resell, at fair value, and federal funds sold
|
353,719 | 540 | 0.15 | 355,636 | 951 | 0.27 | 421,157 | 11,746 | 2.79 | |||||||||||||||||||||||||||||
|
U.S.
|
243,907 | 75 | 0.03 | 255,785 | 14 | 0.01 | 331,043 | 8,791 | 2.66 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
109,812 | 465 | 0.42 | 99,851 | 937 | 0.94 | 90,114 | 2,955 | 3.28 | |||||||||||||||||||||||||||||
|
Financial instruments owned, at fair
value
1,
2
|
273,801 | 10,346 | 3.78 | 277,706 | 11,106 | 4.00 | 328,208 | 13,150 | 4.01 | |||||||||||||||||||||||||||||
|
U.S.
|
189,136 | 7,865 | 4.16 | 198,849 | 8,429 | 4.24 | 186,498 | 7,700 | 4.13 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
84,665 | 2,481 | 2.93 | 78,857 | 2,677 | 3.39 | 141,710 | 5,450 | 3.85 | |||||||||||||||||||||||||||||
|
Other interest-earning
assets
3
|
118,364 | 1,337 | 1.13 | 127,067 | 1,785 | 1.40 | 221,040 | 10,549 | 4.77 | |||||||||||||||||||||||||||||
|
U.S.
|
82,965 | 689 | 0.83 | 83,000 | 1,052 | 1.27 | 131,778 | 4,438 | 3.37 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
35,399 | 648 | 1.83 | 44,067 | 733 | 1.66 | 89,262 | 6,111 | 6.85 | |||||||||||||||||||||||||||||
|
Total interest-earning assets
|
775,255 | 12,309 | 1.59 | 782,517 | 13,907 | 1.78 | 976,292 | 35,633 | 3.65 | |||||||||||||||||||||||||||||
|
Cash and due from banks
|
3,709 | 5,066 | 7,975 | |||||||||||||||||||||||||||||||||||
|
Other
non-interest-earning
assets
2
|
113,310 | 124,554 | 154,727 | |||||||||||||||||||||||||||||||||||
|
Total Assets
|
$ | 892,274 | $ | 912,137 | $ | 1,138,994 | ||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 38,011 | 304 | 0.80 | $ | 41,076 | 415 | 1.01 | $ | 26,455 | 756 | 2.86 | ||||||||||||||||||||||||||
|
U.S.
|
31,418 | 279 | 0.89 | 35,043 | 371 | 1.06 | 21,598 | 617 | 2.86 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
6,593 | 25 | 0.38 | 6,033 | 44 | 0.73 | 4,857 | 139 | 2.86 | |||||||||||||||||||||||||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
160,280 | 708 | 0.44 | 156,794 | 1,317 | 0.84 | 194,935 | 7,414 | 3.80 | |||||||||||||||||||||||||||||
|
U.S.
|
112,839 | 355 | 0.31 | 111,718 | 392 | 0.35 | 107,361 | 3,663 | 3.41 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
47,441 | 353 | 0.74 | 45,076 | 925 | 2.05 | 87,574 | 3,751 | 4.28 | |||||||||||||||||||||||||||||
|
Financial instruments sold, but not yet
purchased
1,
2
|
89,040 | 1,859 | 2.09 | 72,866 | 1,854 | 2.54 | 95,377 | 2,789 | 2.92 | |||||||||||||||||||||||||||||
|
U.S.
|
44,713 | 818 | 1.83 | 39,647 | 586 | 1.48 | 49,152 | 1,202 | 2.45 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
44,327 | 1,041 | 2.35 | 33,219 | 1,268 | 3.82 | 46,225 | 1,587 | 3.43 | |||||||||||||||||||||||||||||
|
Commercial paper
|
1,624 | 5 | 0.31 | 1,002 | 5 | 0.50 | 4,097 | 145 | 3.54 | |||||||||||||||||||||||||||||
|
U.S.
|
289 | 1 | 0.35 | 284 | 3 | 1.06 | 3,147 | 121 | 3.84 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
1,335 | 4 | 0.30 | 718 | 2 | 0.28 | 950 | 24 | 2.53 | |||||||||||||||||||||||||||||
|
Other
borrowings
4,
5
|
53,888 | 448 | 0.83 | 58,129 | 618 | 1.06 | 99,351 | 1,719 | 1.73 | |||||||||||||||||||||||||||||
|
U.S.
|
33,017 | 393 | 1.19 | 36,164 | 525 | 1.45 | 52,126 | 1,046 | 2.01 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
20,871 | 55 | 0.26 | 21,965 | 93 | 0.42 | 47,225 | 673 | 1.43 | |||||||||||||||||||||||||||||
|
Long-term
borrowings
5,
6
|
193,031 | 3,155 | 1.63 | 203,280 | 2,585 | 1.27 | 203,360 | 6,975 | 3.43 | |||||||||||||||||||||||||||||
|
U.S.
|
183,338 | 2,910 | 1.59 | 192,054 | 2,313 | 1.20 | 181,775 | 6,271 | 3.45 | |||||||||||||||||||||||||||||
|
Non-U.S.
|
9,693 | 245 | 2.53 | 11,226 | 272 | 2.42 | 21,585 | 704 | 3.26 | |||||||||||||||||||||||||||||
|
Other interest-bearing
liabilities
7
|
189,008 | 327 | 0.17 | 207,148 | (294 | ) | (0.14 | ) | 345,956 | 11,559 | 3.34 | |||||||||||||||||||||||||||
|
U.S.
|
142,752 | (221 | ) | (0.15 | ) | 147,206 | (723 | ) | (0.49 | ) | 214,780 | 6,275 | 2.92 | |||||||||||||||||||||||||
|
Non-U.S.
|
46,256 | 548 | 1.18 | 59,942 | 429 | 0.72 | 131,176 | 5,284 | 4.03 | |||||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
724,882 | 6,806 | 0.94 | 740,295 | 6,500 | 0.88 | 969,531 | 31,357 | 3.23 | |||||||||||||||||||||||||||||
|
Non-interest-bearing
deposits
|
169 | 115 | 4 | |||||||||||||||||||||||||||||||||||
|
Other
non-interest-bearing
liabilities
2
|
92,966 | 106,200 | 122,292 | |||||||||||||||||||||||||||||||||||
|
Total liabilities
|
818,017 | 846,610 | 1,091,827 | |||||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
||||||||||||||||||||||||||||||||||||||
|
Preferred stock
|
6,957 | 11,363 | 5,157 | |||||||||||||||||||||||||||||||||||
|
Common stock
|
67,300 | 54,164 | 42,010 | |||||||||||||||||||||||||||||||||||
|
Total shareholders’ equity
|
74,257 | 65,527 | 47,167 | |||||||||||||||||||||||||||||||||||
|
Total liabilities, preferred stock and shareholders’
equity
|
$ | 892,274 | $ | 912,137 | $ | 1,138,994 | ||||||||||||||||||||||||||||||||
|
Interest rate spread
|
0.65 | % | 0.90 | % | 0.42 | % | ||||||||||||||||||||||||||||||||
|
Net interest income and net yield on interest-earning assets
|
$ | 5,503 | 0.71 | $ | 7,407 | 0.95 | $ | 4,276 | 0.44 | |||||||||||||||||||||||||||||
|
U.S.
|
4,161 | 0.77 | 6,073 | 1.09 | 1,775 | 0.27 | ||||||||||||||||||||||||||||||||
|
Non-U.S.
|
1,342 | 0.57 | 1,334 | 0.59 | 2,501 | 0.77 | ||||||||||||||||||||||||||||||||
|
Percentage of interest-earning assets and interest-bearing
liabilities attributable to
non-U.S. operations
8
|
||||||||||||||||||||||||||||||||||||||
|
Assets
|
30.22 | % | 28.98 | % | 33.33 | % | ||||||||||||||||||||||||||||||||
|
Liabilities
|
24.35 | 24.07 | 35.03 | |||||||||||||||||||||||||||||||||||
205
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
| 1. | Consists of cash financial instruments, including equity securities and convertible debentures. |
| 2. | Derivative instruments and commodities 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 certain 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 certain 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. |
206
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Changes in Net
Interest Income, Volume and Rate
Analysis
Analysis
The table below presents an analysis of the effect on net
interest income of volume and rate changes. In this
analysis, changes due to volume/rate variance have been
allocated to volume.
| For the Year Ended | ||||||||||||||||||||||||||
| December 2010 versus December 2009 | December 2009 versus November 2008 | |||||||||||||||||||||||||
|
Increase (decrease) due
|
Increase (decrease) due
|
|||||||||||||||||||||||||
| to change in: | to change in: | |||||||||||||||||||||||||
|
Net
|
Net
|
|||||||||||||||||||||||||
| in millions | Volume | Rate | change | Volume | Rate | change | ||||||||||||||||||||
|
Interest-earning assets
|
||||||||||||||||||||||||||
|
Deposits with banks
|
$ | 20 | $ | 1 | $ | 21 | $ | 39 | $ | (162 | ) | $ | (123 | ) | ||||||||||||
|
U.S.
|
18 | 4 | 22 | 41 | (37 | ) | 4 | |||||||||||||||||||
|
Non-U.S.
|
2 | (3 | ) | (1 | ) | (2 | ) | (125 | ) | (127 | ) | |||||||||||||||
|
Securities borrowed, securities purchased under agreements to
resell, at fair value and federal funds sold
|
38 | (449 | ) | (411 | ) | 87 | (10,882 | ) | (10,795 | ) | ||||||||||||||||
|
U.S.
|
(4 | ) | 65 | 61 | (4 | ) | (8,773 | ) | (8,777 | ) | ||||||||||||||||
|
Non-U.S.
|
42 | (514 | ) | (472 | ) | 91 | (2,109 | ) | (2,018 | ) | ||||||||||||||||
|
Financial instruments owned, at fair value
|
(234 | ) | (526 | ) | (760 | ) | (1,610 | ) | (434 | ) | (2,044 | ) | ||||||||||||||
|
U.S.
|
(404 | ) | (160 | ) | (564 | ) | 524 | 205 | 729 | |||||||||||||||||
|
Non-U.S.
|
170 | (366 | ) | (196 | ) | (2,134 | ) | (639 | ) | (2,773 | ) | |||||||||||||||
|
Other interest-earning assets
|
(159 | ) | (289 | ) | (448 | ) | (1,370 | ) | (7,394 | ) | (8,764 | ) | ||||||||||||||
|
U.S.
|
— | (363 | ) | (363 | ) | (618 | ) | (2,768 | ) | (3,386 | ) | |||||||||||||||
|
Non-U.S.
|
(159 | ) | 74 | (85 | ) | (752 | ) | (4,626 | ) | (5,378 | ) | |||||||||||||||
|
Change in interest income
|
(335 | ) | (1,263 | ) | (1,598 | ) | (2,854 | ) | (18,872 | ) | (21,726 | ) | ||||||||||||||
|
Interest-bearing liabilities
|
||||||||||||||||||||||||||
|
Interest-bearing deposits
|
(30 | ) | (81 | ) | (111 | ) | 151 | (492 | ) | (341 | ) | |||||||||||||||
|
U.S.
|
(32 | ) | (60 | ) | (92 | ) | 142 | (388 | ) | (246 | ) | |||||||||||||||
|
Non-U.S.
|
2 | (21 | ) | (19 | ) | 9 | (104 | ) | (95 | ) | ||||||||||||||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
22 | (631 | ) | (609 | ) | (857 | ) | (5,240 | ) | (6,097 | ) | |||||||||||||||
|
U.S.
|
4 | (41 | ) | (37 | ) | 15 | (3,286 | ) | (3,271 | ) | ||||||||||||||||
|
Non-U.S.
|
18 | (590 | ) | (572 | ) | (872 | ) | (1,954 | ) | (2,826 | ) | |||||||||||||||
|
Financial instruments sold, but not yet purchased, at fair value
|
354 | (349 | ) | 5 | (636 | ) | (299 | ) | (935 | ) | ||||||||||||||||
|
U.S.
|
93 | 139 | 232 | (140 | ) | (476 | ) | (616 | ) | |||||||||||||||||
|
Non-U.S.
|
261 | (488 | ) | (227 | ) | (496 | ) | 177 | (319 | ) | ||||||||||||||||
|
Commercial paper
|
2 | (2 | ) | — | (31 | ) | (109 | ) | (140 | ) | ||||||||||||||||
|
U.S.
|
— | (2 | ) | (2 | ) | (30 | ) | (88 | ) | (118 | ) | |||||||||||||||
|
Non-U.S.
|
2 | — | 2 | (1 | ) | (21 | ) | (22 | ) | |||||||||||||||||
|
Other borrowings
|
(40 | ) | (130 | ) | (170 | ) | (339 | ) | (762 | ) | (1,101 | ) | ||||||||||||||
|
U.S.
|
(37 | ) | (95 | ) | (132 | ) | (232 | ) | (289 | ) | (521 | ) | ||||||||||||||
|
Non-U.S.
|
(3 | ) | (35 | ) | (38 | ) | (107 | ) | (473 | ) | (580 | ) | ||||||||||||||
|
Long-term
debt
|
(177 | ) | 747 | 570 | (128 | ) | (4,262 | ) | (4,390 | ) | ||||||||||||||||
|
U.S.
|
(138 | ) | 735 | 597 | 123 | (4,081 | ) | (3,958 | ) | |||||||||||||||||
|
Non-U.S.
|
(39 | ) | 12 | (27 | ) | (251 | ) | (181 | ) | (432 | ) | |||||||||||||||
|
Other interest-bearing liabilities
|
(155 | ) | 776 | 621 | (178 | ) | (11,675 | ) | (11,853 | ) | ||||||||||||||||
|
U.S.
|
7 | 495 | 502 | 332 | (7,330 | ) | (6,998 | ) | ||||||||||||||||||
|
Non-U.S.
|
(162 | ) | 281 | 119 | (510 | ) | (4,345 | ) | (4,855 | ) | ||||||||||||||||
|
Change in interest expense
|
(24 | ) | 330 | 306 | (2,018 | ) | (22,839 | ) | (24,857 | ) | ||||||||||||||||
|
Change in net interest income
|
$ | (311 | ) | $ | (1,593 | ) | $ | (1,904 | ) | $ | (836 | ) | $ | 3,967 | $ | 3,131 | ||||||||||
207
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Available-for-sale
Securities Portfolio
The table below presents the fair value of
available-for-sale
securities.
|
Gross
|
Gross
|
|||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||
| in millions | Cost | Gains | Losses | Value | ||||||||||||||
|
Available-for-sale
securities, December 2010
|
||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 176 | $ | — | $ | — | $ | 176 | ||||||||||
|
U.S. government and federal agency obligations
|
638 | 18 | (19 | ) | 637 | |||||||||||||
|
Non-U.S. government
obligations
|
2 | — | — | 2 | ||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
593 | 82 | (5 | ) | 670 | |||||||||||||
|
Corporate debt securities
|
1,533 | 162 | (7 | ) | 1,688 | |||||||||||||
|
State and municipal obligations
|
356 | 8 | (5 | ) | 359 | |||||||||||||
|
Other debt obligations
|
136 | 7 | (2 | ) | 141 | |||||||||||||
|
Total
available-for-sale
securities
|
$ | 3,434 | $ | 277 | $ | (38 | ) | $ | 3,673 | |||||||||
|
Available-for-sale
securities, December 2009
|
||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 309 | $ | — | $ | — | $ | 309 | ||||||||||
|
U.S. government and federal agency obligations
|
982 | 8 | (40 | ) | 950 | |||||||||||||
|
Non-U.S. government
obligations
|
32 | 1 | — | 33 | ||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
583 | 70 | (15 | ) | 638 | |||||||||||||
|
Corporate debt securities
|
1,485 | 160 | (4 | ) | 1,641 | |||||||||||||
|
State and municipal obligations
|
179 | 5 | (2 | ) | 182 | |||||||||||||
|
Other debt obligations
|
108 | 3 | — | 111 | ||||||||||||||
|
Total
available-for-sale
securities
|
$ | 3,678 | $ | 247 | $ | (61 | ) | $ | 3,864 | |||||||||
208
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
The table below presents the fair value, amortized cost and
weighted average yields of
available-for-sale
securities by contractual maturity. Yields are calculated on a
weighted average basis.
| As of December 2010 | ||||||||||||||||||||||||||||||||||||||||||
|
Due After
|
Due After
|
|||||||||||||||||||||||||||||||||||||||||
|
Due in
|
One Year Through
|
Five Years Through
|
Due After
|
|||||||||||||||||||||||||||||||||||||||
| One Year or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||||
| $ in millions | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||
|
Fair value of
available-for-sale
securities
|
||||||||||||||||||||||||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 176 | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 176 | — | % | ||||||||||||||||||||||
|
U.S. government and federal agency obligations
|
37 | 4 | 99 | 3 | 17 | 4 | 484 | 4 | 637 | 4 | ||||||||||||||||||||||||||||||||
|
Non-U.S. government
obligations
|
— | — | 2 | 2 | — | — | — | — | 2 | 2 | ||||||||||||||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | — | — | — | — | — | 670 | 11 | 670 | 11 | ||||||||||||||||||||||||||||||||
|
Corporate debt securities
|
34 | 6 | 126 | 6 | 717 | 6 | 811 | 7 | 1,688 | 6 | ||||||||||||||||||||||||||||||||
|
State and municipal obligations
|
— | — | 10 | 5 | 11 | 5 | 338 | 6 | 359 | 6 | ||||||||||||||||||||||||||||||||
|
Other debt obligations
|
— | — | — | — | 24 | 1 | 117 | 5 | 141 | 4 | ||||||||||||||||||||||||||||||||
|
Total
available-for-sale
securities
|
$ | 247 | $ | 237 | $ | 769 | $ | 2,420 | $ | 3,673 | ||||||||||||||||||||||||||||||||
|
Amortized cost of
available-for-sale
securities
|
$ | 246 | $ | 220 | $ | 708 | $ | 2,260 | $ | 3,434 | ||||||||||||||||||||||||||||||||
| As of December 2009 | ||||||||||||||||||||||||||||||||||||||||||
|
Due After
|
Due After
|
|||||||||||||||||||||||||||||||||||||||||
|
Due in
|
One Year Through
|
Five Years Through
|
Due After
|
|||||||||||||||||||||||||||||||||||||||
| One Year or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||||
| $ in millions | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||||
|
Fair value of
available-for-sale
securities
|
||||||||||||||||||||||||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 309 | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 309 | — | % | ||||||||||||||||||||||
|
U.S. government and federal agency obligations
|
15 | 3 | 142 | 3 | 148 | 4 | 645 | 4 | 950 | 4 | ||||||||||||||||||||||||||||||||
|
Non-U.S. government
obligations
|
— | — | 33 | 3 | — | — | — | — | 33 | 3 | ||||||||||||||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities
|
— | — | — | — | 22 | 5 | 616 | 15 | 638 | 15 | ||||||||||||||||||||||||||||||||
|
Corporate debt securities
|
71 | 6 | 252 | 6 | 638 | 7 | 680 | 7 | 1,641 | 6 | ||||||||||||||||||||||||||||||||
|
State and municipal obligations
|
— | — | 10 | 5 | 10 | 5 | 162 | 7 | 182 | 6 | ||||||||||||||||||||||||||||||||
|
Other debt obligations
|
— | — | 41 | 1 | 15 | 3 | 55 | 9 | 111 | 5 | ||||||||||||||||||||||||||||||||
|
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 | ||||||||||||||||||||||||||||||||
209
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Deposits
The table below presents a summary of the firm’s
interest-bearing deposits.
| Average Balances | Average Interest Rates | |||||||||||||||||||||||||
|
December
|
December
|
November
|
December
|
December
|
November
|
|||||||||||||||||||||
| $ in millions | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||
|
U.S.:
|
||||||||||||||||||||||||||
|
Savings
1
|
$ | 23,260 | $ | 23,024 | $ | 20,214 | 0.44 | % | 0.62 | % | 2.82 | % | ||||||||||||||
|
Time
|
8,158 | 12,019 | 1,384 | 2.16 | 1.89 | 3.40 | ||||||||||||||||||||
|
Total U.S. deposits
|
31,418 | 35,043 | 21,598 | 0.89 | 1.06 | 2.86 | ||||||||||||||||||||
|
Non-U.S.:
|
||||||||||||||||||||||||||
|
Demand
|
5,559 | 5,402 | 4,842 | 0.34 | 0.61 | 2.83 | ||||||||||||||||||||
|
Time
|
1,034 | 631 | 15 | 0.58 | 1.65 | 13.00 | ||||||||||||||||||||
|
Total
Non-U.S. deposits
|
6,593 | 6,033 | 4,857 | 0.38 | 0.73 | 2.86 | ||||||||||||||||||||
|
Total deposits
|
$ | 38,011 | $ | 41,076 | $ | 26,455 | 0.80 | 1.01 | 2.86 | |||||||||||||||||
| 1. | Amounts are available for withdrawal upon short notice, generally within seven days. |
Ratios
The table below presents selected financial ratios.
| Year Ended | ||||||||||||||
|
December
|
December
|
November
|
||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||
|
Net earnings to average assets
|
0.9 | % | 1.5 | % | 0.2 | % | ||||||||
|
Return on common shareholders’
equity
1
|
11.5 | 22.5 | 4.9 | |||||||||||
|
Return on total shareholders’
equity
2
|
11.3 | 20.4 | 4.9 | |||||||||||
|
Total average equity to average assets
|
8.3 | 7.2 | 4.1 | |||||||||||
| 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. |
210
Table of Contents
SUPPLEMENTAL
FINANCIAL INFORMATION
Short-term
and Other Borrowed Funds
The table below presents a summary of the firm’s securities
loaned and securities sold under agreements to repurchase and
short-term
borrowings. These borrowings generally mature
within one year of the financial statement date and include
borrowings that are redeemable at the option of the holder
within one year of the financial statement date.
|
Securities Loaned and Securities Sold
|
||||||||||||||||||||||||||||||||||||||
| Under Agreements to Repurchase | Commercial Paper | Other Funds Borrowed 1, 2 | ||||||||||||||||||||||||||||||||||||
|
December
|
December
|
November
|
December
|
December
|
November
|
December
|
December
|
November
|
||||||||||||||||||||||||||||||
| $ in millions | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||||
|
Amounts outstanding at year-end
|
$ | 173,557 | $ | 143,567 | $ | 79,943 | $ | 1,306 | $ | 1,660 | $ | 1,125 | $ | 71,065 | $ | 48,787 | $ | 72,758 | ||||||||||||||||||||
|
Average outstanding during the year
|
160,280 | 156,794 | 194,935 | 1,624 | 1,002 | 4,097 | 53,888 | 58,129 | 99,351 | |||||||||||||||||||||||||||||
|
Maximum month-end outstanding
|
173,557 | 169,083 | 256,596 | 1,712 | 3,060 | 12,718 | 71,065 | 77,712 | 109,927 | |||||||||||||||||||||||||||||
|
Weighted average interest rate
|
||||||||||||||||||||||||||||||||||||||
|
During the year
|
0.44 | % | 0.84 | % | 3.80 | % | 0.31 | % | 0.50 | % | 3.54 | % | 0.83 | % | 1.06 | % | 1.73 | % | ||||||||||||||||||||
|
At year-end
|
0.44 | 0.26 | 3.27 | 0.20 | 0.37 | 2.79 | 0.63 | 0.76 | 2.06 | |||||||||||||||||||||||||||||
| 1. | Includes short-term secured financings of $24.53 billion, $12.93 billion and $21.23 billion as of December 2010, December 2009 and November 2008, respectively. |
| 2. | As of December 2010, December 2009 and November 2008, weighted average interest rates include the effects of hedging. |
211
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 financial 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 tables below present cross-border outstandings for each
country in which cross-border outstandings exceed 0.75% of
consolidated assets in accordance with the FFIEC guidelines.
| As of December 2010 | ||||||||||||||||||
| in millions | Banks | Governments | Other | Total | ||||||||||||||
|
Country
|
||||||||||||||||||
|
France
|
$ | 29,380 | $ | 7,369 | $ | 4,326 | $ | 41,075 | ||||||||||
|
United Kingdom
|
5,630 | 4,833 | 26,516 | 36,979 | ||||||||||||||
|
Cayman Islands
|
7 | — | 35,949 | 35,956 | ||||||||||||||
|
Japan
|
28,579 | 49 | 4,936 | 33,564 | ||||||||||||||
|
Germany
|
3,897 | 15,791 | 2,186 | 21,874 | ||||||||||||||
|
China
|
10,724 | 700 | 2,705 | 14,129 | ||||||||||||||
|
Switzerland
|
2,464 | 150 | 6,875 | 9,489 | ||||||||||||||
| As of December 2009 | ||||||||||||||||||
| in millions | Banks | Governments | Other | Total | ||||||||||||||
|
Country
|
||||||||||||||||||
|
United Kingdom
|
$ | 3,284 | $ | 4,843 | $ | 51,664 | $ | 59,791 | ||||||||||
|
Japan
|
18,259 | 107 | 4,833 | 23,199 | ||||||||||||||
|
Cayman Islands
|
53 | 16 | 21,476 | 21,545 | ||||||||||||||
|
France
|
8,846 | 4,648 | 5,655 | 19,149 | ||||||||||||||
|
Germany
|
8,610 | 6,080 | 2,885 | 17,575 | ||||||||||||||
|
China
|
9,105 | 108 | 4,187 | 13,400 | ||||||||||||||
|
Ireland
|
5,634 | 20 | 1,577 | 7,231 | ||||||||||||||
212
Table of Contents
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last two fiscal
years.
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, 2010 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
Form 10-K.
Not applicable.
Information relating to our executive officers is included on
pages 32 to 33 of this
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 2011 Annual Meeting of Shareholders to
be held on May 6, 2011, which will be filed within
120 days of the end of our fiscal year ended
December 31, 2010 (2011 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
Form 10-K.
Information relating to our executive officer and director
compensation and the compensation committee of our board of
directors will be in the 2011 Proxy Statement and is
incorporated herein by reference.
213
Table of Contents
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 2011 Proxy
Statement and is incorporated herein by reference.
The following table provides information as of
December 31, 2010, the last day of fiscal 2010,
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 2010.
|
Number of
|
Number of Securities
|
|||||||||||||||||
|
Securities to be
|
Remaining Available for
|
|||||||||||||||||
|
Issued Upon
|
Weighted-Average
|
Future Issuance Under
|
||||||||||||||||
|
Exercise of
|
Exercise Price of
|
Equity Compensation
|
||||||||||||||||
|
Outstanding
|
Outstanding
|
Plans (Excluding
|
||||||||||||||||
|
Options, Warrants
|
Options, Warrants
|
Securities Reflected in
|
||||||||||||||||
| Plan Category | and Rights | and Rights | the Second Column) | |||||||||||||||
| Equity compensation plans approved by security holders |
The Goldman Sachs Amended and
Restated Stock Incentive Plan 1 |
116,097,803 | 2 | $ | 96.71 | 3 | 139,152,653 | 4 | ||||||||||
| Equity compensation plans not approved by security holders | None | — | — | — | ||||||||||||||
|
Total
|
116,097,803 | 2 | 139,152,653 | 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) 55,247,865 shares of common stock that may be issued upon exercise of outstanding options; (ii) 60,780,875 shares that may be issued pursuant to outstanding restricted stock units; and (iii) 69,063 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. |
Information regarding certain relationships and related
transactions and director independence will be in the 2011 Proxy
Statement and is incorporated herein by reference.
Information regarding principal accountant fees and services
will be in the 2011 Proxy Statement and is incorporated herein
by reference.
214
Table of Contents
| 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
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 | Amended and Restated Certificate of Incorporation of The Goldman Sachs Group, Inc., amended as of May 7, 2010 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed May 11, 2010). | ||
| 3 | .2 | Amended and Restated By-Laws of The Goldman Sachs Group, Inc., amended as of May 7, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed May 11, 2010). | ||
| 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). | ||
| 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 | .5 | 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 | .6 | 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 Participating Managing Directors (applicable to executive officers) (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)). |
215
Table of Contents
| 10 | .6 | Amended and Restated Shareholders’ Agreement, effective as of January 22, 2010, among The Goldman Sachs Group, Inc. and various parties (incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). | ||
| 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 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 | .13 | 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 | .14 | 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 | .15 | 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 | .16 | 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 | .17 | 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 | .18 | 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 | .19 | 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 | .20 | 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 | .21 | 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 | .22 | 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). † | ||
| 10 | .23 | 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 | .24 | Form of Year-End RSU Award Agreement (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 December 31, 2009). † |
216
Table of Contents
| 10 | .25 | 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 | .26 | Form of Non-Employee Director Option Award Agreement (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). † | ||
| 10 | .27 | Form of Non-Employee Director RSU Award Agreement. † | ||
| 10 | .28 | Description of Independent Director Compensation. † | ||
| 10 | .29 | 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 | .30 | General Guarantee Agreement, dated January 30, 2006, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman, Sachs & Co. (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 | .31 | 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 | .32 | 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 | .33 | 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 | .34 | 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 | .35 | 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 | .36 | 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). | ||
| 10 | .37 | 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 | .38 | 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 | .39 | 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 | .40 | 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 (incorporated by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). | ||
| 10 | .41 | 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). |
217
Table of Contents
| 10 | .42 | Form of One-Time RSU Award Agreement. † | ||
| 10 | .43 | 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 | .44 | 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 | .45 | Form of Signature Card for Equity Awards. † | ||
| 10 | .46 | Form of Signature Card for Equity Awards (employees in Asia outside China). † | ||
| 10 | .47 | Form of Signature Card for Equity Awards (employees in China). † | ||
| 10 | .48 | Form of Year-End RSU Award Agreement (not fully vested). † | ||
| 10 | .49 | Form of Year-End RSU Award Agreement (fully vested). † | ||
| 10 | .50 | Form of Year-End RSU Award Agreement (Base and/or Supplemental). † | ||
| 10 | .51 | Form of Year-End Short-Term RSU Award Agreement. † | ||
| 10 | .52 | Form of Year-End Restricted Stock Award Agreement (Base and/or Supplemental). † | ||
| 10 | .53 | Form of Year-End Restricted Stock Award Agreement (fully vested). † | ||
| 10 | .54 | Form of Year-End Short-Term Restricted Stock Award Agreement. † | ||
| 10 | .55 | General Guarantee Agreement, dated March 2, 2010, made by The Goldman Sachs Group, Inc. relating to the obligations of Goldman Sachs Execution & Clearing, L.P. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2010). | ||
| 10 | .56 | Form of Deed of Gift (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2010). † | ||
| 10 | .57 | The Goldman Sachs Long-Term Performance Incentive Plan, dated December 17, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). † | ||
| 10 | .58 | Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). † | ||
| 10 | .59 | Form of Performance-Based Option Award Agreement (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). † | ||
| 10 | .60 | Form of Performance-Based Cash Compensation Award Agreement (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). † | ||
| 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. * | ||
| 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, 2010, December 31, 2009 and November 28, 2008; (ii) the Consolidated Statements of Financial Condition as of December 31, 2010 and December 31, 2009; (iii) the Consolidated Statements of Changes in Shareholders’ Equity for the fiscal years ended December 31, 2010, December 31, 2009 and November 28, 2008; (iv) the Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2010, December 31, 2009 and November 28, 2008; (v) the Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2010, December 31, 2009 and November 28, 2008; and (vi) the notes to the Consolidated Financial Statements. * |
| † | 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. |
218
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
|
Name: David A. Viniar
| Title: | Chief Financial Officer |
Date: February 28, 2011
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 28, 2011 | ||||
|
/s/ JOHN
H. BRYAN
|
Director | February 28, 2011 | ||||
|
/s/ GARY
D. COHN
|
Director | February 28, 2011 | ||||
|
/s/ CLAES
DAHLBÄCK
|
Director | February 28, 2011 | ||||
|
/s/ STEPHEN
FRIEDMAN
|
Director | February 28, 2011 | ||||
|
/s/ WILLIAM
W. GEORGE
|
Director | February 28, 2011 | ||||
|
/s/ JAMES
A. JOHNSON
|
Director | February 28, 2011 | ||||
|
/s/ LOIS
D. JULIBER
|
Director | February 28, 2011 | ||||
II-1
Table of Contents
| Signature | Capacity | Date | ||||
|
/s/ LAKSHMI
N. MITTAL
|
Director | February 28, 2011 | ||||
|
/s/ JAMES
J. SCHIRO
|
Director | February 28, 2011 | ||||
|
/s/ H.
LEE SCOTT, JR.
|
Director | February 28, 2011 | ||||
|
/s/ DAVID
A. VINIAR
|
Chief Financial Officer
(Principal Financial Officer) |
February 28, 2011 | ||||
|
/s/ SARAH
E. SMITH
|
Principal Accounting Officer | February 28, 2011 | ||||
II-2
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial Data The Selected Financial Data Table Is Set Forth Under Part Ii, Item 8 Of This Form 10-kItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Description Of BusinessNote 2. Basis Of PresentationNote 3. Significant Accounting PoliciesNote 4. Financial Instruments Owned, At Fair Value and Financial Instruments Sold, But Not Yet Purchased, At Fair ValueNote 5. Fair Value MeasurementsNote 6. Cash InstrumentsNote 7. Derivatives and Hedging ActivitiesNote 8. Fair Value OptionNote 9. Collateralized Agreements and FinancingsNote 10. Securitization ActivitiesNote 11. Variable Interest EntitiesNote 12. Other AssetsNote 13. Goodwill and Identifiable Intangible AssetsNote 14. DepositsNote 15. Short-term BorrowingsNote 15. Short-termNote 16. Long-term BorrowingsNote 16. Long-termNote 17. Other Liabilities and Accrued ExpensesNote 18. Commitments, Contingencies and GuaranteesNote 19. Shareholders EquityNote 20. Regulation and Capital AdequacyNote 21. Earnings Per Common Share (eps)Note 22. Transactions with Affiliated FundsNote 23. Interest Income and Interest ExpenseNote 24. Employee Benefit PlansNote 25. Employee Incentive PlansNote 26. Income TaxesNote 27. Business SegmentsNote 28. Credit ConcentrationsNote 29. Parent CompanyNote 30. Legal ProceedingsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules