FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended
February 23, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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For the transition
period to
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Commission File Number:
001-14965
The Goldman Sachs Group,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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13-4019460
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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85 Broad Street, New York,
NY
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10004
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(Address of principal executive
offices)
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(Zip
Code)
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(212) 902-1000
(Registrants 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 is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer x Accelerated
filer o Non-accelerated
filer 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 March 23, 2007 there were 408,469,518 shares of
the registrants common stock outstanding.
THE GOLDMAN SACHS
GROUP, INC.
QUARTERLY REPORT
ON
FORM 10-Q
FOR THE FISCAL QUARTER ENDED FEBRUARY 23, 2007
INDEX
1
PART I:
FINANCIAL INFORMATION
Item 1: Financial
Statements (Unaudited)
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
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Three Months
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Ended
February
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2007
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2006
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(in millions, except
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per share amounts)
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Revenues
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Investment banking
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$
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1,716
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$
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1,470
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Trading and principal investments
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9,073
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6,687
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Asset management and securities
services
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1,133
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1,554
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Interest income
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10,358
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7,535
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Total revenues
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22,280
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17,246
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Interest expense
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9,550
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6,813
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Revenues, net of interest expense
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12,730
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10,433
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Operating expenses
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Compensation and benefits
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6,111
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5,314
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Brokerage, clearing, exchange and
distribution fees
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551
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418
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Market development
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132
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100
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Communications and technology
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151
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124
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Depreciation and amortization
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132
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125
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Amortization of identifiable
intangible assets
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51
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34
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Occupancy
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204
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193
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Professional fees
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161
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109
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Cost of power generation
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84
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85
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Other expenses
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294
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242
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Total non-compensation expenses
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1,760
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1,430
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Total operating expenses
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7,871
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6,744
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Pre-tax earnings
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4,859
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3,689
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Provision for taxes
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1,662
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1,210
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Net earnings
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3,197
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2,479
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Preferred stock dividends
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49
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26
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Net earnings applicable to common
shareholders
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$
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3,148
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$
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2,453
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Earnings per common
share
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Basic
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$
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7.08
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$
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5.36
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Diluted
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6.67
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5.08
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Dividends declared and paid per
common share
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$
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0.35
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$
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0.25
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Average common shares
outstanding
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Basic
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444.5
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457.3
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Diluted
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471.9
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483.3
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
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As of
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February
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November
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2007
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2006
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(in millions, except
share and per share amounts)
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Assets
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Cash and cash equivalents
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$
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6,887
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$
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6,293
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Cash and securities segregated for
regulatory and other purposes
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78,284
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80,990
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Receivables from brokers, dealers
and clearing organizations
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12,964
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13,223
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Receivables from customers and
counterparties
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96,305
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79,790
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Collateralized agreements:
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Securities borrowed
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241,270
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219,342
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Financial instruments purchased
under agreements to resell, at fair value
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81,886
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82,126
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Financial instruments owned, at
fair value
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334,232
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298,563
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Financial instruments owned and
pledged as collateral, at fair value
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38,660
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35,998
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Total financial instruments owned,
at fair value
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372,892
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334,561
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Other assets
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22,007
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21,876
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Total assets
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$
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912,495
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$
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838,201
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Liabilities and
shareholders equity
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Unsecured short-term borrowings,
including the current portion of
unsecured long-term borrowings
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$
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54,062
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$
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47,904
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Payables to brokers, dealers and
clearing organizations
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6,422
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6,293
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Payables to customers and
counterparties
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215,299
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217,581
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Collateralized financings:
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Securities loaned
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26,334
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22,208
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Financial instruments sold under
agreements to repurchase, at fair value
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192,665
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147,492
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Other secured financings
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47,875
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50,424
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Financial instruments sold, but not
yet purchased, at fair value
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166,481
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155,805
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Other liabilities and accrued
expenses
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33,725
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31,866
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Unsecured long-term borrowings
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132,732
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122,842
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Total liabilities
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875,595
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802,415
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Commitments, contingencies and
guarantees
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Shareholders
equity
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Preferred stock, par value
$0.01 per share; 150,000,000 shares authorized,
124,000 shares issued and outstanding as of both February
2007 and November 2006, with liquidation preference of
$25,000 per share
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3,100
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3,100
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Common stock, par value
$0.01 per share; 4,000,000,000 shares authorized,
611,277,969 and 599,697,200 shares issued as of February
2007 and November 2006, respectively, and 411,316,967 and
412,666,084 shares outstanding as of February 2007 and
November 2006, respectively
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6
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6
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Restricted stock units and employee
stock options
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5,819
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6,290
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Nonvoting common stock, par value
$0.01 per share; 200,000,000 shares authorized,
no shares issued and outstanding
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Additional paid-in capital
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21,013
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19,731
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Retained earnings
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30,859
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27,868
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Accumulated other comprehensive
income
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18
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21
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Common stock held in treasury, at
cost, par value $0.01 per share; 199,961,002 and
187,031,116 shares as of February 2007 and November 2006,
respectively
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(23,915
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)
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(21,230
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Total shareholders equity
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36,900
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35,786
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Total liabilities and
shareholders equity
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$
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912,495
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$
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838,201
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
(UNAUDITED)
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Period
Ended
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February
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November
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2007
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2006
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(in millions,
except
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per share amounts)
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Preferred stock
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Balance, beginning of year
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$
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3,100
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$
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1,750
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Issued
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1,350
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Balance, end of period
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3,100
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3,100
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Common stock, par value
$0.01 per share
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Balance, beginning of year
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6
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6
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Issued
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Balance, end of period
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6
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6
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Restricted stock units and
employee stock options
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Balance, beginning of year
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6,290
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3,415
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Issuance and amortization of
restricted stock units and employee stock options
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846
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3,787
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Delivery of common stock underlying
restricted stock units
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(1,284
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)
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(781
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)
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Forfeiture of restricted stock
units and employee stock options
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(28
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)
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(129
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)
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Exercise of employee stock options
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(5
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)
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(2
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)
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Balance, end of period
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5,819
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6,290
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Additional paid-in
capital
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Balance, beginning of year
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19,731
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|
|
17,159
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Issuance of common stock, including
proceeds from exercise of employee stock options
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1,613
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2,432
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Cancellation of restricted stock
units in satisfaction of withholding tax requirements
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(927
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)
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(375
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)
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Preferred stock issuance costs
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|
|
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(1
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)
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Excess net tax benefit related to
share-based compensation
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|
|
596
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|
|
|
653
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Cash settlement of share-based
compensation
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(137
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)
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Balance, end of period
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|
21,013
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|
|
|
19,731
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Retained earnings
|
|
|
|
|
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Balance, beginning of year, as
previously reported
|
|
|
27,868
|
|
|
|
19,085
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|
Cumulative effect of adjustment
from adoption of SFAS No. 157, net of tax
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|
51
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|
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Cumulative effect of adjustment
from adoption of SFAS No. 159, net of tax
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|
|
(45
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)
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|
|
|
|
|
|
|
|
|
|
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|
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Balance, beginning of year, after
cumulative effect of adjustments
|
|
|
27,874
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|
|
|
19,085
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|
Net earnings
|
|
|
3,197
|
|
|
|
9,537
|
|
Dividends and dividend equivalents
declared on common stock and restricted stock units
|
|
|
(163
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)
|
|
|
(615
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)
|
Dividends declared on preferred
stock
|
|
|
(49
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)
|
|
|
(139
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)
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
30,859
|
|
|
|
27,868
|
|
Accumulated other comprehensive
income/(loss)
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
21
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|
|
|
|
|
Currency translation adjustment,
net of tax
|
|
|
5
|
|
|
|
45
|
|
Minimum pension liability
adjustment, net of tax
|
|
|
|
|
|
|
(27
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)
|
Net gains/(losses) on cash flow
hedges, net of tax
|
|
|
2
|
|
|
|
(7
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)
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
|
|
(2
|
)
|
|
|
10
|
|
Reclassification to retained
earnings from adoption of SFAS No. 159, net of tax
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
18
|
|
|
|
21
|
|
Common stock held in treasury,
at cost
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
(21,230
|
)
|
|
|
(13,413
|
)
|
Repurchased
|
|
|
(2,688
|
)
|
|
|
(7,817
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)
|
Reissued
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
|
(23,915
|
)
|
|
|
(21,230
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders
equity
|
|
$
|
36,900
|
|
|
$
|
35,786
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,197
|
|
|
$
|
2,479
|
|
Non-cash items included in net
earnings
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
204
|
|
|
|
175
|
|
Amortization of identifiable
intangible assets
|
|
|
68
|
|
|
|
44
|
|
Share-based compensation
|
|
|
362
|
|
|
|
343
|
|
Changes in operating assets and
liabilities
|
|
|
|
|
|
|
|
|
Cash and securities segregated for
regulatory and other purposes
|
|
|
2,664
|
|
|
|
(1,009
|
)
|
Net receivables from brokers,
dealers and clearing organizations
|
|
|
390
|
|
|
|
(2,400
|
)
|
Net payables to customers and
counterparties
|
|
|
(18,822
|
)
|
|
|
(5,282
|
)
|
Securities borrowed, net of
securities loaned
|
|
|
(17,802
|
)
|
|
|
(8,645
|
)
|
Financial instruments sold under
agreements to repurchase, net of financial instruments purchased
under agreements to resell
|
|
|
45,413
|
|
|
|
5,377
|
|
Financial instruments owned, at
fair value
|
|
|
(36,937
|
)
|
|
|
(14,878
|
)
|
Financial instruments sold, but
not yet purchased, at fair value
|
|
|
10,676
|
|
|
|
4,466
|
|
Other, net
|
|
|
(3,435
|
)
|
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used for operating
activities
|
|
|
(14,022
|
)
|
|
|
(19,643
|
)
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
Purchase of property, leasehold
improvements and equipment
|
|
|
(580
|
)
|
|
|
(674
|
)
|
Proceeds from sales of property,
leasehold improvements and equipment
|
|
|
12
|
|
|
|
24
|
|
Business acquisitions, net of cash
acquired
|
|
|
(55
|
)
|
|
|
(270
|
)
|
Proceeds from sales of investments
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(424
|
)
|
|
|
(920
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
Unsecured short-term borrowings,
net
|
|
|
1,652
|
|
|
|
3,178
|
|
Other secured financings
(short-term), net
|
|
|
241
|
|
|
|
760
|
|
Proceeds from issuance of other
secured financings (long-term)
|
|
|
400
|
|
|
|
3,792
|
|
Repayment of other secured
financings (long-term), including the current portion
|
|
|
(1,134
|
)
|
|
|
(1,118
|
)
|
Proceeds from issuance of
unsecured long-term borrowings
|
|
|
17,741
|
|
|
|
14,447
|
|
Repayment of unsecured long-term
borrowings, including the current portion
|
|
|
(3,325
|
)
|
|
|
(2,893
|
)
|
Derivative contracts with a
financing element, net
|
|
|
1,495
|
|
|
|
620
|
|
Common stock repurchased
|
|
|
(2,685
|
)
|
|
|
(2,577
|
)
|
Dividends and dividend equivalents
paid on common stock, preferred stock and restricted stock units
|
|
|
(212
|
)
|
|
|
(148
|
)
|
Proceeds from issuance of common
stock
|
|
|
308
|
|
|
|
644
|
|
Excess tax benefit related to
share-based compensation
|
|
|
559
|
|
|
|
181
|
|
Cash settlement of share-based
compensation
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
15,040
|
|
|
|
16,873
|
|
Net increase/(decrease) in cash
and cash equivalents
|
|
|
594
|
|
|
|
(3,690
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
6,293
|
|
|
|
10,261
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
6,887
|
|
|
$
|
6,571
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
Cash payments for interest, net of capitalized interest, were
$9.51 billion and $7.11 billion during the three
months ended February 2007 and February 2006, respectively.
Cash payments for income taxes, net of refunds, were
$1.51 billion and $659 million during the three months
ended February 2007 and February 2006, respectively.
Non-cash
activities:
The firm issued $17 million of common stock in connection
with business acquisitions for the three months
ended February 2007.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Net earnings
|
|
$
|
3,197
|
|
|
$
|
2,479
|
|
Currency translation adjustment,
net of tax
|
|
|
5
|
|
|
|
17
|
|
Net gains/(losses) on cash flow
hedges, net of tax
|
|
|
2
|
|
|
|
1
|
|
Net unrealized gains/(losses) on
available-for-sale
securities, net of tax
|
|
|
(2
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,202
|
|
|
$
|
2,494
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
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 services worldwide to a substantial and
diversified client base that includes corporations, financial
institutions, governments and
high-net-worth
individuals.
The firms activities are divided into three segments:
|
|
|
|
|
Investment Banking. The firm provides a broad
range of investment banking services to a diverse group of
corporations, financial institutions, investment funds,
governments and individuals.
|
|
|
|
Trading and Principal Investments. The firm
facilitates client transactions with a diverse group of
corporations, financial institutions, investment funds,
governments and individuals and takes proprietary positions
through market making in, trading of and investing in fixed
income and equity products, currencies, commodities and
derivatives on these products. In addition, the firm engages in
specialist and market-making activities on equities and options
exchanges and clears client transactions on major stock, options
and futures exchanges worldwide. In connection with the
firms merchant banking and other investing activities, the
firm makes principal investments directly and through funds that
the firm raises and manages.
|
|
|
|
Asset Management and Securities Services. The
firm provides investment advisory and financial planning
services and offers investment products (primarily through
separate accounts and funds) across all major asset classes to a
diverse group of institutions and individuals worldwide and
provides prime brokerage services, financing services and
securities lending services to institutional clients, including
hedge funds, mutual funds, pension funds and foundations, and to
high-net-worth
individuals worldwide.
|
|
|
Note 2.
|
Significant
Accounting Policies
|
Basis of
Presentation
These condensed consolidated financial statements include the
accounts of Group Inc. and all other entities in which the firm
has a controlling financial interest. All material intercompany
transactions and balances have been eliminated.
The firm determines whether it has a controlling financial
interest in an entity by first evaluating whether the entity is
a voting interest entity, a variable interest entity (VIE) or a
qualifying special-purpose entity (QSPE) under generally
accepted accounting principles.
|
|
|
|
|
Voting Interest Entities. Voting interest
entities are entities in which (i) the total equity
investment at risk is sufficient to enable the entity to finance
its activities independently and (ii) the equity holders
have the obligation to absorb losses, the right to receive
residual returns and the right to make decisions about the
entitys activities. Voting interest entities are
consolidated in accordance with Accounting Research Bulletin
(ARB) No. 51, Consolidated Financial
Statements, as amended. ARB No. 51 states that
the usual condition for a controlling financial interest in an
entity is ownership of a majority voting interest. Accordingly,
the firm consolidates voting interest entities in which it has a
majority voting interest.
|
7
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
|
|
|
Variable Interest Entities. VIEs are entities
that lack one or more of the characteristics of a voting
interest entity. A controlling financial interest in a VIE is
present when an enterprise has a variable interest, or a
combination of variable interests, that will absorb a majority
of the VIEs expected losses, receive a majority of the
VIEs expected residual returns, or both. The enterprise
with a controlling financial interest, known as the primary
beneficiary, consolidates the VIE. In accordance with Financial
Accounting Standards Board (FASB) Interpretation (FIN)
No. 46-R,
Consolidation of Variable Interest Entities, the
firm consolidates VIEs for which it is the primary beneficiary.
|
The firm determines whether it is the primary beneficiary of a
VIE by first performing a qualitative analysis of the VIE that
includes a review of, among other factors, its capital
structure, contractual terms, which interests create or absorb
variability, related party relationships and the design of the
VIE. Where qualitative analysis is not conclusive, the firm
performs a quantitative analysis. For purposes of allocating a
VIEs expected losses and expected residual returns to its
variable interest holders, the firm utilizes the top
down method. Under that method, the firm calculates its
share of the VIEs expected losses and expected residual
returns using the specific cash flows that would be allocated to
it, based on contractual arrangements
and/or the
firms position in the capital structure of the VIE, under
various probability-weighted scenarios.
|
|
|
|
|
QSPEs. QSPEs are passive entities that are
commonly used in mortgage and other securitization transactions.
Statement of Financial Accounting Standards (SFAS) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, sets forth the
criteria an entity must satisfy to be a QSPE. These criteria
include the types of assets a QSPE may hold, limits on asset
sales, the use of derivatives and financial guarantees, and the
level of discretion a servicer may exercise in attempting to
collect receivables. These criteria may require management to
make judgments about complex matters, including whether a
derivative is considered passive and the degree of discretion a
servicer may exercise. In accordance with SFAS No. 140
and
FIN No. 46-R,
the firm does not consolidate QSPEs.
|
|
|
|
Equity-Method Investments. When the firm does
not have a controlling financial interest in an entity but
exerts significant influence over the entitys 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
in accordance with the equity method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 18, The
Equity Method of Accounting for Investments in Common
Stock.
|
|
|
|
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 does not hold a majority of the economic interests in any
fund. The firm has generally provided the third-party investors
with rights to remove the firm as the general partner or to
terminate the funds (see Recent Accounting
Developments below for a discussion of the impact of
Emerging Issues Task Force (EITF) Issue No.
04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights).
These fund investments are included in Financial
instruments owned, at fair value in the condensed
consolidated statements of financial condition.
|
8
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 incorporated by reference in the
firms Annual Report on
Form 10-K
for the fiscal year ended November 24, 2006. The condensed
consolidated financial information as of November 24, 2006
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.
Unless specifically stated otherwise, all references to February
2007 and February 2006 refer to the firms fiscal periods
ended, or the dates, as the context requires, February 23,
2007 and February 24, 2006, respectively. All references to
November 2006, unless specifically stated otherwise, refer to
the firms fiscal year ended, or the date, as the context
requires, November 24, 2006. All references to 2007,
unless specifically stated otherwise, refer to the firms
fiscal year ending, or the date, as the context requires,
November 30, 2007. 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 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.
Financial Instruments. Total financial
instruments owned, at fair value and Financial
instruments sold, but not yet purchased, at fair value are
reflected in the condensed consolidated statements of financial
condition on a trade-date basis. Related unrealized gains or
losses are generally recognized in Trading and principal
investments in the condensed consolidated statements of
earnings. 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 (the exit price). Instruments that the
firm owns (long positions) are marked to bid prices, and
instruments that the firm has sold, but not yet purchased (short
positions) are marked to offer prices. Fair value measurements
are not adjusted for transaction costs.
9
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The firm adopted SFAS No. 157, Fair Value
Measurements, as of the beginning of 2007.
SFAS No. 157 establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The
three levels of the fair value hierarchy under
SFAS No. 157 are described below:
Basis of Fair Value
Measurement
|
|
|
|
Level 1
|
Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or
liabilities;
|
|
|
Level 2
|
Quoted prices in markets that are not active, or inputs that are
observable,
either directly or indirectly, for substantially the full term
of the asset or liability;
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(i.e., supported by little or no market activity).
|
A financial instruments level within the fair value
hierarchy is based on the lowest level of input that is
significant to the fair value measurement. See
Recent Accounting Developments for a
discussion of the impact of adopting SFAS No. 157.
In determining fair value, the firm separates its
Financial instruments owned, at fair value and its
Financial instruments sold, but not yet purchased, at fair
value into two categories: cash instruments and derivative
contracts.
|
|
|
|
|
Cash Instruments. The firms cash
instruments are generally classified within level 1 or
level 2 of the fair value hierarchy because they are valued
using quoted market prices, broker or dealer quotations, or
alternative pricing sources with reasonable levels of price
transparency. The types of instruments valued based on quoted
market prices in active markets include most
U.S. government and agency securities, many other sovereign
government obligations, liquid mortgage products, active listed
equities and most money market securities. Such instruments are
generally classified within level 1 of the fair value
hierarchy. As required by SFAS No. 157, the firm does
not adjust the quoted price for such instruments, even in
situations where the firm holds a large position and a sale
could reasonably impact the quoted price. The types of
instruments valued based on quoted prices in markets that are
not active, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency include
most investment-grade and high-yield corporate bonds, less
liquid mortgage products, less liquid listed equities, state,
municipal and provincial obligations, and certain physical
commodities. Such instruments are generally classified within
level 2 of the fair value hierarchy.
|
Certain cash instruments are classified within level 3 of
the fair value hierarchy because they trade infrequently and
therefore have little or no price transparency. Such instruments
include certain corporate bank loans and mortgage whole loans,
highly distressed debt, and private equity and real estate
investments. Where the firm is unable to substantiate the
significant valuation inputs and assumptions to corroborative
market data, the transaction price is used as managements
best estimate of fair value at inception. 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 inception, management only
changes level 3 inputs and assumptions when 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.
10
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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, and such adjustments are generally based on
available market evidence. In the absence of such evidence,
managements best estimate is used.
|
|
|
|
|
Derivative Contracts. Derivative contracts can
be exchange-traded or
over-the-counter
(OTC). Exchange-traded derivatives are generally valued based on
quoted market prices. Exchange-traded derivatives that are
valued using unadjusted quoted prices in active markets are
classified within level 1 of the fair value hierarchy. Some
exchange-traded derivatives are valued within portfolios using
models that calibrate to broker or dealer quotations or market
transactions in either the listed or OTC markets. In such cases,
exchange-traded derivatives are classified within level 2
of the fair value hierarchy.
|
OTC derivatives are valued using models. 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. Where possible, the firm verifies the
values produced by its pricing models to market transactions.
Valuation models require a variety of inputs, including
contractual terms, market prices, yield curves, credit curves,
measures of volatility, prepayment rates and correlations of
such inputs. For OTC derivatives that trade in liquid markets,
such as generic forwards, swaps and options, model inputs can
generally be verified and model selection does not involve
significant management judgment. Such instruments are typically
classified within level 2 of the fair value hierarchy.
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. Further,
complex structures often involve multiple product types
requiring additional complex inputs such as correlations and
volatilities. Such instruments are classified within
level 3 of the fair value hierarchy. Where the firm does
not have corroborating market evidence to support significant
model inputs and cannot verify the model to market transactions,
management believes that transaction price is the best estimate
of fair value at inception. Accordingly, when a pricing model is
used to value such an instrument, the model is adjusted so that
the model value at inception equals the transaction price. The
valuations of these less liquid OTC derivatives are typically
impacted by level 1
and/or
level 2 inputs that can be observed in the market, as well
as unobservable level 3 inputs. Subsequent to initial
recognition, the firm updates the level 1 and level 2
inputs to reflect observable market changes. 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. As markets continue to develop and more pricing
information becomes available, the firm continues to review and
refine the models used.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on available market
evidence. In the absence of such evidence, managements
best estimate is used.
Collateralized Agreements and
Financings. Collateralized agreements consist of
resale agreements and securities borrowed. Collateralized
financings consist of repurchase agreements, securities loaned
and other secured financings. Interest on collateralized
agreements and collateralized financings is recognized in
Interest income or Interest expense,
respectively, over the life of the transaction.
11
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
|
|
|
Resale and Repurchase Agreements. Financial
instruments purchased under agreements to resell and financial
instruments sold under agreements to repurchase, principally
U.S. government, federal agency and investment-grade
sovereign obligations, represent
short-term
collateralized financing transactions. The firm receives
financial instruments purchased under agreements to resell,
makes delivery of financial instruments sold under agreements to
repurchase, monitors the market value of these financial
instruments on a daily basis and delivers or obtains additional
collateral as appropriate. Resale and repurchase agreements are
carried in the condensed consolidated statements of financial
condition at fair value as allowed by SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. Prior to the adoption of
SFAS No. 159, these transactions were recorded at
contractual amounts plus accrued interest. Resale and repurchase
agreements are generally valued based on inputs with reasonable
levels of price transparency and are classified within
level 2 of the fair value hierarchy. Resale and repurchase
agreements are presented on a
net-by-counterparty
basis when the requirements of FIN No. 41,
Offsetting of Amounts Related to Certain Repurchase and
Reverse Repurchase Agreements, or FIN No. 39,
Offsetting of Amounts Related to Certain Contracts,
are satisfied.
|
|
|
|
Securities Borrowed and Loaned. Securities
borrowed and loaned are generally collateralized by cash,
securities or letters of credit. The firm receives securities
borrowed, makes delivery of securities loaned, monitors the
market value of securities borrowed and loaned, and delivers or
obtains additional collateral as appropriate. Securities
borrowed and loaned related to the firms Securities
Services business, substantially all of which are transacted
on-demand, are recorded based on the amount of cash collateral
advanced or received plus accrued interest. These transactions
exhibit little, if any, sensitivity to changes in interest
rates. The firms remaining securities borrowed and loaned
transactions, which are related to the firms financing and
matched book activities, are recorded at fair value as allowed
by SFAS No. 159. Prior to the adoption of
SFAS No. 159, these transactions were recorded based
on the amount of cash collateral advanced or received plus
accrued interest. These securities borrowed and loaned
transactions are generally valued based on inputs with
reasonable levels of price transparency and are classified
within level 2 of the fair value hierarchy.
|
|
|
|
Other Secured Financings. In addition to
repurchase agreements and securities loaned, the firm funds
assets through the use of other secured financing arrangements
and pledges financial instruments and other assets as collateral
in these transactions. SFAS No. 159 has been adopted
for those financings for which the use of fair value would
eliminate volatility in earnings from using different
measurement attributes, primarily transfers accounted for as
financings under SFAS No. 140 and debt raised through
the firms William Street program. These other secured
financing transactions are generally valued based on inputs with
reasonable levels of price transparency and are classified
within level 2 of the fair value hierarchy. Other secured
financings that are not recorded at fair value are recorded
based on the amount of cash received plus accrued interest. See
Note 3 for further information regarding other secured
financings.
|
Hybrid Financial Instruments. Hybrid financial
instruments are instruments that contain bifurcatable embedded
derivatives under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, and do not
require settlement by physical delivery of non-financial assets
(e.g., physical commodities). If the firm elects to
bifurcate the embedded derivative, it is accounted for at fair
value and the host contract is accounted for at amortized cost,
adjusted for the effective portion of any fair value hedge
accounting relationships. If the firm does not elect to
bifurcate, the entire
12
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
hybrid financial instrument is accounted for at fair value under
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB
Statements No. 133 and 140. The primary reasons for
electing the fair value option for hybrid financial instruments
were mitigating volatility in earnings from using different
measurement attributes, simplification and cost-benefit
considerations. See Notes 3, 4 and 5 for additional
information about hybrid financial instruments.
Transfers of Financial Assets. In general,
transfers of financial assets are accounted for as sales under
SFAS No. 140 when the firm has relinquished control
over the transferred assets. For transfers accounted for as
sales, any related gains or losses are recognized in net
revenues. Transfers that are not accounted for as sales are
accounted for as collateralized financings, with the related
interest expense recognized in net revenues over the life of the
transaction.
Power Generation. Power generation revenues
associated with the firms consolidated power generation
facilities are included in Trading and principal
investments in the condensed consolidated statements of
earnings when power is delivered. These revenues were
$118 million and $112 million for the periods ended
February 2007 and February 2006, respectively. Direct employee
costs associated with the firms consolidated power
generation facilities of $21 million and $13 million
for the periods ended February 2007 and February 2006,
respectively, are included in Compensation and
benefits. The other direct costs associated with these
power generation facilities and related contractual assets are
included in Cost of power generation.
Commissions. Commission revenues from
executing and clearing client transactions on stock, options and
futures markets worldwide are recognized in Trading and
principal investments in the condensed consolidated
statements of earnings on a trade-date basis.
Insurance Activities. Revenues from variable
annuity and variable life insurance contracts, and from
providing reinsurance of such contracts, generally consist of
fees assessed on contract holder account balances for mortality
charges, policy administration and surrender charges. These fees
are recognized within Trading and principal
investments in the condensed consolidated statements of
earnings in the period that services are provided.
Interest credited to variable annuity and life insurance account
balances and changes in reserves are recognized in Other
expenses in the condensed consolidated statements of
earnings.
Premiums earned for providing property catastrophe reinsurance
are recognized within Trading and principal
investments in the condensed consolidated statements of
earnings over the coverage period, net of premiums ceded for the
cost of reinsurance. Expenses for liabilities related to
property catastrophe reinsurance claims, including estimates of
claims that have been incurred but not reported, are recognized
within Other expenses in the condensed consolidated
statements of earnings.
Merchant Banking Overrides. The firm is
entitled to receive merchant banking overrides (i.e., an
increased share of a funds 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.
13
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Asset Management. Management fees are
recognized over the period that the related service is provided
based upon average net asset values. In certain circumstances,
the firm is also entitled to receive incentive fees based on a
percentage of a funds 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
In the first quarter of 2006, the firm adopted
SFAS No. 123-R,
Share-Based Payment, which is a revision to
SFAS No. 123, Accounting for Stock-Based
Compensation.
SFAS No. 123-R
focuses primarily on accounting for transactions in which an
entity obtains employee services in exchange for share-based
payments. Under
SFAS No. 123-R,
the cost of employee services received in exchange for an award
of equity instruments is generally measured based on the
grant-date fair value of the award. Under
SFAS No. 123-R,
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. The firm adopted
SFAS No. 123-R
under the modified prospective adoption method. Under that
method of adoption, the provisions of
SFAS No. 123-R
are generally applied only to share-based awards granted
subsequent to adoption. Share-based awards held by employees
that were retirement-eligible on the date of adoption of
SFAS No. 123-R
must continue to be amortized over the stated service period of
the award (and accelerated if the employee actually retires).
SFAS No. 123-R
requires expected forfeitures to be included in determining
share-based employee compensation expense.
The firm pays cash dividend equivalents on outstanding
restricted stock units. Dividend equivalents paid on restricted
stock units accounted for under SFAS No. 123 and
SFAS No. 123-R
are charged to retained earnings when paid.
SFAS No. 123-R
requires dividend equivalents paid on restricted stock units
expected to be forfeited to be included in compensation expense.
Prior to the adoption of
SFAS No. 123-R,
dividend equivalents paid on restricted stock units that were
later forfeited by employees were reclassified to compensation
expense from retained earnings. The tax benefit related to
dividend equivalents paid on restricted stock units is accounted
for as a reduction of 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. Additional paid-in capital is
adjusted to the extent of the difference between the current
value of the award and the grant-date value of the award.
Goodwill
Goodwill is the cost of acquired companies in excess of the fair
value of identifiable net assets at acquisition date. In
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill is tested at least annually
for impairment. An impairment loss is triggered if the estimated
fair value of an operating segment 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.
14
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Identifiable
Intangible Assets
Identifiable intangible assets, which consist primarily of
customer lists, above-market power contracts, specialist rights
and the value of business acquired (VOBA) and deferred
acquisition costs (DAC) in the firms insurance
subsidiaries, are amortized over their estimated useful lives.
Identifiable intangible assets are tested for potential
impairment whenever events or changes in circumstances suggest
that an assets or asset groups carrying value may
not be fully recoverable in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. 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 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 included in
Other assets in the condensed consolidated
statements of financial condition.
Property and equipment placed in service prior to
December 1, 2001 are depreciated under the accelerated cost
recovery method. Property and equipment placed in service on or
after December 1, 2001 are depreciated on a
straight-line basis over the useful life of the asset. Leasehold
improvements for which the useful life of the improvement is
shorter than the term of the lease are amortized under the
accelerated cost recovery method if placed in service prior to
December 1, 2001. All other 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
potential impairment whenever events or changes in circumstances
suggest that an assets or asset groups carrying
value may not be fully recoverable in accordance with
SFAS No. 144. An impairment loss, calculated as the
difference between the estimated fair value and the carrying
value of an asset or asset group, is recognized if the sum of
the expected undiscounted cash flows relating to the asset or
asset group is less than the corresponding carrying value.
The firms operating leases include space held in excess of
current requirements. Rent expense relating to space held for
growth is included in Occupancy in the condensed
consolidated statements of earnings. In accordance with
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, the firm records a
liability, based on the 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 statement of financial condition, and
revenues and expenses are translated at average rates of
exchange for the year. 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 of comprehensive income. The firm seeks
to reduce its net investment exposure to fluctuations in foreign
15
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
exchange rates through the use of foreign currency forward
contracts and foreign currency-denominated debt. For foreign
currency forward contracts, hedge effectiveness is assessed
based on changes in forward exchange rates; accordingly, forward
points are reflected as a component of the currency translation
adjustment in the condensed consolidated statements of
comprehensive income. For foreign currency-denominated debt,
hedge effectiveness is assessed based on changes in spot rates.
Foreign currency remeasurement gains or losses on transactions
in nonfunctional currencies are included in the condensed
consolidated statements of earnings.
Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting and tax bases of the
firms assets and liabilities. Valuation allowances are
established to reduce deferred tax assets to the amount that
more likely than not will be realized. The firms tax
assets and liabilities are presented as a component of
Other assets and Other liabilities and accrued
expenses, respectively, in the condensed consolidated
statements of financial condition. Tax provisions are computed
in accordance with SFAS No. 109, Accounting for
Income Taxes. Contingent liabilities related to income
taxes are recorded when the criteria for loss recognition under
SFAS No. 5, Accounting for Contingencies,
as amended, have been met (see Recent
Accounting Developments below for a discussion of the
impact of FIN No. 48, Accounting for Uncertainty
in Income Taxes an Interpretation of FASB Statement
No. 109, on SFAS No. 109).
|
|
|
Earnings Per
Common Share (EPS)
|
Basic EPS is calculated by dividing net earnings applicable to
common shareholders by the weighted average number of common
shares outstanding. Common shares outstanding includes common
stock and restricted stock units for which no future service is
required as a condition to the delivery of the underlying common
stock. Diluted EPS includes the determinants of basic EPS and,
in addition, reflects the dilutive effect of the common stock
deliverable pursuant to stock options and to restricted stock
units for which future service is required as a condition to the
delivery of the underlying common stock.
|
|
|
Cash and Cash
Equivalents
|
The firm defines cash equivalents as highly liquid overnight
deposits held in the ordinary course of business.
|
|
|
Recent
Accounting Developments
|
EITF Issue
No. 04-5. In
June 2005, the EITF reached consensus on Issue
No. 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights,
which requires general partners to consolidate their
partnerships or to provide limited partners with rights to
remove the general partner or to terminate the partnership. The
firm, as the general partner of numerous merchant banking and
asset management partnerships, was required to adopt the
provisions of EITF Issue
No. 04-5
(i) immediately for partnerships formed or modified after
June 29, 2005 and (ii) in the first quarter of 2007
for partnerships formed on or before June 29, 2005 that
have not been modified. The firm has generally provided limited
partners in these funds with rights to remove the firm as the
general partner or to terminate the partnerships. Therefore, the
adoption of EITF Issue
No. 04-5
did not have a material effect on the firms financial
condition, results of operations or cash flows in 2006 or in the
first quarter of 2007.
16
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
FIN No. 48. In June 2006, the FASB
issued FIN No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109. FIN No. 48 requires that the firm
determine whether a tax position is more likely than not to be
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits
of the position. Once it is determined that a position meets
this recognition threshold, the position is measured to
determine the amount of benefit to be recognized in the
financial statements. The firm expects to adopt the provisions
of FIN No. 48 beginning in the first quarter of 2008.
The firm does not expect that the adoption of
FIN No. 48 will have a material effect on its
financial condition, results of operations or cash flows.
SFAS No. 157. In September 2006, the
FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 clarifies that fair
value is an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. Under
SFAS No. 157, fair value measurements are not adjusted
for transaction costs.
SFAS No. 157 nullifies the guidance included in EITF
Issue
No. 02-3,
Issues Involved in Accounting for Derivative Contracts
Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities, that prohibited
the recognition of a day one gain or loss on derivative
contracts (and hybrid financial instruments measured at fair
value under SFAS No. 155) where the firm was unable to
verify all of the significant model inputs to observable market
data and/or
verify the model to market transactions. However,
SFAS No. 157 requires that a fair value measurement
reflect the assumptions market participants would use in pricing
an asset or liability based on the best information available.
Assumptions include the risks inherent in a particular valuation
technique (such as a pricing model)
and/or the
risks inherent in the inputs to the model.
In addition, SFAS No. 157 prohibits the recognition of
block discounts for large holdings of unrestricted
financial instruments where quoted prices are readily and
regularly available for an identical asset or liability in an
active market.
The provisions of SFAS No. 157 are to be applied
prospectively, except changes in fair value measurements that
result from the initial application of SFAS No. 157 to
existing derivative financial instruments measured under EITF
Issue
No. 02-3,
existing hybrid financial instruments measured at fair value and
block discounts, all of which are to be recorded as an
adjustment to beginning retained earnings in the year of
adoption.
The firm adopted SFAS No. 157 as of the beginning of
2007. The transition adjustment to beginning retained earnings
was a gain of $51 million, net of tax. The effect of the
nullification of EITF Issue
No. 02-3
and the removal of liquidity discounts for actively traded
positions was not material for the first quarter of 2007. In
addition, under SFAS No. 157, gains on principal
investments should be recorded in the absence of substantial
third-party transactions if market evidence is sufficient. The
firm recorded approximately $500 million of such gains as a
result of adopting SFAS No. 157 in the first quarter
of 2007.
17
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
SFAS No. 158. In September 2006, the
FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and
132-R. SFAS No. 158 requires an entity to
recognize in its statement of financial condition the funded
status of its defined benefit pension and postretirement plans,
measured as the difference between the fair value of the plan
assets and the benefit obligation. SFAS No. 158 also
requires an entity to recognize changes in the funded status of
a defined benefit pension and postretirement plan within
accumulated other comprehensive income, net of tax, to the
extent such changes are not recognized in earnings as components
of periodic net benefit cost. SFAS No. 158 is
effective as of the end of the fiscal year ending after
December 15, 2006. The firm will adopt
SFAS No. 158 as of the end of 2007. The firm does not
expect that the adoption of SFAS No. 158 will have a
material effect on its financial condition, results of
operations or cash flows.
SFAS No. 159. On February 15,
2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities, which gives entities the option to measure
eligible financial assets, financial liabilities and firm
commitments at fair value (i.e., the fair value option), on an
instrument-by-instrument
basis, that are otherwise not permitted to be accounted for at
fair value under other accounting standards. The election to use
the fair value option is available when an entity first
recognizes a financial asset or financial liability or upon
entering into a firm commitment. Subsequent changes in fair
value must be recorded in earnings. Additionally,
SFAS No. 159 allows for a one-time election for
existing positions upon adoption, with the transition adjustment
recorded to beginning retained earnings.
The firm adopted SFAS No. 159 as of the beginning of
2007 and elected to apply the fair value option to the following
financial assets and liabilities existing at the time of
adoption:
|
|
|
|
|
certain unsecured short-term borrowings, consisting of all
promissory notes and commercial paper;
|
|
|
|
certain other secured financings;
|
|
|
|
certain unsecured long-term borrowings, including those
resulting from prepaid physical commodity transactions;
|
|
|
|
resale and repurchase agreements;
|
|
|
|
securities borrowed and loaned related to the firms
financing and matched book activities; and
|
|
|
|
securities held by the firms bank subsidiary (previously
accounted for as
available-for-sale).
|
The primary reasons for electing the fair value option were
mitigating volatility in earnings from using different
measurement attributes, simplification and cost-benefit
considerations. The transition adjustment to beginning retained
earnings related to the adoption of SFAS No. 159 was a
loss of $45 million, net of tax, substantially all of which
related to applying the fair value option to prepaid physical
commodity transactions. The effect of SFAS No. 159 was
not material to the firms financial condition, results of
operations or cash flows for the first quarter of 2007.
18
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 firms financial
instruments owned, at fair value, including those pledged as
collateral, and financial instruments sold, but not yet
purchased, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
2007
|
|
November
2006
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
|
(in millions)
|
|
Commercial paper, certificates of
deposit, time deposits and other money market instruments
|
|
$
|
15,193
|
(1)
|
|
$
|
|
|
|
$
|
14,723
|
(1)
|
|
$
|
|
|
U.S. government, federal
agency and sovereign obligations
|
|
|
69,673
|
|
|
|
54,850
|
|
|
|
64,383
|
|
|
|
51,200
|
|
Corporate and other debt
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage whole loans and
collateralized debt obligations
|
|
|
46,259
|
|
|
|
449
|
|
|
|
41,017
|
|
|
|
253
|
|
Investment-grade corporate bonds
|
|
|
19,404
|
|
|
|
5,138
|
|
|
|
17,485
|
|
|
|
4,745
|
|
Bank loans
|
|
|
28,171
|
|
|
|
786
|
|
|
|
28,196
|
|
|
|
1,154
|
|
High-yield securities
|
|
|
12,310
|
|
|
|
2,190
|
|
|
|
11,054
|
|
|
|
2,064
|
|
Preferred stock
|
|
|
7,397
|
|
|
|
87
|
|
|
|
7,927
|
|
|
|
118
|
|
Other
|
|
|
1,346
|
|
|
|
240
|
|
|
|
1,267
|
|
|
|
241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,887
|
|
|
|
8,890
|
|
|
|
106,946
|
|
|
|
8,575
|
|
Equities and convertible debentures
|
|
|
96,762
|
|
|
|
35,624
|
|
|
|
75,355
|
|
|
|
30,323
|
|
State, municipal and provincial
obligations
|
|
|
4,135
|
|
|
|
702
|
|
|
|
3,688
|
|
|
|
|
|
Derivative contracts
|
|
|
69,407
|
(2)
|
|
|
66,409
|
(3)
|
|
|
67,543
|
(2)
|
|
|
65,496
|
(3)
|
Physical commodities
|
|
|
2,835
|
|
|
|
6
|
|
|
|
1,923
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
372,892
|
|
|
$
|
166,481
|
|
|
$
|
334,561
|
|
|
$
|
155,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $6.58 billion and $6.93 billion as of
February 2007 and November 2006, respectively, of money market
instruments held by William Street Funding Corporation to
support the William Street credit extension program
(see Note 6 for further information regarding the
William Street program).
|
|
|
(2)
|
Net of cash received pursuant to credit support agreements of
$25.81 billion and $24.06 billion as of February 2007
and November 2006, respectively.
|
|
|
(3)
|
Net of cash paid pursuant to credit support agreements of
$15.92 billion and $16.00 billion as of February 2007
and November 2006, respectively.
|
19
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following tables set forth the firms financial assets
and liabilities that were accounted for at fair value as of
February 2007 by level within the fair value hierarchy (see
Note 2 for further information on the fair value
hierarchy). As required by SFAS No. 157, financial
assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair
Value
|
|
|
As of February
2007
|
|
|
|
|
|
|
|
|
Netting and
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Collateral
|
|
Total
|
|
|
(in millions)
|
|
Cash instruments
|
|
$
|
121,213
|
|
|
$
|
144,424
|
|
|
$
|
37,848
|
(3)
|
|
$
|
|
|
|
$
|
303,485
|
|
Derivative contracts
|
|
|
133
|
|
|
|
87,215
|
|
|
|
9,785
|
|
|
|
(27,726
|
) (4)
|
|
|
69,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned, at
fair value
|
|
|
121,346
|
|
|
|
231,639
|
|
|
|
47,633
|
|
|
|
(27,726
|
)
|
|
|
372,892
|
|
Securities segregated for
regulatory and other
purposes (1)
|
|
|
5,840
|
|
|
|
37,573
|
|
|
|
|
|
|
|
|
|
|
|
43,413
|
|
Securities
borrowed (2)
|
|
|
|
|
|
|
77,969
|
|
|
|
|
|
|
|
|
|
|
|
77,969
|
|
Financial instruments purchased
under agreements to resell, at fair value
|
|
|
|
|
|
|
81,886
|
|
|
|
|
|
|
|
|
|
|
|
81,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized agreements
|
|
|
|
|
|
|
159,855
|
|
|
|
|
|
|
|
|
|
|
|
159,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
127,186
|
|
|
$
|
429,067
|
|
|
$
|
47,633
|
|
|
$
|
(27,726
|
)
|
|
$
|
576,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily includes securities borrowed and resale agreements.
The underlying securities have been segregated to satisfy
certain regulatory requirements.
|
|
|
(2)
|
Excludes securities borrowed related to the firms
Securities Services business, which are accounted for based on
the amount of cash collateral advanced plus accrued interest.
|
|
|
(3)
|
Does not reflect the firms economic exposure to
level 3 assets because the amount in the above table
includes amounts that are attributable to minority investors or
financed by non-recourse debt. The firms economic exposure
to level 3 cash instruments is $20.38 billion, which
is comprised of cash trading instruments with little or no price
transparency and principal investments with no recent
third-party transaction.
|
|
|
(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.
|
20
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at
Fair Value
|
|
|
As of February
2007
|
|
|
|
|
|
|
|
|
Netting and
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Collateral
|
|
Total
|
|
|
(in millions)
|
|
Cash instruments
|
|
$
|
90,840
|
|
|
$
|
9,008
|
|
|
$
|
224
|
|
|
$
|
|
|
|
$
|
100,072
|
|
Derivative contracts
|
|
|
232
|
|
|
|
74,564
|
|
|
|
9,444
|
|
|
|
(17,831
|
)(5)
|
|
|
66,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, but
not yet purchased, at fair value
|
|
|
91,072
|
|
|
|
83,572
|
|
|
|
9,668
|
|
|
|
(17,831
|
)
|
|
|
166,481
|
|
Securities loaned
(1)
|
|
|
|
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
1,711
|
|
Financial instruments sold under
agreements to repurchase, at fair value
|
|
|
|
|
|
|
192,665
|
|
|
|
|
|
|
|
|
|
|
|
192,665
|
|
Other secured financings
(2)
|
|
|
|
|
|
|
18,516
|
|
|
|
|
|
|
|
|
|
|
|
18,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized financings
|
|
|
|
|
|
|
212,892
|
|
|
|
|
|
|
|
|
|
|
|
212,892
|
|
Unsecured short-term borrowings
(3)
|
|
|
|
|
|
|
33,208
|
|
|
|
1,580
|
|
|
|
|
|
|
|
34,788
|
|
Unsecured long-term borrowings
(4)
|
|
|
|
|
|
|
13,422
|
|
|
|
777
|
|
|
|
|
|
|
|
14,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
91,072
|
|
|
$
|
343,094
|
|
|
$
|
12,025
|
|
|
$
|
(17,831
|
)
|
|
$
|
428,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes securities loaned related to the firms Securities
Services business, which are accounted for based on the amount
of cash collateral received plus accrued interest.
|
|
|
(2)
|
Primarily includes transfers accounted for as financings under
SFAS No. 140 and debt raised through the firms
William Street program.
|
|
|
(3)
|
Primarily includes promissory notes, commercial paper and hybrid
financial instruments.
|
|
|
(4)
|
Primarily includes hybrid financial instruments.
|
|
|
(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.
|
See Note 2 for a discussion of the types of financial
assets and liabilities that are classified within level 3
of the fair value hierarchy as well as the firms valuation
policies for such instruments.
21
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following table sets forth a summary of changes in the fair
value of the firms level 3 financial assets and
liabilities. As required by SFAS No. 157, financial
assets and liabilities are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement. For example, a hypothetical derivative contract
with level 1, level 2 and significant level 3
inputs would be classified as a level 3 financial
instrument in its entirety. Subsequently, even if only
level 1 and level 2 inputs are adjusted, the resulting
gain or loss is classified as level 3. Further,
level 3 instruments are frequently hedged with instruments
that are classified as level 1 or level 2 and,
accordingly, gains or losses reported as level 3 in the
table below may be offset by gains or losses attributable to
instruments classified in level 1 or 2 of the fair value
hierarchy. See Note 2 for further discussion of
level 3 instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3
Financial Assets and Liabilities
|
|
|
Three Months
Ended February 2007
|
|
|
Cash
|
|
Cash
|
|
Derivative
|
|
Unsecured
|
|
Unsecured
|
|
|
Instruments
|
|
Instruments
|
|
Contracts
|
|
Short-Term
|
|
Long-Term
|
|
|
-
Assets
|
|
-
Liabilities
|
|
- Net
|
|
Borrowings
|
|
Borrowings
|
|
|
(in millions)
|
|
Balance, beginning of year
|
|
$
|
29,905
|
|
|
$
|
(223
|
)
|
|
$
|
580
|
|
|
$
|
(1,007
|
)
|
|
$
|
(135
|
)
|
Total gains/(losses) (realized and
unrealized)
|
|
|
1,905
|
(2)
|
|
|
(1
|
) (1)
|
|
|
481
|
(1)
|
|
|
(61
|
) (1)
|
|
|
34
|
(1)
|
Purchases, issuances and
settlements
|
|
|
7,059
|
|
|
|
(4
|
)
|
|
|
(227
|
)
|
|
|
(703
|
)
|
|
|
(472
|
)
|
Transfers in
and/or out
of level 3
|
|
|
(1,021
|
)
|
|
|
4
|
|
|
|
(493
|
)
|
|
|
191
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
37,848
|
|
|
$
|
(224
|
)
|
|
$
|
341
|
|
|
$
|
(1,580
|
)
|
|
$
|
(777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
gains/(losses) relating to instruments still held at the
reporting
date (1)
|
|
$
|
1,083
|
(3)
|
|
$
|
(25
|
)
|
|
$
|
193
|
|
|
$
|
(61
|
)
|
|
$
|
34
|
|
|
|
|
|
(1)
|
Substantially all is reported in Trading and principal
investments in the condensed consolidated statements of
earnings.
|
|
|
(2)
|
Includes approximately $1.60 billion and $303 million
reported in Trading and principal investments and
Interest income, respectively, in the condensed
consolidated statements of earnings.
|
|
|
(3)
|
Includes approximately $500 million of gains on the
firms private principal investments recognized as a result
of the adoption of SFAS No. 157.
|
22
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following table sets forth the gains and losses included in
earnings during the three months ended February 2007 related to
financial assets and liabilities for which the firm has elected
to apply the fair value option under SFAS No. 155 and
SFAS No. 159. Substantially all of these gains and
losses would have otherwise been recognized because they
primarily relate to borrowings that contain bifurcatable
embedded derivatives accounted for at fair value under SFAS
No. 133 and were largely offset by gains and losses on
related instruments that were accounted for at fair value under
other generally accepted accounting principles.
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
February
2007
|
|
|
(in millions)
|
|
Unsecured short-term borrowings
|
|
$
|
(244
|
)
|
Other secured financings
|
|
|
(130
|
)
|
Unsecured long-term borrowings
|
|
|
(792
|
)
|
Other
(1)
|
|
|
6
|
|
|
|
|
|
|
Total
(2)
|
|
$
|
(1,160
|
)
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes resale and repurchase agreements; securities borrowed
and loaned related to the firms financing and matched book
activities; and securities held in the firms bank
subsidiary (previously accounted for as
available-for-sale).
|
|
|
(2)
|
Substantially all is reported in Trading and principal
investments in the condensed consolidated statements of
earnings.
|
Derivative contracts are instruments, such as futures, forwards,
swaps or option contracts, that derive their value from
underlying assets, indices, reference rates or a combination of
these factors. Derivative instruments may be privately
negotiated contracts, which are often referred to as OTC
derivatives, or they may be listed and traded on an exchange.
Derivatives may involve future commitments to purchase or sell
financial instruments or commodities, or to exchange currency or
interest payment streams. The amounts exchanged are based on the
specific terms of the contract with reference to specified
rates, securities, commodities, currencies or indices.
Certain cash instruments, such as mortgage-backed securities,
interest-only and principal-only obligations, and indexed debt
instruments, are not considered derivatives even though their
values or contractually required cash flows are derived from the
price of some other security or index. However, certain
commodity-related contracts are included in the firms
derivatives disclosure, as these contracts may be settled in
cash or the assets to be delivered under the contract are
readily convertible into cash.
The firm enters into derivative transactions to facilitate
client transactions, to take proprietary positions and as a
means of risk management. Risk exposures are managed through
diversification, by controlling position sizes and by entering
into offsetting positions. For example, the firm may manage the
risk related to a portfolio of common stock by entering into an
offsetting position in a related equity-index futures contract.
The firm applies hedge accounting under SFAS No. 133
to certain derivative contracts. The firm uses these derivatives
to manage certain interest rate and currency exposures,
including the firms net investment in
non-U.S. operations.
The firm designates certain interest rate swap contracts as fair
value hedges. These interest rate swap contracts hedge changes
in the relevant benchmark interest rate (e.g., London Interbank
Offered Rate (LIBOR)), effectively converting a substantial
portion of the firms unsecured long-term and certain
unsecured short-term borrowings into floating rate obligations.
23
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
In addition, the firm applies cash flow hedge accounting to a
limited number of foreign currency forward contracts that hedge
currency exposure on certain forecasted transactions in its
consolidated power generation facilities. See Note 2 for
information regarding the firms policy on foreign currency
forward contracts used to hedge its net investment in
non-U.S. operations.
The firm applies a long-haul method to substantially all of its
hedge accounting relationships to perform an ongoing assessment
of the effectiveness of these relationships in achieving
offsetting changes in fair value or offsetting cash flows
attributable to the risk being hedged. The firm utilizes a
dollar-offset method, which compares the change in the fair
value of the hedging instrument to the change in the fair value
of the hedged item, excluding the effect of the passage of time,
to prospectively and retrospectively assess hedge effectiveness.
The firms prospective dollar-offset assessment utilizes
scenario analyses to test hedge effectiveness via simulations of
numerous parallel and slope shifts of the relevant yield curve.
Parallel shifts change the interest rate of all maturities by
identical amounts. Slope shifts change the curvature of the
yield curve. For both the prospective assessment, in response to
each of the simulated yield curve shifts, and the retrospective
assessment, a hedging relationship is deemed to be effective if
the fair value of the hedging instrument and the hedged item
change inversely within a range of 80% to 125%.
For fair value hedges, gains or losses on derivative
transactions are recognized in Interest expense in
the condensed consolidated statements of earnings. The change in
fair value of the hedged item attributable to the risk being
hedged is reported as an adjustment to its carrying value and is
subsequently amortized into interest expense over its remaining
life. For cash flow hedges, the effective portion of gains or
losses on derivative transactions is reported as a component of
Other comprehensive income in the condensed
consolidated statements of comprehensive income. Gains or losses
related to hedge ineffectiveness for all hedges are generally
included in Interest expense. These gains or losses
and the component of gains or losses on derivative transactions
excluded from the assessment of hedge effectiveness (e.g., the
effect of the passage of time on fair value hedges of the
firms borrowings) were not material to the firms
results of operations for the three months ended February 2007
or February 2006. Gains and losses on derivatives used for
trading purposes are included in Trading and principal
investments in the condensed consolidated statements of
earnings.
The fair value of the firms 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 firms condensed consolidated statements of
financial condition when management believes a legal right of
setoff exists under an enforceable netting agreement. The fair
value of derivative financial instruments, computed in
accordance with the firms netting policy, is set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
2007
|
|
November
2006
|
|
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
|
(in millions)
|
|
Forward settlement contracts
|
|
$
|
12,282
|
|
|
$
|
14,222
|
|
|
$
|
11,751
|
|
|
$
|
14,335
|
|
Swap agreements
|
|
|
30,108
|
|
|
|
22,679
|
|
|
|
28,012
|
|
|
|
22,471
|
|
Option contracts
|
|
|
27,017
|
|
|
|
29,508
|
|
|
|
27,780
|
|
|
|
28,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
69,407
|
|
|
$
|
66,409
|
|
|
$
|
67,543
|
|
|
$
|
65,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of derivatives accounted for as qualifying hedges
under SFAS No. 133 consisted of $2.11 billion and
$2.66 billion in assets as of February 2007 and November
2006, respectively, and $931 million and $551 million
in liabilities as of February 2007 and November 2006,
respectively.
24
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The firm also has embedded derivatives that have been bifurcated
from related borrowings under SFAS No. 133. Such
derivatives, which are classified in unsecured short-term and
unsecured long-term borrowings, had a carrying value of
$973 million and $1.13 billion (excluding the debt
host contract) as of February 2007 and November 2006,
respectively. See Notes 4 and 5 for further information
regarding the firms unsecured borrowings.
|
|
|
Securitization
Activities
|
The firm securitizes commercial and residential mortgages, home
equity and auto loans, government and corporate bonds and other
types of financial assets. The firm acts as underwriter of the
beneficial interests that are sold to investors. The firm
derecognizes financial assets transferred in securitizations
provided it has relinquished control over such assets.
Transferred assets are accounted for at fair value prior to
securitization. Net revenues related to these underwriting
activities are recognized in connection with the sales of the
underlying beneficial interests to investors.
The firm may retain interests in securitized financial assets,
primarily in the form of senior or subordinated securities,
including residual interests. Retained interests are accounted
for at fair value and are included in Total financial
instruments owned, at fair value in the condensed
consolidated statements of financial condition.
During the three months ended February 2007, the firm
securitized $31.69 billion of financial assets, consisting
of $16.89 billion in residential mortgage securitizations
and $14.80 billion in other securitizations, primarily
collateralized debt obligations (CDOs). During the three months
ended February 2006, the firm securitized
$19.25 billion of financial assets, consisting of
$18.15 billion in residential mortgage securitizations and
$1.10 billion in CDOs and other securitizations. Cash flows
received on retained interests were approximately
$175 million and $211 million for the three months
ended February 2007 and February 2006, respectively.
As of February 2007 and November 2006, the firm held
$9.81 billion and $7.08 billion of retained interests,
respectively, including $4.51 billion and
$5.18 billion, respectively, held in QSPEs.
25
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following table sets forth the weighted average key economic
assumptions used in measuring the fair value of the firms
retained interests and the sensitivity of this fair value to
immediate adverse changes of 10% and 20% in those assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
As of November
2006
|
|
|
Type of Retained
Interests
|
|
Type of Retained
Interests
|
|
|
Mortgage-
|
|
|
|
Corporate
|
|
Mortgage-
|
|
|
|
Corporate
|
|
|
Backed
|
|
CDOs
|
|
Debt (3)
|
|
Backed
|
|
CDOs
|
|
Debt (3)
|
|
|
($ in millions)
|
|
Fair value of retained interests
|
|
$
|
3,347
|
|
|
$
|
5,345
|
|
|
$
|
1,118
|
|
|
$
|
4,013
|
|
|
$
|
1,973
|
|
|
$
|
1,097
|
|
Weighted average life (years)
|
|
|
5.5
|
|
|
|
5.4
|
|
|
|
1.9
|
|
|
|
6.0
|
|
|
|
7.0
|
|
|
|
2.2
|
|
Constant prepayment rate
|
|
|
22.7
|
%
|
|
|
25.0
|
%
|
|
|
N/A
|
|
|
|
21.2
|
%
|
|
|
24.5
|
%
|
|
|
N/A
|
|
Impact of 10% adverse change
|
|
$
|
(137
|
)
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(121
|
)
|
|
$
|
(2
|
)
|
|
$
|
|
|
Impact of 20% adverse change
|
|
|
(240
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
(221
|
)
|
|
|
(6
|
)
|
|
|
|
|
Anticipated credit
losses (1)
|
|
|
3.9
|
%
|
|
|
2.3
|
%
|
|
|
N/A
|
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
N/A
|
|
Impact of 10% adverse
change (2)
|
|
$
|
(98
|
)
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
$
|
(81
|
)
|
|
$
|
(3
|
)
|
|
$
|
|
|
Impact of 20% adverse
change (2)
|
|
|
(176
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(155
|
)
|
|
|
(4
|
)
|
|
|
|
|
Discount rate
|
|
|
10.5
|
%
|
|
|
6.1
|
%
|
|
|
3.9
|
%
|
|
|
9.4
|
%
|
|
|
6.9
|
%
|
|
|
2.4
|
%
|
Impact of 10% adverse change
|
|
$
|
(109
|
)
|
|
$
|
(169
|
)
|
|
$
|
(8
|
)
|
|
$
|
(136
|
)
|
|
$
|
(35
|
)
|
|
$
|
(9
|
)
|
Impact of 20% adverse change
|
|
|
(214
|
)
|
|
|
(327
|
)
|
|
|
(16
|
)
|
|
|
(266
|
)
|
|
|
(70
|
)
|
|
|
(17
|
)
|
|
|
|
|
(1)
|
Anticipated credit losses are computed only on positions in
which expected credit loss is a key assumption in the
determination of fair value.
|
|
(2)
|
The impacts of adverse change take into account credit mitigants
incorporated in the retained interests, including
over-collateralization and subordination provisions.
|
|
(3)
|
Includes retained interests in bonds and other types of
financial assets that are not subject to prepayment risk.
|
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.
In addition to the retained interests described above, the firm
also held interests in residential mortgage QSPEs purchased in
connection with secondary market-making activities. These
purchased interests approximated $6 billion and
$8 billion as of February 2007 and November 2006,
respectively.
26
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
|
Variable
Interest Entities (VIEs)
|
The firm, in the ordinary course of business, retains interests
in VIEs in connection with its securitization activities. The
firm also purchases and sells variable interests in VIEs, which
primarily issue mortgage-backed and other asset-backed
securities and CDOs, 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. In certain instances, the firm provides guarantees
to VIEs or holders of variable interests in VIEs. In such cases,
the maximum exposure to loss included in the tables set forth
below is the notional amount of such guarantees. Such amounts do
not represent anticipated losses in connection with these
guarantees.
The firms variable interests in VIEs include senior and
subordinated debt; loan commitments; limited and general
partnership interests; preferred and common stock; interest
rate, foreign currency, equity, commodity and credit
derivatives; guarantees; and residual interests in
mortgage-backed and asset-backed securitization vehicles and
CDOs. The firms exposure to the obligations of VIEs is
generally limited to its interests in these entities.
The following tables set forth total assets in nonconsolidated
VIEs in which the firm holds significant variable interests and
the firms maximum exposure to loss associated with these
interests. The firm has aggregated nonconsolidated VIEs based on
principal business activity, as reflected in the first column.
The nature of the firms variable interests can take
different forms, as described in the columns under maximum
exposure to loss.
27
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
|
|
|
|
Maximum Exposure
to Loss in Nonconsolidated
VIEs (1)
|
|
|
|
|
|
Purchased
|
|
Commitments
|
|
|
|
|
|
|
|
|
VIE
|
|
|
and Retained
|
|
and
|
|
|
|
Loans and
|
|
|
|
|
Assets
|
|
|
Interests
|
|
Guarantees
|
|
Derivatives (3)
|
|
Investments
|
|
Total
|
|
|
|
|
|
(in millions)
|
Collateralized debt obligations
|
|
$
|
54,773
|
|
|
|
$
|
5,567
|
|
|
$
|
|
|
|
$
|
11,269
|
|
|
$
|
|
|
|
$
|
16,836
|
|
Real estate, credit-related and
other
investing (2)
|
|
|
16,262
|
|
|
|
|
|
|
|
|
119
|
|
|
|
6
|
|
|
|
2,088
|
|
|
|
2,213
|
|
Municipal bond securitizations
|
|
|
1,135
|
|
|
|
|
|
|
|
|
1,135
|
|
|
|
|
|
|
|
|
|
|
|
1,135
|
|
Mortgage-backed and other
asset-backed
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
Power-related
|
|
|
3,537
|
|
|
|
|
2
|
|
|
|
249
|
|
|
|
|
|
|
|
630
|
|
|
|
881
|
|
Principal-protected notes
|
|
|
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
2,950
|
|
|
|
|
|
|
|
2,950
|
|
Asset repackagings and
credit-linked notes
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
|
529
|
|
|
|
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,900
|
|
|
|
$
|
5,569
|
|
|
$
|
1,503
|
|
|
$
|
14,824
|
|
|
$
|
2,718
|
|
|
$
|
24,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November
2006
|
|
|
|
|
|
Maximum Exposure
to Loss in Nonconsolidated
VIEs (1)
|
|
|
|
|
|
Purchased
|
|
Commitments
|
|
|
|
|
|
|
|
|
VIE
|
|
|
and Retained
|
|
and
|
|
|
|
Loans and
|
|
|
|
|
Assets
|
|
|
Interests
|
|
Guarantees
|
|
Derivatives (3)
|
|
Investments
|
|
Total
|
|
|
|
|
|
(in millions)
|
Collateralized debt obligations
|
|
$
|
37,610
|
|
|
|
$
|
2,406
|
|
|
$
|
|
|
|
$
|
9,782
|
|
|
$
|
|
|
|
$
|
12,188
|
|
Real estate, credit-related and
other
investing (2)
|
|
|
16,300
|
|
|
|
|
|
|
|
|
113
|
|
|
|
8
|
|
|
|
2,088
|
|
|
|
2,209
|
|
Municipal bond securitizations
|
|
|
1,182
|
|
|
|
|
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
1,182
|
|
Mortgage-backed and other
asset-backed
|
|
|
8,239
|
|
|
|
|
477
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
543
|
|
Power-related
|
|
|
3,422
|
|
|
|
|
10
|
|
|
|
73
|
|
|
|
|
|
|
|
597
|
|
|
|
680
|
|
Principal-protected notes
|
|
|
4,363
|
|
|
|
|
|
|
|
|
|
|
|
|
3,437
|
|
|
|
|
|
|
|
3,437
|
|
Asset repackagings and
credit-linked notes
|
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
|
355
|
|
|
|
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
72,476
|
|
|
|
$
|
2,893
|
|
|
$
|
1,368
|
|
|
$
|
13,648
|
|
|
$
|
2,685
|
|
|
$
|
20,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Such amounts do not represent the anticipated losses in
connection with these transactions.
|
|
|
(2)
|
The firm obtains interests in these VIEs in connection with
making proprietary investments in real estate, distressed loans
and other types of debt, mezzanine instruments and equities. The
transactions included in the above table do not expose the firm
to a majority of the VIEs expected losses or expected
residual returns and, consequently, the firm is not the primary
beneficiary of the VIE. In certain cases, the firm is the
primary beneficiary in these types of transactions (see table of
consolidated VIEs below).
|
|
|
(3)
|
Derivatives related to CDOs consist of total return swaps on
investment-grade securities issued by VIEs and
out-of-the-money
written put options on investment-grade collateral held by VIEs.
Derivatives related to principal-protected notes consist 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. Derivatives related to
asset repackagings and credit-linked notes consist of interest
rate swaps, equity swaps, commodity swaps and purchased credit
default protection, through which the firm creates structured
notes designed for specific needs of investors. The derivative
transactions included in the above table do not expose the firm
to a majority of the VIEs expected losses or expected
residual returns and, consequently, the firm is not the primary
beneficiary of the VIE. In certain cases, the firm is the
primary beneficiary in these types of transactions (see table of
consolidated VIEs below).
|
28
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following table sets forth the firms total assets and
maximum exposure to loss associated with its significant
variable interests in consolidated VIEs where the firm does not
hold a majority voting interest. The firm has aggregated
consolidated VIEs based on principal business activity, as
reflected in the first column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
As of November
2006
|
|
|
|
|
Maximum
|
|
|
|
Maximum
|
|
|
VIE
|
|
Exposure
|
|
VIE
|
|
Exposure
|
|
|
Assets (1)
|
|
to
Loss (2)
|
|
Assets (1)
|
|
to
Loss (2)
|
|
|
(in millions)
|
|
Real estate, credit-related and
other investing
|
|
$
|
2,329
|
|
|
$
|
1,057
|
|
|
$
|
3,077
|
|
|
$
|
1,368
|
|
Municipal bond securitizations
|
|
|
3,351
|
|
|
|
3,351
|
|
|
|
2,715
|
|
|
|
2,715
|
|
Mortgage-backed and other
asset-backed
|
|
|
68
|
|
|
|
4
|
|
|
|
1,537
|
|
|
|
20
|
|
Foreign exchange and commodities
|
|
|
491
|
|
|
|
431
|
|
|
|
433
|
|
|
|
340
|
|
Principal-protected notes
|
|
|
1,077
|
|
|
|
998
|
|
|
|
894
|
|
|
|
774
|
|
Asset repackagings and
credit-linked notes
|
|
|
304
|
|
|
|
17
|
|
|
|
388
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,620
|
|
|
$
|
5,858
|
|
|
$
|
9,044
|
|
|
$
|
5,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consolidated VIE assets include assets financed on a nonrecourse
basis.
|
|
|
(2)
|
Such amounts do not represent the anticipated losses in
connection with these transactions.
|
|
|
|
Collateralized
Transactions
|
The firm receives financial instruments as collateral, primarily
in connection with resale agreements, securities borrowed,
derivative transactions and customer margin loans. Such
financial instruments may include obligations of the
U.S. government, federal agencies, sovereigns and
corporations, as well as equities and convertibles.
In many cases, the firm is permitted to deliver or repledge
these financial instruments in connection with entering into
repurchase agreements, securities lending agreements and other
secured financings, collateralizing derivative transactions and
meeting firm or customer settlement requirements. As of February
2007 and November 2006, the fair value of financial instruments
received as collateral by the firm that it was permitted to
deliver or repledge was $823.14 billion and
$746.08 billion, respectively, of which the firm delivered
or repledged $713.93 billion and $639.87 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.
Financial instruments owned and pledged to counterparties that
have the right to deliver or repledge are reported as
Financial instruments owned and pledged as collateral, at
fair value in the condensed consolidated statements of
financial condition and were $38.66 billion and
$36.00 billion as of February 2007 and November 2006,
respectively. Financial instruments owned and 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
Financial instruments owned, at fair value in the
condensed consolidated statements of financial condition and
were $144.98 billion and $134.31 billion as of
February 2007 and November 2006, respectively. Other assets
(primarily real estate, power generation facilities and related
assets, and cash) owned and pledged in connection with other
secured financings to counterparties that did not have the right
to sell or repledge were $5.20 billion and
$5.34 billion as of February 2007 and November 2006,
respectively.
29
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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 firms
William Street program, consolidated variable interest entities,
collateralized central bank financings, transfers of financial
assets that are accounted for as financings rather than sales
(primarily pledged bank loans and mortgage whole loans),
consolidated power generation facilities and other structured
financing arrangements.
Other secured financings are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Other secured financings
(short-term)
(1)(2)(3)
|
|
$
|
23,605
|
|
|
$
|
24,290
|
|
Other secured financings
(long-term):
|
|
|
|
|
|
|
|
|
2008
|
|
|
5,252
|
|
|
|
5,535
|
|
2009
|
|
|
775
|
|
|
|
877
|
|
2010
|
|
|
1,763
|
|
|
|
1,894
|
|
2011
|
|
|
5,029
|
|
|
|
5,105
|
|
2012
|
|
|
1,874
|
|
|
|
1,928
|
|
2013-thereafter
|
|
|
9,577
|
|
|
|
10,795
|
|
|
|
|
|
|
|
|
|
|
Total other secured financings
(long-term)
(4)(5)(6)
|
|
|
24,270
|
|
|
|
26,134
|
|
|
|
|
|
|
|
|
|
|
Total other secured financings
(7)
|
|
$
|
47,875
|
|
|
$
|
50,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of February 2007, consists of U.S. dollar-denominated
financings of $14.41 billion with a weighted average
interest rate of 5.08% and
non-U.S. dollar-denominated
financings of $9.20 billion with a weighted average
interest rate of 1.48%. As of November 2006, consists of
U.S. dollar-denominated financings of $14.28 billion
with a weighted average interest rate of 5.22% and
non-U.S. dollar-denominated
financings of $10.01 billion with a weighted average
interest rate of 2.00%.
|
|
|
(2)
|
Includes $12.13 billion and $3.30 billion accounted
for at fair value under SFAS No. 155 or
SFAS No. 159 as of February 2007 and November 2006,
respectively.
|
|
|
(3)
|
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.
|
|
|
(4)
|
As of February 2007, consists of U.S. dollar-denominated
financings of $15.64 billion with a weighted average
interest rate of 5.64% and
non-U.S. dollar-denominated
financings of $8.63 billion with a weighted average
interest rate of 3.40%. As of November 2006, consists of
U.S. dollar-denominated financings of $16.97 billion
with a weighted average interest rate of 5.61% and
non-U.S. dollar-denominated
financings of $9.16 billion with a weighted average
interest rate of 3.81%.
|
|
|
(5)
|
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.
|
|
|
(6)
|
Includes $6.39 billion accounted for at fair value under
SFAS No. 155 or SFAS No. 159 as of February 2007.
|
|
|
(7)
|
As of February 2007, $44.65 billion of these financings
were collateralized by financial instruments and
$3.23 billion by other assets (primarily real estate, power
generation facilities and related assets, and cash). As of
November 2006, $47.22 billion of these financings were
collateralized by financial instruments and $3.20 billion
by other assets. Other secured financings include
$19.00 billion and $19.79 billion of nonrecourse
obligations as of February 2007 and November 2006, respectively.
|
30
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
Note 4.
|
Unsecured
Short-Term Borrowings
|
The firm obtains unsecured short-term borrowings primarily
through the issuance of promissory notes, commercial paper and
hybrid financial instruments. As of February 2007 and November
2006, these borrowings were $54.06 billion and
$47.90 billion, respectively. Such amounts include the
portion of unsecured long-term borrowings maturing within one
year of the financial statement date and unsecured long-term
borrowings that are redeemable within one year of the financial
statement date at the option of the holder. The firm accounts
for promissory notes, commercial paper and certain hybrid
financial instruments at fair value under SFAS No. 155 or
SFAS No. 159. Short-term borrowings that are not recorded
at fair value are recorded based on the amount of cash received
plus accrued interest, and such amounts approximate fair value
due to the short-term nature of the obligations.
Unsecured short-term borrowings are set forth below:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Promissory notes
|
|
$
|
11,765
|
|
|
$
|
13,811
|
|
Commercial paper
|
|
|
1,592
|
|
|
|
1,489
|
|
Current portion of unsecured
long-term borrowings
|
|
|
18,922
|
|
|
|
14,115
|
|
Hybrid financial instruments
|
|
|
15,878
|
|
|
|
14,060
|
|
Other short-term borrowings
|
|
|
5,905
|
|
|
|
4,429
|
|
|
|
|
|
|
|
|
|
|
Total (1)(2)
|
|
$
|
54,062
|
|
|
$
|
47,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $34.79 billion and $10.22 billion accounted
for at fair value under SFAS No. 155 or
SFAS No. 159 as of February 2007 and November 2006,
respectively.
|
|
|
(2)
|
The weighted average interest rates for these borrowings were
5.05% and 5.13% as of February 2007 and November 2006,
respectively. The weighted average interest rates, after giving
effect to hedging activities, were 5.21% and 5.16% as of
February 2007 and November 2006, respectively. The weighted
average interest rates as of February 2007 and November 2006
excluded hybrid financial instruments accounted for at fair
value under SFAS No. 155 or SFAS No. 159.
|
31
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
Note 5.
|
Unsecured
Long-Term Borrowings
|
The firm obtains unsecured long-term borrowings that consist
principally of senior borrowings with maturities extending to
2039. As of February 2007 and November 2006, these borrowings
were $132.73 billion and $122.84 billion, respectively.
Unsecured long-term borrowings are set forth below:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Fixed rate obligations
(1)
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
$
|
42,435
|
|
|
$
|
41,719
|
|
Non-U.S. dollar
|
|
|
23,545
|
|
|
|
22,854
|
|
Floating rate obligations
(2)
|
|
|
|
|
|
|
|
|
U.S. dollar
|
|
|
44,201
|
|
|
|
38,342
|
|
Non-U.S. dollar
|
|
|
22,551
|
|
|
|
19,927
|
|
|
|
|
|
|
|
|
|
|
Total (3)
|
|
$
|
132,732
|
|
|
$
|
122,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of both February 2007 and November 2006, interest rates on
U.S. dollar fixed rate obligations ranged from 3.88% to
12.00%. As of both February 2007 and November 2006, interest
rates on
non-U.S. dollar
fixed rate obligations ranged from 0.31% to 8.88%.
|
|
|
(2)
|
Floating interest rates generally are based on LIBOR or the
federal funds target rate. Certain equity-linked and indexed
instruments are included in floating rate obligations.
|
|
|
(3)
|
Includes $14.20 billion and $7.25 billion accounted
for at fair value under SFAS No. 155 or
SFAS No. 159 as of February 2007 and November 2006,
respectively, primarily consisting of hybrid financial
instruments.
|
Unsecured long-term borrowings by maturity date are set forth
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February 2007
(1)(2)
|
|
November 2006
(1)(2)
|
|
|
U.S.
|
|
Non-U.S.
|
|
|
|
U.S.
|
|
Non-U.S.
|
|
|
|
|
Dollar
|
|
Dollar
|
|
Total
|
|
Dollar
|
|
Dollar
|
|
Total
|
|
|
(in millions)
|
|
2008
|
|
$
|
9,055
|
|
|
$
|
2,056
|
|
|
$
|
11,111
|
|
|
$
|
14,848
|
|
|
$
|
3,038
|
|
|
$
|
17,886
|
|
2009
|
|
|
16,112
|
|
|
|
2,632
|
|
|
|
18,744
|
|
|
|
12,398
|
|
|
|
2,978
|
|
|
|
15,376
|
|
2010
|
|
|
5,990
|
|
|
|
4,872
|
|
|
|
10,862
|
|
|
|
5,034
|
|
|
|
4,945
|
|
|
|
9,979
|
|
2011
|
|
|
5,826
|
|
|
|
4,337
|
|
|
|
10,163
|
|
|
|
5,675
|
|
|
|
4,389
|
|
|
|
10,064
|
|
2012
|
|
|
7,199
|
|
|
|
2,925
|
|
|
|
10,124
|
|
|
|
4,500
|
|
|
|
2,098
|
|
|
|
6,598
|
|
2013-thereafter
|
|
|
42,454
|
|
|
|
29,274
|
|
|
|
71,728
|
|
|
|
37,606
|
|
|
|
25,333
|
|
|
|
62,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,636
|
|
|
$
|
46,096
|
|
|
$
|
132,732
|
|
|
$
|
80,061
|
|
|
$
|
42,781
|
|
|
$
|
122,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Unsecured long-term borrowings maturing within one year of the
financial statement date and certain 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.
|
32
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The firm enters into derivative contracts, such as interest rate
futures contracts, interest rate swap agreements, currency swap
agreements, and equity-linked and indexed contracts, to
effectively convert a substantial portion of its unsecured
long-term borrowings into U.S. dollar-based floating rate
obligations. Accordingly, the carrying value of unsecured
long-term borrowings approximated fair value as of February 2007
and November 2006.
The effective weighted average interest rates for unsecured
long-term borrowings are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
2007
|
|
November
2006
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
|
($ in millions)
|
|
Fixed rate obligations
|
|
$
|
1,964
|
|
|
|
6.16
|
%
|
|
$
|
1,997
|
|
|
|
6.13
|
%
|
Floating rate
obligations (1)(2)
|
|
|
130,768
|
|
|
|
5.78
|
|
|
|
120,845
|
|
|
|
5.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,732
|
|
|
|
5.79
|
|
|
$
|
122,842
|
|
|
|
5.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes fixed rate obligations that have been converted into
floating rate obligations through derivative contracts.
|
|
|
(2)
|
The weighted average interest rates as of February 2007 and
November 2006 excluded hybrid financial instruments accounted
for at fair value under SFAS No. 155 or SFAS
No. 159.
|
Subordinated
Borrowings
Unsecured long-term borrowings include $9.61 billion and
$7.51 billion of subordinated borrowings as of February
2007 and November 2006, respectively, as set forth below.
Subordinated Notes. As of February 2007, the
firm had $6.77 billion of subordinated notes outstanding
with maturities ranging from 2008 to 2036. The effective
weighted average interest rate on these subordinated notes was
6.07%, after giving effect to derivative contracts used to
convert fixed rate obligations into floating rate obligations.
As of November 2006, the firm had $4.67 billion of
subordinated notes outstanding with maturities ranging from 2007
to 2036 and with an effective weighted average interest rate of
6.24%. These notes are junior in right of payment to all of the
firms senior indebtedness.
Junior Subordinated Debentures. The firm
issued $2.84 billion of junior subordinated debentures in
its first quarter of 2004 to Goldman Sachs Capital Trust I
(the Trust), a Delaware statutory trust created for the
exclusive purposes of (i) issuing $2.75 billion of
guaranteed preferred beneficial interests and $85 million
of common beneficial interests in the Trust, (ii) investing
the proceeds from the sale to purchase junior subordinated
debentures issued by the firm and (iii) engaging in only
those other activities necessary or incidental to these
purposes. The preferred beneficial interests were purchased by
third parties, and, as of February 2007 and November 2006, the
firm held all the common beneficial interests. The Trust is a
wholly owned finance subsidiary of the firm for regulatory and
legal purposes but is not consolidated for accounting purposes.
The firm pays interest semiannually 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
Trusts preferred beneficial interests to be deferred, in
each case up to ten consecutive semiannual 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.
33
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The Trust is not permitted to pay any distributions on the
common beneficial interests held by the firm unless all
dividends payable on the preferred beneficial interests have
been paid in full. These notes are junior in right of payment to
all of the firms senior indebtedness and all of the
firms subordinated notes (described above). See
Note 6 for information regarding the firms guarantee
of the preferred beneficial interests issued by the Trust.
|
|
Note 6.
|
Commitments,
Contingencies and Guarantees
|
Commitments
Forward Starting Collateralized Agreements and
Financings. The firm had forward starting resale
agreements and securities borrowing agreements of
$18.43 billion and $18.29 billion as of February 2007
and November 2006, respectively. The firm had forward starting
repurchase agreements and securities lending agreements of
$30.59 billion and $17.15 billion as of February 2007
and November 2006, respectively.
Commitments to Extend Credit. In connection
with its lending activities, the firm had outstanding
commitments to extend credit of $87.64 billion and
$100.48 billion as of February 2007 and November 2006,
respectively. The firms 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
counterpartys request, the total commitment amount does
not necessarily reflect the actual future cash flow
requirements. The firm accounts for these commitments at fair
value.
The following table summarizes the firms commitments to
extend credit as of February 2007 and November 2006:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
William Street program
|
|
$
|
19,256
|
|
|
$
|
18,831
|
|
Other commercial lending
commitments
|
|
|
|
|
|
|
|
|
Investment-grade
|
|
|
13,880
|
|
|
|
7,604
|
|
Non-investment-grade
|
|
|
39,119
|
|
|
|
57,017
|
|
Warehouse financing
|
|
|
15,388
|
|
|
|
17,026
|
|
|
|
|
|
|
|
|
|
|
Total commitments to extend credit
|
|
$
|
87,643
|
|
|
$
|
100,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Street program. Substantially all of
the commitments provided under the William Street credit
extension program are to investment-grade corporate borrowers.
Commitments under the program are primarily extended by William
Street Commitment Corporation (Commitment Corp.), a consolidated
wholly owned subsidiary of Group Inc. whose assets and
liabilities are legally separated from other assets and
liabilities of the firm, and, to a lesser extent, by William
Street Credit Corporation, another consolidated wholly owned
subsidiary of Group Inc. A majority of the commitments extended
by Commitment Corp. are supported by funding raised by William
Street Funding Corporation (Funding Corp.), another consolidated
wholly owned subsidiary of Group Inc. whose assets and
liabilities are also 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.,
|
34
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
|
|
|
except in limited cases as expressly agreed in writing, is
responsible for any obligation of either entity. With respect to
substantially all of the William Street commitments, Sumitomo
Mitsui Financial Group, Inc. (SMFG) provides the firm with
credit loss protection that is generally limited to 95% of the
first loss the firm realizes on approved loan commitments, up to
a maximum of $1.00 billion. In addition, subject to the
satisfaction of certain conditions, upon the firms
request, SMFG will provide protection for 70% of the second loss
on such commitments, up to a maximum of $1.13 billion. The
firm also uses other financial instruments to mitigate credit
risks related to certain William Street commitments not covered
by SMFG.
|
|
|
|
|
|
Other commercial lending commitments. In
addition to the commitments issued under the William Street
credit extension program, the firm extends other credit
commitments, primarily in connection with contingent acquisition
financing and other types of corporate lending. The total
commitment amount does not necessarily reflect the actual future
cash flow requirements, as the firm often syndicates all or
substantial portions of these commitments, 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
short-term in nature, as borrowers often replace them with other
funding sources.
|
|
|
|
Warehouse financing. The firm provides
financing for the warehousing of financial assets to be
securitized, primarily in connection with CDOs and mortgage
securitizations. These financings are expected to be repaid from
the proceeds of the related securitizations for which the firm
may or may not act as underwriter. These arrangements are
secured by the warehoused assets, primarily consisting of
mortgage-backed and other asset-backed securities, residential
and commercial mortgages and corporate debt instruments.
|
Letters of Credit. The firm provides letters
of credit issued by various banks to counterparties in lieu of
securities or cash to satisfy various collateral and margin
deposit requirements. Letters of credit outstanding were
$6.05 billion and $5.73 billion as of February 2007
and November 2006, respectively.
Merchant Banking Commitments. The firm acts as
an investor in merchant banking transactions, which includes
making long-term investments in equity and debt instruments in
privately negotiated transactions, corporate acquisitions and
real estate transactions. In connection with these activities,
the firm had commitments to invest up to $12.44 billion and
$6.36 billion in corporate and real estate investment funds
as of February 2007 and November 2006, respectively.
Construction-Related Commitments. As of
February 2007 and November 2006, the firm had
construction-related commitments of $1.88 billion and
$1.63 billion, respectively, including commitments of
$986 million and $1.07 billion, respectively, related
to the development of wind energy projects. Construction-related
commitments also include outstanding commitments of
$835 million and $500 million as of February 2007 and
November 2006, respectively, related to the firms new
world headquarters in New York City, which is expected to cost
between $2.3 billion and $2.5 billion.
Underwriting Commitments. As of February 2007
and November 2006, the firm had commitments to purchase
$1.07 billion and $2.62 billion, respectively, of
securities in connection with its underwriting activities.
35
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Other. The firm had other purchase commitments
of $388 million and $393 million as of February 2007
and November 2006, respectively. In addition, the firm had other
investment commitments of $1.40 billion and
$1.88 billion as of February 2007 and November 2006,
respectively.
In March 2007, the firm entered into an agreement to sell its
interest in Horizon Wind Energy LLC to Energias de Portugal,
S.A., subject to the receipt of regulatory approvals and other
closing conditions. The transaction is expected to close during
the firms third quarter of 2007, and depending on the
level of net revenues in such period, the resulting gain may be
material to the firms results of operations.
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, and rent
charged to operating expense are set forth below:
|
|
|
|
|
|
|
(in millions)
|
|
Minimum rental payments
|
|
|
|
|
Remainder of 2007
|
|
$
|
469
|
|
2008
|
|
|
412
|
|
2009
|
|
|
418
|
|
2010
|
|
|
335
|
|
2011
|
|
|
278
|
|
2012-thereafter
|
|
|
2,165
|
|
|
|
|
|
|
Total
|
|
$
|
4,077
|
|
|
|
|
|
|
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 firms financial condition, but may be
material to the firms 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 firms 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 $7.96 billion and $8.04 billion
of contract holder account balances as of February 2007 and
November 2006, respectively, for such benefits. The weighted
average attained age of these contract holders was 71 years
and 70 years as of February 2007 and November 2006,
respectively. The net amount at risk, representing guaranteed
minimum death benefits in excess of contract holder account
balances, was $1.12 billion and $1.27 billion as of
February 2007 and November 2006, respectively. See Note 10
for more information on the firms insurance liabilities.
36
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Guarantees
The firm enters into various derivative contracts that meet the
definition of a guarantee under FIN No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. Such derivative contracts include credit default
and total return swaps, written equity and commodity put
options, written currency contracts and interest rate caps,
floors and swaptions. FIN No. 45 does not require
disclosures about derivative contracts if such contracts may be
cash settled and the firm has no basis to conclude it is
probable that the counterparties held, at inception, the
underlying instruments related to the derivative contracts. The
firm has concluded that these conditions have been met for
certain large, internationally active commercial and investment
bank end users and certain other users. 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 connection with the firms establishment of the Trust,
Group Inc. effectively provided for the full and unconditional
guarantee of the beneficial interests in the Trust held by third
parties. Timely payment by Group Inc. of interest on the junior
subordinated debentures and other amounts due and performance of
its other obligations under the transaction documents will be
sufficient to cover payments due by the Trust on its beneficial
interests. As a result, management believes that it is unlikely
the firm will have to make payments related to the Trust other
than those required under the junior subordinated debentures and
in connection with certain expenses incurred by the Trust.
In the ordinary course of business, the firm provides other
financial guarantees of the obligations of third parties (e.g.,
performance bonds, standby letters of credit and other
guarantees to enable clients to complete transactions and
merchant banking fund-related guarantees). These guarantees
represent obligations to make payments to beneficiaries if the
guaranteed party fails to fulfill its obligation under a
contractual arrangement with that beneficiary.
37
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
The following tables set forth certain information about the
firms derivative contracts that meet the definition of a
guarantee and certain other guarantees as of February 2007 and
November 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
|
|
Maximum
Payout/Notional Amount by Period of
Expiration (6)
|
|
|
|
Remainder
|
|
|
2008-
|
|
|
2010-
|
|
|
2012-
|
|
|
|
|
|
|
of 2007
|
|
|
2009
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Derivatives (1)
|
|
$
|
382,262
|
|
|
$
|
552,858
|
|
|
$
|
469,145
|
|
|
$
|
459,728
|
|
|
$
|
1,863,993
|
|
Securities lending
indemnifications (2)
|
|
|
23,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,765
|
|
Performance
bonds (3)
|
|
|
14,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,067
|
|
Guarantees of trust preferred
beneficial
interest (4)
|
|
|
87
|
|
|
|
349
|
|
|
|
349
|
|
|
|
6,676
|
|
|
|
7,461
|
|
Other financial
guarantees (5)
|
|
|
581
|
|
|
|
109
|
|
|
|
71
|
|
|
|
95
|
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of November
2006
|
|
|
|
Maximum
Payout/Notional Amount by Period of
Expiration (6)
|
|
|
|
Remainder
|
|
|
2008-
|
|
|
2010-
|
|
|
2012-
|
|
|
|
|
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
Derivatives (1)
|
|
$
|
379,256
|
|
|
$
|
428,258
|
|
|
$
|
460,088
|
|
|
$
|
399,449
|
|
|
$
|
1,667,051
|
|
Securities lending
indemnifications (2)
|
|
|
19,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,023
|
|
Performance bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees of trust preferred
beneficial
interest (4)
|
|
|
174
|
|
|
|
349
|
|
|
|
349
|
|
|
|
6,676
|
|
|
|
7,548
|
|
Other financial
guarantees (5)
|
|
|
592
|
|
|
|
99
|
|
|
|
76
|
|
|
|
86
|
|
|
|
853
|
|
|
|
|
|
(1)
|
The aggregate carrying value of these derivatives as of February
2007 was an asset of $4.31 billion, consisting of contracts
with an asset value of $13.50 billion and contracts with a
liability value of $9.19 billion. The aggregate carrying
value of these derivatives as of November 2006 was an asset of
$1.12 billion, consisting of contracts with an asset value
of $11.06 billion and contracts with a liability value of
$9.94 billion. The carrying value excludes the effect of a
legal right of setoff that may exist under an enforceable
netting agreement.
|
|
|
(2)
|
Collateral held by the lenders in connection with securities
lending indemnifications was $24.61 billion and
$19.70 billion as of February 2007 and November 2006,
respectively.
|
|
|
(3)
|
Excludes collateral of $4.51 billion related to these
obligations.
|
|
|
(4)
|
Includes the guarantee of all payments scheduled to be made over
the life of the Trust, which could be shortened in the event the
firm redeems the junior subordinated debentures issued to fund
the Trust. See Note 5 for further information regarding the
Trust.
|
|
|
(5)
|
The carrying value of these guarantees was a liability of
$14 million and $15 million as of February 2007 and
November 2006, respectively.
|
|
|
(6)
|
Such amounts do not represent the anticipated losses in
connection with these contracts.
|
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 firms obligations in respect of such transactions are
secured by the assets in the clients account as well as
any proceeds received from the
38
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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 February 2007 and November 2006.
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 February
2007 and November 2006.
|
|
Note 7.
|
Shareholders
Equity
|
On March 12, 2007, the Board of Directors of Group Inc.
(the Board) declared a dividend of $0.35 per common share
with respect to the firms first quarter of 2007 to be paid
on May 24, 2007, to common shareholders of record on
April 24, 2007.
During the three months ended February 2007, the firm
repurchased 13.0 million shares of its common stock at a
total cost of $2.69 billion. The average price paid per
share for repurchased shares was $207.26 for the three months
ended February 2007. In addition, to satisfy minimum statutory
employee tax withholding requirements related to the delivery of
common stock underlying restricted stock units, the firm
cancelled 4.7 million restricted stock units with a total
value of $927 million in the first quarter of 2007.
The firms share repurchase program is intended to help
maintain the appropriate level of common equity and to
substantially offset increases in share count over time
resulting from employee share-based compensation. The repurchase
program is effected primarily through regular open-market
purchases and is influenced by the firms overall capital
position (i.e., the comparison of the firms capital
requirements to its available capital), general market
conditions and the prevailing price and trading volumes of the
firms common stock.
39
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
As of February 2007, the firm had 124,000 shares of
perpetual non-cumulative preferred stock outstanding in four
series as set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Shares
|
|
|
|
Earliest
|
|
Redemption
Value
|
Series
|
|
Issued
|
|
Authorized
|
|
Dividend
Rate
|
|
Redemption
Date
|
|
(in
millions)
|
|
A
|
|
30,000
|
|
|
50,000
|
|
|
3 month LIBOR + 0.75%,
with floor of 3.75% per annum
|
|
April 25, 2010
|
|
$
|
750
|
|
B
|
|
32,000
|
|
|
50,000
|
|
|
6.20% per annum
|
|
October 31, 2010
|
|
|
800
|
|
C
|
|
8,000
|
|
|
25,000
|
|
|
3 month LIBOR + 0.75%,
with floor of 4% per annum
|
|
October 31, 2010
|
|
|
200
|
|
D
|
|
54,000
|
|
|
60,000
|
|
|
3 month LIBOR + 0.67%,
with floor of 4% per annum
|
|
May 24, 2011
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,000
|
|
|
185,000
|
|
|
|
|
|
|
$
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Each share of preferred stock 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 firms option at
a redemption price equal to $25,000 plus declared and unpaid
dividends. Dividends on each series of preferred stock, if
declared, are payable quarterly in arrears. The firms
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. All preferred stock also has a
preference over the firms common stock upon liquidation.
On March 12, 2007, the Board declared a dividend per
preferred share of $369.15, $387.50, $369.15 and $364.31 for
Series A, Series B, Series C and Series D
preferred stock, respectively, to be paid on May 10, 2007
to preferred shareholders of record on April 25, 2007.
The following table sets forth the firms accumulated other
comprehensive income by type:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Currency translation adjustment,
net of tax
|
|
$
|
34
|
|
|
$
|
29
|
|
Minimum pension liability
adjustment, net of tax
|
|
|
(38
|
)
|
|
|
(38
|
)
|
Net gains on cash flow hedges, net
of tax
|
|
|
4
|
|
|
|
2
|
|
Net unrealized gains on
available-for-sale
securities, net of tax
|
|
|
18
|
(1)
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive income, net of tax
|
|
$
|
18
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consists of net unrealized gains of $1 million on
available-for-sale
securities held by the firms insurance subsidiaries and
net unrealized gains of $17 million on
available-for-sale
securities held by investees accounted for under the equity
method.
|
40
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
Note 8.
|
Earnings Per
Common Share
|
The computations of basic and diluted earnings per common share
are set forth below:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions,
except
|
|
|
per share amounts)
|
|
Numerator for basic and diluted
EPS net earnings applicable to
common shareholders
|
|
$
|
3,148
|
|
|
$
|
2,453
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic
EPS weighted average number of common shares
|
|
|
444.5
|
|
|
|
457.3
|
|
Effect of dilutive securities
(1)
|
|
|
|
|
|
|
|
|
Restricted stock units
|
|
|
11.7
|
|
|
|
10.9
|
|
Stock options
|
|
|
15.7
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares
|
|
|
27.4
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted
EPS weighted average number of common
shares and dilutive potential common shares
|
|
|
471.9
|
|
|
|
483.3
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
7.08
|
|
|
$
|
5.36
|
|
Diluted EPS
|
|
|
6.67
|
|
|
|
5.08
|
|
(1)
There were no anti-dilutive securities during the three months
ended February 2007 or February 2006.
|
|
Note 9.
|
Goodwill and
Identifiable Intangible Assets
|
Goodwill
The following table sets forth the carrying value of the
firms goodwill by operating segment, which is included in
Other assets in the condensed consolidated
statements of financial condition:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Investment Banking
|
|
|
|
|
|
|
|
|
Financial Advisory
|
|
$
|
|
|
|
$
|
|
|
Underwriting
|
|
|
125
|
|
|
|
125
|
|
Trading and Principal Investments
|
|
|
|
|
|
|
|
|
FICC
|
|
|
133
|
|
|
|
136
|
|
Equities (1)
|
|
|
2,381
|
|
|
|
2,381
|
|
Principal Investments
|
|
|
4
|
|
|
|
4
|
|
Asset Management and Securities
Services
|
|
|
|
|
|
|
|
|
Asset
Management (2)
|
|
|
421
|
|
|
|
421
|
|
Securities Services
|
|
|
117
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,181
|
|
|
$
|
3,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily related to SLK LLC (SLK).
|
|
|
(2)
|
Primarily related to The Ayco Company, L.P. (Ayco).
|
41
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
firms identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
February
|
|
November
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(in millions)
|
|
Customer
lists (1)
|
|
Gross carrying amount
|
|
$
|
1,034
|
|
|
$
|
1,034
|
|
|
|
Accumulated amortization
|
|
|
(310
|
)
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
724
|
|
|
$
|
737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Power
contracts (2)
|
|
Gross carrying amount
|
|
$
|
697
|
|
|
$
|
750
|
|
|
|
Accumulated amortization
|
|
|
(92
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
605
|
|
|
$
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
New York Stock
|
|
Gross carrying amount
|
|
$
|
714
|
|
|
$
|
714
|
|
Exchange (NYSE)
|
|
Accumulated amortization
|
|
|
(182
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
specialist rights
|
|
Net carrying amount
|
|
$
|
532
|
|
|
$
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance-related
|
|
Gross carrying amount
|
|
$
|
419
|
|
|
$
|
396
|
|
assets (3)
|
|
Accumulated amortization
|
|
|
(50
|
)
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
369
|
|
|
$
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange-traded
|
|
Gross carrying amount
|
|
$
|
138
|
|
|
$
|
138
|
|
fund (ETF)
|
|
Accumulated amortization
|
|
|
(34
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
specialist rights
|
|
Net carrying amount
|
|
$
|
104
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (4)
|
|
Gross carrying amount
|
|
$
|
336
|
|
|
$
|
335
|
|
|
|
Accumulated amortization
|
|
|
(258
|
)
|
|
|
(246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
78
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Gross carrying amount
|
|
$
|
3,338
|
|
|
$
|
3,367
|
|
|
|
Accumulated amortization
|
|
|
(926
|
)
|
|
|
(865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
2,412
|
|
|
$
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily includes the firms clearance and execution and
NASDAQ customer lists related to SLK and financial counseling
customer lists related to Ayco.
|
|
|
(2)
|
Primarily relates to above-market power contracts of
consolidated power generation facilities related to Cogentrix
Energy, Inc. and National Energy & Gas Transmission,
Inc. (NEGT). Substantially all of these power contracts have
been pledged to counterparties in connection with the
firms secured financings. The weighted average remaining
life of these power contracts is approximately 11 years.
|
|
|
(3)
|
Consists of VOBA and DAC. VOBA represents the present value of
estimated future gross profits of the variable annuity and
variable life insurance business acquired in 2006. DAC results
from commissions paid by the firm to the primary insurer (ceding
company) on life and annuity reinsurance agreements as
compensation to place the business with the firm and to cover
the ceding companys acquisition expenses. VOBA and DAC are
amortized over the estimated life of the underlying contracts
based on estimated gross profits, and amortization is adjusted
based on actual experience. The weighted average remaining
amortization period for VOBA and DAC is seven years as of
February 2007.
|
|
|
(4)
|
Primarily includes marketing and technology-related assets.
|
42
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Substantially all of the firms identifiable intangible
assets are considered to have finite lives and are amortized
over their estimated useful lives. The weighted average
remaining life of the firms identifiable intangibles is
approximately 12 years.
Amortization expense associated with identifiable intangible
assets was $68 million and $44 million for the three
months ended February 2007 and February 2006, respectively.
Amortization expense associated with the firms
consolidated power generation facilities is reported within
Cost of power generation in the condensed
consolidated statements of earnings.
The estimated future amortization for existing identifiable
intangible assets through 2012 is set forth below:
|
|
|
|
|
|
|
(in millions)
|
|
Remainder of 2007
|
|
$
|
199
|
|
2008
|
|
|
225
|
|
2009
|
|
|
210
|
|
2010
|
|
|
201
|
|
2011
|
|
|
193
|
|
2012
|
|
|
180
|
|
|
|
Note 10.
|
Other Assets and
Other Liabilities
|
Other
Assets
Other assets are generally less liquid, nonfinancial assets. The
following table sets forth the firms other assets by type:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Goodwill and identifiable
intangible
assets (1)
|
|
$
|
5,593
|
|
|
$
|
5,686
|
|
Property, leasehold improvements
and
equipment (2)
|
|
|
7,311
|
|
|
|
6,990
|
|
Equity-method investments
|
|
|
2,950
|
|
|
|
2,764
|
|
Income tax-related assets
|
|
|
3,029
|
|
|
|
3,427
|
|
Miscellaneous receivables and other
|
|
|
3,124
|
|
|
|
3,009
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,007
|
|
|
$
|
21,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See Note 9 for further information regarding the
firms goodwill and identifiable intangible assets.
|
|
|
(2)
|
Net of accumulated depreciation and amortization of
$5.26 billion and $5.06 billion as of February 2007
and November
2006, respectively.
|
43
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
Other
Liabilities
Other liabilities and accrued expenses primarily includes
insurance-related liabilities, minority interest in consolidated
entities, compensation and benefits, income tax-related
liabilities, litigation and regulatory liabilities, deferred
revenue and other payables. The following table sets forth the
firms other liabilities and accrued expenses by type:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Insurance-related
liabilities (1)
|
|
$
|
11,459
|
|
|
$
|
11,471
|
|
Minority interest
(2)
|
|
|
10,526
|
|
|
|
4,759
|
|
Compensation and benefits
|
|
|
6,255
|
|
|
|
9,165
|
|
Income tax-related liabilities
|
|
|
1,817
|
|
|
|
2,639
|
|
Accrued expenses and other payables
|
|
|
3,668
|
|
|
|
3,832
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,725
|
|
|
$
|
31,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Insurance-related liabilities are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Separate account liabilities
|
|
$
|
7,925
|
|
|
$
|
7,957
|
|
Liabilities for future benefits and
unpaid claims
|
|
|
2,175
|
|
|
|
2,123
|
|
Contract holder account balances
|
|
|
1,116
|
|
|
|
1,134
|
|
Reserves for guaranteed minimum
death and income benefits
|
|
|
243
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
Total insurance-related liabilities
|
|
$
|
11,459
|
|
|
$
|
11,471
|
|
|
|
|
|
|
|
|
|
|
Separate account liabilities are offset by separate account
assets, representing segregated contract holder funds under
variable annuity and variable life insurance contracts. Separate
account assets are included in Cash and securities
segregated for regulatory and other purposes in the
condensed consolidated statements of financial condition.
Liabilities for future benefits and unpaid claims include
liabilities arising from reinsurance provided by the firm to
other insurers. The firm had a receivable for $1.36 billion
and $1.33 billion as of February 2007 and November
2006, 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
$784 million and $786 million as of February 2007 and
November 2006, 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.
Reserves for guaranteed minimum death and income benefits
represent a liability for the expected value of guaranteed
benefits in excess of projected annuity account balances. These
reserves are computed in accordance with AICPA Statement of
Position
03-1,
Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate
Accounts, and are based on total payments expected to be
made less total fees expected to be assessed over the life of
the contract.
|
|
|
|
(2)
|
Includes $9.11 billion and $3.31 billion related to
consolidated investment funds as of February 2007 and
November 2006, respectively.
|
44
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
Note 11.
|
Employee Benefit
Plans
|
The firm sponsors various pension plans and certain other
postretirement benefit plans, primarily healthcare and life
insurance. The firm also provides certain benefits to former or
inactive employees prior to retirement.
Defined
Benefit Pension Plans and Postretirement Plans
Employees of certain
non-U.S. subsidiaries
participate in various defined benefit pension plans. These
plans generally provide benefits based on years of credited
service and a percentage of the employees eligible
compensation. The firm also maintains a defined benefit pension
plan for substantially all U.S. employees hired prior to
November 1, 2003. As of November 2004, this plan has been
closed to new participants and no further benefits will be
accrued to existing participants. In addition, the firm has
unfunded postretirement benefit plans that provide medical and
life insurance for eligible retirees and their dependents
covered under these programs.
The components of pension expense/(income) and postretirement
expense are set forth below:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
U.S. pension
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
Interest cost
|
|
|
6
|
|
|
|
5
|
|
Expected return on plan assets
|
|
|
(8
|
)
|
|
|
(7
|
)
|
Net amortization
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. pension
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
18
|
|
|
$
|
14
|
|
Interest cost
|
|
|
8
|
|
|
|
6
|
|
Expected return on plan assets
|
|
|
(8
|
)
|
|
|
(7
|
)
|
Net amortization
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
5
|
|
|
$
|
4
|
|
Interest cost
|
|
|
5
|
|
|
|
5
|
|
Net amortization
|
|
|
4
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
The firm expects to contribute a minimum of $33 million to
its pension plans and $9 million to its postretirement
plans in 2007.
45
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
|
|
Note 12.
|
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 $1.04 billion and $1.22 billion for the
three months ended February 2007 and February 2006,
respectively. As of February 2007 and November 2006, the fees
receivable from these funds were $575 million and
$362 million, respectively. Additionally, the firm may
invest alongside the third-party investors in certain funds. The
aggregate carrying value of the firms interests in these
funds was $5.23 billion and $3.94 billion as of
February 2007 and November 2006, 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 and custody. See Note 6 for the
firms commitments related to these funds.
The firm is regulated by the U.S. Securities and Exchange
Commission (SEC) as a Consolidated Supervised Entity (CSE). As
such, it is subject to group-wide supervision and examination by
the SEC and to minimum capital requirements on a consolidated
basis. As of February 2007 and November 2006, the firm was
in compliance with the CSE capital requirements.
The firms principal U.S. regulated subsidiaries
include Goldman, Sachs & Co. (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
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 February 2007 and November 2006, GS&Co. and GSEC
had net capital in excess of their minimum capital requirements.
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
February 2007 and November 2006, GS&Co. had
tentative net capital and net capital in excess of both the
minimum and the notification requirements.
Goldman Sachs Bank USA (GS Bank), a wholly owned industrial
bank, is regulated by the Federal Deposit Insurance Corporation
and the State of Utah Department of Financial Institutions and
is subject to minimum capital requirements. As of February 2007,
GS Bank was in compliance with all regulatory capital
requirements. GS Bank had approximately $12.81 billion of
interest-bearing deposits as of February 2007, which are
included in Payables to customers and counterparties
in the condensed consolidated statements of financial condition.
The firm has U.S. insurance subsidiaries that are subject
to state insurance regulation in the states in which they are
domiciled and in the other states in which they are licensed. In
addition, certain of the firms insurance subsidiaries are
regulated by the Bermuda Registrar of Companies. The firms
insurance subsidiaries were in compliance with all regulatory
capital requirements as of February 2007 and November 2006.
The firms principal
non-U.S. regulated
subsidiaries include Goldman Sachs International (GSI) and
Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firms
regulated U.K. broker-dealer, is subject to the capital
requirements of the U.K.s Financial Services Authority.
GSJCL, the firms regulated Japanese broker-dealer, is
subject to the capital requirements of Japans Financial
Services Agency. As of February 2007 and November 2006, 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
46
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
adequacy requirements promulgated by authorities of the
countries in which they operate. As of February 2007 and
November 2006, these subsidiaries were in compliance with their
local capital adequacy requirements.
|
|
Note 14.
|
Business
Segments
|
In reporting to management, the firms operating results
are categorized into the following three segments: Investment
Banking, Trading and Principal Investments, and Asset Management
and Securities Services.
Basis of
Presentation
In reporting segments, certain of the firms business lines
have been aggregated where they have similar economic
characteristics and are similar in each of the following areas:
(i) the nature of the services they provide,
(ii) their methods of distribution, (iii) the types of
clients they serve and (iv) the regulatory environments in
which they operate.
The cost drivers of the firm taken as a whole
compensation, headcount and levels of business
activity are broadly similar in each of the
firms business segments. Compensation and benefits
expenses within the firms segments reflect, among other
factors, the overall performance of the firm as well as the
performance of individual business units. Consequently, pre-tax
margins in one segment of the firms business may be
significantly affected by the performance of the firms
other business segments. The timing and magnitude of changes in
the firms bonus accruals can have a significant effect on
segment results in a given period.
The firm allocates revenues and expenses among the three
segments. Due to the integrated nature of the business segments,
estimates and judgments have been made in allocating certain
revenue and expense items. Transactions between segments are
based on specific criteria or approximate third-party rates.
Total operating expenses include corporate items that have not
been allocated to individual business segments. The allocation
process is based on the manner in which management views the
business of the firm.
The segment information presented in the table below is prepared
according to the following methodologies:
|
|
|
|
|
Revenues and expenses directly associated with each segment are
included in determining pre-tax earnings.
|
|
|
|
Net revenues in the firms segments include allocations of
interest income and interest expense to specific securities,
commodities and other positions in relation to the cash
generated by, or funding requirements of, such underlying
positions. Net interest is included within segment net revenues
as it is consistent with the way in which management assesses
segment performance.
|
|
|
|
Overhead expenses not directly allocable to specific segments
are allocated ratably based on direct segment expenses.
|
47
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 segments contribution to
consolidated pre-tax earnings and total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for
the
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
February
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(in millions)
|
|
Investment
|
|
Net revenues
|
|
$
|
1,716
|
|
|
$
|
1,471
|
|
Banking
|
|
Operating expenses
|
|
|
1,294
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
422
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
3,883
|
|
|
$
|
4,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading and Principal
|
|
Net revenues
|
|
$
|
9,417
|
|
|
$
|
6,982
|
|
Investments
|
|
Operating expenses
|
|
|
5,394
|
|
|
|
4,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
4,023
|
|
|
$
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
621,281
|
|
|
$
|
548,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Management and
|
|
Net revenues
|
|
$
|
1,597
|
|
|
$
|
1,980
|
|
Securities Services
|
|
Operating expenses
|
|
|
1,183
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
414
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
287,331
|
|
|
$
|
205,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Net
revenues (1)
|
|
$
|
12,730
|
|
|
$
|
10,433
|
|
|
|
Operating
expenses (2)
|
|
|
7,871
|
|
|
|
6,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
earnings (3)
|
|
$
|
4,859
|
|
|
$
|
3,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
912,495
|
|
|
$
|
758,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net revenues include net interest as set forth in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Investment Banking
|
|
$
|
|
|
|
$
|
1
|
|
Trading and Principal Investments
|
|
|
344
|
|
|
|
295
|
|
Asset Management and Securities
Services
|
|
|
464
|
|
|
|
426
|
|
|
|
|
|
|
|
|
|
|
Total net interest
|
|
$
|
808
|
|
|
$
|
722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
Includes net provisions for a number of litigation and
regulatory proceedings of $29 million for the three months
ended February 2006 that have not been allocated to the
firms segments.
|
|
|
(3)
|
Pre-tax earnings include total depreciation and amortization as
set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Investment Banking
|
|
$
|
33
|
|
|
$
|
31
|
|
Trading and Principal Investments
|
|
|
197
|
|
|
|
149
|
|
Asset Management and Securities
Services
|
|
|
42
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
272
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
48
THE GOLDMAN SACHS
GROUP, INC. and SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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. Accordingly,
management believes that profitability by geographic region is
not necessarily meaningful. In addition, as a significant
portion of the firms activities require cross-border
coordination in order to facilitate the needs of the firms
clients, the methodology for allocating the firms
profitability to geographic regions is dependent on the judgment
of management.
Geographic results are generally allocated as follows:
|
|
|
|
|
Investment Banking: location of the client and investment
banking team.
|
|
|
|
Fixed Income, Currency and Commodities, and
Equities: location of the trading desk.
|
|
|
|
Principal Investments: location of the investment.
|
|
|
|
Asset Management: location of the sales team.
|
|
|
|
Securities Services: location of the primary market for the
underlying security.
|
The following table sets forth the total net revenues of the
firm and its consolidated subsidiaries by geographic region
allocated on the methodology described above:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Net revenues
|
|
|
|
|
|
|
|
|
Americas (1)
|
|
$
|
6,263
|
|
|
$
|
5,438
|
|
EMEA (2)
|
|
|
4,167
|
|
|
|
3,017
|
|
Asia
|
|
|
2,300
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
12,730
|
|
|
$
|
10,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Substantially all relates to U.S. results.
|
|
|
(2)
|
EMEA (Europe, Middle East and Africa).
|
49
Report of
Independent Registered Public Accounting Firm
To the Directors and 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 February 23,
2007, the related condensed consolidated statements of earnings
for the three months ended February 23, 2007 and
February 24, 2006, the condensed consolidated statement of
changes in shareholders equity for the three months ended
February 23, 2007, the condensed consolidated statements of
cash flows for the three months ended February 23, 2007 and
February 24, 2006, and the condensed consolidated
statements of comprehensive income for the three months ended
February 23, 2007 and February 24, 2006. These
condensed consolidated interim financial statements are the
responsibility of the Companys 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 have previously audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States),
the consolidated statement of financial condition as of
November 24, 2006 and the related consolidated statements
of earnings, changes in shareholders equity, cash flows
and comprehensive income for the year then ended,
managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
November 24, 2006 and the effectiveness of the
Companys internal control over financial reporting as of
November 24, 2006; and in our report dated January 31,
2007, we expressed unqualified opinions thereon. The
consolidated financial statements and managements
assessment of the effectiveness of internal control over
financial reporting referred to above are not presented herein.
In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of
November 24, 2006, and the condensed consolidated statement
of changes in shareholders equity for the year ended
November 24, 2006, 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
March 26, 2007
50
|
|
Item 2:
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
INDEX
|
|
|
|
|
|
|
Page
|
|
|
No.
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
96
|
|
51
Introduction
Goldman Sachs is a leading global investment banking, securities
and investment management firm that provides a wide range of
services worldwide to a substantial and diversified client base
that includes corporations, financial institutions, governments
and
high-net-worth
individuals.
Our activities are divided into three segments:
|
|
|
|
|
Investment Banking. We provide a broad range
of investment banking services to a diverse group of
corporations, financial institutions, investment funds,
governments and individuals.
|
|
|
|
Trading and Principal Investments. We
facilitate client transactions with a diverse group of
corporations, financial institutions, investment funds,
governments and individuals and take proprietary positions
through market making in, trading of and investing in fixed
income and equity products, currencies, commodities and
derivatives on these products. In addition, we engage in
specialist and 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 advisory and financial planning services and
offer investment products (primarily through separate accounts
and 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 Managements Discussion and Analysis of Financial
Condition and Results of Operations should be read in
conjunction with our Annual Report on
Form 10-K
for the fiscal year ended November 24, 2006. References
herein to the Annual Report on
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended November 24, 2006.
Unless specifically stated otherwise, all references to February
2007 and February 2006 refer to our fiscal periods ended, or the
dates, as the context requires, February 23, 2007 and
February 24, 2006, respectively. All references to
November 2006, unless specifically stated otherwise, refer to
our fiscal year ended, or the date, as the context requires,
November 24, 2006. All references to 2007, unless
specifically stated otherwise, refer to our fiscal year ending,
or the date, as the context requires, November 30, 2007.
When we use the terms Goldman Sachs, we,
us and our, we mean The Goldman Sachs
Group, Inc. (Group Inc.), a Delaware corporation, and its
consolidated subsidiaries.
52
Executive
Overview
Our diluted earnings per common share were $6.67 for the first
quarter of 2007, compared with $5.08 for the first quarter of
2006. Annualized return on average tangible common
shareholders
equity (1)
was 44.7% and annualized return on average common
shareholders equity was 38.0% for the first quarter of
2007.
During the first quarter of 2007, we generated record quarterly
net revenues, net earnings and diluted earnings per common
share, reflecting strong performance across all of our segments
and regions. Net revenues in Trading and Principal Investments
increased compared with the first quarter of 2006, reflecting
significantly higher net revenues in Principal Investments,
Fixed Income, Currency and Commodities (FICC) and Equities. The
increase in Principal Investments reflected significantly higher
gains and overrides from corporate and real estate principal
investments. Net revenues in Principal Investments included
approximately $500 million in gains in the first quarter of
2007 related to our adoption of SFAS No. 157,
Fair Value Measurements. The increase in FICC
reflected higher net revenues in credit products and mortgages,
while net revenues in commodities, interest rate products and
currencies were also strong. During the quarter, FICC operated
in an environment characterized by strong customer-driven
activity and favorable market opportunities. In addition,
although the subprime sector within the mortgage market
experienced significant weakness, the broader credit environment
remained strong. The increase in Equities was primarily due to
significantly higher net revenues in shares and principal
strategies, reflecting strong results across all regions, while
net revenues in derivatives were also strong. During the
quarter, Equities operated in an environment characterized by
rising equity prices, strong customer-driven activity and
favorable market opportunities. In our trading businesses, we
increased our market risk, particularly in Equities, to
capitalize on these favorable opportunities for our clients and
ourselves. Net revenues in Investment Banking increased compared
with the first quarter of 2006, reflecting significantly higher
net revenues in debt underwriting, as financing activity
remained strong, particularly in leveraged finance. In addition,
net revenues in Financial Advisory were higher, reflecting
continued strong activity levels from both corporate clients and
financial sponsors. Our investment banking backlog increased
during the
quarter. (2)
Net revenues in Asset Management and Securities Services were
lower than the first quarter of 2006, primarily due to
significantly lower incentive fees, partially offset by higher
asset management and other fees, and continued growth in
securities lending and margin lending. During the quarter,
assets under management increased $43 billion or 6% to a
record $719 billion, with net asset inflows of
$35 billion.
Though we generated record operating results in the first
quarter of 2007, our business, by its nature, does not produce
predictable earnings. Our results in any given period may be
materially affected by conditions in global financial markets
and economic conditions generally. For a further discussion of
the factors that may affect our future operating results, see
Risk Factors in Part I, Item 1A of our
Annual Report on
Form 10-K.
|
|
(1)
|
Annualized return on average tangible common shareholders
equity is computed by dividing annualized net earnings
applicable to common shareholders by average monthly tangible
common shareholders equity. See Results
of Operations Financial Overview below for
further information regarding our calculation of annualized
return on average tangible common shareholders equity.
|
|
(2)
|
Our investment banking 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.
|
53
Business
Environment
Global economic conditions remained generally favorable during
our first quarter of fiscal 2007, with global economic growth
remaining solid, although it appeared to slow toward the end of
our quarter. Business and consumer confidence remained at
generally high levels across the worlds major economies,
particularly reflecting the impact of generally lower energy
prices during much of the quarter. Global equity markets broadly
moved higher during our first quarter, with particularly strong
gains in China. In the fixed income markets, yield curves in
both the U.S. and Europe remained relatively flat. In addition,
although the subprime sector within the U.S. mortgage
market experienced significant weakness, corporate credit
spreads narrowed further. In Investment Banking, corporate and
financial sponsor activity remained strong, as mergers and
acquisitions and debt origination levels, particularly leveraged
loan activity, remained at high levels.
In the U.S., economic growth, although lower than in recent
quarters, remained solid, particularly in the first half of our
fiscal quarter, aided by the combination of generally lower
energy prices and unusually warm weather. Unemployment remained
at low levels, ending our fiscal quarter essentially unchanged
from the end of fiscal 2006. While inflationary pressures
appeared to be contained, as reflected in measures of core
inflation, signs of pressure reemerged toward the end of our
fiscal quarter. The U.S. Federal Reserve left its federal
funds target rate unchanged at 5.25% during our fiscal quarter.
Long-term bond yields rose slightly, with the
10-year
U.S. Treasury note yield ending the quarter up
13 basis points at 4.68%. The S&P 500 Index, Dow Jones
Industrial Average and NASDAQ Composite Index increased by 4%,
3% and 2%, respectively, during our fiscal quarter.
In Europe, the pace of economic growth appears to have
accelerated slightly during our fiscal quarter, with an increase
in employment driving stronger domestic demand. The modest
acceleration in economic growth was evident in surveys of
business activity, which remained at high levels during our
fiscal quarter. The European Central Bank increased its main
refinancing operations rate by 25 basis points during the
fiscal quarter to 3.50%, its highest level in more than five
years. In the U.K., although financial conditions became less
accommodative, the economy showed continued modest growth.
Inflationary pressures also increased during the quarter. The
Bank of England raised its official bank rate by 25 basis
points to 5.25%, its highest level since 2001. Equity markets in
both the U.K. and continental Europe rose sharply and long-term
bond yields increased during our fiscal quarter.
In Japan, real gross domestic product appears to have
accelerated, particularly in the first half of our first
quarter, driven by an increase in both capital expenditure and
domestic demand. Unemployment levels remained low, though wages
declined on a
year-on-year
basis. During the quarter, the Bank of Japan raised its target
overnight call rate by 25 basis points to 0.50% and the
yield on
10-year
Japanese government bonds increased slightly. The Nikkei 225
Index ended the fiscal quarter 16% higher.
In China, economic growth remained solid, primarily driven by
continued strength in net exports. While the Peoples Bank
of China maintained the one-year benchmark lending rate at
6.12%, it raised the reserve requirement ratio by 50 basis
points during our fiscal quarter. The Shanghai Composite Index
continued its sharp increase during our fiscal quarter.
Elsewhere in Asia, growth in exports and industrial activity
softened, though growth appeared to recover toward the end of
our fiscal quarter. Equity markets across the region broadly
ended our fiscal quarter higher.
54
Critical
Accounting Policies
Fair
Value
The use of fair value to measure financial instruments, with
related unrealized gains or losses generally recognized in
Trading and principal investments in our condensed
consolidated statements of earnings, is fundamental to our
financial statements and 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 (the exit price). Instruments that we
own (long positions) are marked to bid prices, and
instruments that we have sold, but not yet purchased
(short positions) are marked to offer prices.
We adopted SFAS No. 157, Fair Value
Measurements, as of the beginning of 2007. 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 on SFAS No. 157, including the
impact of adoption.
In determining fair value, we separate our Financial
instruments, at fair value and Financial instruments
sold, but not yet purchased, at fair value into two
categories: cash instruments and derivative contracts, as set
forth in the following table:
Financial
Instruments by Category
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
As of November
2006
|
|
|
|
|
Financial
|
|
|
|
Financial
|
|
|
Financial
|
|
Instruments
Sold,
|
|
Financial
|
|
Instruments
Sold,
|
|
|
Instruments
|
|
but not Yet
|
|
Instruments
|
|
but not Yet
|
|
|
Owned, at
|
|
Purchased, at
|
|
Owned, at
|
|
Purchased, at
|
|
|
Fair
Value
|
|
Fair
Value
|
|
Fair
Value
|
|
Fair
Value
|
|
Cash trading instruments
|
|
$
|
274,781
|
|
|
$
|
96,800
|
|
|
$
|
247,031
|
|
|
$
|
87,244
|
|
SMFG
|
|
|
4,662
|
|
|
|
3,272
|
(5)
|
|
|
4,505
|
|
|
|
3,065
|
(5)
|
ICBC
|
|
|
5,898
|
(1)
|
|
|
|
|
|
|
5,194
|
(1)
|
|
|
|
|
Other principal investments
|
|
|
6,019
|
(2)
|
|
|
|
|
|
|
4,263
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal investments
|
|
|
16,579
|
|
|
|
3,272
|
|
|
|
13,962
|
|
|
|
3,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash instruments
|
|
|
291,360
|
|
|
|
100,072
|
|
|
|
260,993
|
|
|
|
90,309
|
|
Exchange-traded
|
|
|
12,383
|
|
|
|
12,227
|
|
|
|
14,407
|
|
|
|
13,851
|
|
Over-the-counter
|
|
|
57,024
|
|
|
|
54,182
|
|
|
|
53,136
|
|
|
|
51,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
69,407
|
(3)
|
|
|
66,409
|
(6)
|
|
|
67,543
|
(3)
|
|
|
65,496
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
360,767
|
(4)
|
|
$
|
166,481
|
|
|
$
|
328,536
|
(4)
|
|
$
|
155,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes interests of
$3.73 billion and $3.28 billion as of February 2007
and November 2006, respectively, held by investment funds
managed by Goldman Sachs. The fair value of our investment in
the ordinary shares of Industrial and Commercial Bank of China
Limited (ICBC), which trade on The Stock Exchange of Hong Kong,
includes the effect of foreign exchange revaluation.
|
|
(2) |
|
The following table sets forth the
principal investments (in addition to our investments in SMFG
and ICBC) included within the Principal Investments component of
our Trading and Principal Investments segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
As of November
2006
|
|
|
Corporate
|
|
Real
Estate
|
|
Total
|
|
Corporate
|
|
Real
Estate
|
|
Total
|
|
|
(in millions)
|
|
(in millions)
|
Private
|
|
$
|
3,939
|
|
|
$
|
1,103
|
|
|
$
|
5,042
|
|
|
$
|
2,741
|
|
|
$
|
555
|
|
|
$
|
3,296
|
|
Public
|
|
|
939
|
|
|
|
38
|
|
|
|
977
|
|
|
|
934
|
|
|
|
33
|
|
|
|
967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,878
|
|
|
$
|
1,141
|
|
|
$
|
6,019
|
|
|
$
|
3,675
|
|
|
$
|
588
|
|
|
$
|
4,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Net of cash received pursuant to
credit support agreements of $25.81 billion and
$24.06 billion as of February 2007 and November 2006,
respectively.
|
55
|
|
|
(4) |
|
Excludes assets related to
consolidated investment funds of $12.13 billion and
$6.03 billion as of February 2007 and November 2006,
respectively, for which Goldman Sachs is not at risk.
|
|
(5) |
|
Represents an economic hedge on the
shares of common stock underlying our investment in the
convertible preferred stock of Sumitomo Mitsui Financial Group,
Inc. (SMFG).
|
|
(6) |
|
Net of cash paid pursuant to credit
support agreements of $15.92 billion and
$16.00 billion as of February 2007 and November 2006,
respectively.
|
Cash Instruments. Cash instruments include
cash trading instruments, public principal investments and
private principal investments.
|
|
|
|
|
Cash Trading Instruments. Our cash trading
instruments are generally valued using quoted market prices in
active markets, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency.
The types of instruments valued based on quoted market prices in
active markets include most U.S. government and agency
securities, many other sovereign government obligations, liquid
mortgage products, active listed equities and most money market
securities. The types of instruments valued based on quoted
prices in markets that are not active, broker or dealer
quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and
high-yield corporate bonds, less liquid mortgage products, less
liquid listed equities, state, municipal and provincial
obligations, and certain physical commodities.
|
Certain cash trading instruments trade infrequently and
therefore have little or no price transparency. Such instruments
include certain corporate bank loans and mortgage whole loans,
highly distressed debt, and private equity and real estate
investments. Where we are unable to substantiate the significant
valuation inputs and assumptions to corroborative market data,
the transaction price is used as managements best estimate
of fair value at inception. 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 inception, we change inputs and assumptions when
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, and such
adjustments are generally based on available market evidence. In
the absence of such evidence, managements 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,
and such adjustments are generally based on available market
evidence. In the absence of such evidence, managements
best estimate is used.
|
Our two most significant public principal investments are our
investment in the convertible preferred stock of Sumitomo Mitsui
Financial Group, Inc. (SMFG) and our investment in the ordinary
shares of Industrial and Commercial Bank of China Limited (ICBC).
56
|
|
|
|
|
Our investment in SMFG is valued using a model that is
principally based on SMFGs common stock price. As of
February 2007, the conversion price of our SMFG convertible
preferred stock into shares of SMFG common stock was
¥318,800. This price is subject to downward adjustment if
the price of SMFG common stock at the time of conversion is less
than the conversion price (subject to a floor of ¥105,100).
As a result of downside protection on the conversion stock
price, the relationship between changes in the fair value of our
investment and changes in SMFGs common stock price would
be nonlinear for a significant decline in the SMFG common stock
price. As of February 2007, we had hedged approximately 70% of
the common stock underlying our investment in SMFG and there
were no restrictions on our ability to hedge the remaining 30%.
|
Our investment in ICBC is valued using the quoted market prices
adjusted for transfer restrictions. The ordinary shares acquired
from ICBC are subject to transfer restrictions that, among other
things, prohibit any sale, disposition or other transfer until
April 28, 2009. From April 28, 2009 to
October 20, 2009, we may transfer up to 50% of the
aggregate ordinary shares of ICBC that we owned as of
October 20, 2006. We may transfer our remaining shares
after October 20, 2009. A portion of our interest is held
by investment funds managed by Goldman Sachs.
|
|
|
|
|
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. By
their nature, these investments have little or no price
transparency. We value such instruments initially at transaction
price and adjust the valuation when evidence is available to
support such adjustments. Such evidence includes transactions in
similar instruments, completed or pending third-party
transactions in the underlying investment or comparable
entities, subsequent rounds of financing, recapitalizations and
other transactions across the capital structure, offerings in
the equity or debt capital markets, and changes in financial
ratios or cash flows.
|
Derivative Contracts. Derivative contracts can
be exchange-traded or
over-the-counter
(OTC). Exchange-traded derivatives are generally valued based on
quoted market prices. Some exchange-traded derivatives are
valued within portfolios using models that calibrate to broker
or dealer quotations or market transactions in either the listed
or OTC markets.
OTC derivatives are valued using models. 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. Where possible, we verify the values produced by
our pricing models to market transactions. Valuation models
require a variety of inputs, including contractual terms, market
prices, yield curves, credit curves, measures of volatility,
prepayment rates and correlations of such inputs. For OTC
derivatives that trade in liquid markets, such as generic
forwards, swaps and options, model inputs can generally be
verified and model selection does not involve significant
management judgment.
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. Further,
complex structures often involve multiple product types
requiring additional complex inputs such as correlations and
volatilities. Where we do not have corroborating market evidence
to support significant model inputs and cannot verify the model
to market transactions, management believes that transaction
price is the best estimate of fair value at inception.
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 evidence such as 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
57
estimate of fair value. As markets continue to develop and more
pricing information becomes available, we continue to review and
refine the models used. See Derivatives
below for a 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 available market
evidence. In the absence of such evidence, managements
best estimate is used.
Other Financial Assets and Financial
Liabilities. In addition to Financial
instruments owned, at fair value and Financial
instruments sold, but not yet purchased, at fair value, we
have elected to account for certain of our other financial
assets and financial liabilities at fair value under
SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB
Statements No. 133 and 140, or
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. Such financial
assets and financial liabilities include (i) certain
unsecured short-term borrowings, consisting of all promissory
notes and commercial paper and certain hybrid financial
instruments; (ii) certain other secured financings;
(iii) certain unsecured long-term borrowings, including
those resulting from prepaid physical commodity transactions;
(iv) resale and repurchase agreements; (v) securities
borrowed and securities loaned related to our financing and
matched book activities; and (vi) securities held by our
bank subsidiary (previously accounted for as
available-for-sale).
See Recent Accounting Developments below
for a discussion of the impact of adopting
SFAS No. 159.
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 and that fair value measurements are
reliable. This is particularly important in valuing instruments
with lower levels of price transparency.
We employ an oversight structure that includes appropriate
segregation of duties. Senior management, independent of the
trading functions, is responsible for the oversight of control
and valuation policies and for reporting the results of these
policies to our Audit Committee. We seek to maintain the
necessary resources to ensure that control functions are
performed to the highest standards. 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 revenue-producing
units. For trading and principal investments with little or no
price transparency, we employ, where possible, procedures that
include comparisons with similar observable positions, analysis
of actual to projected cash flows, comparisons with subsequent
sales and discussions with senior business leaders. See
Market Risk below for a further
discussion of how we manage the risks inherent in our trading
and principal investing businesses.
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, Cogentrix Energy,
Inc. (Cogentrix) in 2004, National Energy & Gas
Transmission, Inc. (NEGT) in 2005 and our variable annuity and
variable 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 for impairment at least annually in
accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, by comparing the estimated fair value
of each operating segment with its estimated net book value. We
derive the fair value of each of our operating segments
primarily based on price-earnings 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 2006 fourth quarter and no impairment was
identified.
58
The following table sets forth the carrying value of our
goodwill by operating segment:
Goodwill by
Operating Segment
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
February
|
|
November
|
|
|
2007
|
|
2006
|
|
Investment Banking
|
|
|
|
|
|
|
|
|
Financial Advisory
|
|
$
|
|
|
|
$
|
|
|
Underwriting
|
|
|
125
|
|
|
|
125
|
|
Trading and Principal Investments
|
|
|
|
|
|
|
|
|
FICC
|
|
|
133
|
|
|
|
136
|
|
Equities
(1)
|
|
|
2,381
|
|
|
|
2,381
|
|
Principal Investments
|
|
|
4
|
|
|
|
4
|
|
Asset Management and Securities
Services
|
|
|
|
|
|
|
|
|
Asset Management
(2)
|
|
|
421
|
|
|
|
421
|
|
Securities Services
|
|
|
117
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,181
|
|
|
$
|
3,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily related to SLK.
|
|
|
(2)
|
Primarily related to Ayco.
|
Identifiable Intangible Assets. We amortize
our identifiable intangible assets over their estimated useful
lives in accordance with SFAS No. 142, and test for
potential impairment whenever events or changes in circumstances
suggest that an assets or asset groups carrying
value may not be fully recoverable in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. 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 estimated undiscounted cash flows relating to
the asset or asset group is less than the corresponding carrying
value.
59
The following table sets forth the carrying value and range of
remaining useful lives of our identifiable intangible assets by
major asset class:
Identifiable
Intangible Assets by Asset Class
($ in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February
2007
|
|
As of November
2006
|
|
|
|
|
Range of
Remaining
|
|
|
|
|
Carrying
|
|
Useful Lives
|
|
Carrying
|
|
|
Value
|
|
(in
years)
|
|
Value
|
|
Customer lists
(1)
|
|
$
|
724
|
|
|
|
5 - 18
|
|
|
$
|
737
|
|
Power contracts
(2)
|
|
|
605
|
|
|
|
2 - 22
|
|
|
|
667
|
|
New York Stock Exchange (NYSE)
specialist rights
|
|
|
532
|
|
|
|
15
|
|
|
|
542
|
|
Insurance-related assets
(3)
|
|
|
369
|
|
|
|
7
|
|
|
|
362
|
|
Exchange-traded fund (ETF)
specialist rights
|
|
|
104
|
|
|
|
21
|
|
|
|
105
|
|
Other
(4)
|
|
|
78
|
|
|
|
1 - 9
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,412
|
|
|
|
|
|
|
$
|
2,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Primarily includes our clearance and execution and NASDAQ
customer lists related to SLK and financial counseling customer
lists related to Ayco.
|
|
|
(2)
|
Primarily relates to above-market power contracts of
consolidated power generation facilities related to Cogentrix
and NEGT. Substantially all of these power contracts have been
pledged to counterparties in connection with our secured
financings.
|
|
|
(3)
|
Consists of the value of business acquired (VOBA) and deferred
acquisition costs (DAC). VOBA represents the present value of
estimated future gross profits of the variable annuity and
variable life insurance business acquired in 2006. DAC results
from commissions paid by Goldman Sachs to the primary insurer
(ceding company) on life and annuity reinsurance agreements as
compensation to place the business with us and to cover the
ceding companys acquisition expenses. VOBA and DAC are
amortized over the estimated life of the underlying contracts
based on estimated gross profits, and amortization is adjusted
based on actual experience. The seven-year useful life
represents the weighted average remaining amortization period of
the underlying contracts (certain of which extend for
approximately 30 years).
|
|
|
(4)
|
Primarily includes marketing and technology-related assets.
|
A prolonged period of weakness in global equity markets and the
trading of securities in multiple markets and on multiple
exchanges could adversely impact our businesses and impair the
value of our goodwill
and/or
identifiable intangible assets. In addition, certain events
could indicate a potential impairment of our identifiable
intangible assets, including (i) changes in market
structure that could adversely affect our specialist businesses,
(ii) an adverse action or assessment by a regulator,
(iii) a default event under a power contract or
physical damage or other adverse events impacting the underlying
power generation facilities, or (iv) adverse actual
experience on the contracts in our variable annuity and variable
life insurance business.
60
Use of
Estimates
The use of generally accepted accounting principles requires
management to make certain estimates. In addition to the
estimates we make in connection with fair value measurements and
the accounting for goodwill and identifiable intangible assets,
the use of estimates 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 bonuses, which are determined at year
end. We believe the most appropriate way to allocate estimated
annual discretionary bonuses among interim periods is in
proportion to the net revenues earned in such periods. In
addition to the level of net revenues, our overall compensation
expense in any given year is also influenced by, among other
factors, prevailing labor markets, business mix and the
structure of our share-based compensation programs. Our ratio of
compensation and benefits to net revenues was 48.0% for the
first quarter of 2007 compared with 50.9% for the first quarter
of 2006.
We estimate and provide for potential losses that may arise out
of litigation and regulatory proceedings and tax audits to the
extent that such losses are probable and can be estimated, in
accordance with SFAS No. 5, Accounting for
Contingencies. Significant judgment is required in making
these estimates and our final liabilities may ultimately be
materially different. Our total 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 the 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.
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 the Annual Report on
Form 10-K
for a further discussion of the impact of economic and market
conditions on our results of operations.
61
Financial
Overview
The following table sets forth an overview of our financial
results:
Financial
Overview
($ in
millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
Net revenues
|
|
$
|
12,730
|
|
|
$
|
10,433
|
|
Pre-tax earnings
|
|
|
4,859
|
|
|
|
3,689
|
|
Net earnings
|
|
|
3,197
|
|
|
|
2,479
|
|
Net earnings applicable to common
shareholders
|
|
|
3,148
|
|
|
|
2,453
|
|
Diluted earnings per common share
|
|
|
6.67
|
|
|
|
5.08
|
|
Annualized return on average
common shareholders equity
(1)
|
|
|
38.0
|
%
|
|
|
36.4
|
%
|
Annualized return on average
tangible common shareholders equity
(2)
|
|
|
44.7
|
%
|
|
|
44.4
|
%
|
|
|
|
|
(1)
|
Annualized return on average common shareholders equity is
computed by dividing annualized net earnings applicable to
common shareholders by average monthly common shareholders
equity.
|
|
|
(2)
|
Tangible common shareholders equity equals total
shareholders equity less preferred stock, goodwill and
identifiable intangible assets, excluding power contracts.
Identifiable intangible assets associated with power contracts
are not deducted from total shareholders equity because,
unlike other intangible assets, less than 50% of these assets
are supported by common shareholders equity.
|
We believe that annualized return on average tangible common
shareholders equity is meaningful because it measures the
performance of businesses consistently, whether they were
acquired or developed internally. Annualized return on average
tangible common shareholders equity is computed by
dividing annualized net earnings applicable to common
shareholders by average monthly tangible common
shareholders equity.
The following table sets forth a reconciliation of average total
shareholders equity to average tangible common
shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
Average for
the
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|
(in millions)
|
|
Total shareholders equity
|
|
$
|
36,258
|
|
|
$
|
28,724
|
|
Preferred stock
|
|
|
(3,100
|
)
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
Common shareholders equity
|
|
$
|
33,158
|
|
|
$
|
26,974
|
|
Goodwill and identifiable
intangible assets, excluding power contracts
|
|
|
(5,002
|
)
|
|
|
(4,896
|
)
|
|
|
|
|
|
|
|
|
|
Tangible common shareholders
equity
|
|
$
|
28,156
|
|
|
$
|
22,078
|
|
|
|
|
|
|
|
|
|
|
Net
Revenues
Three Months Ended February 2007 versus February
2006. Our net revenues were $12.73 billion
for the first quarter of 2007, an increase of 22% compared with
the first quarter of 2006, reflecting strong performance across
all of our segments and regions. Net revenues in Trading and
Principal Investments increased compared with the first quarter
of 2006, reflecting significantly higher net revenues in
Principal Investments, FICC and Equities. The increase in
Principal Investments reflected significantly higher gains and
overrides from corporate and real estate principal investments.
Net revenues in Principal Investments included approximately
$500 million in gains in the first quarter of 2007 related
to our adoption of SFAS No. 157, Fair Value
Measurements. The increase in FICC reflected higher net
revenues in credit products and mortgages, while net revenues in
commodities, interest rate products and currencies were also
strong. During the quarter, FICC operated in an environment
characterized by strong customer-driven activity and favorable
market opportunities. In addition, although the subprime sector
within the mortgage market experienced significant weakness, the
broader credit environment remained strong. The increase in
Equities was primarily due to
62
significantly higher net revenues in shares and principal
strategies, reflecting strong results across all regions, while
net revenues in derivatives were also strong. During the
quarter, Equities operated in an environment characterized by
rising equity prices, strong customer-driven activity and
favorable market opportunities. In our trading businesses, we
increased our market risk, particularly in Equities, to
capitalize on these favorable opportunities for our clients and
ourselves. Net revenues in Investment Banking increased compared
with the first quarter of 2006, reflecting significantly higher
net revenues in debt underwriting, as financing activity
remained strong, particularly in leveraged finance. In addition,
net revenues in Financial Advisory were higher, reflecting
continued strong activity levels from both corporate clients and
financial sponsors. Net revenues in Asset Management and
Securities Services were lower than the first quarter of 2006,
primarily due to significantly lower incentive fees, partially
offset by higher asset management and other fees, and continued
growth in securities lending and margin lending. During the
quarter, assets under management increased $43 billion or
6% to a record $719 billion, with net asset inflows of
$35 billion.
Our operating expenses are primarily influenced by compensation,
headcount and levels of business activity. A substantial portion
of our compensation expense represents discretionary bonuses
that are significantly impacted by, among other factors, the
level of net revenues, prevailing labor markets, business mix
and the structure of our share-based compensation programs.
During the first quarter of 2007, our ratio of compensation and
benefits to net revenues was 48.0% compared with 50.9% for the
first quarter of 2006. See Use of
Estimates above for more information on our ratio of
compensation and benefits to net revenues.
The following table sets forth our operating expenses and number
of employees:
Operating
Expenses and Employees
($ in
millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended February
|
|
|
2007
|
|
2006
|
|
Compensation and
benefits (1)
|
|
$
|
6,111
|
|
|
$
|
5,314
|
|
|
|
|
|
|
|
|
|
|
Brokerage, clearing, exchange and
distribution fees
|
|
|
551
|
|
|
|
418
|
|
Market development
|
|
|
132
|
|
|
|
100
|
|
Communications and technology
|
|
|
151
|
|
|
|
124
|
|
Depreciation and amortization
|
|
|
132
|
|
|
|
125
|
|
Amortization of identifiable
intangible assets
|
|
|
51
|
|
|
|
34
|
|
Occupancy
|
|
|
204
|
|
|
|
193
|
|
Professional fees
|
|
|
161
|
|
|
|
109
|
|
Cost of power generation
|
|
|
84
|
|
|
|
85
|
|
Other expenses
|
|
|
294
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
Total non-compensation expenses
|
|
|
1,760
|
|
|
|
1,430
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
7,871
|
|
|
$
|
6,744
|
|
|
|
|
|
|
|
|
|
|
Employees at period
end (2)
|
|
|
26,959
|
|
|
|
23,641
|
|
|
|
|
(1) |
|
Compensation and benefits includes
$35 million and $51 million for the three months ended
February 2007 and February 2006, respectively, attributable to
consolidated entities held for investment purposes. Consolidated
entities held for investment purposes are entities that are held
strictly for capital appreciation, have a defined exit strategy
and are engaged in activities that are not closely related to
our principal businesses.
|
|
(2) |
|
Excludes 4,994 and 8,171 employees
as of February 2007 and February 2006, respectively, of
consolidated entities held for investment purposes (see
footnote 1 above).
|
63
The following table sets forth non-compensation expenses of
consolidated entities held for investment purposes and our
remaining non-compensation expenses by line item:
Non-Compensation
Expenses
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
Non-compensation expenses of
consolidated
investments (1)
|
|
$
|
87
|
|
|
$
|
99
|
|
|
|
|
|
|
|
|
|
|
Non-compensation expenses
excluding consolidated investments
|
|
|
|
|
|
|
|
|
Brokerage, clearing, exchange and
distribution fees
|
|
|
551
|
|
|
|
418
|
|
Market development
|
|
|
130
|
|
|
|
92
|
|
Communications and technology
|
|
|
150
|
|
|
|
123
|
|
Depreciation and amortization
|
|
|
118
|
|
|
|
112
|
|
Amortization of identifiable
intangible assets
|
|
|
50
|
|
|
|
34
|
|
Occupancy
|
|
|
189
|
|
|
|
169
|
|
Professional fees
|
|
|
160
|
|
|
|
105
|
|
Cost of power generation
|
|
|
84
|
|
|
|
85
|
|
Other expenses
|
|
|
241
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
1,673
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-compensation expenses,
as reported
|
|
$
|
1,760
|
|
|
$
|
1,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consolidated entities held for investment purposes are entities
that are held strictly for capital appreciation, have a defined
exit strategy and are engaged in activities that are not closely
related to our principal businesses. For example, these
investments include consolidated entities that hold real estate
assets, such as hotels, but exclude investments in entities that
primarily hold financial assets. We believe that it is
meaningful to review non-compensation expenses excluding
expenses related to these consolidated entities in order to
evaluate trends in non-compensation expenses related to our
principal business activities. Revenues related to such entities
are included in Trading and principal investments in
the condensed consolidated statements of earnings.
|
Three Months Ended February 2007 versus February
2006. Operating expenses of $7.87 billion
increased 17% compared with the first quarter of 2006.
Compensation and benefits expenses of $6.11 billion
increased 15% compared with the first quarter of 2006,
reflecting the impact of higher net revenues. The ratio of
compensation and benefits to net revenues for the quarter was
48.0% compared with 50.9% for the first quarter of 2006.
Employment levels increased 2% during the quarter.
Non-compensation expenses were $1.76 billion, 23% higher
than the first quarter of 2006. Excluding non-compensation
expenses related to consolidated entities held for investment
purposes, non-compensation expenses were 26% higher than the
first quarter of 2006, primarily due to higher brokerage,
clearing, exchange and distribution fees, reflecting higher
transaction volumes in Equities, and increased professional
fees, reflecting increased levels of business activity. Other
expenses also increased, primarily due to growth in our
insurance business.
64
Provision for
Taxes
The provision for taxes for the quarter ended February 2007 was
$1.66 billion. The effective income tax rate was 34.2% for
the first quarter of 2007, down from 34.5% for fiscal year 2006
and up from 32.8% for the first quarter of 2006. The increase
from the first quarter of 2006 was primarily due to a reduction
in the impact of permanent benefits due to higher levels of
earnings, and changes in the geographic mix of earnings.
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
February
|
|
|
|
|
2007
|
|
2006
|
|
Investment
|
|
Net revenues
|
|
$
|
1,716
|
|
|
$
|
1,471
|
|
Banking
|
|
Operating expenses
|
|
|
1,294
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
422
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading and Principal
|
|
Net revenues
|
|
$
|
9,417
|
|
|
$
|
6,982
|
|
Investments
|
|
Operating expenses
|
|
|
5,394
|
|
|
|
4,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
4,023
|
|
|
$
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Management and
|
|
Net revenues
|
|
$
|
1,597
|
|
|
$
|
1,980
|
|
Securities Services
|
|
Operating expenses
|
|
|
1,183
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
414
|
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Net revenues
|
|
$
|
12,730
|
|
|
$
|
10,433
|
|
|
|
Operating
expenses (1)
|
|
|
7,871
|
|
|
|
6,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
4,859
|
|
|
$
|
3,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes net provisions for a number of litigation and
regulatory proceedings of $29 million for the three months
ended February 2006 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 14 to the condensed consolidated financial statements
in Part I, Item 1 of this Quarterly Report on
Form 10-Q
for further information regarding our 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. The timing and magnitude of changes in our
bonus accruals can have a significant effect on segment results
in a given period. A discussion of segment operating results
follows.
65
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)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
Financial Advisory
|
|
$
|
861
|
|
|
$
|
736
|
|
|
|
|
|
|
|
|
|
|
Equity underwriting
|
|
|
266
|
|
|
|
283
|
|
Debt underwriting
|
|
|
589
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
Total Underwriting
|
|
|
855
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
1,716
|
|
|
|
1,471
|
|
Operating expenses
|
|
|
1,294
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
Pre-tax earnings
|
|
$
|
422
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our financial advisory and
underwriting transaction volumes:
Goldman Sachs
Global Investment Banking
Volumes (1)
(in
billions)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
Announced mergers and acquisitions
|
|
$
|
337
|
|
|
$
|
285
|
|
Completed mergers and acquisitions
|
|
|
324
|
|
|
|
272
|
|
Equity and equity-related
offerings (2)
|
|
|
13
|
|
|
|
16
|
|
Debt
offerings (3)
|
|
|
86
|
|
|
|
83
|
|
|
|
|
|
(1)
|
Source: Thomson Financial. 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.
|
|
|
(2)
|
Includes public common stock offerings, convertible offerings,
rights offerings and Rule 144A issues.
|
|
|
(3)
|
Includes non-convertible preferred stock, mortgage-backed
securities, asset-backed securities and taxable municipal debt.
Includes publicly registered and Rule 144A issues.
|
66
Three Months Ended February 2007 versus February
2006. Net revenues in Investment Banking of
$1.72 billion for the first quarter of 2007 increased 17%
compared with the first quarter of 2006. Net revenues in
Financial Advisory of $861 million increased 17% compared
with first quarter of 2006, primarily reflecting growth in
industry-wide completed mergers and acquisitions. Net revenues
in our Underwriting business of $855 million increased 16%
compared with the first quarter of 2006, reflecting
significantly higher net revenues in debt underwriting,
primarily due to an increase in leveraged finance activity, as
the financing environment remained favorable. Our investment
banking backlog increased during the
quarter. (1)
Operating expenses of $1.29 billion for the first quarter
of 2007 increased 9% compared with the first quarter of 2006,
primarily due to increased compensation and benefits expenses
resulting from a higher accrual of discretionary compensation.
Pre-tax earnings of $422 million in the first quarter of
2007 increased 50% compared with the first quarter of 2006.
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, 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, trade and act as
a specialist for equities and equity-related products, structure
and enter into equity derivative transactions and engage in
proprietary trading and insurance activities. We also execute
and clear client transactions on major stock, options and
futures exchanges worldwide.
|
|
|
|
Principal Investments. We make real estate and
corporate principal investments, including our investments in
the convertible preferred stock of SMFG and 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
funds investments, over the life of the fund, exceeds
certain threshold returns (overrides).
|
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 in privately
held concerns and in real estate may fluctuate significantly
depending on the revaluation or sale 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 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.
67
The following table sets forth the operating results of our
Trading and Principal Investments segment:
Trading and
Principal Investments Operating Results
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended
February
|
|
|
2007
|
|
2006
|
|
|