GOLDMAN SACHS GROUP INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the quarterly period ended March 31, 2010 | ||
|
or
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| For the transition period from to | ||
Commission File Number:
001-14965
The Goldman Sachs Group,
Inc.
(Exact name of registrant as
specified in its charter)
| Delaware | 13-4019460 | |
|
(State or other jurisdiction
of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
|
| 200 West Street, New York, NY | 10282 | |
| (Address of principal executive offices) | (Zip Code) |
(212) 902-1000
(Registrant’s telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.
x
Yes
o
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files).
x
Yes
o
No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer
x
Accelerated
filer
o
Non-accelerated
filer
o
(Do not check if a smaller reporting company)
Smaller reporting
company
o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act).
o
Yes
x
No
APPLICABLE ONLY
TO CORPORATE ISSUERS
As of
April 23, 2010, there were 514,788,856 shares of the
registrant’s common stock outstanding.
THE GOLDMAN SACHS
GROUP, INC.
QUARTERLY REPORT ON
FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 31, 2010
INDEX
1
Table of Contents
| Item 1: | Financial Statements (Unaudited) |
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
(in millions, except
|
||||||||
| per share amounts) | ||||||||
|
Revenues
|
||||||||
|
Investment banking
|
$ | 1,184 | $ | 823 | ||||
|
Trading and principal investments
|
9,195 | 5,706 | ||||||
|
Asset management and securities services
|
978 | 989 | ||||||
|
Total
non-interest
revenues
|
11,357 | 7,518 | ||||||
|
Interest income
|
3,001 | 4,362 | ||||||
|
Interest expense
|
1,583 | 2,455 | ||||||
|
Net interest income
|
1,418 | 1,907 | ||||||
|
Net revenues, including net interest income
|
12,775 | 9,425 | ||||||
|
Operating expenses
|
||||||||
|
Compensation and benefits
|
5,493 | 4,712 | ||||||
|
Brokerage, clearing, exchange and distribution fees
|
562 | 536 | ||||||
|
Market development
|
110 | 68 | ||||||
|
Communications and technology
|
176 | 173 | ||||||
|
Depreciation and amortization
|
372 | 549 | ||||||
|
Occupancy
|
256 | 241 | ||||||
|
Professional fees
|
182 | 135 | ||||||
|
Other expenses
|
465 | 382 | ||||||
|
Total
non-compensation
expenses
|
2,123 | 2,084 | ||||||
|
Total operating expenses
|
7,616 | 6,796 | ||||||
|
Pre-tax
earnings
|
5,159 | 2,629 | ||||||
|
Provision for taxes
|
1,703 | 815 | ||||||
|
Net earnings
|
3,456 | 1,814 | ||||||
|
Preferred stock dividends
|
160 | 155 | ||||||
|
Net earnings applicable to common shareholders
|
$ | 3,296 | $ | 1,659 | ||||
|
Earnings per common share
|
||||||||
|
Basic
|
$ | 6.02 | $ | 3.48 | ||||
|
Diluted
|
5.59 | 3.39 | ||||||
|
Dividends declared per common share
|
$ | 0.35 | $ | — | (1) | |||
|
Average common shares outstanding
|
||||||||
|
Basic
|
546.0 | 477.4 | ||||||
|
Diluted
|
590.0 | 489.2 | ||||||
| (1) | The firm declared a dividend of $0.4666666 per common share in December 2008, which was reflective of a four-month period (December 2008 through March 2009), due to the change in the firm’s fiscal year-end. |
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
|
(in millions, except share
|
||||||||
| and per share amounts) | ||||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 27,064 | $ | 38,291 | ||||
|
Cash and securities segregated for regulatory and other purposes
(includes $27,312 and $18,853 at fair value as of
March 2010 and December 2009, respectively)
|
43,053 | 36,663 | ||||||
|
Collateralized agreements:
|
||||||||
|
Securities purchased under agreements to resell and federal
funds sold (includes $166,368 and $144,279 at fair value as of
March 2010 and December 2009, respectively)
|
166,368 | 144,279 | ||||||
|
Securities borrowed (includes $71,349 and $66,329 at fair value
as of March 2010 and December 2009, respectively)
|
202,841 | 189,939 | ||||||
|
Receivables from brokers, dealers and clearing organizations
|
13,557 | 12,597 | ||||||
|
Receivables from customers and counterparties (includes $1,774
and $1,925 at fair value as of March 2010 and
December 2009, respectively)
|
57,886 | 55,303 | ||||||
|
Trading assets, at fair value (includes $43,281 and $31,485
pledged as collateral as of March 2010 and
December 2009, respectively)
|
339,435 | 342,402 | ||||||
|
Other assets
|
30,324 | 29,468 | ||||||
|
Total assets
|
$ | 880,528 | $ | 848,942 | ||||
|
Liabilities and shareholders’ equity
|
||||||||
|
Deposits (includes $2,014 and $1,947 at fair value as of
March 2010 and December 2009, respectively)
|
$ | 38,431 | $ | 39,418 | ||||
|
Collateralized financings:
|
||||||||
|
Securities sold under agreements to repurchase, at fair value
|
153,517 | 128,360 | ||||||
|
Securities loaned (includes $3,108 and $6,194 at fair value as
of March 2010 and December 2009, respectively)
|
14,841 | 15,207 | ||||||
|
Other secured financings (includes $15,986 and $15,228 at fair
value as of March 2010 and December 2009, respectively)
|
24,037 | 24,134 | ||||||
|
Payables to brokers, dealers and clearing organizations
|
4,613 | 5,242 | ||||||
|
Payables to customers and counterparties
|
181,133 | 180,392 | ||||||
|
Trading liabilities, at fair value
|
140,081 | 129,019 | ||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings (includes $19,594 and $18,403 at fair value as of
March 2010 and December 2009, respectively)
|
40,784 | 37,516 | ||||||
|
Unsecured
long-term
borrowings (includes $20,187 and $21,392 at fair value as of
March 2010 and December 2009, respectively)
|
180,414 | 185,085 | ||||||
|
Other liabilities and accrued expenses (includes $2,782 and
$2,054 at fair value as of March 2010 and
December 2009, respectively)
|
29,733 | 33,855 | ||||||
|
Total liabilities
|
807,584 | 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 March 2010 and
December 2009
|
6,957 | 6,957 | ||||||
|
Common stock, par value $0.01 per share;
4,000,000,000 shares authorized, 765,392,931 and
753,412,247 shares issued as of March 2010 and
December 2009, respectively, and 514,190,734 and
515,113,890 shares outstanding as of March 2010 and
December 2009, respectively
|
8 | 8 | ||||||
|
Restricted stock units and employee stock options
|
5,934 | 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
|
41,444 | 39,770 | ||||||
|
Retained earnings
|
53,345 | 50,252 | ||||||
|
Accumulated other comprehensive loss
|
(356 | ) | (362 | ) | ||||
|
Common stock held in treasury, at cost, par value $0.01 per
share; 251,202,197 and 238,298,357 shares as of
March 2010 and December 2009, respectively
|
(34,388 | ) | (32,156 | ) | ||||
|
Total shareholders’ equity
|
72,944 | 70,714 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 880,528 | $ | 848,942 | ||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months
|
||||||||
| Ended | Year Ended | |||||||
| March 2010 | December 2009 | |||||||
| (in millions) | ||||||||
|
Preferred stock
|
||||||||
|
Balance, beginning of year
|
$ | 6,957 | $ | 16,483 | ||||
|
Accretion
|
— | 48 | ||||||
|
Repurchased
|
— | (9,574 | ) | |||||
|
Balance, end of period
|
6,957 | 6,957 | ||||||
|
Common stock
|
||||||||
|
Balance, beginning of year
|
8 | 7 | ||||||
|
Issued
|
— | 1 | ||||||
|
Balance, end of period
|
8 | 8 | ||||||
|
Restricted stock units and employee stock options
|
||||||||
|
Balance, beginning of year
|
6,245 | 9,463 | ||||||
|
Issuance and amortization of restricted stock units and employee
stock options
|
2,186 | 2,064 | ||||||
|
Delivery of common stock underlying restricted stock units
|
(2,455 | ) | (5,206 | ) | ||||
|
Forfeiture of restricted stock units and employee stock options
|
(38 | ) | (73 | ) | ||||
|
Exercise of employee stock options
|
(4 | ) | (3 | ) | ||||
|
Balance, end of period
|
5,934 | 6,245 | ||||||
|
Additional
paid-in
capital
|
||||||||
|
Balance, beginning of year
|
39,770 | 31,070 | ||||||
|
Issuance of common stock
|
— | 5,750 | ||||||
|
Repurchase of common stock warrants
|
— | (1,100 | ) | |||||
|
Delivery of common stock underlying restricted stock units and
proceeds from the exercise of employee stock options
|
2,560 | 5,708 | ||||||
|
Cancellation of restricted stock units in satisfaction of
withholding tax requirements
|
(962 | ) | (863 | ) | ||||
|
Excess net tax benefit/(provision) related to
share-based
compensation
|
76 | (793 | ) | |||||
|
Cash settlement of
share-based
compensation
|
— | (2 | ) | |||||
|
Balance, end of period
|
41,444 | 39,770 | ||||||
|
Retained earnings
|
||||||||
|
Balance, beginning of year
|
50,252 | 38,579 | ||||||
|
Net earnings
|
3,456 | 13,385 | ||||||
|
Dividends and dividend equivalents declared on common stock and
restricted stock units
|
(203 | ) | (588 | ) | ||||
|
Dividends declared on preferred stock
|
(160 | ) | (1,076 | ) | ||||
|
Preferred stock accretion
|
— | (48 | ) | |||||
|
Balance, end of period
|
53,345 | 50,252 | ||||||
|
Accumulated other comprehensive income/(loss)
|
||||||||
|
Balance, beginning of year
|
(362 | ) | (372 | ) | ||||
|
Currency translation adjustment, net of tax
|
(4 | ) | (70 | ) | ||||
|
Pension and postretirement liability adjustments, net of tax
|
6 | (17 | ) | |||||
|
Net unrealized gains on
available-for-sale
securities, net of tax
|
4 | 97 | ||||||
|
Balance, end of period
|
(356 | ) | (362 | ) | ||||
|
Common stock held in treasury, at cost
|
||||||||
|
Balance, beginning of year
|
(32,156 | ) | (32,176 | ) | ||||
|
Repurchased
|
(2,269 | ) | (2 | ) (1) | ||||
|
Reissued
|
37 | 22 | ||||||
|
Balance, end of period
|
(34,388 | ) | (32,156 | ) | ||||
|
Total shareholders’ equity
|
$ | 72,944 | $ | 70,714 | ||||
| (1) | 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 condensed
consolidated financial statements.
4
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Cash flows from operating activities
|
||||||||
|
Net earnings
|
$ | 3,456 | $ | 1,814 | ||||
|
Non-cash
items included in net earnings
|
||||||||
|
Depreciation and amortization
|
375 | 649 | ||||||
|
Share-based
compensation
|
2,160 | 468 | ||||||
|
Changes in operating assets and liabilities
|
||||||||
|
Cash and securities segregated for regulatory and other purposes
|
(6,378 | ) | 43,126 | |||||
|
Net receivables from brokers, dealers and clearing organizations
|
(1,540 | ) | 8,140 | |||||
|
Net payables to customers and counterparties
|
(1,793 | ) | (17,879 | ) | ||||
|
Securities borrowed, net of securities loaned
|
(13,269 | ) | (27,552 | ) | ||||
|
Securities sold under agreements to repurchase, net of
securities purchased under agreements to resell and federal
funds sold
|
3,068 | (140,648 | ) | |||||
|
Trading assets, at fair value
|
6,986 | 180,563 | ||||||
|
Trading liabilities, at fair value
|
11,056 | (38,810 | ) | |||||
|
Other, net
|
(11,625 | ) | (6,674 | ) | ||||
|
Net cash provided by/(used for) operating activities
|
(7,504 | ) | 3,197 | |||||
|
Cash flows from investing activities
|
||||||||
|
Purchase of property, leasehold improvements and equipment
|
(278 | ) | (278 | ) | ||||
|
Proceeds from sales of property, leasehold improvements and
equipment
|
28 | 28 | ||||||
|
Business acquisitions, net of cash acquired
|
(699 | ) | (190 | ) | ||||
|
Proceeds from sales of investments
|
173 | 75 | ||||||
|
Purchase of
available-for-sale
securities
|
(864 | ) | (1,440 | ) | ||||
|
Proceeds from sales of
available-for-sale
securities
|
674 | 892 | ||||||
|
Net cash used for investing activities
|
(966 | ) | (913 | ) | ||||
|
Cash flows from financing activities
|
||||||||
|
Unsecured
short-term
borrowings, net
|
525 | (4,680 | ) | |||||
|
Other secured financings
(short-term),
net
|
(312 | ) | 5,222 | |||||
|
Proceeds from issuance of other secured financings
(long-term)
|
1,541 | 2,322 | ||||||
|
Repayment of other secured financings
(long-term),
including the current portion
|
(1,880 | ) | (2,435 | ) | ||||
|
Proceeds from issuance of unsecured
long-term
borrowings
|
6,081 | 14,689 | ||||||
|
Repayment of unsecured
long-term
borrowings, including the current portion
|
(5,584 | ) | (8,325 | ) | ||||
|
Derivative contracts with a financing element, net
|
110 | 670 | ||||||
|
Deposits, net
|
(987 | ) | 12,374 | |||||
|
Common stock repurchased
|
(2,269 | ) | (2 | ) | ||||
|
Dividends and dividend equivalents paid on common stock,
preferred stock and restricted stock units
|
(363 | ) | (545 | ) | ||||
|
Proceeds from issuance of common stock, including stock option
exercises
|
138 | 27 | ||||||
|
Excess tax benefit related to
share-based
compensation
|
243 | 11 | ||||||
|
Net cash provided by/(used for) financing activities
|
(2,757 | ) | 19,328 | |||||
|
Net increase/(decrease) in cash and cash equivalents
|
(11,227 | ) | 21,612 | |||||
|
Cash and cash equivalents, beginning of year
|
38,291 | 13,805 | ||||||
|
Cash and cash equivalents, end of period
|
$ | 27,064 | $ | 35,417 | ||||
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of capitalized interest, were
$2.01 billion and $3.42 billion during the three
months ended March 2010 and March 2009, respectively.
Cash payments for income taxes, net of refunds, were
$778 million and $256 million during the three months
ended March 2010 and March 2009, respectively.
Non-cash
activities:
The firm assumed $90 million and $16 million of debt
in connection with business acquisitions during the three months
ended March 2010 and March 2009, respectively. In
addition, during the three months ended March 2010, the
firm recorded an increase of approximately $3 billion in
both assets (primarily trading assets, 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.”
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
(UNAUDITED)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Net earnings
|
$ | 3,456 | $ | 1,814 | ||||
|
Currency translation adjustment, net of tax
|
(4 | ) | 25 | |||||
|
Pension and postretirement liability adjustments, net of tax
|
6 | 9 | ||||||
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
4 | (19 | ) | |||||
|
Comprehensive income
|
$ | 3,462 | $ | 1,829 | ||||
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| Note 1. | Description of Business |
The Goldman Sachs Group, Inc. (Group Inc.), a Delaware
corporation, together with its consolidated subsidiaries
(collectively, the firm), is a leading global investment
banking, securities and investment management firm that provides
a wide range of financial services to a substantial and
diversified client base that includes corporations, financial
institutions, governments and
high-net-worth
individuals. Founded in 1869, the firm is headquartered in New
York and maintains offices in London, Frankfurt, Tokyo, Hong
Kong and other major financial centers around the world.
The firm’s activities are divided into three segments:
| • | Investment Banking. The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals. | |
| • | Trading and Principal Investments. The firm facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. The firm also takes proprietary positions on certain of these products. In addition, the firm engages in market-making activities on equities and options exchanges, and the firm clears client transactions on major stock, options and futures exchanges worldwide. In connection with the firm’s merchant banking and other investing activities, the firm makes principal investments directly and through funds that the firm raises and manages. | |
| • | Asset Management and Securities Services. The firm provides investment and wealth advisory services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. |
| Note 2. | Significant Accounting Policies |
Basis of
Presentation
These condensed consolidated financial statements include the
accounts of Group Inc. and all other entities in which the
firm has a controlling financial interest. All material
intercompany transactions and balances have been eliminated.
The firm determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is
a voting interest entity or a variable interest entity (VIE)
under generally accepted accounting principles (GAAP).
| • | Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the 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. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest. |
7
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| • | Variable Interest Entities. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that provides the enterprise 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. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (i) the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders, (ii) the VIE’s capital structure, (iii) the terms between the VIE and its variable interest holders and other parties involved with the VIE, (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, (v) which variable interest holders have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE and (vi) related party relationships. The firm reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events. The firm reassesses its determination of whether the firm is the primary beneficiary of a VIE upon changes in facts and circumstances that could potentially alter the firm’s assessment. See “— Recent Accounting Developments” below for further information regarding accounting for VIEs. | |
| • | Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting interest of 20% to 50%) and has an investment in common stock or in-substance common stock, the firm accounts for its investment either under the equity method of accounting or at fair value pursuant to the fair value option available under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10. In general, the firm accounts for investments acquired subsequent to November 24, 2006, when the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, where the firm has a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. See “— Revenue Recognition — Other Financial Assets and Financial Liabilities at Fair Value” below for a discussion of the firm’s application of the fair value option. | |
| • | Other. If the firm does not consolidate an entity or apply the equity method of accounting, the firm accounts for its investment at fair value. The firm also has formed numerous nonconsolidated investment funds with third-party investors that are typically organized as limited partnerships. The firm acts as general partner for these funds and generally does not hold a majority of the economic interests in these funds. The firm has generally provided the third-party investors with rights to terminate the funds or to remove the firm as the general partner. As a result, the firm does not consolidate these funds. Investments in these funds are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
These condensed consolidated financial statements are unaudited
and should be read in conjunction with the audited consolidated
financial statements included in the firm’s Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2009. The
condensed consolidated financial information as of
December 31, 2009 has been derived from audited
consolidated financial statements not included herein.
These unaudited condensed consolidated financial statements
reflect all adjustments that are, in the opinion of management,
necessary for a fair statement of the results for the interim
periods presented. These adjustments are of a normal, recurring
nature. Interim period operating results may not be indicative
of the operating results for a full year.
All references to March 2010 and March 2009, unless
specifically stated otherwise, refer to the firm’s fiscal
periods ended, or the dates, as the context requires,
March 31, 2010 and March 27, 2009,
respectively. Beginning with the fourth quarter of fiscal 2009,
the firm changed its fiscal year-end from the last Friday of
December to December 31. All references to
December 2009, unless specifically stated otherwise, refer
to the firm’s fiscal year ended, or the date, as the
context requires, December 31, 2009. All references to
2010, unless specifically stated otherwise, refer to the
firm’s year ending, or the date, as the context requires,
December 31, 2010. Certain reclassifications have been
made to previously reported amounts to conform to the current
presentation.
Use of
Estimates
These condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting
principles that require management to make certain estimates and
assumptions. The most important of these estimates and
assumptions relate to fair value measurements, the accounting
for goodwill and identifiable intangible assets, discretionary
compensation accruals and the provision for potential losses
that may arise from litigation and regulatory proceedings and
tax audits. Although these and other estimates and assumptions
are based on the best available information, actual results
could be materially different from these estimates.
Revenue
Recognition
Investment
Banking
Underwriting revenues and fees from mergers and acquisitions and
other financial advisory assignments are recognized in the
condensed consolidated statements of earnings when the services
related to the underlying transaction are completed under the
terms of the engagement. Expenses associated with such
transactions are deferred until the related revenue is
recognized or the engagement is otherwise concluded.
Underwriting revenues are presented net of related expenses.
Expenses associated with financial advisory transactions are
recorded as
non-compensation
expenses, net of client reimbursements.
Trading Assets
and Trading Liabilities
Substantially all trading assets and trading liabilities are
reflected in the condensed consolidated statements of financial
condition at fair value. Related gains or losses are generally
recognized in “Trading and principal investments” in
the condensed consolidated statements of earnings.
Other
Financial Assets and Financial Liabilities at Fair
Value
In addition to trading assets, at fair value and trading
liabilities, at fair value, the firm has elected to account for
certain of its other financial assets and financial liabilities
at fair value under
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
ASC 815-15
and
825-10
(i.e., the fair value option). The primary reasons for
electing the fair value option are to reflect economic events in
earnings on a timely basis, to mitigate volatility in earnings
from using different measurement attributes and to address
simplification and
cost-benefit
considerations.
Such financial assets and financial liabilities accounted for at
fair value include:
| • | certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; | |
| • | certain other secured financings, primarily transfers of financial 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 long-term borrowings, including prepaid physical commodity transactions and certain hybrid financial instruments; | |
| • | resale and repurchase agreements; | |
| • | securities borrowed and loaned within Trading and Principal Investments, consisting of the firm’s matched book and certain firm financing activities; | |
| • | certain deposits issued by the firm’s bank subsidiaries, as well as securities held by Goldman Sachs Bank USA (GS Bank USA); | |
| • | certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards; | |
| • | certain insurance and reinsurance contracts and certain guarantees; | |
| • | 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. |
Fair Value
Measurements
The fair value of a financial instrument is the amount that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date (i.e., the exit price). Financial
assets are marked to bid prices and financial liabilities are
marked to offer prices. Fair value measurements do not include
transaction costs.
The fair value hierarchy under ASC 820 prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value
hierarchy are as follows:
Basis of Fair Value
Measurement
| Level 1 | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Level 2 | Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; | |
| Level 3 | Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
A financial instrument’s level within the fair value
hierarchy is based on the lowest level of any input that is
significant to the fair value measurement. Transfers between
levels are recognized at the beginning of the reporting period
in which they occur.
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.
Credit risk is an essential component of fair value. Cash
products (e.g., bonds and loans) and derivative instruments
(particularly those with significant future projected cash
flows) trade in the market at levels which reflect credit
considerations. The firm calculates the fair value of derivative
assets by discounting future cash flows at a rate which
incorporates counterparty credit spreads and the fair value of
derivative liabilities by discounting future cash flows at a
rate which incorporates the firm’s own credit spreads. In
doing so, credit exposures are adjusted to reflect mitigants,
namely collateral agreements which reduce exposures based on
triggers and contractual posting requirements. The firm manages
its exposure to credit risk as it does other market risks and
will price, economically hedge, facilitate and intermediate
trades which involve credit risk. The firm records liquidity
valuation adjustments to reflect the cost of exiting
concentrated risk positions, including exposure to the
firm’s own credit spreads.
Trading Assets, at Fair Value and Trading Liabilities, at
Fair Value
Level 1 and level 2 trading assets, at fair value
and trading liabilities, at fair value.
In
determining fair value, the firm separates trading assets, at
fair value and trading liabilities, at fair value into two
categories: cash instruments and derivative contracts.
The valuation techniques and significant inputs used in
determining the fair values of cash instruments and derivative
contracts classified within level 1 and level 2 of the
fair value hierarchy are as follows:
| • | Cash instruments. The firm’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted prices in active markets include U.S. and non-U.S. government obligations, actively traded listed equities and certain money market instruments. These instruments are generally classified within level 1 of the fair value hierarchy. Instruments classified within level 1 of the fair value hierarchy are required to be carried at quoted market prices, even in situations where the firm holds a large position and a sale could reasonably impact the quoted price. |
The types of instruments that trade in markets that are not
considered to be active, but are valued based on quoted market
prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
commercial paper, certificates of deposit, time deposits, most
government agency obligations, most corporate debt securities,
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
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
instruments and loan commitments. These instruments are
generally classified within level 2 of the fair value
hierarchy. For positions that are not traded in active markets
or are subject to transfer restrictions, valuations are adjusted
to reflect illiquidity
and/or
non-transferability.
Such adjustments are generally based on market evidence where
available.
| • | Derivative contracts. Derivative contracts are instruments such as futures, forwards, swaps or option contracts that derive their value from underlying asset prices, indices, reference rates and other inputs or a combination of these factors. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter (OTC) derivatives, or they may be listed and traded on an exchange. The assets and inputs underlying derivative instruments may include financial instruments (such as government and corporate bonds, mortgage and other asset-backed loans and securities and bank loans), currencies, commodities, interest rates and related indices. |
Exchange-traded
derivatives typically fall within level 1 or level 2
of the fair value hierarchy depending on whether they are deemed
to be actively traded or not. The firm generally values
exchange-traded
derivatives using models which calibrate to
market-clearing
levels and eliminate timing differences between the closing
price of the
exchange-traded
derivatives and their underlying instruments. In such cases,
exchange-traded
derivatives are classified within level 2 of the fair value
hierarchy.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including
market-based
inputs to models, calibration to
market-clearing
transactions, broker or dealer quotations, or other alternative
pricing sources with reasonable levels of price transparency.
Where models are used, the selection of a particular model to
value an OTC derivative depends upon the contractual terms of,
and specific risks inherent in, the instrument, as well as the
availability of pricing information in the market. The firm
generally uses similar models to value similar instruments.
Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit curves,
measures of volatility, voluntary and involuntary prepayment
rates, loss severity rates and correlations of such inputs. For
OTC derivatives that trade in liquid markets, model inputs can
generally be verified and model selection does not involve
significant management judgment. OTC derivatives are classified
within level 2 of the fair value hierarchy when all of the
significant inputs are corroborated by market evidence. When
appropriate, valuations are adjusted for various factors such as
liquidity, bid/offer spreads and credit considerations. Such
adjustments are generally based on market evidence where
available.
Level 3 trading assets, at fair value and trading
liabilities, at fair value.
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. Accordingly, when a pricing model is used to value such
an instrument, the model is adjusted so that the model value at
inception equals the transaction price. Subsequent to the
transaction date, the firm uses other methodologies to determine
fair value, which vary based on the type of instrument, as
described below. Regardless of methodology, valuation inputs and
assumptions are only changed when corroborated by substantive
evidence. Valuations are further corroborated by values realized
upon sales of the firm’s level 3 assets. The valuation
techniques and significant inputs used in determining the fair
values of each class of cash instrument and derivative contracts
classified within level 3 of the fair value hierarchy are
as follows:
| • | Equities and convertible debentures. For private equity investments, recent third-party investments or pending transactions are considered to be the best evidence for any change in |
12
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| fair value. In the absence of such evidence, valuations are based on one or more of the following methodologies, as appropriate and available: transactions in similar instruments, discounted cash flow techniques, third-party independent appraisals, valuation multiples and public comparables. Such evidence includes pending reorganizations (e.g., merger proposals, tender offers or debt restructurings), and significant changes in financial metrics (e.g., operating results as compared to previous projections, industry multiples, credit ratings and balance sheet ratios). Real estate fund investments are carried at net asset value per share. The underlying investments in the funds are generally valued using discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, capitalization rates and valuation multiples. |
| • | Bank loans and bridge loans, Corporate debt securities, State and municipal obligations and Other debt obligations. Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to credit default swaps that reference the same underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotes are available. | |
| • | Loans and securities backed by commercial real estate. Loans and securities backed by commercial real estate are collateralized by specific assets and may be tranched into varying levels of subordination. Due to the nature of these instruments, valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof. Significant inputs for these valuations include transactions in both the underlying collateral and instruments with the same or substantially the same underlying collateral, credit default swap prices, current levels and trends of market indices (such as the CMBX), market yields and other factors (such as the operating income generated by the underlying collateral) which are used in determining the amount and timing of expected future cash flows. | |
| • | Loans and securities backed by residential real estate. Valuations are based on both proprietary and industry recognized models (including Intex and Bloomberg), and discounted cash flow techniques. The most significant inputs to the valuation of these instruments are the rates and timing of delinquencies, and default and loss expectations, which are driven in part by housing prices. The 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. | |
| • | Loan portfolios. Loan portfolios are acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. Valuations are based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows and market yields. The significant inputs are determined based on relative value analyses which incorporate comparisons to recent auction data for other similar loan portfolios. | |
| • | Derivative contracts. Certain OTC derivatives trade in less liquid markets with limited pricing information and the determination of fair value for these derivatives is inherently more difficult. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Unobservable inputs typically include certain correlations as well as credit spreads, equity volatilities, commodity prices and commodity volatilities that are long-dated or derived from trading activity in inactive or less liquid markets. When unobservable inputs to a valuation |
13
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| model are significant to the fair value measurement of an instrument, the instrument is classified within level 3 of the fair value hierarchy. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes with resulting gains and losses reflected within level 3. Level 3 inputs are only changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations, or other empirical market data. In circumstances where the firm cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. |
Other
Financial Assets and Financial Liabilities at Fair
Value
Other 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 within level 2 of
the fair value hierarchy. Significant inputs for each category
of other financial asset and financial liability 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 within Trading and Principal Investments (which are related to the firm’s matched book and certain firm financing activities) are the amount and timing of expected future cash flows, interest rates and collateral funding spreads. | |
| • | Other Secured Financings. The significant inputs to the valuation of other secured financings at fair value, including transfers of financial assets accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings, 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. | |
| • | Unsecured short-term and long-term borrowings. The significant inputs to the valuation of certain short-term and long-term borrowings at fair value, including all promissory notes and commercial paper, certain hybrid financial instruments and prepaid physical commodity transactions, 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 physical commodity transactions and, for certain hybrid financial instruments, equity prices, inflation rates and index levels. | |
| • | Receivables from customers and counterparties. The significant inputs to the valuation of certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards, are 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” in the firm’s condensed consolidated statements of financial condition. 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 |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| 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 within level 3 of the fair value hierarchy. |
| • | Deposits. The significant inputs to the valuation of deposits are interest rates. |
Collateralized
Agreements and Financings
Collateralized agreements consist of resale agreements and
securities borrowed. For these agreements, the firm requires
delivery of collateral with a fair value approximately equal to
the carrying value of the relevant assets in the condensed
consolidated statements of financial condition. Collateralized
financings consist of repurchase agreements, securities loaned
and other secured financings. Interest on collateralized
agreements and collateralized financings is recognized in
“Interest income” and “Interest expense,”
respectively, in the condensed consolidated statements of
earnings over the life of the transaction. Collateralized
agreements and financings are presented on a
net-by-counterparty
basis when a right of setoff exists.
| • | Resale and Repurchase Agreements. Securities purchased under agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade sovereign obligations, represent collateralized financing transactions. The firm receives securities purchased under agreements to resell, makes delivery of securities sold under agreements to repurchase, monitors the market value of these securities on a daily basis and delivers or obtains additional collateral as appropriate. As noted above, resale and repurchase agreements are carried in the condensed consolidated statements of financial condition at fair value under the fair value option. | |
| • | Securities Borrowed and Loaned. Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Securities borrowed and loaned within Securities Services, relating to both customer activities and, to a lesser extent, certain firm financing activities, are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminated on demand, they exhibit little, if any, sensitivity to changes in interest rates. As noted above, securities borrowed and loaned within Trading and Principal Investments, which are related to the firm’s matched book and certain firm financing activities, are recorded at fair value under the fair value option. | |
| • | Other Secured Financings. In addition to repurchase agreements and securities loaned, the firm funds assets through the use of other secured financing arrangements and pledges financial instruments and other assets as collateral in these transactions. As noted above, the firm has elected to apply the fair value option to transfers of financial assets accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings, for which the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest. See Note 3 for further information regarding other secured financings. |
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Hybrid
Financial Instruments
Hybrid financial instruments are instruments that contain
bifurcatable embedded derivatives and do not require settlement
by physical delivery of
non-financial
assets (e.g., physical commodities). If the firm elects to
bifurcate the embedded derivative from the associated debt, 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 hedge accounting relationships. If the
firm does not elect to bifurcate, the entire hybrid financial
instrument is accounted for at fair value under the fair value
option. See Notes 3 and 6 for further information regarding
hybrid financial instruments.
Transfers of
Financial Assets
In general, transfers of financial assets are accounted for as
sales when the firm has relinquished control over the
transferred assets. For transfers of financial 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 financial assets are
measured at fair value. For transfers that are not accounted for
as sales, the financial assets remain in “Trading assets,
at fair value” in the condensed consolidated statements of
financial condition and the transfer is accounted for as a
collateralized financing, with the related interest expense
recognized in net revenues over the life of the transaction.
When 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 (such that the firm
effectively no longer has a repurchase obligation) and the firm
has relinquished control over the underlying security, the firm
records such transactions as sales. See
“— Recent
Accounting Developments” below for further information
regarding accounting for transfers of financial assets.
Commissions
Commission revenues from executing and clearing client
transactions on stock, options and futures markets are
recognized in “Trading and principal investments” in
the condensed consolidated statements of earnings on a
trade-date
basis.
Insurance
Activities
Certain of the firm’s insurance and reinsurance contracts
are accounted for at fair value under the fair value option,
with changes in fair value included in “Trading and
principal investments” in the condensed consolidated
statements of earnings.
Revenues from variable annuity and life insurance and
reinsurance contracts not accounted for at fair value generally
consist of fees assessed on contract holder account balances for
mortality charges, policy administration fees and surrender
charges, and are recognized in “Trading and principal
investments” in the condensed consolidated statements of
earnings in the period that services are provided.
Interest credited to variable annuity and life insurance and
reinsurance contract account balances and changes in reserves
are recognized in “Other expenses” in the condensed
consolidated statements of earnings.
Premiums earned for underwriting property catastrophe
reinsurance are recognized in “Trading and principal
investments” in the condensed consolidated statements of
earnings over the coverage period, net of premiums ceded for the
cost of reinsurance. Expenses for liabilities related to
property
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
catastrophe reinsurance claims, including estimates of losses
that have been incurred but not reported, are recognized in
“Other expenses” in the condensed consolidated
statements of earnings.
Merchant
Banking Overrides
The firm is entitled to receive merchant banking overrides
(i.e., an increased share of a fund’s income and
gains) when the return on the funds’ investments exceeds
certain threshold returns. Overrides are based on investment
performance over the life of each merchant banking fund, and
future investment underperformance may require amounts of
override previously distributed to the firm to be returned to
the funds. Accordingly, overrides are recognized in the
condensed consolidated statements of earnings only when all
material contingencies have been resolved. Overrides are
included in “Trading and principal investments” in the
condensed consolidated statements of earnings.
Asset
Management
Management fees are recognized over the period that the related
service is provided based upon average net asset values. In
certain circumstances, the firm is also entitled to receive
incentive fees based on a percentage of a fund’s return or
when the return on assets under management exceeds specified
benchmark returns or other performance targets. Incentive fees
are generally based on investment performance over a
12-month
period and are subject to adjustment prior to the end of the
measurement period. Accordingly, incentive fees are recognized
in the condensed consolidated statements of earnings when the
measurement period ends. Asset management fees and incentive
fees are included in “Asset management and securities
services” in the condensed consolidated statements of
earnings.
Share-Based
Compensation
The cost of employee services received in exchange for a
share-based
award is generally measured based on the grant-date fair value
of the award in accordance with ASC 718.
Share-based
awards that do not require future service (i.e., vested
awards, including awards granted to
retirement-eligible
employees) are expensed immediately.
Share-based
employee awards that require future service are amortized over
the relevant service period. Expected forfeitures are included
in determining
share-based
employee compensation expense.
The firm pays cash dividend equivalents on outstanding
restricted stock units (RSUs). Dividend equivalents paid on RSUs
are generally charged to retained earnings. Dividend equivalents
paid on RSUs expected to be forfeited are included in
compensation expense. In the first quarter of fiscal 2009, the
firm adopted amended accounting principles related to income tax
benefits of dividends on
share-based
payment awards (ASC 718). These amended principles require the
tax benefit related to dividend equivalents paid on RSUs to be
accounted for as an increase to additional
paid-in
capital. Previously, the firm accounted for this tax benefit as
a reduction to income tax expense.
In certain cases, primarily related to the death of an employee
or conflicted employment (as outlined in the applicable award
agreements), the firm may cash settle
share-based
compensation awards. For awards accounted for as equity
instruments, additional
paid-in
capital is adjusted to the extent of the difference between the
current value of the award and the grant-date value of the award.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair
value of identifiable net assets at acquisition date. Goodwill
is tested at least annually for impairment. An impairment loss
is recognized
17
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
if the estimated fair value of an operating segment, which is a
component one level below the firm’s three business
segments, is less than its estimated net book value. Such loss
is calculated as the difference between the estimated fair value
of goodwill and its carrying value.
Identifiable
Intangible Assets
Identifiable intangible assets, which consist primarily of
customer lists, television broadcast royalties, contractual
rights related to commodity-related acquisitions, New York Stock
Exchange (NYSE) Designated Market Maker (DMM) rights and
the value of business acquired (VOBA) in the firm’s
insurance subsidiaries, are amortized over their estimated lives
or, in the case of insurance contracts, in proportion to
estimated gross profits or premium revenues. Identifiable
intangible assets are tested for impairment whenever events or
changes in circumstances suggest that an asset’s or asset
group’s carrying value may not be fully recoverable. An
impairment loss, generally calculated as the difference between
the estimated fair value and the carrying value of an asset or
asset group, is recognized if the sum of the estimated
undiscounted cash flows relating to the asset or asset group is
less than the corresponding carrying value.
Property,
Leasehold Improvements and Equipment
Property, leasehold improvements and equipment, net of
accumulated depreciation and amortization, are recorded at cost
and included in “Other assets” in the condensed
consolidated statements of financial condition.
Substantially all property and equipment are depreciated on a
straight-line basis over the useful life of the asset. Leasehold
improvements are amortized on a straight-line basis over the
useful life of the improvement or the term of the lease,
whichever is shorter. Certain costs of software developed or
obtained for internal use are capitalized and amortized on a
straight-line basis over the useful life of the software.
Property, leasehold improvements and equipment are tested for
impairment whenever events or changes in circumstances suggest
that an asset’s or asset group’s carrying value may
not be fully recoverable. An impairment loss, calculated as the
difference between the estimated fair value and the carrying
value of an asset or asset group, is recognized if the sum of
the expected undiscounted cash flows relating to the asset or
asset group is less than the corresponding carrying value.
The firm’s operating leases include office space held in
excess of current requirements. Rent expense relating to space
held for growth is included in “Occupancy” in the
condensed consolidated statements of earnings. The firm records
a liability, based on the fair value of the remaining lease
rentals reduced by any potential or existing sublease rentals,
for leases where the firm has ceased using the space and
management has concluded that the firm will not derive any
future economic benefits. Costs to terminate a lease before the
end of its term are recognized and measured at fair value upon
termination.
Foreign
Currency Translation
Assets and liabilities denominated in
non-U.S. currencies
are translated at rates of exchange prevailing on the date of
the condensed consolidated statements of financial condition,
and revenues and expenses are translated at average rates of
exchange for the period. Gains or losses on translation of the
financial statements of a
non-U.S. operation,
when the functional currency is other than the U.S. dollar,
are included, net of hedges and taxes, in the condensed
consolidated statements
18
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
of comprehensive income. Foreign currency remeasurement gains or
losses on transactions in nonfunctional currencies are included
in the condensed consolidated statements of earnings.
Hedge
Accounting
The firm applies hedge accounting for certain derivative
contracts used to manage the interest rate exposure of certain
fixed-rate obligations, and for certain derivative contracts and
foreign
currency-denominated
debt used to manage foreign currency exposures resulting from
the firm’s net investment in certain
non-U.S. operations.
The firm documents its risk management strategy at the inception
of each hedging relationship and assesses the effectiveness of
each hedging relationship at least quarterly.
Fair Value Hedges — Interest
Rate.
The firm designates certain interest rate
swap contracts as fair value hedges. These interest rate swap
contracts hedge changes in the relevant benchmark interest rate
(e.g., London Interbank Offered Rate (LIBOR)), effectively
converting a substantial portion of the firm’s unsecured
long-term
fixed-rate borrowings, certain unsecured
short-term
fixed-rate
borrowings and certificates of deposit 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 hedged item. 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 firm’s
prospective
dollar-offset
assessment utilized scenario analyses to test hedge
effectiveness via 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 deemed to be 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 derivative
transactions are recognized in “Interest expense” in
the condensed consolidated statements of earnings. The change in
fair value of the hedged item attributable to the risk being
hedged is reported as an adjustment to its carrying value and is
subsequently amortized into interest expense over its remaining
life. Gains or losses resulting from hedge ineffectiveness are
included in “Interest expense” in the condensed
consolidated statements of earnings.
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 (that
is, 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 hedging instruments,
to the extent effective, are included in the condensed
consolidated statements of comprehensive income.
19
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Income
Taxes
Income taxes are provided for using the asset and liability
method. Deferred tax assets and liabilities are recognized for
temporary differences between the financial reporting and tax
bases of the firm’s assets and liabilities. Valuation
allowances are established to reduce deferred tax assets to the
amount that more likely than not will be realized. The
firm’s tax assets and liabilities are presented as a
component of “Other assets” and “Other
liabilities and accrued expenses,” respectively, in the
condensed consolidated statements of financial condition. The
firm recognizes tax positions in the financial statements only
when it is more likely than not that the position will be
sustained upon examination by the relevant taxing authority
based on the technical merits of the position. A position that
meets this standard is measured at the largest amount of benefit
that will more likely than not be realized upon settlement. A
liability is established for differences between positions taken
in a tax return and amounts recognized in the financial
statements. The firm reports interest expense related to income
tax matters in “Provision for taxes” in the condensed
consolidated statements of earnings and income tax penalties in
“Other expenses” in the condensed consolidated
statements of earnings.
Earnings Per
Common Share (EPS)
Basic EPS is calculated by dividing net earnings applicable to
common shareholders by the weighted average number of common
shares outstanding. Common shares outstanding includes common
stock and RSUs for which no future service is required as a
condition to the delivery of the underlying common stock.
Diluted EPS includes the determinants of basic EPS and, in
addition, reflects the dilutive effect of the common stock
deliverable pursuant to stock warrants and options and to RSUs
for which future service is required as a condition to the
delivery of the underlying common stock. In the first quarter of
fiscal 2009, the firm adopted amended accounting principles
related to determining whether instruments granted in
share-based
payment transactions are participating securities. Accordingly,
the firm treats unvested
share-based
payment awards that have
non-forfeitable
rights to dividends or dividend equivalents as a separate class
of securities in calculating earnings per common share.
Cash and Cash
Equivalents
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business. As of
March 2010 and December 2009, “Cash and cash
equivalents” on the condensed consolidated statements of
financial condition included $2.62 billion and
$4.45 billion, respectively, of cash and due from banks and
$24.44 billion and $33.84 billion, respectively, of
interest-bearing deposits with banks.
20
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Recent
Accounting Developments
Transfers of Financial Assets and Interests in Variable
Interest Entities (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. Additionally,
entities previously classified as QSPEs are now required to be
evaluated for consolidation and disclosure as VIEs. Previously,
QSPEs were not consolidated and not considered for disclosure as
VIEs and the determination of whether to consolidate a VIE was
based on whether an enterprise had a variable interest, or
combination of variable interests, that would absorb a majority
of the VIE’s expected losses, receive a majority of the
VIE’s expected residual returns, or both. 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 ASU Nos.
2009-16
and
2009-17
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 2010,
principally within “Trading assets, at fair value” in
the condensed consolidated statement of financial condition. In
addition, “Other assets” in the condensed consolidated
statement of financial condition increased by $545 million
as of March 2010, with a corresponding decrease in
“Trading assets, at fair value,” as a result of the
consolidation of an entity which holds 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 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 disclosure requirements of ASU
No. 2010-06
were effective for the firm beginning in the first quarter of
2010, while other disclosure requirements of the ASU 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.
21
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 3. | Financial Instruments |
Fair Value of
Financial Instruments
The following table sets forth the firm’s trading assets,
at fair value, including those pledged as collateral, and
trading liabilities, at fair value. At any point in time, the
firm may use cash instruments as well as derivatives to manage a
long or short risk position.
| As of | ||||||||||||||||
| March 2010 | December 2009 | |||||||||||||||
| Assets | Liabilities | Assets | Liabilities | |||||||||||||
| (in millions) | ||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 11,735 | (1) | $ | — | $ | 9,111 | (1) | $ | — | ||||||
|
U.S. government and federal agency obligations
|
79,451 | 20,426 | 78,336 | 20,982 | ||||||||||||
|
Non-U.S. government
obligations
|
43,030 | 29,929 | 38,858 | 23,843 | ||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||
|
Loans and securities backed by commercial real estate
|
6,241 | 39 | 6,203 | 29 | ||||||||||||
|
Loans and securities backed by residential real estate
|
5,657 | 9 | 6,704 | 74 | ||||||||||||
|
Loan portfolios
|
1,338 | (2) | — | 1,370 | (2) | — | ||||||||||
|
Bank loans and bridge loans
|
20,787 | 2,158 | (5) | 19,345 | 1,541 | (5) | ||||||||||
|
Corporate debt securities
|
25,653 | 7,224 | 26,368 | 6,229 | ||||||||||||
|
State and municipal obligations
|
2,942 | 6 | 2,759 | 36 | ||||||||||||
|
Other debt obligations
|
2,919 | — | 2,914 | — | ||||||||||||
|
Equities and convertible debentures
|
65,348 | 26,392 | 71,474 | 20,253 | ||||||||||||
|
Physical commodities
|
3,761 | 37 | 3,707 | 23 | ||||||||||||
|
Derivative contracts
|
70,573 | (3) | 53,861 | (6) | 75,253 | (3) | 56,009 | (6) | ||||||||
|
Total
|
$ | 339,435 | (4) | $ | 140,081 | $ | 342,402 | (4) | $ | 129,019 | ||||||
| (1) | Includes $4.03 billion and $4.31 billion as of March 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 8 for further information regarding the William Street credit extension program. | |
| (2) | Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. | |
| (3) | Net of cash received pursuant to credit support agreements of $118.75 billion and $124.60 billion as of March 2010 and December 2009, respectively. | |
| (4) | Includes $3.92 billion and $3.86 billion as of March 2010 and December 2009, respectively, of securities accounted for as available-for-sale, substantially all of which is held within the firm’s insurance subsidiaries. | |
| (5) | Includes the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets, at fair value. | |
| (6) | Net of cash paid pursuant to credit support agreements of $14.50 billion and $14.74 billion as of March 2010 and December 2009, respectively. |
22
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Fair Value
Hierarchy
The firm’s financial assets at fair value classified within
level 3 of the fair value hierarchy are summarized below:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| ($ in millions) | ||||||||
|
Total level 3 assets
|
$ | 45,153 | $ | 46,475 | ||||
|
Level 3 assets for which the firm bears economic
exposure
(1)
|
42,513 | 43,348 | ||||||
|
Total assets
|
880,528 | 848,942 | ||||||
|
Total financial assets at fair value
|
606,238 | 573,788 | ||||||
|
Total level 3 assets as a percentage of Total assets
|
5.1 | % | 5.5 | % | ||||
|
Level 3 assets for which the firm bears economic exposure
as a percentage of Total assets
|
4.8 | 5.1 | ||||||
|
Total level 3 assets as a percentage of Total financial
assets at
fair value |
7.4 | 8.1 | ||||||
|
Level 3 assets for which the firm bears economic exposure
as a percentage of Total financial assets at fair value
|
7.0 | 7.6 | ||||||
| (1) | Excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
The following tables set forth by level within the fair value
hierarchy trading assets, at fair value, trading liabilities, at
fair value, and other financial assets and financial liabilities
accounted for at fair value under the fair value option as of
March 2010 and December 2009. See Note 2 for
further information on the fair value hierarchy. Assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
23
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Assets at Fair Value as of March 2010 | ||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Collateral | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 4,345 | $ | 7,390 | $ | — | $ | — | $ | 11,735 | ||||||||||
|
U.S. government and federal agency obligations
|
30,536 | 48,915 | — | — | 79,451 | |||||||||||||||
|
Non-U.S. government
obligations
|
39,043 | 3,987 | — | — | 43,030 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and
securities
(1)
:
|
||||||||||||||||||||
|
Loans and securities backed by commercial
real estate |
— | 2,171 | 4,070 | — | 6,241 | |||||||||||||||
|
Loans and securities backed by residential
real estate |
— | 3,526 | 2,131 | — | 5,657 | |||||||||||||||
|
Loan portfolios
|
— | 47 | 1,291 | — | 1,338 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 11,464 | 9,323 | — | 20,787 | |||||||||||||||
|
Corporate debt
securities
(2)
|
116 | 22,834 | 2,703 | — | 25,653 | |||||||||||||||
|
State and municipal obligations
|
— | 2,072 | 870 | — | 2,942 | |||||||||||||||
|
Other debt obligations
|
— | 1,432 | 1,487 | — | 2,919 | |||||||||||||||
|
Equities and convertible debentures
|
32,700 | (4) | 21,995 | (6) | 10,653 | (8) | — | 65,348 | ||||||||||||
|
Physical commodities
|
— | 3,761 | — | — | 3,761 | |||||||||||||||
|
Cash instruments
|
106,740 | 129,594 | 32,528 | — | 268,862 | |||||||||||||||
|
Derivative contracts
|
115 | 179,307 | 12,123 | (120,972 | ) (9) | 70,573 | ||||||||||||||
|
Trading assets, at fair value
|
106,855 | 308,901 | 44,651 | (120,972 | ) | 339,435 | ||||||||||||||
|
Securities segregated for regulatory and other purposes
|
17,975 | (5) | 9,337 | (7) | — | — | 27,312 | |||||||||||||
|
Securities purchased under agreements to resell
|
— | 166,100 | 268 | — | 166,368 | |||||||||||||||
|
Securities borrowed
|
— | 71,349 | — | — | 71,349 | |||||||||||||||
|
Receivables from customers and counterparties
|
— | 1,540 | 234 | — | 1,774 | |||||||||||||||
|
Total financial assets at fair value
|
$ | 124,830 | $ | 557,227 | $ | 45,153 | $ | (120,972 | ) | $ | 606,238 | |||||||||
|
Level 3 assets for which the firm does not bear economic
exposure
(3)
|
(2,640 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm bears economic exposure
|
$ | 42,513 | ||||||||||||||||||
| (1) | Includes $141 million and $491 million of collateralized debt obligations (CDOs) backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy. |
| (2) | Includes $376 million and $802 million of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy. |
| (3) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
| (4) | Consists of publicly listed equity securities. |
| (5) | 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. |
| (6) | Substantially all consists of less liquid publicly listed securities. |
| (7) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. |
| (8) | Includes $9.45 billion of private equity investments, $968 million of real estate investments and $233 million of convertible debentures. |
| (9) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
24
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Liabilities at Fair Value as of March 2010 | ||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Collateral | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 20,249 | $ | 177 | $ | — | $ | — | $ | 20,426 | ||||||||||
|
Non-U.S. government
obligations
|
29,621 | 308 | — | — | 29,929 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 39 | — | — | 39 | |||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 9 | — | — | 9 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 1,751 | 407 | — | 2,158 | |||||||||||||||
|
Corporate debt
securities
(1)
|
31 | 7,122 | 71 | — | 7,224 | |||||||||||||||
|
State and municipal obligations
|
— | 6 | — | — | 6 | |||||||||||||||
|
Equities and convertible
debentures
(2)
|
25,047 | 1,340 | 5 | — | 26,392 | |||||||||||||||
|
Physical commodities
|
— | 37 | — | — | 37 | |||||||||||||||
|
Cash instruments
|
74,948 | 10,789 | 483 | — | 86,220 | |||||||||||||||
|
Derivative contracts
|
136 | 64,657 | 5,787 | (16,719 | ) (4) | 53,861 | ||||||||||||||
|
Trading liabilities, at fair value
|
75,084 | 75,446 | 6,270 | (16,719 | ) | 140,081 | ||||||||||||||
|
Deposits
|
— | 2,014 | — | — | 2,014 | |||||||||||||||
|
Securities sold under agreements to repurchase,
at fair value |
— | 152,462 | 1,055 | — | 153,517 | |||||||||||||||
|
Securities loaned
|
— | 3,108 | — | — | 3,108 | |||||||||||||||
|
Other secured financings
|
178 | 7,669 | 8,139 | — | 15,986 | |||||||||||||||
|
Unsecured
short-term
borrowings
|
— | 16,600 | 2,994 | — | 19,594 | |||||||||||||||
|
Unsecured
long-term
borrowings
|
— | 18,472 | 1,715 | — | 20,187 | |||||||||||||||
|
Other liabilities and accrued expenses
|
— | 455 | 2,327 | — | 2,782 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 75,262 | $ | 276,226 | $ | 22,500 | (3) | $ | (16,719 | ) | $ | 357,269 | ||||||||
| (1) | Includes $5 million and $45 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy. |
| (2) | Substantially all consists of publicly listed equity securities. |
| (3) | Level 3 liabilities were 6.3% of Total financial liabilities at fair value. |
| (4) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
25
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Assets at Fair Value as of December 2009 | ||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Collateral | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Commercial paper, certificates of deposit, time deposits and
other money market instruments
|
$ | 5,026 | $ | 4,085 | $ | — | $ | — | $ | 9,111 | ||||||||||
|
U.S. government and federal agency obligations
|
36,391 | 41,945 | — | — | 78,336 | |||||||||||||||
|
Non-U.S. government
obligations
|
33,881 | 4,977 | — | — | 38,858 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and
securities
(1)
:
|
||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 1,583 | 4,620 | — | 6,203 | |||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 4,824 | 1,880 | — | 6,704 | |||||||||||||||
|
Loan portfolios
|
— | 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 | (4) | 22,500 | (6) | 11,871 | (9) | — | 71,474 | ||||||||||||
|
Physical commodities
|
— | 3,707 | — | — | 3,707 | |||||||||||||||
|
Cash instruments
|
112,565 | 119,705 | 34,879 | — | 267,149 | |||||||||||||||
|
Derivative contracts
|
161 | 190,816 | (7) | 11,596 | (7) | (127,320 | ) (10) | 75,253 | ||||||||||||
|
Trading assets, at fair value
|
112,726 | 310,521 | 46,475 | (127,320 | ) | 342,402 | ||||||||||||||
|
Securities segregated for regulatory and other purposes
|
14,381 | (5) | 4,472 | (8) | — | — | 18,853 | |||||||||||||
|
Securities purchased under agreements to resell
|
— | 144,279 | — | — | 144,279 | |||||||||||||||
|
Securities borrowed
|
— | 66,329 | — | — | 66,329 | |||||||||||||||
|
Receivables from customers and counterparties
|
— | 1,925 | — | — | 1,925 | |||||||||||||||
|
Total financial assets at fair value
|
$ | 127,107 | $ | 527,526 | $ | 46,475 | $ | (127,320 | ) | $ | 573,788 | |||||||||
|
Level 3 assets for which the firm does not bear economic
exposure
(3)
|
(3,127 | ) | ||||||||||||||||||
|
Level 3 assets for which the firm bears economic exposure
|
$ | 43,348 | ||||||||||||||||||
| (1) | Includes $291 million and $311 million of CDOs and CLOs backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy. | |
| (2) | Includes $338 million and $741 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy. | |
| (3) | Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. | |
| (4) | Consists of publicly listed equity securities. | |
| (5) | Principally consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value. | |
| (6) | Substantially all consists of less liquid publicly listed securities. | |
| (7) | Includes $31.44 billion and $9.58 billion of credit derivative assets within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types. | |
| (8) | Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements. | |
| (9) | Includes $10.56 billion of private equity investments, $1.23 billion of real estate investments and $79 million of convertible debentures. |
| (10) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
26
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Financial Liabilities at Fair Value as of December 2009 | ||||||||||||||||||||
|
Netting and
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Collateral | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
U.S. government and federal agency obligations
|
$ | 20,940 | $ | 42 | $ | — | $ | — | $ | 20,982 | ||||||||||
|
Non-U.S. government
obligations
|
23,306 | 537 | — | — | 23,843 | |||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
— | 29 | — | — | 29 | |||||||||||||||
|
Loans and securities backed by residential real estate
|
— | 74 | — | — | 74 | |||||||||||||||
|
Bank loans and bridge loans
|
— | 1,128 | 413 | — | 1,541 | |||||||||||||||
|
Corporate debt
securities
(1)
|
65 | 6,018 | 146 | — | 6,229 | |||||||||||||||
|
State and municipal obligations
|
— | 36 | — | — | 36 | |||||||||||||||
|
Equities and convertible
debentures
(2)
|
19,072 | 1,168 | 13 | — | 20,253 | |||||||||||||||
|
Physical commodities
|
— | 23 | — | — | 23 | |||||||||||||||
|
Cash instruments
|
63,383 | 9,055 | 572 | — | 73,010 | |||||||||||||||
|
Derivative contracts
|
126 | 66,943 | (3) | 6,400 | (3) | (17,460 | ) (5) | 56,009 | ||||||||||||
|
Trading liabilities, at fair value
|
63,509 | 75,998 | 6,972 | (17,460 | ) | 129,019 | ||||||||||||||
|
Deposits
|
— | 1,947 | — | — | 1,947 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
— | 127,966 | 394 | — | 128,360 | |||||||||||||||
|
Securities loaned
|
— | 6,194 | — | — | 6,194 | |||||||||||||||
|
Other secured financings
|
118 | 8,354 | 6,756 | — | 15,228 | |||||||||||||||
|
Unsecured
short-term
borrowings
|
— | 16,093 | 2,310 | — | 18,403 | |||||||||||||||
|
Unsecured
long-term
borrowings
|
— | 18,315 | 3,077 | — | 21,392 | |||||||||||||||
|
Other liabilities and accrued expenses
|
— | 141 | 1,913 | — | 2,054 | |||||||||||||||
|
Total financial liabilities at fair value
|
$ | 63,627 | $ | 255,008 | $ | 21,422 | (4) | $ | (17,460 | ) | $ | 322,597 | ||||||||
| (1) | Includes $45 million of CDOs and CLOs backed by corporate obligations within level 3 of the fair value hierarchy. |
| (2) | Substantially all consists of publicly listed equity securities. |
| (3) | Includes $7.96 billion and $3.20 billion of credit derivative liabilities within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types. |
| (4) | Level 3 liabilities were 6.6% of Total financial liabilities at fair value. |
| (5) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level. |
27
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The fair value of the firm’s derivative contracts is
reflected net of cash paid or received pursuant to credit
support agreements and is reported on a
net-by-counterparty
basis in the firm’s consolidated statements of financial
condition when management believes a legal right of setoff
exists under an enforceable netting agreement. The following
table sets forth the fair value of the firm’s derivative
contracts on a gross basis by level within the fair value
hierarchy and major product type as of March 2010. Gross
fair values in the tables below exclude the effects of both
netting under enforceable netting agreements and netting of cash
received or posted pursuant to credit support agreements both
within and across the levels of the fair value hierarchy, and
therefore are not representative of the firm’s exposure.
| Derivative Assets at Fair Value as of March 2010 | ||||||||||||||||||||
|
Cross-Level
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Netting | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Interest rates
|
$ | 45 | $ | 481,042 | $ | 506 | $ | 481,593 | ||||||||||||
|
Credit
|
— | 136,888 | 13,344 | 150,232 | ||||||||||||||||
|
Currencies
|
— | 72,080 | 667 | 72,747 | ||||||||||||||||
|
Commodities
|
— | 42,617 | 761 | 43,378 | ||||||||||||||||
|
Equities
|
70 | 62,965 | 1,467 | 64,502 | ||||||||||||||||
|
Gross fair value of derivative assets
|
$ | 115 | $ | 795,592 | $ | 16,745 | $ | 812,452 | ||||||||||||
|
Counterparty
netting
(1)
|
— | (616,285 | ) | (4,622 | ) | $ | (2,218 | ) (3) | (623,125 | ) | ||||||||||
|
Subtotal
|
$ | 115 | $ | 179,307 | $ | 12,123 | $ | (2,218 | ) | $ | 189,327 | |||||||||
|
Cash collateral
netting
(2)
|
(118,754 | ) | ||||||||||||||||||
|
Fair value included in trading
assets, at fair value |
$ | 70,573 | ||||||||||||||||||
| Derivative Liabilities at Fair Value as of March 2010 | ||||||||||||||||||||
|
Cross-Level
|
||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Netting | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Interest rates
|
$ | 55 | $ | 413,419 | $ | 430 | $ | 413,904 | ||||||||||||
|
Credit
|
— | 115,392 | 6,162 | 121,554 | ||||||||||||||||
|
Currencies
|
— | 59,339 | 195 | 59,534 | ||||||||||||||||
|
Commodities
|
— | 44,749 | 1,009 | 45,758 | ||||||||||||||||
|
Equities
|
81 | 48,043 | 2,613 | 50,737 | ||||||||||||||||
|
Gross fair value of derivative assets
|
$ | 136 | $ | 680,942 | $ | 10,409 | $ | 691,487 | ||||||||||||
|
Counterparty
netting
(1)
|
— | (616,285 | ) | (4,622 | ) | $ | (2,218 | ) (3) | (623,125 | ) | ||||||||||
|
Subtotal
|
$ | 136 | $ | 64,657 | $ | 5,787 | $ | (2,218 | ) | $ | 68,362 | |||||||||
|
Cash collateral
netting
(2)
|
(14,501 | ) | ||||||||||||||||||
|
Fair value included in trading
liabilities, at fair value |
$ | 53,861 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements. | |
| (2) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (3) | Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy pursuant to enforceable netting agreements. |
28
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Level 3
Unrealized Gains/(Losses)
The table below sets forth a summary of unrealized
gains/(losses) on the firm’s level 3 financial assets
and financial liabilities at fair value still held at the
reporting date for the three months ended March 2010 and
March 2009:
|
Level 3 Unrealized
|
||||||||
| Gains/(Losses) | ||||||||
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Cash instruments — assets
|
$ | 833 | $ | (4,072 | ) | |||
|
Cash instruments — liabilities
|
34 | 15 | ||||||
|
Net unrealized gains/(losses) on level 3 cash instruments
|
867 | (4,057 | ) | |||||
|
Derivative contracts — net
|
1,568 | 975 | ||||||
|
Receivables from customers and counterparties
|
(28 | ) | — | |||||
|
Other secured financings
|
(10 | ) | 17 | |||||
|
Unsecured
short-term
borrowings
|
82 | 124 | ||||||
|
Unsecured
long-term
borrowings
|
12 | 82 | ||||||
|
Other liabilities and accrued expenses
|
64 | 64 | ||||||
|
Total level 3 unrealized gains/(losses)
|
$ | 2,555 | $ | (2,795 | ) | |||
Cash
Instruments
The net unrealized gain on level 3 cash instruments of
$867 million for the three months ended March 2010
primarily consisted of unrealized gains on corporate debt
securities, bank loans and bridge loans, loans and securities
backed by commercial real estate, and loans and securities
backed by residential real estate reflecting a decrease in
market yields evidenced by sales of similar assets during the
period. The net unrealized loss on level 3 cash instruments
of $4.06 billion for the three months ended March 2009
primarily consisted of unrealized losses on private equity
investments and real estate fund investments, loans and
securities backed by commercial real estate, and bank loans and
bridge loans. Losses during the period reflected the weakness in
the global credit and equity markets.
Level 3 cash instruments are frequently economically hedged
with instruments classified within level 1 and
level 2, and accordingly, gains or losses that have been
reported in level 3 can be partially offset by gains or
losses attributable to instruments classified within
level 1 or level 2 or by gains or losses on derivative
contracts classified within level 3 of the fair value
hierarchy.
29
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Derivative
Contracts
The net unrealized gain on level 3 derivative contracts of
$1.57 billion for the three months ended March 2010
was primarily attributable to changes in foreign exchange rates
and interest rates (which are level 2 inputs) underlying
certain credit derivative contracts. These unrealized gains were
substantially offset by unrealized losses on currency, interest
rate and credit derivative contracts which are classified within
level 2 of the fair value hierarchy and are used to
economically hedge derivative contracts classified within
level 3 of the fair value hierarchy. The net unrealized
gain on level 3 derivative contracts of $975 million
for the three months ended March 2009 was primarily
attributable to increases in commodities prices (which are
level 2 inputs) and changes in credit spreads corroborated
by trading activity during the quarter. Level 3 gains and
losses on derivative contracts should be considered in the
context of the following:
| • | A derivative contract with level 1 and/or level 2 inputs is classified as a level 3 financial instrument in its entirety if it has at least one significant level 3 input. | |
| • | If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2) is still classified as level 3. | |
| • | Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to instruments classified within level 1 or level 2 or cash instruments reported within level 3 of the fair value hierarchy. |
30
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The tables below set forth a summary of changes in the fair
value of the firm’s level 3 financial assets and
financial liabilities at fair value for the three months ended
March 2010 and March 2009. The tables reflect gains
and losses, including gains and losses for the entire period on
financial assets and financial liabilities at fair value that
were transferred to level 3 during the period, for all
financial assets and financial liabilities at fair value
categorized as level 3 as of March 2010 and
March 2009, respectively.
| Level 3 Financial Assets and Financial Liabilities at Fair Value | ||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
|||||||||||||||||||||||
|
relating to
|
purchases,
|
|||||||||||||||||||||||
|
Balance,
|
instruments still
|
issuances
|
Net transfers
|
Balance,
|
||||||||||||||||||||
|
beginning
|
Net realized
|
held at the
|
and
|
in
and/or
out
|
end of
|
|||||||||||||||||||
| of year | gains/(losses) | reporting date | settlements | of level 3 | period | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Three Months Ended March 2010
|
||||||||||||||||||||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||||||||||||||||||
|
Loans and securities backed by commercial real estate
|
$ | 4,620 | $ | 63 | $ | 184 | $ | (506 | ) | $ | (291 | ) (4) | $ | 4,070 | ||||||||||
|
Loans and securities backed by residential real estate
|
1,880 | 37 | 102 | (141 | ) | 253 | (4) | 2,131 | ||||||||||||||||
|
Loan portfolios
|
1,364 | 28 | 3 | (116 | ) | 12 | (4) | 1,291 | ||||||||||||||||
|
Bank loans and bridge loans
|
9,560 | 180 | 202 | (655 | ) | 36 | (4) | 9,323 | ||||||||||||||||
|
Corporate debt securities
|
2,235 | 82 | 260 | 707 | (581 | ) (5) | 2,703 | |||||||||||||||||
|
State and municipal obligations
|
1,114 | 1 | 5 | (225 | ) | (25 | ) (4) | 870 | ||||||||||||||||
|
Other debt obligations
|
2,235 | (5 | ) | 94 | (75 | ) | (762 | ) (6) | 1,487 | |||||||||||||||
|
Equities and convertible debentures
|
11,871 | 115 | (17 | ) | (1,053 | ) | (263 | ) (4) | 10,653 | |||||||||||||||
|
Total cash instruments — assets
|
34,879 | 501 | (1) | 833 | (1) | (2,064 | ) | (1,621 | ) | 32,528 | ||||||||||||||
|
Cash instruments — liabilities
|
(572 | ) | 14 | (2) | 34 | (2) | 10 | 31 | (4) | (483 | ) | |||||||||||||
|
Derivative contracts:
|
||||||||||||||||||||||||
|
Interest rates — net
|
(71 | ) | 9 | (43 | ) | (1 | ) | 200 | (4) | 94 | ||||||||||||||
|
Credit — net
|
6,366 | 332 | 1,459 | (755 | ) | (265 | ) (4) | 7,137 | ||||||||||||||||
|
Currencies — net
|
215 | (18 | ) | 5 | 9 | 257 | (4) | 468 | ||||||||||||||||
|
Commodities — net
|
(90 | ) | 6 | 71 | 3 | (234 | ) (4) | (244 | ) | |||||||||||||||
|
Equities — net
|
(1,224 | ) | 40 | 76 | (173 | ) | 162 | (4) | (1,119 | ) | ||||||||||||||
|
Total derivative contracts — net
|
5,196 | 369 | (2) | 1,568 | (2)(3) | (917 | ) | 120 | 6,336 | |||||||||||||||
|
Securities purchased under agreements to resell
|
— | — | — | — | 268 | (4) | 268 | |||||||||||||||||
|
Receivables from customers and counterparties
|
— | 6 | (2) | (28 | ) (2) | — | 256 | (4) | 234 | |||||||||||||||
|
Securities sold under agreements to repurchase, at fair value
|
(394 | ) | — | — | (494 | ) | (167 | ) (4) | (1,055 | ) | ||||||||||||||
|
Other secured financings
|
(6,756 | ) | (9 | ) (2) | (10 | ) (2) | (1,172 | ) | (192 | ) (7) | (8,139 | ) | ||||||||||||
|
Unsecured
short-term
borrowings
|
(2,310 | ) | (21 | ) (2) | 82 | (2) | 139 | (884 | ) (7) | (2,994 | ) | |||||||||||||
|
Unsecured
long-term
borrowings
|
(3,077 | ) | (13 | ) (2) | 12 | (2) | (33 | ) | 1,396 | (8) | (1,715 | ) | ||||||||||||
|
Other liabilities and accrued expenses
|
(1,913 | ) | (3 | ) (2) | 64 | (2) | — | (475 | ) (9) | (2,327 | ) | |||||||||||||
| (1) | The aggregate amounts include approximately $961 million and $373 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the three months ended March 2010. |
| (2) | Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings. |
| (3) | Principally resulted from changes in level 2 inputs. |
| (4) | Includes no individually significant transfers into or out of level 3 during the three months ended March 2010. |
| (5) | Principally reflects a reduction in financial instruments as a result of the consolidation of a VIE, which holds identifiable intangible assets, as a result of the adoption of ASU No. 2009-17. Such assets are included in “Other assets” in the condensed consolidated statement of financial condition. |
| (6) | Principally reflects a reduction in financial instruments as a result of the consolidation of a VIE, which holds real estate assets. Such assets are included in “Other assets” in the condensed consolidated statement of financial condition. |
| (7) | Principally reflects consolidation of certain VIEs as a result of the adoption of ASU No. 2009-17. |
| (8) | Upon the firm’s consolidation of certain VIEs as a result of the adoption of ASU No. 2009-17, the firm’s borrowings from such VIEs, substantially all of which were level 3, became intercompany borrowings and were eliminated in consolidation. |
| (9) | Principally reflects an increase related to subordinated liabilities issued by VIEs which were consolidated upon the adoption of ASU No. 2009-17. |
31
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Level 3 Financial Assets and Financial Liabilities at Fair Value | ||||||||||||||||||||||||
|
Net unrealized
|
||||||||||||||||||||||||
|
gains/(losses)
|
Net
|
|||||||||||||||||||||||
|
relating to
|
purchases,
|
|||||||||||||||||||||||
|
Balance,
|
instruments still
|
issuances
|
Net transfers
|
Balance,
|
||||||||||||||||||||
|
beginning
|
Net realized
|
held at the
|
and
|
in
and/or
out
|
end of
|
|||||||||||||||||||
| of period | gains/(losses) | reporting date | settlements | of level 3 | period | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Three Months Ended March 2009
|
||||||||||||||||||||||||
|
Cash instruments — assets
|
$ | 49,652 | $ | 623 | (1) | $ | (4,072 | ) (1) | $ | (2,462 | ) | $ | (1,057 | ) (4) | $ | 42,684 | ||||||||
|
Cash instruments — liabilities
|
(1,727 | ) | 14 | (2) | 15 | (2) | 285 | 109 | (1,304 | ) | ||||||||||||||
|
Derivative contracts — net
|
3,315 | 238 | (2) | 975 | (2)(3) | 342 | (754 | ) (5) | 4,116 | |||||||||||||||
|
Other secured financings
|
(4,039 | ) | (6 | ) (2) | 17 | (2) | (1,144 | ) | (2,105 | ) (6) | (7,277 | ) | ||||||||||||
|
Unsecured
short-term
borrowings
|
(4,712 | ) | 32 | (2) | 124 | (2) | (868 | ) | 2,281 | (6) | (3,143 | ) | ||||||||||||
|
Unsecured
long-term
borrowings
|
(1,689 | ) | (13 | ) (2) | 82 | (2) | 177 | (473 | ) (6) | (1,916 | ) | |||||||||||||
|
Other liabilities and accrued expenses
|
— | (10 | ) (2) | 64 | (2) | (600 | ) | (964 | ) (7) | (1,510 | ) | |||||||||||||
| (1) | The aggregate amounts include approximately $(4.07) billion and $620 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the three months ended March 2009. |
| (2) | Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings. |
| (3) | Principally resulted from changes in level 2 inputs and changes in credit spreads corroborated by trading activity during the period. |
| (4) | Principally reflects the deconsolidation of certain loan portfolios for which the firm did not bear economic exposure. |
| (5) | Principally reflects transfers from level 2 within the fair value hierarchy of certain derivative liabilities, due to reduced trading activity, and therefore price transparency, on the underlying instruments. |
| (6) | Principally reflects transfers from level 3 unsecured short-term borrowings to level 3 other secured financings and level 3 unsecured long-term borrowings related to changes in the terms of certain notes. |
| (7) | Principally reflects transfers from level 2 within the fair value hierarchy of certain insurance contracts, reflecting reduced transparency of mortality curve inputs used to value these instruments as a result of less observable trading activity. |
32
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Derivative
Activities
Derivative contracts are instruments such as futures, forwards,
swaps or option contracts that derive their value from
underlying asset prices, indices, reference rates and other
inputs or a combination of these factors. Derivative instruments
may be privately negotiated contracts, which are often referred
to as OTC derivatives, or they may be listed and traded on an
exchange. Derivatives may involve future commitments to purchase
or sell financial instruments or commodities, or to exchange
currency or interest payment streams. The amounts exchanged are
based on the specific terms of the contract with reference to
specified rates, financial instruments, commodities, currencies
or indices.
Certain cash instruments such as
mortgage-backed
securities, interest-only and principal-only obligations, and
indexed debt instruments are not considered derivatives even
though their values or contractually required cash flows are
derived from the price of some other security or index. However,
certain commodity-related contracts are included in the
firm’s derivatives disclosure, as these contracts may be
settled in cash or the assets to be delivered under the contract
are readily convertible into cash.
The firm enters into derivative transactions to facilitate
client transactions, as a means of risk management or to take
proprietary positions. Risk exposures are managed through
diversification, by controlling position sizes and by entering
into offsetting positions. For example, the firm may manage the
risk related to a portfolio of common stock by entering into an
offsetting position in a related
equity-index
futures contract.
Gains and losses on derivatives used for trading purposes are
included in “Trading and principal investments” in the
condensed consolidated statements of earnings. See Note 2
for information regarding the firm’s accounting policy and
use of derivatives for hedge accounting.
33
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The fair value of the firm’s derivative contracts is
reflected net of cash paid or received pursuant to credit
support agreements and is reported on a
net-by-counterparty
basis in the firm’s condensed consolidated statements of
financial condition when management believes a legal right of
setoff exists under an enforceable netting agreement. The
following table sets forth the fair value and the number of
contracts of the firm’s derivative contracts by major
product type on a gross basis as of March 2010 and
December 2009. Gross fair values in the table below exclude
the effects of both netting under enforceable netting agreements
and netting of cash received or posted pursuant to credit
support agreements, and therefore are not representative of the
firm’s exposure:
| As of March 2010 | As of December 2009 | |||||||||||||||||||||||
|
Number
|
Number
|
|||||||||||||||||||||||
|
Derivative
|
Derivative
|
of
|
Derivative
|
Derivative
|
of
|
|||||||||||||||||||
| Assets | Liabilities | Contracts | Assets | Liabilities | Contracts | |||||||||||||||||||
| (in millions, except number of contracts) | ||||||||||||||||||||||||
| Derivative contracts for trading activities | ||||||||||||||||||||||||
|
Interest rates
|
$ | 460,870 | $ | 413,903 | 262,110 | $ | 458,614 | $ | 407,125 | 270,707 | ||||||||||||||
|
Credit
|
150,232 | 121,554 | 434,738 | 164,669 | 134,810 | 443,450 | ||||||||||||||||||
|
Currencies
|
72,734 | 59,447 | 233,634 | 77,223 | 62,413 | 171,760 | ||||||||||||||||||
|
Commodities
|
43,378 | 45,758 | 64,457 | 47,234 | 48,163 | 73,010 | ||||||||||||||||||
|
Equities
|
64,502 | 50,737 | 242,825 | 67,559 | 53,207 | 237,625 | ||||||||||||||||||
|
Subtotal
|
$ | 791,716 | $ | 691,399 | 1,237,764 | $ | 815,299 | $ | 705,718 | 1,196,552 | ||||||||||||||
| Derivative contracts accounted for as hedges | ||||||||||||||||||||||||
|
Interest rates
|
$ | 20,723 | $ | 1 | 806 | $ | 19,563 | $ | 1 | 806 | ||||||||||||||
|
Currencies
|
13 | 87 | 63 | 8 | 47 | 58 | ||||||||||||||||||
|
Subtotal
|
$ | 20,736 | $ | 88 | 869 | $ | 19,571 | $ | 48 | 864 | ||||||||||||||
|
Gross fair value of derivative contracts
|
$ | 812,452 | $ | 691,487 | 1,238,633 | $ | 834,870 | $ | 705,766 | 1,197,416 | ||||||||||||||
|
Counterparty
netting
(1)
|
(623,125 | ) | (623,125 | ) | (635,014 | ) | (635,014 | ) | ||||||||||||||||
|
Cash collateral
netting
(2)
|
(118,754 | ) | (14,501 | ) | (124,603 | ) | (14,743 | ) | ||||||||||||||||
|
Fair value included in trading assets,
at fair value |
$ | 70,573 | $ | 75,253 | ||||||||||||||||||||
|
Fair value included in trading liabilities,
at fair value |
$ | 53,861 | $ | 56,009 | ||||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements. |
| (2) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. |
34
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
For the three months ended March 2010 and March 2009,
the gain/(loss) recognized on interest rate derivative contracts
accounted for as hedges was $687 million and $(2.47)
billion, respectively, and the related gain/(loss) recognized on
the hedged borrowings and bank deposits was $(1.10) billion
and $2.43 billion, respectively. These gains and losses are
included in “Interest expense” in the condensed
consolidated statements of earnings. The hedge ineffectiveness
recognized on these derivative contracts for the three months
ended March 2010 was a loss of $413 million. This loss
consisted primarily of the amortization of prepaid credit
spreads, and was not material for the three months ended
March 2009. The
gain/(loss)
excluded from the assessment of hedge effectiveness was not
material for the three months ended March 2010 and was a
loss of $316 million for the three months ended
March 2009.
For the three months ended March 2010 and March 2009,
the gain on currency derivative contracts accounted for as
hedges was $121 million and $153 million,
respectively. Such amounts are included in “Currency
translation adjustment, net of tax” in the condensed
consolidated statements of comprehensive income. The
gain/(loss)
related to ineffectiveness and the
gain/(loss)
reclassified to earnings from accumulated other comprehensive
income were not material for the three months ended
March 2010 and March 2009.
The firm also has embedded derivatives that have been bifurcated
from related borrowings. Such derivatives, which are classified
in unsecured
short-term
and unsecured
long-term
borrowings in the firm’s condensed consolidated statements
of financial condition, had a net asset carrying value of
$95 million and $96 million as of March 2010 and
December 2009, respectively. The net asset as of
March 2010, which represented 306 contracts, included gross
assets of $447 million (primarily comprised of equity and
interest rate derivatives) and gross liabilities of
$352 million (primarily comprised of interest rate and
equity derivatives). The net asset as of December 2009,
which represented 297 contracts, included gross assets of
$478 million (primarily comprised of equity and interest
rate derivatives) and gross liabilities of $382 million
(primarily comprised of equity and interest rate derivatives).
See Notes 6 and 7 for further information regarding the
firm’s unsecured borrowings.
As of March 2010 and December 2009, the firm has
designated $3.37 billion and $3.38 billion,
respectively, of foreign
currency-denominated
debt, included in unsecured
long-term
borrowings and unsecured
short-term
borrowings in the firm’s condensed consolidated statements
of financial condition, as hedges of net investments in
non-U.S. subsidiaries.
For the three months ended March 2010 and March 2009,
the gain on these debt instruments was $12 million and
$269 million, respectively. Such amounts are included in
“Currency translation adjustment, net of tax” in the
condensed consolidated statements of comprehensive income. The
gain/(loss) related to ineffectiveness and the gain/(loss)
reclassified to earnings from accumulated other comprehensive
income was not material for the three months ended
March 2010 and March 2009.
35
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth by major product type the
firm’s gains/(losses) related to trading activities,
including both derivative and nonderivative financial
instruments, for the three months ended March 2010 and
March 2009. These gains/(losses) are not representative of
the firm’s individual business unit results because many of
the firm’s trading strategies utilize financial instruments
across various product types. Accordingly, gains or losses in
one product type frequently offset gains or losses in other
product types. For example, most of the firm’s longer-term
derivative contracts are sensitive to changes in interest rates
and may be economically hedged with interest rate swaps.
Similarly, a significant portion of the firm’s cash and
derivatives trading inventory has exposure to foreign
currencies and may be economically hedged with foreign currency
contracts. The
gains/(losses)
set forth below are included in “Trading and principal
investments” in the condensed consolidated statements of
earnings and exclude related interest income and interest
expense.
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Interest rates
|
$ | (1,914 | ) | $ | 660 | |||
|
Credit
|
4,103 | 1,556 | ||||||
|
Currencies
(1)
|
3,321 | 977 | ||||||
|
Equities
|
1,573 | 1,044 | ||||||
|
Commodities and other
|
818 | 1,769 | ||||||
|
Total
|
$ | 7,901 | $ | 6,006 | ||||
| (1) | Includes gains/(losses) on currency contracts used to economically hedge positions included in other product types in this table. |
Certain of the firm’s derivative instruments have been
transacted pursuant to bilateral agreements with certain
counterparties that may require the firm to post collateral or
terminate the transactions based on the firm’s
long-term
credit ratings. As of March 2010, the aggregate fair value
of such derivative contracts that were in a net liability
position was $22.42 billion, and the aggregate fair value
of assets posted by the firm as collateral for these derivative
contracts was $14.80 billion. As of March 2010,
additional collateral or termination payments pursuant to
bilateral agreements with certain counterparties of
approximately $1.51 billion and $2.77 billion could
have been called by counterparties in the event of a
one-notch
and
two-notch
reduction, respectively, in the firm’s
long-term
credit ratings. As of December 2009, the aggregate fair
value of such derivative contracts that were in a net liability
position was $20.85 billion, and the aggregate fair value
of assets posted by the firm as collateral for these derivative
contracts was $14.48 billion. As of December 2009,
additional collateral or termination payments pursuant to
bilateral agreements with certain counterparties of
approximately $1.12 billion and $2.36 billion could
have been called by counterparties in the event of a
one-notch
and
two-notch
reduction, respectively, in the firm’s
long-term
credit ratings.
36
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm enters into a broad array of credit derivatives to
facilitate client transactions, to take proprietary positions
and as a means of risk management. The firm uses each of the
credit derivatives described below for these purposes. These
credit derivatives are entered into by various trading desks
around the world, and are actively managed based on the
underlying risks. These activities are frequently part of a
broader trading strategy and are dynamically managed based on
the net risk position. As individually negotiated contracts,
credit derivatives can have numerous settlement and payment
conventions. The more common types of triggers include
bankruptcy of the reference credit entity, acceleration of
indebtedness, failure to pay, restructuring, repudiation and
dissolution of the entity.
| • | Credit default swaps. Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event of a default by the issuer (reference entity). The buyer of protection pays an initial or periodic premium to the seller and receives credit default protection for the period of the contract. If there is no credit default event, as defined by the specific derivative contract, then the seller of protection makes no payments to the buyer of protection. However, if a credit default event occurs, the seller of protection will be required to make a payment to the buyer of protection. Typical credit default events requiring payment include bankruptcy of the reference credit entity, failure to pay the principal or interest, and restructuring of the relevant obligations of the reference entity. | |
| • | Credit indices, baskets and tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. Typically, in the event of a default of one of the underlying reference obligations, the protection seller will pay to the protection buyer a pro-rata portion of a transaction’s total notional amount relating to the underlying defaulted reference obligation. In tranched transactions, the credit risk of a basket or index is separated into various portions each having different levels of subordination. The most junior tranches cover initial defaults, and once losses exceed the notional amount of these tranches, the excess is covered by the next most senior tranche in the capital structure. | |
| • | Total return swaps. A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives from the protection seller a floating rate of interest and protection against any reduction in fair value of the reference obligation, and in return the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation. | |
| • | Credit options. In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation. |
Substantially all of the firm’s purchased credit derivative
transactions are with financial institutions and are subject to
stringent collateral thresholds. The firm economically hedges
its exposure to written credit derivatives primarily by entering
into offsetting purchased credit derivatives with identical
underlyings. In addition, upon the occurrence of a specified
trigger event, the firm may take possession of the reference
obligations underlying a particular written credit derivative,
and consequently may, upon liquidation of the reference
obligations, recover amounts on the underlying reference
obligations in the event of default. As of March 2010, the
firm’s written and purchased credit derivatives had total
gross notional amounts of $2.37 trillion and
$2.53 trillion, respectively, for total net purchased
protection of $161.61 billion in notional value. As of
December 2009, the firm’s written and purchased credit
derivatives had total gross notional amounts of
$2.54 trillion and $2.71 trillion, respectively, for
total net purchased protection of $164.13 billion in
notional value.
37
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth certain information related to
the firm’s credit derivatives. Fair values in the table
below exclude the effects of both netting under enforceable
netting agreements and netting of cash paid or received pursuant
to credit support agreements, and therefore are not
representative of the firm’s exposure.
|
Maximum Payout/Notional
|
||||||||||||||||||||||||||||||||||||
|
Maximum Payout/Notional Amount
|
Amount of Purchased
|
Fair Value of
|
||||||||||||||||||||||||||||||||||
| of Written Credit Derivatives by Tenor (1) | Credit Derivatives | Written Credit Derivatives | ||||||||||||||||||||||||||||||||||
|
Offsetting
|
Other
|
|||||||||||||||||||||||||||||||||||
|
5 Years
|
Purchased
|
Purchased
|
Net
|
|||||||||||||||||||||||||||||||||
|
0 - 12
|
1 - 5
|
or
|
Credit
|
Credit
|
Asset/
|
|||||||||||||||||||||||||||||||
| Months | Years | Greater | Total | Derivatives (2) | Derivatives (3) | Asset | Liability | (Liability) | ||||||||||||||||||||||||||||
| ($ in millions) | ||||||||||||||||||||||||||||||||||||
|
As of March 2010
|
||||||||||||||||||||||||||||||||||||
| Credit spread on underlying (basis points) (4) | ||||||||||||||||||||||||||||||||||||
|
0-250
|
$ | 255,593 | $ | 1,270,269 | $ | 400,256 | $ | 1,926,118 | $ | 1,782,661 | $ | 290,037 | $ | 37,799 | $ | 19,761 | $ | 18,038 | ||||||||||||||||||
|
251-500
|
10,501 | 142,331 | 35,273 | 188,105 | 173,539 | 29,597 | 6,012 | 6,084 | (72 | ) | ||||||||||||||||||||||||||
|
501-1,000
|
12,556 | 102,082 | 37,144 | 151,782 | 125,875 | 19,350 | 4,034 | 10,550 | (6,516 | ) | ||||||||||||||||||||||||||
|
Greater than 1,000
|
10,061 | 72,873 | 23,481 | 106,415 | 77,648 | 35,323 | 2,073 | 44,628 | (42,555 | ) | ||||||||||||||||||||||||||
|
Total
|
$ | 288,711 | $ | 1,587,555 | $ | 496,154 | $ | 2,372,420 | $ | 2,159,723 | $ | 374,307 | $ | 49,918 | $ | 81,023 | $ | (31,105 | ) (5) | |||||||||||||||||
| As of December 2009 | ||||||||||||||||||||||||||||||||||||
| Credit spread on underlying (basis points) (4) | ||||||||||||||||||||||||||||||||||||
|
0-250
|
$ | 283,353 | $ | 1,342,649 | $ | 414,809 | $ | 2,040,811 | $ | 1,884,864 | $ | 299,329 | $ | 39,740 | $ | 13,441 | $ | 26,299 | ||||||||||||||||||
|
251-500
|
15,151 | 142,732 | 39,337 | 197,220 | 182,583 | 27,194 | 5,008 | 6,816 | (1,808 | ) | ||||||||||||||||||||||||||
|
501-1,000
|
10,364 | 101,621 | 34,194 | 146,179 | 141,317 | 5,673 | 2,841 | 12,448 | (9,607 | ) | ||||||||||||||||||||||||||
|
Greater than 1,000
|
20,262 | 107,768 | 31,208 | 159,238 | 117,914 | 48,699 | 1,524 | 60,279 | (58,755 | ) | ||||||||||||||||||||||||||
|
Total
|
$ | 329,130 | $ | 1,694,770 | $ | 519,548 | $ | 2,543,448 | $ | 2,326,678 | $ | 380,895 | $ | 49,113 | $ | 92,984 | $ | (43,871 | ) (5) | |||||||||||||||||
| (1) | Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives. |
| (2) | Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent they economically hedge written credit derivatives with identical underlyings. |
| (3) | Comprised of purchased protection in excess of the amount of written protection on identical underlyings and purchased protection on other underlyings on which the firm has not written protection. |
| (4) | Credit spread on the underlying, together with the tenor of the contract, are indicators of payment/performance risk. For example, the firm is least likely to pay or otherwise be required to perform where the credit spread on the underlying is “0-250” basis points and the tenor is “0-12 Months.” The likelihood of payment or performance is generally greater as the credit spread on the underlying and tenor increase. |
| (5) | These net liabilities differ from the carrying values related to credit derivatives in the firm’s condensed consolidated statements of financial condition because they exclude the effects of both netting under enforceable netting agreements and netting of cash collateral paid or received pursuant to credit support agreements. |
38
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Impact of
Credit Spreads
On an ongoing basis, the firm realizes gains or losses relating
to changes in credit risk on derivative contracts through
changes in credit mitigants or the sale or unwind of the
contracts. The net gain attributable to the impact of changes in
credit exposure and credit spreads on derivative contracts
(including derivative assets and liabilities and related hedges)
was $44 million and $48 million for the three months
ended March 2010 and March 2009, respectively.
The following table sets forth the net gains/(losses)
attributable to the impact of changes in the firm’s own
credit spreads on borrowings for which the fair value option was
elected. The firm calculates the fair value of borrowings by
discounting future cash flows at a rate which incorporates the
firm’s observable credit spreads.
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Net gains/(losses) including hedges
|
$ | 107 | $ | (197 | ) | |||
|
Net gains/(losses) excluding hedges
|
109 | (192 | ) | |||||
The net gain/(loss) attributable to changes in
instrument-specific credit spreads on loans and loan commitments
for which the fair value option was elected was
$1.07 billion and $(1.21) billion for the three months
ended March 2010 and March 2009, respectively. The
firm attributes changes in the fair value of floating rate loans
and loan commitments to changes in instrument-specific credit
spreads. For fixed rate loans and loan commitments, the firm
allocates changes in fair value between interest rate-related
changes and credit spread-related changes based on changes in
interest rates. See below for additional details regarding the
fair value option.
39
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The Fair Value
Option
Gains/(Losses)
The following table sets forth the gains/(losses) included in
earnings for the three months ended March 2010 and
March 2009 as a result of the firm electing to apply the
fair value option to certain financial assets and financial
liabilities, as described in Note 2. The table excludes
gains and losses related to (i) trading assets, at fair
value and trading liabilities, at fair value, (ii) gains
and losses on assets and liabilities that would have been
accounted for at fair value under other GAAP if the firm had not
elected the fair value option, (iii) gains and losses on
secured financings related to transfers of financial assets
accounted for as financings rather than sales, as such gains and
losses are offset by gains and losses on the related financial
assets, and (iv) gains and losses on subordinated
liabilities issued by consolidated VIEs, as such gains and
losses are offset by gains and losses on the financial assets
held by the consolidated VIEs.
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Unsecured
long-term
borrowings
(1)
|
$ | 84 | $ | (135 | ) | |||
|
Other secured
financings
(2)
|
(4 | ) | 25 | |||||
|
Unsecured
short-term
borrowings
(3)
|
13 | (67 | ) | |||||
|
Receivables from customers and
counterparties
(4)
|
(38 | ) | (2 | ) | ||||
|
Other liabilities and accrued
expenses
(5)(6)
|
69 | 82 | ||||||
|
Other
(7)
|
(3 | ) | (26 | ) | ||||
|
Total
(8)
|
$ | 121 | $ | (123 | ) | |||
| (1) | Excludes gains of $575 million and $1.24 billion for the three months ended March 2010 and March 2009, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option. | |
| (2) | Excludes gains/(losses) of $(5) million and $19 million for the three months ended March 2010 and March 2009, respectively, related to financings recorded as a result of transactions that were accounted for as secured financings rather than sales. Changes in the fair value of these secured financings are offset by changes in the fair value of the related financial instruments included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition. | |
| (3) | Excludes losses of $205 million and $305 million for the three months ended March 2010 and March 2009, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option. | |
| (4) | Primarily consists of losses on certain reinsurance contracts. | |
| (5) | Excludes gains of $107 million for the three months ended March 2010 related to subordinated liabilities issued by consolidated VIEs. Changes in the fair value of these financial instruments are offset by changes in the fair value of the financial assets held by the consolidated VIEs. | |
| (6) | Primarily consists of gains on certain insurance and reinsurance contracts. | |
| (7) | Primarily consists of gains/(losses) on resale and repurchase agreements, securities borrowed and loaned within Trading and Principal Investments, and deposits. | |
| (8) | Reported in “Trading and principal investments” in the condensed consolidated statements of earnings. The amounts exclude contractual interest, which is included in “Interest income” and “Interest expense” in the condensed consolidated statements of earnings, for all instruments other than hybrid financial instruments. |
40
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
All trading assets and trading liabilities are accounted for at
fair value either under the fair value option or as required by
other accounting standards (principally ASC 320, ASC 940 and ASC
815). Excluding equities commissions of $881 million and
$974 million for the three months ended March 2010 and
March 2009, respectively, and the gains and losses on the
instruments accounted for under the fair value option described
above, “Trading and principal investments” in the
condensed consolidated statements of earnings primarily
represents gains and losses on “Trading assets, at fair
value” and “Trading liabilities, at fair value”
in the condensed consolidated statements of financial condition.
Loans and Loan
Commitments
As of March 2010, the aggregate contractual principal
amount of loans and
long-term
receivables for which the fair value option was elected exceeded
the related fair value by $39.34 billion, including a
difference of $34.47 billion related to loans with an
aggregate fair value of $4.20 billion that were on
nonaccrual status (including loans more than 90 days past
due). As of December 2009, the aggregate contractual
principal amount of loans and
long-term
receivables for which the fair value option was elected exceeded
the related fair value by $41.96 billion, including a
difference of $36.30 billion related to loans with an
aggregate fair value of $4.28 billion that were on
nonaccrual status (including loans more than 90 days past
due). The aggregate contractual principal exceeds the related
fair value primarily because the firm regularly purchases loans,
such as distressed loans, at values significantly below
contractual principal amounts.
As of March 2010 and December 2009, the fair value of
unfunded lending commitments for which the fair value option was
elected was a liability of $955 million and
$879 million, respectively, and the related total
contractual amount of these lending commitments was
$44.48 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 $955 million and
$752 million as of March 2010 and December 2009,
respectively.
41
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Investments in
Funds That Calculate Net Asset Value Per Share
The firm’s investments in funds that calculate net asset
value per share primarily consist of investments in
firm-sponsored funds where the firm co-invests with
third-party
investors. The private equity, private debt and real estate
funds are primarily closed-end funds in which the firm’s
investments are not eligible for redemption. Distributions will
be received from these funds as the underlying assets are
liquidated and it is estimated that substantially all of the
underlying assets of these existing funds will be liquidated
over the next 10 years. The firm’s investments in
hedge funds are generally redeemable on a quarterly basis with
91 days notice, subject to a maximum redemption level of
25% of the firm’s initial investments at any quarter-end.
The following table sets forth the fair value of the firm’s
investments in and unfunded commitments to funds that calculate
net asset value per share:
| As of March 2010 | As of December 2009 | |||||||||||||||
|
Fair Value of
|
Unfunded
|
Fair Value of
|
Unfunded
|
|||||||||||||
| Investments | Commitments | Investments | Commitments | |||||||||||||
| (in millions) | ||||||||||||||||
|
Private equity
funds
(1)
|
$ | 7,463 | $ | 6,112 | $ | 8,229 | $ | 5,722 | ||||||||
|
Private debt
funds
(2)
|
4,047 | 3,578 | 3,628 | 4,048 | ||||||||||||
|
Hedge
funds
(3)
|
3,038 | — | 3,133 | — | ||||||||||||
|
Real estate and other
funds
(4)
|
951 | 2,426 | 939 | 2,398 | ||||||||||||
|
Total
|
$ | 15,499 | $ | 12,116 | $ | 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 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. |
42
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Collateralized
Transactions
The firm receives financial instruments as collateral, primarily
in connection with resale agreements, securities borrowed,
derivative transactions and customer margin loans. Such
financial instruments may include obligations of the
U.S. government, federal agencies, sovereigns and
corporations, as well as equities and convertible debentures.
In many cases, the firm is permitted to deliver or repledge
these financial instruments in connection with entering into
repurchase agreements, securities lending agreements and other
secured financings, collateralizing derivative transactions and
meeting firm or customer settlement requirements. As of
March 2010 and December 2009, the fair value of
financial instruments received as collateral by the firm that it
was permitted to deliver or repledge was $615.83 billion
and $561.77 billion, respectively, of which the firm
delivered or repledged $440.15 billion and
$392.89 billion, respectively.
The firm also pledges assets that it owns to counterparties who
may or may not have the right to deliver or repledge them.
Trading assets pledged to counterparties that have the right to
deliver or repledge are included in “Trading assets, at
fair value” in the condensed consolidated statements of
financial condition and were $43.28 billion and
$31.49 billion as of March 2010 and
December 2009, respectively. Trading assets, pledged in
connection with repurchase agreements, securities lending
agreements and other secured financings to counterparties that
did not have the right to sell or repledge are included in
“Trading assets, at fair value” in the condensed
consolidated statements of financial condition and were
$114.42 billion and $109.11 billion as of
March 2010 and December 2009, respectively. Other
assets (primarily real estate and cash) owned and pledged in
connection with other secured financings to counterparties that
did not have the right to sell or repledge were
$7.04 billion and $7.93 billion as of March 2010
and December 2009, respectively.
In addition to repurchase agreements and securities lending
agreements, the firm obtains secured funding through the use of
other arrangements. Other secured financings include
arrangements that are nonrecourse, that is, only the subsidiary
that executed the arrangement or a subsidiary guaranteeing the
arrangement is obligated to repay the financing. Other secured
financings consist of liabilities related to the firm’s
William Street credit extension program; consolidated VIEs;
collateralized central bank financings and other transfers of
financial assets accounted for as financings rather than sales
(primarily pledged bank loans and mortgage whole loans); and
other structured financing arrangements.
43
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other secured financings by maturity are set forth in the table
below:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Other secured financings
(short-term)
(1)(2)
|
$ | 10,842 | $ | 12,931 | ||||
|
Other secured financings
(long-term):
|
||||||||
|
2011
|
2,316 | 3,832 | ||||||
|
2012
|
4,811 | 1,726 | ||||||
|
2013
|
1,265 | 1,518 | ||||||
|
2014
|
2,122 | 1,617 | ||||||
|
2015-thereafter
|
2,681 | 2,510 | ||||||
|
Total other secured financings
(long-term)
(3)(4)(5)
|
13,195 | 11,203 | ||||||
|
Total other secured
financings
(6)(7)
|
$ | 24,037 | $ | 24,134 | ||||
| (1) | As of March 2010 and December 2009, consists of U.S. dollar-denominated financings of $4.84 billion and $6.47 billion (including $4.65 billion and $6.15 billion at fair value) and non-U.S. dollar-denominated financings of $6.00 billion and $6.46 billion (including $927 million and $1.08 billion at fair value), respectively. As of March 2010 and December 2009, the U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 4.11% and 3.44%, respectively, and the non-U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 0.92% and 1.57%, respectively, after giving effect to hedging activities. | |
| (2) | Includes other secured financings maturing within one year of the financial statement date and other secured financings that are redeemable within one year of the financial statement date at the option of the holder. | |
| (3) | As of March 2010 and December 2009, consists of U.S. dollar-denominated financings of $9.82 billion and $7.28 billion (including $8.35 billion and $5.90 billion at fair value) and non-U.S. dollar-denominated financings of $3.38 billion and $3.92 billion (including $2.06 billion and $2.10 billion at fair value), respectively. As of March 2010 and December 2009, the U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 1.81% and 1.83%, respectively, and the non-U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 2.76% and 2.30%, respectively, after giving effect to hedging activities. | |
| (4) | Secured long-term financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Secured long-term financings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. | |
| (5) | The aggregate contractual principal amount of other secured financings (long-term) for which the fair value option was elected, primarily consisting of transfers of financial assets accounted for as financings rather than sales, debt raised through the William Street credit extension program and certain other nonrecourse financings, exceeded the related fair value by $398 million. | |
| (6) | As of March 2010 and December 2009, $19.71 billion and $18.25 billion, respectively, of these financings were collateralized by trading assets and $4.33 billion and $5.88 billion, respectively, by other assets (primarily real estate and cash). Other secured financings include $9.77 billion and $10.63 billion of nonrecourse obligations as of March 2010 and December 2009, respectively. | |
| (7) | As of March 2010 and December 2009, other secured financings include $8.69 billion and $9.51 billion, respectively, related to transfers of financial assets accounted for as financings rather than sales. Such financings were collateralized by financial assets included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition of $8.95 billion and $9.78 billion as of March 2010 and December 2009, respectively. |
44
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 4. | Securitization Activities and Variable Interest Entities |
Securitization
Activities
The firm securitizes residential and commercial mortgages,
corporate bonds and other types of financial assets. The firm
acts as underwriter of the beneficial interests that are sold to
investors. The firm derecognizes financial assets transferred in
securitizations, provided it has relinquished control over such
assets. Transferred assets are accounted for at fair value prior
to securitization. The firm generally receives cash in exchange
for the transferred assets. Net revenues related to underwriting
activities are recognized in connection with the sales of the
underlying beneficial interests to investors.
The firm may have continuing involvement with transferred
assets, including: retaining interests in securitized financial
assets, primarily in the form of senior or subordinated
securities; and retaining servicing rights. The firm may also
purchase senior or subordinated securities in connection with
secondary
market-making
activities. Retained interests and other interests related to
the firm’s continuing involvement are accounted for at fair
value and are included in “Trading assets, at fair
value” in the condensed consolidated statements of
financial condition and are generally classified within
level 2 of the fair value hierarchy. See Note 2 for
additional information regarding fair value measurement.
During the three months ended March 2010, the firm
securitized $9.97 billion of financial assets in which the
firm had continuing involvement, including $9.96 billion of
residential mortgages, primarily in connection with government
agency securitizations, and $14 million of other financial
assets. During the three months ended March 2009, the firm
securitized $3.57 billion of financial assets, including
$3.47 billion of residential mortgages, primarily in
connection with government agency securitizations, and
$95 million of other financial assets. Cash flows received
on retained interests were $199 million and
$94 million for the three months ended March 2010 and
March 2009, respectively.
45
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth certain information related to
the firm’s continuing involvement in securitization
entities to which the firm sold assets, as well as the total
outstanding principal amount of transferred assets in which the
firm has continuing involvement, as of March 2010 and
December 2009. The outstanding principal amount set forth
in the table below is presented for the purpose of providing
information about the size of the securitization entities in
which the firm has continuing involvement, and is not
representative of the firm’s risk of loss. For retained or
purchased interests, the firm’s risk of loss is limited to
the fair value of these interests.
| As of March 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
|
|||||||||||||||||||
| Amount | Interests | Interests (1) | Amount | Interests | Interests (1) | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Residential
mortgage-backed
(2)
|
$ | 61,790 | $ | 3,160 | $ | 10 | $ | 59,410 | $ | 3,956 | $ | 17 | ||||||||||||
|
Commercial
mortgage-backed
|
11,195 | 62 | 138 | 11,643 | 56 | 96 | ||||||||||||||||||
|
Other
(3)
|
16,907 | 115 | 72 | 17,768 | 93 | 54 | ||||||||||||||||||
|
Total
(4)
|
$ | 89,892 | $ | 3,337 | $ | 220 | $ | 88,821 | $ | 4,105 | $ | 167 | ||||||||||||
| (1) | Comprised of senior and subordinated interests in securitization-related entities purchased in connection with secondary market-making activities in which the firm also holds retained interests. In addition to these interests, the firm had other continuing involvement in the form of derivative transactions and guarantees with certain nonconsolidated VIEs for which the carrying value was a net liability of $70 million and $87 million as of March 2010 and December 2009, respectively. The notional amounts of these transactions are included in maximum exposure to loss in the nonconsolidated VIE table below. | |
| (2) | Primarily consists of outstanding principal and retained interests related to government agency securitization entities. | |
| (3) | Primarily consists of CDOs backed by corporate and mortgage obligations and CLOs. | |
| (4) | Includes $7.57 billion of outstanding principal amount and $25 million of fair value of retained interests as of March 2010 related to securitization entities in which the firm’s only continuing involvement is retained servicing, which is not a variable interest. |
46
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth the weighted average key economic
assumptions used in measuring the fair value of the firm’s
retained interests and the sensitivity of this fair value to
immediate adverse changes of 10% and 20% in those assumptions:
| As of March 2010 | As of December 2009 | |||||||||||||||
| Type of Retained Interests | Type of Retained Interests | |||||||||||||||
|
Mortgage-
|
Mortgage-
|
|||||||||||||||
| Backed | Other (1) | Backed | Other (1) | |||||||||||||
| ($ in millions) | ||||||||||||||||
|
Fair value of retained interests
|
$ | 3,222 | $ | 115 | $ | 4,012 | $ | 93 | ||||||||
|
Weighted average life (years)
|
5.3 | 4.4 | 4.4 | 4.4 | ||||||||||||
|
Constant prepayment
rate
(2)
|
18.6 | % | N.M. | 23.5 | % | N.M. | ||||||||||
|
Impact of 10% adverse
change
(2)
|
$ | (46 | ) | N.M. | $ | (44 | ) | N.M. | ||||||||
|
Impact of 20% adverse
change
(2)
|
(86 | ) | N.M. | (92 | ) | N.M. | ||||||||||
|
Discount
rate
(3)
|
8.7 | % | N.M. | 8.4 | % | N.M. | ||||||||||
|
Impact of 10% adverse change
|
$ | (78 | ) | N.M. | $ | (76 | ) | N.M. | ||||||||
|
Impact of 20% adverse change
|
(143 | ) | 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 March 2010 and December 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the firm’s carrying value of $115 million and $93 million as of March 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 the firm’s mortgage-backed retained interests are U.S. government agency-issued collateralized mortgage obligations, for which there is no anticipated credit loss. For the remainder of the firm’s retained interests, the expected credit loss assumptions are reflected within the discount rate. |
The preceding table does not give effect to the offsetting
benefit of other financial instruments that are held to mitigate
risks inherent in these retained interests. Changes in fair
value based on an adverse variation in assumptions generally
cannot be extrapolated because the relationship of the change in
assumptions to the change in fair value is not usually linear.
In addition, the impact of a change in a particular assumption
is calculated independently of changes in any other assumption.
In practice, simultaneous changes in assumptions might magnify
or counteract the sensitivities disclosed above.
Variable
Interest Entities
The firm, in the ordinary course of business, retains interests
in VIEs in connection with its securitization activities. The
firm also purchases and sells variable interests in VIEs, which
primarily issue residential and commercial
mortgage-backed
and other
asset-backed
securities, CDOs and CLOs, in connection with its
market-making
activities and makes investments in and loans to VIEs that hold
performing and nonperforming debt, equity, real estate,
power-related and other assets. In addition, the firm utilizes
VIEs to provide investors with principal-protected notes,
credit-linked
notes and
asset-repackaged
notes designed to meet their objectives. VIEs generally purchase
assets by issuing debt and equity instruments.
The firm’s variable interests in VIEs include senior and
subordinated debt interests in
mortgage-backed
and
asset-backed
securitization vehicles, CDOs and CLOs; loan commitments;
limited and general partnership interests; preferred and common
stock; interest rate, foreign currency, equity, commodity and
credit derivatives; and guarantees.
47
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm’s exposure to the obligations of VIEs is generally
limited to its interests in these entities. In the tables set
forth below, the maximum exposure to loss for retained and
purchased interests and loans and investments is the carrying
value of these interests. In certain instances, the firm
provides guarantees, including derivative guarantees, to VIEs or
holders of variable interests in VIEs. For these contracts,
maximum exposure to loss set forth in the tables below is the
notional amount of such guarantees, which does not represent
anticipated losses and also has not been reduced by unrealized
losses already recorded by the firm in connection with these
guarantees. As a result, the maximum exposure to loss exceeds
the firm’s liabilities related to VIEs. The firm has
aggregated nonconsolidated VIEs based on principal business
activity, as reflected in the tables below. The nature of the
firm’s variable interests can take different forms, as
described in the rows under maximum exposure to loss.
The following tables set forth total assets in nonconsolidated
VIEs in which the firm holds variable interests, the firm’s
maximum exposure to loss excluding the benefit of offsetting
financial instruments that are held to mitigate the risks
associated with these variable interests and the total assets
and total liabilities included in the condensed consolidated
statements of financial condition related to the firm’s
variable interests in these nonconsolidated VIEs. For
March 2010, in accordance with ASU Nos.
2009-16
and
2009-17,
the
following table also includes nonconsolidated VIEs in which the
firm holds variable interests (and to which the firm sold assets
and has continuing involvement as of March 2010) that
were formerly considered to be QSPEs prior to the adoption of
these standards.
| As of March 2010 | ||||||||||||||||||||||||||||
|
Real estate,
|
||||||||||||||||||||||||||||
|
Corporate
|
credit-related
|
Other
|
||||||||||||||||||||||||||
|
Mortgage-
|
CDOs and
|
and other
|
asset-
|
Power-
|
Investment
|
|||||||||||||||||||||||
| backed (1) | CLOs (1) | investing (2) | backed (1) | related (3) | funds (4) | Total | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
|
Assets in VIE
|
$ | 78,648 | (6) | $ | 22,732 | $ | 14,676 | $ | 1,781 | $ | 580 | $ | 1,888 | $ | 120,305 | |||||||||||||
| Carrying Value of the Firm’s Variable Interests | ||||||||||||||||||||||||||||
|
Assets
|
$ | 3,773 | $ | 1,180 | $ | 1,322 | $ | 26 | $ | 236 | $ | 7 | $ | 6,544 | ||||||||||||||
|
Liabilities
|
4 | 219 | 173 | 14 | 1 | — | 411 | |||||||||||||||||||||
| Maximum Exposure to Loss in Nonconsolidated VIEs (5) | ||||||||||||||||||||||||||||
|
Retained interests
|
$ | 3,197 | $ | 102 | $ | — | $ | 13 | $ | — | $ | — | $ | 3,312 | ||||||||||||||
|
Purchased interests
|
363 | 223 | — | — | — | — | 586 | |||||||||||||||||||||
|
Commitments and guarantees
|
— | 65 | 276 | — | 37 | — | 378 | (9) | ||||||||||||||||||||
|
Derivatives
|
4,092 | (6)(7) | 7,258 | (8) | — | 1,383 | — | — | 12,733 | (9) | ||||||||||||||||||
|
Loans and investments
|
165 | — | 1,322 | — | 236 | 7 | 1,730 | |||||||||||||||||||||
|
Total
|
$ | 7,817 | $ | 7,648 | $ | 1,598 | $ | 1,396 | $ | 273 | $ | 7 | $ | 18,739 | ||||||||||||||
48
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| As of December 2009 | ||||||||||||||||||||||||||||
|
Real estate,
|
||||||||||||||||||||||||||||
|
Corporate
|
credit-related
|
Other
|
Principal-
|
|||||||||||||||||||||||||
|
Mortgage
|
CDOs and
|
and other
|
asset-
|
Power-
|
protected
|
|||||||||||||||||||||||
| CDOs (1) | CLOs (1) | investing (2) | backed (1) | related (3) | notes (10) | Total | ||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||
|
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 (5) | ||||||||||||||||||||||||||||
|
Retained and purchased interests
|
135 | 259 | — | — | — | — | 394 | |||||||||||||||||||||
|
Commitments and guarantees
|
— | 3 | 397 | — | 37 | — | 437 | (9) | ||||||||||||||||||||
|
Derivatives
|
4,111 | (7) | 7,577 | (8) | — | 497 | — | 2,512 | 14,697 | (9) | ||||||||||||||||||
|
Loans and investments
|
— | — | 2,425 | — | 224 | — | 2,649 | |||||||||||||||||||||
|
Total
|
$ | 4,246 | $ | 7,839 | $ | 2,822 | $ | 497 | $ | 261 | $ | 2,512 | $ | 18,177 | ||||||||||||||
| (1) | These VIEs are generally financed through the issuance of debt instruments collateralized by assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Trading liabilities, at fair value,” respectively, in the condensed consolidated statements of financial condition. | |
| (2) | The firm obtains interests in these VIEs in connection with making investments in real estate, distressed loans and other types of debt, mezzanine instruments and equities. These VIEs are generally financed through the issuance of debt and equity instruments which are either collateralized by or indexed to assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Other assets,” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. | |
| (3) | These VIEs are financed through the issuance of debt instruments. Assets and liabilities held by the firm related to these VIEs are included in “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. | |
| (4) | These VIEs are generally financed through the issuance of equity instruments. Assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statement of financial condition. | |
| (5) | Such amounts do not represent the anticipated losses in connection with these transactions because they exclude the effect of offsetting financial instruments that are held to mitigate these risks. | |
| (6) | Assets in VIE and maximum exposure to loss include $7.15 billion and $4.09 billion, respectively, related to CDOs backed by mortgage obligations. | |
| (7) | Primarily consists of written protection on investment-grade, short-term collateral held by VIEs that have issued CDOs. | |
| (8) | Primarily consists of total return swaps on CDOs and CLOs. The firm has generally transferred the risks related to the underlying securities through derivatives with non-VIEs. | |
| (9) | The aggregate amounts include $4.53 billion and $4.66 billion as of March 2010 and December 2009, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets. |
| (10) | Consists of out-of-the-money written put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing. Assets related to these VIEs are included in “Trading assets, at fair value” and liabilities related to these VIEs are included in “Other secured financings,” “Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings” or “Unsecured long-term borrowings” in the condensed consolidated statement of financial condition. Assets in VIE, carrying value of liabilities and maximum exposure to loss exclude $3.97 billion as of December 2009, associated with guarantees related to the firm’s performance under borrowings from the VIE, which are recorded as liabilities in the condensed consolidated statement of financial condition. Substantially all of the liabilities included in the table above relate to additional borrowings from the VIE associated with principal protected notes guaranteed by the firm. These VIEs were consolidated by the firm upon adoption of ASU No. 2009-17. |
49
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following tables set forth the carrying amount and
classification of the firm’s assets and liabilities,
excluding the benefit of offsetting financial instruments that
are held to mitigate the risks associated with its variable
interests, in consolidated VIEs. For March 2010, in
accordance with ASU
No. 2009-17,
the following table excludes VIEs in which the firm holds a
majority voting interest if (i) the VIE meets the
definition of a business as defined in ASC 805 and (ii) the
VIE’s assets can be used for purposes other than the
settlement of its obligations. For December 2009, prior to
the adoption of ASU
No. 2009-17,
the following table excludes VIEs in which the firm holds a
majority voting interest unless the activities of the VIE are
primarily related to securitization,
asset-backed
financings or single-lessee leasing arrangements. The increase
in total assets of consolidated VIEs from December 2009 to
March 2010 is primarily related to (i) VIEs that are
required to be disclosed in accordance with ASU
No. 2009-17
that were not required to be disclosed under previous GAAP, as
described above, and (ii) VIEs that were consolidated by
the firm upon adoption of ASU
No. 2009-17.
The firm has aggregated consolidated VIEs based on principal
business activity, as reflected in the table below. Consolidated
VIE assets and liabilities are presented after intercompany
eliminations and include assets financed on a nonrecourse basis.
| As of March 2010 | ||||||||||||||||||||
|
CDOs,
|
||||||||||||||||||||
|
Real estate,
|
mortgage-
|
|||||||||||||||||||
|
credit-related
|
backed and
|
Principal-
|
||||||||||||||||||
|
and other
|
Municipal bond
|
other asset-
|
protected
|
|||||||||||||||||
| investing (1) | securitizations (2) | backed (3) | notes (4) | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Assets
(5)
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 248 | $ | — | $ | 160 | $ | 375 | $ | 783 | ||||||||||
|
Cash and securities segregated for regulatory and other purposes
|
149 | — | — | — | 149 | |||||||||||||||
|
Receivables from brokers, dealers and clearing organizations
|
11 | — | 1 | — | 12 | |||||||||||||||
|
Receivables from customers and counterparties
|
2 | — | 48 | — | 50 | |||||||||||||||
|
Trading assets, at fair value
|
3,271 | 704 | 416 | 797 | 5,188 | |||||||||||||||
|
Other assets
|
3,668 | — | 546 | — | 4,214 | |||||||||||||||
|
Total
|
$ | 7,349 | $ | 704 | $ | 1,171 | $ | 1,172 | $ | 10,396 | ||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Other secured financings
|
$ | 2,997 | $ | 803 | $ | 1,058 | $ | 3,227 | $ | 8,085 | ||||||||||
|
Payables to customers and counterparties
|
4 | — | 32 | — | 36 | |||||||||||||||
|
Trading liabilities, at fair value
|
— | — | 6 | — | 6 | |||||||||||||||
|
Unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings
|
234 | — | — | 2,956 | 3,190 | |||||||||||||||
|
Unsecured
long-term
borrowings
|
27 | — | — | 157 | 184 | |||||||||||||||
|
Other liabilities and accrued expenses
|
2,435 | — | 24 | — | 2,459 | |||||||||||||||
|
Total
|
$ | 5,697 | $ | 803 | $ | 1,120 | $ | 6,340 | $ | 13,960 | ||||||||||
50
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| As of December 2009 | ||||||||||||||||||||||||
|
CDOs,
|
||||||||||||||||||||||||
|
Real estate,
|
mortgage-
|
Foreign
|
||||||||||||||||||||||
|
credit-related
|
backed and
|
Principal-
|
exchange
|
|||||||||||||||||||||
|
and other
|
Municipal bond
|
other asset-
|
protected
|
and
|
||||||||||||||||||||
| investing (1) | securitizations (2) | backed (3) | notes (4) | commodities | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 13 | $ | — | $ | — | $ | — | $ | 13 | $ | 26 | ||||||||||||
|
Receivables from customers and counterparties
|
1 | — | — | — | — | 1 | ||||||||||||||||||
|
Trading assets, 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 | ||||||||||||||||||
|
Trading liabilities, 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 | ||||||||||||
| (1) | These VIEs are generally financed through the issuance of subordinated liabilities and debt and equity instruments. The VIE liabilities are generally collateralized by or indexed to the related VIE assets and generally do not provide for recourse to the general credit of the firm. |
| (2) | These VIEs are generally financed through the issuance of debt instruments and the VIE liabilities are partially collateralized by the related VIE assets. |
| (3) | These VIEs are generally financed through the issuance of debt instruments collateralized by assets held by the VIE and the VIE liabilities generally do not provide for recourse to the general credit of the firm. |
| (4) | These VIEs are financed through the issuance of debt instruments. |
| (5) | Substantially all VIE assets can be used only to settle obligations of the VIE. |
The firm did not have
off-balance-sheet
commitments to purchase or finance any CDOs held by structured
investment vehicles as of March 2010 or December 2009.
51
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 5. | Deposits |
The following table sets forth deposits as of March 2010
and December 2009:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
U.S. offices
(1)
|
$ | 31,381 | $ | 32,797 | ||||
|
Non-U.S. offices
(2)
|
7,050 | 6,621 | ||||||
|
Total
|
$ | 38,431 | $ | 39,418 | ||||
| (1) | Substantially all U.S. deposits were interest-bearing and were held at GS Bank USA. | |
| (2) | Substantially all non-U.S. deposits were interest-bearing and were held at Goldman Sachs Bank (Europe) PLC (GS Bank Europe). |
Included in the above table are time deposits of
$9.46 billion and $9.30 billion as of March 2010
and December 2009, respectively. The following table sets
forth the maturities of time deposits as of March 2010:
| As of March 2010 | ||||||||||||
| U.S. | Non-U.S. | Total | ||||||||||
| (in millions) | ||||||||||||
|
2010
|
$ | 1,416 | $ | 1,072 | $ | 2,488 | ||||||
|
2011
|
1,630 | 24 | 1,654 | |||||||||
|
2012
|
886 | — | 886 | |||||||||
|
2013
|
1,830 | — | 1,830 | |||||||||
|
2014
|
484 | — | 484 | |||||||||
|
2015-thereafter
|
2,121 | — | 2,121 | |||||||||
|
Total
|
$ | 8,367 | $ | 1,096 | $ | 9,463 | ||||||
52
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 6. | Short-Term Borrowings |
As of March 2010 and December 2009,
short-term
borrowings were $51.62 billion and $50.45 billion,
respectively, comprised of $10.84 billion and
$12.93 billion, respectively, included in “Other
secured financings” in the condensed consolidated
statements of financial condition and $40.78 billion and
$37.52 billion, respectively, of unsecured
short-term
borrowings. See Note 3 for information on other secured
financings.
Unsecured
short-term
borrowings include the portion of unsecured
long-term
borrowings maturing within one year of the financial statement
date and unsecured
long-term
borrowings that are redeemable within one year of the financial
statement date at the option of the holder. The firm accounts
for promissory notes, commercial paper and certain hybrid
financial instruments at fair value under the fair value option.
Short-term
borrowings that are not recorded at fair value are recorded
based on the amount of cash received plus accrued interest, and
such amounts approximate fair value due to the
short-term
nature of the obligations.
Unsecured
short-term
borrowings are set forth below:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Current portion of unsecured
long-term
borrowings
(1)
|
$ | 19,210 | $ | 17,928 | ||||
|
Hybrid financial instruments
|
13,302 | 10,741 | ||||||
|
Promissory notes
|
2,402 | 2,119 | ||||||
|
Commercial paper
|
1,328 | 1,660 | ||||||
|
Other
short-term
borrowings
|
4,542 | 5,068 | ||||||
|
Total
(2)
|
$ | 40,784 | $ | 37,516 | ||||
| (1) | Includes $3.73 billion and $1.73 billion as of March 2010 and December 2009, respectively, guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP). | |
| (2) | The weighted average interest rates for these borrowings, after giving effect to hedging activities, were 1.71% and 1.31% as of March 2010 and December 2009, respectively, and excluded financial instruments accounted for at fair value under the fair value option. |
53
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 7. | Long-Term Borrowings |
As of March 2010 and December 2009,
long-term
borrowings were $193.61 billion and $196.29 billion,
respectively, comprised of $13.20 billion and
$11.20 billion, respectively, included in “Other
secured financings” in the condensed consolidated
statements of financial condition and $180.41 billion and
$185.09 billion, respectively, of unsecured
long-term
borrowings. See Note 3 for information regarding other
secured financings.
The firm’s unsecured
long-term
borrowings extend through 2043 and consist principally of senior
borrowings.
Unsecured
long-term
borrowings are set forth below:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Fixed rate
obligations
(1)
|
$ | 116,434 | $ | 117,413 | ||||
|
Floating rate
obligations
(2)
|
63,980 | 67,672 | ||||||
|
Total
(3)
|
$ | 180,414 | $ | 185,085 | ||||
| (1) | As of March 2010 and December 2009, $77.54 billion and $79.12 billion, respectively, of the firm’s fixed rate debt obligations were denominated in U.S. dollars and interest rates ranged from 1.63% to 10.04% as of both March 2010 and December 2009. As of March 2010 and December 2009, $38.89 billion and $38.29 billion, respectively, of the firm’s fixed rate debt obligations were denominated in non-U.S. dollars and interest rates ranged from 0.80% to 8.64% and 0.80% to 7.45%, respectively. | |
| (2) | As of March 2010 and December 2009, $31.92 billion and $32.26 billion, respectively, of the firm’s floating rate debt obligations were denominated in U.S. dollars. As of March 2010 and December 2009, $32.06 billion and $35.41 billion, respectively, of the firm’s floating rate debt obligations were denominated in non-U.S. dollars. Floating interest rates generally are based on LIBOR or the federal funds target rate. Equity-linked and indexed instruments are included in floating rate obligations. | |
| (3) | Includes $16.96 billion and $19.03 billion as of March 2010 and December 2009, respectively, guaranteed by the FDIC under the TLGP. |
54
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Unsecured
long-term
borrowings by maturity date are set forth below:
|
As of
|
||||
| March 2010 | ||||
| (in millions) | ||||
|
2011
|
$ | 17,871 | ||
|
2012
|
25,695 | |||
|
2013
|
22,864 | |||
|
2014
|
17,872 | |||
|
2015
|
13,804 | |||
|
2016-thereafter
|
82,308 | |||
|
Total
(1)(2)(3)(4)
|
$ | 180,414 | ||
| (1) | Unsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder are included as unsecured short-term borrowings in the condensed consolidated statements of financial condition. | |
| (2) | Unsecured long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Unsecured long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. | |
| (3) | Amount includes an increase of $6.44 billion to the carrying amount of certain of the firm’s unsecured long-term borrowings related to fair value hedges. The amounts related to the carrying value of the firm’s unsecured long-term borrowings associated with fair value hedges by year of maturity are as follows: $71 million in 2011, $520 million in 2012, $730 million in 2013, $710 million in 2014, $322 million in 2015 and $4.08 billion in 2016 and thereafter. | |
| (4) | 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 $557 million. |
The firm designates certain derivative contracts as fair value
hedges to effectively convert a substantial portion of its
unsecured
long-term
borrowings which are not accounted for at fair value into
floating rate obligations. Accordingly, excluding the cumulative
impact of changes in the firm’s credit spreads, the
carrying value of unsecured
long-term
borrowings approximated fair value as of March 2010 and
December 2009. For unsecured
long-term
borrowings for which the firm did not elect the fair value
option, the cumulative impact due to the widening of the
firm’s own credit spreads would be a reduction in the
carrying value of total unsecured
long-term
borrowings of less than 1% as of both March 2010 and
December 2009.
The effective weighted average interest rates for unsecured
long-term
borrowings are set forth below:
| As of | ||||||||||||||||
| March 2010 | December 2009 | |||||||||||||||
| Amount | Rate | Amount | Rate | |||||||||||||
| ($ in millions) | ||||||||||||||||
|
Fixed rate obligations
|
$ | 5,756 | 4.93 | % | $ | 4,320 | 5.49 | % | ||||||||
|
Floating rate
obligations
(1)(2)
|
174,658 | 1.57 | 180,765 | 1.33 | ||||||||||||
|
Total
|
$ | 180,414 | 1.68 | $ | 185,085 | 1.42 | ||||||||||
| (1) | Includes fixed rate obligations that have been converted into floating rate obligations through hedge accounting. | |
| (2) | The weighted average interest rates as of March 2010 and December 2009 excluded financial instruments accounted for at fair value under the fair value option. |
55
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Subordinated
Borrowings
As of March 2010 and December 2009, unsecured
long-term
borrowings were comprised of subordinated borrowings with
outstanding principal amounts of $19.00 billion and
$19.16 billion, respectively, as set forth below.
Junior Subordinated Debt Issued to Trusts in Connection with
Fixed-to-Floating
and Floating Rate Normal Automatic Preferred Enhanced Capital
Securities.
In 2007, Group Inc. issued a
total of $2.25 billion of remarketable junior subordinated
debt to Goldman Sachs Capital II and Goldman Sachs Capital III
(APEX Trusts), Delaware statutory trusts that, in turn, issued
$2.25 billion of guaranteed perpetual Normal Automatic
Preferred Enhanced Capital Securities (APEX) to third parties
and a de minimis amount of common securities to Group Inc.
Group Inc. also entered into contracts with the APEX Trusts
to sell $2.25 billion of perpetual
non-cumulative
preferred stock to be issued by Group Inc. (the stock
purchase contracts). The APEX Trusts are wholly owned finance
subsidiaries of the firm for regulatory and legal purposes but
are not consolidated for accounting purposes.
The firm pays interest
semi-annually
on $1.75 billion of junior subordinated debt issued to
Goldman Sachs Capital II at a fixed annual rate of 5.59% and the
debt matures on June 1, 2043. The firm pays interest
quarterly on $500 million of junior subordinated debt
issued to Goldman Sachs Capital III at a rate per annum equal to
three-month
LIBOR plus 0.57% and the debt matures on
September 1, 2043. In addition, the firm makes
contract payments at a rate of 0.20% per annum on the stock
purchase contracts held by the APEX Trusts. The firm has the
right to defer payments on the junior subordinated debt and the
stock purchase contracts, subject to limitations, and therefore
cause payment on the APEX to be deferred. During any such
extension period, the firm will not be permitted to, among other
things, pay dividends on or make certain repurchases of its
common or preferred stock. The junior subordinated debt is
junior in right of payment to all of Group Inc.’s
senior indebtedness and all of Group Inc.’s other
subordinated borrowings.
In connection with the APEX issuance, the firm covenanted in
favor of certain of its debtholders, who are initially the
holders of Group Inc.’s 6.345% Junior Subordinated
Debentures due February 15, 2034, that, subject to
certain exceptions, the firm would not redeem or purchase
(i) Group Inc.’s junior subordinated debt issued
to the APEX Trusts prior to the applicable stock purchase date
or (ii) APEX or shares of Group Inc.’s
Series E or Series F Preferred Stock prior to the date
that is ten years after the applicable stock purchase date,
unless the applicable redemption or purchase price does not
exceed a maximum amount determined by reference to the aggregate
amount of net cash proceeds that the firm has received from the
sale of qualifying equity securities during the
180-day
period preceding the redemption or purchase.
The firm accounted for the stock purchase contracts as equity
instruments and, accordingly, recorded the cost of the stock
purchase contracts as a reduction to additional
paid-in
capital. See Note 9 for information on the preferred stock
that Group Inc. will issue in connection with the stock
purchase contracts.
Junior Subordinated Debt Issued to a Trust in Connection with
Trust Preferred Securities.
Group Inc.
issued $2.84 billion of junior subordinated debentures in
2004 to Goldman Sachs Capital I (Trust), a Delaware statutory
trust that, in turn, issued $2.75 billion of guaranteed
preferred beneficial interests to third parties and
$85 million of common beneficial interests to
Group Inc. and invested the proceeds from the sale in
junior subordinated debentures issued by Group Inc. The
Trust is a wholly owned finance subsidiary of the firm for
regulatory and legal purposes but is not consolidated for
accounting purposes.
56
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm pays interest
semi-annually
on these debentures at an annual rate of 6.345% and the
debentures mature on February 15, 2034. The coupon
rate and the payment dates applicable to the beneficial
interests are the same as the interest rate and payment dates
applicable to the debentures. The firm has the right, from time
to time, to defer payment of interest on the debentures, and,
therefore, cause payment on the Trust’s preferred
beneficial interests to be deferred, in each case up to ten
consecutive
semi-annual
periods. During any such extension period, the firm will not be
permitted to, among other things, pay dividends on or make
certain repurchases of its common stock. The Trust is not
permitted to pay any distributions on the common beneficial
interests held by Group Inc. unless all dividends payable
on the preferred beneficial interests have been paid in full.
These debentures are junior in right of payment to all of
Group Inc.’s senior indebtedness and all of
Group Inc.’s subordinated borrowings, other than the
junior subordinated debt issued in connection with the APEX.
Subordinated Debt.
As of March 2010, the
firm had $13.91 billion of other subordinated debt
outstanding with maturities ranging from 2012 to 2038. The
effective weighted average interest rate on this debt was 1.03%,
after giving effect to fair value hedges that effectively
convert fixed rate obligations into floating rate obligations.
As of December 2009, the firm had $14.07 billion of
other subordinated debt outstanding with maturities ranging from
2012 to 2038. The effective weighted average interest rate on
this debt was 1.51%, after giving effect to derivative contracts
used to convert fixed rate obligations into floating rate
obligations. This debt is junior in right of payment to all of
the firm’s senior indebtedness.
57
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 8. | Commitments, Contingencies and Guarantees |
Commitments
The following table summarizes the firm’s commitments as of
March 2010 and December 2009:
|
Commitment Amount by Period
|
||||||||||||||||||||||||
| of Expiration as of March 2010 | Total Commitments as of | |||||||||||||||||||||||
|
Remainder
|
2011-
|
2013-
|
2015-
|
March
|
December
|
|||||||||||||||||||
| of 2010 | 2012 | 2014 | Thereafter | 2010 | 2009 | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Commitments to extend
credit
(1)
|
||||||||||||||||||||||||
|
Commercial lending:
|
||||||||||||||||||||||||
|
Investment-grade
|
$ | 3,279 | $ | 6,185 | $ | 1,296 | $ | — | $ | 10,760 | $ | 11,415 | ||||||||||||
|
Non-investment-grade
|
4,664 | 3,953 | 2,133 | 1,493 | 12,243 | 8,153 | ||||||||||||||||||
|
William Street credit extension program
|
3,948 | 18,398 | 3,263 | 319 | 25,928 | 25,218 | ||||||||||||||||||
|
Warehouse financing
|
15 | — | — | — | 15 | 12 | ||||||||||||||||||
|
Total commitments to extend credit
|
11,906 | 28,536 | 6,692 | 1,812 | 48,946 | 44,798 | ||||||||||||||||||
|
Forward starting resale and securities borrowing agreements
|
58,751 | — | — | — | 58,751 | 34,844 | ||||||||||||||||||
|
Forward starting repurchase and securities lending agreements
|
15,975 | — | — | — | 15,975 | 10,545 | ||||||||||||||||||
|
Underwriting commitments
|
75 | — | — | — | 75 | 1,811 | ||||||||||||||||||
|
Letters of
credit
(2)
|
1,516 | 268 | 146 | 4 | 1,934 | 1,804 | ||||||||||||||||||
|
Investment
commitments
(3)
|
2,137 | 9,080 | 172 | 1,146 | 12,535 | 13,240 | ||||||||||||||||||
|
Other
(4)
|
179 | 54 | 41 | 31 | 305 | 380 | ||||||||||||||||||
|
Total commitments
|
$ | 90,539 | $ | 37,938 | $ | 7,051 | $ | 2,993 | $ | 138,521 | $ | 107,422 | ||||||||||||
| (1) | Commitments to extend credit are presented net of amounts syndicated to third parties. |
| (2) | 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. |
| (3) | Consists of the firm’s commitments to invest in private equity, real estate and other assets directly and through funds that the firm raises and manages in connection with its merchant banking and other investing activities, consisting of $2.43 billion and $2.46 billion as of March 2010 and December 2009, respectively, related to real estate private investments and $10.11 billion and $10.78 billion as of March 2010 and December 2009, respectively, related to corporate and other private investments. Such commitments include $11.43 billion and $11.38 billion as of March 2010 and December 2009, respectively, of commitments to invest in funds managed by the firm, which will be funded at market value on the date of investment. |
| (4) | Includes commitments of $52 million and $104 million as of March 2010 and December 2009, respectively, related to the firm’s new headquarters in New York City. |
58
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Commitments to Extend Credit.
The firm’s
commitments to extend credit are agreements to lend to
counterparties that have fixed termination dates and are
contingent on the satisfaction of all conditions to borrowing
set forth in the contract. Since these commitments may expire
unused or be reduced or cancelled at the counterparty’s
request, the total commitment amount does not necessarily
reflect the actual future cash flow requirements. The firm
accounts for these commitments at fair value. To the extent that
the firm recognizes losses on these commitments, such losses are
recorded within the firm’s Trading and Principal
Investments segment net of any related underwriting fees.
| • | Commercial lending commitments. The firm’s commercial lending commitments are generally extended in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. The total commitment amount does not necessarily reflect the actual future cash flow requirements, as the firm may syndicate all or substantial portions of these commitments in the future, the commitments may expire unused, or the commitments may be cancelled or reduced at the request of the counterparty. In addition, commitments that are extended for contingent acquisition financing are often intended to be short-term in nature, as borrowers often seek to replace them with other funding sources. | |
| • | William Street credit extension program. Substantially all of the commitments provided under the William Street credit extension program are to investment-grade corporate borrowers. Commitments under the program are principally extended by William Street Commitment Corporation (Commitment Corp.), a consolidated wholly owned subsidiary of GS Bank USA, GS Bank USA and other subsidiaries of GS Bank USA. The commitments extended by Commitment Corp. are supported, in part, by funding raised by William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of GS Bank USA. The assets and liabilities of Commitment Corp. and Funding Corp. are legally separated from other assets and liabilities of the firm. The assets of Commitment Corp. and of Funding Corp. will not be available to their respective shareholders until the claims of their respective creditors have been paid. In addition, no affiliate of either Commitment Corp. or Funding Corp., except in limited cases as expressly agreed in writing, is responsible for any obligation of either entity. With respect to most of the William Street commitments, Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection that is generally limited to 95% of the first loss the firm realizes on approved loan commitments, up to a maximum of approximately $950 million. In addition, subject to the satisfaction of certain conditions, upon the firm’s request, SMFG will provide protection for 70% of additional losses on such commitments, up to a maximum of $1.13 billion, of which $375 million of protection had been provided as of both March 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 for the warehousing of financial assets. These arrangements are secured by the warehoused assets, primarily consisting of commercial mortgages as of March 2010 and December 2009. |
59
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Leases.
The firm has contractual obligations
under
long-term
noncancelable lease agreements, principally for office space,
expiring on various dates through 2069. Certain agreements are
subject to periodic escalation provisions for increases in real
estate taxes and other charges. Future minimum rental payments,
net of minimum sublease rentals are set forth below:
|
As of
|
||||
| March 2010 | ||||
| (in millions) | ||||
|
Remainder of 2010
|
$ | 376 | ||
|
2011
|
416 | |||
|
2012
|
349 | |||
|
2013
|
306 | |||
|
2014
|
202 | |||
|
2015-thereafter
|
1,559 | |||
|
Total
|
$ | 3,208 | ||
Contingencies
The firm is involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection
with the conduct of its businesses. Management believes, based
on currently available information, that the results of such
proceedings, in the aggregate, will not have a material adverse
effect on the firm’s financial condition, but may be
material to the firm’s operating results for any particular
period, depending, in part, upon the operating results for such
period. Given the inherent difficulty of predicting the outcome
of the firm’s litigation and regulatory matters,
particularly in cases or proceedings in which substantial or
indeterminate damages or fines are sought, the firm cannot
estimate losses or ranges of losses for cases or proceedings
where there is only a reasonable possibility that a loss may be
incurred.
In connection with its insurance business, the firm is
contingently liable to provide guaranteed minimum death and
income benefits to certain contract holders and has established
a reserve related to $6.29 billion and $6.35 billion
of contract holder account balances as of March 2010 and
December 2009, respectively, for such benefits. The
weighted average attained age of these contract holders was
68 years as of both March 2010 and December 2009.
The net amount at risk, representing guaranteed minimum death
and income benefits in excess of contract holder account
balances, was $1.88 billion and $1.96 billion as of
March 2010 and December 2009, respectively. See
Note 12 for more information on the firm’s insurance
liabilities.
60
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Guarantees
The firm enters into various derivative contracts that meet the
definition of a guarantee under ASC 460. Disclosures about
derivative contracts are not required if such contracts may be
cash settled and the firm has no basis to conclude it is
probable that the counterparties held, at inception, the
underlying instruments related to the derivative contracts. The
firm has concluded that these conditions have been met for
certain large, internationally active commercial and investment
bank counterparties and certain other counterparties.
Accordingly, the firm has not included such contracts in the
tables below.
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 merchant banking
fund-related guarantees). These guarantees represent obligations
to make payments to beneficiaries if the guaranteed party fails
to fulfill its obligation under a contractual arrangement with
that beneficiary.
The following table sets forth certain information about the
firm’s derivative contracts that meet the definition of a
guarantee and certain other guarantees as of March 2010.
Derivative contracts set forth below include written equity and
commodity put options, written currency contracts and interest
rate caps, floors and swaptions. See Note 3 for information
regarding credit derivative contracts that meet the definition
of a guarantee, which are not included below.
|
Maximum Payout/
|
||||||||||||||||||||||||
|
Carrying
|
Notional Amount by Period of Expiration (1) | |||||||||||||||||||||||
|
Value of
|
2011-
|
2013-
|
2015-
|
|||||||||||||||||||||
| Net Liability | 2010 | 2012 | 2014 | Thereafter | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
As of March 2010
|
||||||||||||||||||||||||
|
Derivatives
(2)
|
$ | 6,598 | $ | 155,292 | $ | 173,598 | $ | 51,637 | $ | 63,701 | $ | 444,228 | ||||||||||||
|
Securities lending
indemnifications
(3)
|
— | 27,728 | — | — | — | 27,728 | ||||||||||||||||||
|
Other financial
guarantees
(4)
|
190 | 352 | 329 | 344 | 961 | 1,986 | ||||||||||||||||||
| (1) | Such amounts do not represent the anticipated losses in connection with these contracts. | |
| (2) | Because derivative contracts are accounted for at fair value, carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying value excludes the effect of a legal right of setoff that may exist under an enforceable netting agreement and the effect of netting of cash paid pursuant to credit support agreements. These derivative contracts are risk managed together with derivative contracts that do not meet the definition of a guarantee under ASC 460 and, therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities. As of December 2009, the carrying value of the net liability related to derivative guarantees was $7.22 billion. | |
| (3) | Collateral held by the lenders in connection with securities lending indemnifications was $28.58 billion as of March 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 on loan from the borrower, there is minimal performance risk associated with these guarantees. | |
| (4) | As of December 2009, the carrying value of the net liability related to other financial guarantees was $207 million. |
61
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The firm has established trusts, including Goldman Sachs Capital
I, II and III, and other entities for the limited purpose of
issuing securities to third parties, lending the proceeds to the
firm and entering into contractual arrangements with the firm
and third parties related to this purpose. See Note 7 for
information regarding the transactions involving Goldman Sachs
Capital I, II and III. The firm effectively provides for the
full and unconditional guarantee of the securities issued by
these entities, which are not consolidated for accounting
purposes. Timely payment by the firm of amounts due to these
entities under the borrowing, preferred stock and related
contractual arrangements will be sufficient to cover payments
due on the securities issued by these entities. Management
believes that it is unlikely that any circumstances will occur,
such as nonperformance on the part of paying agents or other
service providers, that would make it necessary for the firm to
make payments related to these entities other than those
required under the terms of the borrowing, preferred stock and
related contractual arrangements and in connection with certain
expenses incurred by these entities. Group Inc. also fully
and unconditionally guarantees the securities issued by GS
Finance Corp., a wholly owned finance subsidiary of the firm,
which is consolidated for accounting purposes.
In the ordinary course of business, the firm indemnifies and
guarantees certain service providers, such as clearing and
custody agents, trustees and administrators, against specified
potential losses in connection with their acting as an agent of,
or providing services to, the firm or its affiliates. The firm
also indemnifies some clients against potential losses incurred
in the event specified
third-party
service providers, including
sub-custodians
and
third-party
brokers, improperly execute transactions. In addition, the firm
is a member of payment, clearing and settlement networks as well
as securities exchanges around the world that may require the
firm to meet the obligations of such networks and exchanges in
the event of member defaults. In connection with its prime
brokerage and clearing businesses, the firm agrees to clear and
settle on behalf of its clients the transactions entered into by
them with other brokerage firms. The firm’s obligations in
respect of such transactions are secured by the assets in the
client’s account as well as any proceeds received from the
transactions cleared and settled by the firm on behalf of the
client. In connection with joint venture investments, the firm
may issue loan guarantees under which it may be liable in the
event of fraud, misappropriation, environmental liabilities and
certain other matters involving the borrower. The firm is unable
to develop an estimate of the maximum payout under these
guarantees and indemnifications. However, management believes
that it is unlikely the firm will have to make any material
payments under these arrangements, and no liabilities related to
these guarantees and indemnifications have been recognized in
the condensed consolidated statements of financial condition as
of March 2010 and December 2009.
The firm provides representations and warranties to
counterparties in connection with a variety of commercial
transactions and occasionally indemnifies them against potential
losses caused by the breach of those representations and
warranties. The firm may also provide indemnifications
protecting against changes in or adverse application of certain
U.S. tax laws in connection with ordinary-course
transactions such as securities issuances, borrowings or
derivatives. In addition, the firm may provide indemnifications
to some counterparties to protect them in the event additional
taxes are owed or payments are withheld, due either to a change
in or an adverse application of certain
non-U.S. tax
laws. These indemnifications generally are standard contractual
terms and are entered into in the ordinary course of business.
Generally, there are no stated or notional amounts included in
these indemnifications, and the contingencies triggering the
obligation to indemnify are not expected to occur. The firm is
unable to develop an estimate of the maximum payout under these
guarantees and indemnifications. However, management believes
that it is unlikely the firm will have to make any material
payments under these arrangements, and no liabilities related to
these arrangements have been recognized in the condensed
consolidated statements of financial condition as of
March 2010 and December 2009.
62
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 9. | Shareholders’ Equity |
Common and
Preferred Equity
On April 19, 2010, the Board of Directors of
Group Inc. (Board) declared a dividend of $0.35 per common
share to be paid on June 29, 2010 to common
shareholders of record on June 1, 2010.
During the three months ended March 2010, the firm
repurchased 13.2 million shares of its common stock at an
average cost per share of $172.15, for a total cost of
$2.27 billion. In addition, to satisfy minimum statutory
employee tax withholding requirements related to the delivery of
common stock underlying RSUs, the firm cancelled
6.1 million of RSUs with a total value of $962 million
during the three months ended March 2010.
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).
As of March 2010, the firm had 174,000 shares of
perpetual preferred stock issued and outstanding as set forth in
the following table:
|
Redemption
|
||||||||||||||||||
|
Dividend
|
Shares
|
Shares
|
Earliest
|
Value
|
||||||||||||||
| Series | Preference | Issued | Authorized | Dividend Rate | Redemption Date | (in millions) | ||||||||||||
|
A
|
Non-cumulative | 30,000 | 50,000 |
3 month LIBOR + 0.75%,
with floor of 3.75% per annum |
April 25, 2010 | $ | 750 | |||||||||||
|
B
|
Non-cumulative | 32,000 | 50,000 | 6.20% per annum | October 31, 2010 | 800 | ||||||||||||
|
C
|
Non-cumulative | 8,000 | 25,000 |
3 month LIBOR + 0.75%,
with floor of 4.00% per annum |
October 31, 2010 | 200 | ||||||||||||
|
D
|
Non-cumulative | 54,000 | 60,000 |
3 month LIBOR + 0.67%,
with floor of 4.00% per annum |
May 24, 2011 | 1,350 | ||||||||||||
|
G
|
Cumulative | 50,000 | 50,000 | 10.00% per annum | October 1, 2008 | 5,500 | ||||||||||||
| 174,000 | 235,000 | $ | 8,600 | |||||||||||||||
Each share of
non-cumulative
preferred stock issued and outstanding has a par value of $0.01,
has a liquidation preference of $25,000, is represented by 1,000
depositary shares and is redeemable at the firm’s option,
subject to the approval of the Federal Reserve Board, at a
redemption price equal to $25,000 plus declared and unpaid
dividends.
Each share of 10% Cumulative Perpetual Preferred Stock,
Series G (Series G Preferred Stock) issued and
outstanding has a par value of $0.01, has a liquidation
preference of $100,000 and is redeemable at the firm’s
option, subject to the approval of the Federal Reserve Board, at
a redemption price equal to $110,000 plus accrued and unpaid
dividends. In connection with the issuance of the Series G
Preferred Stock, the firm issued a five-year warrant to purchase
up to 43.5 million shares of common stock at an exercise
price of $115.00 per share. The warrant is exercisable at any
time until October 1, 2013 and the number of shares of
common stock underlying the warrant and the exercise price are
subject to adjustment for certain dilutive events.
63
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
All series of preferred stock are pari passu and have a
preference over the firm’s common stock upon liquidation.
Dividends on each series of preferred stock, if declared, are
payable quarterly in arrears. The firm’s ability to declare
or pay dividends on, or purchase, redeem or otherwise acquire,
its common stock is subject to certain restrictions in the event
that the firm fails to pay or set aside full dividends on the
preferred stock for the latest completed dividend period.
In 2007, the Board authorized 17,500.1 shares of perpetual
Non-Cumulative
Preferred Stock, Series E (Series E Preferred Stock),
and 5,000.1 shares of perpetual
Non-Cumulative
Preferred Stock, Series F (Series F Preferred Stock),
in connection with the APEX issuance. See Note 7 for
further information on the APEX issuance. Under the stock
purchase contracts, Group Inc. will issue on the relevant
stock purchase dates (on or before June 1, 2013 and
September 1, 2013 for Series E and Series F
Preferred Stock, respectively) one share of Series E and
Series F Preferred Stock to Goldman Sachs Capital II and
III, respectively, for each $100,000 principal amount of
subordinated debt held by these trusts. When issued, each share
of Series E and Series F Preferred Stock will have a
par value of $0.01 and a liquidation preference of $100,000 per
share. Dividends on Series E Preferred Stock, if declared,
will be payable
semi-annually
at a fixed annual rate of 5.79% if the stock is issued prior to
June 1, 2012 and quarterly thereafter, at a rate per
annum equal to the greater of
(i) three-month
LIBOR plus 0.77% and (ii) 4.00%. Dividends on Series F
Preferred Stock, if declared, will be payable quarterly at a
rate per annum equal to
three-month
LIBOR plus 0.77% if the stock is issued prior to
September 1, 2012 and quarterly thereafter, at a rate
per annum equal to the greater of
(i) three-month
LIBOR plus 0.77% and (ii) 4.00%. The preferred stock may be
redeemed at the option of the firm on the stock purchase dates
or any day thereafter, subject to regulatory approval and
certain covenant restrictions governing the firm’s ability
to redeem or purchase the preferred stock without issuing common
stock or other instruments with
equity-like
characteristics.
On April 19, 2010, the Board declared dividends of
$231.77, $387.50, $247.22 and $247.22 per share of Series A
Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock, respectively,
to be paid on May 10, 2010 to preferred shareholders
of record on April 25, 2010. In addition, the Board
declared a dividend of $2,500 per share of Series G
Preferred Stock to be paid on May 10, 2010 to
preferred shareholders of record on April 25, 2010.
Accumulated
Other Comprehensive Income
The following table sets forth the firm’s accumulated other
comprehensive income/(loss) by type:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Currency translation adjustment, net of tax
|
$ | (136 | ) | $ | (132 | ) | ||
|
Pension and postretirement liability adjustments, net of tax
|
(311 | ) | (317 | ) | ||||
|
Net unrealized gains on
available-for-sale
securities, net of
tax
(1)
|
91 | 87 | ||||||
|
Total accumulated other comprehensive loss, net of tax
|
$ | (356 | ) | $ | (362 | ) | ||
| (1) | Consists of net unrealized gains of $88 million and $84 million on available-for-sale securities held by the firm’s insurance subsidiaries as of March 2010 and December 2009, respectively, and net unrealized gains of $3 million on available-for-sale securities held by investees accounted for under the equity method as of both March 2010 and December 2009. |
64
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 10. | Earnings Per Common Share |
The computations of basic and diluted earnings per common share
are set forth below:
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
(in millions, except
|
||||||||
| per share amounts) | ||||||||
|
Numerator for basic and diluted EPS — net earnings
applicable to common shareholders
|
$ | 3,296 | $ | 1,659 | ||||
|
Denominator for basic EPS — weighted average number of
common shares
|
546.0 | 477.4 | ||||||
|
Effect of dilutive
securities
(1)
|
||||||||
|
RSUs
|
12.3 | 9.3 | ||||||
|
Stock options and warrants
|
31.7 | 2.5 | ||||||
|
Dilutive potential common shares
|
44.0 | 11.8 | ||||||
|
Denominator for diluted EPS — weighted average number
of common shares and dilutive potential common shares
|
590.0 | 489.2 | ||||||
|
Basic
EPS
(2)
|
$ | 6.02 | $ | 3.48 | ||||
|
Diluted EPS
|
5.59 | 3.39 | ||||||
| (1) | The diluted EPS computations do not include the antidilutive effect of RSUs, stock options and warrants as follows: |
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Number of antidilutive RSUs and common shares underlying
antidilutive stock options and warrants
|
6.0 | 92.7 | ||||||
| (2) | 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 earnings per common share. The impact of applying this methodology was a reduction to basic earnings per common share of $0.02 for the three months ended March 2010. There was no impact to basic earnings per common share for the three months ended March 2009. |
65
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 11. | Goodwill and Identifiable Intangible Assets |
Goodwill
The following table sets forth the carrying value of the
firm’s goodwill by operating segment, which is included in
“Other assets” in the condensed consolidated
statements of financial condition:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Investment Banking
|
||||||||
|
Underwriting
|
$ | 125 | $ | 125 | ||||
|
Trading and Principal Investments
|
||||||||
|
FICC
|
297 | 265 | ||||||
|
Equities
(1)
|
2,389 | 2,389 | ||||||
|
Principal Investments
|
84 | 84 | ||||||
|
Asset Management and Securities Services
|
||||||||
|
Asset
Management
(2)
|
563 | 563 | ||||||
|
Securities Services
|
117 | 117 | ||||||
|
Total
|
$ | 3,575 | $ | 3,543 | ||||
| (1) | Primarily related to SLK LLC (SLK). | |
| (2) | Primarily related to The Ayco Company, L.P. (Ayco). |
66
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Identifiable
Intangible Assets
The following table sets forth the gross carrying amount,
accumulated amortization and net carrying amount of the
firm’s identifiable intangible assets:
| As of | ||||||||||
|
March
|
December
|
|||||||||
| 2010 | 2009 | |||||||||
| (in millions) | ||||||||||
|
Customer
lists
(1)
|
Gross carrying amount | $ | 1,118 | $ | 1,117 | |||||
| Accumulated amortization | (488 | ) | (472 | ) | ||||||
| Net carrying amount | $ | 630 | $ | 645 | ||||||
|
Broadcast
|
Gross carrying amount | $ | 560 | $ | — | |||||
|
royalties
(2)
|
Accumulated amortization | (15 | ) | — | ||||||
| Net carrying amount | $ | 545 | $ | — | ||||||
|
Commodities-related
|
Gross carrying amount | $ | 553 | $ | 40 | |||||
|
intangibles
(3)
|
Accumulated amortization | (10 | ) | (10 | ) | |||||
| Net carrying amount | $ | 543 | $ | 30 | ||||||
|
NYSE DMM rights
|
Gross carrying amount | $ | 714 | $ | 714 | |||||
| Accumulated amortization | (304 | ) | (294 | ) | ||||||
| Net carrying amount | $ | 410 | $ | 420 | ||||||
|
Insurance-related
|
Gross carrying amount | $ | 292 | $ | 292 | |||||
|
intangibles
(4)
|
Accumulated amortization | (140 | ) | (142 | ) | |||||
| Net carrying amount | $ | 152 | $ | 150 | ||||||
|
Exchange-traded
|
Gross carrying amount | $ | 138 | $ | 138 | |||||
|
fund (ETF) lead
|
Accumulated amortization | (50 | ) | (48 | ) | |||||
|
market maker rights
|
Net carrying amount | $ | 88 | $ | 90 | |||||
|
Other
(5)
|
Gross carrying amount | $ | 120 | $ | 130 | |||||
| Accumulated amortization | (80 | ) | (88 | ) | ||||||
| Net carrying amount | $ | 40 | $ | 42 | ||||||
|
Total
|
Gross carrying amount | $ | 3,495 | $ | 2,431 | |||||
| Accumulated amortization | (1,087 | ) | (1,054 | ) | ||||||
| Net carrying amount | $ | 2,408 | $ | 1,377 | ||||||
| (1) | Primarily includes the firm’s clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco. | |
| (2) | Represents television broadcast royalties held by a VIE consolidated upon adoption of ASU No. 2009-17. | |
| (3) | Primarily includes commodity-related customer contracts and relationships, permits and access rights acquired during the first quarter of 2010. | |
| (4) | Primarily includes VOBA related to the firm’s insurance businesses. | |
| (5) | Primarily includes marketing-related assets and other contractual rights. |
67
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Substantially all of the firm’s identifiable intangible
assets are considered to have finite lives and are amortized
over their estimated lives. The weighted average remaining life
of the firm’s identifiable intangible assets is
approximately 11 years. “Depreciation and
amortization” in the condensed consolidated statements of
earnings includes amortization related to identifiable
intangible assets of $44 million and $38 million for
the three months ended March 2010 and March 2009,
respectively.
The estimated future amortization for existing identifiable
intangible assets through 2015 is set forth below:
|
As of
|
||||
| March 2010 | ||||
| (in millions) | ||||
|
Remainder of 2010
|
$ | 216 | ||
|
2011
|
282 | |||
|
2012
|
274 | |||
|
2013
|
264 | |||
|
2014
|
206 | |||
|
2015
|
185 | |||
| Note 12. | Other Assets and Other Liabilities |
Other
Assets
Other assets are generally less liquid,
non-financial
assets. The following table sets forth the firm’s other
assets by type:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Property, leasehold improvements and
equipment
(1)(2)
|
$ | 12,322 | $ | 11,380 | ||||
|
Goodwill and identifiable intangible
assets
(3)
|
5,983 | 4,920 | ||||||
|
Income tax-related assets
|
6,751 | 7,937 | ||||||
|
Equity-method
investments
(4)
|
1,374 | 1,484 | ||||||
|
Miscellaneous receivables and other
|
3,894 | 3,747 | ||||||
|
Total
|
$ | 30,324 | $ | 29,468 | ||||
| (1) | Net of accumulated depreciation and amortization of $7.50 billion and $7.28 billion as of March 2010 and December 2009, respectively. | |
| (2) | Includes $5.99 billion and $5.90 billion as of March 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 consolidated by the firm. The increase in property, leasehold improvements and equipment from December 2009 to March 2010 is primarily related to consolidated VIEs. | |
| (3) | See Note 11 for further information regarding the firm’s goodwill and identifiable intangible assets. | |
| (4) | Excludes investments of $3.85 billion and $2.95 billion accounted for at fair value under the fair value option as of March 2010 and December 2009, respectively, which are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition. The increase in investments accounted for at fair value under the fair value option from December 2009 to March 2010 is primarily related to investments held by VIEs consolidated upon adoption of ASU No. 2009-17. |
68
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Other
Liabilities
The following table sets forth the firm’s other liabilities
and accrued expenses by type:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Compensation and benefits
|
$ | 6,497 | $ | 11,170 | ||||
|
Insurance-related
liabilities
(1)
|
11,829 | 11,832 | ||||||
|
Noncontrolling
interests
(2)
|
984 | 960 | ||||||
|
Income tax-related liabilities
|
3,701 | 4,022 | ||||||
|
Employee interests in consolidated funds
|
466 | 416 | ||||||
|
Subordinated liabilities issued by consolidated VIEs
|
2,020 | (3) | 612 | |||||
|
Accrued expenses and other
|
4,236 | 4,843 | ||||||
|
Total
|
$ | 29,733 | $ | 33,855 | ||||
| (1) | Insurance-related liabilities are set forth in the table below: |
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Separate account liabilities
|
$ | 4,202 | $ | 4,186 | ||||
|
Liabilities for future benefits and unpaid claims
|
6,557 | 6,484 | ||||||
|
Contract holder account balances
|
814 | 874 | ||||||
|
Reserves for guaranteed minimum death and income benefits
|
256 | 288 | ||||||
|
Total insurance-related liabilities
|
$ | 11,829 | $ | 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” in the condensed
consolidated statements of financial condition.
Liabilities for future benefits and unpaid claims include
liabilities arising from reinsurance provided by the firm to
other insurers. The firm had a receivable of $1.37 billion
and $1.29 billion as of March 2010 and
December 2009, respectively, related to such reinsurance
contracts, which is reported in “Receivables from customers
and counterparties” in the condensed consolidated
statements of financial condition. In addition, the firm has
ceded risks to reinsurers related to certain of its liabilities
for future benefits and unpaid claims and had a receivable of
$875 million and $870 million as of March 2010
and December 2009, respectively, related to such
reinsurance contracts, which is reported in “Receivables
from customers and counterparties” in the condensed
consolidated statements of financial condition. Contracts to
cede risks to reinsurers do not relieve the firm from its
obligations to contract holders. Liabilities for future benefits
and unpaid claims include $1.79 billion and
$1.84 billion carried at fair value under the fair value
option as of March 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.
| (2) | Includes $616 million and $598 million related to consolidated investment funds as of March 2010 and December 2009, respectively. | |
| (3) | Includes $1.50 billion related to entities consolidated upon adoption of ASU No. 2009-17. |
69
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 13. | Transactions with Affiliated Funds |
The firm has formed numerous nonconsolidated investment funds
with
third-party
investors. The firm generally acts as the investment manager for
these funds and, as such, is entitled to receive management fees
and, in certain cases, advisory fees, incentive fees or
overrides from these funds. These fees amounted to
$553 million and $593 million for the three months
ended March 2010 and March 2009, respectively. As of
March 2010 and December 2009, the fees receivable from
these funds were $832 million and $1.04 billion,
respectively. Additionally, the firm may invest alongside the
third-party
investors in certain funds. The aggregate carrying value of the
firm’s interests in these funds was $13.68 billion and
$13.84 billion as of March 2010 and
December 2009, respectively. In the ordinary course of
business, the firm may also engage in other activities with
these funds, including, among others, securities lending, trade
execution, trading, custody, and acquisition and bridge
financing. See Note 8 for the firm’s commitments
related to these funds.
| Note 14. | Income Taxes |
The firm is subject to examination by the U.S. Internal
Revenue Service (IRS) and other taxing authorities in
jurisdictions where the firm has significant business
operations, such as the United Kingdom, Japan, Hong Kong, Korea
and various states, such as New York. The tax years under
examination vary by jurisdiction. The firm does not expect
unrecognized tax benefits to change significantly during the
twelve months subsequent to March 2010.
Below is a table of the earliest tax years that remain subject
to examination by major jurisdiction:
|
As of
|
||||
| Jurisdiction | March 2010 | |||
|
U.S. Federal
|
2005 | (1) | ||
|
New York State and City
|
2004 | (2) | ||
|
United Kingdom
|
2005 | |||
|
Japan
|
2005 | (3) | ||
|
Hong Kong
|
2003 | |||
|
Korea
|
2003 | |||
| (1) | IRS examination of fiscal 2005, 2006 and 2007 began during 2008. IRS examination of fiscal 2003 and 2004 has been completed but the liabilities for those years are not yet final. | |
| (2) | New York State and City examination of fiscal 2004, 2005 and 2006 began in 2008. | |
| (3) | Japan National Tax Agency examination of fiscal 2005 through 2009 began during the first quarter of 2010. |
All years subsequent to the above years remain open to
examination by the taxing authorities. The firm believes that
the liability for unrecognized tax benefits it has established
is adequate in relation to the potential for additional
assessments. The resolution of tax matters is not expected to
have a material effect on the firm’s financial condition
but may be material to the firm’s operating results for a
particular period, depending, in part, upon the operating
results for that period.
70
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 15. | Regulation and Capital Adequacy |
The Federal Reserve Board is the primary U.S. regulator of
Group Inc., 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 administered by the Federal
Reserve Board. The firm’s bank depository institution
subsidiaries, including GS Bank USA, are subject to similar
capital requirements. Under the Federal Reserve Board’s
capital adequacy requirements and the regulatory framework for
prompt corrective action (PCA) that is applicable to GS Bank
USA, the firm and its bank depository institution subsidiaries
must meet specific capital requirements that involve
quantitative measures of assets, liabilities and certain
off-balance-sheet
items as calculated under regulatory reporting practices. The
firm and its bank depository institution subsidiaries’
capital amounts, as well as GS Bank USA’s PCA
classification, are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Many of the firm’s subsidiaries, including Goldman,
Sachs & Co. (GS&Co.) and the firm’s other
broker-dealer
subsidiaries, are subject to separate regulation and capital
requirements as described below.
The following table sets forth information regarding
Group Inc.’s capital ratios as of March 2010
calculated in accordance with the Federal Reserve Board’s
regulatory capital requirements currently applicable to bank
holding companies, which are based on the Capital Accord of the
Basel Committee on Banking Supervision (Basel I). These ratios
are used by the Federal Reserve Board and other
U.S. federal banking agencies in the supervisory review
process, including the assessment of the firm’s capital
adequacy.
|
As of
|
||||
| March 2010 | ||||
| ($ in millions) | ||||
|
Tier 1 capital
|
$ | 68,472 | ||
|
Tier 2 capital
|
13,541 | |||
|
Total capital
|
82,013 | |||
|
Risk-weighted
assets
|
455,790 | |||
|
Tier 1 capital ratio
|
15.0 | % | ||
|
Total capital ratio
|
18.0 | % | ||
|
Tier 1 leverage ratio
|
8.1 | % | ||
Risk-Weighted
Assets (RWAs) under the Federal Reserve Board’s
risk-based
capital guidelines are calculated based on the amount of market
risk and credit risk. RWAs for market risk are determined by
reference to the firm’s VaR models, supplemented by other
measures to capture risks not reflected in the firm’s 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 of each trade. All such assets
and amounts are then assigned a risk weight depending on, among
other things, whether the counterparty is a sovereign, bank or
qualifying securities firm, or other entity (or if collateral is
held, depending on the nature of the collateral).
The firm’s Tier 1 leverage ratio is defined as
Tier 1 capital under Basel I divided by adjusted average
total assets (which includes adjustments for disallowed goodwill
and certain intangible assets).
71
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Federal Reserve Board regulations require bank holding companies
to maintain a minimum Tier 1 capital ratio of 4% and a
minimum total capital ratio of 8%. The required minimum
Tier 1 capital ratio and total capital ratio in order to be
considered a “well capitalized” bank holding company
under the Federal Reserve Board guidelines are 6% and 10%,
respectively. Bank holding companies may be expected to maintain
ratios well above the minimum levels, depending upon their
particular condition, risk profile and growth plans. The minimum
Tier 1 leverage ratio is 3% for bank holding companies that
have received the highest supervisory rating under Federal
Reserve Board guidelines or that have implemented the Federal
Reserve Board’s
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%.
The firm is currently working to implement the requirements set
out in the Revised Framework for the International Convergence
of Capital Measurement and Capital Standards issued by the Basel
Committee on Banking Supervision (Basel II) as applicable
to it as a bank holding company. U.S. banking regulators
have incorporated the Basel II framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as Group Inc., transition to
Basel II over several years.
GS Bank USA, a New York State-chartered bank and a member of the
Federal Reserve System and the Federal Deposit Insurance
Corporation (FDIC), is regulated by the Federal Reserve Board
and the New York State Banking Department (NYSBD) and is subject
to minimum capital requirements that (subject to certain
exceptions) are similar to those applicable to bank holding
companies. GS Bank USA computes its capital ratios in accordance
with the regulatory capital guidelines currently applicable to
state member banks, which are based on Basel I as implemented by
the Federal Reserve Board, for purposes of assessing the
adequacy of its capital. In order to be considered a “well
capitalized” depository institution under the Federal
Reserve Board guidelines, GS Bank USA must maintain a
Tier 1 capital ratio of at least 6%, a total capital ratio
of at least 10% and a Tier 1 leverage ratio of at least 5%.
In November 2008, the firm contributed subsidiaries into GS
Bank USA. In connection with this contribution, GS Bank USA
agreed with the Federal Reserve Board to minimum capital ratios
in excess of these “well capitalized” levels.
Accordingly, for a period of time, GS Bank USA is expected to
maintain a Tier 1 capital ratio of at least 8%, a total
capital ratio of at least 11% and a Tier 1 leverage ratio
of at least 6%.
The following table sets forth information regarding GS Bank
USA’s capital ratios under Basel I as implemented by the
Federal Reserve Board, as of March 2010:
|
As of
|
||||
| March 2010 | ||||
|
Tier 1 capital ratio
|
17.5 | % | ||
|
Total capital ratio
|
22.4 | % | ||
|
Tier 1 leverage ratio
|
18.9 | % | ||
GS Bank USA is currently working to implement the Basel II
framework. Similar to the firm’s requirement as a bank
holding company, GS Bank USA is required to transition to Basel
II over the next several years.
72
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THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 $16.53 billion and $27.43 billion as of
March 2010 and December 2009, respectively, which
exceeded required reserve amounts by $15.77 billion and
$25.86 billion as of March 2010 and
December 2009, respectively. GS Bank Europe, a wholly owned
credit institution, is regulated by the Irish Financial Services
Regulatory Authority and is subject to minimum capital
requirements. As of March 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 arms-length basis.
The firm’s U.S. regulated
broker-dealer
subsidiaries include GS&Co. and Goldman Sachs
Execution & Clearing, L.P. (GSEC). GS&Co. and
GSEC are registered
U.S. broker-dealers
and futures commission merchants subject to
Rule 15c3-1
of the SEC and Rule 1.17 of the Commodity Futures Trading
Commission, which specify uniform minimum net capital
requirements, as defined, for their registrants, and also
effectively require that a significant part of the
registrants’ assets be kept in relatively liquid form.
GS&Co. and GSEC have elected to compute their minimum
capital requirements in accordance with the “Alternative
Net Capital Requirement” as permitted by
Rule 15c3-1.
As of March 2010, GS&Co. had regulatory net capital,
as defined by
Rule 15c3-1,
of $11.60 billion, which exceeded the amount required by
$9.59 billion. As of March 2010, GSEC had regulatory
net capital, as defined by
Rule 15c3-1,
of $1.92 billion, which exceeded the amount required by
$1.80 billion. In addition to its alternative minimum net
capital requirements, GS&Co. is also required to hold
tentative net capital in excess of $1 billion and net
capital in excess of $500 million in accordance with the
market and credit risk standards of Appendix E of
Rule 15c3-1.
GS&Co. is also required to notify the SEC in the event that
its tentative net capital is less than $5 billion. As of
March 2010 and December 2009, GS&Co. had
tentative net capital and net capital in excess of both the
minimum and the notification requirements.
The firm has U.S. insurance subsidiaries that are subject
to state insurance regulation and oversight in the states in
which they are domiciled and in the other states in which they
are licensed. In addition, certain of the firm’s insurance
subsidiaries outside of the U.S. are part of the
Lloyd’s market (which is regulated by the U.K.’s
Financial Services Authority (FSA)) and certain are regulated by
the Bermuda Monetary Authority. The firm’s insurance
subsidiaries were in compliance with all regulatory capital
requirements as of March 2010 and December 2009.
The firm’s principal
non-U.S. regulated
subsidiaries include Goldman Sachs International (GSI) and
Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firm’s
regulated U.K.
broker-dealer,
is subject to the capital requirements of the FSA. GSJCL, the
firm’s regulated Japanese
broker-dealer,
is subject to the capital requirements imposed by Japan’s
Financial Services Agency. As of March 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 March 2010 and December 2009, these
subsidiaries were in compliance with their local capital
adequacy requirements.
73
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The regulatory requirements referred to above restrict
Group Inc.’s ability to withdraw capital from its
regulated subsidiaries. In addition to limitations on the
payment of dividends imposed by federal and state laws, the
Federal Reserve Board, the FDIC and the NYSBD have authority to
prohibit or to limit the payment of dividends by the banking
organizations they supervise (including GS Bank USA) if, in
the relevant regulator’s opinion, payment of a dividend
would constitute an unsafe or unsound practice in the light of
the financial condition of the banking organization.
| Note 16. | Business Segments |
In reporting to management, the firm’s operating results
are categorized into the following three business segments:
Investment Banking, Trading and Principal Investments, and Asset
Management and Securities Services. See Note 18 to the
consolidated financial statements in Part II, Item 8
of the firm’s Annual Report on
Form 10-K
for the fiscal year ended December 2009 for a discussion of
the basis of presentation for the firm’s business segments.
74
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Segment
Operating Results
Management believes that the following information provides a
reasonable representation of each segment’s contribution to
consolidated
pre-tax
earnings and total assets:
|
As of or for the
|
||||||||||
|
Three Months
|
||||||||||
| Ended March | ||||||||||
| 2010 | 2009 | |||||||||
| (in millions) | ||||||||||
|
Investment
|
Net revenues | $ | 1,184 | $ | 823 | |||||
|
Banking
|
Operating expenses | 950 | 705 | |||||||
| Pre-tax earnings | $ | 234 | $ | 118 | ||||||
| Segment assets | $ | 1,541 | $ | 1,479 | ||||||
|
Trading and
|
Net revenues | $ | 10,250 | $ | 7,150 | |||||
|
Principal
|
Operating expenses | 5,565 | 4,873 | |||||||
|
Investments
|
Pre-tax earnings | $ | 4,685 | $ | 2,277 | |||||
| Segment assets | $ | 685,937 | $ | 706,647 | ||||||
|
Asset Management
|
Net revenues | $ | 1,341 | $ | 1,452 | |||||
|
and Securities
|
Operating expenses | 1,080 | 1,205 | |||||||
|
Services
|
Pre-tax earnings | $ | 261 | $ | 247 | |||||
| Segment assets | $ | 193,050 | $ | 217,164 | ||||||
|
Total
|
Net revenues (1)(2) | $ | 12,775 | $ | 9,425 | |||||
| Operating expenses (3) | 7,616 | 6,796 | ||||||||
| Pre-tax earnings (4) | $ | 5,159 | $ | 2,629 | ||||||
| Total assets | $ | 880,528 | $ | 925,290 | ||||||
| (1) | Net revenues include net interest income as set forth in the table below: |
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Investment Banking
|
$ | — | $ | — | ||||
|
Trading and Principal Investments
|
1,055 | 1,444 | ||||||
|
Asset Management and Securities Services
|
363 | 463 | ||||||
|
Total net interest
|
$ | 1,418 | $ | 1,907 | ||||
75
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| (2) | Net revenues include non-interest revenues as set forth in the table below: |
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Investment banking fees
|
$ | 1,184 | $ | 823 | ||||
|
Equities commissions
|
881 | 974 | ||||||
|
Asset management and other fees
|
978 | 989 | ||||||
|
Trading and principal investments revenues
|
8,314 | 4,732 | ||||||
|
Total
non-interest
revenues
|
$ | 11,357 | $ | 7,518 | ||||
Trading and principal investments revenues include
$26 million and $6 million for the three months ended
March 2010 and March 2009, respectively, of realized
gains on securities held within the firm’s insurance
subsidiaries which are accounted for as
available-for-sale.
| (3) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $21 million and $13 million for the three months ended March 2010 and March 2009, respectively, that have not been allocated to the firm’s segments. | |
| (4) | Pre-tax earnings include total depreciation and amortization as set forth in the table below: |
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Investment Banking
|
$ | 44 | $ | 37 | ||||
|
Trading and Principal Investments
|
270 | 523 | ||||||
|
Asset Management and Securities Services
|
61 | 89 | ||||||
|
Total depreciation and amortization
|
$ | 375 | $ | 649 | ||||
Geographic
Information
Due to the highly integrated nature of international financial
markets, the firm manages its businesses based on the
profitability of the enterprise as a whole. Since a significant
portion of the firm’s activities require cross-border
coordination in order to facilitate the needs of the firm’s
clients, the methodology for allocating the firm’s
profitability to geographic regions is dependent on estimates
and management judgment. Specifically, in interim periods, the
firm allocates compensation and benefits to geographic regions
based upon the firmwide compensation to net revenues ratio. In
the fourth quarter when compensation by employee is finalized,
compensation and benefits are allocated to the geographic
regions based upon total actual compensation during the fiscal
year. See Note 18 to the consolidated financial statements
in Part II, Item 8 of the firm’s Annual Report on
Form 10-K
for the fiscal year ended December 2009 for a discussion of
the method of allocating by geographic region.
76
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The following table sets forth the total net revenues and
pre-tax
earnings of the firm by geographic region allocated based on the
methodology referred to above, as well as the percentage of
total net revenues and
pre-tax
earnings for each geographic region:
| Three Months Ended March | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| ($ in millions) | ||||||||||||||||
|
Net revenues
|
||||||||||||||||
|
Americas
(1)
|
$ | 7,131 | 55 | % | $ | 6,473 | 69 | % | ||||||||
|
EMEA
(2)
|
3,905 | 31 | 1,886 | 20 | ||||||||||||
|
Asia
|
1,739 | 14 | 1,066 | 11 | ||||||||||||
|
Total net revenues
|
$ | 12,775 | 100 | % | $ | 9,425 | 100 | % | ||||||||
|
Pre-tax
earnings
|
||||||||||||||||
|
Americas
(1)
|
$ | 2,764 | 53 | % | $ | 2,145 | N.M. | |||||||||
|
EMEA
(2)
|
1,800 | 35 | 579 | N.M. | ||||||||||||
|
Asia
|
616 | 12 | (82 | ) | N.M. | |||||||||||
|
Corporate
(3)
|
(21 | ) | N.M. | (13 | ) | N.M. | ||||||||||
|
Total
pre-tax
earnings
|
$ | 5,159 | 100 | % | $ | 2,629 | 100 | % | ||||||||
| (1) | Substantially all relates to the U.S. | |
| (2) | EMEA (Europe, Middle East and Africa). | |
| (3) | Consists of net provisions for a number of litigation and regulatory proceedings. |
77
Table of Contents
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
| Note 17. | Interest Income and Interest Expense |
The following table sets forth the details of the firm’s
interest income and interest expense:
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Interest
income
(1)
|
||||||||
|
Deposits with banks
|
$ | 15 | $ | 22 | ||||
|
Securities borrowed, securities purchased under agreements to
resell and federal funds sold
|
79 | 551 | ||||||
|
Trading assets, at fair value
|
2,621 | 3,158 | ||||||
|
Other
interest
(2)
|
286 | 631 | ||||||
|
Total interest income
|
$ | 3,001 | $ | 4,362 | ||||
|
Interest expense
|
||||||||
|
Deposits
|
$ | 68 | $ | 150 | ||||
|
Securities loaned and securities sold under agreements to
repurchase, at fair value
|
136 | 545 | ||||||
|
Trading liabilities, at fair value
|
495 | 463 | ||||||
|
Short-term
borrowings
(3)
|
118 | 240 | ||||||
|
Long-term
borrowings
(4)
|
746 | 949 | ||||||
|
Other
interest
(5)
|
20 | 108 | ||||||
|
Total interest expense
|
$ | 1,583 | $ | 2,455 | ||||
|
Net interest income
|
$ | 1,418 | $ | 1,907 | ||||
| (1) | Interest income is recorded on an accrual basis based on contractual interest rates. | |
| (2) | Primarily includes interest income on customer debit balances and other interest-earning assets. | |
| (3) | Includes interest on unsecured short-term borrowings and short-term other secured financings. | |
| (4) | Includes interest on unsecured long-term borrowings and long-term other secured financings. | |
| (5) | Primarily includes interest expense on customer credit balances and other interest-bearing liabilities. |
78
Table of Contents
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and the Shareholders of
The Goldman Sachs Group, Inc.:
We have reviewed the accompanying condensed consolidated
statement of financial condition of The Goldman Sachs Group,
Inc. and its subsidiaries (the Company) as of
March 31, 2010, the related condensed consolidated
statements of earnings for the three months ended
March 31, 2010 and March 27, 2009, the
condensed consolidated statement of changes in
shareholders’ equity for the three months ended
March 31, 2010, the condensed consolidated statements
of cash flows for the three months ended
March 31, 2010 and March 27, 2009, and the
condensed consolidated statements of comprehensive income for
the three months ended March 31, 2010 and
March 27, 2009. These condensed consolidated interim
financial statements are the responsibility of the
Company’s management.
We conducted our review in accordance with the standards of the
Public Company Accounting Oversight Board (United States). A
review of interim financial information consists principally of
applying analytical procedures and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the objective of which is the
expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated interim financial statements for them to be in
conformity with accounting principles generally accepted in the
United States of America.
We previously audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statement of financial condition as of
December 31, 2009, and the related consolidated
statements of earnings, changes in shareholders’ equity,
cash flows and comprehensive income for the year then ended (not
presented herein), and in our report dated
February 26, 2010, we expressed an unqualified opinion
on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
statement of financial condition as of
December 31, 2009 and the condensed consolidated
statement of changes in shareholders’ equity for the year
ended December 31, 2009, is fairly stated in all
material respects in relation to the consolidated financial
statements from which it has been derived.
/s/
PricewaterhouseCoopers LLP
New York, New York
May 7, 2010
79
Table of Contents
STATISTICAL
DISCLOSURES
Distribution
of Assets, Liabilities and Shareholders’
Equity
The following table sets forth a summary of consolidated average
balances and interest rates for the three months ended
March 2010 and March 2009:
| Three Months Ended March | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
|
Average
|
Average
|
|||||||||||||||||||||||
|
Average
|
rate
|
Average
|
rate
|
|||||||||||||||||||||
| balance | Interest | (annualized) | balance | Interest | (annualized) | |||||||||||||||||||
| (in millions, except rates) | ||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Deposits with banks
|
$ | 25,706 | $ | 15 | 0.24 | % | $ | 20,880 | $ | 22 | 0.42 | % | ||||||||||||
|
U.S.
|
19,941 | 11 | 0.22 | 18,422 | 13 | 0.28 | ||||||||||||||||||
|
Non-U.S.
|
5,765 | 4 | 0.28 | 2,458 | 9 | 1.47 | ||||||||||||||||||
|
Securities borrowed, securities purchased under agreements
to resell, at fair value, and federal funds sold |
352,607 | 79 | 0.09 | 355,278 | 551 | 0.62 | ||||||||||||||||||
|
U.S.
|
242,394 | (27 | ) | (0.05 | ) | 264,440 | 161 | 0.24 | ||||||||||||||||
|
Non-U.S.
|
110,213 | 106 | 0.39 | 90,838 | 390 | 1.72 | ||||||||||||||||||
|
Trading
assets
(1)(2)
|
270,056 | 2,621 | 3.94 | 295,731 | 3,158 | 4.28 | ||||||||||||||||||
|
U.S.
|
186,455 | 1,964 | 4.27 | 218,423 | 2,576 | 4.73 | ||||||||||||||||||
|
Non-U.S.
|
83,601 | 657 | 3.19 | 77,308 | 582 | 3.02 | ||||||||||||||||||
|
Other interest-earning
assets
(3)
|
108,298 | 286 | 1.07 | 159,932 | 631 | 1.58 | ||||||||||||||||||
|
U.S.
|
75,028 | 146 | 0.79 | 110,069 | 362 | 1.32 | ||||||||||||||||||
|
Non-U.S.
|
33,270 | 140 | 1.71 | 49,863 | 269 | 2.16 | ||||||||||||||||||
|
Total interest-earning assets
|
756,667 | 3,001 | 1.61 | 831,821 | 4,362 | 2.10 | ||||||||||||||||||
|
Cash and due from banks
|
2,690 | 3,259 | ||||||||||||||||||||||
|
Other noninterest-earning
assets
(2)
|
109,130 | 144,543 | ||||||||||||||||||||||
|
Total assets
|
$ | 868,487 | $ | 979,623 | ||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing deposits
|
$ | 39,026 | $ | 68 | 0.71 | % | $ | 39,525 | $ | 150 | 1.52 | % | ||||||||||||
|
U.S.
|
32,336 | 63 | 0.79 | 34,268 | 136 | 1.59 | ||||||||||||||||||
|
Non-U.S.
|
6,690 | 5 | 0.30 | 5,257 | 14 | 1.07 | ||||||||||||||||||
|
Securities loaned and securities sold under agreements
to repurchase, at fair value |
149,691 | 136 | 0.37 | 187,292 | 545 | 1.17 | ||||||||||||||||||
|
U.S.
|
107,259 | 55 | 0.21 | 136,737 | 149 | 0.44 | ||||||||||||||||||
|
Non-U.S.
|
42,432 | 81 | 0.77 | 50,555 | 396 | 3.14 | ||||||||||||||||||
|
Trading
liabilities
(1)(2)
|
83,875 | 495 | 2.39 | 63,285 | 463 | 2.93 | ||||||||||||||||||
|
U.S.
|
45,440 | 229 | 2.04 | 31,008 | 152 | 1.97 | ||||||||||||||||||
|
Non-U.S.
|
38,435 | 266 | 2.81 | 32,277 | 311 | 3.86 | ||||||||||||||||||
|
Commercial paper
|
1,693 | 1 | 0.26 | 669 | 3 | 1.80 | ||||||||||||||||||
|
U.S.
|
322 | — | 0.10 | 384 | 3 | 3.13 | ||||||||||||||||||
|
Non-U.S.
|
1,371 | 1 | 0.30 | 285 | — | 0.27 | ||||||||||||||||||
|
Other
borrowings
(4)(5)
|
49,261 | 117 | 0.96 | 74,227 | 237 | 1.28 | ||||||||||||||||||
|
U.S.
|
29,520 | 98 | 1.35 | 49,153 | 207 | 1.69 | ||||||||||||||||||
|
Non-U.S.
|
19,741 | 19 | 0.39 | 25,074 | 30 | 0.48 | ||||||||||||||||||
|
Long-term
borrowings
(5)(6)
|
193,471 | 746 | 1.56 | 200,733 | 949 | 1.90 | ||||||||||||||||||
|
U.S.
|
182,695 | 679 | 1.51 | 189,497 | 874 | 1.85 | ||||||||||||||||||
|
Non-U.S.
|
10,776 | 67 | 2.52 | 11,236 | 75 | 2.68 | ||||||||||||||||||
|
Other interest-bearing
liabilities
(7)
|
189,072 | 20 | 0.04 | 226,534 | 108 | 0.19 | ||||||||||||||||||
|
U.S.
|
143,894 | (84 | ) | (0.24 | ) | 158,849 | (73 | ) | (0.18 | ) | ||||||||||||||
|
Non-U.S.
|
45,178 | 104 | 0.93 | 67,685 | 181 | 1.07 | ||||||||||||||||||
|
Total interest-bearing liabilities
|
706,089 | 1,583 | 0.91 | 792,265 | 2,455 | 1.24 | ||||||||||||||||||
|
Noninterest-bearing deposits
|
239 | 83 | ||||||||||||||||||||||
|
Other noninterest-bearing
liabilities
(2)
|
89,727 | 124,214 | ||||||||||||||||||||||
|
Total liabilities
|
796,055 | 916,562 | ||||||||||||||||||||||
|
Shareholders’ equity
|
||||||||||||||||||||||||
|
Preferred stock
|
6,957 | 16,495 | ||||||||||||||||||||||
|
Common stock
|
65,475 | 46,566 | ||||||||||||||||||||||
|
Total shareholders’ equity
|
72,432 | 63,061 | ||||||||||||||||||||||
|
Total liabilities, preferred stock and shareholders’
equity
|
$ | 868,487 | $ | 979,623 | ||||||||||||||||||||
|
Interest rate spread
|
0.70 | % | 0.86 | % | ||||||||||||||||||||
|
Net interest income and net yield on interest-earning assets
|
$ | 1,418 | 0.76 | $ | 1,907 | 0.92 | ||||||||||||||||||
|
U.S.
|
1,054 | 0.82 | 1,664 | 1.09 | ||||||||||||||||||||
|
Non-U.S.
|
364 | 0.63 | 243 | 0.44 | ||||||||||||||||||||
|
Percentage of interest-earning assets and
interest-bearing
liabilities attributable to
non-U.S. operations
(8)
|
||||||||||||||||||||||||
|
Assets
|
30.77 | % | 26.50 | % | ||||||||||||||||||||
|
Liabilities
|
23.31 | 24.28 | ||||||||||||||||||||||
80
Table of Contents
STATISTICAL
DISCLOSURES
| (1) | Consists of cash trading instruments, including equity securities and convertible debentures. |
| (2) | Derivative instruments are included in other noninterest-earning assets and other noninterest-bearing liabilities. |
| (3) | Primarily consists of cash and securities segregated for regulatory and other purposes and receivables from customers and counterparties. |
| (4) | Consists of short-term other secured financings and unsecured short-term borrowings, excluding commercial paper. |
| (5) | Interest rates include the effects of interest rate swaps accounted for as hedges. |
| (6) | Consists of long-term other secured financings and unsecured long-term borrowings. |
| (7) | Primarily consists of payables to customers and counterparties. |
| (8) | Assets, liabilities and interest are attributed to U.S. and non-U.S. based on the location of the legal entity in which the assets and liabilities are held. |
81
Table of Contents
STATISTICAL
DISCLOSURES
Ratios
The following table sets forth selected financial ratios:
| Three Months Ended March | ||||||||
| 2010 | 2009 | |||||||
|
Annualized net earnings to average assets
|
1.6 | % | 0.7 | % | ||||
|
Annualized return on average common shareholders’
equity
(1)
|
20.1 | 14.3 | ||||||
|
Annualized return on average total shareholders’
equity
(2)
|
19.1 | 11.5 | ||||||
|
Total average equity to average assets
|
8.3 | 6.4 | ||||||
| (1) | Based on annualized net earnings applicable to common shareholders divided by average monthly common shareholders’ equity. | |
| (2) | Based on annualized net earnings divided by average monthly total shareholders’ equity. |
Cross-border
Outstandings
Cross-border outstandings are based upon the Federal Financial
Institutions Examination Council’s (FFIEC) regulatory
guidelines for reporting cross-border risk. Claims include cash,
receivables, securities purchased under agreements to resell,
securities borrowed and cash trading instruments, but exclude
derivative instruments and commitments. Securities purchased
under agreements to resell and securities borrowed are presented
based on the domicile of the counterparty, without reduction for
related securities collateral held.
The following tables set forth cross-border outstandings for
each country in which cross-border outstandings exceed 0.75% of
consolidated assets as of March 2010 and December 2009
in accordance with the FFIEC guidelines:
| As of March 2010 | ||||||||||||||||
| Banks | Governments | Other | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Country
|
||||||||||||||||
|
United Kingdom
|
$ | 4,905 | $ | 4,693 | $ | 51,611 | $ | 61,209 | ||||||||
|
France
|
18,929 | 3,838 | 6,153 | 28,920 | ||||||||||||
|
Japan
|
15,027 | 155 | 6,511 | 21,693 | ||||||||||||
|
Germany
|
7,878 | 5,951 | 2,723 | 16,552 | ||||||||||||
|
China
|
8,899 | 755 | 4,702 | 14,356 | ||||||||||||
|
Cayman Islands
|
1 | — | 10,703 | 10,704 | ||||||||||||
|
Ireland
|
5,463 | 127 | 3,832 | 9,422 | ||||||||||||
|
Switzerland
|
1,510 | 22 | 6,302 | 7,834 | ||||||||||||
|
Italy
|
1,251 | 4,635 | 741 | 6,627 | ||||||||||||
| As of December 2009 | ||||||||||||||||
| Banks | Governments | Other | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Country
|
||||||||||||||||
|
United Kingdom
|
$ | 3,276 | $ | 4,843 | $ | 52,342 | $ | 60,461 | ||||||||
|
Japan
|
18,251 | 107 | 6,624 | 24,982 | ||||||||||||
|
France
|
8,844 | 4,648 | 5,863 | 19,355 | ||||||||||||
|
Germany
|
8,610 | 6,050 | 3,594 | 18,254 | ||||||||||||
|
China
|
9,105 | 108 | 4,196 | 13,409 | ||||||||||||
|
Ireland
|
5,633 | 20 | 1,815 | 7,468 | ||||||||||||
82
Table of Contents
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INDEX
|
Page
|
||||
| No. | ||||
| 84 | ||||
| 85 | ||||
| 87 | ||||
| 88 | ||||
| 97 | ||||
| 98 | ||||
| 108 | ||||
| 109 | ||||
| 116 | ||||
| 118 | ||||
| 123 | ||||
| 124 | ||||
| 128 | ||||
| 136 | ||||
| 137 | ||||
83
Table of Contents
Introduction
The Goldman Sachs Group, Inc. (Group Inc.) is a leading
global investment banking, securities and investment management
firm that provides a wide range of financial services to a
substantial and diversified client base that includes
corporations, financial institutions, governments and
high-net-worth
individuals. Founded in 1869, the firm is headquartered in New
York and maintains offices in London, Frankfurt, Tokyo, Hong
Kong and other major financial centers around the world.
Our activities are divided into three segments:
| • | Investment Banking. We provide a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals. | |
| • | Trading and Principal Investments. We facilitate client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. We also take proprietary positions on certain of these products. In addition, we engage in market-making activities on equities and options exchanges, and we clear client transactions on major stock, options and futures exchanges worldwide. In connection with our merchant banking and other investing activities, we make principal investments directly and through funds that we raise and manage. | |
| • | Asset Management and Securities Services. We provide investment and wealth advisory services and offer investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provide prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide. |
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
References herein to our Annual Report on
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
When we use the terms “Goldman Sachs,” “the
firm,” “we,” “us” and “our,”
we mean Group Inc., a Delaware corporation, and its
consolidated subsidiaries.
All references to March 2010 and March 2009, unless
specifically stated otherwise, refer to our fiscal periods
ended, or the dates, as the context requires,
March 31, 2010 and March 27, 2009,
respectively. Beginning with the fourth quarter of fiscal 2009,
we changed our fiscal year-end from the last Friday of December
to December 31. All references to December 2009,
unless specifically stated otherwise, refer to our fiscal year
ended, or the date, as the context requires,
December 31, 2009. All references to 2010, unless
specifically stated otherwise, refer to our year ending, or the
date, as the context requires, December 31, 2010.
84
Table of Contents
Executive
Overview
Our diluted earnings per common share were $5.59 for the first
quarter of 2010 compared with $3.39 for the first quarter of
2009. Annualized return on average common shareholders’
equity
(ROE)
(1)
was 20.1% for the first quarter of 2010. Our Tier 1 capital
ratio under
Basel I
(2)
was 15.0% as of March 2010. Our Tier 1 common ratio
under
Basel I
(3)
was 12.4% as of March 2010.
Net revenues in Trading and Principal Investments were
significantly higher compared with the first quarter of 2009,
reflecting significantly improved results in Principal
Investments, as well as higher net revenues in Fixed Income,
Currency and Commodities (FICC) and Equities. In the first
quarter of 2010, results in Principal Investments included a net
gain of $760 million from corporate principal investments,
partially offset by a loss of $222 million related to our
investment in the ordinary shares of Industrial and Commercial
Bank of China Limited (ICBC) and a net loss of $34 million
from real estate principal investments. In the first quarter of
2009, results in Principal Investments included net losses of
$640 million from real estate principal investments and
$621 million from corporate principal investments, as well
as a loss of $151 million related to our investment in the
ordinary shares of ICBC. The increase in FICC reflected strength
in the client franchise and included strong performances in
credit products, mortgages and currencies, which were each
significantly higher compared with the first quarter of 2009.
Net revenues in interest rate products and commodities were also
strong, although each was significantly lower compared with
particularly strong results in the first quarter of 2009. During
the first quarter of 2009, credit products included losses from
corporate debt and private equity investments, and mortgages
included a loss of approximately $800 million (excluding
hedges) on commercial mortgage loans and securities. During the
first quarter of 2010, FICC operated in an environment
characterized by strong client-driven activity, increased
volumes across several businesses, tighter bid/offer spreads and
a decline in volatility levels. Net revenues in Equities for the
first quarter of 2010 reflected strong net revenues in
derivatives, which were significantly higher compared with the
first quarter of 2009. In addition, results in principal
strategies were positive compared with losses in the first
quarter of 2009. Commissions were lower compared with the first
quarter of 2009, reflecting generally lower market volumes.
During the quarter, Equities operated in an environment largely
characterized by an increase in global equity prices and a
decline in volatility levels.
Net revenues in Investment Banking also increased compared with
the first quarter of 2009, reflecting significantly higher net
revenues in our Underwriting business, partially offset by lower
net revenues in Financial Advisory. Net revenues in equity
underwriting were significantly higher, primarily reflecting a
significant increase in
industry-wide
equity and
equity-related
offerings compared with a difficult first quarter of 2009. Net
revenues in debt underwriting were also significantly higher,
primarily reflecting an increase in leveraged finance activity.
The decrease in Financial Advisory reflected a decline in
industry-wide
completed mergers and acquisitions. Our investment banking
transaction backlog was essentially unchanged compared with the
end of 2009.
(4)
| (1) | Annualized ROE is computed by dividing annualized net earnings applicable to common shareholders by average monthly common shareholders’ equity. See “— Results of Operations — Financial Overview” below for further information regarding our calculation of ROE. |
| (2) | As a bank holding company, we are subject to consolidated regulatory capital requirements administered by the Board of Governors of the Federal Reserve System (Federal Reserve Board). We are reporting our Tier 1 capital ratio calculated in accordance with the regulatory capital requirements currently applicable to bank holding companies, which are based on the Capital Accord of the Basel Committee on Banking Supervision (Basel I). The Tier 1 capital ratio equals Tier 1 capital divided by risk-weighted assets (RWAs). See “ — Equity Capital — Consolidated Capital Requirements” below for further information regarding our Tier 1 capital ratio. |
| (3) | The Tier 1 common ratio equals Tier 1 capital less preferred stock and junior subordinated debt issued to trusts, divided by RWAs. We believe that the Tier 1 common ratio is meaningful because it is one of the measures that we and investors use to assess capital adequacy. See “— Equity Capital — Capital Ratios and Metrics” below for further information regarding our Tier 1 common ratio. |
| (4) | Our investment banking transaction backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not. |
85
Table of Contents
Net revenues in Asset Management and Securities Services
decreased compared with the first quarter of 2009, reflecting
lower net revenues in Securities Services. The decline in
Securities Services primarily reflected tighter securities
lending spreads, principally due to the impact of changes in the
composition of securities lending customer balances, partially
offset by the impact of higher average customer balances. Net
revenues in Asset Management were essentially unchanged compared
with the first quarter of 2009. During the first quarter of
2010, assets under management decreased $31 billion to
$840 billion, due to $39 billion of net outflows,
primarily reflecting outflows in money market assets, consistent
with industry trends, partially offset by inflows in fixed
income assets, and $8 billion of market appreciation,
primarily in equity assets.
The accrual for compensation and benefits expenses was 43.0% of
net revenues for the first quarter of 2010, down from 50.0% for
the first quarter of 2009. The ratio of compensation and
benefits to net revenues for the first quarter of 2010 is our
lowest ever first quarter ratio, 650 basis points lower than our
historical reported first quarter average ratio of 49.5%.
In order to offset increases in share count resulting from
employee
share-based
compensation, we repurchased 13.2 million shares of our
common stock during the first quarter of 2010 at an average cost
per share of $172.15, for a total cost of $2.27 billion.
Including the effect of these share repurchases, common
shareholders’ equity increased $2.23 billion to
$65.99 billion during the quarter. In addition, book value
per common share increased 4% during the quarter to $122.52 and
tangible book value per common share
(1)
increased 3% during the quarter to $111.41.
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
“Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K.
| (1) | 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. See “— Equity Capital — Capital Ratios and Metrics” below for further information regarding tangible common shareholders’ equity and tangible book value per common share. |
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Business
Environment
Global economic conditions generally improved during the first
quarter of 2010 as real gross domestic product (GDP) increased
in most economies. Global equity markets largely increased
during the first quarter and volatility levels across fixed
income and equity markets declined. The U.S. dollar
appreciated against the Euro, the British pound and the Japanese
yen. Investment banking activity generally declined during the
first quarter, with significant declines in
industry-wide
completed mergers and acquisitions and
industry-wide
equity and
equity-related
offerings.
In the U.S., real GDP increased during the first quarter,
although at a slower pace than in the fourth quarter of 2009.
The rate of unemployment declined slightly and consumer spending
improved during the first quarter. Measures of core inflation
continued to decline during the quarter, reflecting significant
excess production capacity. The U.S. Federal Reserve
maintained its federal funds rate at a target range of zero to
0.25% during the first quarter. The
10-year
U.S. Treasury note yield ended the first quarter at 3.84%,
essentially unchanged from the end of 2009. In equity markets,
the NASDAQ Composite Index, the S&P 500 Index and the Dow
Jones Industrial Average increased by 6%, 5% and 4%,
respectively, during the first quarter.
In the Eurozone economies, real GDP appeared to increase during
the first quarter, driven by an increase in industrial
production. In addition, surveys of business confidence
continued to improve. However, concerns about fiscal challenges
in certain Eurozone economies intensified over the quarter,
weighing on markets and economic growth in these economies. In
addition, labor markets remained weak, with the rate of
unemployment rising in most of the major economies. Although the
rate of overall inflation increased moderately, measures of core
inflation continued to fall during the first quarter. The
European Central Bank kept its main refinancing operations rate
unchanged at 1.00% and the Euro depreciated by 6% against the
U.S. dollar. In the U.K., real GDP increased during the
first quarter, partially driven by an increase in exports. The
Bank of England maintained its official bank rate at 0.50% and
the British pound depreciated by 6% against the
U.S. dollar.
Long-term
government bond yields in both the Eurozone and the U.K.
decreased during the first quarter. The FTSE 100 Index, the DAX
Index and the CAC 40 Index increased 5%, 3% and 1%,
respectively, during the first quarter, while the Euro Stoxx 50
Index declined by 1% during the quarter.
In Japan, real GDP appeared to increase during the first
quarter, primarily driven by a significant increase in exports.
Government fiscal stimulus programs supported an increase in
consumer spending during the quarter. Measures of core inflation
generally remained negative. The Bank of Japan left its target
overnight call rate unchanged at 0.10%, while the yield on
10-year
Japanese government bonds increased during the quarter. The
Japanese yen depreciated slightly against the U.S. dollar
and the Nikkei 225 Index increased 5% during the first quarter.
In China, real GDP growth remained strong during the first
quarter. Growth was driven by strong fixed investment spending
and consumption. The rate of inflation increased during the
quarter. The People’s Bank of China increased the reserve
requirement ratio by 100 basis points during the quarter. The
Chinese yuan remained essentially unchanged against the
U.S. dollar and the Shanghai Composite Index decreased by
5% during the first quarter. In India, economic growth was
strong, supported by continued growth in domestic demand. The
Indian rupee appreciated by 4% against the U.S. dollar. The
Hang Seng Index declined by 3% during the first quarter, while
equity markets in Korea and India ended the quarter essentially
unchanged.
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Critical
Accounting Policies
Fair
Value
The use of fair value to measure financial instruments, with
related gains or losses generally recognized in “Trading
and principal investments” in our condensed consolidated
statements of earnings, is fundamental to our financial
statements and our risk management processes and is our most
critical accounting policy. The fair value of a financial
instrument is the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
(i.e., the exit price). Financial assets are marked to bid
prices and financial liabilities are marked to offer prices.
Fair value measurements do not include transaction costs.
Substantially all trading assets and trading liabilities are
reflected in our condensed consolidated statements of financial
condition at fair value. In determining fair value, we separate
our trading assets, at fair value and trading liabilities, at
fair value into two categories: cash instruments and derivative
contracts, as set forth in the following table:
Trading
Instruments by Category
(in millions)
(in millions)
| As of March 2010 | As of December 2009 | |||||||||||||||
|
Trading
|
Trading
|
Trading
|
Trading
|
|||||||||||||
|
Assets, at
|
Liabilities, at
|
Assets, at
|
Liabilities, at
|
|||||||||||||
| Fair Value | Fair Value | Fair Value | Fair Value | |||||||||||||
|
Cash trading instruments
|
$ | 247,318 | $ | 86,220 | $ | 244,124 | $ | 72,117 | ||||||||
|
ICBC
|
7,538 | (1) | — | 8,111 | (1) | — | ||||||||||
|
SMFG
|
— | — | 933 | 893 | (4) | |||||||||||
|
Other principal investments
|
14,006 | (2) | — | 13,981 | (2) | — | ||||||||||
|
Principal investments
|
21,544 | — | 23,025 | 893 | ||||||||||||
|
Cash instruments
|
268,862 | 86,220 | 267,149 | 73,010 | ||||||||||||
|
Exchange-traded
|
6,816 | 1,954 | 6,831 | 2,548 | ||||||||||||
|
Over-the-counter
|
63,757 | 51,907 | 68,422 | 53,461 | ||||||||||||
|
Derivative contracts
|
70,573 | (3) | 53,861 | (5) | 75,253 | (3) | 56,009 | (5) | ||||||||
|
Total
|
$ | 339,435 | $ | 140,081 | $ | 342,402 | $ | 129,019 | ||||||||
| (1) | Includes interests of $4.76 billion and $5.13 billion as of March 2010 and December 2009, respectively, held by investment funds managed by Goldman Sachs. The fair value of our investment in the ordinary shares of ICBC, which trade on The Stock Exchange of Hong Kong, includes the effect of foreign exchange revaluation for which we maintain an economic currency hedge. |
| (2) | The following table sets forth the principal investments (other than our investments in ICBC and Sumitomo Mitsui Financial Group, Inc. (SMFG)) included within the Principal Investments component of our Trading and Principal Investments segment: |
| As of March 2010 | As of December 2009 | |||||||||||||||||||||||
| Corporate | Real Estate | Total | Corporate | Real Estate | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Private
|
$ | 9,960 | $ | 1,235 | $ | 11,195 | $ | 9,507 | $ | 1,325 | $ | 10,832 | ||||||||||||
|
Public
|
2,758 | 53 | 2,811 | 3,091 | 58 | 3,149 | ||||||||||||||||||
|
Total
|
$ | 12,718 | $ | 1,288 | $ | 14,006 | $ | 12,598 | $ | 1,383 | $ | 13,981 | ||||||||||||
| (3) | Net of cash received pursuant to credit support agreements of $118.75 billion and $124.60 billion as of March 2010 and December 2009, respectively. | |
| (4) | Represents an economic hedge on the shares of common stock underlying our investment in the convertible preferred stock of SMFG. | |
| (5) | Net of cash paid pursuant to credit support agreements of $14.50 billion and $14.74 billion as of March 2010 and December 2009, respectively. |
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Table of Contents
Cash Instruments.
Cash instruments include
cash trading instruments, public principal investments and
private principal investments.
| • | Cash Trading Instruments. Our cash trading instruments (e.g., equity and debt securities) are generally valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted prices in active markets include U.S. and non-U.S. government obligations, actively traded listed equities and certain money market instruments. |
The types of instruments that trade in markets that are not
considered to be active, but are valued based on quoted market
prices, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
commercial paper, certificates of deposit, time deposits, most
government agency obligations, most corporate debt securities,
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 loan
commitments.
Certain cash trading instruments trade infrequently and
therefore have little or no price transparency. Such instruments
include private equity investments and real estate fund
investments, certain bank loans and bridge loans (including
certain mezzanine financing, leveraged loans arising from
capital market transactions and other corporate bank debt), less
liquid corporate debt securities and other debt obligations
(including less liquid corporate bonds, distressed debt
instruments and collateralized debt obligations (CDOs) backed by
corporate obligations), less liquid mortgage whole loans and
securities (backed by either commercial or residential real
estate), and acquired portfolios of distressed loans. For these
instruments, the transaction price is initially used as the best
estimate of fair value. Accordingly, when a pricing model is
used to value such an instrument, the model is adjusted so that
the model value at inception equals the transaction price. This
valuation is adjusted only when changes to inputs and
assumptions are corroborated by evidence such as transactions in
similar instruments, completed or pending
third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity or debt capital markets, and changes in financial
ratios or cash flows.
For positions that are not traded in active markets or are
subject to transfer restrictions, valuations are adjusted to
reflect illiquidity
and/or
non-transferability.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
| • | Public Principal Investments. Our public principal investments held within the Principal Investments component of our Trading and Principal Investments segment tend to be large, concentrated holdings resulting from initial public offerings or other corporate transactions, and are valued based on quoted market prices. For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on market evidence where available. In the absence of such evidence, management’s best estimate is used. |
Our investment in the ordinary shares of ICBC is valued using
the quoted market price adjusted for transfer restrictions.
Under the original transfer restrictions, the ICBC shares we
held would have become free from transfer restrictions in equal
installments on April 28, 2009 and
October 20, 2009. During the quarter ended
March 2009, the shares became subject to new supplemental
transfer restrictions. Under these new supplemental transfer
restrictions, on April 28, 2009, 20% of the ICBC
shares that we held became free from transfer restrictions and
we completed the disposition of these shares during the second
quarter of 2009, while the remaining shares were subject to
transfer restrictions until April 28, 2010. As of
April 28, 2010, all of our remaining ICBC shares
became free from transfer restrictions.
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Table of Contents
Our investment in the convertible preferred stock of SMFG was
valued using a model that is principally based on SMFG’s
common stock price. During 2008, we converted
one-third
of
our SMFG preferred stock investment into SMFG common stock and
delivered the common stock to close out
one-third
of
our hedge position. During the first quarter of 2010, we
converted the remaining two-thirds of our SMFG preferred stock
investment into common stock and delivered the common stock to
close out our remaining hedge position.
| • | Private Principal Investments. Our private principal investments held within the Principal Investments component of our Trading and Principal Investments segment include investments in private equity, debt and real estate, primarily held through investment funds. By their nature, these investments have little or no price transparency. We value such instruments initially at transaction price and adjust valuations when evidence is available to support such adjustments. Such evidence includes recent third-party investments or pending transactions, third-party independent appraisals, transactions in similar instruments, discounted cash flow techniques, valuation multiples and public comparables. |
Derivative Contracts.
Derivative contracts can
be
exchange-traded
or
over-the-counter
(OTC). We generally value
exchange-traded
derivatives using models which calibrate to
market-clearing
levels and eliminate timing differences between the closing
price of the
exchange-traded
derivatives and their underlying instruments.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including
market-based
inputs to models, calibration to
market-clearing
transactions, broker or dealer quotations, or other alternative
pricing sources with reasonable levels of price transparency.
Where models are used, the selection of a particular model to
value an OTC derivative depends upon the contractual terms of,
and specific risks inherent in, the instrument, as well as the
availability of pricing information in the market. We generally
use similar models to value similar instruments. Valuation
models require a variety of inputs, including contractual terms,
market prices, yield curves, credit curves, measures of
volatility, voluntary and involuntary prepayment rates, loss
severity rates and correlations of such inputs. For OTC
derivatives that trade in liquid markets, such as generic
forwards, swaps and options, model inputs can generally be
verified and model selection does not involve significant
management judgment.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. Where we do
not have corroborating market evidence to support significant
model inputs and cannot verify the model to market transactions,
the transaction price is initially used as the best estimate of
fair value. Accordingly, when a pricing model is used to value
such an instrument, the model is adjusted so that the model
value at inception equals the transaction price. Subsequent to
initial recognition, we only update valuation inputs when
corroborated by evidence such as similar market transactions,
third-party
pricing services
and/or
broker or dealer quotations, or other empirical market data. In
circumstances where we cannot verify the model value to market
transactions, it is possible that a different valuation model
could produce a materially different estimate of fair value. See
“— Derivatives” below for further
information on our OTC derivatives.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on market evidence where
available. In the absence of such evidence, management’s
best estimate is used.
Controls Over Valuation of Financial
Instruments.
A control infrastructure,
independent of the trading and investing functions, is
fundamental to ensuring that our financial instruments are
appropriately valued at
market-clearing
levels (i.e., exit prices) and that fair value measurements
are reliable and consistently determined.
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Table of Contents
We employ an oversight structure that includes appropriate
segregation of duties. Senior management, independent of the
trading and investing functions, is responsible for the
oversight of control and valuation policies and for reporting
the results of these policies to the Audit Committee of the
Board of Directors of Group Inc. (Board). We seek to maintain
the necessary resources to ensure that control functions are
performed appropriately. We employ procedures for the approval
of new transaction types and markets, price verification, review
of daily profit and loss, and review of valuation models by
personnel with appropriate technical knowledge of relevant
products and markets. These procedures are performed by
personnel independent of the trading and investing functions.
For financial instruments where prices or valuations that
require inputs are less observable, we employ, where possible,
procedures that include comparisons with similar observable
positions, analysis of actual to projected cash flows,
comparisons with subsequent sales, reviews of valuations used
for collateral management purposes and discussions with senior
business leaders. See
“— Market
Risk” and
“— Credit
Risk” below for a further discussion of how we manage the
risks inherent in our trading and principal investing businesses.
Fair Value Hierarchy —
Level 3.
The fair value hierarchy under
Financial Accounting Standards Board Accounting Standards
Codification (ASC) 820 prioritizes the inputs to valuation
techniques used to measure fair value. The objective of a fair
value measurement is to determine the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date (i.e., the exit price). The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1
measurements) and the lowest priority to unobservable inputs
(level 3 measurements). Assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
Instruments that trade infrequently and therefore have little or
no price transparency are classified within level 3 of the
fair value hierarchy. We determine which instruments are
classified within level 3 based on the results of our price
verification process. This process is performed by personnel
independent of our trading and investing functions who
corroborate valuations to external market data
(e.g., quoted market prices, broker or dealer quotations,
third-party
pricing vendors, recent trading activity and comparative
analyses to similar instruments). Instruments with valuations
which cannot be corroborated to external market data are
classified within level 3 of the fair value hierarchy.
When broker or dealer quotations or
third-party
pricing vendors are used for valuation or price verification,
greater priority is generally given to executable quotes. As
part of our price verification process, valuations based on
quotes are corroborated by comparison both to other quotes and
to recent trading activity in the same or similar instruments.
The number of quotes obtained varies by instrument and depends
on the liquidity of the particular instrument. See Notes 2
and 3 to the condensed consolidated financial statements in
Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding fair value measurements.
Valuation Methodologies for Level 3
Assets.
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. Regardless of the methodology, valuation inputs and
assumptions are only changed when corroborated by substantive
evidence. Senior management in control functions, independent of
the trading and investing functions, reviews all significant
unrealized gains/losses, including the primary drivers of the
change in value. Valuations are further corroborated by values
realized upon sales of our level 3 assets. See Note 2
to the condensed consolidated financial statements in
Part I, Item 1 of this Quarterly Report on
Form 10-Q
for an overview of methodologies used to value our level 3
assets subsequent to the transaction date.
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Table of Contents
Total level 3 assets were $45.15 billion and
$46.48 billion as of March 2010 and
December 2009, respectively. The decrease in level 3
assets during the first quarter of 2010 primarily reflected
sales and paydowns of loans and securities backed by commercial
real estate, and bank loans and bridge loans, as well as net
reductions in level 3 financial instruments as a result of
the consolidations of certain VIEs.
The following table sets forth the fair values of financial
assets classified within level 3 of the fair value
hierarchy:
Level 3
Financial Assets at Fair Value
(in millions)
(in millions)
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
|
Equities and convertible
debentures
(1)
|
$ | 10,653 | $ | 11,871 | ||||
|
Bank loans and bridge
loans
(2)
|
9,323 | 9,560 | ||||||
|
Corporate debt
securities
(3)
|
2,703 | 2,235 | ||||||
|
State and municipal obligations
|
870 | 1,114 | ||||||
|
Other debt obligations
|
1,487 | 2,235 | ||||||
|
Mortgage and other
asset-backed
loans and securities:
|
||||||||
|
Loans and securities backed by commercial real estate
|
4,070 | 4,620 | ||||||
|
Loans and securities backed by residential real estate
|
2,131 | 1,880 | ||||||
|
Loan
portfolios
(4)
|
1,291 | 1,364 | ||||||
|
Cash instruments
|
32,528 | 34,879 | ||||||
|
Derivative contracts
|
12,123 | 11,596 | ||||||
|
Securities purchased under agreements to resell
|
268 | — | ||||||
|
Receivables from customers and counterparties
|
234 | — | ||||||
|
Total level 3 assets at fair value
|
45,153 | 46,475 | ||||||
|
Level 3 assets for which we do not bear economic
exposure
(5)
|
(2,640 | ) | (3,127 | ) | ||||
|
Level 3 assets for which we bear economic exposure
|
$ | 42,513 | $ | 43,348 | ||||
| (1) | Substantially all consists of private equity investments and real estate fund investments. Real estate investments were $968 million and $1.23 billion as of March 2010 and December 2009, respectively. | |
| (2) | Includes certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt. | |
| (3) | Includes $802 million and $741 million as of March 2010 and December 2009, respectively, of CDOs and collateralized loan obligations backed by corporate obligations. | |
| (4) | Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. | |
| (5) | We do not bear economic exposure to these level 3 assets as they are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds. |
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Table of Contents
Loans and securities backed by residential real
estate.
We securitize, underwrite and make
markets in various types of residential mortgages, including
prime,
Alt-A
and subprime. At any point in time, we may use cash instruments
as well as derivatives to manage our long or short risk position
in residential real estate. The following table sets forth the
fair value of our long positions in prime,
Alt-A
and
subprime mortgage cash instruments:
Long Positions in
Loans and Securities Backed by Residential Real Estate
(in millions)
(in millions)
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
|
Prime
(1)
|
$ | 2,087 | $ | 2,483 | ||||
|
Alt-A
|
1,419 | 1,761 | ||||||
|
Subprime
(2)
|
2,151 | 2,460 | ||||||
|
Total
(3)
|
$ | 5,657 | $ | 6,704 | ||||
| (1) | Excludes U.S. government agency-issued collateralized mortgage obligations of $10.02 billion and $6.33 billion as of March 2010 and December 2009, respectively. Also excludes U.S. government agency-issued mortgage pass-through certificates. | |
| (2) | Includes $350 million and $381 million of CDOs backed by subprime mortgages as of March 2010 and December 2009, respectively. | |
| (3) | Includes $2.13 billion and $1.88 billion of financial instruments (primarily loans and investment-grade securities, the majority of which were issued during 2006 and 2007) classified within level 3 of the fair value hierarchy as of March 2010 and December 2009, respectively. |
Loans and securities backed by commercial real
estate.
We originate, securitize and syndicate
fixed and floating rate commercial mortgages globally. At any
point in time, we may use cash instruments as well as
derivatives to manage our risk position in the commercial
mortgage market. The following table sets forth the fair value
of our long positions in loans and securities backed by
commercial real estate by geographic region:
Long Positions in
Loans and Securities Backed by
Commercial Real Estate by Geographic Region
(in millions)
Commercial Real Estate by Geographic Region
(in millions)
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
|
Americas
(1)
|
$ | 5,571 | $ | 5,157 | ||||
|
EMEA
(2)
|
660 | 1,032 | ||||||
|
Asia
|
10 | 14 | ||||||
|
Total
(3)
|
$ | 6,241 | (4) | $ | 6,203 | (5) | ||
| (1) | Substantially all relates to the U.S. | |
| (2) | EMEA (Europe, Middle East and Africa). | |
| (3) | Includes $4.07 billion and $4.62 billion of financial instruments classified within level 3 of the fair value hierarchy as of March 2010 and December 2009, respectively. | |
| (4) | Comprised of loans of $4.20 billion and commercial mortgage-backed securities of $2.04 billion as of March 2010, of which $4.98 billion was floating rate and $1.26 billion was fixed rate. | |
| (5) | Comprised of loans of $4.70 billion and commercial mortgage-backed securities of $1.50 billion as of December 2009, of which $5.68 billion was floating rate and $519 million was fixed rate. |
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Table of Contents
Other Financial Assets and Financial Liabilities at Fair
Value.
In addition to trading assets, at fair
value and trading liabilities, at fair value, we have elected to
account for certain of our other financial assets and financial
liabilities at fair value under ASC
815-15
and
ASC
825-10
(i.e., the fair value option). The primary reasons for
electing the fair value option are to reflect economic events in
earnings on a timely basis, to mitigate volatility in earnings
from using different measurement attributes and to address
simplification and
cost-benefit
considerations.
Such financial assets and financial liabilities accounted for at
fair value include:
| • | certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; | |
| • | certain other secured financings, primarily transfers of financial assets accounted for as financings rather than sales, debt raised through our William Street credit extension program and certain other nonrecourse financings; | |
| • | certain unsecured long-term borrowings, including prepaid physical commodity transactions and certain hybrid financial instruments; | |
| • | resale and repurchase agreements; | |
| • | securities borrowed and loaned within Trading and Principal Investments, consisting of our matched book and certain firm financing activities; | |
| • | certain deposits issued by our bank subsidiaries, as well as securities held by GS Bank USA; | |
| • | certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards; | |
| • | certain insurance and reinsurance contracts and certain guarantees; | |
| • | certain subordinated liabilities issued by consolidated VIEs; and | |
| • | in general, investments acquired after November 24, 2006, when the fair value option became available, where we have significant influence over the investee and would otherwise apply the equity method of accounting. In certain cases, we apply the equity method of accounting to new investments that are strategic in nature or closely related to our principal business activities, where we have a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. |
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Table of Contents
Goodwill and
Identifiable Intangible Assets
As a result of our acquisitions, principally SLK LLC (SLK) in
2000, The Ayco Company, L.P. (Ayco) in 2003 and our variable
annuity and life insurance business in 2006, we have acquired
goodwill and identifiable intangible assets. Goodwill is the
cost of acquired companies in excess of the fair value of net
assets, including identifiable intangible assets, at the
acquisition date.
Goodwill.
We test the goodwill in each of our
operating segments, which are components one level below our
three business segments, for impairment at least annually, by
comparing the estimated fair value of each operating segment
with its estimated net book value. We derive the fair value of
each of our operating segments based on valuation techniques we
believe market participants would use for each segment
(observable average
price-to-earnings
multiples of our competitors in these businesses and
price-to-book
multiples). We derive the net book value of our operating
segments by estimating the amount of shareholders’ equity
required to support the activities of each operating segment.
Our last annual impairment test was performed during our 2009
fourth quarter and no impairment was identified.
The following table sets forth the carrying value of our
goodwill by operating segment:
Goodwill by
Operating Segment
(in millions)
(in millions)
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
|
Investment Banking
|
||||||||
|
Underwriting
|
$ | 125 | $ | 125 | ||||
|
Trading and Principal Investments
|
||||||||
|
FICC
|
297 | 265 | ||||||
|
Equities
(1)
|
2,389 | 2,389 | ||||||
|
Principal Investments
|
84 | 84 | ||||||
|
Asset Management and Securities Services
|
||||||||
|
Asset
Management
(2)
|
563 | 563 | ||||||
|
Securities Services
|
117 | 117 | ||||||
|
Total
|
$ | 3,575 | $ | 3,543 | ||||
| (1) | Primarily related to SLK. | |
| (2) | Primarily related to Ayco. |
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.
95
Table of Contents
The following table sets forth the carrying value and range of
estimated remaining lives of our identifiable intangible assets
by major asset class:
Identifiable
Intangible Assets by Asset Class
($ in millions)
($ in millions)
|
As of
|
As of
|
|||||||||||
| March 2010 | December 2009 | |||||||||||
|
Range of Estimated
|
||||||||||||
|
Carrying
|
Remaining Lives
|
Carrying
|
||||||||||
| Value | (in years) | Value | ||||||||||
|
Customer
lists
(1)
|
$ | 630 | 1-15 | $ | 645 | |||||||
|
Broadcast
royalties
(2)
|
545 | 9 | — | |||||||||
|
Commodities-related
intangibles
(3)
|
543 | 1-49 | 30 | |||||||||
|
New York Stock Exchange (NYSE) Designated Market Maker
(DMM) rights
|
410 | 12 | 420 | |||||||||
|
Insurance-related
intangibles
(4)
|
152 | 6 | 150 | |||||||||
|
Exchange-traded
fund (ETF) lead market maker rights
|
88 | 17 | 90 | |||||||||
|
Other
(5)
|
40 | 1-16 | 42 | |||||||||
|
Total
|
$ | 2,408 | $ | 1,377 | ||||||||
| (1) | Primarily includes our clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco. | |
| (2) | Represents television broadcast royalties held by a VIE consolidated upon adoption of Accounting Standards Update (ASU) No. 2009-17. | |
| (3) | Primarily includes commodity-related customer contracts and relationships, permits and access rights acquired during the first quarter of 2010. | |
| (4) | Primarily includes the value of business acquired related to our insurance businesses. | |
| (5) | Primarily includes marketing-related assets and other contractual rights. |
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 exchange-based
market-making
businesses (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.
In October 2008, the SEC approved the NYSE’s proposal
to create a new market model and redefine the role of NYSE DMMs.
In June 2009, the NYSE successfully completed the rollout
of new systems architecture that further reduces order
completion time, which enables the NYSE to offer competitive
execution speeds, while continuing to incorporate the price
discovery provided by DMMs. Following solid performance during
the first half of 2009, our DMM business has been adversely
impacted primarily by the lack of timely market data in the
internal order/execution system of the NYSE (which, at times,
results in DMMs making markets without real-time price
information) and to a lesser extent, by lower trading volumes
and lower volatility. In 2010, the NYSE is expected to address
this market data issue. There can be no assurance that changes
in these factors will result in sufficient cash flows to avoid
impairment of our NYSE DMM rights in the future. In accordance
with the requirements of ASC 360, we will be closely monitoring
the performance of our DMM business to determine whether an
impairment loss is required in the future. As of
March 2010, the carrying value of our NYSE DMM rights was
$410 million. To the extent that there were to be an
impairment in the future, it would result in a significant
writedown in the carrying value of these DMM rights.
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Table of Contents
Use of
Estimates
The use of generally accepted accounting principles requires
management to make certain estimates and assumptions. In
addition to the estimates we make in connection with fair value
measurements, the accounting for goodwill and identifiable
intangible assets, and discretionary compensation accruals, the
use of estimates and assumptions is also important in
determining provisions for potential losses that may arise from
litigation and regulatory proceedings and tax audits.
A substantial portion of our compensation and benefits
represents discretionary compensation, which is finalized at
year-end. We believe the most appropriate way to allocate
estimated annual discretionary compensation among interim
periods is in proportion to the net revenues earned in such
periods. In addition to the level of net revenues, our overall
compensation expense in any given year is also influenced by,
among other factors, prevailing labor markets, business mix, the
structure of our
share-based
compensation programs and the external environment. Our ratio of
compensation and benefits to net revenues was 43.0% for the
first quarter of 2010 compared with 50.0% for the first quarter
of 2009.
We estimate and provide for potential losses that may arise out
of litigation and regulatory proceedings to the extent that such
losses are probable and can be reasonably estimated. In
accounting for income taxes, we estimate and provide for
potential liabilities that may arise out of tax audits to the
extent that uncertain tax positions fail to meet the recognition
standard under ASC 740. See Note 2 to the condensed
consolidated financial statements in Part I, Item 1 of
this Quarterly Report on
Form 10-Q
for further information regarding accounting for income taxes.
Significant judgment is required in making these estimates and
our final liabilities may ultimately be materially different.
Our total estimated liability in respect of litigation and
regulatory proceedings is determined on a
case-by-case
basis and represents an estimate of probable losses after
considering, among other factors, the progress of each case or
proceeding, our experience and the experience of others in
similar cases or proceedings, and the opinions and views of
legal counsel. Given the inherent difficulty of predicting the
outcome of our litigation and regulatory matters, particularly
in cases or proceedings in which substantial or indeterminate
damages or fines are sought, we cannot estimate losses or ranges
of losses for cases or proceedings where there is only a
reasonable possibility that a loss may be incurred. See
“— Legal
Proceedings” in Part I, Item 3 of our Annual
Report on
Form 10-K,
and in Part II, Item 1 of this Quarterly Report on
Form 10-Q
for information on our judicial, regulatory and arbitration
proceedings.
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Table of Contents
Results of
Operations
The composition of our net revenues has varied over time as
financial markets and the scope of our operations have changed.
The composition of net revenues can also vary over the shorter
term due to fluctuations in U.S. and global economic and
market conditions. See “Risk Factors” in Part I,
Item 1A of our Annual Report on
Form 10-K
for a further discussion of the impact of economic and market
conditions on our results of operations.
Financial
Overview
The following table sets forth an overview of our financial
results:
Financial
Overview
($ in millions, except per share amounts)
($ in millions, except per share amounts)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
Net revenues
|
$ | 12,775 | $ | 9,425 | ||||
|
Pre-tax
earnings
|
5,159 | 2,629 | ||||||
|
Net earnings
|
3,456 | 1,814 | ||||||
|
Net earnings applicable to common shareholders
|
3,296 | 1,659 | ||||||
|
Diluted earnings per common share
|
5.59 | 3.39 | ||||||
|
Annualized return on average common shareholders’
equity
(1)
|
20.1 | % | 14.3 | % | ||||
| (1) | Annualized ROE is computed by dividing annualized net earnings applicable to common shareholders by average monthly common shareholders’ equity. The following table sets forth our average common shareholders’ equity: |
|
Average for the
|
||||||||
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Total shareholders’ equity
|
$ | 72,432 | $ | 63,061 | ||||
|
Preferred stock
|
(6,957 | ) | (16,495 | ) | ||||
|
Common shareholders’ equity
|
$ | 65,475 | $ | 46,566 | ||||
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Table of Contents
Net
Revenues
Three Months Ended March 2010 versus
March 2009.
Our net revenues were
$12.78 billion for the first quarter of 2010, an increase
of 36% compared with the first quarter of 2009, primarily
reflecting significantly higher net revenues in Trading and
Principal Investments. The increase in Trading and Principal
Investments reflected significantly improved results in
Principal Investments, as well as higher net revenues in FICC
and Equities. In the first quarter of 2010, results in Principal
Investments included a net gain of $760 million from
corporate principal investments, partially offset by a loss of
$222 million related to our investment in the ordinary
shares of ICBC and a net loss of $34 million from real
estate principal investments. In the first quarter of 2009,
results in Principal Investments included net losses of
$640 million from real estate principal investments and
$621 million from corporate principal investments, as well
as a loss of $151 million related to our investment in the
ordinary shares of ICBC. The increase in FICC reflected strength
in the client franchise and included strong performances in
credit products, mortgages and currencies, which were each
significantly higher compared with the first quarter of 2009.
Net revenues in interest rate products and commodities were also
strong, although each was significantly lower compared with
particularly strong results in the first quarter of 2009. During
the first quarter of 2009, credit products included losses from
corporate debt and private equity investments, and mortgages
included a loss of approximately $800 million (excluding
hedges) on commercial mortgage loans and securities. During the
first quarter of 2010, FICC operated in an environment
characterized by strong client-driven activity, increased
volumes across several businesses, tighter bid/offer spreads and
a decline in volatility levels. Net revenues in Equities for the
first quarter of 2010 reflected strong net revenues in
derivatives, which were significantly higher compared with the
first quarter of 2009. In addition, results in principal
strategies were positive compared with losses in the first
quarter of 2009. Commissions were lower compared with the first
quarter of 2009, reflecting generally lower market volumes.
During the quarter, Equities operated in an environment largely
characterized by an increase in global equity prices and a
decline in volatility levels.
Net revenues in Investment Banking also increased compared with
the first quarter of 2009, reflecting significantly higher net
revenues in our Underwriting business, partially offset by lower
net revenues in Financial Advisory. Net revenues in equity
underwriting were significantly higher, primarily reflecting a
significant increase in
industry-wide
equity and
equity-related
offerings compared with a difficult first quarter of 2009. Net
revenues in debt underwriting were also significantly higher,
primarily reflecting an increase in leveraged finance activity.
The decrease in Financial Advisory reflected a decline in
industry-wide
completed mergers and acquisitions.
Net revenues in Asset Management and Securities Services
decreased compared with the first quarter of 2009, reflecting
lower net revenues in Securities Services. The decline in
Securities Services primarily reflected tighter securities
lending spreads, principally due to the impact of changes in the
composition of securities lending customer balances, partially
offset by the impact of higher average customer balances. Net
revenues in Asset Management were essentially unchanged compared
with the first quarter of 2009. During the first quarter of
2010, assets under management decreased $31 billion to
$840 billion, due to $39 billion of net outflows,
primarily reflecting outflows in money market assets, consistent
with industry trends, partially offset by inflows in fixed
income assets, and $8 billion of market appreciation,
primarily in equity assets.
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Table of Contents
Operating
Expenses
Our operating expenses are primarily influenced by compensation,
headcount and levels of business activity. Compensation and
benefits expenses includes salaries, estimated year-end
discretionary compensation, amortization of equity awards and
other items such as payroll taxes, benefits and severance costs.
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. Our ratio of
compensation and benefits to net revenues was 43.0% for the
first quarter of 2010 compared with 50.0% for the first quarter
of 2009. The ratio of compensation and benefits to net revenues
for the first quarter of 2010 is our lowest ever first quarter
ratio, 650 basis points lower than our historical reported first
quarter average ratio of 49.5%.
On April 8, 2010, the United Kingdom enacted
legislation that imposes 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 current estimate, based on our
understanding of the enacted legislation, of the total amount of
tax expected to be paid is in excess of $600 million. We
are currently engaged in discussions with HM Revenue and Customs
regarding the legislation. Depending on the outcome of those
discussions the expected tax to be paid may change. The tax will
be recognized in earnings in the second quarter of 2010.
The following table sets forth our operating expenses and total
staff:
Operating
Expenses and Total Staff
($ in millions)
($ in millions)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
Compensation and benefits
|
$ | 5,493 | $ | 4,712 | ||||
|
Brokerage, clearing, exchange and distribution fees
|
562 | 536 | ||||||
|
Market development
|
110 | 68 | ||||||
|
Communications and technology
|
176 | 173 | ||||||
|
Depreciation and amortization
|
372 | 549 | ||||||
|
Occupancy
|
256 | 241 | ||||||
|
Professional fees
|
182 | 135 | ||||||
|
Other expenses
|
465 | 382 | ||||||
|
Total
non-compensation
expenses
|
2,123 | 2,084 | ||||||
|
Total operating expenses
|
$ | 7,616 | $ | 6,796 | ||||
|
Total staff at period
end
(1)
|
33,100 | 31,600 | ||||||
|
Total staff at period end including consolidated entities held
for investment
purposes
(2)
|
38,500 | 35,500 | ||||||
| (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 condensed 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. |
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Table of Contents
Three Months Ended March 2010 versus
March 2009.
Operating expenses of
$7.62 billion for the first quarter of 2010 increased 12%
compared with the first quarter of 2009. The accrual for
compensation and benefits expenses (including salaries,
estimated year-end discretionary compensation, amortization of
equity awards and other items such as payroll taxes, benefits
and severance costs) was $5.49 billion for the first
quarter of 2010. The ratio of compensation and benefits to net
revenues was 43.0% for the first quarter of 2010, down from
50.0% for the first quarter of 2009. Total staff increased 2%
during the quarter. Total staff including consolidated entities
held for investment purposes increased 6% during the quarter,
primarily due to the consolidation of certain investment
entities during the first quarter of 2010 as a result of our
adoption of ASU
No. 2009-17,
“Consolidations (Topic 810) — Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities” on January 1, 2010.
Non-compensation
expenses of $2.12 billion increased 2% compared with the
first quarter of 2009. The increase compared with the first
quarter of 2009 primarily reflected higher levels of business
activity, as well as the impact of charitable contributions of
$40 million and net provisions for litigation and
regulatory proceedings of $21 million during the first
quarter of 2010. These increases were partially offset by
decreased depreciation and amortization expenses, due to the
impact of significantly higher real estate impairment charges in
the first quarter of 2009 related to consolidated entities held
for investment purposes. These real estate impairment charges,
which were measured based on discounted cash flow analysis, were
included in our Trading and Principal Investments segment and
reflected weakness in the commercial real estate markets,
particularly in Asia.
Provision for
Taxes
The effective income tax rate for the first quarter of 2010 was
33.0%, up slightly from 32.5% for fiscal year 2009.
Effective January 1, 2010, the rules related to the
deferral of U.S. tax on certain
non-repatriated
active financing income expired. This change did not have a
material effect on our financial condition, results of
operations or cash flows for the first quarter of 2010 and we do
not expect this change to have a material effect on our
financial condition, results of operations or cash flows for the
remainder of 2010.
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Table of Contents
Segment Operating
Results
The following table sets forth the net revenues, operating
expenses and
pre-tax
earnings of our segments:
Segment Operating
Results
(in millions)
(in millions)
|
Three Months
|
||||||||||
| Ended March | ||||||||||
| 2010 | 2009 | |||||||||
|
Investment
|
Net revenues | $ | 1,184 | $ | 823 | |||||
|
Banking
|
Operating expenses | 950 | 705 | |||||||
| Pre-tax earnings | $ | 234 | $ | 118 | ||||||
|
Trading and Principal
|
Net revenues | $ | 10,250 | $ | 7,150 | |||||
|
Investments
|
Operating expenses | 5,565 | 4,873 | |||||||
| Pre-tax earnings | $ | 4,685 | $ | 2,277 | ||||||
|
Asset Management and
|
Net revenues | $ | 1,341 | $ | 1,452 | |||||
|
Securities Services
|
Operating expenses | 1,080 | 1,205 | |||||||
| Pre-tax earnings | $ | 261 | $ | 247 | ||||||
|
Total
|
Net revenues | $ | 12,775 | $ | 9,425 | |||||
| Operating expenses (1) | 7,616 | 6,796 | ||||||||
| Pre-tax earnings | $ | 5,159 | $ | 2,629 | ||||||
| (1) | Operating expenses include net provisions for a number of litigation and regulatory proceedings of $21 million and $13 million for the three months ended March 2010 and March 2009, respectively, that have not been allocated to our segments. |
Net revenues in our segments include allocations of interest
income and interest expense to specific securities, commodities
and other positions in relation to the cash generated by, or
funding requirements of, such underlying positions. See
Note 16 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our business segments.
The cost drivers of Goldman Sachs taken as a whole —
compensation, headcount and levels of business
activity — are broadly similar in each of our business
segments. Compensation and benefits expenses within our segments
reflect, among other factors, the overall performance of Goldman
Sachs as well as the performance of individual business units.
Consequently,
pre-tax
margins in one segment of our business may be significantly
affected by the performance of our other business segments. A
discussion of segment operating results follows.
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Table of Contents
Investment
Banking
Our Investment Banking segment is divided into two components:
| • | Financial Advisory. Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings and spin-offs. | |
| • | Underwriting. Underwriting includes public offerings and private placements of a wide range of securities and other financial instruments. |
The following table sets forth the operating results of our
Investment Banking segment:
Investment
Banking Operating Results
(in millions)
(in millions)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
Financial Advisory
|
$ | 464 | $ | 527 | ||||
|
Equity underwriting
|
371 | 48 | ||||||
|
Debt underwriting
|
349 | 248 | ||||||
|
Total Underwriting
|
720 | 296 | ||||||
|
Total net revenues
|
1,184 | 823 | ||||||
|
Operating expenses
|
950 | 705 | ||||||
|
Pre-tax
earnings
|
$ | 234 | $ | 118 | ||||
The following table sets forth our financial advisory and
underwriting transaction volumes:
Goldman Sachs
Global Investment Banking Volumes
(1)
(in billions)
(in billions)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
Announced mergers and
acquisitions
(2)
|
$ | 183 | $ | 201 | ||||
|
Completed mergers and
acquisitions
(2)
|
113 | 193 | ||||||
|
Equity and
equity-related
offerings
(3)
|
14 | 2 | ||||||
|
Debt
offerings
(4)
|
60 | 69 | ||||||
| (1) | Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or a change in the value of a transaction. | |
| (2) | Source: Dealogic. | |
| (3) | Source: Thomson Reuters. Includes Rule 144A and public common stock offerings, convertible offerings and rights offerings. | |
| (4) | Source: Thomson Reuters. Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. Excludes leveraged loans. |
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Table of Contents
Three Months Ended March 2010 versus
March 2009.
Net revenues in Investment
Banking of $1.18 billion increased 44% compared with the
first quarter of 2009.
Net revenues in Financial Advisory of $464 million
decreased 12% compared with the first quarter of 2009,
reflecting a decline in
industry-wide
completed mergers and acquisitions. Net revenues in our
Underwriting business of $720 million were more than double
the amount in the first quarter of 2009. Net revenues in equity
underwriting were significantly higher, primarily reflecting a
significant increase in
industry-wide
equity and
equity-related
offerings compared with a difficult first quarter of 2009. Net
revenues in debt underwriting were also significantly higher,
primarily reflecting an increase in leveraged finance activity.
Our investment banking transaction backlog was essentially
unchanged compared with the end of 2009.
(1)
Operating expenses of $950 million for the first quarter of
2010 increased 35% compared with the first quarter of 2009,
primarily due to increased compensation and benefits expenses,
resulting from higher net revenues.
Pre-tax
earnings of $234 million in the first quarter of 2010
increased 98% compared with the first quarter of 2009.
Trading and
Principal Investments
Our Trading and Principal Investments segment is divided into
three components:
| • | FICC. We make markets in and trade interest rate and credit products, mortgage-related securities and loan products and other asset-backed instruments, currencies and commodities, structure and enter into a wide variety of derivative transactions, and engage in proprietary trading and investing. | |
| • | Equities. We make markets in and trade equities and equity-related products, structure and enter into equity derivative transactions and engage in proprietary trading. We generate commissions from executing and clearing client transactions on major stock, options and futures exchanges worldwide through our Equities client franchise and clearing activities. We also engage in exchange-based market-making activities and in insurance activities. | |
| • | Principal Investments. We make real estate and corporate principal investments, including our investment in the ordinary shares of ICBC. We generate net revenues from returns on these investments and from the increased share of the income and gains derived from our merchant banking funds when the return on a fund’s investments over the life of the fund exceeds certain threshold returns (typically referred to as an override). |
Substantially all of our inventory is
marked-to-market
daily and, therefore, its value and our net revenues are subject
to fluctuations based on market movements. In addition, net
revenues derived from our principal investments, including those
in privately held concerns and in real estate, may fluctuate
significantly depending on the revaluation of these investments
in any given period. We also regularly enter into large
transactions as part of our trading businesses. The number and
size of such transactions may affect our results of operations
in a given period.
Net revenues from Principal Investments do not include
management fees generated from our merchant banking funds. These
management fees are included in the net revenues of the Asset
Management and Securities Services segment.
(1)
Our
investment banking transaction backlog represents an estimate of
our future net revenues from investment banking transactions
where we believe that future revenue realization is more likely
than not.
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Table of Contents
The following table sets forth the operating results of our
Trading and Principal Investments segment:
Trading and
Principal Investments Operating Results
(in millions)
(in millions)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
FICC
|
$ | 7,386 | $ | 6,557 | ||||
|
Equities trading
|
1,473 | 1,027 | ||||||
|
Equities commissions
|
881 | 974 | ||||||
|
Total Equities
|
2,354 | 2,001 | ||||||
|
ICBC
|
(222 | ) | (151 | ) | ||||
|
Gross gains
|
1,147 | 672 | ||||||
|
Gross losses
|
(421 | ) | (1,933 | ) | ||||
|
Net other corporate and real estate investments
|
726 | (1,261 | ) | |||||
|
Overrides
|
6 | 4 | ||||||
|
Total Principal Investments
|
510 | (1,408 | ) | |||||
|
Total net revenues
|
10,250 | 7,150 | ||||||
|
Operating expenses
|
5,565 | 4,873 | ||||||
|
Pre-tax
earnings
|
$ | 4,685 | $ | 2,277 | ||||
Three Months Ended March 2010 versus
March 2009.
Net revenues in Trading and
Principal Investments of $10.25 billion increased 43%
compared with the first quarter of 2009.
Net revenues in FICC of $7.39 billion increased 13%
compared with the first quarter of 2009, reflecting strength in
the client franchise. These results reflected strong
performances in credit products, mortgages and currencies, which
were each significantly higher compared with the first quarter
of 2009. Net revenues in interest rate products and commodities
were also strong, although each was significantly lower compared
with particularly strong results in the first quarter of 2009.
During the first quarter of 2009, credit products included
losses from corporate debt and private equity investments, and
mortgages included a loss of approximately $800 million
(excluding hedges) on commercial mortgage loans and securities.
During the first quarter of 2010, FICC operated in an
environment characterized by strong client-driven activity,
increased volumes across several businesses, tighter bid/offer
spreads and a decline in volatility levels.
Net revenues in Equities of $2.35 billion increased 18%
compared with the first quarter of 2009. These results reflected
strong net revenues in derivatives, which were significantly
higher compared with the first quarter of 2009. In addition,
results in principal strategies were positive compared with
losses in the first quarter of 2009. Commissions were lower
compared with the first quarter of 2009, reflecting generally
lower market volumes. During the quarter, Equities operated in
an environment largely characterized by an increase in global
equity prices and a decline in volatility levels.
Principal Investments recorded net revenues of $510 million
for the first quarter of 2010. These results included a net gain
of $760 million from corporate principal investments,
partially offset by a loss of $222 million related to the
firm’s investment in the ordinary shares of ICBC and a net
loss of $34 million from real estate principal investments.
In the first quarter of 2009, results in Principal Investments
included net losses of $640 million from real estate
principal investments and $621 million from corporate
principal investments, as well as a loss of $151 million
related to our investment in the ordinary shares of ICBC.
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Table of Contents
Operating expenses of $5.57 billion for the first quarter
of 2010 increased 14% compared with the first quarter of 2009,
due to increased compensation and benefits expenses, resulting
from higher net revenues, partially offset by decreased
depreciation and amortization expenses, due to the impact of
significantly higher real estate impairment charges in the first
quarter of 2009 related to consolidated entities held for
investment purposes.
Pre-tax
earnings were $4.69 billion in the first quarter of 2010
compared with $2.28 billion in the first quarter of 2009.
Asset
Management and Securities Services
Our Asset Management and Securities Services segment is divided
into two components:
| • | Asset Management. Asset Management provides investment and wealth advisory services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and primarily generates revenues in the form of management and incentive fees. | |
| • | Securities Services. Securities Services provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide, and generates revenues primarily in the form of interest rate spreads or fees. |
Assets under management typically generate fees as a percentage
of asset value, which is affected by investment performance and
by inflows and redemptions. The fees that we charge vary by
asset class, as do our related expenses. In certain
circumstances, we are also entitled to receive incentive fees
based on a percentage of a fund’s return or when the return
on assets under management exceeds specified benchmark returns
or other performance targets. Incentive fees are recognized when
the performance period ends (in most cases, on December
31) and they are no longer subject to adjustment.
The following table sets forth the operating results of our
Asset Management and Securities Services segment:
Asset Management
and Securities Services Operating Results
(in millions)
(in millions)
|
Three Months
|
||||||||
| Ended March | ||||||||
| 2010 | 2009 | |||||||
|
Management and other fees
|
$ | 926 | $ | 931 | ||||
|
Incentive fees
|
20 | 18 | ||||||
|
Total Asset Management
|
946 | 949 | ||||||
|
Securities Services
|
395 | 503 | ||||||
|
Total net revenues
|
1,341 | 1,452 | ||||||
|
Operating expenses
|
1,080 | 1,205 | ||||||
|
Pre-tax
earnings
|
$ | 261 | $ | 247 | ||||
106
Table of Contents
Assets under management include assets in our mutual funds,
alternative investment funds and separately managed accounts for
institutional and individual investors. Substantially all assets
under management are valued as of calendar month-end. Assets
under management do not include:
| • | assets in brokerage accounts that generate commissions, mark-ups and spreads based on transactional activity; | |
| • | our own investments in funds that we manage; or | |
| • | interest-bearing deposits held through our bank depository institution subsidiaries. |
The following table sets forth our assets under management by
asset class:
Assets Under
Management by Asset Class
(in billions)
(in billions)
| As of | ||||||||||||||||
| March 31, |
December 31,
|
November 30,
|
||||||||||||||
| 2010 | 2009 | 2009 | 2008 | |||||||||||||
|
Alternative
investments
(1)
|
$ | 147 | $ | 141 | $ | 146 | $ | 146 | ||||||||
|
Equity
|
150 | 101 | 146 | 112 | ||||||||||||
|
Fixed income
|
324 | 248 | 315 | 248 | ||||||||||||
|
Total
non-money
market assets
|
621 | 490 | 607 | 506 | ||||||||||||
|
Money markets
|
219 | 281 | 264 | 273 | ||||||||||||
|
Total assets under management
|
$ | 840 | $ | 771 | $ | 871 | $ | 779 | ||||||||
| (1) | Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies. |
The following table sets forth a summary of the changes in our
assets under management:
Changes in Assets
Under Management
(in billions)
(in billions)
|
Three Months
|
||||||||
| Ended March 31, | ||||||||
| 2010 | 2009 | |||||||
|
Balance, beginning of period
|
$ | 871 | $ | 798 | ||||
|
Net inflows/(outflows)
|
||||||||
|
Alternative investments
|
1 | (2 | ) | |||||
|
Equity
|
(2 | ) | (1 | ) | ||||
|
Fixed income
|
7 | (3 | ) | |||||
|
Total
non-money
market net inflows/(outflows)
|
6 | (6 | ) | |||||
|
Money markets
|
(45 | ) | (5 | ) | ||||
|
Total net inflows/(outflows)
|
(39 | ) | (11 | ) | ||||
|
Net market appreciation/(depreciation)
|
8 | (16 | ) | |||||
|
Balance, end of period
|
$ | 840 | $ | 771 | ||||
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Table of Contents
Three Months Ended March 2010 versus
March 2009.
Net revenues in Asset Management
and Securities Services of $1.34 billion decreased 8%
compared with the first quarter of 2009.
Asset Management net revenues of $946 million were
essentially unchanged compared with the first quarter of 2009.
During the first quarter of 2010, assets under management
decreased $31 billion to $840 billion, due to
$39 billion of net outflows, primarily reflecting outflows
in money market assets, consistent with industry trends,
partially offset by inflows in fixed income assets, and
$8 billion of market appreciation, primarily in equity
assets.
Securities Services net revenues of $395 million decreased
21% compared with the first quarter of 2009. The decrease in net
revenues primarily reflected tighter securities lending spreads,
principally due to the impact of changes in the composition of
securities lending customer balances, partially offset by the
impact of higher average customer balances.
Operating expenses of $1.08 billion for the first quarter
of 2010 decreased 10% compared with the first quarter of 2009,
due to decreased compensation and benefits expenses, primarily
resulting from lower net revenues.
Pre-tax
earnings of $261 million in the first quarter of 2010
increased 6% compared with the first quarter of 2009.
Geographic
Data
See Note 16 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for a summary of our total net revenues and
pre-tax
earnings by geographic region.
Off-Balance-Sheet
Arrangements
We have various types of
off-balance-sheet
arrangements that we enter into in the ordinary course of
business. Our involvement in these arrangements can take many
different forms, including purchasing or retaining residual and
other interests in 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 the securitization of commercial and
residential mortgages, corporate bonds, and other types of
financial assets.
Asset-backed
financing vehicles are critical to the functioning of several
significant investor markets, including the
mortgage-backed
and other
asset-backed
securities markets, since they offer investors access to
specific cash flows and risks created through the securitization
process. Other reasons for entering into these arrangements
include underwriting client securitization transactions;
providing secondary market liquidity; making investments in
performing and nonperforming debt, equity, real estate and other
assets; providing investors with
credit-linked
and
asset-repackaged
notes; and receiving or providing letters of credit to satisfy
margin requirements and to facilitate the clearance and
settlement process.
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. The amount of these transactions
outstanding as of March 2010 was $48 million.
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Table of Contents
The following table sets forth where a discussion of
off-balance-sheet
arrangements may be found in Part I, Items 1 and 2 of
this Quarterly Report on
Form 10-Q:
| Type of Off-Balance-Sheet Arrangement | Disclosure in Quarterly Report on Form 10-Q | |
| Variable interests and other obligations, including contingent obligations, arising from variable interests in nonconsolidated VIEs | See Note 4 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Leases, letters of credit, and loans and other commitments | See Note 8 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Guarantees | See Note 8 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| Derivative contracts | See Notes 3 and 7 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, “— Critical Accounting Policies” above and “— Derivatives” below. | |
In addition, see Note 2 to the condensed consolidated
financial statements in Part I, Item 1 of this
Quarterly Report on
Form 10-Q
for a discussion of our consolidation policies and recent
accounting developments that affected these policies effective
January 1, 2010.
Equity
Capital
The level and composition of our equity capital are determined
by multiple factors including our consolidated regulatory
capital requirements and an internal capital adequacy assessment
process (ICAAP), and may also be influenced by rating agency
guidelines, subsidiary capital requirements, the business
environment, conditions in the financial markets and assessments
of potential future losses due to adverse changes in our
business and market environments.
Our consolidated regulatory capital requirements are determined
by the Federal Reserve Board, as described below. Our ICAAP
incorporates an internal
risk-based
capital (IRBC) 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.
As of March 2010, our total shareholders’ equity was
$72.94 billion (consisting of common shareholders’
equity of $65.99 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 $5.00 billion of
junior subordinated debt issued to trusts to be part of our
equity capital, as it qualifies as capital for regulatory and
certain rating agency purposes.
Consolidated
Capital Requirements
The Federal Reserve Board is the primary U.S. regulator of
Group Inc., a bank holding company and a financial holding
company under the U.S. Bank Holding Company Act of 1956. As
a bank holding company, we are subject to consolidated
regulatory capital requirements administered by the Federal
Reserve Board. Under the Federal Reserve Board’s capital
adequacy rules, Goldman Sachs must meet specific capital
requirements that involve quantitative measures of assets,
liabilities and
109
Table of Contents
certain
off-balance-sheet
items as calculated under regulatory reporting practices. The
firm’s capital levels are also subject to qualitative
judgments by its regulators about components, risk weightings
and other factors.
Consolidated
Capital Ratios
The following table sets forth information regarding our
consolidated capital ratios as of March 2010 calculated in
accordance with the Federal Reserve Board’s regulatory
capital requirements currently applicable to bank holding
companies, which are based on Basel I. These ratios are used by
the Federal Reserve Board and other U.S. federal banking
agencies in the supervisory review process, including the
assessment of our capital adequacy.
|
As of
|
||||
| March 2010 | ||||
| ($ in millions) | ||||
|
Tier 1 Capital
|
||||
|
Common shareholders’ equity
|
$ | 65,987 | ||
|
Preferred stock
|
6,957 | |||
|
Junior subordinated debt issued to trusts
|
5,000 | |||
|
Less: Goodwill
|
(3,575 | ) | ||
|
Less: Disallowable intangible assets
|
(2,408 | ) | ||
|
Less: Other
deductions
(1)
|
(3,489 | ) | ||
|
Tier 1 Capital
|
68,472 | |||
|
Tier 2 Capital
|
||||
|
Qualifying subordinated
debt
(2)
|
13,826 | |||
|
Less: Other
deductions
(1)
|
(285 | ) | ||
|
Tier 2 Capital
|
$ | 13,541 | ||
|
Total Capital
|
$ | 82,013 | ||
|
Risk-Weighted
Assets
|
$ | 455,790 | ||
|
Tier 1 Capital Ratio
|
15.0 | % | ||
|
Total Capital Ratio
|
18.0 | % | ||
|
Tier 1 Leverage Ratio
|
8.1 | % | ||
| (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 I purposes. |
RWAs under the Federal Reserve Board’s
risk-based
capital guidelines are calculated based on the amount of market
risk and credit risk. RWAs for market risk are determined by
reference to our VaR models, supplemented by other measures to
capture risks not reflected in our 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 of each trade. All such assets and amounts are then
assigned a risk weight depending on, among other things, whether
the counterparty is a sovereign, bank or qualifying securities
firm, or other entity (or if collateral is held, depending on
the nature of the collateral).
Our Tier 1 leverage ratio is defined as Tier 1 capital
under Basel I divided by adjusted average total assets (which
includes adjustments for disallowed goodwill and certain
intangible assets).
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Table of Contents
Federal Reserve Board regulations require bank holding companies
to maintain a minimum Tier 1 capital ratio of 4% and a
minimum total capital ratio of 8%. The required minimum
Tier 1 capital ratio and total capital ratio in order to be
considered a “well capitalized” bank holding company
under the Federal Reserve Board guidelines are 6% and 10%,
respectively. Bank holding companies may be expected to maintain
ratios well above the minimum levels, depending upon their
particular condition, risk profile and growth plans. The minimum
Tier 1 leverage ratio is 3% for bank holding companies that
have received the highest supervisory rating under Federal
Reserve Board guidelines or that have implemented the Federal
Reserve Board’s
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%.
During 2009, the Basel Committee on Banking Supervision proposed
several changes to the method of computing capital ratios. In
addition, there are several other proposals which could
potentially impact capital requirements. As a consequence, it is
possible that minimum capital ratios required to be maintained
under Federal Reserve Board regulations could be increased. It
is also possible that changes in the prescribed calculation
methodology could result in higher RWAs and lower capital ratios
than those currently computed.
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 IRBC assessment. We evaluate
capital adequacy based on the result of our IRBC assessment,
supplemented with the results of stress tests which measure the
firm’s performance under various market conditions. 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 business units based
upon our IRBC framework and manage the levels of usage based
upon the balance sheet and risk limits established.
Subsidiary
Capital Requirements
Many of our subsidiaries are subject to separate regulation and
capital requirements in jurisdictions throughout the world. GS
Bank USA, a New York State-chartered bank and a member of the
Federal Reserve System and the Federal Deposit Insurance
Corporation (FDIC), is regulated by the Federal Reserve Board
and the New York State Banking Department and is subject to
minimum capital requirements that (subject to certain
exceptions) are similar to those applicable to bank holding
companies. GS Bank USA and its subsidiaries are subject to the
regulatory framework for prompt corrective action (PCA). GS Bank
USA computes its capital ratios in accordance with the
regulatory capital guidelines currently applicable to state
member banks, which are based on Basel I as implemented by the
Federal Reserve Board. In addition, 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 PCA classification are subject to
qualitative judgments by its regulators about components, risk
weightings and other factors.
Goldman, Sachs & Co. (GS&Co.) and Goldman Sachs
Execution & Clearing, L.P. (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, CME Group Inc., the
Financial Industry Regulatory Authority, Inc. and the National
Futures Association. Goldman Sachs International (GSI) and
Goldman Sachs Japan Co., Ltd., our principal
non-U.S. regulated
broker-dealer
subsidiaries, are subject to the capital requirements of the
U.K.’s Financial Services Authority and Japan’s
Financial Services Agency, respectively.
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Table of Contents
See Note 15 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for information regarding GS Bank USA’s capital ratios
under Basel I as implemented by the Federal Reserve Board, and
for further information regarding the capital requirements of
our other regulated subsidiaries.
Subsidiaries not subject to separate regulatory capital
requirements may hold capital to satisfy local tax guidelines,
rating agency requirements (for entities with assigned credit
ratings) or internal policies, including policies concerning the
minimum amount of capital a subsidiary should hold based on its
underlying level of risk. In certain instances, Group Inc.
may be limited in its ability to access capital held at certain
subsidiaries as a result of regulatory, tax or other
constraints. As of March 2010 and December 2009,
Group Inc.’s equity investment in subsidiaries was
$69.15 billion and $65.74 billion, respectively,
compared with its total shareholders’ equity of
$72.94 billion and $70.71 billion, respectively.
Group Inc. has guaranteed the payment obligations of
GS&Co., GS Bank USA, GS Bank Europe 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 derivative
contracts and
non-U.S. denominated
debt.
Rating Agency
Guidelines
The credit rating agencies assign credit ratings to the
obligations of Group Inc., which directly issues or
guarantees substantially all of the firm’s senior unsecured
obligations. GS Bank USA has also been assigned
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
and Funding Risk — Credit Ratings” below for
further information regarding our credit ratings.
Equity Capital
Management
Our objective is to maintain a sufficient level and optimal
composition of equity capital. We principally manage our capital
through issuances and repurchases of our common stock. We may
also, from time to time, issue or repurchase our preferred
stock, junior subordinated debt issued to trusts and other
subordinated debt as business conditions warrant 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 at both the consolidated and
business unit levels. We attribute capital usage to each of our
business units based upon our IRBC framework and manage the
levels of usage based upon the balance sheet and risk limits
established.
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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.
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. Any repurchase of our
common stock requires approval by the Federal Reserve Board.
As of March 2010, under the Board’s existing share
repurchase program, we can repurchase up to 47.7 million
additional shares of common stock; however, any such repurchases
are subject to the approval of the Federal Reserve Board. See
“Unregistered Sales of Equity Securities and Use of
Proceeds” in Part II, Item 2 and Note 9 to
the condensed consolidated financial statements in Part I,
Item 1 of this Quarterly Report on
Form 10-Q
for additional information on our repurchase program.
See Notes 7 and 9 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for further information regarding our preferred stock, junior
subordinated debt issued to trusts and other subordinated debt.
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Table of Contents
Capital Ratios
and Metrics
The following table sets forth information on our assets,
shareholders’ equity, leverage ratios, capital ratios and
book value per common share:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| ($ in millions, except per share amounts) | ||||||||
|
Total assets
|
$ | 880,528 | $ | 848,942 | ||||
|
Adjusted
assets
(1)
|
548,503 | 546,151 | ||||||
|
Total shareholders’ equity
|
72,944 | 70,714 | ||||||
|
Tangible equity
capital
(2)
|
71,961 | 70,794 | ||||||
|
Leverage
ratio
(3)
|
12.1 | x | 12.0 | x | ||||
|
Adjusted leverage
ratio
(4)
|
7.6 | x | 7.7 | x | ||||
|
Debt to equity
ratio
(5)
|
2.5 | x | 2.6 | x | ||||
|
Common shareholders’ equity
|
$ | 65,987 | $ | 63,757 | ||||
|
Tangible common shareholders’
equity
(6)
|
60,004 | 58,837 | ||||||
|
Book value per common
share
(7)
|
122.52 | 117.48 | ||||||
|
Tangible book value per common
share
(6)(7)
|
111.41 | 108.42 | ||||||
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| Basel I (8) | ||||||||
|
Tier 1 capital ratio
|
15.0 | % | 15.0 | % | ||||
|
Total capital ratio
|
18.0 | % | 18.2 | % | ||||
|
Tier 1 leverage ratio
|
8.1 | % | 7.6 | % | ||||
|
Tier 1 common
ratio
(9)
|
12.4 | % | 12.2 | % | ||||
|
Tangible common shareholders’
equity
(6)
to
risk-weighted
assets ratio
|
13.2 | % | 13.6 | % | ||||
| (1) | Adjusted assets excludes (i) low-risk collateralized assets generally associated with our matched book and securities lending businesses and federal funds sold, (ii) cash and securities we segregate for regulatory and other purposes and (iii) goodwill and identifiable intangible assets which are deducted when calculating tangible equity capital (see footnote 2 below). |
The following table sets forth the reconciliation of total
assets to adjusted assets:
| As of | ||||||||||
|
March
|
December
|
|||||||||
| 2010 | 2009 | |||||||||
| (in millions) | ||||||||||
|
Total assets
|
$ | 880,528 | $ | 848,942 | ||||||
|
Deduct:
|
Securities borrowed | (202,841 | ) | (189,939 | ) | |||||
| Securities purchased under agreements to resell and federal funds sold | (166,368 | ) | (144,279 | ) | ||||||
|
Add:
|
Trading liabilities, at fair value | 140,081 | 129,019 | |||||||
| Less derivative liabilities | (53,861 | ) | (56,009 | ) | ||||||
| Subtotal | 86,220 | 73,010 | ||||||||
|
Deduct:
|
Cash and securities segregated for regulatory and other purposes | (43,053 | ) | (36,663 | ) | |||||
| Goodwill and identifiable intangible assets | (5,983 | ) | (4,920 | ) | ||||||
|
Adjusted assets
|
$ | 548,503 | $ | 546,151 | ||||||
| (2) | Tangible equity capital equals total shareholders’ equity and junior subordinated debt issued to trusts less goodwill and identifiable intangible assets. We consider junior subordinated debt issued to trusts to be a component of our tangible equity capital base due to certain characteristics of the debt, including its long-term nature, our ability to defer payments due on the debt and the subordinated nature of the debt in our capital structure. |
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Table of Contents
The following table sets forth the reconciliation of total
shareholders’ equity to tangible equity capital:
| As of | ||||||||||
|
March
|
December
|
|||||||||
| 2010 | 2009 | |||||||||
| (in millions) | ||||||||||
|
Total shareholders’ equity
|
$ | 72,944 | $ | 70,714 | ||||||
|
Add:
|
Junior subordinated debt issued to trusts | 5,000 | 5,000 | |||||||
|
Deduct:
|
Goodwill and identifiable intangible assets | (5,983 | ) | (4,920 | ) | |||||
|
Tangible equity capital
|
$ | 71,961 | $ | 70,794 | ||||||
| (3) | The leverage ratio equals total assets divided by total shareholders’ equity. This ratio is different from the Tier 1 leverage ratio included above, which is described in Note 15 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. | |
| (4) | The adjusted leverage ratio equals adjusted assets divided by tangible equity capital. We believe that the adjusted leverage ratio is a more meaningful measure of our capital adequacy than the leverage ratio because it excludes certain low-risk collateralized assets that are generally supported with little or no capital and reflects the tangible equity capital deployed in our businesses. | |
| (5) | The debt to equity ratio equals unsecured long-term borrowings divided by total shareholders’ equity. | |
| (6) | Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets. Tangible book value per common share is computed by dividing tangible common shareholders’ equity by the number of common shares outstanding, including RSUs granted to employees with no future service requirements. We believe that tangible common shareholders’ equity and tangible book value per common share are meaningful because they are measures that we and investors use to assess capital adequacy. |
The following table sets forth the reconciliation of total
shareholders’ equity to tangible common shareholders’
equity:
| As of | ||||||||||
|
March
|
December
|
|||||||||
| 2010 | 2009 | |||||||||
| (in millions) | ||||||||||
|
Total shareholders’ equity
|
$ | 72,944 | $ | 70,714 | ||||||
|
Deduct:
|
Preferred stock | (6,957 | ) | (6,957 | ) | |||||
|
Common shareholders’ equity
|
65,987 | 63,757 | ||||||||
|
Deduct:
|
Goodwill and identifiable intangible assets | (5,983 | ) | (4,920 | ) | |||||
|
Tangible common shareholders’ equity
|
$ | 60,004 | $ | 58,837 | ||||||
| (7) | Book value and tangible book value per common share are based on common shares outstanding, including RSUs granted to employees with no future service requirements, of 538.6 million and 542.7 million as of March 2010 and December 2009, respectively. | |
| (8) | Calculated in accordance with the regulatory capital requirements currently applicable to bank holding companies. RWAs were $455.79 billion and $431.89 billion as of March 2010 and December 2009, respectively, under Basel I. See Note 15 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our regulatory capital ratios. | |
| (9) | The Tier 1 common ratio equals Tier 1 capital less preferred stock and junior subordinated debt issued to trusts, divided by RWAs. We believe that the Tier 1 common ratio is meaningful because it is one of the measures that we and investors use to assess capital adequacy. |
The following table sets forth the reconciliation of Tier 1
capital to Tier 1 common capital:
| As of | ||||||||||
|
March
|
December
|
|||||||||
| 2010 | 2009 | |||||||||
| (in millions) | ||||||||||
|
Tier 1 capital
|
$ | 68,472 | $ | 64,642 | ||||||
|
Deduct:
|
Preferred stock | (6,957 | ) | (6,957 | ) | |||||
| Junior subordinated debt issued to trusts | (5,000 | ) | (5,000 | ) | ||||||
|
Tier 1 common capital
|
$ | 56,515 | $ | 52,685 | ||||||
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Contractual
Obligations
Goldman Sachs has contractual obligations to make future
payments related to our unsecured
long-term
borrowings, secured
long-term
financings, time deposits,
long-term
noncancelable lease agreements and purchase obligations and has
commitments under a variety of commercial arrangements.
The following table sets forth our contractual obligations by
maturity date as of March 2010:
Contractual
Obligations
(in millions)
(in millions)
|
Remainder
|
2011-
|
2013-
|
2015-
|
|||||||||||||||||
| of 2010 | 2012 | 2014 | Thereafter | Total | ||||||||||||||||
|
Unsecured
long-term
borrowings
(1)(2)(3)
|
$ | — | $ | 43,566 | $ | 40,736 | $ | 96,112 | $ | 180,414 | ||||||||||
|
Secured
long-term
financings
(1)(2)(4)
|
— | 7,127 | 3,387 | 2,681 | 13,195 | |||||||||||||||
|
Time
deposits
(5)
|
— | 1,991 | 2,314 | 2,121 | 6,426 | |||||||||||||||
|
Contractual interest
payments
(6)
|
5,006 | 12,804 | 9,801 | 29,645 | 57,256 | |||||||||||||||
|
Insurance
liabilities
(7)
|
517 | 1,610 | 1,041 | 8,636 | 11,804 | |||||||||||||||
|
Minimum rental payments
|
376 | 765 | 508 | 1,559 | 3,208 | |||||||||||||||
|
Purchase obligations
|
179 | 54 | 41 | 31 | 305 | |||||||||||||||
| (1) | Obligations maturing within one year of our financial statement date or redeemable within one year of our financial statement date at the option of the holder are excluded from this table and are treated as short-term obligations. See Note 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding our secured financings. | |
| (2) | Obligations that are repayable prior to maturity at the option of Goldman Sachs are reflected at their contractual maturity dates. Obligations that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable. | |
| (3) | Amount includes an increase of $6.44 billion to the carrying amount of certain of the firm’s 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 $557 million. | |
| (4) | The aggregate contractual principal amount of secured long-term financings for which the fair value option was elected, primarily consisting of transfers of financial assets accounted for as financings rather than sales, debt raised through our William Street credit extension program and certain other nonrecourse financings, exceeded the related fair value by $398 million. | |
| (5) | Excludes $3.04 billion of time deposits maturing within one year of our financial statement date. | |
| (6) | Represents estimated future interest payments related to unsecured long-term borrowings, secured long-term financings and time deposits based on applicable interest rates as of March 2010. Includes stated coupons, if any, on structured notes. | |
| (7) | Represents estimated undiscounted payments related to future benefits and unpaid claims arising from policies associated with our insurance activities, excluding separate accounts and estimated recoveries under reinsurance contracts. |
As of March 2010, our unsecured
long-term
borrowings were $180.41 billion, with maturities extending
to 2043, and consisted principally of senior borrowings. See
Note 7 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our unsecured
long-term
borrowings.
As of March 2010, our future minimum rental payments, net
of minimum sublease rentals, under noncancelable leases were
$3.21 billion. These lease commitments, principally for
office space, expire on various dates through 2069. Certain
agreements are subject to periodic escalation provisions for
increases in real estate taxes and other charges. See
Note 8 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our leases.
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Table of Contents
Our occupancy expenses include costs associated with office
space held in excess of our current requirements. This excess
space, the cost of which is charged to earnings as incurred, is
being held for potential growth or to replace currently occupied
space that we may exit in the future. We regularly evaluate our
current and future space capacity in relation to current and
projected staffing levels. During the first quarter of 2010,
total occupancy expenses for space held in excess of our current
requirements was approximately $20 million, which includes
costs related to the transition to our new headquarters in New
York City. We may incur exit costs in the future to the extent
we (i) reduce our space capacity or (ii) commit to, or
occupy, new properties in the locations in which we operate and,
consequently, dispose of existing space that had been held for
potential growth. These exit costs may be material to our
results of operations in a given period.
As of March 2010, included in purchase obligations was
$93 million of
construction-related
obligations. As of March 2010, our
construction-related
obligations include commitments of $52 million related to
our new headquarters in New York City. Initial occupancy of our
new headquarters occurred during the fourth quarter of 2009.
Due to the uncertainty of the timing and amounts that will
ultimately be paid, our liability for unrecognized tax benefits
has been excluded from the above contractual obligations table.
See Note 8 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for information regarding our commitments, contingencies and
guarantees.
117
Table of Contents
Market
Risk
The potential for changes in the market value of our trading and
investing positions is referred to as market risk. Such
positions result from
market-making,
underwriting, investing activities and proprietary trading.
Substantially all of our inventory positions are
marked-to-market
on a daily basis and changes are recorded in net revenues.
Categories of market risk include exposures to interest rates,
equity prices, currency rates and commodity prices. A
description of each market risk category is set forth below:
| • | Interest rate risks primarily result from exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates, mortgage prepayment speeds and credit spreads. | |
| • | Equity price risks result from exposures to changes in prices and volatilities of individual equities, equity baskets and equity indices. | |
| • | Currency rate risks result from exposures to changes in spot prices, forward prices and volatilities of currency rates. | |
| • | Commodity price risks result from exposures to changes in spot prices, forward prices and volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products, and precious and base metals. |
We seek to manage these risks by diversifying exposures,
controlling position sizes and establishing economic hedges in
related securities or derivatives. For example, we may seek to
hedge a portfolio of common stocks by taking an offsetting
position in a related
equity-index
futures contract. The ability to manage an exposure may,
however, be limited by adverse changes in the liquidity of the
security or the related hedge instrument and in the correlation
of price movements between the security and related hedge
instrument.
In addition to applying business judgment, senior management
uses a number of quantitative tools to manage our exposure to
market risk for “Trading assets, at fair value” and
“Trading liabilities, at fair value” in the condensed
consolidated statements of financial condition. These tools
include:
| • | risk limits based on a summary measure of market risk exposure referred to as VaR; | |
| • | scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events, including, but not limited to, a large widening of credit spreads, a substantial decline in equity markets and significant moves in selected emerging markets; and | |
| • | inventory position limits for selected business units. |
VaR
VaR is the potential loss in value of trading positions due to
adverse market movements over a defined time horizon with a
specified confidence level.
For the VaR numbers reported below, a
one-day
time
horizon and a 95% confidence level were used. This means that
there is a 1 in 20 chance that daily trading net revenues will
fall below the expected daily trading net revenues by an amount
at least as large as the reported VaR. Thus, shortfalls from
expected trading net revenues on a single trading day greater
than the reported VaR would be anticipated to occur, on average,
about once a month. Shortfalls on a single day can exceed
reported VaR by significant amounts. Shortfalls can also occur
more frequently or accumulate over a longer time horizon such as
a number of consecutive trading days.
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Table of Contents
The modeling of the risk characteristics of our trading
positions involves a number of assumptions and approximations.
While we believe that these assumptions and approximations are
reasonable, there is no standard methodology for estimating VaR,
and different assumptions
and/or
approximations could produce materially different VaR estimates.
We use historical data to estimate our VaR and, to better
reflect current asset volatilities, we generally weight
historical data to give greater importance to more recent
observations. Given its reliance on historical data, VaR is most
effective in estimating risk exposures in markets in which there
are no sudden fundamental changes or shifts in market
conditions. An inherent limitation of VaR is that the
distribution of past changes in market risk factors may not
produce accurate predictions of future market risk. Different
VaR methodologies and distributional assumptions could produce a
materially different VaR. Moreover, VaR calculated for a
one-day
time
horizon does not fully capture the market risk of positions that
cannot be liquidated or offset with hedges within one day.
The following tables set forth the daily VaR:
Average Daily VaR
(1)
(in millions)
(in millions)
|
Average for the
|
||||||||
| Three Months Ended | ||||||||
|
March
|
March
|
|||||||
|
Risk Categories
|
2010 | 2009 | ||||||
|
Interest rates
|
$ | 109 | $ | 218 | ||||
|
Equity prices
|
88 | 38 | ||||||
|
Currency rates
|
35 | 38 | ||||||
|
Commodity prices
|
49 | 40 | ||||||
|
Diversification
effect
(2)
|
(120 | ) | (94 | ) | ||||
|
Total
|
$ | 161 | $ | 240 | ||||
| (1) | Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g., due to transfer restrictions and/or illiquidity). See “— Other Market Risk Measures” below. | |
| (2) | Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. |
Our average daily VaR decreased to $161 million for the
first quarter of 2010 from $240 million for the first
quarter of 2009, principally due to a decrease in the interest
rates category and an increase in the diversification benefit
across risk categories, partially offset by an increase in the
equity prices category. The decrease in interest rates was
primarily due to reduced rate exposures and lower levels of
volatility. The increase in equity prices was primarily due to
increased equity exposures.
VaR excludes the impact of changes in counterparty and our own
credit spreads on derivatives as well as changes in our own
credit spreads on unsecured borrowings for which the fair value
option was elected. The estimated sensitivity of our net
revenues to a one basis point increase in credit spreads
(counterparty and our own) on derivatives was a $2 million
gain as of March 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 a $9 million gain
(including hedges) as of March 2010.
119
Table of Contents
Daily VaR
(1)
(in millions)
(in millions)
| As of |
Three Months Ended
|
|||||||||||||||
|
March
|
December
|
March 2010 | ||||||||||||||
|
Risk Categories
|
2010 | 2009 | High | Low | ||||||||||||
|
Interest rates
|
$ | 90 | $ | 122 | $ | 123 | $ | 90 | ||||||||
|
Equity prices
|
93 | 99 | 124 | 58 | ||||||||||||
|
Currency rates
|
57 | 21 | 57 | 20 | ||||||||||||
|
Commodity prices
|
35 | 33 | 62 | 33 | ||||||||||||
|
Diversification
effect
(2)
|
(111 | ) | (122 | ) | ||||||||||||
|
Total
|
$ | 164 | $ | 153 | $ | 196 | $ | 142 | ||||||||
| (1) | Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g., due to transfer restrictions and/or illiquidity). See “— Other Market Risk Measures” below. | |
| (2) | Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. |
Our daily VaR increased to $164 million as of
March 2010 from $153 million as of December 2009,
primarily due to an increase in the currency rates category and
a decrease in the diversification benefit across risk
categories, partially offset by a decrease in the interest rates
category. The increase in currency rates was principally due to
higher levels of exposure. The decrease in interest rates was
primarily due to reduced rate exposures and lower levels of
volatility.
The following chart presents our daily VaR during the last four
quarters:
Daily VaR
($ in millions)
($ in millions)
120
Table of Contents
Trading Net
Revenues Distribution
The following chart sets forth the frequency distribution of our
daily trading net revenues for substantially all inventory
positions included in VaR for the quarter ended March 2010:
Daily Trading Net
Revenues
($ in millions)
($ in millions)
As part of our overall risk control process, daily trading net
revenues are compared with VaR calculated as of the end of the
prior business day. Trading losses incurred on a single day did
not exceed our 95%
one-day
VaR
during the first quarter of 2010.
Other Market
Risk Measures
Certain portfolios and individual positions are not included in
VaR, where VaR is not the most appropriate measure of risk
(e.g., due to transfer restrictions
and/or
illiquidity). The market risk related to our investment in the
ordinary shares of ICBC, excluding interests held by investment
funds managed by Goldman Sachs, is measured by estimating the
potential reduction in net revenues associated with a 10%
decline in the ICBC ordinary share price. The market risk
related to the remaining positions is measured by estimating the
potential reduction in net revenues associated with a 10%
decline in asset values.
The sensitivity analyses for these equity and debt positions in
the FICC and Equities components of our Trading and Principal
Investments segment and equity, debt (primarily mezzanine
instruments) and real estate positions in the Principal
Investments component of our Trading and Principal Investments
segment are measured by the impact of a decline in the asset
values (including the impact of leverage in the underlying
investments for real estate positions in the Principal
Investments component) of such positions. The fair value of the
underlying positions may be impacted by recent
third-party
investments or pending transactions,
third-party
independent appraisals, transactions in similar instruments,
valuation multiples and public comparables, and changes in
financial ratios or cash flows.
121
Table of Contents
The following table sets forth market risk for positions not
included in VaR. These measures do not reflect diversification
benefits across asset categories and, given the differing
likelihood of the potential declines in asset categories, these
measures have not been aggregated:
|
Asset Categories
|
10% Sensitivity Measure
|
10% Sensitivity | ||||||||
| Amount as of | ||||||||||
| March 2010 | December 2009 | |||||||||
| (in millions) | ||||||||||
|
FICC and Equities
(1)
|
||||||||||
|
Equity
(2)
|
Underlying asset value | $ | 548 | $ | 616 | |||||
|
Debt
(3)
|
Underlying asset value | 375 | 431 | |||||||
|
Principal
Investments
(4)
|
||||||||||
|
ICBC
|
ICBC ordinary share price | 277 | 298 | |||||||
|
Other
Equity
(5)
|
Underlying asset value | 954 | 1,001 | |||||||
|
Debt
(6)
|
Underlying asset value | 972 | 947 | |||||||
|
Real
Estate
(7)
|
Underlying asset value | 675 | 690 | |||||||
| (1) | In addition to the positions in these portfolios, which are accounted for at fair value, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in “Other assets” in the condensed consolidated statements of financial condition. Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 12 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information on “Other assets.” | |
| (2) | Relates to private and restricted public equity securities held within the FICC and Equities components of our Trading and Principal Investments segment. | |
| (3) | Primarily relates to acquired portfolios of distressed loans (primarily backed by commercial and residential real estate collateral), loans backed by commercial real estate, and corporate debt held within the FICC component of our Trading and Principal Investments segment. | |
| (4) | Represents investments included within the Principal Investments component of our Trading and Principal Investments segment. | |
| (5) | Primarily relates to interests in our merchant banking funds that invest in corporate equities. | |
| (6) | Primarily relates to interests in our merchant banking funds that invest in corporate mezzanine debt instruments. | |
| (7) | Primarily relates to interests in our merchant banking funds that invest in real estate. Such funds typically employ leverage as part of the investment strategy. This sensitivity measure is based on our percentage ownership of the underlying asset values in the funds and unfunded commitments to the funds. |
In addition to the positions included in VaR and the other risk
measures described above, as of March 2010, we held
approximately $10.45 billion of financial instruments in
our bank and insurance subsidiaries, primarily consisting of
$4.61 billion of money market instruments,
$1.38 billion of government and U.S. federal agency
obligations, $2.78 billion of corporate debt securities and
other debt obligations, and $1.31 billion of mortgage and
other
asset-backed
loans and securities. As of December 2009, we held
approximately $10.70 billion of financial instruments in
our bank and insurance subsidiaries, primarily consisting of
$5.12 billion of money market instruments,
$1.25 billion of government and U.S. federal agency
obligations, $2.78 billion of corporate debt securities and
other debt obligations, and $1.31 billion of mortgage and
other
asset-backed
loans and securities. In addition, as of March 2010 and
December 2009, we held commitments and loans under the
William Street credit extension program. See Note 8 to the
condensed consolidated financial statements in Part I,
Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our William Street credit
extension program.
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Table of Contents
Credit
Risk
Credit risk represents the loss that we would incur if a
counterparty or an issuer of securities or other instruments we
hold fails to perform under its contractual obligations to us,
or upon a deterioration in the credit quality of third parties
whose securities or other instruments, including OTC
derivatives, we hold. Our exposure to credit risk principally
arises through our trading, investing and financing activities.
To reduce our credit exposures, we seek to enter into netting
agreements with counterparties that permit us to offset
receivables and payables with such counterparties. In addition,
we attempt to further reduce credit risk with certain
counterparties by (i) entering into agreements that enable
us to obtain collateral from a counterparty on an upfront or
contingent basis, (ii) seeking
third-party
guarantees of the counterparty’s obligations,
and/or
(iii) transferring our credit risk to third parties using
credit derivatives
and/or
other
structures and techniques.
To measure and manage our credit exposures, we use a variety of
tools, including credit limits referenced to potential exposure.
Potential exposure is an estimate of exposure, within a
specified confidence level, that could be outstanding over the
life of a transaction based on market movements. In addition, as
part of our market risk management process, for positions
measured by changes in credit spreads, we use VaR and other
sensitivity measures. To supplement our primary credit exposure
measures, we also use scenario analyses, such as credit spread
widening scenarios, stress tests and other quantitative tools.
Our global credit management systems monitor credit exposure to
individual counterparties and on an aggregate basis to
counterparties and their subsidiaries. These systems also
provide management, including the Firmwide Risk and Credit
Policy Committees, with information regarding credit risk by
product, industry sector, country and region.
While our activities expose us to many different industries and
counterparties, we routinely execute a high volume of
transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks,
clearing houses, exchanges and investment funds. This has
resulted in significant credit concentration with respect to
this industry. In the ordinary course of business, we may also
be subject to a concentration of credit risk to a particular
counterparty, borrower or issuer, including sovereign issuers,
or to a particular clearing house or exchange.
As of March 2010 and December 2009, we held
$88.58 billion (10% of total assets) and
$83.83 billion (10% of total assets), respectively, of
U.S. government and federal agency obligations included in
“Trading assets, at fair value” and “Cash and
securities segregated for regulatory and other purposes” in
the condensed consolidated statements of financial condition. We
held $42.75 billion (5% of total assets) and
$38.61 billion (5% of total assets) of other sovereign
obligations as of March 2010 and December 2009,
respectively, principally consisting of securities issued by the
governments of the United Kingdom, Japan and Germany as of
March 2010, and the United Kingdom and Japan as of December
2009. In addition, as of March 2010 and December 2009,
$108.42 billion and $87.63 billion of our securities
purchased under agreements to resell and securities borrowed
(including those in “Cash and securities segregated for
regulatory and other purposes” in the condensed
consolidated statements of financial condition), respectively,
were collateralized by U.S. government and federal agency
obligations. Our securities purchased under agreements to resell
and securities borrowed collateralized by other sovereign
obligations were $83.93 billion and $77.99 billion as
of March 2010 and December 2009, respectively,
principally consisting of securities issued by the governments
of Germany, France, Japan and the United Kingdom as of
March 2010, and Germany, the United Kingdom and Japan as of
December 2009. As of March 2010 and
December 2009, we did not have credit exposure to any other
counterparty that exceeded 2% of our total assets.
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Table of Contents
Derivatives
Derivative contracts are instruments such as futures, forwards,
swaps or option contracts that derive their value from
underlying asset prices, indices, reference rates and other
inputs or a combination of these factors. Derivative instruments
may be privately negotiated contracts, which are often referred
to as OTC derivatives, or they may be listed and traded on an
exchange.
Substantially all of our derivative transactions are entered
into to facilitate client transactions, as a means of risk
management or to take proprietary positions. In addition to
derivative transactions entered into for trading purposes, we
enter into derivative contracts to manage currency exposure on
our net investment in
non-U.S. operations
and to manage the interest rate and currency exposure on our
long-term
borrowings and certain
short-term
borrowings.
Derivatives are used in many of our businesses, and we believe
that the associated market risk can only be understood relative
to all of the underlying assets or risks being hedged, or as
part of a broader trading strategy. Accordingly, the market risk
of derivative positions is managed together with our
nonderivative positions.
The fair value of our derivative contracts is reflected net of
cash paid or received pursuant to credit support agreements and
is reported on a
net-by-counterparty
basis in our consolidated statements of financial condition when
we believe a legal right of setoff exists under an enforceable
netting agreement. For an OTC derivative, our credit exposure is
directly with our counterparty and continues until the maturity
or termination of such contract.
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Table of Contents
The following tables set forth the fair values of our OTC
derivative assets and liabilities by tenor and by product type
or credit rating. Tenor is based on expected duration for
mortgage-related
credit derivatives and generally on remaining contractual
maturity for other derivatives. For option contracts that
require settlement by delivery of an underlying derivative
instrument, the tenor is generally classified based upon the
maturity date of the underlying derivative instrument. In those
instances where the underlying instrument does not have a
maturity date or either counterparty has the right to settle in
cash, the tenor is generally based upon the option expiration
date.
The following tables set forth the fair values of our OTC
derivative assets and liabilities by product type and by tenor:
OTC
Derivatives
(in millions)
(in millions)
| Assets | As of March 2010 | |||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months | Years | Years | or Greater | Total | |||||||||||||||
|
Interest rates
|
$ | 11,457 | $ | 36,858 | $ | 24,756 | $ | 39,127 | $ | 112,198 | ||||||||||
|
Credit
|
3,456 | 21,147 | 10,249 | 5,844 | 40,696 | |||||||||||||||
|
Currencies
|
9,469 | 10,954 | 5,203 | 6,852 | 32,478 | |||||||||||||||
|
Commodities
|
5,596 | 6,248 | 436 | 8 | 12,288 | |||||||||||||||
|
Equities
|
6,124 | 8,815 | 4,953 | 2,086 | 21,978 | |||||||||||||||
|
Netting across product
types
(1)
|
(2,754 | ) | (5,565 | ) | (2,946 | ) | (1,512 | ) | (12,777 | ) | ||||||||||
|
Subtotal
|
$ | 33,348 | (4) | $ | 78,457 | $ | 42,651 | $ | 52,405 | $ | 206,861 | |||||||||
|
Cross maturity
netting
(2)
|
(24,350 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(118,754 | ) | ||||||||||||||||||
|
Total
|
$ | 63,757 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months | Years | Years | or Greater | Total | |||||||||||||||
|
Interest rates
|
$ | 5,322 | $ | 13,386 | $ | 11,876 | $ | 13,979 | $ | 44,563 | ||||||||||
|
Credit
|
1,439 | 5,970 | 2,340 | 2,270 | 12,019 | |||||||||||||||
|
Currencies
|
10,103 | 4,523 | 2,664 | 2,217 | 19,507 | |||||||||||||||
|
Commodities
|
6,006 | 7,314 | 1,056 | 722 | 15,098 | |||||||||||||||
|
Equities
|
4,471 | 4,023 | 3,344 | 510 | 12,348 | |||||||||||||||
|
Netting across product
types
(1)
|
(2,754 | ) | (5,565 | ) | (2,946 | ) | (1,512 | ) | (12,777 | ) | ||||||||||
|
Subtotal
|
$ | 24,587 | (4) | $ | 29,651 | $ | 18,334 | $ | 18,186 | $ | 90,758 | |||||||||
|
Cross maturity
netting
(2)
|
(24,350 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(14,501 | ) | ||||||||||||||||||
|
Total
|
$ | 51,907 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category, pursuant to enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category, where appropriate. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories, pursuant to enforceable netting agreements. | |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (4) | Includes fair values of OTC derivative assets and liabilities, maturing within six months, of $19.94 billion and $15.91 billion, respectively. |
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Table of Contents
OTC
Derivatives
(in millions)
(in millions)
| Assets | As of December 2009 | |||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months | Years | Years | or Greater | Total | |||||||||||||||
|
Interest rates
|
$ | 14,266 | $ | 37,146 | $ | 25,608 | $ | 37,721 | $ | 114,741 | ||||||||||
|
Credit
|
5,743 | 20,465 | 11,497 | 6,281 | 43,986 | |||||||||||||||
|
Currencies
|
9,870 | 12,789 | 6,408 | 6,955 | 36,022 | |||||||||||||||
|
Commodities
|
6,201 | 7,546 | 521 | 41 | 14,309 | |||||||||||||||
|
Equities
|
6,742 | 8,818 | 4,920 | 2,350 | 22,830 | |||||||||||||||
|
Netting across product
types
(1)
|
(3,480 | ) | (6,256 | ) | (3,047 | ) | (1,399 | ) | (14,182 | ) | ||||||||||
|
Subtotal
|
$ | 39,342 | (4) | $ | 80,508 | $ | 45,907 | $ | 51,949 | $ | 217,706 | |||||||||
|
Cross maturity
netting
(2)
|
(24,681 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(124,603 | ) | ||||||||||||||||||
|
Total
|
$ | 68,422 | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
|||||||||||||||||
|
Product Type
|
Months | Years | Years | or Greater | Total | |||||||||||||||
|
Interest rates
|
$ | 7,042 | $ | 12,831 | $ | 11,421 | $ | 12,518 | $ | 43,812 | ||||||||||
|
Credit
|
2,487 | 7,168 | 2,356 | 2,116 | 14,127 | |||||||||||||||
|
Currencies
|
12,202 | 4,003 | 2,789 | 2,132 | 21,126 | |||||||||||||||
|
Commodities
|
6,922 | 7,161 | 1,157 | 846 | 16,086 | |||||||||||||||
|
Equities
|
4,213 | 3,746 | 3,371 | 586 | 11,916 | |||||||||||||||
|
Netting across product
types
(1)
|
(3,480 | ) | (6,256 | ) | (3,047 | ) | (1,399 | ) | (14,182 | ) | ||||||||||
|
Subtotal
|
$ | 29,386 | (4) | $ | 28,653 | $ | 18,047 | $ | 16,799 | $ | 92,885 | |||||||||
|
Cross maturity
netting
(2)
|
(24,681 | ) | ||||||||||||||||||
|
Cash collateral
netting
(3)
|
(14,743 | ) | ||||||||||||||||||
|
Total
|
$ | 53,461 | ||||||||||||||||||
| (1) | Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category, pursuant to enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category, where appropriate. | |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories, pursuant to enforceable netting agreements. | |
| (3) | Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements. | |
| (4) | Includes fair values of OTC derivative assets and liabilities, maturing within six months, of $21.60 billion and $18.08 billion, respectively. |
126
Table of Contents
The following tables set forth the distribution, by credit
rating, of our exposure with respect to OTC derivatives by
tenor, both before and after consideration of the effect of
collateral and netting agreements. The categories shown reflect
our internally determined public rating agency equivalents:
OTC Derivative
Credit Exposure
(in millions)
(in millions)
| As of March 2010 | ||||||||||||||||||||||||||||||||
|
Exposure
|
||||||||||||||||||||||||||||||||
|
Credit Rating
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
Net of
|
|||||||||||||||||||||||||||
|
Equivalent
|
Months | Years | Years | or Greater | Total | Netting (2) | Exposure | Collateral | ||||||||||||||||||||||||
|
AAA/Aaa
|
$ | 890 | $ | 2,586 | $ | 2,047 | $ | 2,153 | $ | 7,676 | $ | (2,781 | ) | $ | 4,895 | $ | 4,475 | |||||||||||||||
|
AA/Aa2
|
4,736 | 11,186 | 8,331 | 9,601 | 33,854 | (23,401 | ) | 10,453 | 7,144 | |||||||||||||||||||||||
|
A/A2
|
18,588 | 47,069 | 27,228 | 31,547 | 124,432 | (100,712 | ) | 23,720 | 19,883 | |||||||||||||||||||||||
|
BBB/Baa2
|
4,634 | 8,202 | 2,860 | 7,853 | 23,549 | (12,304 | ) | 11,245 | 5,824 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
3,793 | 8,206 | 1,899 | 1,065 | 14,963 | (3,710 | ) | 11,253 | 7,168 | |||||||||||||||||||||||
|
Unrated
|
707 | 1,208 | 286 | 186 | 2,387 | (196 | ) | 2,191 | 1,494 | |||||||||||||||||||||||
|
Total
|
$ | 33,348 | (1) | $ | 78,457 | $ | 42,651 | $ | 52,405 | $ | 206,861 | $ | (143,104 | ) | $ | 63,757 | $ | 45,988 | ||||||||||||||
| As of December 2009 | ||||||||||||||||||||||||||||||||
|
Exposure
|
||||||||||||||||||||||||||||||||
|
Credit Rating
|
0 - 12
|
1 - 5
|
5 - 10
|
10 Years
|
Net of
|
|||||||||||||||||||||||||||
|
Equivalent
|
Months | Years | Years | or Greater | Total | Netting (2) | Exposure | Collateral | ||||||||||||||||||||||||
|
AAA/Aaa
|
$ | 2,020 | $ | 3,157 | $ | 3,507 | $ | 2,567 | $ | 11,251 | $ | (5,603 | ) | $ | 5,648 | $ | 5,109 | |||||||||||||||
|
AA/Aa2
|
5,285 | 10,745 | 7,090 | 8,954 | 32,074 | (19,653 | ) | 12,421 | 8,735 | |||||||||||||||||||||||
|
A/A2
|
22,707 | 47,891 | 30,267 | 31,203 | 132,068 | (107,942 | ) | 24,126 | 20,111 | |||||||||||||||||||||||
|
BBB/Baa2
|
4,402 | 8,300 | 3,024 | 7,830 | 23,556 | (11,064 | ) | 12,492 | 6,202 | |||||||||||||||||||||||
|
BB/Ba2 or lower
|
4,444 | 9,438 | 1,735 | 1,354 | 16,971 | (4,914 | ) | 12,057 | 7,381 | |||||||||||||||||||||||
|
Unrated
|
484 | 977 | 284 | 41 | 1,786 | (108 | ) | 1,678 | 1,161 | |||||||||||||||||||||||
|
Total
|
$ | 39,342 | (1) | $ | 80,508 | $ | 45,907 | $ | 51,949 | $ | 217,706 | $ | (149,284 | ) | $ | 68,422 | $ | 48,699 | ||||||||||||||
| (1) | Includes fair values of OTC derivative assets, maturing within six months, of $19.94 billion and $21.60 billion as of March 2010 and December 2009, respectively. |
| (2) | Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories, pursuant to enforceable netting agreements, and the netting of cash collateral received, pursuant to credit support agreements. Receivable and payable balances with the same counterparty in the same tenor category are netted within such tenor category, where appropriate. |
Derivative transactions may also involve legal risks including
the risk that they are not authorized or appropriate for a
counterparty, that documentation has not been properly executed
or that executed agreements may not be enforceable against the
counterparty. We attempt to minimize these risks by obtaining
advice of counsel on the enforceability of agreements as well as
on the authority of a counterparty to effect the derivative
transaction. In addition, certain derivative transactions
(e.g., credit derivative contracts) involve the risk that
we may have difficulty obtaining, or be unable to obtain, the
underlying security or obligation in order to satisfy any
physical settlement requirement.
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Table of Contents
Liquidity and
Funding Risk
Liquidity is of critical importance to companies in the
financial services sector. Most failures of financial
institutions have occurred in large part due to insufficient
liquidity. Accordingly, Goldman Sachs has in place a
comprehensive set of liquidity and funding policies that are
intended to maintain significant flexibility to address both
Goldman Sachs-specific and broader industry or market liquidity
events. Our principal objective is to be able to
fund Goldman Sachs and to enable our core businesses to
continue to generate revenues, even under adverse circumstances.
We manage liquidity risk according to the following framework:
| • | Excess Liquidity. We maintain substantial excess liquidity to meet a broad range of potential cash outflows in a stressed environment, including financing obligations. The amount of our excess liquidity is based on an internal liquidity model together with a qualitative assessment of the condition of the financial markets and of Goldman Sachs. | |
| • | Asset-Liability Management. Our funding strategy includes an assessment of the overall characteristics of our assets with respect to their anticipated holding periods and potential illiquidity in a stressed environment. In addition, we manage the maturities and diversity of our secured and unsecured funding liabilities across markets, products and counterparties, and we seek to maintain liabilities of appropriate term relative to our asset base. | |
| • | Contingency Funding Plan (CFP). We maintain a CFP to help identify, measure, monitor and mitigate liquidity and funding risk. The CFP considers various risk factors that could occur during a crisis and provides a framework for analyzing and responding to a liquidity crisis. |
During 2009, the Basel Committee on Banking Supervision
introduced for public comment a new framework for liquidity risk
management for financial institutions. While the principles
behind the proposed measures are broadly consistent with our
liquidity management framework and policies, it is possible that
the final standards could impact the firm’s liquidity and
funding requirements and practices.
Excess
Liquidity
Our most important liquidity policy is to
pre-fund
what we estimate will be our potential cash needs during a
liquidity crisis and hold such excess liquidity in the form of
unencumbered, highly liquid securities that may be sold or
pledged to provide
same-day
liquidity. This “Global Core Excess” is intended to
allow us to meet immediate obligations without needing to sell
other assets or depend on additional funding from
credit-sensitive
markets. We believe that this pool of excess liquidity provides
us with a resilient source of funds and gives us significant
flexibility in managing through a difficult funding environment.
Our Global Core Excess reflects the following principles:
| • | The first days or weeks of a liquidity crisis are the most critical to a company’s survival. | |
| • | Focus must be maintained on all potential cash and collateral outflows, not just disruptions to financing flows. Our businesses are diverse, and our cash needs are driven by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. | |
| • | During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms or availability of other types of secured financing may change. | |
| • | As a result of our policy to pre-fund liquidity that we estimate may be needed in a crisis, we hold more unencumbered securities and have larger debt balances than our businesses would otherwise require. We believe that our liquidity is stronger with greater balances of highly liquid unencumbered securities, even though it increases our total assets, and our funding costs. |
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Table of Contents
The size of our Global Core Excess is based on an internal
liquidity model together with a qualitative assessment of the
condition of the financial markets and of Goldman Sachs. Our
liquidity model, through which we analyze the consolidated firm
as well as our major
broker-dealer
and bank depository institution subsidiaries, identifies and
estimates potential contractual and contingent cash and
collateral outflows over a
short-term
horizon in a liquidity crisis, including, but not limited to:
| • | upcoming maturities of unsecured long-term debt, promissory notes, commercial paper, term deposits and other unsecured funding products; | |
| • | potential buybacks of a portion of our outstanding unsecured funding; | |
| • | potential withdrawals of client deposits in our banking entities; | |
| • | adverse changes in the terms of, or the inability to refinance, secured funding trades with upcoming maturities, reflecting, among other factors, the quality of the underlying collateral and counterparty concentration; | |
| • | outflows of cash or collateral associated with the impact of market moves on our OTC derivatives, listed derivatives and securities and loans pledged as collateral for financing transactions; | |
| • | other outflows of cash or collateral related to derivatives, including the impact of trade terminations, collateral substitutions, collateral disputes, collateral calls or termination payments (in the event of a two-notch downgrade in our credit ratings), collateral that has not been called by counterparties but is available to them, or additional margin that could be requested by exchanges or clearing houses in a stressed environment; | |
| • | potential liquidity outflows associated with our prime brokerage business, including those related to customer credit balances; | |
| • | draws on our unfunded commitments not supported by William Street Funding Corporation (1) , with draw assumptions varying in magnitude reflecting, among other things, the type of commitment and counterparty, and | |
| • | other upcoming cash outflows, such as tax and other large payments. |
The following table sets forth the average loan value of the
securities (the estimated amount of cash that would be advanced
by counterparties against these securities), as well as certain
overnight cash deposits that are included in our Global Core
Excess:
|
Three Months
|
Year Ended
|
|||||||
| Ended March | December | |||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
U.S. dollar-denominated
|
$ | 111,258 | $ | 120,970 | ||||
|
Non-U.S. dollar-denominated
|
50,343 | 45,404 | ||||||
|
Total Global Core Excess
|
$ | 161,601 | $ | 166,374 | ||||
The
U.S. dollar-denominated
excess is comprised of only unencumbered U.S. government
securities, U.S. agency securities and highly liquid
U.S. agency
mortgage-backed
securities, all of which are eligible as collateral in Federal
Reserve open market operations, as well as certain overnight
cash deposits. Our
non-U.S. dollar-denominated
excess is comprised of only unencumbered French, German, United
Kingdom and Japanese government bonds and certain overnight cash
deposits in highly liquid currencies. We strictly limit our
Global Core Excess to this narrowly defined
(1)
The
Global Core Excess excludes liquid assets of $4.03 billion
held separately by William Street Funding Corporation. See
Note 8 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding the William Street credit
extension program.
129
Table of Contents
list of securities and cash because we believe they are highly
liquid, even in a difficult funding environment. We do not
believe that other potential sources of excess liquidity, such
as lower-quality unencumbered securities or committed credit
facilities, are as reliable in a liquidity crisis.
We maintain our Global Core Excess to enable us to meet current
and potential liquidity requirements of our parent company,
Group Inc., and all of its subsidiaries. The Global Core
Excess is held at Group Inc. and our major
broker-dealer
and bank depository institution subsidiaries. Each of these
entities has its own liquidity model and funding risk management
framework with separate excess liquidity pools intended to meet
potential outflows in each entity in a stressed environment.
Liquidity held in each of these subsidiaries is assumed to be
usable only by that entity for the purpose of meeting its
liquidity requirements. Subsidiary liquidity is not available to
Group Inc. unless legally provided for and there are no
additional regulatory, tax or other restrictions.
In addition to our Global Core Excess, we have a significant
amount of other unencumbered securities as a result of our
business activities. These assets include other government
bonds,
high-grade
money market securities, corporate bonds and marginable
equities. We do not include these securities in our Global Core
Excess.
In reporting our Global Core Excess and other unencumbered
assets, we use loan values that are based on
stress-scenario
borrowing capacity and we regularly review these assumptions
asset class by asset class. The estimated aggregate loan value
of our Global Core Excess, cash deposits not included in the
Global Core Excess and our other unencumbered assets averaged
$207.10 billion and $210.48 billion for the three
months ended March 2010 and year ended December 2009,
respectively.
Asset-Liability
Management
Assets.
We seek to maintain a liquid balance
sheet and substantially all of our inventory is
marked-to-market
daily. We impose balance sheet limits for each business and
utilize aged inventory limits for certain financial instruments
as a disincentive to our businesses to hold inventory over
longer periods of time. Although our balance sheet fluctuates
due to client activity, market conventions and periodic market
opportunities in certain of our businesses, our total assets and
adjusted assets at financial statement dates are typically not
materially different from those occurring within our reporting
periods.
Liabilities.
We seek to structure our
liabilities to meet the following objectives:
| • | Term Structure. We seek to structure our liabilities to have long-dated maturities in order to reduce refinancing risk. We manage maturity concentrations for both secured and unsecured funding to ensure we are able to mitigate any concentrated funding outflows. | |
| • | Diversity of Funding Sources. We seek to maintain broad and diversified funding sources globally for both secured and unsecured funding. We make use of the repurchase agreement and securities lending markets, as well as other secured funding markets. We issue long-term debt through syndicated U.S. registered offerings, U.S. registered and 144A medium-term note programs, offshore medium-term note offerings and other debt offerings. We issue short-term debt through U.S. and non-U.S. commercial paper and promissory note issuances and other methods. We raise demand and savings deposits through cash sweep programs and time deposits through internal and third-party broker networks. We generally distribute our funding products through our own sales force to a large, diverse global creditor base. We believe that our relationships with our creditors are critical to our liquidity. Our creditors include banks, governments, securities lenders, pension funds, insurance companies, mutual funds and individuals. We access funding in a variety of markets in the Americas, Europe and Asia. We have imposed various internal guidelines on creditor concentration, including the amount of our commercial paper and promissory notes that can be owned by any single creditor or group of creditors. |
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Table of Contents
| • | Structural Protection. We structure our liabilities to reduce the risk that we may be required to redeem or repurchase certain of our borrowings prior to their contractual maturity. We issue substantially all of our unsecured debt without put provisions or other provisions that would, based solely upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price, trigger a requirement for an early payment, collateral support, change in terms, acceleration of maturity or the creation of an additional financial obligation. |
Secured Funding.
We fund a substantial portion
of our inventory on a secured basis, which we believe provides
us with a more stable source of liquidity than unsecured
financing, as it is less sensitive to changes in our credit
quality due to the underlying collateral. However, we recognize
that the terms or availability of secured funding, particularly
overnight funding, can deteriorate rapidly in a difficult
environment. To help mitigate this risk, we generally do not
rely on overnight secured funding, unless collateralized with
highly liquid securities such as securities eligible for
inclusion in our Global Core Excess. Substantially all of our
other secured funding is executed for tenors of one month or
greater. Additionally, we monitor counterparty concentration and
hold a portion of our Global Core Excess for refinancing risk
associated with all secured funding transactions. We seek longer
terms for secured funding collateralized by lower-quality
assets, as we believe these funding transactions may pose
greater refinancing risk. The weighted average life of our
secured funding, excluding funding collateralized by highly
liquid securities eligible for inclusion in our Global Core
Excess, exceeded 100 days as of March 2010.
Unsecured
Short-Term
Borrowings.
Our liquidity also depends on the
stability of our unsecured
short-term
financing base. Accordingly, we prefer issuing promissory notes,
in which we do not make a market, over commercial paper, which
we may repurchase prior to maturity through the ordinary course
of business as a market maker. As of March 2010, our
unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings, were $40.78 billion. See Note 6 to the
condensed consolidated financial statements in Part I,
Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our unsecured
short-term
borrowings.
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Table of Contents
Unsecured
Long-Term
Borrowings.
We issue unsecured
long-term
borrowings as a source of total capital in order to meet our
long-term
financing requirements. The following table sets forth our
quarterly unsecured
long-term
borrowings maturity profile through the first quarter of 2016 as
of March 2010:
Unsecured
Long-Term
Borrowings Maturity Profile
($ in millions)
($ in millions)
The weighted average maturity of our unsecured
long-term
borrowings as of March 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 swap a substantial portion of our
long-term
borrowings into
short-term
floating rate obligations in order to minimize our exposure to
interest rates.
Deposits.
As of March 2010, our bank
depository institution subsidiaries had $38.43 billion in
customer deposits, including $9.46 billion of certificates
of deposit and other time deposits with a weighted average
maturity of three years, and $28.97 billion of other
deposits, substantially all of which were from cash sweep
programs. GS Bank USA has access to funding through the Federal
Reserve Bank discount window. While we do not rely on funding
through the Federal Reserve Bank discount window in our
liquidity modeling and stress testing, we maintain policies and
procedures necessary to access this funding.
Temporary Liquidity Guarantee Program
(TLGP).
As of March 2010, we had outstanding
$20.69 billion of senior unsecured debt (comprised of
$3.73 billion of
short-term
and $16.96 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.
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Table of Contents
See “Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K
for a discussion of factors that could impair our ability to
access the capital markets.
Funding Policies.
We seek to manage our assets
and the maturity profile of our secured and unsecured funding
base such that we should be able to liquidate our assets prior
to our liabilities coming due, even in times of prolonged or
severe liquidity stress.
In order to avoid reliance on asset sales (other than our Global
Core Excess), our goal is to ensure that we have sufficient
total capital (unsecured
long-term
borrowings plus total shareholders’ equity) to fund our
balance sheet for at least one year. However, we recognize that
orderly asset sales may be prudent or necessary in a severe or
persistent liquidity crisis. The target amount of our total
capital is based on an internal funding model which
incorporates, among other things, the following
long-term
financing requirements:
| • | the portion of trading assets that we believe could not be funded on a secured basis in periods of market stress, assuming stressed loan values; | |
| • | goodwill and identifiable intangible assets, property, leasehold improvements and equipment, and other illiquid assets; | |
| • | derivative and other margin and collateral requirements; | |
| • | anticipated draws on our unfunded loan commitments; and | |
| • | capital or other forms of financing in our regulated subsidiaries that are in excess of their long-term financing requirements. |
Certain financial instruments may be more difficult to fund on a
secured basis during times of market stress. Accordingly, we
focus on funding these assets with longer contractual maturities
to reduce refinancing risk in periods of market stress and
generally hold higher levels of total capital for these assets
than more liquid types of financial instruments. The following
table sets forth our aggregate holdings in these categories of
financial instruments:
| As of | ||||||||
|
March
|
December
|
|||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
|
Mortgage and other
asset-backed
loans and securities
|
$ | 13,236 | $ | 14,277 | ||||
|
Bank loans and bridge
loans
(1)
|
20,787 | 19,345 | ||||||
|
Emerging market debt securities
|
2,736 | 2,957 | ||||||
|
High-yield
and other debt obligations
|
12,866 | 12,028 | ||||||
|
Private equity investments and real estate fund
investments
(2)
|
13,182 | 14,633 | ||||||
|
Emerging market equity securities
|
5,835 | 5,193 | ||||||
|
ICBC ordinary
shares
(3)
|
7,538 | 8,111 | ||||||
|
SMFG convertible preferred
stock
(4)
|
— | 933 | ||||||
|
Other restricted public equity securities
|
99 | 203 | ||||||
|
Other investments in
funds
(5)
|
3,031 | 2,911 | ||||||
| (1) | Includes funded commitments and inventory held in connection with our origination and secondary trading activities. | |
| (2) | Includes interests in our merchant banking funds. Such amounts exclude assets related to consolidated investment funds of $1.03 billion and $919 million as of March 2010 and December 2009, respectively, for which Goldman Sachs does not bear economic exposure. Excludes $1.29 billion as of March 2010, related to VIEs consolidated upon adoption of ASU No. 2009-17, for which Goldman Sachs does not bear economic exposure. | |
| (3) | Includes interests of $4.76 billion and $5.13 billion as of March 2010 and December 2009, respectively, held by investment funds managed by Goldman Sachs. | |
| (4) | During the first quarter of 2010, we converted our remaining SMFG preferred stock investment into common stock and delivered the common stock to close out our related hedge position. | |
| (5) | Includes interests in other investment funds that we manage. |
133
Table of Contents
See Note 3 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for further information regarding the financial instruments we
hold.
Subsidiary Funding Policies.
The majority of
our unsecured funding is raised by Group Inc.
Group Inc. then lends the necessary funds to its
subsidiaries, some of which are regulated, to meet their asset
financing, liquidity and capital requirements. In addition,
Group Inc. provides its regulated subsidiaries with the
necessary capital to meet their regulatory requirements. The
benefits of this approach to subsidiary funding include enhanced
control and greater flexibility to meet the funding requirements
of our subsidiaries. Funding is also raised at the subsidiary
level through a variety of products, including secured funding,
unsecured borrowings and deposits.
Our intercompany funding policies are predicated on an
assumption that, unless legally provided for, funds or
securities are not freely available from a subsidiary to its
parent company or other subsidiaries. In particular, many of our
subsidiaries are subject to laws that authorize regulatory
bodies to block or reduce the flow of funds from those
subsidiaries to Group Inc. Regulatory action of that kind
could impede access to funds that Group Inc. needs to make
payments on obligations, including debt obligations. As such, we
assume that capital or other financing provided to our regulated
subsidiaries is not available to Group Inc. or other
subsidiaries until the maturity of such financing.
Group Inc. has provided substantial amounts of equity and
subordinated indebtedness, directly or indirectly, to its
regulated subsidiaries. For example, as of March 2010,
Group Inc. had $26.21 billion of such equity and
subordinated indebtedness invested in GS&Co., its principal
U.S. registered
broker-dealer;
$22.96 billion invested in GSI, a regulated U.K.
broker-dealer;
$2.65 billion invested in Goldman Sachs
Execution & Clearing, L.P., a U.S. registered
broker-dealer;
$3.84 billion invested in Goldman Sachs Japan Co., Ltd., a
regulated Japanese
broker-dealer;
and $22.86 billion invested in GS Bank USA, a regulated New
York State-chartered bank. Group Inc. also had
$81.55 billion of unsubordinated loans and
$14.84 billion of collateral provided to these entities as
of March 2010, as well as significant amounts of capital
invested in and loans to its other regulated subsidiaries.
Contingency
Funding Plan
The Goldman Sachs CFP sets out the plan of action to fund
business activity in crisis situations
and/or
periods of market stress. The CFP outlines the appropriate
communication channels to be followed throughout a crisis period
and also provides a framework for analyzing and responding to a
liquidity crisis including, but not limited to, the potential
risk factors, identification of liquidity outflows, mitigants
and potential actions.
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Table of Contents
Credit
Ratings
The following table sets forth our unsecured credit ratings
(excluding debt guaranteed by the FDIC under the TLGP) and
outlook as of March 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- | Stable (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. |
On May 5, 2010, Fitch, Inc. affirmed Group Inc.’s
long-term and short-term issuer default ratings but revised its
Rating Outlook from “Stable” to “Negative.”
We rely upon the short-term and long-term debt capital markets
to fund a significant portion of our day-to-day operations. The
cost and availability of debt financing is influenced by our
credit ratings. Credit ratings are important when we are
competing in certain markets and when we seek to engage in
longer-term transactions, including OTC derivatives. See
“Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K
for a discussion of the risks associated with a reduction in our
credit ratings.
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. Recently, certain rating agencies have
indicated that the enactment of financial regulatory reform
legislation in the U.S. could result in the rating agencies
reducing their assumed level of government support and therefore
result in ratings downgrades for certain large financial
institutions. However, this legislation is still in the proposal
stage and any actions to be taken by the rating agencies have
not been determined.
In evaluating our liquidity requirements, we consider additional
collateral or termination payments that may be required in the
event of a two-notch reduction in our long-term credit ratings,
as well as collateral that has not been called by
counterparties, but is available to them. Based on our credit
ratings as of March 2010, additional collateral or termination
payments pursuant to bilateral agreements with certain
counterparties of approximately $1.51 billion and
$2.77 billion could have been called by counterparties in
the event of a one-notch and two-notch reduction, respectively,
in our long-term credit ratings.
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Table of Contents
Cash
Flows
As a global financial institution, our cash flows are complex
and interrelated and bear little relation to our net earnings
and net assets and, consequently, we believe that traditional
cash flow analysis is less meaningful in evaluating our
liquidity position than the excess liquidity and
asset-liability
management policies described above. Cash flow analysis may,
however, be helpful in highlighting certain macro trends and
strategic initiatives in our businesses.
Three Months Ended March 2010.
Our cash
and cash equivalents decreased by $11.23 billion to
$27.06 billion at the end of the first quarter of 2010. We
used net cash of $8.47 billion in our operating and
investing activities, primarily to fund securities borrowed and
securities purchased under agreements to resell. We used net
cash in financing activities of $2.76 billion, primarily
due to repurchases of common stock.
Three Months Ended March 2009.
Our cash
and cash equivalents increased by $21.61 billion to
$35.42 billion at the end of the first quarter of 2009. We
raised $22.52 billion in net cash from operating and
financing activities, primarily in bank deposits and unsecured
long-term
borrowings. We used net cash of $913 million in our
investing activities.
As of March 2010, total assets on our condensed
consolidated statement of financial condition were
$880.53 billion, an increase of $31.59 billion from
December 2009. Consistent with the activity described in
“— Cash
Flows” above, the $31.59 billion increase is primarily
attributable to (i) an increase in securities purchased
under agreements to resell and federal funds sold of
$22.09 billion, primarily due to an increase in our matched
book business within Trading and Principal Investments related
to an increase in client-driven activity and (ii) an
increase in securities borrowed of $12.90 billion,
primarily related to client-driven activity.
As of March 2010, total liabilities on our condensed
consolidated statement of financial condition were
$807.58 billion, an increase of $29.36 billion from
December 2009. The $29.36 billion increase is
primarily attributable to (i) an increase in securities
sold under agreements to repurchase of $25.16 billion,
primarily due to an increase in our matched book business within
Trading and Principal Investments related to an increase in
client-driven activity, (ii) an increase in trading
liabilities, at fair value of $11.06 billion, primarily due
to increases in equities and convertible debentures, and
non-U.S. government
obligations and (iii) a decrease in other liabilities and
accrued expenses of $4.12 billion (see Note 12 to the
condensed consolidated financial statements in Part I,
Item 1 of this Quarterly Report on Form 10-Q for
additional information on “Other liabilities and accrued
expenses”).
Recent Accounting
Developments
See Note 2 to the condensed consolidated financial
statements in Part I, Item 1 of this Quarterly Report
on
Form 10-Q
for information regarding Recent Accounting Developments.
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Table of Contents
Cautionary
Statement Pursuant to the U.S. Private Securities
Litigation Reform Act of 1995
We have included or incorporated by reference in this Quarterly
Report on
Form 10-Q,
and from time to time our management may make, statements that
may constitute “forward-looking statements” within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts but instead represent only
our beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. It is
possible that our actual results and financial condition may
differ, possibly materially, from the anticipated results and
financial condition indicated in these forward-looking
statements. For a discussion of some of the risks and important
factors that could affect our future results and financial
condition, see “Risk Factors” in Part I,
Item 1A of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009 and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
Statements about our investment banking transaction backlog also
may constitute forward-looking statements. Such statements are
subject to the risk that the terms of these transactions may be
modified or that they may not be completed at all; therefore,
the net revenues, if any, that we actually earn from these
transactions may differ, possibly materially, from those
currently expected. Important factors that could result in a
modification of the terms of a transaction or a transaction not
being completed include, in the case of underwriting
transactions, a decline or weakness in general economic
conditions, outbreak of hostilities, volatility in the
securities markets generally or an adverse development with
respect to the issuer of the securities and, in the case of
financial advisory transactions, a decline in the securities
markets, an inability to obtain adequate financing, an adverse
development with respect to a party to the transaction or a
failure to obtain a required regulatory approval. For a
discussion of other important factors that could adversely
affect our investment banking transactions, see “Risk
Factors” in Part I, Item 1A of our Annual Report
on
Form 10-K
for the fiscal year ended December 31, 2009 and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Part II,
Item 7 of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2009.
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk |
Quantitative and qualitative disclosures about market risk are
set forth under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Market Risk” in Part I, Item 2 above.
| Item 4: | Controls and Procedures |
As of the end of the period covered by this report, an
evaluation was carried out by Goldman Sachs’ management,
with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (Exchange Act)). Based
upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that these disclosure controls and
procedures were effective as of the end of the period covered by
this report. In addition, no change in our internal control over
financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) occurred during our most recent quarter
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
137
Table of Contents
| Item 1: | Legal Proceedings |
We are involved in a number of judicial, regulatory and
arbitration proceedings (including those described below)
concerning matters arising in connection with the conduct of our
businesses. We believe, based on currently available
information, that the results of such proceedings, in the
aggregate, will not have a material adverse effect on our
financial condition, but might be material to our operating
results for any particular period, depending, in part, upon the
operating results for such period. Given the range of litigation
and investigations presently under way, our litigation expenses
can be expected to remain high. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Use of Estimates” in Part I,
Item 2 of this Quarterly Report on
Form 10-Q.
The following supplements and amends our discussion set forth
under Item 3 “Legal Proceedings” in our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2009.
IPO Process Matters.
In the lawsuit brought by
an official committee of unsecured creditors on behalf of eToys,
Inc., GS&Co. moved for summary judgment on March 19,
2010.
Enron Litigation Matters.
In the Texas federal
court litigation relating to the Exchangeable Notes of Enron
Corp., no appeal was taken from the final judgment approving the
settlement in the class action, disposing of the matter. In the
separate action brought by several funds that invested in the
Exchangeable Notes and Zero Coupon Convertible Notes of Enron
Corp., the funds did not opt out of the class settlement, and on
April 20, 2010 filed a notice discontinuing the individual
action with prejudice.
Adelphia Communications Fraudulent Conveyance
Litigation.
On March 2, 2010, GS&Co.
moved for summary judgment.
Treasury Matters.
By an order dated
April 13, 2010, the U.S. Court of Appeals for the
Seventh Circuit ruled that GS&Co.’s motion to dismiss
the appeal would be entertained together with the merits of the
appeal.
Refco Securities Litigation.
On April 20,
2010, certain underwriting defendants including GS&Co.
entered into a definitive settlement of the class action,
pursuant to which they will contribute $49.5 million to a
settlement fund. The settlement is subject to court approval.
Short-Selling Litigation.
On March 3,
2010, plaintiffs filed a petition in the U.S. Supreme Court
seeking review of the appellate court decision affirming
dismissal of the complaint.
Compensation-Related Litigation.
In the action
relating to Group Inc.’s 2007 proxy statement, on
March 15, 2010, plaintiff filed a petition in the
U.S. Supreme Court seeking review of the appellate court
decision affirming dismissal of the complaint.
In the action relating to Group Inc.’s 2008 proxy
statement, plaintiff filed a further amended complaint on
March 24, 2010.
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Table of Contents
In the actions in New York state court, on April 8, 2010,
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. In
the actions brought in the Delaware Court of Chancery,
defendants moved to dismiss on March 9, 2010, and
plaintiffs amended their complaint on April 28, 2010 to
include, among other things, the allegations included in the
SEC’s action described under “Mortgage-Related
Matters” below.
Mortgage-Related Matters.
On March 31,
2010, the plaintiff in the purported class action commenced on
December 11, 2008 relating to various mortgage pass-through
and asset-backed certificates issued by various securitization
trusts in 2007 filed a third amended complaint. On
April 26, 2010, an alleged purchaser of asset-backed
certificates issued in an offering that is not included in the
third amended complaint moved to intervene in the action as an
additional plaintiff on behalf of a putative class of purchasers
of securities in that offering.
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 one of its employees in connection with
a CDO offering made in early 2007 (2007 CDO Transaction),
alleging that the defendants made materially false and
misleading statements to investors and seeking, among other
things, unspecified monetary penalties. Notices of investigation
subsequently have been received by GS&Co. from FINRA and by
GSI from the U.K. Financial Services Authority, and Group Inc.
and certain of its affiliates have received requests for
information from other regulators regarding CDO offerings,
including the 2007 CDO Transaction, and related matters.
Since April 22, 2010, a number of putative shareholder
derivative actions have been filed in New York Supreme Court,
New York County, and the United States 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 CDO offerings made between 2004 and 2007,
including the 2007 CDO Transaction. These derivative complaints
generally include allegations of breach of fiduciary duty,
corporate waste, abuse of control, mismanagement, unjust
enrichment, misappropriation of information 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. In
addition, plaintiffs in the Delaware Court of Chancery actions
described in the “Compensation-Related Litigation”
section above have amended their complaint to assert, among
other things, allegations similar to those in the derivative
claims referred to above.
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 2007
CDO 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.
In addition, beginning April 26, 2010, a number of
purported securities law class actions have been filed in the
United States 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.
We anticipate that additional putative shareholder derivative
actions and other litigation may be filed, and regulatory and
other investigations and actions commenced, against us with
respect to offerings of CDOs.
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Table of Contents
To the extent we are unable to obtain appropriate waivers from
relevant regulators, resolution of the SEC Action, through a
judgment or a settlement that includes an injunction, a
cease-and-desist
order or a finding of fraud, could result in collateral
consequences to us that may materially adversely affect the
manner in which we conduct our businesses, including, without
limitation, an inability to act as a registered broker-dealer or
provide certain advisory and other services to
U.S. registered mutual funds. In addition, regulators could
impose restrictions on the activities of our banking,
commodities, investment advisory or other regulated businesses.
Auction Products Matters.
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. is in the process of entering into
similar consent orders with the other states.
In the actions alleging a conspiracy to manipulate the auction
securities market in violation of the federal antitrust laws, on
March 1, 2010, plaintiffs filed a notice of appeal from the
dismissal of their complaints.
Washington Mutual Securities
Litigation.
Plaintiffs filed their motion for
class certification on April 30, 2010.
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 and Trading 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, trading of credit
derivative instruments, commodities trading and the
effectiveness of internal information barriers. Goldman Sachs is
cooperating with the investigations and reviews.
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
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 six
individual antitrust actions filed beginning on
November 12, 2009 in the U.S. District Courts for the
Central and Eastern Districts of California by multiple
California municipalities, which 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 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 California’s Cartwright Act, and seek,
among other things, treble damages under the antitrust laws and
injunctive relief. On April 26, 2010, the Goldman Sachs
defendants’ motion to dismiss was denied.
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Table of Contents
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.
Research 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 research practices,
including communications among research analysts, sales and
trading personnel and clients. Goldman Sachs is cooperating with
the investigations and reviews.
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Table of Contents
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds |
The table below sets forth the information with respect to
purchases made by or on behalf of Group Inc. or any
“affiliated purchaser” (as defined in
Rule 10b-18(a)(3)
under the Exchange Act) of our common stock during the three
months ended March 31, 2010.
|
Total Number of
|
Maximum Number
|
|||||||||||||||
|
Average
|
Shares Purchased
|
of Shares That May
|
||||||||||||||
|
Total Number
|
Price
|
as Part of Publicly
|
Yet Be Purchased
|
|||||||||||||
|
of Shares
|
Paid per
|
Announced Plans
|
Under the Plans or
|
|||||||||||||
|
Period
|
Purchased | Share | or Programs (1) | Programs (1) | ||||||||||||
|
Month #1
|
||||||||||||||||
|
(January 1, 2010 to
January 31, 2010) |
— | — | — | 60,837,406 | ||||||||||||
|
Month #2
|
||||||||||||||||
|
(February 1, 2010 to
February 28, 2010) |
— | — | — | 60,837,406 | ||||||||||||
|
Month #3
|
||||||||||||||||
|
(March 1, 2010 to
March 31, 2010) |
13,180,250 | $ | 172.15 | 13,180,250 | 47,657,156 | |||||||||||
|
Total
|
13,180,250 | 13,180,250 | ||||||||||||||
| (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 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. Any repurchase of our common stock requires approval by the Federal Reserve Board. The total remaining authorization under the repurchase program was 47,657,156 shares as of April 23, 2010; the repurchase program has no set expiration or termination date. |
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Table of Contents
| Item 6: | Exhibits |
| Exhibits: | ||||
|
10.1
|
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. | |||
|
12.1
|
Statement re: Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends. | |||
|
15.1
|
Letter re: Unaudited Interim Financial Information. | |||
|
31.1
|
Rule 13a-14(a) Certifications.* | |||
|
32.1
|
Section 1350 Certifications.* | |||
|
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Statements of Earnings for the three months ended March 31, 2010 and March 27, 2009, (ii) the Condensed Consolidated Statements of Financial Condition as of March 31, 2010 and December 31, 2009, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2010 and year ended December 31, 2009, (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and March 27, 2009, (v) the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and March 27, 2009, and (vi) the notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.* | |||
| * | 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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE GOLDMAN SACHS GROUP, INC.
| By: |
/s/
David
A. Viniar
|
Name: David A. Viniar
| Title: | Chief Financial Officer |
| By: |
/s/
Sarah
E. Smith
|
Name: Sarah E. Smith
| Title: | Principal Accounting Officer |
Date: May 7, 2010
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TABLE OF CONTENTS
Part I: Financial InformationItem 1: Financial Statements (unaudited)Note 1. Description Of BusinessNote 2. Significant Accounting PoliciesNote 3. Financial InstrumentsNote 4. Securitization Activities and Variable Interest EntitiesNote 5. DepositsNote 6. Short-term BorrowingsNote 7. Long-term BorrowingsNote 8. Commitments, Contingencies and GuaranteesNote 9. Shareholders EquityNote 10. Earnings Per Common ShareNote 11. Goodwill and Identifiable Intangible AssetsNote 12. Other Assets and Other LiabilitiesNote 13. Transactions with Affiliated FundsNote 14. Income TaxesNote 15. Regulation and Capital AdequacyNote 16. Business SegmentsNote 17. Interest Income and Interest ExpenseItem 2: Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3: Quantitative and Qualitative Disclosures About Market RiskItem 4: Controls and ProceduresPart Ii: Other InformationItem 1: Legal ProceedingsItem 2: Unregistered Sales Of Equity Securities and Use Of ProceedsItem 6: Exhibits