UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the fiscal year ended
December 31, 2010
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Commission File Number: 001-14965
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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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200 West Street
New York, N.Y.
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10282
(Zip Code)
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(Address of principal executive
offices)
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(212) 902-1000
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each
class:
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Name of each exchange on
which registered:
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Common stock, par value $.01 per share
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New York Stock Exchange
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Depositary Shares, Each Representing 1/1,000th Interest in a
Share of Floating Rate
Non-Cumulative
Preferred Stock, Series A
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New York Stock Exchange
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Depositary Shares, Each Representing 1/1,000th Interest in a
Share of 6.20%
Non-Cumulative
Preferred Stock, Series B
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New York Stock Exchange
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Depositary Shares, Each Representing 1/1,000th Interest in a
Share of Floating Rate
Non-Cumulative
Preferred Stock, Series C
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New York Stock Exchange
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Depositary Shares, Each Representing 1/1,000th Interest in a
Share of Floating Rate
Non-Cumulative
Preferred Stock, Series D
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New York Stock Exchange
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5.793%
Fixed-to-Floating
Rate Normal Automatic Preferred Enhanced Capital Securities of
Goldman Sachs Capital II (and Registrants guarantee
with respect thereto)
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New York Stock Exchange
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Floating Rate Normal Automatic Preferred Enhanced Capital
Securities of Goldman Sachs Capital III (and
Registrants guarantee with respect thereto)
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New York Stock Exchange
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Medium-Term
Notes, Series B, Index-Linked Notes due February 2013;
Index-Linked Notes due April 2013; Index-Linked Notes due
May 2013; and Index-Linked Notes due 2011
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NYSE Amex
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Medium-Term
Notes, Series B, Floating Rate Notes due 2011
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New York Stock Exchange
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Medium-Term
Notes, Series A, Index-Linked Notes due 2037 of GS Finance
Corp. (and Registrants guarantee with respect
thereto)
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NYSE Arca
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Medium-Term
Notes, Series B, Index-Linked Notes due 2037
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NYSE Arca
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Medium-Term
Notes, Series D, 7.50% Notes due 2019
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New York Stock Exchange
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6.125% Notes due 2060
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of the Annual Report on
Form 10-K
or any amendment to the Annual Report on
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
Large
accelerated
filer x Accelerated
filer o Non-accelerated
filer (Do not check if a smaller reporting
company) o Smaller
reporting
company o
Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes o No x
As of
June 30, 2010, the aggregate market value of the
common stock of the registrant held by
non-affiliates
of the registrant was approximately $66.7 billion.
As of
February 11, 2011, there were 520,507,295 shares of
the registrants common stock outstanding.
Documents
incorporated by reference: Portions of The
Goldman Sachs Group, Inc.s Proxy Statement for its 2011
Annual Meeting of Shareholders to be held on
May 6, 2011 are incorporated by reference in the
Annual Report on
Form 10-K
in response to Part III, Items 10, 11, 12, 13 and 14.
PART I
Introduction
Goldman Sachs is a leading global investment banking, securities
and investment management firm that provides a wide range of
financial services to a substantial and diversified client base
that includes corporations, financial institutions, governments
and
high-net-worth
individuals.
When we use the terms Goldman Sachs, the
firm, we, us and our,
we mean The Goldman Sachs Group, Inc. (Group Inc.), a
Delaware corporation, and its consolidated subsidiaries.
References to this
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010. All
references to 2010, 2009 and 2008 refer to our fiscal years
ended, or the dates, as the context requires,
December 31, 2010, December 31, 2009 and
November 28, 2008, respectively.
Group Inc. is a bank holding company and a financial
holding company regulated by the Board of Governors of the
Federal Reserve System (Federal Reserve Board). Our
U.S. depository institution subsidiary, Goldman Sachs Bank
USA (GS Bank USA), is a New York State-chartered bank.
As of December 2010, we had offices in over 30 countries
and 44% of our total staff was based outside the Americas (which
includes the countries in North and South America). Our clients
are located worldwide, and we are an active participant in
financial markets around the world. In 2010, we generated 45% of
our net revenues outside the Americas. For more information on
our geographic results, see Note 27 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K.
Our Business
Segments and Segment Operating Results
We report our activities in four business segments: Investment
Banking; Institutional Client Services; Investing &
Lending; and Investment Management. The chart below presents our
four business segments. Prior to the end of 2010, we reported
our activities in three segments.
1
The table below presents our segment operating results.
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Year
Ended 1
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% of 2010
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December
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December
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November
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Net
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$ in millions
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2010
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2009
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2008
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Revenues
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Investment Banking
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Net revenues
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$
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4,810
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$
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4,984
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$
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5,453
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12%
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Operating expenses
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3,511
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3,482
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3,269
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Pre-tax
earnings/(loss)
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$
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1,299
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$
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1,502
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$
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2,184
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Institutional Client Services
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Net revenues
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$
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21,796
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$
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32,719
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$
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22,345
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56%
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Operating expenses
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14,291
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13,691
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10,294
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Pre-tax
earnings
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$
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7,505
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$
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19,028
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$
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12,051
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Investing & Lending
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Net revenues
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$
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7,541
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$
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2,863
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$
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(10,821
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19%
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Operating expenses
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3,361
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3,523
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2,719
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Pre-tax
earnings/(loss)
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$
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4,180
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$
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(660
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$
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(13,540
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Investment Management
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Net revenues
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$
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5,014
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$
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4,607
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$
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5,245
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13%
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Operating expenses
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4,051
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3,673
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3,528
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Pre-tax
earnings
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$
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963
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$
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934
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$
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1,717
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Total
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Net revenues
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$
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39,161
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$
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45,173
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$
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22,222
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Operating
expenses 2
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26,269
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25,344
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19,886
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Pre-tax
earnings/(loss)
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$
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12,892
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$
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19,829
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$
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2,336
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1.
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Financial information concerning our business segments for 2010,
2009 and 2008 (with prior periods recast to reflect our new
segment reporting) is included in Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and
Supplementary Data, which are in Part II,
Items 7 and 8, respectively, of this
Form 10-K.
See Note 27 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for a further breakdown of our net revenues.
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2.
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Includes the following expenses that have not been allocated to
our segments: (i) charitable contributions of
$345 million and $810 million for the years ended
December 2010 and December 2009, respectively;
(ii) net provisions for a number of litigation and
regulatory proceedings of $682 million, $104 million
and $(4) million for the years ended December 2010,
December 2009 and November 2008, respectively; and
(iii) real estate-related exit costs of $28 million,
$61 million and $80 million for the years ended
December 2010, December 2009 and November 2008,
respectively.
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Investment
Banking
Investment Banking serves corporate and government clients
around the world. We provide financial advisory services and
help companies raise capital to strengthen and grow their
businesses. We seek to develop and maintain
long-term
relationships with a diverse global group of institutional
clients, including governments, states and municipalities. Our
goal is to deliver to our clients the entire resources of the
firm in a seamless fashion, with investment banking serving as
the main initial point of contact with Goldman Sachs.
Financial Advisory. Financial Advisory
includes strategic advisory assignments with respect to mergers
and acquisitions, divestitures, corporate defense activities,
risk management, restructurings and
spin-offs.
In particular, we help clients execute large, complex
transactions for which we provide multiple services, including
one-stop
acquisition financing and cross-border structuring expertise.
We also assist our clients in managing their asset and liability
exposures and their capital. In addition, we may provide lending
commitments and bank loan and bridge loan facilities in
connection with our advisory assignments.
2
Underwriting. The other core activity of
Investment Banking is helping companies raise capital to fund
their businesses. As a financial intermediary, our job is to
match the capital of our investing clients who aim
to grow the savings of millions of people with
the needs of our corporate and government clients
who need financing to generate growth, create jobs and deliver
products and services. Our underwriting activities include
public offerings and private placements, including domestic and
cross-border transactions, of a wide range of securities and
other financial instruments. Underwriting also includes revenues
from derivative transactions entered into with institutional
clients in connection with our underwriting activities.
Equity Underwriting. We underwrite
common and preferred stock and convertible and exchangeable
securities. We regularly receive mandates for large, complex
transactions and have held a leading position in worldwide
public common stock offerings and worldwide initial public
offerings for many years.
Debt Underwriting. We underwrite and
originate various types of debt instruments, including
investment-grade
and
high-yield
debt, bank loans and bridge loans, and emerging and growth
market debt, which may be issued by, among others, corporate,
sovereign, municipal and agency issuers. In addition, we
underwrite and originate structured securities, which include
mortgage-related
securities and other
asset-backed
securities.
Institutional
Client Services
Institutional Client Services serves our clients who come to the
firm to buy and sell financial products, raise funding and
manage risk. We do this by acting as a market maker and offering
market expertise on a global basis. Institutional Client
Services makes markets and facilitates client transactions in
fixed income, equity, currency and commodity products. In
addition, we make markets in and clear client transactions on
major stock, options and futures exchanges worldwide. Market
makers provide liquidity and play a critical role in price
discovery, which contributes to the overall efficiency of the
capital markets. Our willingness to make markets, commit capital
and take risk in a broad range of products is crucial to our
client relationships.
Our clients are primarily institutions that are professional
market participants, including investment entities whose
ultimate customers include individual investors investing for
their retirement, buying insurance or putting aside surplus cash
in a deposit account.
Through our global sales force, we maintain relationships with
our clients, receiving orders and distributing investment
research, trading ideas, market information and analysis. As a
market maker, we provide prices to clients globally across
thousands of products in all major asset classes and markets. At
times we take the other side of transactions ourselves if a
buyer or seller is not readily available and at other times we
connect our clients to other parties who want to transact. Much
of this connectivity between the firm and its clients is
maintained on technology platforms and operates globally
wherever and whenever markets are open for trading.
Institutional Client Services and our other businesses are
supported by our Global Investment Research division, which, as
of December 2010, provided fundamental research on more
than 3,300 companies worldwide and over 45 national economies,
as well as on industries, currencies and commodities.
Institutional Client Services generates revenues in three ways:
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In large, highly liquid markets (such as markets for
U.S. Treasury bills or large capitalization S&P 500
stocks), we execute a high volume of transactions for our
clients for modest spreads and fees.
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In less liquid markets (such as mid-cap corporate bonds and
growth market currencies), we execute transactions for our
clients for spreads and fees that are generally somewhat larger.
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We also structure and execute transactions involving customized
or tailor-made products that address our clients risk
exposures, investment objectives or other complex needs (such as
a jet fuel hedge for an airline).
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Institutional Client Services activities are organized by asset
class and include both cash and
derivative instruments. Cash refers to
trading the underlying instrument (such as a stock, bond or
barrel of oil). Derivative refers to instruments
that derive their value from underlying asset prices, indices,
reference rates and other inputs, or a combination of these
factors (such as an option, which is the right or obligation to
buy or sell a certain bond or stock index on a specified date in
the future at a certain price, or an interest rate swap, which
is the right to convert a fixed rate of interest into a floating
rate or vice versa).
3
Fixed Income, Currency and Commodities Client
Execution. Includes interest rate products,
credit products, mortgages, currencies and commodities.
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Interest Rate Products. Government bonds,
money market instruments such as commercial paper, treasury
bills, repurchase agreements and other highly liquid securities
and instruments, as well as interest rate swaps, options and
other derivatives.
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Credit
Products. Investment-grade
corporate securities,
high-yield
securities, bank and secured loans, municipal securities,
emerging market and distressed debt, and credit derivatives.
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Mortgages. Commercial and residential
mortgage-related securities and loan products, and other
asset-backed
and derivative instruments.
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Currencies. Most currencies, including growth
market currencies.
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Commodities. Oil and natural gas, base,
precious and other metals, electricity, coal, agricultural and
other commodity products.
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Equities. Includes equity client execution,
commissions and fees, and securities services.
Equities Client Execution. We make
markets in equity securities and
equity-related
products, including convertible securities, options, futures and
over-the-counter
(OTC) derivative instruments, on a global basis. As a principal,
we facilitate client transactions by providing liquidity to our
clients with large blocks of stocks or options, requiring the
commitment of our capital. In addition, we engage in insurance
activities where we reinsure and purchase portfolios of
insurance risk and acquire pension liabilities.
We also structure and execute derivatives on indices, industry
groups, financial measures and individual company stocks. We
develop strategies and provide information about portfolio
hedging and restructuring and asset allocation transactions for
our clients. We also work with our clients to create specially
tailored instruments to enable sophisticated investors to
establish or liquidate investment positions or undertake hedging
strategies. We are one of the leading participants in the
trading and development of equity derivative instruments.
Our exchange-based
market-making
activities include making markets in stocks and
exchange-traded
funds. In the United States, we are one of the leading
Designated Market Makers (DMMs) for stocks traded on the NYSE.
For ETFs, we are registered market makers on NYSE Arca. In
listed options, we are registered as a primary or lead market
maker or otherwise make markets on the International Securities
Exchange, the Chicago Board Options Exchange, NYSE Arca, the
Boston Options Exchange, the Philadelphia Stock Exchange and
NYSE Amex. In futures and options on futures, we are market
makers on the Chicago Mercantile Exchange and the Chicago Board
of Trade.
Commissions and Fees. We generate
commissions and fees from executing and clearing institutional
client transactions on major stock, options and futures
exchanges worldwide. We increasingly provide our clients with
access to electronic
low-touch
equity trading platforms, and electronic trades account for the
majority of our equity trading activity. However, a majority of
our net revenues in these activities continue to be derived from
our traditional
high-touch
handling of more complex trades. We expect both types of
activity to remain important.
Securities Services. Includes
financing, securities lending and other prime brokerage services.
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Financing Services. We provide financing to
our clients for their securities trading activities through
margin loans that are collateralized by securities, cash or
other acceptable collateral. We earn a spread equal to the
difference between the amount we pay for funds and the amount we
receive from our client.
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Securities Lending Services. We provide
services that principally involve borrowing and lending
securities to cover institutional clients short sales and
borrowing securities to cover our short sales and otherwise to
make deliveries into the market. In addition, we are an active
participant in
broker-to-broker
securities lending and
third-party
agency lending activities.
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Other Prime Brokerage Services. We earn fees
by providing clearing, custody and settlement services globally.
In addition, we help our hedge fund and other clients maintain
the infrastructure that supports their investing activity by
providing a suite of services from the moment a client begins
the process of establishing a new investing business. We provide
a technology platform and reporting which enables clients to
monitor their security portfolios, and manage risk exposures.
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4
Investing &
Lending
Our investing and lending activities, which are typically
longer-term, include the firms investing and relationship
lending activities across various asset classes, primarily
including debt securities and loans, public and private equity
securities, and real estate. These activities include investing
directly in publicly and privately traded securities and also
through certain investment funds that we manage. We also provide
financing to our clients. We manage a diversified global
portfolio of investments in equity and debt securities and other
investments in privately negotiated transactions, leveraged
buyouts, acquisitions and investments in funds managed by
external parties.
ICBC. We have an investment in the ordinary
shares of ICBC, the largest bank in China.
Equity Securities (excluding ICBC). We
make corporate, real estate and infrastructure
equity-related
investments.
Debt Securities and Loans. We make
corporate, real estate and infrastructure debt security-related
investments. In addition, we provide credit to corporate clients
through loan facilities and to
high-net-worth
individuals through secured loans.
Other. Our other investments primarily
include our consolidated investment entities, which are entities
we hold for investment purposes strictly for capital
appreciation. These entities have a defined exit strategy and
are engaged in activities that are not closely related to our
principal businesses. We also invest directly in distressed
assets, currencies, commodities and other assets, including
power generation facilities.
Investment
Management
Investment Management provides investment and wealth advisory
services to help clients preserve and grow their financial
assets. Our clients include institutions and
high-net-worth
individuals as well as retail investors, who access our products
through a network of
third-party
distributors around the world.
We manage client assets across a broad range of asset classes
and investment strategies, including equity, fixed income and
alternative investments. Alternative investments primarily
include hedge funds, private equity, real estate, currencies,
commodities, and asset allocation strategies. Our investment
offerings include those managed on a fiduciary basis by our
portfolio managers as well as strategies managed by
third-party
managers. We offer our investments in a variety of structures,
including separately managed
accounts, mutual funds, private partnerships and other
commingled vehicles.
We also provide customized investment advisory solutions
designed to address our clients investment needs. These
solutions begin with identifying clients objectives and
continue through portfolio construction, ongoing asset
allocation and risk management and investment realization. We
draw from a variety of
third-party
managers as well as our proprietary offerings to implement
solutions for clients.
We supplement our investment advisory solutions for
high-net-worth
clients with wealth advisory services that include income and
liability management, trust and estate planning, philanthropic
giving and tax planning. We also use the firms global
securities and derivatives
market-making
capabilities to address clients specific investment needs.
Management and Other Fees. The majority
of revenues in management and other fees is comprised of
asset-based
management fees on client assets. The fees that we charge vary
by asset class and are affected by investment performance as
well as asset inflows and redemptions. Other fees we receive
include financial counseling fees generated through our wealth
advisory services and fees related to the administration of real
estate assets.
Assets under management include only those client assets where
we earn a fee for managing assets on a discretionary basis. This
includes assets in our mutual funds, hedge funds, private equity
funds and separately managed accounts for institutional and
individual investors. Assets under management do not include the
self-directed
assets of our clients, including brokerage accounts, or
interest-bearing deposits held through our bank depository
institution subsidiaries.
Incentive Fees. In certain circumstances, we
are also entitled to receive incentive fees based on a
percentage of a funds or a separately managed
accounts return, or when the return exceeds a specified
benchmark or other performance targets. Such fees include
overrides, which consist of the increased share of the income
and gains derived primarily from our private equity and real
estate funds when the return on a funds investments over
the life of the fund exceeds certain threshold returns.
Incentive fees are recognized only when all material
contingencies are resolved.
Transaction Revenues. We receive commissions
and net spreads for facilitating transactional activity in
high-net-worth
client accounts. In addition, we earn net interest income
primarily associated with client deposits and margin lending
activity undertaken by such clients.
5
The tables below present assets under management by asset class
and by distribution channel and client category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
December 31,
|
|
|
December 31,
|
|
|
November 30,
|
|
|
|
in billions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Alternative investments
|
|
$
|
148
|
|
|
$
|
146
|
|
|
$
|
146
|
|
|
|
Equity
|
|
|
144
|
|
|
|
146
|
|
|
|
112
|
|
|
|
Fixed income
|
|
|
340
|
|
|
|
315
|
|
|
|
248
|
|
|
|
|
|
Total
non-money
market assets
|
|
|
632
|
|
|
|
607
|
|
|
|
506
|
|
|
|
Money markets
|
|
|
208
|
|
|
|
264
|
|
|
|
273
|
|
|
|
|
|
Total assets under management
|
|
$
|
840
|
|
|
$
|
871
|
|
|
$
|
779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
December 31,
|
|
|
December 31,
|
|
|
November 30,
|
|
|
|
in billions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Directly Distributed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
|
|
$
|
286
|
|
|
$
|
297
|
|
|
$
|
273
|
|
|
|
High-net-worth
individuals
|
|
|
229
|
|
|
|
231
|
|
|
|
215
|
|
|
|
Third-Party
Distributed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional,
high-net-worth
individuals and retail
|
|
|
325
|
|
|
|
343
|
|
|
|
291
|
|
|
|
|
|
Total
|
|
$
|
840
|
|
|
$
|
871
|
|
|
$
|
779
|
|
|
|
|
|
Business
Continuity and Information Security
Business continuity and information security are high priorities
for Goldman Sachs. Our Business Continuity Program has been
developed to provide reasonable assurance of business continuity
in the event of disruptions at the firms critical
facilities and to comply with regulatory requirements, including
those of FINRA. Because we are a bank holding company, our
Business Continuity Program is also subject to review by the
Federal Reserve Board. The key elements of the program are
crisis management, people recovery facilities, business
recovery, systems and data recovery, and process improvement. In
the area of information security, we have developed and
implemented a framework of principles, policies and technology
to protect the information assets of the firm and our clients.
Safeguards are applied to maintain the confidentiality,
integrity and availability of information resources.
Employees
Management believes that a major strength and principal reason
for the success of Goldman Sachs is the quality and
dedication of our people and the shared sense of being part
of a team. We strive to maintain a work environment that fosters
professionalism, excellence, diversity, cooperation among our
employees worldwide and high standards of business ethics.
Instilling the Goldman Sachs culture in all employees is a
continuous process, in which training plays an important part.
All employees are offered the opportunity to participate in
education and periodic seminars that we sponsor at various
locations throughout the world. Another important part of
instilling the Goldman Sachs culture is our employee review
process. Employees are reviewed by supervisors, co-workers and
employees they supervise in a
360-degree
review process that is integral to our team approach, and
includes an evaluation of an employees performance with
respect to risk management, compliance and diversity.
As of December 2010, we had 35,700 total staff, excluding
staff at consolidated entities held for investment purposes. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Results of
Operations Operating Expenses in Part II,
Item 7 of this
Form 10-K
for additional information on our consolidated entities held for
investment purposes.
6
Competition
The financial services industry and all of our
businesses are intensely competitive, and we expect
them to remain so. Our competitors are other entities that
provide investment banking, securities and investment management
services, as well as those entities that make investments in
securities, commodities, derivatives, real estate, loans and
other financial assets. These entities include brokers and
dealers, investment banking firms, commercial banks, insurance
companies, investment advisers, mutual funds, hedge funds,
private equity funds and merchant banks. We compete with some
entities globally and with others on a regional, product or
niche basis. Our competition is based on a number of factors,
including transaction execution, our products and services,
innovation, reputation and price.
We also face intense competition in attracting and retaining
qualified employees. Our ability to continue to compete
effectively will depend upon our ability to attract new
employees, retain and motivate our existing employees and to
continue to compensate employees competitively amid intense
public and regulatory scrutiny on the compensation practices of
large financial institutions. Our pay practices and those of our
principal competitors are subject to review by, and the
standards of, the Federal Reserve Board and regulators outside
the United States, including the Financial Services Authority
(FSA) in the United Kingdom. See Regulation
Banking Regulation and Regulation
Compensation Practices below and Risk
Factors Our businesses may be adversely affected if
we are unable to hire and retain qualified employees in
Part I, Item 1A of this
Form 10-K
for more information on the regulation of our compensation
practices.
Over time, there has been substantial consolidation and
convergence among companies in the financial services industry.
This trend accelerated in recent years as the credit crisis
caused numerous mergers and asset acquisitions among industry
participants. Many commercial banks and other
broad-based
financial services firms have had the ability for some time to
offer a wide range of products, from loans, deposit-taking and
insurance to brokerage, asset management and investment banking
services, which may enhance their competitive position. They
also have had the ability to support investment banking and
securities products with commercial banking, insurance and other
financial services revenues in an effort to gain market share,
which has resulted in pricing pressure in our investment banking
and client execution
businesses and could result in pricing pressure in other of our
businesses.
Moreover, we have faced, and expect to continue to face,
pressure to retain market share by committing capital to
businesses or transactions on terms that offer returns that may
not be commensurate with their risks. In particular, corporate
clients seek such commitments (such as agreements to participate
in their commercial paper backstop or other loan facilities)
from financial services firms in connection with investment
banking and other assignments.
Consolidation and convergence have significantly increased the
capital base and geographic reach of some of our competitors,
and have also hastened the globalization of the securities and
other financial services markets. As a result, we have had to
commit capital to support our international operations and to
execute large global transactions. To take advantage of some of
our most significant challenges and opportunities, we will have
to compete successfully with financial institutions that are
larger and have more capital and that may have a stronger local
presence and longer operating history outside the United States.
We have experienced intense price competition in some of our
businesses in recent years. For example, over the past several
years the increasing volume of trades executed electronically,
through the internet and through alternative trading systems,
has increased the pressure on trading commissions, in that
commissions for
low-touch
electronic trading are generally lower than for
high-touch
non-electronic
trading. It appears that this trend toward electronic and other
low-touch,
low-commission
trading will continue. In addition, we believe that we will
continue to experience competitive pressures in these and other
areas in the future as some of our competitors seek to obtain
market share by further reducing prices.
The provisions of the
U.S. Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
and other financial regulation could affect our competitive
position to the extent that limitations on activities, increased
fees and compliance costs or other regulatory requirements do
not apply, or do not apply equally, to all of our competitors.
The impact of the Dodd-Frank Act on our competitive position
will depend to a large extent on the details of the required
rulemaking, as discussed further under Regulation
below.
7
Regulation
As a participant in the banking, securities, futures and options
and insurance industries, we are subject to extensive regulation
worldwide. Regulatory bodies around the world are generally
charged with safeguarding the integrity of the securities and
other financial markets and with protecting the interests of the
customers of market participants, including depositors in
banking entities and the customers of
broker-dealers.
They are not, however, generally charged with protecting the
interests of security holders.
The financial services industry has been the subject of intense
regulatory scrutiny in recent years. Our businesses have been
subject to increasing regulation in the United States and other
countries, and we expect this trend to continue in the future.
The Dodd-Frank Act, which was enacted in July 2010,
significantly alters the framework within which we operate,
including through the creation of a new systemic risk oversight
body, the Financial Stability Oversight Council (FSOC). The FSOC
will oversee and coordinate the efforts of the primary
U.S. financial regulatory agencies (including the Federal
Reserve Board, the SEC, the CFTC and the FDIC) in establishing
regulations to address financial stability concerns. The
Dodd-Frank Act directs the FSOC to make recommendations to the
Federal Reserve Board as to supervisory requirements and
prudential standards applicable to systemically important
financial institutions, including
risk-based
capital, leverage, liquidity and
risk-management
requirements. The Dodd-Frank Act mandates that the requirements
applicable to systemically important financial institutions be
more stringent than those applicable to other financial
companies. Although the criteria for treatment as a systemically
important financial institution have not yet been determined, it
is probable that they will apply to our firm.
The implications of the Dodd-Frank Act for our businesses will
depend to a large extent on the provisions of required future
rulemaking by the Federal Reserve, the FDIC, the SEC, the CFTC
and other agencies, as well as the development of market
practices and structures under the regime established by the
legislation and the rules adopted pursuant to it, as discussed
further throughout this section.
Banking
Regulation
In September 2008, Group Inc. became a bank holding
company under the Bank Holding Company Act of 1956 (BHC Act) and
the Federal Reserve Board became the primary regulator of
Group Inc., as a consolidated entity. In August 2009,
Group Inc. became a financial holding company under
amendments to the BHC Act effected by the
U.S. Gramm-Leach-Bliley
Act of 1999 (GLB Act).
Supervision and
Regulation
As a bank holding company and a financial holding company under
the BHC Act, Group Inc. is subject to supervision and
examination by the Federal Reserve Board. Under the system of
functional regulation established under the BHC Act,
the Federal Reserve Board serves as the primary regulator of our
consolidated organization, but generally defers to the primary
regulators of our
U.S. non-bank
subsidiaries with respect to the activities of those
subsidiaries. Such functionally regulated
non-bank
subsidiaries include
broker-dealers
registered with the SEC, such as our principal
U.S. broker-dealer,
Goldman, Sachs & Co. (GS&Co.), insurance
companies regulated by state insurance authorities, investment
advisers registered with the SEC with respect to their
investment advisory activities and entities regulated by the
CFTC with respect to certain futures-related activities.
Activities
The BHC Act generally restricts bank holding companies from
engaging in business activities other than the business of
banking and certain closely related activities. As a financial
holding company, we may engage in a broader range of financial
and related activities than are permissible for bank holding
companies as long as we continue to meet the eligibility
requirements for financial holding companies, including our
U.S. depository institution subsidiaries (consisting of
GS Bank USA and our national bank trust company subsidiary)
maintaining their status as well-capitalized and
well-managed as described under
Prompt Corrective Action below. These
activities include underwriting, dealing and making markets in
securities, insurance underwriting and making investments in
nonfinancial companies. In addition, we are permitted under the
GLB Act to continue to engage in certain commodities
activities in the United States that would otherwise be
impermissible for bank holding companies, so long as the assets
held pursuant to these activities do not equal 5% or more of our
consolidated assets.
8
Beginning in July 2011, our financial holding company
status will also depend on Group Inc.s maintaining
its status as well-capitalized and
well-managed.
As a bank holding company, we are required to obtain prior
Federal Reserve Board approval before directly or indirectly
acquiring more than 5% of any class of voting shares of any
unaffiliated depository institution. In addition, as a bank
holding company, we may generally engage in banking and other
financial activities abroad, including investing in and owning
non-U.S. banks,
if those activities and investments do not exceed certain limits
and, in some cases, if we have obtained the prior approval of
the Federal Reserve Board.
We expect to face additional limitations on our activities upon
implementation of those provisions of the
Dodd-Frank
Act referred to as the Volcker Rule, which will
prohibit proprietary trading (other than for certain
risk-mitigation
activities) and limit the sponsorship of, and investment in,
hedge funds and private equity funds by banking entities,
including bank holding companies such as us. The extent of the
additional limitations will depend on the details of agency
rulemaking. The Volcker Rule provisions will take effect no
later than July 2012, and companies will be required to
come into compliance within two years after the effective date
(subject to possible extensions).
Capital and
Liquidity Requirements
As a bank holding company, we are subject to consolidated
regulatory capital requirements administered by the Federal
Reserve Board. GS Bank USA is subject to broadly similar
capital requirements, as discussed below. Under the Federal
Reserve Boards capital adequacy requirements and the
regulatory framework for prompt corrective action that is
applicable to GS Bank USA, Group Inc. and GS Bank
USA must meet specific regulatory capital requirements that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet
items. The calculation of our capital levels and those of
GS Bank USA, as well as GS Bank USAs prompt
corrective action classification, are also subject to
qualitative judgments by regulators.
Tier 1 Leverage and Basel I Capital
Ratios. See Note 20 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
for information on our Tier 1 capital ratio, Tier 1
capital, total capital,
risk-weighted
assets and Tier 1 leverage ratio, and for a discussion of
minimum required ratios.
Pending Changes in Capital Requirements. We
are currently working to implement the requirements set out in
the Federal Reserve Boards Capital Adequacy Guidelines for
Bank Holding Companies: Internal Ratings-Based and Advanced
Measurement Approaches, which are based on the advanced
approaches under the Revised Framework for the International
Convergence of Capital Measurement and Capital Standards issued
by the Basel Committee on Banking Supervision (Basel Committee)
as such requirements apply to us as a bank holding company
(Basel 2). U.S. banking regulators have incorporated
the Basel 2 framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as us, transition to Basel 2
following the successful completion of a parallel run.
In addition, the Basel Committee has undertaken a program of
substantial revisions to its capital guidelines. In particular,
the changes in the Basel 2.5 guidelines will
result in increased capital requirements for market risk.
Additionally, the Basel 3 guidelines issued by the Basel
Committee in December 2010 revise the definition of
Tier 1 capital, introduce Tier 1 common equity as a
regulatory metric, set new minimum capital ratios (including a
new capital conservation buffer, which must be
composed exclusively of Tier 1 common equity and will be in
addition to the other capital ratios), introduce a Tier 1
leverage ratio within international guidelines for the first
time, and make substantial revisions to the computation of
risk-weighted
assets for credit exposures. Implementation of the new
requirements is expected to take place over an extended
transition period, starting at the end of 2011 (for
Basel 2.5) and end of 2012 (for Basel 3). Although the
U.S. federal banking agencies have now issued proposed
rules that are intended to implement certain aspects of the
Basel 2.5 guidelines, they have not yet addressed all
aspects of those guidelines or the Basel 3 changes. In
addition, both the Basel Committee and U.S. banking
regulators implementing the Dodd-Frank Act have indicated that
they will impose more stringent capital standards on
systemically important financial institutions. Therefore, the
regulations ultimately applicable to us may be substantially
different from those that have been published to date.
9
The Dodd-Frank Act will subject Goldman Sachs at a firmwide
level to the same leverage and
risk-based
capital requirements that apply to depository institutions, and
directs banking regulators to impose additional capital
requirements, as discussed above. The Federal Reserve Board will
be required to begin implementing the new leverage and
risk-based
capital regulation by January 2012. As a consequence of
these changes, Tier 1 capital treatment for our junior
subordinated debt issued to trusts and our cumulative preferred
stock will be phased out over a three-year period beginning on
January 1, 2013. The interaction between the
Dodd-Frank Act and the Basel Committees proposed changes
adds further uncertainty to our future capital requirements. For
example, regulations implementing provisions of the Dodd-Frank
Act are expected to subject us to a continuing floor
of the Federal Reserve Boards regulatory requirements
currently applicable to bank holding companies (Basel 1),
which are based on the Capital Accord of the Basel Committee, in
cases where Basel 2 or Basel 3 would otherwise permit lower
capital requirements.
Liquidity Ratios under Basel 3. Historically,
regulation and monitoring of bank and bank holding company
liquidity has been addressed as a supervisory matter, both in
the U.S. and internationally, without required formulaic
measures. Basel 3 will require banks and bank holding companies
to measure their liquidity against two specific liquidity tests
that, although similar in some respects to liquidity measures
historically applied by banks and regulators for management and
supervisory purposes, will be required by regulation. One test,
referred to as the liquidity coverage ratio, is designed to
ensure that the banking entity maintains an adequate level of
unencumbered
high-quality
liquid assets equal to the entitys expected net cash
outflow for a
30-day time
horizon (or, if greater, 25% of its expected total cash outflow)
under an acute liquidity stress scenario. The other, referred to
as the net stable funding ratio, is designed to promote more
medium- and
long-term
funding of the assets and activities of banking entities over a
one-year
time horizon. These requirements may incent banking entities to
increase their holdings of U.S. Treasury securities and
other sovereign debt as a component of assets and increase the
use of
long-term
debt as a funding source. The liquidity coverage ratio would be
implemented subject to an observation period beginning in 2011,
but would not be introduced as a requirement until
January 1, 2015, and the net stable funding ratio
would not be introduced as a requirement until
January 1, 2018. These new standards are subject to
further rulemaking and their terms may change before
implementation.
Payment of
Dividends
Dividend payments by Group Inc. to its shareholders are
subject to the oversight of the Federal Reserve Board. Under
temporary guidance issued by the Federal Reserve Board in
November 2010, the dividend policy of large bank holding
companies, such as Goldman Sachs, is reviewed by the Federal
Reserve Board based on capital plans and stress tests submitted
by the bank holding company, and will be assessed against, among
other things, the ability to achieve the Basel 3 capital ratio
requirements referred to above as they are phased in by
U.S. regulators and any potential impact of the Dodd-Frank
Act on the companys risk profile, business strategy,
corporate structure or capital adequacy. The Federal
Reserves current guidance provides that, for large bank
holding companies like us, dividend payout ratios exceeding 30%
of after-tax net income will receive particularly close scrutiny.
Federal and state law imposes limitations on the payment of
dividends by our depository institution subsidiaries to
Group Inc. In general, the amount of dividends that may be
paid by GS Bank USA or our national bank trust company
subsidiary is limited to the lesser of the amounts calculated
under a recent earnings test and an undivided
profits test. Under the recent earnings test, a dividend
may not be paid if the total of all dividends declared by the
entity in any calendar year is in excess of the current
years net income combined with the retained net income of
the two preceding years, unless the entity obtains prior
regulatory approval. Under the undivided profits test, a
dividend may not be paid in excess of the entitys
undivided profits (generally, accumulated net
profits that have not been paid out as dividends or transferred
to surplus). While GS Bank USA could have declared
dividends of $4.63 billion to Group Inc. as of
December 2010 in accordance with these limitations, the
banking regulators have overriding authority to prohibit the
payment of any dividends by GS Bank USA. In addition to the
dividend restrictions described above, the banking regulators
have authority to prohibit or to limit the payment of dividends
by the banking organizations they supervise if, in the banking
regulators opinion, payment of a dividend would constitute
an unsafe or unsound practice in light of the financial
condition of the banking organization.
In addition, certain of Group Inc.s
non-bank
subsidiaries are subject to separate regulatory limitations on
dividends and distributions, including our
broker-dealer
and our insurance subsidiaries as described below.
10
Source of
Strength
Federal Reserve Board policy historically has required bank
holding companies to act as a source of strength to their bank
subsidiaries and to commit capital and financial resources to
support those subsidiaries. The Dodd-Frank Act codifies this
policy as a statutory requirement. This support may be required
by the Federal Reserve Board at times when we might otherwise
determine not to provide it. Capital loans by a bank holding
company to a subsidiary bank are subordinate in right of payment
to deposits and to certain other indebtedness of the subsidiary
bank. In the event of a bank holding companys bankruptcy,
any commitment by the bank holding company to a federal bank
regulator to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to priority
payment.
However, because the BHC Act provides for functional regulation
of bank holding company activities by various regulators, the
BHC Act prohibits the Federal Reserve Board from requiring
payment by a holding company or subsidiary to a depository
institution if the functional regulator of the payor entity
objects to such payment. In such a case, the Federal Reserve
Board could instead require the divestiture of the depository
institution and impose operating restrictions pending the
divestiture.
Cross-guarantee
Provisions
Each insured depository institution controlled (as
defined in the BHC Act) by the same bank holding company can be
held liable to the FDIC for any loss incurred, or reasonably
expected to be incurred, by the FDIC due to the default of any
other insured depository institution controlled by that holding
company and for any assistance provided by the FDIC to any of
those depository institutions that is in danger of default. Such
a cross-guarantee claim against a depository
institution is generally superior in right of payment to claims
of the holding company and its affiliates against that
depository institution. At this time, we control only one
insured depository institution for this purpose, namely
GS Bank USA. However, if, in the future, we were to control
other insured depository institutions, the cross-guarantee would
apply to all such insured depository institutions.
Compensation
Practices
Our compensation practices are subject to oversight by the
Federal Reserve Board and, with respect to some of our
subsidiaries and employees, by other financial regulatory bodies
worldwide. The scope and content of compensation regulation in
the financial industry are continuing to develop, and we expect
that these policies will evolve over a number of years.
The Dodd-Frank Act requires the U.S. financial regulators,
including the Federal Reserve Board, to establish joint
regulations or guidelines prohibiting incentive-based payment
arrangements at specified regulated entities having at least
$1 billion in total assets (which would include
Group Inc. and some of its depositary institution,
broker-dealer
and investment advisor subsidiaries) that encourage
inappropriate risks by providing an executive officer, employee,
director or principal shareholder with excessive compensation,
fees, or benefits or that could lead to material financial loss
to the entity. In addition, these regulators must establish
regulations or guidelines requiring enhanced disclosure to
regulators of incentive-based compensation arrangements. The
initial version of these regulations was proposed by the FDIC in
February 2011 and the regulations may become effective
before the end of 2011. If the regulations are adopted in the
form initially proposed, they will impose limitations on the
manner in which we may structure compensation for our executives.
In June 2010, the Federal Reserve Board and other financial
regulators jointly issued guidance designed to ensure that
incentive compensation arrangements at banking organizations
take into account risk and are consistent with safe and
sound practices. The guidance sets forth the following three key
principles with respect to incentive compensation arrangements:
the arrangements should provide employees incentives that
appropriately balance risk and financial results in
a manner that does not encourage employees to expose their
organizations to imprudent risk; the arrangements should be
compatible with effective controls and risk management; and the
arrangements should be supported by strong corporate governance.
These three principles are incorporated into the proposed joint
compensation regulations under
Dodd-Frank,
discussed above. In addition, the Federal Reserve Board has
conducted a review of the incentive compensation policies and
practices of a number of large, complex banking organizations,
including us. The June 2010 guidance provides that
supervisory findings with respect to incentive compensation will
be incorporated, as appropriate, into the organizations
supervisory ratings, which can affect its ability to make
acquisitions or perform other actions. The guidance also
provides that enforcement actions may be taken against a banking
organization if its incentive compensation arrangements or
related risk management, control or governance processes pose a
risk to the organizations safety and soundness.
11
The Financial Stability Board, established at the direction of
the leaders of the Group of 20, has released standards for
implementing certain compensation principles for banks and other
financial companies designed to encourage sound compensation
practices. These standards are to be implemented by local
regulators. In July 2010, the European Parliament adopted
amendments to the Capital Requirements Directive designed to
implement the Financial Stability Boards compensation
standards within the EU. Regulators in a number of countries,
including the United Kingdom, France and Germany, have proposed
or adopted compensation policies or regulations applicable to
financial institutions pursuant to the Capital Requirements
Directive. These are in addition to the proposals and guidance
issued by U.S. financial regulators discussed above.
GS Bank
USA
Our subsidiary, GS Bank USA, an FDIC-insured, New York
State-chartered bank and a member of the Federal Reserve System
and the FDIC, is regulated by the Federal Reserve Board and the
New York State Banking Department and is subject to minimum
capital requirements (described further below) that are
calculated in a manner similar to those applicable to bank
holding companies. A number of our activities are conducted
partially or entirely through GS Bank USA and its
subsidiaries, including: origination of and market making in
bank loans; interest rate, credit, currency and other
derivatives; leveraged finance; commercial and residential
mortgage origination, trading and servicing; structured finance;
and agency lending, custody and hedge fund administration
services. These activities are subject to regulation by the
Federal Reserve Board, the New York State Banking Department and
the FDIC.
The Dodd-Frank Act contains derivative push-out
provisions that, beginning in July 2012, will essentially
prevent us from conducting certain
swaps-related
activities through GS Bank USA or another insured
depository institution subsidiary, subject to exceptions for
certain interest rate and currency swaps and for hedging or risk
mitigation activities directly related to the banks
business. These precluded activities may be conducted elsewhere
within the firm, subject to certain requirements.
Transactions with
Affiliates
Transactions between GS Bank USA and Group Inc. and
its subsidiaries and affiliates are regulated by the Federal
Reserve Board. These regulations limit the types and amounts of
transactions (including loans to and credit extensions from
GS Bank USA) that may take place and generally require
those transactions to be on an arms-length basis. These
regulations generally do not apply to transactions between
GS Bank USA and its subsidiaries. The Dodd-Frank Act
significantly expands the coverage and scope of the regulations
that limit affiliate transactions within a banking organization,
including coverage of the credit exposure on derivative
transactions, repurchase and reverse repurchase agreements,
securities borrowing and lending transactions, and transactions
with sponsored hedge funds and private equity funds.
In November 2008, Group Inc. transferred assets and
operations to GS Bank USA. In connection with this
transfer, Group Inc. entered into a guarantee agreement
with GS Bank USA whereby Group Inc. agreed to
(i) purchase from GS Bank USA certain transferred
assets (other than derivatives and mortgage servicing rights) or
reimburse GS Bank USA for certain losses relating to those
assets; (ii) reimburse GS Bank USA for
credit-related
losses from assets transferred to GS Bank USA;
(iii) protect GS Bank USA or reimburse it for certain
losses arising from derivatives and mortgage servicing rights
transferred to GS Bank USA; and (iv) pledge collateral
to GS Bank USA.
The Dodd-Frank Act will require us to prepare and provide to
regulators a resolution plan (a so-called living
will) that must, among other things, ensure that our
depository institution subsidiaries are adequately protected
from risks arising from our other subsidiaries. The
establishment and maintenance of this resolution plan may, as a
practical matter, present additional constraints on our entity
structure and transactions among our subsidiaries.
12
Deposit
Insurance
GS Bank USA accepts deposits, and those deposits have the
benefit of FDIC insurance up to the applicable limits. The
FDICs Deposit Insurance Fund is funded by assessments on
insured depository institutions, such as GS Bank USA, and
these assessments are currently based on the risk category of an
institution and the amount of insured deposits that it holds.
The FDIC required all insured depository institutions to prepay
estimated assessments for all of 2010, 2011 and 2012 on
December 30, 2009. The FDIC may increase or decrease
the assessment rate schedule on a
semi-annual
basis. In accordance with the Dodd-Frank Act, the FDIC amended
its regulations, effective April 1, 2011, to base insurance
assessments on the average total consolidated assets less the
average tangible equity of the insured depository institution
during the assessment period.
Prompt Corrective
Action
The U.S. Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), among other things, requires the federal
banking agencies to take prompt corrective action in
respect of depository institutions that do not meet specified
capital requirements. FDICIA establishes five capital categories
for FDIC-insured banks: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized.
A depository institution is generally deemed to be
well-capitalized,
the highest category, if it has a Tier 1 capital ratio of
at least 6%, a total capital ratio of at least 10% and a
Tier 1 leverage ratio of at least 5%. In connection with
the November 2008 asset transfer described under
Transactions with Affiliates below, GS Bank USA
agreed with the Federal Reserve Board to maintain minimum
capital ratios in excess of these well-capitalized
levels.
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information on the calculation of GS Bank USAs
capital ratios under Basel 1 and for a discussion of
minimum required ratios.
GS Bank USA computes its capital ratios in accordance with
the regulatory capital requirements currently applicable to
state member banks, which are based on Basel 1 as implemented by
the Federal Reserve Board. An institution may be downgraded to,
or deemed to be in, a capital category that is lower than is
indicated by its capital ratios if it is determined to be in an
unsafe or unsound condition or if it receives an unsatisfactory
examination rating with respect to certain matters. FDICIA
imposes progressively more restrictive constraints on
operations, management and capital distributions, as the capital
category of an institution
declines. Failure to meet the capital requirements could also
subject a depository institution to capital raising
requirements. Ultimately, critically undercapitalized
institutions are subject to the appointment of a receiver or
conservator.
The prompt corrective action regulations apply only to
depository institutions and not to bank holding companies such
as Group Inc. However, the Federal Reserve Board is
authorized to take appropriate action at the holding company
level, based upon the undercapitalized status of the holding
companys depository institution subsidiaries. In certain
instances relating to an undercapitalized depository institution
subsidiary, the bank holding company would be required to
guarantee the performance of the undercapitalized
subsidiarys capital restoration plan and might be liable
for civil money damages for failure to fulfill its commitments
on that guarantee. Furthermore, in the event of the bankruptcy
of the holding company, the guarantee would take priority over
the holding companys general unsecured creditors.
Insolvency of an
Insured Depository Institution or a Bank Holding
Company
If the FDIC is appointed the conservator or receiver of an
insured depository institution such as GS Bank USA, upon
its insolvency or in certain other events, the FDIC has the
power:
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to transfer any of the depository institutions assets and
liabilities to a new obligor without the approval of the
depository institutions creditors;
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to enforce the terms of the depository institutions
contracts pursuant to their terms; or
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to repudiate or disaffirm any contract or lease to which the
depository institution is a party, the performance of which is
determined by the FDIC to be burdensome and the disaffirmance or
repudiation of which is determined by the FDIC to promote the
orderly administration of the depository institution.
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In addition, under federal law, the claims of holders of deposit
liabilities and certain claims for administrative expenses
against an insured depository institution would be afforded a
priority over other general unsecured claims against such an
institution, including claims of debt holders of the
institution, in the liquidation or other resolution
of such an institution by any receiver. As a result, whether or
not the FDIC ever sought to repudiate any debt obligations of
GS Bank USA, the debt holders would be treated differently
from, and could receive, if anything, substantially less than,
the depositors of the depository institution.
13
The Dodd-Frank Act creates a resolution regime for systemically
important
non-bank
financial companies, including bank holding companies and their
affiliates, under which the FDIC may be appointed receiver to
liquidate the entity. This resolution authority was based on the
FDIC resolution model for depository institutions, with certain
modifications to reflect differences between depository
institutions and
non-bank
financial companies and to reduce disparities between the
treatment of creditors claims under the
U.S. Bankruptcy Code and in an orderly liquidation
authority proceeding compared to those that would exist under
the resolution model for depository institutions.
Trust Companies
Group Inc.s two limited purpose trust company
subsidiaries are not permitted to and do not accept deposits or
make loans (other than as incidental to their trust
activities) and, as a result, are not insured by the FDIC. The
Goldman Sachs Trust Company, N.A., a national banking
association that is limited to fiduciary activities, is
regulated by the Office of the Comptroller of the Currency
and is a member bank of the Federal Reserve System. The Goldman
Sachs Trust Company of Delaware, a Delaware limited purpose
trust company, is regulated by the Office of the Delaware State
Bank Commissioner.
U.S. Securities
and Commodities Regulation
Goldman Sachs
broker-dealer
subsidiaries are subject to regulations that cover all aspects
of the securities business, including sales methods, trade
practices, use and safekeeping of clients funds and
securities, capital structure, recordkeeping, the financing of
clients purchases, and the conduct of directors, officers
and employees. In the United States, the SEC is the federal
agency responsible for the administration of the federal
securities laws. GS&Co. is registered as a
broker-dealer,
a municipal advisor and an investment adviser with the SEC and
as a
broker-dealer
in all 50 states and the District of Columbia.
Self-regulatory organizations, such as FINRA and the NYSE, adopt
rules that apply to, and examine,
broker-dealers
such as GS&Co.
In addition, state securities and other regulators also have
regulatory or oversight authority over GS&Co. Similarly,
our businesses are also subject to regulation by various
non-U.S. governmental
and regulatory bodies and self-regulatory authorities in
virtually all countries where we have offices. Goldman Sachs
Execution & Clearing, L.P. (GSEC) and one of its
subsidiaries are registered
U.S. broker-dealers
and are
regulated by the SEC, the NYSE and FINRA. Goldman Sachs
Financial Markets, L.P. is registered with the SEC as an OTC
derivatives dealer and conducts certain OTC derivatives
activities.
The commodity futures and commodity options industry in the
United States is subject to regulation under the
U.S. Commodity Exchange Act (CEA). The CFTC is the federal
agency charged with the administration of the CEA. Several of
Goldman Sachs subsidiaries, including GS&Co. and
GSEC, are registered with the CFTC and act as futures commission
merchants, commodity pool operators or commodity trading
advisors and are subject to CEA regulations. The rules and
regulations of various self-regulatory organizations, such as
the Chicago Board of Trade and the Chicago Mercantile Exchange,
other futures exchanges and the National Futures Association,
also govern the commodity futures and commodity options
activities of these entities.
For a discussion of net capital requirements applicable to
GS&Co. and GSEC, see Note 20 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K.
Our exchange-based
market-making
activities are subject to extensive regulation by a number of
securities exchanges. As a DMM on the NYSE and as a market maker
on other exchanges, we are required to maintain orderly markets
in the securities to which we are assigned. Under the
NYSEs DMM rules, this may require us to supply liquidity
to these markets in certain circumstances.
J. Aron & Company is authorized by the
U.S. Federal Energy Regulatory Commission (FERC) to sell
wholesale physical power at
market-based
rates. As a FERC-authorized power marketer, J. Aron &
Company is subject to regulation under the U.S. Federal
Power Act and FERC regulations and to the oversight of FERC. As
a result of our investing activities, GS&Co. is also an
exempt holding company under the U.S. Public
Utility Holding Company Act of 2005 and applicable FERC rules.
In addition, as a result of our power-related and commodities
activities, we are subject to extensive and evolving energy,
environmental and other governmental laws and regulations, as
discussed under Risk
Factors Our
commodities activities, particularly our power generation
interests and our physical commodities activities, subject us to
extensive regulation, potential catastrophic events and
environmental, reputational and other risks that may expose us
to significant liabilities and costs in Part I,
Item 1A of this
Form 10-K.
14
The Dodd-Frank Act will result in additional regulation of our
broker-dealer
and regulated subsidiaries in a number of respects. The
legislation calls for the imposition of expanded standards of
care by market participants in dealing with clients and
customers, including by providing the SEC with authority to
adopt rules establishing fiduciary duties for
broker-dealers
and directing the SEC to examine and improve sales practices and
disclosure by
broker-dealers
and investment advisers. The Dodd-Frank Act also contains
provisions designed to increase transparency in
over-the-counter
derivatives markets by requiring the registration of all swap
dealers and
security-based
swap dealers, and the clearing and execution of
swaps through regulated facilities (subject to
limited exceptions, including swaps with
non-financial
end users and swaps that are not cleared by a clearing agency).
Furthermore, federal banking agencies are required under the
Dodd-Frank Act to develop rules whereby anyone who organizes or
initiates an
asset-backed
security transaction must retain a portion (generally, at least
five percent) of any credit risk that the person conveys to a
third party.
Other Regulation
in the United States
Our U.S. insurance subsidiaries are subject to state
insurance regulation and oversight in the states in which they
are domiciled and in the other states in which they are
licensed, and Group Inc. is subject to oversight as an
insurance holding company in states where our insurance
subsidiaries are domiciled. State insurance regulations limit
the ability of our insurance subsidiaries to pay dividends to
Group Inc. in certain circumstances, and could require
regulatory approval for any change in control of
Group Inc., which may include control of 10% or more of our
voting stock. In addition, a number of our other activities,
including our lending and mortgage activities, require us to
obtain licenses, adhere to applicable regulations and be subject
to the oversight of various regulators in the states in which we
conduct these activities.
The U.S. Bank Secrecy Act (BSA), as amended by the USA
PATRIOT Act of 2001 (PATRIOT Act), contains
anti-money
laundering and financial transparency laws and mandated the
implementation of various regulations applicable to all
financial institutions, including standards for verifying client
identification at account opening, and obligations to monitor
client transactions and report suspicious activities. Through
these and other provisions, the BSA and the PATRIOT Act seek to
promote the identification of parties that may be involved in
terrorism, money laundering or other suspicious activities.
Anti-money laundering laws outside the United States contain
some similar
provisions. The obligation of financial institutions, including
Goldman Sachs, to identify their clients, to monitor for and
report suspicious transactions, to respond to requests for
information by regulatory authorities and law enforcement
agencies, and to share information with other financial
institutions, has required the implementation and maintenance of
internal practices, procedures and controls that have increased,
and may continue to increase, our costs, and any failure with
respect to our programs in this area could subject us to
substantial liability and regulatory fines.
Regulation Outside
the United States
Goldman Sachs provides investment services in and from the
United Kingdom under the regulation of the FSA. Goldman Sachs
International (GSI), our regulated U.K.
broker-dealer,
is subject to the capital requirements imposed by the FSA. Other
subsidiaries, including Goldman Sachs International Bank (GSIB),
our regulated U.K. bank, are also regulated by the FSA. As of
December 2010, GSI and GSIB were in compliance with the FSA
capital requirements.
Goldman Sachs Bank (Europe) PLC (GS Bank Europe), our
regulated Irish bank, is subject to minimum capital requirements
imposed by the Central Bank of Ireland. As of
December 2010, this bank was in compliance with all
regulatory capital requirements. Group Inc. has issued a
general guarantee of the obligations of this bank.
Various other Goldman Sachs entities are regulated by the
banking, insurance and securities regulatory authorities of the
European countries in which they operate, including, among
others, the Federal Financial Supervisory Authority (BaFin) and
the Bundesbank in Germany, the Autorité de Contrôle
Prudentiel and the Autorité des Marchés Financiers in
France, Banca dItalia and the Commissione Nazionale per le
Società e la Borsa (CONSOB) in Italy, the Federal Financial
Markets Service and the Central Bank of the Russian Federation
in Russia and the Swiss Financial Market Supervisory Authority.
Certain Goldman Sachs entities are also regulated by the
European securities, derivatives and commodities exchanges of
which they are members.
15
The investment services that are subject to oversight by the FSA
and other regulators within the European Union (EU) are
regulated in accordance with national laws, many of which
implement EU directives requiring, among other things,
compliance with certain capital adequacy standards, customer
protection requirements and market conduct and trade reporting
rules. These standards, requirements and rules are generally
implemented in a similar manner, under the same directives,
throughout the EU.
The EU has adopted risk retention requirements applicable to
asset-backed
security offerings similar to those required under the
Dodd-Frank Act, as well as enhanced disclosure requirements
applicable to such offerings.
Goldman Sachs Japan Co., Ltd. (GSJCL), our regulated Japanese
broker-dealer,
is subject to the capital requirements imposed by Japans
Financial Services Agency. As of December 2010, GSJCL was
in compliance with its capital adequacy requirements. GSJCL is
also regulated by the Tokyo Stock Exchange, the Osaka Securities
Exchange, the Tokyo Financial Exchange, the Japan Securities
Dealers Association, the Tokyo Commodity Exchange and the
Ministry of Economy, Trade and Industry in Japan.
Also in Asia, the Securities and Futures Commission in Hong
Kong, the Monetary Authority of Singapore, the China Securities
Regulatory Commission, the Korean Financial Supervisory Service,
the Reserve Bank of India and the Securities and Exchange Board
of India, among others, regulate various of our subsidiaries and
also have capital standards and other requirements comparable to
the rules of the SEC.
Various Goldman Sachs entities are regulated by the banking and
regulatory authorities in countries in which Goldman Sachs
operates, including, among others, Brazil and Dubai. In
addition, certain of our insurance subsidiaries are regulated by
the FSA and certain are regulated by the Bermuda Monetary
Authority.
Regulations
Applicable in and Outside the United States
The U.S. and
non-U.S. government
agencies, regulatory bodies and self-regulatory organizations,
as well as state securities commissions and other state
regulators in the United States, are empowered to conduct
administrative proceedings that can result in censure, fine, the
issuance of cease and desist orders, or the suspension or
expulsion of a
broker-dealer
or its directors, officers or employees. From time to time, our
subsidiaries have been subject to investigations and
proceedings, and sanctions have been imposed for infractions of
various regulations relating to our activities.
The SEC and FINRA have rules governing research analysts,
including rules imposing restrictions on the interaction between
equity research analysts and investment banking personnel at
member securities firms. Various
non-U.S. jurisdictions
have imposed both substantive and disclosure-based requirements
with respect to research and may impose additional regulations.
Our investment management business is subject to significant
regulation in numerous jurisdictions around the world relating
to, among other things, the safeguarding of client assets and
our management of client funds.
As discussed above, many of our subsidiaries are subject to
regulatory capital requirements in jurisdictions throughout the
world. Subsidiaries not subject to separate regulation may hold
capital to satisfy local tax guidelines, rating agency
requirements or internal policies, including policies concerning
the minimum amount of capital a subsidiary should hold based
upon its underlying risk.
Certain of our businesses are subject to compliance with
regulations enacted by U.S. federal and state governments,
the EU or other jurisdictions
and/or
enacted by various regulatory organizations or exchanges
relating to the privacy of the information of clients, employees
or others, and any failure to comply with these regulations
could expose us to liability
and/or
reputational damage.
16
Available
Information
Our internet address is www.gs.com and the investor
relations section of our web site is located at
www.gs.com/shareholders. We make available free of charge
through the investor relations section of our web site, annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the U.S. Securities Exchange
Act of 1934 (Exchange Act), as well as proxy statements, as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. Also posted on our web
site, and available in print upon request of any shareholder to
our Investor Relations Department, are our certificate of
incorporation and by-laws, charters for our Audit Committee,
Risk Committee, Compensation Committee, and Corporate Governance
and Nominating Committee, our Policy Regarding Director
Independence Determinations, our Policy on Reporting of Concerns
Regarding Accounting and Other Matters, our Corporate Governance
Guidelines and our Code of Business Conduct and Ethics governing
our directors, officers and employees. Within the time period
required by the SEC, we will post on our web site any amendment
to the Code of Business Conduct and Ethics and any waiver
applicable to any executive officer, director or senior
financial officer (as defined in the Code).
In addition, our web site includes information concerning
purchases and sales of our equity securities by our executive
officers and directors, as well as disclosure relating to
certain
non-GAAP
financial measures (as defined in the SECs
Regulation G) that we may make public orally,
telephonically, by webcast, by broadcast or by similar means
from time to time.
Our Investor Relations Department can be contacted at The
Goldman Sachs Group, Inc., 200 West Street, 29th Floor, New
York, New York 10282, Attn: Investor Relations, telephone:
212-902-0300,
e-mail:
gs-investor-relations@gs.com.
Cautionary
Statement Pursuant to the U.S. Private Securities
Litigation Reform Act of 1995
We have included or incorporated by reference in this
Form 10-K,
and from time to time our management may make, statements that
may constitute forward-looking statements within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts, but instead represent only
our
beliefs regarding future events, many of which, by their nature,
are inherently uncertain and outside our control. These
statements include statements other than historical information
or statements of current condition and may relate to our future
plans and objectives and results, among other things, and may
also include our belief regarding the effect of changes to the
capital and leverage rules applicable to bank holding companies,
the impact of the Dodd-Frank Act on our businesses and
operations, and various legal proceedings as set forth under
Legal Proceedings in Note 30 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K,
as well as statements about the objectives and effectiveness of
our risk management and liquidity policies, statements about
trends in or growth opportunities for our businesses, statements
about our future status, activities or reporting under
U.S. or
non-U.S. banking
and financial regulation, and statements about our investment
banking transaction backlog.
By identifying these statements for you in this manner, we are
alerting you to the possibility that our actual results and
financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these
forward-looking statements. Important factors that could cause
our actual results and financial condition to differ from those
indicated in the forward-looking statements include, among
others, those discussed below and under Risk Factors
in Part I, Item 1A of this
Form 10-K.
In the case of statements about our investment banking
transaction backlog, such statements are subject to the risk
that the terms of these transactions may be modified or that
they may not be completed at all; therefore, the net revenues,
if any, that we actually earn from these transactions may
differ, possibly materially, from those currently expected.
Important factors that could result in a modification of the
terms of a transaction or a transaction not being completed
include, in the case of underwriting transactions, a decline or
continued weakness in general economic conditions, outbreak of
hostilities, volatility in the securities markets generally or
an adverse development with respect to the issuer of the
securities and, in the case of financial advisory transactions,
a decline in the securities markets, an inability to obtain
adequate financing, an adverse development with respect to a
party to the transaction or a failure to obtain a required
regulatory approval. For a discussion of other important factors
that could adversely affect our investment banking transactions,
see Risk Factors in Part I, Item 1A of
this
Form 10-K.
17
We face a variety of risks that are substantial and inherent in
our businesses, including market, liquidity, credit,
operational, legal, regulatory and reputational risks. The
following are some of the more important factors that could
affect our businesses.
Our businesses have been and may continue to be adversely
affected by conditions in the global financial markets and
economic conditions generally.
Our businesses, by their nature, do not produce predictable
earnings, and all of our businesses are materially affected by
conditions in the global financial markets and economic
conditions generally. In the past several years, these
conditions have changed suddenly and, for a period of time, very
negatively. In 2008 and through early 2009, the financial
services industry and the securities markets generally were
materially and adversely affected by significant declines in the
values of nearly all asset classes and by a serious lack of
liquidity.
Since 2008, governments, regulators and central banks in the
United States and worldwide have taken numerous steps to
increase liquidity and to restore investor and public
confidence. In addition, there are numerous legislative and
regulatory actions that have been taken to deal with what
regulators, politicians and others believe to be the root
causes of the financial crisis, including laws and regulations
relating to financial institution capital requirements and
compensation practices, restrictions on the type of activities
in which financial institutions are permitted to engage, and
generally increased regulatory scrutiny. In some cases,
additional taxes have been (or have been proposed to be) imposed
on certain financial institutions. Many of the regulations that
are required to implement recently adopted legislation
(including the Dodd-Frank Act) are still being drafted or are
not yet in effect; therefore, the exact impact that these
regulations will have on our businesses, results of operations
and cash flows is presently unclear.
Business activity across a wide range of industries and regions
has been greatly reduced and many companies were, and some
continue to be, in serious difficulty due to reduced consumer
spending and low levels of liquidity in the credit markets.
National and local governments are facing difficult financial
conditions due to significant reductions in tax revenues,
particularly from corporate and personal income taxes, as well
as increased outlays for unemployment benefits due to high
unemployment levels and the cost of stimulus programs.
Declines in asset values, the lack of liquidity, reduced
volatility, general uncertainty about economic and market
activities and a lack of consumer, investor and CEO confidence
have negatively impacted many of our businesses.
Our financial performance is highly dependent on the environment
in which our businesses operate. A favorable business
environment is generally characterized by, among other factors,
high global gross domestic product growth, transparent, liquid
and efficient capital markets, low inflation, high business and
investor confidence, stable geopolitical conditions, and strong
business earnings. Unfavorable or uncertain economic and market
conditions can be caused by: declines in economic growth,
business activity or investor or business confidence;
limitations on the availability or increases in the cost of
credit and capital; increases in inflation, interest rates,
exchange rate volatility, default rates or the price of basic
commodities; outbreaks of hostilities or other geopolitical
instability; corporate, political or other scandals that reduce
investor confidence in capital markets; natural disasters or
pandemics; or a combination of these or other factors.
The business environment continued to improve during 2010,
although there were several periods of market disruption, but
there can be no assurance that these conditions will continue in
the near or long term. If they do not, our results of operations
may be adversely affected.
18
Our businesses have been and may be adversely affected by
declining asset values. This is particularly true for those
businesses in which we have net long positions,
receive fees based on the value of assets managed, or receive or
post collateral.
Many of our businesses have net long positions in
debt securities, loans, derivatives, mortgages, equities
(including private equity and real estate) and most other asset
classes. These include positions we take when we act as a
principal to facilitate our clients activities, including
our exchange-based
market-making
activities, or commit large amounts of capital to maintain
positions in interest rate and credit products, as well as
through our currencies, commodities and equities activities.
Because nearly all of these investing, lending and market-making
positions are marked-to-market on a daily basis, declines in
asset values directly and immediately impact our earnings,
unless we have effectively hedged our exposures to
such declines. In certain circumstances (particularly in the
case of leveraged loans and private equities or other securities
that are not freely tradable or lack established and liquid
trading markets), it may not be possible or economic to hedge
such exposures and to the extent that we do so the hedge may be
ineffective or may greatly reduce our ability to profit from
increases in the values of the assets. Sudden declines and
significant volatility in the prices of assets may substantially
curtail or eliminate the trading markets for certain assets,
which may make it very difficult to sell, hedge or value such
assets. The inability to sell or effectively hedge assets
reduces our ability to limit losses in such positions and the
difficulty in valuing assets may require us to maintain
additional capital and increase our funding costs.
In our exchange-based
market-making
activities, we are obligated by stock exchange rules to maintain
an orderly market, including by purchasing shares in a declining
market. In markets where asset values are declining and in
volatile markets, this results in losses and an increased need
for liquidity.
We receive
asset-based
management fees based on the value of our clients
portfolios or investment in funds managed by us and, in some
cases, we also receive incentive fees based on increases in the
value of such investments. Declines in asset values reduce the
value of our clients portfolios or fund assets, which in
turn reduce the fees we earn for managing such assets.
We post collateral to support our obligations and receive
collateral to support the obligations of our clients and
counterparties in connection with our client execution
businesses. When the value of the assets posted as collateral
declines, the party posting the collateral may need to provide
additional collateral or, if possible, reduce its trading
position. A classic example of such a situation is a
margin call in connection with a brokerage account.
Therefore, declines in the value of asset classes used as
collateral mean that either the cost of funding positions is
increased or the size of positions is decreased. If we are the
party providing collateral, this can increase our costs and
reduce our profitability and if we are the party receiving
collateral, this can also reduce our profitability by reducing
the level of business done with our clients and counterparties.
In addition, volatile or less liquid markets increase the
difficulty of valuing assets which can lead to costly and
time-consuming disputes over asset values and the level of
required collateral, as well as increased credit risk to the
recipient of the collateral due to delays in receiving adequate
collateral.
Our businesses have been and may be adversely affected by
disruptions in the credit markets, including reduced access to
credit and higher costs of obtaining credit.
Widening credit spreads, as well as significant declines in the
availability of credit, have in the past adversely affected our
ability to borrow on a secured and unsecured basis and may do so
in the future. We fund ourselves on an unsecured basis by
issuing
long-term
debt, promissory notes and commercial paper, by accepting
deposits at our bank subsidiaries or by obtaining bank loans or
lines of credit. We seek to finance many of our assets on a
secured basis, including by entering into repurchase agreements.
Any disruptions in the credit markets may make it harder and
more expensive to obtain funding for our businesses. If our
available funding is limited or we are forced to fund our
operations at a higher cost, these conditions may require us to
curtail our business activities and increase our cost of
funding, both of which could reduce our profitability,
particularly in our businesses that involve investing, lending
and market making.
19
Our clients engaging in mergers and acquisitions often rely on
access to the secured and unsecured credit markets to finance
their transactions. A lack of available credit or an increased
cost of credit can adversely affect the size, volume and timing
of our clients
merger and acquisition
transactions particularly
large transactions and adversely affect our
financial advisory and underwriting businesses.
In addition, we may incur significant unrealized gains or losses
due solely to changes in our credit spreads or those of third
parties, as these changes may affect the fair value of our
derivative instruments and the debt securities that we hold or
issue.
Our
market-making
activities have been and may be affected by changes in the
levels of market volatility.
Certain of our
market-making
activities depend on market volatility to provide trading and
arbitrage opportunities to our clients, and decreases in
volatility may reduce these opportunities and adversely affect
the results of these activities. On the other hand, increased
volatility, while it can increase trading volumes and spreads,
also increases risk as measured by
Value-at-Risk
(VaR) and may expose us to increased risks in connection with
our
market-making
activities or cause us to reduce our
market-making
positions in order to avoid increasing our VaR. Limiting the
size of our
market-making
positions can adversely affect our profitability, even though
spreads are widening and we may earn more on each trade. In
periods when volatility is increasing, but asset values are
declining significantly, it may not be possible to sell assets
at all or it may only be possible to do so at steep discounts.
In such circumstances we may be forced to either take on
additional risk or to incur losses in order to decrease our VaR.
In addition, increases in volatility increase the level of our
risk weighted assets and increase our capital requirements, both
of which in turn increase our funding costs.
Our investment banking, client execution and investment
management businesses have been adversely affected and may
continue to be adversely affected by market uncertainty or lack
of confidence among investors and CEOs due to general declines
in economic activity and other unfavorable economic,
geopolitical or market conditions.
Our investment banking business has been and may continue
to be adversely affected by market conditions. Poor economic
conditions and other adverse geopolitical conditions can
adversely affect and have adversely affected investor and CEO
confidence, resulting in significant
industry-wide
declines in the size and number of underwritings and of
financial advisory transactions, which could have an adverse
effect on our revenues and our profit margins. In particular,
because a significant portion of our investment banking revenues
is derived from our participation in large transactions, a
decline in the number of large transactions would adversely
affect our investment banking business.
In certain circumstances, market uncertainty or general declines
in market or economic activity may affect our client execution
businesses by decreasing levels of overall activity or by
decreasing volatility, but at other times market uncertainty and
even declining economic activity may result in higher trading
volumes or higher spreads or both.
Market uncertainty, volatility and adverse economic conditions,
as well as declines in asset values, may cause our clients to
transfer their assets out of our funds or other products or
their brokerage accounts and result in reduced net revenues,
principally in our investment management business. To the extent
that clients do not withdraw their funds, they may invest them
in products that generate less fee income.
20
Our investment management business may be affected by the
poor investment performance of our investment products.
Poor investment returns in our investment management business,
due to either general market conditions or underperformance
(relative to our competitors or to benchmarks) by funds or
accounts that we manage or investment products that we design or
sell, affects our ability to retain existing assets and to
attract new clients or additional assets from existing clients.
This could affect the management and incentive fees that we earn
on assets under management or the commissions that we earn for
selling other investment products, such as structured notes or
derivatives.
We may incur losses as a result of ineffective risk
management processes and strategies.
We seek to monitor and control our risk exposure through a risk
and control framework encompassing a variety of separate but
complementary financial, credit, operational, compliance and
legal reporting systems, internal controls, management review
processes and other mechanisms. Our risk management process
seeks to balance our ability to profit from
market-making,
investing or lending positions with our exposure to potential
losses. While we employ a broad and diversified set of risk
monitoring and risk mitigation techniques, those techniques and
the judgments that accompany their application cannot anticipate
every economic and financial outcome or the specifics and timing
of such outcomes. Thus, we may, in the course of our activities,
incur losses. Market conditions in recent years have involved
unprecedented dislocations and highlight the limitations
inherent in using historical data to manage risk.
The models that we use to assess and control our risk exposures
reflect assumptions about the degrees of correlation or lack
thereof among prices of various asset classes or other
market indicators. In times of market stress or other unforeseen
circumstances, such as occurred during 2008 and early 2009,
previously uncorrelated indicators may become correlated, or
conversely previously correlated indicators may move in
different directions. These types of market movements have at
times limited the effectiveness of our hedging strategies and
have caused us to incur significant losses, and they may do so
in the future. These changes in correlation can be exacerbated
where other market participants are using risk or trading models
with assumptions or algorithms that are similar to ours. In
these and other cases, it may be difficult to reduce our risk
positions due to the activity of other market participants or
widespread market
dislocations, including circumstances where asset values are
declining significantly or no market exists for certain assets.
To the extent that we have positions through our
market-making
or origination activities or we make investments directly
through our investing activities in securities, including
private equity, that do not have an established liquid trading
market or are otherwise subject to restrictions on sale or
hedging, we may not be able to reduce our positions and
therefore reduce our risk associated with such positions. In
addition, we invest our own capital in private equity, debt,
real estate and hedge funds that we manage and limitations on
our ability to withdraw some or all of our investments in these
funds, whether for legal, reputational or other reasons, may
make it more difficult for us to control the risk exposures
relating to these investments.
For a further discussion of our risk management policies and
procedures, see Managements Discussion and Analysis
of Financial Condition and Results of Operations
Risk Management in Part II, Item 7 of this
Form 10-K.
Our liquidity, profitability and businesses may be
adversely affected by an inability to access the debt capital
markets or to sell assets or by a reduction in our credit
ratings or by an increase in our credit spreads.
Liquidity is essential to our businesses. Our liquidity may be
impaired by an inability to access secured
and/or
unsecured debt markets, an inability to access funds from our
subsidiaries, an inability to sell assets or redeem our
investments, or unforeseen outflows of cash or collateral. This
situation may arise due to circumstances that we may be unable
to control, such as a general market disruption or an
operational problem that affects third parties or us, or even by
the perception among market participants that we, or other
market participants, are experiencing greater liquidity risk.
The financial instruments that we hold and the contracts to
which we are a party are complex, as we employ structured
products to benefit our clients and ourselves, and these complex
structured products often do not have readily available markets
to access in times of liquidity stress. Our investing and
lending activities may lead to situations where the holdings
from these activities represent a significant portion of
specific markets, which could restrict liquidity for our
positions.
21
Further, our ability to sell assets may be impaired if other
market participants are seeking to sell similar assets at the
same time, as is likely to occur in a liquidity or other market
crisis. In addition, financial institutions with which we
interact may exercise
set-off
rights or the right to require additional collateral, including
in difficult market conditions, which could further impair our
access to liquidity.
Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger our obligations under
certain provisions in some of our trading and collateralized
financing contracts. Under these provisions, counterparties
could be permitted to terminate contracts with Goldman Sachs or
require us to post additional collateral. Termination of our
trading and collateralized financing contracts could cause us to
sustain losses and impair our liquidity by requiring us to
find other sources of financing or to make significant cash
payments or securities movements. Certain rating agencies have
indicated that the
Dodd-Frank
Act could result in the rating agencies reducing their assumed
level of government support and therefore result in ratings
downgrades for certain large financial institutions, including
Goldman Sachs.
Our cost of obtaining
long-term
unsecured funding is directly related to our credit spreads (the
amount in excess of the interest rate of U.S. Treasury
securities (or other benchmark securities) of the same
maturity that we need to pay to our debt investors). Increases
in our credit spreads can significantly increase our
cost of this funding. Changes in credit spreads are
continuous,
market-driven,
and subject at times to unpredictable and highly volatile
movements. Credit spreads are influenced by market perceptions
of our creditworthiness. In addition, our credit spreads
may be influenced by movements in the costs to purchasers
of credit default swaps referenced to our
long-term
debt. The market for credit default swaps, although very
large, has proven to be extremely volatile and currently lacks a
high degree of structure or transparency.
Conflicts of interest are increasing and a failure to
appropriately identify and address conflicts of interest could
adversely affect our businesses.
As we have expanded the scope of our businesses and our client
base, we increasingly must address potential conflicts of
interest, including situations where our services to a
particular client or our own investments or other interests
conflict, or are perceived to conflict, with the interests of
another client, as well as situations where one or more of our
businesses have access to material
non-public
information that may not be shared with other businesses within
the firm and situations where we may be a creditor of an entity
with which we also have an advisory or other relationship.
In addition, our status as a bank holding company subjects us to
heightened regulation and increased regulatory scrutiny by the
Federal Reserve Board with respect to transactions between
GS Bank USA and entities that are or could be viewed as
affiliates of ours.
We have extensive procedures and controls that are designed to
identify and address conflicts of interest, including those
designed to prevent the improper sharing of information among
our businesses. However, appropriately identifying and dealing
with conflicts of interest is complex and difficult, and our
reputation, which is one of our most important assets, could be
damaged and the willingness of clients to enter into
transactions with us may be affected if we fail, or appear to
fail, to identify, disclose and deal appropriately with
conflicts of interest. In addition, potential or perceived
conflicts could give rise to litigation or regulatory
enforcement actions.
22
Group Inc. is a holding company and is dependent for
liquidity on payments from its subsidiaries, many of which are
subject to restrictions.
Group Inc. is a holding company and, therefore, depends on
dividends, distributions and other payments from its
subsidiaries to fund dividend payments and to fund all payments
on its obligations, including debt obligations. Many of our
subsidiaries, including our
broker-dealer,
bank and insurance subsidiaries, are subject to laws that
restrict dividend payments or authorize regulatory bodies to
block or reduce the flow of funds from those subsidiaries to
Group Inc. In addition, our
broker-dealer,
bank and insurance subsidiaries are subject to restrictions on
their ability to lend or transact with affiliates and to minimum
regulatory capital requirements, as well as restrictions on
their ability to use funds deposited with them in brokerage or
bank accounts to fund their businesses. Additional restrictions
on related-party transactions, increased capital requirements
and additional limitations on the use of funds on deposit in
bank or brokerage accounts, as well as lower earnings, can
reduce the amount of funds available to meet the obligations of
Group Inc. and even require Group Inc. to provide
additional funding to such subsidiaries. Restrictions or
regulatory action of that kind could impede access to funds that
Group Inc. needs to make payments on its obligations,
including debt obligations, or dividend payments. In addition,
Group Inc.s right to participate in a distribution of
assets upon a subsidiarys liquidation or reorganization is
subject to the prior claims of the subsidiarys creditors.
Furthermore, Group Inc. has guaranteed the payment
obligations of certain of its subsidiaries, including
GS&Co., GS Bank USA, GS Bank Europe and Goldman
Sachs Execution & Clearing, L.P. subject to certain
exceptions, and has pledged significant assets to GS Bank
USA to support obligations to GS Bank USA. In addition,
Group Inc. guarantees many of the obligations of its other
consolidated subsidiaries on a
transaction-by-transaction
basis, as negotiated with counterparties. These guarantees may
require Group Inc. to provide substantial funds or assets
to its subsidiaries or their creditors or counterparties at a
time when Group Inc. is in need of liquidity to fund its
own obligations. See Business Regulation
in Part I, Item 1 of this
Form 10-K
for a further discussion of regulatory restrictions.
Our businesses, profitability and liquidity may be
adversely affected by deterioration in the credit quality of, or
defaults by, third parties who owe us money, securities or other
assets or whose securities or obligations we hold.
We are exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations.
These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, operational failure or other
reasons. A failure of a significant market participant, or even
concerns about a default by such an institution, could lead to
significant liquidity problems, losses or defaults by other
institutions, which in turn could adversely affect us.
We are also subject to the risk that our rights against third
parties may not be enforceable in all circumstances. In
addition, deterioration in the credit quality of third parties
whose securities or obligations we hold could result in losses
and/or
adversely affect our ability to rehypothecate or otherwise use
those securities or obligations for liquidity purposes. A
significant downgrade in the credit ratings of our
counterparties could also have a negative impact on our results.
While in many cases we are permitted to require additional
collateral from counterparties that experience financial
difficulty, disputes may arise as to the amount of collateral we
are entitled to receive and the value of pledged assets. The
termination of contracts and the foreclosure on collateral may
subject us to claims for the improper exercise of our rights.
Default rates, downgrades and disputes with counterparties as to
the valuation of collateral increase significantly in times of
market stress and illiquidity.
As part of our clearing and prime brokerage activities, we
finance our clients positions, and we could be held
responsible for the defaults or misconduct of our clients.
Although we regularly review credit exposures to specific
clients and counterparties and to specific industries, countries
and regions that we believe may present credit concerns, default
risk may arise from events or circumstances that are difficult
to detect or foresee.
23
Concentration of risk increases the potential for
significant losses in our
market-making,
underwriting, investing and lending activities.
Concentration of risk increases the potential for significant
losses in our
market-making,
underwriting, investing and lending activities. The number and
size of such transactions may affect our results of operations
in a given period. Moreover, because of concentration of risk,
we may suffer losses even when economic and market conditions
are generally favorable for our competitors. Disruptions in the
credit markets can make it difficult to hedge these credit
exposures effectively or economically. In addition, we extend
large commitments as part of our credit origination activities.
The Dodd-Frank Act will require issuers of
asset-backed
securities and any person who organizes and initiates an
asset-backed
securities transaction to retain economic exposure to the asset,
which could significantly increase the cost to us of engaging in
securitization activities. Our inability to reduce our credit
risk by selling, syndicating or securitizing these positions,
including during periods of market stress, could negatively
affect our results of operations due to a decrease in the fair
value of the positions, including due to the insolvency or
bankruptcy of the borrower, as well as the loss of revenues
associated with selling such securities or loans.
In the ordinary course of business, we may be subject to a
concentration of credit risk to a particular counterparty,
borrower or issuer, including sovereign issuers, and a failure
or downgrade of, or default by, such entity could negatively
impact our businesses, perhaps materially, and the systems by
which we set limits and monitor the level of our credit exposure
to individual entities, industries and countries may not
function as we have anticipated. While our activities expose us
to many different industries and counterparties, we routinely
execute a high volume of transactions with counterparties
engaged in financial services activities, including brokers and
dealers, commercial banks, clearing houses, exchanges and
investment funds. This has resulted in significant credit
concentration with respect to these counterparties. Provisions
of the Dodd-Frank Act are expected to lead to increased
centralization of trading activity through particular clearing
houses, central agents or exchanges, which may increase our
concentration of risk with respect to these entities.
The financial services industry is highly
competitive.
The financial services industry and all of our businesses are
intensely competitive, and we expect them to remain so. We
compete on the basis of a number of factors, including
transaction execution, our products and services, innovation,
reputation, creditworthiness and price. Over time, there has
been substantial consolidation and convergence among companies
in the financial services industry. This trend accelerated over
recent years as a result of numerous mergers and asset
acquisitions among industry participants. This trend has also
hastened the globalization of the securities and other financial
services markets. As a result, we have had to commit capital to
support our international operations and to execute large global
transactions. To the extent we expand into new business areas
and new geographic regions, we will face competitors with more
experience and more established relationships with clients,
regulators and industry participants in the relevant market,
which could adversely affect our ability to expand. Governments
and regulators have recently adopted regulations, imposed taxes
or otherwise put forward various proposals that have or may
impact our ability to conduct certain of our businesses in a
cost-effective
manner or at all in certain or all jurisdictions, including
proposals relating to restrictions on the type of activities in
which financial institutions are permitted to engage. These or
other similar proposals, which may not apply to all our
U.S. or
non-U.S. competitors,
could impact our ability to compete effectively.
Pricing and other competitive pressures in our businesses have
continued to increase, particularly in situations where some of
our competitors may seek to increase market share by reducing
prices. For example, in connection with investment banking and
other assignments, we have experienced pressure to extend and
price credit at levels that may not always fully compensate us
for the risks we take.
24
We face enhanced risks as new business initiatives lead us
to transact with a broader array of clients and counterparties
and expose us to new asset classes and new markets.
A number of our recent and planned business initiatives and
expansions of existing businesses may bring us into contact,
directly or indirectly, with individuals and entities that are
not within our traditional client and counterparty base and
expose us to new asset classes and new markets. For example, we
are increasingly transacting business and investing in new
regions, including a wider range of emerging and growth markets.
Furthermore, in a number of our businesses, including where we
make markets, invest and lend, we directly or indirectly own
interests in, or otherwise become affiliated with the ownership
and operation of public services, such as airports, toll roads
and shipping ports, as well as power generation facilities,
physical commodities and other commodities infrastructure
components, both within and outside the United States. Recent
market conditions may lead to an increase in opportunities to
acquire distressed assets and we may determine opportunistically
to increase our exposure to these types of assets.
These activities expose us to new and enhanced risks, including
risks associated with dealing with governmental entities,
reputational concerns arising from dealing with less
sophisticated counterparties and investors, greater regulatory
scrutiny of these activities, increased
credit-related,
sovereign and operational risks, risks arising from accidents or
acts of terrorism, and reputational concerns with the manner in
which these assets are being operated or held.
Derivative transactions and delayed settlements may expose
us to unexpected risk and potential losses.
We are party to a large number of derivative transactions,
including credit derivatives. Many of these derivative
instruments are individually negotiated and
non-standardized,
which can make exiting, transferring or settling positions
difficult. Many credit derivatives require that we deliver to
the counterparty the underlying security, loan or other
obligation in order to receive payment. In a number of cases, we
do not hold the underlying security, loan or other obligation
and may not be able to obtain the underlying security, loan or
other obligation. This could cause us to forfeit the payments
due to us under these contracts or result in settlement delays
with the attendant credit and operational risk as well as
increased costs to the firm. Derivative transactions may also
involve the risk that they are not authorized or appropriate for
a counterparty, that documentation has not been properly
executed or that executed agreements may not be enforceable
against the counterparty.
Derivative contracts and other transactions, including secondary
bank loan purchases and sales, entered into with third parties
are not always confirmed by the counterparties or settled on a
timely basis. While the transaction remains unconfirmed or
during any delay in settlement, we are subject to heightened
credit and operational risk and in the event of a default may
find it more difficult to enforce our rights. In addition, as
new and more complex derivative products are created, covering a
wider array of underlying credit and other instruments, disputes
about the terms of the underlying contracts could arise, which
could impair our ability to effectively manage our risk
exposures from these products and subject us to increased costs.
The provisions of the Dodd-Frank Act requiring central clearing
of credit derivatives and other OTC derivatives, or a market
shift toward standardized derivatives, could reduce the risk
associated with such transactions, but under certain
circumstances could also limit our ability to develop
derivatives that best suit the needs of our clients and
ourselves and adversely affect our profitability and increase
our credit exposure to such platform.
25
Our businesses may be adversely affected if we are unable
to hire and retain qualified employees.
Our performance is largely dependent on the talents and efforts
of highly skilled individuals; therefore, our continued ability
to compete effectively in our businesses, to manage our
businesses effectively and to expand into new businesses and
geographic areas depends on our ability to attract new talented
and diverse employees and to retain and motivate our existing
employees. Factors that affect our ability to attract and retain
such employees include our compensation and benefits, and our
reputation as a successful business with a culture of fairly
hiring, training and promoting qualified employees.
Competition from within the financial services industry and from
businesses outside the financial services industry for qualified
employees has often been intense. This is particularly the case
in emerging and growth markets, where we are often competing for
qualified employees with entities that have a significantly
greater presence or more extensive experience in the region.
As described further in Business
Regulation Banking Regulation and
Regulation Compensation Practices in
Part I, Item 1 of this
Form 10-K,
our compensation practices are subject to review by, and the
standards of, the Federal Reserve Board. As a large financial
and banking institution, we may be subject to limitations on
compensation practices (which may or may not affect our
competitors) by the Federal Reserve Board, the FSA, the FDIC or
other regulators worldwide. These limitations, including any
imposed by or as a result of future legislation or regulation,
may require us to alter our compensation practices in ways that
could adversely affect our ability to attract and retain
talented employees. We may also be required to make additional
disclosure with respect to the compensation of employees,
including
non-executive
officers, in a manner that directly or indirectly results in the
identity of such employees and their compensation being made
public. Any such additional public disclosure of employee
compensation may also make it difficult to attract and retain
talented employees.
Our businesses and those of our clients are subject to
extensive and pervasive regulation around the world.
As a participant in the financial services industry and a bank
holding company, we are subject to extensive regulation in
jurisdictions around the world. We face the risk of significant
intervention by regulatory and taxing authorities in all
jurisdictions in which we conduct our businesses. Among other
things, as a result of regulators enforcing existing laws and
regulations, we could be fined, prohibited from engaging in some
of our business activities, subject to limitations or conditions
on our business activities or subjected to new or substantially
higher taxes or other governmental charges in connection with
the conduct of our business or with respect to our employees.
There is also the risk that new laws or regulations or changes
in enforcement of existing laws or regulations applicable to our
businesses or those of our clients, including tax burdens and
compensation restrictions, could be imposed on a limited subset
of financial institutions (either based on size, activities,
geography or other criteria), which may adversely affect our
ability to compete effectively with other institutions that are
not affected in the same way.
The impact of such developments could impact our profitability
in the affected jurisdictions, or even make it uneconomic for us
to continue to conduct all or certain of our businesses in such
jurisdictions, or could cause us to incur significant costs
associated with changing our business practices, restructuring
our businesses, moving all or certain of our businesses and our
employees to other locations or complying with applicable
capital requirements, including liquidating assets or raising
capital in a manner that adversely increases our funding costs
or otherwise adversely affects our shareholders and creditors.
For a discussion of the extensive regulation to which our
businesses are subject, see Business
Regulation in Part I, Item 1 of this
Form 10-K.
26
We may be adversely affected by increased governmental and
regulatory scrutiny or negative publicity.
Governmental scrutiny from regulators, legislative bodies and
law enforcement agencies with respect to matters relating to
compensation, our business practices, our past actions and other
matters has increased dramatically in the past several years.
The financial crisis and the current political and public
sentiment regarding financial institutions has resulted in a
significant amount of adverse press coverage, as well as
adverse statements or charges by regulators or other government
officials. Press coverage and other public statements that
assert some form of wrongdoing often result in some type of
investigation by regulators, legislators and law enforcement
officials or in lawsuits. Responding to these investigations and
lawsuits, regardless of the ultimate outcome of the proceeding,
is time consuming and expensive and can divert the time and
effort of our senior management from our business. Penalties and
fines sought by regulatory authorities have increased
substantially over the last several years, and certain
regulators have been more likely in recent years to commence
enforcement actions or to advance or support legislation
targeted at the financial services industry. Adverse publicity,
governmental scrutiny and legal and enforcement proceedings can
also have a negative impact on our reputation and on the morale
and performance of our employees, which could adversely
affect our businesses and results of operations.
A failure in our operational systems or infrastructure, or
those of third parties, could impair our liquidity, disrupt our
businesses, result in the disclosure of confidential
information, damage our reputation and cause losses.
Our businesses are highly dependent on our ability to process
and monitor, on a daily basis, a very large number of
transactions, many of which are highly complex, across numerous
and diverse markets in many currencies. These transactions, as
well as the information technology services we provide to
clients, often must adhere to client-specific guidelines, as
well as legal and regulatory standards.
As our client base and our geographical reach expands,
developing and maintaining our operational systems and
infrastructure becomes increasingly challenging. Our financial,
accounting, data processing or other operating systems and
facilities may fail to operate properly or become disabled as a
result of events
that are wholly or partially beyond our control, such as a spike
in transaction volume, adversely affecting our ability to
process these transactions or provide these services. We must
continuously update these systems to support our operations and
growth and to respond to changes in regulations and markets.
This updating entails significant costs and creates risks
associated with implementing new systems and integrating them
with existing ones.
In addition, we also face the risk of operational failure,
termination or capacity constraints of any of the clearing
agents, exchanges, clearing houses or other financial
intermediaries we use to facilitate our securities transactions,
and as our interconnectivity with our clients grows, we
increasingly face the risk of operational failure with respect
to our clients systems.
In recent years, there has been significant consolidation among
clearing agents, exchanges and clearing houses and an increasing
number of derivative transactions are now or in the near future
will be cleared on exchanges, which has increased our exposure
to operational failure, termination or capacity constraints of
the particular financial intermediaries that we use and could
affect our ability to find adequate and
cost-effective
alternatives in the event of any such failure, termination or
constraint. Industry consolidation, whether among market
participants or financial intermediaries, increases the risk of
operational failure as disparate complex systems need to be
integrated, often on an accelerated basis.
Furthermore, the interconnectivity of multiple financial
institutions with central agents, exchanges and clearing houses,
and the increased centrality of these entities, increases the
risk that an operational failure at one institution or entity
may cause an
industry-wide
operational failure that could materially impact our ability to
conduct business. Any such failure, termination or constraint
could adversely affect our ability to effect transactions,
service our clients, manage our exposure to risk or expand our
businesses or result in financial loss or liability to our
clients, impairment of our liquidity, disruption of our
businesses, regulatory intervention or reputational damage.
27
Despite the resiliency plans and facilities we have in place,
our ability to conduct business may be adversely impacted by a
disruption in the infrastructure that supports our businesses
and the communities in which we are located. This may include a
disruption involving electrical, communications, internet,
transportation or other services used by us or third parties
with which we conduct business. These disruptions may occur as a
result of events that affect only our buildings or systems or
those of such third parties, or as a result of events with a
broader impact globally, regionally or in the cities where those
buildings or systems are located.
Nearly all of our employees in our primary locations, including
the New York metropolitan area, London, Bangalore, Hong Kong,
Tokyo and Salt Lake City, work in close proximity to one
another, in one or more buildings. Notwithstanding our efforts
to maintain business continuity, given that our headquarters and
the largest concentration of our employees are in the New York
metropolitan area, depending on the intensity and longevity of
the event, a catastrophic event impacting our New York
metropolitan area offices could very negatively affect our
business. If a disruption occurs in one location and our
employees in that location are unable to occupy our offices or
communicate with or travel to other locations, our ability to
service and interact with our clients may suffer, and we may not
be able to successfully implement contingency plans that depend
on communication or travel.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures and endeavor to modify them as circumstances warrant,
our computer systems, software and networks may be vulnerable to
unauthorized access, misuse, computer viruses or other malicious
code and other events that could have a security impact. If one
or more of such events occur, this potentially could jeopardize
our or our clients or counterparties
confidential and other information processed and stored in, and
transmitted through, our computer systems and networks, or
otherwise cause interruptions or malfunctions in our, our
clients, our counterparties or third parties
operations, which could result in significant losses
or reputational damage. We may be required to expend
significant additional resources to modify our protective
measures or to investigate and remediate vulnerabilities or
other exposures, and we may be subject to litigation and
financial losses that are either not insured against or not
fully covered through any insurance maintained by us.
We routinely transmit and receive personal, confidential and
proprietary information by email and other electronic means. We
have discussed and worked with clients, vendors, service
providers, counterparties and other third parties to develop
secure transmission capabilities, but we do not have, and may be
unable to put in place, secure capabilities with all of our
clients, vendors, service providers, counterparties and other
third parties and we may not be able to ensure that these third
parties have appropriate controls in place to protect the
confidentiality of the information. An interception, misuse or
mishandling of personal, confidential or proprietary information
being sent to or received from a client, vendor, service
provider, counterparty or other third party could result in
legal liability, regulatory action and reputational harm.
Substantial legal liability or significant regulatory
action against us could have material adverse financial effects
or cause us significant reputational harm, which in turn could
seriously harm our business prospects.
We face significant legal risks in our businesses, and the
volume of claims and amount of damages and penalties claimed in
litigation and regulatory proceedings against financial
institutions remain high. See Legal Proceedings
in Part I, Item 3 of this
Form 10-K
for a discussion of certain legal proceedings in which we are
involved. Our experience has been that legal claims by customers
and clients increase in a market downturn and that
employment-related claims increase in periods when we have
reduced the total number of employees.
There have been a number of highly publicized cases, involving
actual or alleged fraud or other misconduct by employees in the
financial services industry in recent years, and we run the risk
that employee misconduct could occur. This misconduct has
included and may include in the future the theft of proprietary
software. It is not always possible to deter or prevent employee
misconduct and the precautions we take to prevent and detect
this activity have not been and may not be effective in all
cases.
28
The growth of electronic trading and the introduction of
new trading technology may adversely affect our business and may
increase competition.
Technology is fundamental to our business and our industry. The
growth of electronic trading and the introduction of new
technologies is changing our businesses and presenting us with
new challenges. Securities, futures and options transactions are
increasingly occurring electronically, both on our own systems
and through other alternative trading systems, and it appears
that the trend toward alternative trading systems will continue
and probably accelerate. Some of these alternative trading
systems compete with us, particularly our exchange-based
market-making
activities, and we may experience continued competitive
pressures in these and other areas. In addition, the increased
use by our clients of
low-cost
electronic trading systems and direct electronic access to
trading markets could cause a reduction in commissions and
spreads. As our clients increasingly use our systems to trade
directly in the markets, we may incur liabilities as a result of
their use of our order routing and execution infrastructure. We
have invested significant resources into the development of
electronic trading systems and expect to continue to do so, but
there is no assurance that the revenues generated by these
systems will yield an adequate return on our investment,
particularly given the relatively lower commissions arising from
electronic trades.
Our commodities activities, particularly our power
generation interests and our physical commodities activities,
subject us to extensive regulation, potential catastrophic
events and environmental, reputational and other risks that may
expose us to significant liabilities and costs.
We engage in, or invest in entities that engage in, the
production, storage, transportation, marketing and trading of
numerous commodities, including crude oil, oil products, natural
gas, electric power, agricultural products, metals (base and
precious), minerals (including uranium), emission credits, coal,
freight, liquefied natural gas and related products and indices.
These activities subject us to extensive and evolving federal,
state and local energy, environmental and other governmental
laws and regulations worldwide, including environmental laws and
regulations relating to, among others, air quality, water
quality, waste management, transportation of hazardous
substances, natural resources, site remediation and health and
safety. Additionally, rising climate change concerns may lead to
additional regulation that could increase the operating costs
and profitability of our investments.
We may incur substantial costs in complying with current or
future laws and regulations relating to our commodities-related
activities and investments, particularly electric power
generation, transportation and storage of physical commodities
and wholesale sales and trading of electricity and natural gas.
Compliance with these laws and regulations could require us to
commit significant capital toward environmental monitoring,
installation of pollution control equipment, renovation of
storage facilities or transport vessels, payment of emission
fees and carbon or other taxes, and application for, and holding
of, permits and licenses.
Our commodities-related activities are also subject to the risk
of unforeseen or catastrophic events, many of which are outside
of our control, including breakdown or failure of power
generation equipment, transmission lines, transport vessels,
storage facilities or other equipment or processes or other
mechanical malfunctions, fires, leaks, spills or release of
hazardous substances, performance below expected levels of
output or efficiency, terrorist attacks, natural disasters or
other hostile or catastrophic events. In addition, we rely on
third-party suppliers or service providers to perform their
contractual obligations and any failure on their part, including
the failure to obtain raw materials at reasonable prices or to
safely transport or store commodities, could adversely affect
our activities. In addition, we may not be able to obtain
insurance to cover some of these risks and the insurance that we
have may be inadequate to cover our losses.
The occurrence of any of such events may prevent us from
performing under our agreements with clients, may impair our
operations or financial results and may result in litigation,
regulatory action, negative publicity or other reputational harm.
29
In conducting our businesses around the world, we are
subject to political, economic, legal, operational and other
risks that are inherent in operating in many countries.
In conducting our businesses and maintaining and supporting our
global operations, we are subject to risks of possible
nationalization, expropriation, price controls, capital
controls, exchange controls and other restrictive governmental
actions, as well as the outbreak of hostilities or acts of
terrorism. In many countries, the laws and regulations
applicable to the securities and financial services industries
and many of the transactions in which we are involved are
uncertain and evolving, and it may be difficult for us to
determine the exact requirements of local laws in every market.
Any determination by local regulators that we have not acted in
compliance with the application of local laws in a particular
market or our failure to develop effective working relationships
with local regulators could have a significant and negative
effect not only on our businesses in that market but also on our
reputation generally. We are also subject to the enhanced risk
that transactions we structure might not be legally enforceable
in all cases.
Our businesses and operations are increasingly expanding into
new regions throughout the world, including emerging and growth
markets, and we expect this trend to continue. Various emerging
and growth market countries have experienced severe economic and
financial disruptions, including significant devaluations of
their currencies, defaults or threatened defaults on sovereign
debt, capital and currency exchange controls, and low or
negative growth rates in their economies, as well as military
activity or acts of terrorism. The possible effects of any of
these conditions include an adverse impact on our businesses and
increased volatility in financial markets generally.
While business and other practices throughout the world differ,
our principal legal entities are subject in their operations
worldwide to rules and regulations relating to corrupt and
illegal payments and money laundering, as well as laws relating
to doing business with certain individuals, groups and
countries, such as the U.S. Foreign Corrupt Practices Act,
the USA PATRIOT Act and U.K. Bribery Act. While we have invested
and continue to invest significant resources in training and in
compliance monitoring, the geographical diversity of our
operations, employees, clients and customers, as well as the
vendors and other third parties that we deal with, greatly
increases the risk that we may be found in violation of such
rules or regulations and any such violation could subject us to
significant penalties or adversely affect our reputation.
We may incur losses as a result of unforeseen or
catastrophic events, including the emergence of a pandemic,
terrorist attacks or natural disasters.
The occurrence of unforeseen or catastrophic events, including
the emergence of a pandemic or other widespread health emergency
(or concerns over the possibility of such an emergency),
terrorist attacks or natural disasters, could create economic
and financial disruptions, could lead to operational
difficulties (including travel limitations) that could impair
our ability to manage our businesses, and could expose our
insurance activities to significant losses.
30
|
|
Item 1B.
|
Unresolved
Staff Comments
|
There are no material unresolved written comments that were
received from the SEC staff 180 days or more before the end
of our fiscal year relating to our periodic or current reports
under the Exchange Act.
Our principal executive offices are located at 200 West
Street, New York, New York and comprise approximately
2.1 million gross square feet. The building is located on a
parcel leased from Battery Park City Authority pursuant to a
ground lease. Under the lease, Battery Park City Authority holds
title to all improvements, including the office building,
subject to Goldman Sachs right of exclusive possession and
use until June 2069, the expiration date of the lease.
Under the terms of the ground lease, we made a lump sum ground
rent payment in June 2007 of $161 million for rent
through the term of the lease.
We have offices at 30 Hudson Street in Jersey City,
New Jersey, which we own and which include approximately
1.6 million gross square feet of office space, and we own
over 700,000 square feet of additional commercial space spread
among four locations in New York and New Jersey. We lease
approximately 2.1 million rentable square feet in the New
York Metropolitan Area.
We have additional offices in the U.S. and elsewhere in the
Americas, which together comprise approximately 3.0 million
rentable square feet of leased space.
In Europe, the Middle East and Africa, we have offices that
total approximately 2.1 million rentable square feet. Our
European headquarters is located in London at Peterborough
Court, pursuant to a lease expiring in 2026. In total, we lease
approximately 1.6 million rentable square feet in London
through various leases, relating to various properties.
In Asia (including India), we have offices that total
approximately 1.7 million rentable square feet. Our
headquarters in this region are in Tokyo, at the Roppongi Hills
Mori Tower, and in Hong Kong, at the Cheung Kong Center. In
Tokyo, we currently lease approximately 388,000 rentable square
feet, the majority of which will expire in 2018. In Hong Kong,
we currently lease approximately 320,000 rentable square feet
under lease agreements, the majority of which will expire in
2017.
See Managements Discussion and Analysis of Financial
Condition and Results of Operations
Off-Balance-Sheet
Arrangements and Contractual Obligations Contractual
Obligations in Part II, Item 7 of this
Form 10-K
for a discussion of exit costs we may incur.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved in a number of judicial, regulatory and
arbitration proceedings concerning matters arising in connection
with the conduct of our businesses. Many of these
proceedings are at preliminary stages, and many of these cases
seek an indeterminate amount of damages. However, we believe,
based on currently available information, that the results of
such proceedings, in the aggregate, will not have a material
adverse effect on our financial condition, but may be material
to our operating results for any particular period, depending,
in part, upon the operating results for such period. Given the
range of litigation and investigations presently under way, our
litigation expenses can be expected to remain high. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Use of
Estimates in Part II, Item 7 of this
Form 10-K.
See Note 30 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information on certain judicial, regulatory and legal
proceedings.
31
Executive
Officers of The Goldman Sachs Group, Inc.
Set forth below are the name, age, present title, principal
occupation and certain biographical information as of
February 1, 2011 for our executive officers. All of
our executive officers have been appointed by and serve at the
pleasure of our board of directors.
Lloyd C.
Blankfein, 56
Mr. Blankfein has been our Chairman and Chief Executive
Officer since June 2006, and a director since
April 2003. Previously, he had been our President and Chief
Operating Officer since January 2004. Prior to that, from
April 2002 until January 2004, he was a Vice Chairman
of Goldman Sachs, with management responsibility for Goldman
Sachs Fixed Income, Currency and Commodities Division
(FICC) and Equities Division (Equities). Prior to becoming a
Vice Chairman, he had served as
co-head of
FICC since its formation in 1997. From 1994 to 1997, he headed
or co-headed the Currency and Commodities Division.
Mr. Blankfein is not currently on the board of any public
company other than Goldman Sachs. He is affiliated with certain
non-profit
organizations, including as a member of the Deans Advisory
Board at Harvard Law School, the Deans Council at Harvard
University and the Advisory Board of the Tsinghua University
School of Economics and Management, an overseer of the Weill
Medical College of Cornell University, and a member of the Board
of Directors of the Partnership for New York City.
Alan M. Cohen,
60
Mr. Cohen has been an Executive Vice President of Goldman
Sachs and our Global Head of Compliance since
February 2004. From 1991 until January 2004, he was a
partner in the law firm of OMelveny & Myers LLP.
He is affiliated with certain
non-profit
organizations, including as a board member of the New York Stem
Cell Foundation.
Gary D. Cohn,
50
Mr. Cohn has been our President and Chief Operating Officer
(or Co-Chief Operating Officer) and a director since
June 2006. From December 2003 to June 2006,
he was the co-head of our global Securities
businesses, having been the co-head of FICC since
September 2002. Prior to that, Mr. Cohn served as
co-chief
operating officer of FICC after having been responsible for
Commodities and a number of other FICC businesses from 1999 to
2002. He was the head of Commodities from 1996 to 1999.
Mr. Cohn is not currently on the board of any public
company other than Goldman Sachs. He is affiliated with certain
non-profit
organizations, including NYU Hospital, NYU Medical School, the
Harlem Childrens Zone and American University.
J. Michael Evans,
53
Mr. Evans has been the global head of Growth Markets since
January 2011, a Vice Chairman of Goldman Sachs since
February 2008 and chairman of Goldman Sachs Asia since
2004. Prior to becoming a Vice Chairman, he had served as global
co-head of Goldman Sachs securities business since 2003.
Previously, he had been co-head of the Equities Division since
2001. Mr. Evans is a board member of CASPER (Center for
Advancement of Standards-based Physical Education Reform). He
also serves as a trustee of the Bendheim Center for Finance at
Princeton University.
Gregory K. Palm,
62
Mr. Palm has been an Executive Vice President of Goldman
Sachs since May 1999, and our General Counsel and head or
co-head of the Legal Department since May 1992.
Michael S.
Sherwood, 45
Mr. Sherwood has been a Vice Chairman of Goldman Sachs
since February 2008 and co-chief executive officer of
Goldman Sachs International since 2005. Prior to becoming a Vice
Chairman, he had served as global co-head of Goldman Sachs
securities business since 2003. Prior to that, he had been head
of FICC Europe since 2001.
32
Esta E. Stecher,
53
Ms. Stecher has been an Executive Vice President of Goldman
Sachs and our General Counsel and co-head of the Legal
Department since December 2000. From 1994 to 2000, she was
head of the firms Tax Department, over which she continues
to have senior oversight responsibility. She is also a trustee
of Columbia University.
David A. Viniar,
55
Mr. Viniar has been an Executive Vice President of Goldman
Sachs and our Chief Financial Officer since May 1999. He
has been the head of Operations, Technology, Finance and
Services Division since December 2002. He was head of the
Finance Division and co-head of Credit Risk Management and
Advisory and Firmwide Risk from December 2001 to
December 2002. Mr. Viniar was co-head of Operations,
Finance and Resources from March 1999 to
December 2001. He was Chief Financial Officer of The
Goldman Sachs Group, L.P. from March 1999 to May 1999.
From July 1998 until March 1999, he was Deputy Chief
Financial Officer and from 1994 until July 1998, he was
head of Finance, with responsibility for Controllers and
Treasury. From 1992 to 1994, he was head of Treasury and prior
to that was in the Structured Finance Department of Investment
Banking. He also serves on the Board of Trustees of Union
College.
John S. Weinberg,
53
Mr. Weinberg has been a Vice Chairman of Goldman Sachs
since June 2006. He has been co-head of Goldman Sachs
Investment Banking Division since December 2002. From
January 2002 to December 2002, he was co-head of the
Investment Banking Division in the Americas. Prior to that, he
served as co-head of the Investment Banking Services Department
since 1997. He is affiliated with certain
non-profit
organizations, including as a trustee of New York-Presbyterian
Hospital and the Brunswick School, and as a member of the Board
of Directors of The Steppingstone Foundation. Mr. Weinberg
also serves on the Visiting Committee for Harvard Business
School.
33
PART II
Item 5. Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
The principal market on which our common stock is traded is the
NYSE. Information relating to the high and low sales prices per
share of our common stock, as reported by the Consolidated Tape
Association, for each full quarterly period during fiscal 2009
and 2010 is set forth under the heading Supplemental
Financial Information Common Stock Price Range
in Part II, Item 8 of this
Form 10-K.
As of February 11, 2011, there were
12,165 holders of record of our common stock.
During fiscal 2009 and fiscal 2010, dividends of $0.35 per
common share were declared on April 13, 2009,
July 13, 2009, October 14, 2009,
January 19, 2010, April 19, 2010,
July 19, 2010 and October 18, 2010. The
holders of our common stock share proportionately on a per share
basis in all dividends and other distributions on common stock
declared by the Board of Directors of Group Inc (Board).
The declaration of dividends by Goldman Sachs is subject to the
discretion of our Board. Our Board will take into account such
matters as general business conditions, our financial results,
capital requirements, contractual, legal and regulatory
restrictions on the payment of dividends by us to our
shareholders or by our subsidiaries to us, the effect on our
debt ratings and such other factors as our Board may deem
relevant. See Business Regulation in
Part I, Item 1 of this
Form 10-K
for a discussion of potential regulatory limitations on our
receipt of funds from our regulated subsidiaries and our payment
of dividends to shareholders of Group Inc.
The table below sets forth the information with respect to
purchases made by or on behalf of Group Inc. or any
affiliated purchaser (as defined in
Rule 10b-18(a)(3)
under the Exchange Act), of our common stock during the fourth
quarter of our fiscal year ended December 2010.
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|
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|
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|
|
|
|
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|
|
|
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|
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Total Number of Shares
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|
|
Maximum Number of
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|
|
|
|
Total Number of
|
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|
Average Price
|
|
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Purchased as Part of
|
|
|
Shares That May Yet Be
|
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|
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Shares
|
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Paid per
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Publicly Announced
|
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Purchased Under the
|
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|
Period
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Purchased
|
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Share
|
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Plans or
Programs 1
|
|
|
Plans or
Programs 1
|
|
|
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Month #1
(October 1, 2010 to
October 31, 2010)
|
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1,200,000
|
|
|
$
|
159.53
|
|
|
|
1,200,000
|
|
|
|
41,056,476
|
|
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Month #2
(November 1, 2010 to
November 30, 2010)
|
|
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3,225,100
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|
|
$
|
164.06
|
|
|
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3,225,100
|
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37,831,376
|
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Month #3
(December 1, 2010 to
December 31, 2010)
|
|
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2,275,000
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|
|
$
|
164.54
|
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2,275,000
|
|
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35,556,376
|
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|
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Total
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6,700,100
|
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|
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6,700,100
|
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|
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1.
|
On March 21, 2000, we announced that our Board had
approved a repurchase program, pursuant to which up to
15 million shares of our common stock may be repurchased.
This repurchase program was increased by an aggregate of
280 million shares by resolutions of our Board adopted on
June 18, 2001, March 18, 2002,
November 20, 2002, January 30, 2004,
January 25, 2005, September 16, 2005,
September 11, 2006 and December 17, 2007. We
use our share repurchase program to substantially offset
increases in share count over time resulting from employee
share-based
compensation and to help maintain the appropriate level of
common equity.
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The repurchase program is effected primarily through regular
open-market
purchases, the amounts and timing of which are determined
primarily by the firms issuance of shares resulting from
employee
share-based
compensation as well as its current and projected capital
position (i.e., comparisons of our desired level of capital
to our actual level of capital) but which may also be influenced
by general market conditions, the prevailing price and trading
volumes of our common stock. The total remaining authorization
under the repurchase program was 32,156,376 shares as of
February 11, 2011; the repurchase program has no set
expiration or termination date.
|
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Any repurchase of our common stock requires approval by the
Federal Reserve Board.
|
Information relating to compensation plans under which our
equity securities are authorized for issuance is presented in
Part III, Item 12 of this
Form 10-K.
|
|
Item 6.
|
Selected
Financial Data
|
The Selected Financial Data table is set forth under
Part II, Item 8 of this
Form 10-K.
34
Introduction
The Goldman Sachs Group, Inc. (Group Inc.) is a leading
global investment banking, securities and investment management
firm that provides a wide range of financial services to a
substantial and diversified client base that includes
corporations, financial institutions, governments and
high-net-worth
individuals. Founded in 1869, the firm is headquartered in New
York and maintains offices in all major financial centers around
the world.
Over the past year, our Business Standards Committee performed
an extensive review of our business and delivered
recommendations designed to ensure that our business standards
and practices are of the highest quality, that they meet or
exceed the expectations of our clients, regulators and other
stakeholders, and that they contribute to overall financial
stability and economic opportunity. These recommendations have
been approved by our senior management and the Board of
Directors of Group Inc. (Board) and implementation has
already begun. In the fourth quarter of 2010, consistent with
managements view of the firms activities and the
recommendations of our Business Standards Committee, we
reorganized our three previous business segments into four new
business segments: Investment Banking, Institutional Client
Services, Investing & Lending and Investment
Management. Prior periods are presented on a comparable basis.
See Results of Operations below for further
information about our business segments.
When we use the terms Goldman Sachs, the
firm, we, us and our,
we mean Group Inc., a Delaware corporation, and its
consolidated subsidiaries. References to this
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2010.
All references to 2010, 2009 and 2008, unless specifically
stated otherwise, refer to our fiscal years ended, or the dates,
as the context requires, December 31, 2010,
December 31, 2009 and November 28, 2008,
respectively. Any reference to a future year refers to a fiscal
year ending on
December 31 of that year. All references to
December 2008, unless specifically stated otherwise, refer
to our fiscal one month ended, or the date, as the context
requires, December 26, 2008. Certain reclassifications
have been made to previously reported amounts to conform to the
current presentation.
In this discussion and analysis of our financial condition and
results of operations, we have included information that may
constitute forward-looking statements within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts, but instead represent only
our beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. This
information includes statements other than historical
information or statements of current condition and may relate to
our future plans and objectives and results, among other things,
and may also include statements about the objectives and
effectiveness of our risk management and liquidity policies,
statements about trends in or growth opportunities for our
businesses, statements about our future status, activities or
reporting under U.S. or
non-U.S. banking
and financial regulation, and statements about our investment
banking transaction backlog. By identifying these statements for
you in this manner, we are alerting you to the possibility that
our actual results and financial condition may differ, possibly
materially, from the anticipated results and financial condition
indicated in these forward-looking statements. Important factors
that could cause our actual results and financial condition to
differ from those indicated in these forward-looking statements
include, among others, those discussed below under Certain
Risk Factors That May Affect Our Businesses as well as
Risk Factors in Part I, Item 1A of this
Form 10-K
and Cautionary Statement Pursuant to the U.S. Private
Securities Litigation Reform Act of 1995 in Part I,
Item 1 of this
Form 10-K.
36
Executive
Overview
Our diluted earnings per common share were $13.18 for the year
ended December 2010, compared with $22.13 for the year
ended December 2009. Return on average common
shareholders equity
(ROE) 1
was 11.5% for 2010, compared with 22.5% for 2009. Excluding the
impact of the $465 million U.K. bank payroll tax, the
$550 million SEC settlement and the $305 million
impairment of our New York Stock Exchange (NYSE) Designated
Market Maker (DMM) rights, diluted earnings per common
share were
$15.22 2
and ROE was
13.1% 2
for 2010.
Book value per common share increased by approximately 10% to
$128.72 and tangible book value per common
share 3
increased by approximately 9% to $118.63 compared with the end
of 2009. Under Basel 1, our Tier 1 capital
ratio 4
was 16.0% and our Tier 1 common
ratio 4
was 13.3% as of December 2010. Our total assets were
$911 billion as of December 2010, 7% higher compared
with the end of 2009.
The firm generated net revenues of $39.16 billion and net
earnings of $8.35 billion for 2010, despite a challenging
operating environment. These results reflected significantly
lower net revenues in Institutional Client Services and slightly
lower net revenues in Investment Banking compared with 2009.
These decreases were partially offset by significantly higher
net revenues in Investing & Lending and higher net
revenues in Investment Management. The results of each of our
business segments are discussed below.
Institutional
Client Services
The decrease in Institutional Client Services reflected
significantly lower net revenues in Fixed Income, Currency and
Commodities Client Execution and, to a lesser extent, Equities.
During 2010, Fixed Income, Currency and Commodities Client
Execution operated in a challenging environment characterized by
lower client activity levels, which reflected broad market
concerns including European sovereign debt risk and uncertainty
over regulatory reform, as well as tighter bid/offer spreads.
The decrease in net revenues compared with a particularly strong
2009 primarily reflected significantly lower results in interest
rate products, credit products, commodities and, to a lesser
extent, currencies. These decreases were partially offset by
higher net revenues in mortgages.
The decline in Equities compared with 2009 primarily reflected
significantly lower net revenues in equities client execution,
principally due to significantly lower results in derivatives
and shares. Commissions and fees were also lower than 2009,
primarily reflecting lower client activity levels. In addition,
securities services net revenues were significantly lower
compared with 2009, primarily reflecting tighter securities
lending spreads, principally due to the impact of changes in the
composition of customer balances, partially offset by the impact
of higher average customer balances. During 2010, although
equity markets were volatile during the first half of the year,
equity prices generally improved and volatility levels declined
in the second half of the year.
1. See Results of Operations Financial
Overview below for further information about our
calculation of ROE.
2. We believe that presenting our results excluding the
impact of the U.K. bank payroll tax, the SEC settlement and the
NYSE DMM rights impairment is meaningful, as excluding these
items increases the comparability of
period-to-period
results. See Results of Operations Financial
Overview below for further information about our
calculation of diluted earnings per common share and ROE
excluding the impact of these items.
3. We believe that tangible book value per common share is
meaningful because it is one of the measures that we and
investors use to assess capital adequacy. See Equity
Capital Other Capital Metrics below for
further information about our calculation of tangible book value
per common share.
4. See Equity Capital Consolidated
Regulatory Capital Ratios below for further information
about our Tier 1 capital ratio and Tier 1 common ratio.
37
Investment
Banking
The decrease in Investment Banking reflected lower net revenues
in our Underwriting business, partially offset by higher net
revenues in Financial Advisory. The decline in Underwriting
reflected lower net revenues in equity underwriting, principally
due to a decline in client activity in comparison to 2009, which
included significant capital-raising activity by financial
institution clients. Net revenues in debt underwriting were
essentially unchanged compared with 2009. The increase in
Financial Advisory primarily reflected an increase in client
activity.
Investing &
Lending
During 2010, an increase in global equity markets and tighter
credit spreads provided a favorable backdrop for our
Investing & Lending business. Results in
Investing & Lending for 2010 primarily reflected a
gain of $747 million from our investment in the ordinary
shares of Industrial and Commercial Bank of China Limited
(ICBC), a net gain of $2.69 billion from other equity
securities and a net gain of $2.60 billion from debt
securities and loans.
Investment
Management
The increase in Investment Management primarily reflected higher
incentive fees across our alternative investment products.
Management and other fees also increased, reflecting favorable
changes in the mix of assets under management, as well as the
impact of appreciation in the value of client assets. During
2010, assets under management decreased 4% to $840 billion,
primarily reflecting outflows in money market assets, consistent
with industry trends.
Our business, by its nature, does not produce predictable
earnings. Our results in any given period can be materially
affected by conditions in global financial markets, economic
conditions generally and other factors. For a further discussion
of the factors that may affect our future operating results, see
Certain Risk Factors That May Affect Our Businesses
below as well as Risk Factors in Part I,
Item 1A of this
Form 10-K.
Business
Environment
Global economic conditions generally improved in 2010, as real
gross domestic product (GDP) grew in most major economies
following declines in 2009, and growth in emerging markets was
strong. However, certain unfavorable conditions emerged during
the second quarter of 2010 that made the environment more
challenging for our businesses, including broad market concerns
over European sovereign debt risk and uncertainty regarding
financial regulatory reform, sharply higher equity volatility
levels, lower global equity prices and wider corporate credit
spreads. During the second half of 2010, some of these
conditions reversed, as equity volatility levels decreased,
global equity prices generally recovered and corporate credit
spreads narrowed. In addition, the U.S. Federal Reserve
announced quantitative easing measures during the fourth quarter
of 2010 in order to stimulate economic growth and protect
against the risk of deflation.
Industry-wide
announced mergers and acquisitions volumes increased, while
industry-wide
debt offerings volumes decreased compared with 2009. A
significant increase in initial public offerings volumes
compared with 2009 offset declines in common stock follow-on
offerings and convertible offerings volumes, as 2009 included
significant capital-raising activity by financial institutions.
For a further discussion of how market conditions affect our
businesses, see Certain Risk Factors That May Affect Our
Businesses below as well as Risk Factors in
Part I, Item 1A of this
Form 10-K.
Global
The global economy strengthened during 2010, as real GDP
increased in most major economies and economic growth in
emerging markets accelerated. The global recovery largely
reflected an increase in business investment, following a
significant decline in 2009. In addition, international trade
grew strongly in 2010. Unemployment levels generally stabilized,
although the rate of unemployment remained elevated in some
economies. During 2010, the U.S. Federal Reserve, the
European Central Bank and the Bank of England left interest
rates unchanged, while the Bank of Japan reduced its target
overnight call rate and the Peoples Bank of China
increased its
one-year
benchmark lending rate. The price of crude oil increased
significantly during 2010. The U.S. dollar strengthened
against the Euro and the British pound, but weakened against the
Japanese yen.
38
United
States
In the United States, real GDP increased by an estimated 2.8% in
2010, compared with a decline of 2.6% in 2009. Growth was
primarily supported by improved business investment spending, as
well as an increase in federal government spending. In addition,
consumer spending and business and consumer confidence improved
during the year. However, residential investment remained weak.
Measures of core inflation decreased during the year, reflecting
high levels of unemployment and significant excess production
capacity, which caused downward pressure on wages and prices.
The U.S. Federal Reserve maintained its federal funds rate
at a target range of zero to 0.25% during the year. In addition,
the U.S. Federal Reserve announced quantitative easing
measures during the fourth quarter of 2010, including its
intention to purchase significant amounts of U.S. Treasury
debt. The yield on the
10-year
U.S. Treasury note fell by 55 basis points to 3.30% during
2010. The NASDAQ Composite Index, the S&P 500 Index and the
Dow Jones Industrial Average ended the year higher by 17%, 13%
and 11%, respectively.
Europe
Real GDP in the Eurozone economies increased by an estimated
1.7% in 2010, compared with a decline of 4.0% in 2009. Growth
primarily reflected an increase in consumer and government
expenditure, as well as the rebuilding of inventories. Exports
and imports increased significantly, although the contribution
from net trade was not significant. Business investment was weak
for the year, but showed signs of recovery in the second half of
the year, and surveys of business and consumer confidence
improved. However, economic growth in certain Eurozone economies
continued to be weighed down by fiscal challenges and banking
sector concerns. In addition, concerns about sovereign debt risk
in certain Eurozone economies intensified, contributing to
higher volatility and funding pressures. The European Central
Bank and certain governments in the Eurozone took a range of
policy measures to address these issues. Measures of core
inflation remained low and the European Central Bank maintained
its main refinancing operations rate at 1.00% during the year.
In the United Kingdom, real GDP increased by an estimated 1.3%
for 2010, compared with a decrease of 4.9% in 2009. The Bank of
England maintained its official bank rate at 0.50% during the
year.
Long-term
government bond yields in both the Eurozone and the U.K.
decreased during 2010. The Euro and British pound depreciated by
7% and 3%, respectively, against the U.S. dollar during
2010. The DAX
Index and the FTSE 100 Index increased by 16% and 9%,
respectively, while the Euro Stoxx 50 Index and the CAC 40 Index
declined by 6% and 3%, respectively, compared with the end of
2009.
Asia
In Japan, real GDP increased by an estimated 3.9% in 2010,
compared with a decrease of 6.3% in 2009. Growth primarily
reflected a significant increase in exports, as well as an
increase in consumer spending. Measures of inflation remained
negative during 2010. The Bank of Japan reduced its target
overnight call rate from 0.10% to a range of zero to 0.10% and
the yield on
10-year
Japanese government bonds fell by 17 basis points to 1.13%. The
Japanese yen appreciated by 13% against the U.S. dollar.
The Nikkei 225 Index decreased 3% during the year. In China,
real GDP growth was an estimated 10.3% in 2010, up from 9.2% in
2009. Economic growth was
broad-based,
with significant increases in exports, retail spending and
business investment. Measures of inflation increased during
2010, reflecting continued growth in demand. The Peoples
Bank of China raised its
one-year
benchmark lending rate by 50 basis points during the year to
5.81% and the Chinese yuan appreciated by 3% against the
U.S. dollar. The Shanghai Composite Index decreased by 14%
during 2010, partially due to concerns over the effect of
tighter policy on economic growth. In India, real GDP growth was
an estimated 8.5% in 2010, up from 7.5% in 2009. Growth
primarily reflected an increase in domestic demand, partially
offset by the impact of lower net exports. The rate of wholesale
inflation increased during the year. The Indian rupee
appreciated by 3% against the U.S. dollar. Equity markets
in Hong Kong ended the year higher and equity markets in India
and South Korea increased significantly during 2010.
Other
Markets
In Brazil, real GDP increased by an estimated 7.6% in 2010,
compared with a decline of 0.6% in 2009. The increase in real
GDP primarily reflected an increase in domestic demand. The
Brazilian real strengthened against the U.S. dollar.
Brazilian equity prices ended the year slightly higher compared
with the end of 2009. In Russia, real GDP increased by an
estimated 4.0% in 2010, compared with a decline of 7.9% in 2009.
Rising oil prices led to a significant improvement in investment
growth, following a decline in 2009. The Russian ruble was
essentially unchanged against the U.S. dollar and Russian
equity prices ended the year significantly higher compared with
2009.
39
Critical
Accounting Policies
Fair
Value
Fair Value Hierarchy. Financial instruments
owned, at fair value and Financial instruments sold, but not yet
purchased, at fair value (i.e., inventory), as well as
certain other financial assets and financial liabilities, are
reflected in our consolidated statements of financial condition
at fair value
(i.e., marked-to-market),
with related gains or losses generally recognized in our
consolidated statements of earnings. The use of fair value to
measure financial instruments is fundamental to our risk
management practices and is our most critical accounting policy.
The fair value of a financial instrument is the amount that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. In determining fair value, the
hierarchy under U.S. generally accepted accounting
principles (U.S. GAAP) gives (i) the highest priority
to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 inputs), (ii) the next
priority to inputs other than level 1 inputs that are
observable either directly or indirectly (level 2 inputs),
and (iii) the lowest priority to inputs that cannot be
observed in market activity (level 3 inputs). Assets and
liabilities are classified in their entirety based on the lowest
level of input that is significant to their fair value
measurement.
The fair values for substantially all of our financial assets
and financial liabilities, including derivatives, are based on
observable prices and inputs and are classified in levels 1
and 2 of the hierarchy. Certain level 2 financial
instruments may require appropriate discounts
(i.e., valuation adjustments) for factors such as:
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transfer restrictions;
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the credit quality of a counterparty or the firm; and
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other premiums and discounts that a market participant would
require to arrive at fair value.
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Valuation adjustments are generally based on market evidence.
Instruments categorized within level 3 of the fair value
hierarchy, which represent approximately 5% of the firms
total assets, require one or more significant inputs that are
not observable. Absent evidence to the contrary, instruments
classified within level 3 of the fair value hierarchy are
initially valued at transaction price, which is considered to be
the best initial estimate of fair value. Subsequent to the
transaction date, we use other methodologies to determine fair
value, which vary based on the type of instrument. Estimating
the fair value of level 3 financial instruments may require
judgments to be made. These judgments include:
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determining the appropriate valuation methodology
and/or model
for each type of level 3 financial instrument;
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determining model inputs based on an evaluation of all relevant
empirical market data, including prices evidenced by market
transactions, interest rates, credit spreads, volatilities and
correlations; and
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determining appropriate valuation adjustments related to
illiquidity or counterparty credit quality.
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Regardless of the methodology, valuation inputs and assumptions
are only changed when corroborated by substantive evidence.
Controls Over Valuation of Financial
Instruments. Our control infrastructure is
independent of the revenue-producing units and is fundamental to
ensuring that all of our financial instruments are appropriately
valued at
market-clearing
levels. In particular, our independent price verification
process is critical to ensuring that financial instruments are
properly valued.
40
Price Verification. The objective of price
verification is to have an informed and independent opinion with
regard to the valuation of financial instruments under review.
Instruments that have one or more significant inputs which
cannot be corroborated by external market data are classified
within level 3 of the fair value hierarchy.
In situations where there is a question about a valuation, the
ultimate valuation is determined by senior managers in control
and support functions that are independent of the
revenue-producing units (independent control and support
functions). Price verification strategies utilized by our
independent control and support functions include:
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Trade Comparison. Analysis of trade data (both
internal and external where available) is used to determine the
most relevant pricing inputs and valuations.
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External Price Comparison. Valuations and
prices are compared to pricing data obtained from third parties
(e.g., broker or dealers, MarkIt, Bloomberg, IDC, TRACE).
Data obtained from various sources is compared to ensure
consistency and validity. When broker or dealer quotations or
third-party
pricing vendors are used for valuation or price verification,
greater priority is generally given to executable quotations.
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Calibration to Market Comparables.
Market-based
transactions are used to corroborate the valuation of positions
with similar characteristics, risks and components.
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Relative Value
Analyses. Market-based
transactions are analyzed to determine the similarity, measured
in terms of risk, liquidity and return, of one instrument
relative to another, or for a given instrument, of one maturity
relative to another.
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Collateral Analyses. Margin disputes on
derivatives are examined and investigated to determine the
impact, if any, on our valuations.
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Execution of trades. Where appropriate,
trading desks are instructed to execute trades in order to
provide evidence of
market-clearing
levels.
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Backtesting. Valuations are corroborated by
comparison to values realized upon sales.
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See Notes 5 through 8 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about fair value measurements.
Review of Net Revenues. Independent control
and support functions ensure adherence to our pricing policy
through a combination of daily procedures, one of which is the
process of validating and understanding results by attributing
and explaining net revenues by the underlying factors. Through
this process we independently validate net revenues, identify
and resolve potential fair value or trade booking issues on a
timely basis and ensure that risks are being properly
categorized and quantified.
Review of Valuation Models. Quantitative
professionals within our Market Risk Management department
(Market Risk Management) perform an independent model approval
process. This process incorporates a review of a diverse set of
model and trade parameters across a broad range of values
(including extreme
and/or
improbable conditions) in order to critically evaluate:
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a models suitability for valuation and risk management of
a particular instrument type;
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the models accuracy in reflecting the characteristics of
the related product and its significant risks;
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the suitability and properties of the numerical algorithms
incorporated in the model;
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the models consistency with models for similar products;
and
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the models sensitivity to input parameters and assumptions.
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New or changed models are reviewed and approved. Models are
evaluated and re-approved annually to assess the impact of any
changes in the product or market and any market developments in
pricing theories.
See Market Risk Management and Credit Risk
Management for a further discussion of how we manage the
risks inherent in our businesses.
41
Goodwill and
Identifiable Intangible Assets
Goodwill. Goodwill is the cost of acquired
companies in excess of the fair value of net assets, including
identifiable intangible assets, at the acquisition date. The
reorganization of the firms segments in 2010 resulted in
the reallocation of assets, including goodwill, and liabilities
across our reporting units. See Notes 13 and 27 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for further information on segments.
We test the goodwill in each of our reporting units for
impairment at least annually, by comparing the estimated fair
value of each reporting unit with its estimated net book value.
We derive the fair value based on valuation techniques we
believe market participants would use (i.e., observable
price-to-earnings
multiples and
price-to-book
multiples). We derive the net book value by estimating the
amount of shareholders equity required to support the
activities of each reporting unit. Estimating the fair value of
our reporting units requires management to make judgments.
Critical inputs include (i) projected earnings,
(ii) estimated
long-term
growth rates and (iii) cost of equity. Our last annual
impairment test was performed during our 2010 fourth quarter and
no impairment was identified. See Note 13 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for the carrying value of our goodwill by operating segment.
Identifiable Intangible Assets. We amortize
our identifiable intangible assets over their estimated lives
or, in the case of insurance contracts, in proportion to
estimated gross profits or premium revenues. Identifiable
intangible assets are tested for impairment whenever events or
changes in circumstances suggest that an assets or asset
groups carrying value may not be fully recoverable.
An impairment loss, generally calculated as the difference
between the estimated fair value and the carrying value of an
asset or asset group, is recognized if the sum of the estimated
undiscounted cash flows relating to the asset or asset group is
less than the corresponding carrying value. See Note 13 to
the consolidated financial statements in Part II,
Item 8 of this
Form 10-K
for the carrying value and estimated remaining lives of our
identifiable intangible assets by major asset class and the
carrying value of our identifiable intangible assets by
operating segment.
A prolonged period of market weakness could adversely impact our
businesses and impair the value of our identifiable intangible
assets. In addition, certain events could indicate a potential
impairment of our identifiable intangible assets, including
(i) changes in trading volumes or market structure that
could adversely affect our NYSE DMM business (see discussion
below), (ii) an adverse action or assessment by a
regulator, (iii) adverse actual experience on the contracts
in our variable annuity and life insurance business,
(iv) decreases in cash receipts from television broadcast
royalties or (v) decreases in revenues from
commodity-related customer contracts and relationships.
Management judgment is required to evaluate whether indications
of potential impairment have occurred, and to test intangibles
for impairment if required.
NYSE DMM Rights. During the fourth quarter of
2010, as a result of continuing weak operating results in our
NYSE DMM business, we tested our NYSE DMM rights for impairment
in accordance with Financial Accounting Standards Board
Accounting Standards Codification (ASC) 360. Because the
carrying value of our NYSE DMM rights exceeded the projected
undiscounted cash flows over the estimated remaining useful life
of our NYSE DMM rights, we determined that the rights were
impaired. We recorded an impairment loss of $305 million,
which was included in our Institutional Client Services segment
in the fourth quarter of 2010. This impairment loss represented
the excess of the carrying value of our NYSE DMM rights over
their estimated fair value. We estimated this fair value, which
is a level 3 measurement, using a relative value analysis
which incorporated a comparison to another DMM portfolio that
was transacted between third parties. As of December 2010,
the carrying value of our NYSE DMM rights was $76 million.
43
Use of
Estimates
The use of generally accepted accounting principles requires
management to make certain estimates and assumptions. In
addition to the estimates we make in connection with fair value
measurements and the accounting for goodwill and identifiable
intangible assets, the use of estimates and assumptions is also
important in determining provisions for potential losses that
may arise from litigation and regulatory proceedings and tax
audits.
We estimate and provide for potential losses that may arise out
of litigation and regulatory proceedings to the extent that such
losses are probable and can be reasonably estimated. In
accounting for income taxes, we estimate and provide for
potential liabilities that may arise out of tax audits to the
extent that uncertain tax positions fail to meet the recognition
standard under ASC 740. See Note 26 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
for further information about accounting for income taxes.
Significant judgment is required in making these estimates and
our final liabilities may ultimately be materially different.
Our total estimated liability in respect of litigation and
regulatory proceedings is determined on a
case-by-case
basis and represents an estimate of probable losses after
considering, among other factors, the progress of each case or
proceeding, our experience and the experience of others in
similar cases or proceedings, and the opinions and views of
legal counsel. See Note 30 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for information on certain judicial, regulatory and legal
proceedings.
Results of
Operations
The composition of our net revenues has varied over time as
financial markets and the scope of our operations have changed.
The composition of net revenues can also vary over the shorter
term due to fluctuations in U.S. and global economic and
market conditions. See Certain Risk Factors That May
Affect Our Businesses below and Risk Factors
in Part I, Item 1A of this
Form 10-K
for a further discussion of the impact of economic and market
conditions on our results of operations.
44
One Month Ended December 2008. Net
revenues were $183 million for the month of
December 2008. These results reflected a continuation of
the difficult operating environment experienced during our
fiscal fourth quarter of 2008, particularly across global equity
and credit markets.
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Investing &
Lending. Investing & Lending
recorded negative net revenues of $1.63 billion for the
month of December 2008. During the month of December,
continued weakness in global equity and credit markets
negatively impacted results in our Investing & Lending
business. Results for December 2008 primarily reflected net
losses of $1.08 billion from equity securities (excluding
ICBC) and $856 million from debt securities and loans,
partially offset by a gain of $228 million from our
investment in the ordinary shares of ICBC.
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Institutional Client Services. Net revenues in
Institutional Client Services were $1.33 billion for the
month of December 2008. During the month of December,
market opportunities were favorable for certain of our Fixed
Income, Currency and Commodities Client Execution product areas,
as interest rate products, commodities and currencies each
produced strong results. However, the environment for Fixed
Income, Currency and Commodities Client Execution also reflected
continued weakness in the broader credit markets, as results in
credit products included a loss of approximately $1 billion
(net of hedges) related to
non-investment-grade
credit origination activities, primarily reflecting a writedown
of approximately $850 million related to the bridge and
bank loan facilities held in LyondellBasell Finance Company. In
addition, results in mortgages included a loss of approximately
$400 million on commercial
mortgage-related
products.
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Results in Equities reflected lower commission volumes, as well
as lower client execution net revenues from derivatives compared
with average monthly levels in 2008. Net revenues in securities
services were also lower compared with average monthly levels in
2008, reflecting a decline in total average customer balances,
partially offset by the impact of favorable changes in the
composition of securities lending balances. During the month of
December, Equities operated in an environment characterized by
continued weakness in global equity markets and continued high
levels of volatility.
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Investment Banking. Net revenues in Investment
Banking were $138 million for the month of
December 2008 and reflected very low levels of activity in
industry-wide
completed mergers and acquisitions, as well as continued
challenging market conditions across equity and leveraged
finance markets, which adversely affected our Underwriting
business.
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Investment Management. Net revenues in
Investment Management were $343 million for the month of
December 2008. During the calendar month of December,
assets under management increased $19 billion to
$798 billion, due to $13 billion of market
appreciation, primarily in fixed income and equity assets, and
$6 billion of net inflows. Net inflows reflected inflows in
money market assets, partially offset by outflows in fixed
income, equity and alternative investment assets.
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Net Interest
Income
2010 versus 2009. Net revenues for 2010
included net interest income of $5.50 billion, 26% lower
than 2009. The decrease compared with 2009 was primarily due to
lower average fixed income assets, most notably
U.S. federal agency obligations, higher interest expense
related to our
long-term
borrowings and tighter securities lending spreads.
2009 versus 2008. Net revenues for 2009
included net interest income of $7.41 billion, 73% higher
than 2008. The increase compared with 2008 was primarily due to
lower interest expense on our
long-term
and
short-term
borrowings, partially offset by tighter spreads on
collateralized financing activity, as well as lower average
customer margin lending balances and financial instruments
owned, at fair value.
One Month Ended December 2008. Net
revenues included net interest income of $685 million for
the month of December 2008. The increase compared with
average monthly net interest income in 2008 was primarily due to
higher average fixed income assets, most notably
U.S. federal agency obligations.
Operating
Expenses
Our operating expenses are primarily influenced by compensation,
headcount and levels of business activity. Compensation and
benefits includes salaries, discretionary compensation,
amortization of equity awards and other items such as benefits.
Discretionary compensation is significantly impacted by, among
other factors, the level of net revenues, prevailing labor
markets, business mix, the structure of our
share-based
compensation programs and the external environment.
48
Non-compensation
expenses were $10.43 billion for 2010, 14% higher than
2009. This increase was primarily attributable to the impact of
net provisions for litigation and regulatory proceedings of
$682 million, including $550 million related to the
SEC settlement (see Note 30 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information), and an impairment of our NYSE DMM
rights of $305 million, each during 2010. The remainder of
the increase compared with 2009 generally reflected higher
professional fees, market development expenses and occupancy
expenses. These increases were partially offset by the impact of
significantly higher real estate impairment charges during 2009
related to our consolidated entities held for investment
purposes, as well as higher charitable contributions during
2009. The real estate impairment charges, which were measured
based on discounted cash flow analyses, are included in our
Investing & Lending segment and reflected weakness in
the commercial real estate markets. Charitable contributions
were approximately $420 million during 2010, primarily
including $25 million to The Goldman Sachs Foundation and
$320 million to Goldman Sachs Gives, our
donor-advised
fund. Compensation was reduced to fund the charitable
contribution to Goldman Sachs Gives. The firm asks its
participating managing directors to make recommendations
regarding potential charitable recipients for this contribution.
2009 versus 2008. Operating expenses were
$25.34 billion for 2009, 27% higher than 2008. Compensation
and benefits expenses of $16.19 billion were higher
compared with 2008, due to higher net revenues. Our ratio of
compensation and benefits to net revenues for 2009 was 35.8%,
down from 48.0% (excluding severance costs of approximately
$275 million in the fourth quarter of 2008) for 2008.
Total staff decreased 2% during 2009. Total staff including
consolidated entities held for investment purposes decreased 5%
during 2009.
Non-compensation
expenses were $9.15 billion for 2009, 2% higher than 2008.
The increase compared with 2008 reflected the impact of
charitable contributions of approximately $850 million
during 2009, primarily including $310 million to The
Goldman Sachs Foundation and $500 million to Goldman Sachs
Gives. Compensation was reduced to fund the charitable
contribution to Goldman Sachs Gives. The firm asks its
participating managing directors to make recommendations
regarding potential charitable recipients for this contribution.
Depreciation and amortization expenses also increased compared
with 2008 and included real estate impairment charges of
approximately $600 million related to consolidated entities
held for investment purposes during 2009. The real estate
impairment charges, which were measured based on discounted cash
flow analyses, are included in our Investing & Lending
segment and reflected weakness in the commercial real estate
markets, particularly in Asia. These increases were partially
offset by the impact of lower brokerage, clearing, exchange and
distribution fees, principally reflecting lower transaction
volumes in Equities, and the impact of reduced staff levels and
expense reduction initiatives during 2009.
One Month Ended December 2008. Operating
expenses were $1.44 billion for the month of
December 2008. Compensation and benefits expenses were
$744 million. No discretionary compensation was accrued for
the month of December. Total staff decreased 3% compared with
the end of fiscal year 2008. Total staff including consolidated
entities held for investment purposes decreased 3% compared with
the end of fiscal year 2008.
Non-compensation
expenses of $697 million for the month of
December 2008 were generally lower than average monthly
levels in 2008, primarily reflecting lower levels of business
activity. Total
non-compensation
expenses included $68 million of net provisions for a
number of litigation and regulatory proceedings.
50
Provision for
Taxes
The effective income tax rate for 2010, excluding the impact of
the $465 million U.K. bank payroll tax and the
$550 million SEC settlement, substantially all of which is
non-deductible,
was
32.7% 1,
essentially unchanged from 2009. Including the impact of these
amounts, the effective income tax rate was 35.2% for 2010.
The effective income tax rate for 2009 was 32.5%, compared with
approximately 1% for 2008. The increase in the effective income
tax rate for 2009 compared with 2008 was primarily due to
changes in the geographic earnings mix and a decrease in
permanent benefits as a percentage of higher earnings. The
effective income tax rate for 2009 represented a return to a
geographic earnings mix that is more in line with our historic
earnings mix. During 2008, we incurred losses in various
U.S. and
non-U.S. entities
whose income/(losses) are subject to tax in the U.S. We
also had profitable operations in certain
non-U.S. entities
that are taxed at their applicable local tax rates, which are
generally lower than the U.S. rate.
The effective income tax rate for the month of
December 2008 was 38.0%.
Effective January 1, 2010, the rules related to the
deferral of U.S. tax on certain
non-repatriated
active financing income expired. During December 2010, the
rules were extended retroactively through
December 31, 2011. If these rules are not extended
beyond December 2011, the expiration may materially
increase our effective income tax rate beginning in 2012.
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We believe that presenting our effective income tax rate
excluding the impact of the U.K. bank payroll tax and the SEC
settlement, substantially all of which is
non-deductible,
is meaningful, as excluding these items increases the
comparability of
period-to-period
results. The table below presents the calculation of the
effective income tax rate excluding the impact of these amounts.
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Year Ended December 2010
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Pre-tax
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Provision
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Effective income
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$ in millions
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earnings
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for taxes
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tax rate
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As reported
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$
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12,892
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$
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4,538
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35.2%
|
|
|
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of the U.K. bank payroll tax
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
Impact of the SEC settlement
|
|
|
550
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$
|
13,907
|
|
|
$
|
4,544
|
|
|
|
32.7%
|
|
|
|
|
|
51
Segment Operating
Results
The table below presents the net revenues, operating expenses
and pre-tax
earnings/(loss) of our segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Month
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
December
|
|
|
December
|
|
|
November
|
|
|
December
|
|
|
|
in millions
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Investment Banking
|
|
Net revenues
|
|
$
|
4,810
|
|
|
$
|
4,984
|
|
|
$
|
5,453
|
|
|
$
|
138
|
|
|
|
|
|
Operating expenses
|
|
|
3,511
|
|
|
|
3,482
|
|
|
|
3,269
|
|
|
|
170
|
|
|
|
|
|
|
|
Pre-tax
earnings/(loss)
|
|
$
|
1,299
|
|
|
$
|
1,502
|
|
|
$
|
2,184
|
|
|
$
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional Client Services
|
|
Net revenues
|
|
$
|
21,796
|
|
|
$
|
32,719
|
|
|
$
|
22,345
|
|
|
$
|
1,332
|
|
|
|
|
|
Operating expenses
|
|
|
14,291
|
|
|
|
13,691
|
|
|
|
10,294
|
|
|
|
736
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
$
|
7,505
|
|
|
$
|
19,028
|
|
|
$
|
12,051
|
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing & Lending
|
|
Net revenues
|
|
$
|
7,541
|
|
|
$
|
2,863
|
|
|
$
|
(10,821
|
)
|
|
$
|
(1,630
|
)
|
|
|
|
|
Operating expenses
|
|
|
3,361
|
|
|
|
3,523
|
|
|
|
2,719
|
|
|
|
204
|
|
|
|
|
|
|
|
Pre-tax
earnings/(loss)
|
|
$
|
4,180
|
|
|
$
|
(660
|
)
|
|
$
|
(13,540
|
)
|
|
$
|
(1,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Management
|
|
Net revenues
|
|
$
|
5,014
|
|
|
$
|
4,607
|
|
|
$
|
5,245
|
|
|
$
|
343
|
|
|
|
|
|
Operating expenses
|
|
|
4,051
|
|
|
|
3,673
|
|
|
|
3,528
|
|
|
|
263
|
|
|
|
|
|
|
|
Pre-tax
earnings
|
|
$
|
963
|
|
|
$
|
934
|
|
|
$
|
1,717
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Net revenues
|
|
$
|
39,161
|
|
|
$
|
45,173
|
|
|
$
|
22,222
|
|
|
$
|
183
|
|
|
|
|
|
Operating
expenses 1
|
|
|
26,269
|
|
|
|
25,344
|
|
|
|
19,886
|
|
|
|
1,441
|
|
|
|
|
|
|
|
Pre-tax
earnings/(loss)
|
|
$
|
12,892
|
|
|
$
|
19,829
|
|
|
$
|
2,336
|
|
|
$
|
(1,258
|
)
|
|
|
|
|
|
|
1. |
Includes the following expenses that have not been allocated to
our segments: (i) charitable contributions of
$345 million and $810 million for the years ended
December 2010 and December 2009, respectively;
(ii) net provisions for a number of litigation and
regulatory proceedings of $682 million, $104 million,
$(4) million and $68 million for the years ended
December 2010, December 2009 and November 2008
and one month ended December 2008, respectively; and
(iii) real estate-related exit costs of $28 million,
$61 million and $80 million for the years ended
December 2010, December 2009 and November 2008,
respectively.
|
Net revenues in our segments include allocations of interest
income and interest expense to specific securities, commodities
and other positions in relation to the cash generated by, or
funding requirements of, such underlying positions. See
Note 27 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information about our business segments.
The cost drivers of Goldman Sachs taken as a
whole compensation,
headcount and levels of business activity are
broadly similar in each of our business segments. Compensation
and benefits expenses within our segments reflect, among other
factors, the overall performance of Goldman Sachs as well as the
performance of individual businesses. Consequently,
pre-tax
margins in one segment of our business may be significantly
affected by the performance of our other business segments. A
discussion of segment operating results follows.
52
Investment
Banking
Our Investment Banking segment is comprised of:
Financial Advisory. Includes advisory
assignments with respect to mergers and acquisitions,
divestitures, corporate defense activities, risk management,
restructurings and
spin-offs.
Underwriting. Includes public offerings and
private placements of a wide range of securities, loans and
other financial instruments, and derivative transactions
directly related to these client underwriting activities.
The table below presents the operating results of our Investment
Banking segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
One Month
Ended
|
|
|
December
|
|
|
December
|
|
|
November
|
|
|
December
|
|
|
|
in millions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Financial Advisory
|
|
$
|
2,062
|
|
|
$
|
1,897
|
|
|
$
|
2,663
|
|
|
$
|
73
|
|
|
|
Equity underwriting
|
|
|
1,462
|
|
|
|
1,797
|
|
|
|
1,415
|
|
|
|
19
|
|
|
|
Debt underwriting
|
|
|
1,286
|
|
|
|
1,290
|
|
|
|
1,375
|
|
|
|
46
|
|
|
|
|
|
Total Underwriting
|
|
|
2,748
|
|
|
|
3,087
|
|
|
|
2,790
|
|
|
|
65
|
|
|
|
|
|
Total net revenues
|
|
|
4,810
|
|
|
|
4,984
|
|
|
|
5,453
|
|
|
|
138
|
|
|
|
Operating expenses
|
|
|
3,511
|
|
|
|
3,482
|
|
|
|
3,269
|
|
|
|
170
|
|
|
|
|
|
Pre-tax
earnings/(loss)
|
|
$
|
1,299
|
|
|
$
|
1,502
|
|
|
$
|
2,184
|
|
|
$
|
(32
|
)
|
|
|
|
|
The table below presents our financial advisory and underwriting
transaction
volumes. 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
One Month
Ended
|
|
|
December
|
|
|
December
|
|
|
November
|
|
|
December
|
|
|
|
in billions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Announced mergers and acquisitions
|
|
$
|
542
|
|
|
$
|
533
|
|
|
$
|
914
|
|
|
$
|
18
|
|
|
|
Completed mergers and acquisitions
|
|
|
425
|
|
|
|
591
|
|
|
|
874
|
|
|
|
12
|
|
|
|
Equity and
equity-related
offerings 2
|
|
|
66
|
|
|
|
83
|
|
|
|
64
|
|
|
|
2
|
|
|
|
Debt
offerings 3
|
|
|
229
|
|
|
|
256
|
|
|
|
165
|
|
|
|
19
|
|
|
|
|
|
|
|
1.
|
Source: Thomson Reuters. Announced and completed mergers and
acquisitions volumes are based on full credit to each of the
advisors in a transaction. Equity and
equity-related
offerings and debt offerings are based on full credit for single
book managers and equal credit for joint book managers.
Transaction volumes may not be indicative of net revenues in a
given period. In addition, transaction volumes for prior periods
may vary from amounts previously reported due to the subsequent
withdrawal or a change in the value of a transaction.
|
|
2.
|
Includes Rule 144A and public common stock offerings,
convertible offerings and rights offerings.
|
|
3.
|
Includes
non-convertible
preferred stock,
mortgage-backed
securities,
asset-backed
securities and taxable municipal debt. Includes publicly
registered and Rule 144A issues. Excludes leveraged loans.
|
2010 versus 2009. Net revenues in Investment
Banking were $4.81 billion for 2010, 3% lower than 2009.
Net revenues in Financial Advisory were $2.06 billion, 9%
higher than 2009, primarily reflecting an increase in client
activity. Net revenues in our Underwriting business were
$2.75 billion, 11% lower than 2009, reflecting lower net
revenues in equity underwriting, principally due to a decline in
client activity in comparison to 2009, which included
significant capital-raising activity by financial institution
clients. Net revenues in debt underwriting were essentially
unchanged compared with 2009.
Our investment banking transaction backlog decreased compared
with the end of 2009. Our investment banking transaction backlog
represents an estimate of our future net revenues from
investment banking transactions where we believe that future
revenue realization is more likely than not. The decrease
compared with the end of 2009 reflected a decline in estimated
net revenues from potential debt and equity underwriting
transactions, primarily related to client mandates to underwrite
leveraged finance transactions and common stock offerings. This
decrease was partially offset by an increase in estimated net
revenues from potential advisory transactions.
Operating expenses were $3.51 billion for 2010, essentially
unchanged from 2009.
Pre-tax
earnings were $1.30 billion in 2010, 14% lower than 2009.
53
2009 versus 2008. Net revenues in Investment
Banking were $4.98 billion for 2009, 9% lower than 2008.
Net revenues in Financial Advisory were $1.90 billion for
2009, 29% lower than 2008, reflecting a decline in
industry-wide
completed mergers and acquisitions. Net revenues in our
Underwriting business were $3.09 billion, 11% higher than
2008, due to higher net revenues in equity underwriting,
primarily reflecting an increase in
industry-wide
equity and
equity-related
offerings, including significant
capital-raising
activity by financial institution clients during 2009. Net
revenues in debt underwriting were lower than 2008, primarily
reflecting significantly lower net revenues from leveraged
finance activity, partially offset by significantly higher net
revenues from
investment-grade
and municipal activity.
Our investment banking transaction backlog increased
significantly during the twelve months ended December 2009.
The increase was primarily due to potential equity and debt
underwriting transactions from client mandates to underwrite
initial public offerings and, to a lesser extent, leveraged
finance transactions, principally due to increased levels of
client activity. The advisory backlog also increased, but was
not a material contributor to the change.
Operating expenses were $3.48 billion for 2009, 7% higher
than 2008, due to increased compensation and benefits expenses.
Pre-tax
earnings were $1.50 billion in 2009, 31% lower than 2008.
One Month Ended December 2008. Net
revenues in Investment Banking were $138 million for the
month of December 2008. Net revenues in Financial Advisory
were $73 million, reflecting very low levels of
industry-wide
completed mergers and acquisitions activity. Net revenues in our
Underwriting business were $65 million, reflecting
continued challenging market conditions across equity and
leveraged finance markets.
Our investment banking transaction backlog decreased during the
one month ended December 2008. The decrease in backlog was
primarily due to a decline in potential advisory transactions,
principally due to a decline in client activity.
Operating expenses were $170 million for the month of
December 2008.
Pre-tax loss
was $32 million for the month of December 2008.
Institutional
Client Services
Our Institutional Client Services segment is comprised of:
Fixed Income, Currency and Commodities Client
Execution. Includes client execution activities
related to making markets in interest rate products, credit
products, mortgages, currencies and commodities.
Equities. Includes client execution activities
related to making markets in equity products, as well as
commissions and fees from executing and clearing institutional
client transactions on major stock, options and futures
exchanges worldwide. Equities also includes our securities
services business, which provides financing, securities lending
and other prime brokerage services to institutional clients,
including hedge funds, mutual funds, pension funds and
foundations, and generates revenues primarily in the form of
interest rate spreads or fees.
The table below presents the operating results of our
Institutional Client Services segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
One Month
Ended
|
|
|
December
|
|
|
December
|
|
|
November
|
|
|
December
|
|
|
|
in millions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Fixed Income, Currency and Commodities Client Execution
|
|
$
|
13,707
|
|
|
$
|
21,883
|
|
|
$
|
9,318
|
|
|
$
|
446
|
|
|
|
Equities client execution
|
|
|
3,231
|
|
|
|
5,237
|
|
|
|
4,950
|
|
|
|
420
|
|
|
|
Commissions and fees
|
|
|
3,426
|
|
|
|
3,680
|
|
|
|
4,826
|
|
|
|
239
|
|
|
|
Securities services
|
|
|
1,432
|
|
|
|
1,919
|
|
|
|
3,251
|
|
|
|
227
|
|
|
|
|
|
Total Equities
|
|
|
8,089
|
|
|
|
10,836
|
|
|
|
13,027
|
|
|
|
886
|
|
|
|
|
|
Total net revenues
|
|
|
21,796
|
|
|
|
32,719
|
|
|
|
22,345
|
|
|
|
1,332
|
|
|
|
Operating expenses
|
|
|
14,291
|
|
|
|
13,691
|
|
|
|
10,294
|
|
|
|
736
|
|
|
|
|
|
Pre-tax
earnings
|
|
$
|
7,505
|
|
|
$
|
19,028
|
|
|
$
|
12,051
|
|
|
$
|
596
|
|
|
|
|
|
54
2010 versus 2009. Net revenues in
Institutional Client Services were $21.80 billion for 2010,
33% lower than 2009.
Net revenues in Fixed Income, Currency and Commodities Client
Execution were $13.71 billion for 2010, 37% lower than a
particularly strong 2009. During 2010, Fixed Income, Currency
and Commodities Client Execution operated in a challenging
environment characterized by lower client activity levels, which
reflected broad market concerns including European sovereign
debt risk and uncertainty over regulatory reform, as well as
tighter bid/offer spreads. The decrease in net revenues compared
with 2009 primarily reflected significantly lower results in
interest rate products, credit products, commodities and, to a
lesser extent, currencies. These decreases were partially offset
by higher net revenues in mortgages, as 2009 included
approximately $1 billion of losses on commercial
mortgage-related
products.
Certain unfavorable conditions emerged during the second quarter
of 2010 that made the environment more challenging for our
businesses, resulting in lower client activity levels. These
conditions included broad market concerns, such as European
sovereign debt risk and uncertainty regarding financial
regulatory reform, sharply higher equity volatility levels,
lower global equity prices and wider corporate credit spreads.
In addition, a more competitive environment drove tighter
bid/offer spreads. During the second half of 2010, some of these
conditions reversed as equity volatility levels decreased,
global equity prices recovered and corporate credit spreads
narrowed. However, lower client activity levels, reflecting
broad market concerns, including European sovereign debt risk
and uncertainty over regulatory reform, continued to negatively
impact our results. If these concerns were to continue over the
long term, net revenues in Fixed Income, Currency and
Commodities Client Execution would likely continue to be
negatively impacted.
Net revenues in Equities were $8.09 billion for 2010, 25%
lower than 2009, primarily reflecting significantly lower net
revenues in equities client execution, principally due to
significantly lower results in derivatives and shares.
Commissions and fees were also lower than 2009, primarily
reflecting lower client activity levels. In addition, securities
services net revenues were significantly lower compared with
2009, primarily reflecting tighter securities lending spreads,
principally due to the impact of changes in the composition of
customer balances, partially offset by the impact of higher
average customer balances. During 2010, although equity markets
were volatile during the first half of the year, equity prices
generally improved and volatility levels declined in the second
half of the year.
Operating expenses were $14.29 billion for 2010, 4% higher
than 2009, due to the impact of the U.K. bank payroll tax, as
well as an impairment of our NYSE DMM rights of
$305 million. These increases were partially offset by
lower compensation and benefits expenses, resulting from lower
levels of discretionary compensation.
Pre-tax
earnings were $7.51 billion in 2010, 61% lower than 2009.
2009 versus 2008. Net revenues in
Institutional Client Services were $32.72 billion for 2009,
46% higher compared with 2008.
Net revenues in Fixed Income, Currency and Commodities Client
Execution were $21.88 billion for 2009, significantly
higher compared with 2008. During 2009, Fixed Income, Currency
and Commodities Client Execution operated in an environment
characterized by strong client-driven activity, particularly in
more liquid products. In addition, asset values generally
improved and corporate credit spreads tightened significantly
for most of the year. The increase in net revenues compared with
2008 reflected particularly strong performances in credit
products, mortgages and interest rate products, which were each
significantly higher than 2008. Net revenues in commodities were
also particularly strong and were higher than 2008, while net
revenues in currencies were strong, but lower than a
particularly strong 2008. During 2009, mortgages included
approximately $1 billion of losses on commercial
mortgage-related
products. Fixed Income, Currency and Commodities Client
Execution results in 2008 included a loss of approximately
$3.1 billion (net of hedges) related to
non-investment-grade
credit origination activities. In addition, results in mortgages
in 2008 included net losses of approximately $900 million
on residential
mortgage-related
products and approximately $600 million on commercial
mortgage-related
products.
Net revenues in Equities were $10.84 billion for 2009, 17%
lower than a particularly strong 2008, reflecting significant
decreases in securities services and commissions and fees. The
decrease in securities services primarily reflected the impact
of lower customer balances, reflecting lower hedge fund industry
assets and reduced leverage. The decrease in commissions and
fees primarily reflected lower average market levels in Europe
and Asia, as well as lower transaction volumes compared with
2008. These decreases were partially offset by strong results in
equities client execution, primarily reflecting higher net
revenues in derivatives and shares. During 2009, Equities
operated in an environment characterized by a significant
increase in global equity prices and a significant decline in
volatility levels.
55
Operating expenses were $13.69 billion for 2009, 33% higher
than 2008, due to increased compensation and benefits expenses,
resulting from higher net revenues. This increase was partially
offset by lower brokerage, clearing, exchange and distribution
fees, principally reflecting lower transaction volumes in
Equities.
Pre-tax
earnings were $19.03 billion in 2009, 58% higher than 2008.
One Month Ended
December 2008. Institutional Client Services
net revenues were $1.33 billion for the month of
December 2008.
Fixed Income, Currency and Commodities Client Execution recorded
net revenues of $446 million for the month of
December 2008. During the month of December, market
opportunities were favorable for certain of our Fixed Income,
Currency and Commodities Client Execution product areas, as
interest rate products, commodities and currencies each produced
strong results. However, the environment for Fixed Income,
Currency and Commodities Client Execution also reflected
continued weakness in the broader credit markets, as results in
credit products included a loss of approximately $1 billion
(net of hedges) related to
non-investment-grade
credit origination activities, primarily reflecting a writedown
of approximately $850 million related to the bridge and
bank loan facilities held in LyondellBasell Finance Company. In
addition, results in mortgages included a loss of approximately
$400 million on commercial
mortgage-related
products.
Net revenues in Equities were $886 million for the month of
December 2008. These results reflected lower commission
volumes, as well as lower client execution net revenues from
derivatives compared with average monthly levels in 2008. Net
revenues in securities services were also lower compared with
average monthly levels in 2008, reflecting a decline in total
average customer balances, partially offset by the impact of
favorable changes in the composition of securities lending
balances. During the month of December, Equities operated in an
environment characterized by continued weakness in global equity
markets and continued high levels of volatility.
Operating expenses were $736 million for the month of
December 2008.
Pre-tax
earnings were $596 million for the month of
December 2008.
Investing &
Lending
Investing & Lending includes our investing activities
and the origination of loans to provide financing to clients.
These investments and loans are typically longer-term in nature.
We make investments, directly and indirectly through funds that
we manage, in debt securities, loans, public and private equity
securities, real estate, consolidated investment entities and
power generation facilities.
The table below presents the operating results of our
Investing & Lending segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
One Month
Ended
|
|
|
December
|
|
|
December
|
|
|
November
|
|
|
December
|
|
|
|
in millions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
ICBC
|
|
$
|
747
|
|
|
$
|
1,582
|
|
|
$
|
(446
|
)
|
|
$
|
228
|
|
|
|
Equity securities (excluding ICBC)
|
|
|
2,692
|
|
|
|
(596
|
)
|
|
|
(5,953
|
)
|
|
|
(1,076
|
)
|
|
|
Debt securities and loans
|
|
|
2,597
|
|
|
|
1,045
|
|
|
|
(6,325
|
)
|
|
|
(856
|
)
|
|
|
Other 1
|
|
|
1,505
|
|
|
|
832
|
|
|
|
1,903
|
|
|
|
74
|
|
|
|
|
|
Total net revenues
|
|
|
7,541
|
|
|
|
2,863
|
|
|
|
(10,821
|
)
|
|
|
(1,630
|
)
|
|
|
Operating expenses
|
|
|
3,361
|
|
|
|
3,523
|
|
|
|
2,719
|
|
|
|
204
|
|
|
|
|
|
Pre-tax
earnings/(loss)
|
|
$
|
4,180
|
|
|
$
|
(660
|
)
|
|
$
|
(13,540
|
)
|
|
$
|
(1,834
|
)
|
|
|
|
|
|
|
1. |
Primarily includes results related to our consolidated entities
held for investment purposes.
|
2010 versus 2009. Investing &
Lending recorded net revenues of $7.54 billion for 2010.
During 2010, an increase in global equity markets and tighter
credit spreads provided a favorable backdrop for our
Investing & Lending business. Results for 2010
primarily reflected a gain of $747 million from our
investment in the ordinary shares of ICBC, a net gain of
$2.69 billion from other equity securities and a net gain
of $2.60 billion from debt securities and loans.
Operating expenses were $3.36 billion for 2010, 5% lower
than 2009, due to the impact of significantly higher real estate
impairment charges during 2009 related to consolidated entities
held for investment purposes, as well as decreased compensation
and benefits expenses, resulting from lower levels of
discretionary compensation.
Pre-tax
earnings were $4.18 billion in 2010, compared with a
pre-tax loss
of $660 million for 2009.
56
2009 versus 2008. Investing &
Lending recorded net revenues of $2.86 billion for 2009.
These results primarily reflected a gain of $1.58 billion
from our investment in the ordinary shares of ICBC, a net gain
of $1.05 billion from debt securities and loans and a net
loss of $596 million from other equity securities. During
2009, our Investing & Lending results reflected a
recovery in global credit and equity markets following
significant weakness during 2008. However, continued weakness in
commercial real estate markets negatively impacted our results
during 2009. In 2008, results in Investing & Lending
primarily reflected a loss of $446 million from our
investment in the ordinary shares of ICBC, a net loss of
$6.33 billion from debt securities and loans and a net loss
of $5.95 billion from other equity securities.
Operating expenses were $3.52 billion for 2009, 30% higher
than 2008, due to increased compensation and benefits expenses,
resulting from higher net revenues.
Pre-tax loss
was $660 million in 2009 compared with a
pre-tax loss
of $13.54 billion in 2008.
One Month Ended
December 2008. Investing & Lending
recorded negative net revenues of $1.63 billion for the
month of December 2008. During the month of December,
continued weakness in global equity and credit markets
negatively impacted results in our Investing & Lending
business. Results for December 2008 primarily reflected net
losses of $1.08 billion from equity securities (excluding
ICBC)
and $856 million from debt securities and loans, partially
offset by a gain of $228 million from our investment in the
ordinary shares of ICBC.
Operating expenses were $204 million for the month of
December 2008.
Pre-tax loss
was $1.83 billion for the month of December 2008.
Investment
Management
Investment Management provides investment management services
and offers investment products (primarily through separately
managed accounts and commingled vehicles, such as mutual funds
and private investment funds) across all major asset classes to
a diverse set of institutional and individual clients.
Investment Management also offers wealth advisory services,
including portfolio management and financial counseling, and
brokerage and other transaction services to
high-net-worth
individuals and families.
Assets under management typically generate fees as a percentage
of net asset value, which vary by asset class and are affected
by investment performance as well as asset inflows and
redemptions. In certain circumstances, we are also entitled to
receive incentive fees based on a percentage of a funds
return or when the return exceeds a specified benchmark or other
performance targets. Incentive fees are recognized when all
material contingencies are resolved.
57
The table below presents the operating results of our Investment
Management segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
One Month
Ended
|
|
|
December
|
|
|
December
|
|
|
November
|
|
|
December
|
|
|
|
in millions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
Management and other fees
|
|
$
|
3,956
|
|
|
$
|
3,860
|
|
|
$
|
4,346
|
|
|
$
|
320
|
|
|
|
Incentive fees
|
|
|
527
|
|
|
|
180
|
|
|
|
301
|
|
|
|
2
|
|
|
|
Transaction revenues
|
|
|
531
|
|
|
|
567
|
|
|
|
598
|
|
|
|
21
|
|
|
|
|
|
Total net revenues
|
|
|
5,014
|
|
|
|
4,607
|
|
|
|
5,245
|
|
|
|
343
|
|
|
|
Operating expenses
|
|
|
4,051
|
|
|
|
3,673
|
|
|
|
3,528
|
|
|
|
263
|
|
|
|
|
|
Pre-tax
earnings
|
|
$
|
963
|
|
|
$
|
934
|
|
|
$
|
1,717
|
|
|
$
|
80
|
|
|
|
|
|
Assets under management include only those client assets where
we earn a fee for managing assets on a discretionary basis. This
includes assets in our mutual funds, hedge funds, private equity
funds and separately managed accounts for institutional and
individual investors. Assets under management do not include
the self-directed assets of our clients, including brokerage
accounts, or interest-bearing deposits held through our bank
depository institution subsidiaries.
The table below presents our assets under management by asset
class.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
December 31,
|
|
|
December 31,
|
|
|
November 30,
|
|
|
|
in billions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Alternative
investments 1
|
|
$
|
148
|
|
|
$
|
146
|
|
|
$
|
146
|
|
|
|
Equity
|
|
|
144
|
|
|
|
146
|
|
|
|
112
|
|
|
|
Fixed income
|
|
|
340
|
|
|
|
315
|
|
|
|
248
|
|
|
|
|
|
Total
non-money
market assets
|
|
|
632
|
|
|
|
607
|
|
|
|
506
|
|
|
|
Money markets
|
|
|
208
|
|
|
|
264
|
|
|
|
273
|
|
|
|
|
|
Total assets under management
|
|
$
|
840
|
|
|
$
|
871
|
|
|
$
|
779
|
|
|
|
|
|
|
|
1. |
Primarily includes hedge funds, private equity, real estate,
currencies, commodities and asset allocation strategies.
|
The table below presents a summary of the changes in our assets
under management.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 31,
|
|
|
December 31,
|
|
|
November 30,
|
|
|
|
in billions
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
Balance, beginning of year
|
|
$
|
871
|
|
|
$
|
798
|
1
|
|
|
$868
|
|
|
|
Net inflows/(outflows)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative investments
|
|
|
(1
|
)
|
|
|
(5
|
)
|
|
|
8
|
|
|
|
Equity
|
|
|
(21
|
)
|
|
|
(2
|
)
|
|
|
(55
|
)
|
|
|
Fixed income
|
|
|
7
|
|
|
|
26
|
|
|
|
14
|
|
|
|
|
|
Total
non-money
market net inflows/(outflows)
|
|
|
(15
|
)
|
|
|
19
|
|
|
|
(33
|
)
|
|
|
Money markets
|
|
|
(56
|
)
|
|
|
(22
|
)
|
|
|
67
|
|
|
|
|
|
Total net inflows/(outflows)
|
|
|
(71
|
)
|
|
|
(3
|
)
|
|
|
34
|
|
|
|
Net market appreciation/(depreciation)
|
|
|
40
|
|
|
|
76
|
|
|
|
(123
|
)
|
|
|
|
|
Balance, end of year
|
|
$
|
840
|
|
|
$
|
871
|
|
|
|
$779
|
|
|
|
|
|
|
|
1. |
Includes market appreciation of $13 billion and net inflows
of $6 billion during the calendar month of
December 2008.
|
2010 versus 2009. Net revenues in Investment
Management were $5.01 billion for 2010, 9% higher than
2009, primarily reflecting higher incentive fees across our
alternative investment products. Management and other fees also
increased, reflecting favorable changes in the mix of assets
under management, as well as the impact of appreciation in the
value of client assets. During 2010, assets under management
decreased 4% to $840 billion, primarily
reflecting outflows in money market assets, consistent with
industry trends.
Operating expenses were $4.05 billion for 2010, 10% higher
than 2009, primarily reflecting increased staff levels and the
impact of growth initiatives.
Pre-tax
earnings were $963 million in 2010, 3% higher than 2009.
58
2009 versus 2008. Net revenues in Investment
Management were $4.61 billion for 2009, 12% lower than
2008, primarily reflecting the impact of changes in the
composition of assets managed, principally due to equity market
depreciation during the fourth quarter of 2008, as well as lower
incentive fees. During 2009, assets under management increased
$73 billion to $871 billion, due to $76 billion
of market appreciation, primarily in fixed income and equity
assets, partially offset by $3 billion of net outflows.
Outflows in money market assets were offset by inflows in fixed
income assets.
Operating expenses were $3.67 billion for 2009, 4% higher
than 2008, due to higher levels of discretionary compensation.
Pre-tax
earnings were $934 million in 2009, 46% lower than 2008.
One Month Ended December 2008. Net
revenues in Investment Management were $343 million for the
month of December 2008. During the calendar month of
December, assets under management increased $19 billion to
$798 billion, due to $13 billion of market
appreciation, primarily in fixed income and equity assets, and
$6 billion of net inflows. Net inflows reflected inflows in
money market assets, partially offset by outflows in fixed
income, equity and alternative investment assets.
Operating expenses were $263 million for the month of
December 2008.
Pre-tax
earnings were $80 million for the month of
December 2008.
Geographic
Data
See Note 27 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for a summary of our total net revenues,
pre-tax
earnings and net earnings by geographic region.
Regulatory
Reform
On July 21, 2010, the
U.S. Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
was enacted. The Dodd-Frank Act significantly restructures the
financial regulatory regime under which we operate. The
implications of the
Dodd-Frank
Act for our businesses will depend to a large extent on the
provisions of required future rulemaking by the Board of
Governors of the Federal Reserve System (Federal Reserve Board),
the Federal Deposit Insurance Corporation (FDIC), the SEC, the
U.S. Commodity Futures Trading Commission (CFTC) and other
agencies, as well as the development of market practices and
structures under the regime established by the legislation and
the rules adopted
pursuant to it. However, we expect that there will be two
principal areas of impact for us:
|
|
|
the prohibition on proprietary trading and the
limitation on the sponsorship of, and investment in, hedge funds
and private equity funds by banking entities, including bank
holding companies; and
|
|
|
increased regulation of and restrictions on
over-the-counter
(OTC) derivatives markets and transactions.
|
In addition, the legislation creates a new systemic risk
oversight body to oversee and coordinate the efforts of the
primary U.S. financial regulatory agencies in establishing
regulations to address financial stability concerns, including
more stringent supervisory requirements and prudential standards
applicable to systemically important financial institutions.
Legal and regulatory changes under consideration in other
jurisdictions could also have an impact on our activities in
markets outside the United States. See
Business Regulation in Part I,
Item 1 of this
Form 10-K
for more information.
In light of the Dodd-Frank Act, during 2010, we liquidated
substantially all of the positions that had been held within
Principal Strategies in our former Equities operating segment,
as this was a proprietary trading business. In addition, during
the first quarter of 2011, we commenced the liquidation of the
positions that had been held by the global macro proprietary
trading desk in our former Fixed Income, Currency and
Commodities operating segment. Net revenues from Principal
Strategies and our global macro proprietary trading desk were
not material for the year ended December 2010. The full
impact of the Dodd-Frank Act and other regulatory reforms on our
businesses, our clients and the markets in which we operate will
depend on the manner in which the relevant authorities develop
and implement the required rules and the reaction of market
participants to these regulatory developments over the next
several years. We will continue to assess our business, risk
management, and compliance practices to conform to developments
in the regulatory environment.
59
Balance Sheet and
Funding Sources
Balance Sheet
Management
One of our most important risk management disciplines is our
ability to manage the size and composition of our balance sheet.
While our asset base changes due to client activity, market
fluctuations and business opportunities, the size and
composition of our balance sheet reflect (i) our overall
risk tolerance, (ii) our ability to access stable funding
sources and (iii) the amount of equity capital we hold.
Although our balance sheet fluctuates on a
day-to-day
basis, our total assets and adjusted assets at quarterly and
year-end dates are generally not materially different from those
occurring within our reporting periods.
In order to ensure appropriate risk management, we seek to
maintain a liquid balance sheet and have processes in place to
dynamically manage our assets and liabilities which include:
|
|
|
quarterly planning;
|
|
|
business-specific limits;
|
|
|
monitoring of key metrics; and
|
|
|
scenario analyses.
|
Quarterly Planning. We prepare a quarterly
balance sheet plan that combines our projected total assets and
composition of assets with our expected funding sources and
capital levels for the upcoming quarter. The objectives of this
quarterly planning process are:
|
|
|
to develop our near-term balance sheet projections, taking into
account the general state of the financial markets and expected
client-driven and firm-driven activity levels;
|
|
|
to ensure that our projected assets are supported by an adequate
level and tenor of funding and that our projected capital and
liquidity metrics are within management guidelines; and
|
|
|
to allow business risk managers and managers from our
independent control and support functions to objectively
evaluate balance sheet limit requests from business managers in
the context of the firms overall balance sheet
constraints. These constraints include the firms liability
profile and equity capital levels, maturities and plans for new
debt and equity issuances, share repurchases, deposit trends and
secured funding transactions.
|
To prepare our quarterly balance sheet plan, business risk
managers and managers from our independent control and support
functions meet with business managers to review current and
prior period metrics and discuss expectations for the upcoming
quarter. The specific metrics reviewed include asset and
liability size and composition, aged inventory, limit
utilization, risk and performance measures and capital usage.
Our consolidated quarterly plan, including our balance sheet
plans by business, funding and capital projections, and
projected capital and liquidity metrics, is reviewed by the
Finance Committee. See Overview and Structure of Risk
Management.
Business-Specific Limits. The Finance
Committee sets asset and liability limits for each business and
aged inventory limits for certain financial instruments as a
disincentive to hold inventory over longer periods of time.
These limits are set at levels which are close to actual
operating levels in order to ensure prompt escalation and
discussion among business managers and managers in our
independent control and support functions on a routine basis.
The Finance Committee reviews and approves balance sheet limits
on a quarterly basis and may also approve changes in limits on
an ad hoc basis in response to changing business needs or market
conditions.
60
The following is a description of the captions in the table
above.
Excess Liquidity and Cash. We maintain
substantial excess liquidity to meet a broad range of potential
cash outflows and collateral needs in the event of a stressed
environment. See Liquidity Risk below for details on
the composition and sizing of our excess liquidity pool or
Global Core Excess (GCE). In addition to our excess
liquidity, we maintain other operating cash balances, primarily
for use in specific currencies, entities, or jurisdictions where
we do not have immediate access to parent company liquidity.
Secured Client Financing. We provide
collateralized financing for client positions, including margin
loans secured by client collateral, securities borrowed, and
resale agreements primarily collateralized by government
obligations. As a result of client activities, we are required
to segregate cash and securities to satisfy regulatory
requirements. Our secured client financing arrangements, which
are generally
short-term,
are accounted for at fair value or at amounts that approximate
fair value, and include daily margin requirements to mitigate
counterparty credit risk.
Institutional Client Services. In
Institutional Client Services, we maintain inventory positions
to facilitate market-making in fixed income, equity, currency
and commodity products. Additionally, as part of client
market-making
activities, we enter into resale or
securities borrowing arrangements to obtain securities which we
can use to cover transactions in which we or our clients have
sold securities that have not yet been purchased. The
receivables in Institutional Client Services primarily relate to
securities transactions.
Investing & Lending. In
Investing & Lending, we make investments and originate
loans to provide financing to clients. These investments and
loans are typically longer-term in nature. We make investments,
directly and indirectly through funds that we manage, in debt
securities, loans, public and private equity securities, real
estate and other investments.
Other Assets. Other assets are generally less
liquid,
non-financial
assets, including property, leasehold improvements and
equipment, goodwill and identifiable intangible assets, income
tax-related receivables,
equity-method
investments and miscellaneous receivables.
The table below presents the reconciliation of this balance
sheet allocation to our U.S. GAAP balance sheet. In the
tables below, total assets for Institutional Client Services and
Investing & Lending represent the inventory and
related assets. These amounts differ from total assets by
business segment disclosed in Note 27 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
because total assets disclosed in Note 27 include
allocations of our excess liquidity and other cash, secured
client financing and other assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 2010
|
|
|
Excess
|
|
|
Secured
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity
|
|
|
Client
|
|
|
Client
|
|
|
Investing &
|
|
|
Other
|
|
|
Total
|
|
|
|
in millions
|
|
and
Cash 1
|
|
|
Financing
|
|
|
Services
|
|
|
Lending
|
|
|
Assets
|
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
39,788
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39,788
|
|
|
|
Cash and securities segregated for regulatory and other purposes
|
|
|
|
|
|
|
53,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,731
|
|
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
62,854
|
|
|
|
102,537
|
|
|
|
22,866
|
|
|
|
98
|
|
|
|
|
|
|
|
188,355
|
|
|
|
Securities borrowed
|
|
|
37,938
|
|
|
|
80,313
|
|
|
|
48,055
|
|
|
|
|
|
|
|
|
|
|
|
166,306
|
|
|
|
Receivables from brokers, dealers and clearing organizations
|
|
|
|
|
|
|
3,702
|
|
|
|
6,698
|
|
|
|
37
|
|
|
|
|
|
|
|
10,437
|
|
|
|
Receivables from customers and counterparties
|
|
|
|
|
|
|
39,008
|
|
|
|
25,698
|
|
|
|
2,997
|
|
|
|
|
|
|
|
67,703
|
|
|
|
Financial instruments owned, at fair value
|
|
|
41,761
|
|
|
|
|
|
|
|
260,406
|
|
|
|
54,786
|
|
|
|
|
|
|
|
356,953
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,059
|
|
|
|
28,059
|
|
|
|
|
|
Total assets
|
|
$
|
182,341
|
|
|
$
|
279,291
|
|
|
$
|
363,723
|
|
|
$
|
57,918
|
|
|
$
|
28,059
|
|
|
$
|
911,332
|
|
|
|
|
|
|
|
1. |
Includes unencumbered cash, U.S. government obligations,
U.S. agency obligations, highly liquid U.S. agency
mortgage-backed
obligations, and French, German, United Kingdom and Japanese
government obligations.
|
62
Less Liquid Inventory Composition. We seek to
maintain a liquid balance sheet comprised of assets that can be
readily funded on a secured basis. However, we do hold certain
financial instruments that may be more difficult to fund on a
secured basis, especially during times of market stress. We
focus on funding these assets with longer contractual maturities
to reduce the need to refinance in periods of market stress and
generally hold higher levels of total capital for these assets
than for more liquid types of financial instruments. The table
below presents our aggregate holdings in these categories of
financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
|
in millions
|
|
2010
|
|
|
2009
|
|
|
|
|
Mortgage and other
asset-backed
loans and securities
|
|
$
|
17,042
|
|
|
$
|
14,277
|
|
|
|
Bank loans and bridge
loans 1
|
|
|
18,039
|
|
|
|
19,345
|
|
|
|
Emerging market debt securities
|
|
|
3,931
|
|
|
|
2,957
|
|
|
|
High-yield
and other debt obligations
|
|
|
11,553
|
|
|
|
12,028
|
|
|
|
Private equity investments and real estate fund
investments 2
|
|
|
14,807
|
|
|
|
14,633
|
|
|
|
Emerging market equity securities
|
|
|
5,784
|
|
|
|
5,193
|
|
|
|
ICBC ordinary
shares 3
|
|
|
7,589
|
|
|
|
8,111
|
|
|
|
SMFG convertible preferred
stock 4
|
|
|
|
|
|
|
933
|
|
|
|
Other restricted public equity securities
|
|
|
116
|
|
|
|
203
|
|
|
|
Other investments in
funds 5
|
|
|
3,212
|
|
|
|
2,911
|
|
|
|
|
|
|
|
1.
|
Includes funded commitments and inventory held in connection
with our origination, investing and
market-making
activities.
|
|
2.
|
Includes interests in funds that we manage. Such amounts exclude
assets related to consolidated investment funds of
$889 million and $919 million as of December 2010
and December 2009, respectively, for which Goldman Sachs
does not bear economic exposure. Excludes $792 million as
of December 2010, related to VIEs consolidated upon
adoption of Accounting Standards Update
No. 2009-17,
Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities, for which Goldman Sachs does not bear
economic exposure.
|
|
3.
|
Includes interests of $4.73 billion and $5.13 billion
as of December 2010 and December 2009, respectively,
held by investment funds managed by Goldman Sachs.
|
|
4.
|
During the first quarter of 2010, we converted our remaining
Sumitomo Mitsui Financial Group, Inc. (SMFG) preferred stock
investment into common stock and delivered the common stock to
close out our remaining hedge position.
|
|
5.
|
Includes interests in other investment funds that we manage.
|
See Notes 4 through 6 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about the financial instruments we hold.
Balance Sheet
Analysis and Metrics
As of December 2010, total assets on our consolidated
statement of financial condition were $911.33 billion, an
increase of $62.39 billion from December 2009. This
increase is primarily due to (i) an increase in
collateralized agreements of $20.44 billion and an increase
in cash and securities segregated for regulatory and other
purposes of $17.07 billion, both primarily due to an
increase in client-driven activity, and (ii) an increase in
financial instruments owned, at fair value of
$14.55 billion, primarily due to increases in physical
commodities and U.S. government and federal agency
obligations.
As of December 2010, total liabilities on our consolidated
statement of financial condition were $833.98 billion, an
increase of $55.75 billion from December 2009. This
increase is primarily due to (i) an increase in securities
sold under agreements to repurchase of $33.99 billion,
primarily due to an increase in secured funding of our financial
instruments owned, at fair value, and an increase in
client-driven activity, (ii) an increase in other secured
financings of $14.24 billion, primarily due to
client-driven
activity and (iii) an increase in financial instruments
sold, but not yet purchased, at fair value of
$11.70 billion, primarily due to increases in
non-U.S. government
obligations and equities and convertible debentures.
As of December 2010, our total securities sold under
agreements to repurchase, accounted for as collateralized
financings, were $162.35 billion, which was 2% higher and
10% higher than the daily average amount of repurchase
agreements during the quarter ended and year ended
December 2010, respectively. As of December 2010, the
increase in our repurchase agreements relative to the daily
average during the quarter and year was due to an increase in
client-driven
activity at the end of the year and an increase in firm
financing activities. As of December 2009 our total
securities sold under agreements to repurchase, accounted for as
collateralized financings, were $128.36 billion, which was
2% lower and 8% lower than the daily average amount of
repurchase agreements during the quarter ended and year ended
December 2009, respectively. The level of our repurchase
agreements fluctuates between and within periods, primarily due
to providing clients with access to highly liquid collateral,
such as U.S. government, federal agency and
investment-grade
sovereign obligations through collateralized financing
activities.
63
The table below presents information on our assets,
shareholders equity and leverage ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
|
$ in millions, except per share amounts
|
|
2010
|
|
|
2009
|
|
|
|
|
Total assets
|
|
$
|
911,332
|
|
|
$
|
848,942
|
|
|
|
Adjusted assets
|
|
|
588,927
|
|
|
|
551,071
|
|
|
|
Total shareholders equity
|
|
|
77,356
|
|
|
|
70,714
|
|
|
|
Leverage ratio
|
|
|
11.8x
|
|
|
|
12.0x
|
|
|
|
Adjusted leverage ratio
|
|
|
7.6x
|
|
|
|
7.8x
|
|
|
|
Debt to equity ratio
|
|
|
2.3x
|
|
|
|
2.6x
|
|
|
|
|
|
Adjusted assets. Adjusted assets equals total
assets less
(i) low-risk
collateralized assets generally associated with our secured
client financing transactions and federal funds sold and
(ii) cash and securities we segregate for regulatory and
other purposes.
The table below presents the reconciliation of total assets to
adjusted assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
|
in millions
|
|
2010
|
|
|
2009
|
|
|
|
|
Total assets
|
|
$
|
911,332
|
|
|
$
|
848,942
|
|
|
|
Deduct:
|
|
Securities borrowed
|
|
|
(166,306
|
)
|
|
|
(189,939
|
)
|
|
|
|
|
Securities purchased under agreements to resell and federal
funds sold
|
|
|
(188,355
|
)
|
|
|
(144,279
|
)
|
|
|
Add:
|
|
Financial instruments sold, but not yet purchased, at
|
|
|
|
|
|
|
|
|
|
|
|
|
fair value
|
|
|
140,717
|
|
|
|
129,019
|
|
|
|
|
|
Less derivative liabilities
|
|
|
(54,730
|
)
|
|
|
(56,009
|
)
|
|
|
|
|
|
|
Subtotal
|
|
|
85,987
|
|
|
|
73,010
|
|
|
|
Deduct:
|
|
Cash and securities segregated for regulatory and other purposes
|
|
|
(53,731
|
)
|
|
|
(36,663
|
)
|
|
|
|
|
Adjusted assets
|
|
$
|
588,927
|
|
|
$
|
551,071
|
|
|
|
|
|
Leverage ratio. The leverage ratio equals
total assets divided by total shareholders equity and
measures the proportion of equity and debt the firm is using to
finance assets. This ratio is different from the Tier 1
leverage ratio included in Equity
Capital Consolidated
Regulatory Capital Ratios below, and further described in
Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K.
Adjusted leverage ratio. The adjusted leverage
ratio equals adjusted assets divided by total shareholders
equity. We believe that the adjusted leverage ratio is a more
meaningful measure of our capital adequacy than the leverage
ratio because it excludes certain
low-risk
collateralized assets that are generally supported with little
or no capital.
Our adjusted leverage ratio decreased to 7.6x as of
December 2010 from 7.8x as of December 2009 primarily
because our total shareholders equity grew at a higher
rate than our adjusted assets. Although total assets increased
by 7% during the period, this growth was principally comprised
of increases in
low-risk
assets (primarily securities purchased under agreements to
resell and cash and securities segregated for regulatory and
other purposes), which do not impact our adjusted assets.
Debt to equity ratio. The debt to equity ratio
equals unsecured
long-term
borrowings divided by total shareholders equity.
Funding
Sources
Our primary sources of funding are secured financings, unsecured
long-term
and
short-term
borrowings, and deposits. We seek to maintain broad and
diversified funding sources globally.
We raise funding through a number of different products,
including:
|
|
|
collateralized financings, such as repurchase agreements,
securities loaned and other secured financings;
|
|
|
long-term
unsecured debt through syndicated U.S. registered
offerings, U.S. registered and 144A
medium-term
note programs, offshore
medium-term
note offerings and other debt offerings;
|
|
|
short-term
unsecured debt through U.S. and
non-U.S. commercial
paper and promissory note issuances and other methods; and
|
|
|
demand and savings deposits through cash sweep programs and time
deposits through internal and
third-party
broker networks.
|
We generally distribute our funding sources through our own
sales force to a large, diverse creditor base in a variety of
markets in the Americas, Europe and Asia. We believe that our
relationships with our creditors are critical to our liquidity.
Our creditors include banks, governments, securities lenders,
pension funds, insurance companies, mutual funds and
individuals. We have imposed various internal guidelines to
monitor creditor concentration across our primary funding
programs.
64
Secured Funding. We fund a significant amount
of our inventory on a secured basis. We believe secured funding
is more stable than unsecured financing because it is less
sensitive to changes in our credit quality due to the nature of
the collateral we post to our lenders. However, because the
terms or availability of secured funding, particularly
short-dated
funding, can deteriorate rapidly in a difficult environment, we
generally do not rely on
short-dated
secured funding unless it is collateralized with highly liquid
securities such as government obligations.
Substantially all of our other secured funding is executed for
tenors of one month or greater. Additionally, we monitor
counterparty concentration and hold a portion of our GCE for
refinancing risk associated with all secured funding
transactions. We seek longer terms for secured funding
collateralized by lower-quality assets because these funding
transactions may pose greater refinancing risk.
The weighted average maturity of our secured funding, excluding
funding collateralized by highly liquid securities eligible for
inclusion in our GCE, exceeded 100 days as of
December 2010.
A majority of our secured funding for securities not eligible
for inclusion in the GCE is executed through term repurchase
agreements and securities lending contracts. We also raise
financing through other types of collateralized financings, such
as secured loans and notes.
Unsecured
Long-Term
Borrowings. We issue unsecured
long-term
borrowings as a source of capital to meet our
long-term
financing requirements and to finance a portion of our GCE. We
issue in different tenors, currencies, and products to maximize
the diversification of our investor base. The table below
presents our quarterly unsecured
long-term
borrowings maturity profile through 2016 as of
December 2010.
Unsecured
Long-Term Borrowings Maturity Profile
($ in millions)
65
The weighted average maturity of our unsecured
long-term
borrowings as of December 2010 was approximately seven
years. To mitigate refinancing risk, we seek to limit the
principal amount of debt maturing on any one day or during any
week or year. We enter into interest rate swaps to convert a
substantial portion of our
long-term
borrowings into floating-rate obligations in order to minimize
our exposure to interest rates.
Temporary Liquidity Guarantee Program
(TLGP). As of December 2010, we had
$19.01 billion of senior unsecured debt outstanding
(comprised of $10.43 billion of
short-term
and $8.58 billion of
long-term)
guaranteed by the FDIC under the TLGP, all of which will mature
on or prior to June 15, 2012. We have not issued
long-term
debt under the TLGP since March 2009 and the program has
expired for new issuances.
Unsecured
Short-Term
Borrowings. A significant portion of our
short-term
borrowings were originally
long-term
debt that is scheduled to mature within one year of the
reporting date. We use
short-term
borrowings to finance liquid assets and for other cash
management purposes. We primarily issue commercial paper,
promissory notes, and other hybrid instruments. We prefer
issuing promissory notes, in which we do not make a market, over
commercial paper, which we may repurchase prior to maturity
through the ordinary course of business as a market maker.
As of December 2010, our unsecured
short-term
borrowings, including the current portion of unsecured
long-term
borrowings, were $47.84 billion. See Note 15 to the
consolidated financial statements in Part II, Item 8
of this
Form 10-K
for further information about our unsecured
short-term
borrowings.
Deposits. As of December 2010, our bank
depository institution subsidiaries had $38.57 billion in
customer deposits, including $8.50 billion of certificates
of deposit and other time deposits with a weighted average
maturity of three years, and $30.07 billion of other
deposits, substantially all of which were from cash sweep
programs. We utilize deposits to finance lending activities in
our bank subsidiaries and to support potential outflows, such as
lending commitments.
Goldman Sachs Bank USA (GS Bank USA) has access to funding
through the Federal Reserve Bank discount window. While we do
not rely on this funding in our liquidity planning and stress
testing, we maintain policies and procedures necessary to access
this funding and test discount window borrowing procedures.
Equity
Capital
The level and composition of our equity capital are determined
by multiple factors including our consolidated regulatory
capital requirements and ICAAP, and may also be influenced by
other factors such as rating agency guidelines, subsidiary
capital requirements, the business environment, conditions in
the financial markets and assessments of potential future losses
due to adverse changes in our business and market environments.
In addition, we maintain a contingency capital plan which
provides a framework for analyzing and responding to an actual
or perceived capital shortfall.
Our consolidated regulatory capital requirements are determined
by the Federal Reserve Board, as described below. Our ICAAP
incorporates an internal
risk-based
capital assessment designed to identify and measure material
risks associated with our business activities, including market
risk, credit risk and operational risk, in a manner that is
closely aligned with our risk management practices. Our internal
risk-based
capital assessment is supplemented with the results of stress
tests.
As of December 2010, our total shareholders equity
was $77.36 billion (consisting of common shareholders
equity of $70.40 billion and preferred stock of
$6.96 billion). As of December 2009, our total
shareholders equity was $70.71 billion (consisting of
common shareholders equity of $63.76 billion and
preferred stock of $6.96 billion). In addition to total
shareholders equity, we consider our $5.00 billion of
junior subordinated debt issued to trusts to be part of our
equity capital, as it qualifies as capital for regulatory and
certain rating agency purposes. See
Consolidated Regulatory Capital Ratios
below for information regarding the impact of regulatory
developments.
66
Consolidated
Regulatory Capital
The Federal Reserve Board is the primary regulator of
Group Inc., a bank holding company and a financial holding
company under the U.S. Bank Holding Company Act of 1956. As
a bank holding company, we are subject to consolidated
regulatory capital requirements that are computed in accordance
with the Federal Reserve Boards capital adequacy
regulations currently applicable to bank holding companies
(Basel 1). These capital requirements, which are based on the
Capital Accord of the Basel Committee on Banking Supervision
(Basel Committee), are expressed as capital ratios that compare
measures of capital to
risk-weighted
assets (RWAs). See Note 20 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for additional information regarding the firms RWAs. The
firms capital levels are also subject to qualitative
judgments by its regulators about components, risk weightings
and other factors.
Federal Reserve Board regulations require bank holding companies
to maintain a minimum Tier 1 capital ratio of 4% and a
minimum total capital ratio of 8%. The required minimum
Tier 1 capital ratio and total capital ratio in order to be
considered a well-capitalized bank holding company
under the Federal Reserve Board guidelines are 6% and 10%,
respectively. Bank holding companies may be expected to maintain
ratios well above the minimum levels, depending upon their
particular condition, risk profile and growth plans. The minimum
Tier 1 leverage ratio is 3% for bank holding companies that
have received the highest supervisory rating under Federal
Reserve Board guidelines or that have implemented the Federal
Reserve Boards
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%.
Consolidated
Regulatory Capital Ratios
The table below presents information about our regulatory
capital ratios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
|
$ in millions
|
|
2010
|
|
|
2009
|
|
|
|
|
Common shareholders equity
|
|
$
|
70,399
|
|
|
$
|
63,757
|
|
|
|
Less: Goodwill
|
|
|
(3,495
|
)
|
|
|
(3,543
|
)
|
|
|
Less: Disallowable intangible assets
|
|
|
(2,027
|
)
|
|
|
(1,377
|
)
|
|
|
Less: Other
deductions 1
|
|
|
(5,601
|
)
|
|
|
(6,152
|
)
|
|
|
|
|
Tier 1 Common Capital
|
|
|
59,276
|
|
|
|
52,685
|
|
|
|
Preferred stock
|
|
|
6,957
|
|
|
|
6,957
|
|
|
|
Junior subordinated debt issued to trusts
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
Tier 1 Capital
|
|
|
71,233
|
|
|
|
64,642
|
|
|
|
Qualifying subordinated
debt 2
|
|
|
13,880
|
|
|
|
14,004
|
|
|
|
Less: Other
deductions 1
|
|
|
(220
|
)
|
|
|
(176
|
)
|
|
|
|
|
Tier 2 Capital
|
|
|
13,660
|
|
|
|
13,828
|
|
|
|
Total Capital
|
|
$
|
84,893
|
|
|
$
|
78,470
|
|
|
|
Risk-Weighted
Assets
3
|
|
$
|
444,290
|
|
|
$
|
431,890
|
|
|
|
Tier 1 Capital Ratio
|
|
|
16.0%
|
|
|
|
15.0%
|
|
|
|
Total Capital Ratio
|
|
|
19.1%
|
|
|
|
18.2%
|
|
|
|
Tier 1 Leverage Ratio
3
|
|
|
8.0%
|
|
|
|
7.6%
|
|
|
|
Tier 1 Common Ratio
4
|
|
|
13.3%
|
|
|
|
12.2%
|
|
|
|
|
|
|
|
1.
|
Principally includes equity investments in
non-financial
companies and the cumulative change in the fair value of our
unsecured borrowings attributable to the impact of changes in
our own credit spreads, disallowed deferred tax assets, and
investments in certain nonconsolidated entities.
|
|
2.
|
Substantially all of our subordinated debt qualifies as
Tier 2 capital for Basel 1 purposes.
|
|
3.
|
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for additional information about the firms RWAs and
Tier 1 leverage ratio.
|
|
4.
|
The Tier 1 common ratio equals Tier 1 common capital
divided by RWAs. We believe that the Tier 1 common ratio is
meaningful because it is one of the measures that we and
investors use to assess capital adequacy.
|
Our Tier 1 capital ratio increased to 16.0% as of
December 2010 from 15.0% as of December 2009. The
growth in our Tier 1 capital during the year ended
December 2010 was principally due to an increase in our
shareholders equity, which was partially offset by an
increase in our RWAs. Our Tier 1 leverage ratio increased
to 8.0% as of December 2010 from 7.6% as of
December 2009, reflecting an increase in our Tier 1
capital, principally due to an increase in our
shareholders equity, which was partially offset by an
increase in average adjusted total assets.
67
We are currently working to implement the requirements set out
in the Federal Reserve Boards Capital Adequacy Guidelines
for Bank Holding Companies: Internal Ratings-Based and Advanced
Measurement Approaches, which are based on the advanced
approaches under the Revised Framework for the International
Convergence of Capital Measurement and Capital Standards issued
by the Basel Committee as applicable to us as a bank holding
company (Basel 2). U.S. banking regulators have
incorporated the Basel 2 framework into the existing
risk-based
capital requirements by requiring that internationally active
banking organizations, such as us, transition to Basel 2
following the successful completion of a parallel run.
In addition, the Basel Committee has undertaken a program of
substantial revisions to its capital guidelines. In particular,
the changes in the Basel 2.5 guidelines will result
in increased capital requirements for market risk; additionally,
the Basel 3 guidelines issued by the Basel Committee in
December 2010 revise the definition of Tier 1 capital,
introduce Tier 1 common equity as a regulatory metric, set
new minimum capital ratios (including a new capital
conservation buffer, which must be composed exclusively of
Tier 1 common equity and will be in addition to the other
capital ratios), introduce a Tier 1 leverage ratio within
international guidelines for the first time, and make
substantial revisions to the computation of RWAs for credit
exposures. Implementation of the new requirements is expected to
take place over an extended transition period, starting at the
end of 2011 (for Basel 2.5) and end of 2012 (for Basel 3).
Although the U.S. federal banking agencies have now issued
proposed rules that are intended to implement certain aspects of
the Basel 2.5 guidelines, they have not yet addressed all
aspects of those guidelines or the Basel 3 changes. In addition,
both the Basel Committee and U.S. banking regulators
implementing the Dodd-Frank Act have indicated that they will
impose more stringent capital standards on systemically
important financial institutions. Although the criteria for
treatment as a systemically important financial institution have
not yet been determined, it is probable that they will apply to
us. Therefore, the regulations ultimately applicable to us may
be substantially different from those that have been published
to date.
The Dodd-Frank Act will subject us at a firmwide level to the
same leverage and
risk-based
capital requirements that apply to depository institutions and
directs banking regulators to impose additional capital
requirements as disclosed above. The Federal Reserve Board will
be required to begin implementing the new leverage and
risk-based
capital regulation by January 2012. As a consequence of
these changes, Tier 1 capital treatment for our junior
subordinated debt issued to trusts and our cumulative preferred
stock will be phased out over a three-year period beginning on
January 1, 2013. The interaction between the
Dodd-Frank
Act and the Basel Committees proposed changes adds further
uncertainty to our future capital requirements.
A number of other governmental entities and regulators,
including the U.S. Treasury, the European Union and the
Financial Services Authority in the United Kingdom, have also
proposed or announced changes which will result in increased
capital requirements for financial institutions.
As a consequence of these developments, we expect minimum
capital ratios required to be maintained under Federal Reserve
Board regulations will be increased and changes in the
prescribed calculation methodology are expected to result in
higher RWAs and lower capital ratios than those currently
computed.
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for additional information about our regulatory capital ratios
and the related regulatory requirements.
Internal Capital
Adequacy Assessment Process
We perform an ICAAP with the objective of ensuring that the firm
is appropriately capitalized relative to the risks in our
business.
As part of our ICAAP, we perform an internal
risk-based
capital assessment. Our internal
risk-based
capital assessment incorporates market risk, credit risk and
operational risk. Market risk is calculated by using
Value-at-Risk
(VaR) calculations supplemented by
risk-based
add-ons which include risks related to rare events (tail risks).
Credit risk utilizes assumptions about our counterparties
probability of default, the size of our losses in the event of a
default and the maturity of our counterparties contractual
obligations to us. Operational risk is calculated based on
scenarios incorporating multiple types of operational failures.
Backtesting is used to gauge the effectiveness of models at
capturing and measuring relevant risks.
68
We evaluate capital adequacy based on the result of our internal
risk-based
capital assessment, supplemented with the results of stress
tests which measure the firms performance under various
market conditions. Our goal is to hold sufficient capital, under
our internal
risk-based
capital framework, to ensure we remain adequately capitalized
after experiencing a severe stress event. Our assessment of
capital adequacy is viewed in tandem with our assessment of
liquidity adequacy and integrated into the overall risk
management structure, governance and policy framework of the
firm.
We attribute capital usage to each of our businesses based upon
our internal
risk-based
capital and regulatory frameworks and manage the levels of usage
based upon the balance sheet and risk limits established.
Rating Agency
Guidelines
The credit rating agencies assign credit ratings to the
obligations of Group Inc., which directly issues or
guarantees substantially all of the firms senior unsecured
obligations. GS Bank USA has also been assigned
long-term
issuer ratings as well as ratings on its
long-term
and
short-term
bank deposits. In addition, credit rating agencies have assigned
ratings to debt obligations of certain other subsidiaries of
Group Inc.
The level and composition of our equity capital are among the
many factors considered in determining our credit ratings. Each
agency has its own definition of eligible capital and
methodology for evaluating capital adequacy, and assessments are
generally based on a combination of factors rather than a single
calculation. See Liquidity Risk Credit
Ratings for further information about our credit ratings.
Subsidiary
Capital Requirements
Many of our subsidiaries, including GS Bank USA and our
broker-dealer
subsidiaries, are subject to separate regulation and capital
requirements in jurisdictions throughout the world. For purposes
of assessing the adequacy of its capital, GS Bank USA has
established an ICAAP which is similar to that used by
Group Inc. GS Bank USAs capital levels and
prompt corrective action classification are subject to
qualitative judgments by its regulators about components, risk
weightings and other factors.
We expect that the capital requirements of several of our
subsidiaries will be impacted in the future by the various
developments arising from the Basel Committee, the Dodd-Frank
Act, and other governmental entities and regulators.
See Note 20 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for information about GS Bank USAs capital ratios
under Basel 1 as implemented by the Federal Reserve Board, and
for further information about the capital requirements of our
other regulated subsidiaries and the potential impact of
regulatory reform.
Subsidiaries not subject to separate regulatory capital
requirements may hold capital to satisfy local tax guidelines,
rating agency requirements (for entities with assigned credit
ratings) or internal policies, including policies concerning the
minimum amount of capital a subsidiary should hold based on its
underlying level of risk. In certain instances, Group Inc.
may be limited in its ability to access capital held at certain
subsidiaries as a result of regulatory, tax or other
constraints. As of December 2010 and December 2009,
Group Inc.s equity investment in subsidiaries was
$71.30 billion and $65.74 billion, respectively,
compared with its total shareholders equity of
$77.36 billion and $70.71 billion, respectively.
Group Inc. has guaranteed the payment obligations of
GS&Co., GS Bank USA, Goldman Sachs Bank (Europe) PLC
and GSEC subject to certain exceptions. In November 2008,
we contributed subsidiaries into GS Bank USA, and
Group Inc. agreed to guarantee certain losses, including
credit-related
losses, relating to assets held by the contributed entities. In
connection with this guarantee, Group Inc. also agreed to
pledge to GS Bank USA certain collateral, including
interests in subsidiaries and other illiquid assets.
Our capital invested in
non-U.S. subsidiaries
is generally exposed to foreign exchange risk, substantially all
of which is managed through a combination of derivatives and
non-U.S. denominated
debt.
69
Preferred Stock. In October 2008, we
issued to Berkshire Hathaway and certain affiliates
50,000 shares of 10% Cumulative Perpetual Preferred Stock,
Series G (Series G Preferred Stock), and a five-year
warrant to purchase up to 43.5 million shares of common
stock at an exercise price of $115.00 per share, for aggregate
proceeds of $5.00 billion. The allocated carrying values of
the warrant and the Series G Preferred Stock (based on
their relative fair values on the date of issuance) were
$1.14 billion and $3.86 billion, respectively. The
Series G Preferred Stock is redeemable at the firms
option, subject to the approval of the Federal Reserve Board, at
a redemption value of $5.50 billion, plus accrued and
unpaid dividends. Accordingly, upon a redemption in full at any
time in the future of the Series G Preferred Stock, we
would recognize a
one-time
preferred dividend of $1.64 billion (calculated as the
difference between the carrying value and redemption value of
the preferred stock), which would be recorded as a reduction to
our earnings applicable to common shareholders and to our common
shareholders equity in the period of redemption. Based on
our December 2010 average diluted common shares outstanding
and basic shares outstanding, the estimated impact to earnings
per common share and book value per common share would be a
reduction of approximately $2.80 and $3.00, respectively, in the
period in which the redemption occurs in the future.
Contingency
Capital Plan
Our contingency capital plan outlines the appropriate
communication procedures to follow during a crisis period,
including internal dissemination of information as well as
ensuring timely communication with external stakeholders. It
also provides a framework for analyzing and responding to a
perceived or actual capital deficiency, including, but not
limited to, identification of drivers of a capital deficiency,
as well as mitigants and potential actions.
Equity Capital
Management
Our objective is to maintain a sufficient level and optimal
composition of equity capital. We principally manage our capital
through issuances and repurchases of our common stock. We may
also, from time to time, issue or repurchase our preferred
stock, junior subordinated debt issued to trusts and other
subordinated debt as business conditions warrant and subject to
any regulatory approvals. We manage our capital requirements
principally by setting limits on balance sheet assets
and/or
limits on risk, in each case both at the consolidated and
business levels. We attribute capital usage to each of our
businesses based upon our internal
risk-based
capital and regulatory frameworks
and manage the levels of usage based upon the balance sheet and
risk limits established.
Share Repurchase Program. We seek to use our
share repurchase program to substantially offset increases in
share count over time resulting from employee
share-based
compensation and to help maintain the appropriate level of
common equity. The repurchase program is effected primarily
through regular
open-market
purchases, the amounts and timing of which are determined
primarily by our issuance of shares resulting from employee
share-based
compensation as well as our current and projected capital
position (i.e., comparisons of our desired level of capital
to our actual level of capital), but which may also be
influenced by general market conditions and the prevailing price
and trading volumes of our common stock.
As of December 2010, under the Boards existing share
repurchase program, we can repurchase up to 35.6 million
additional shares of common stock; however, any such repurchases
are subject to the approval of the Federal Reserve Board. See
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities in Part II, Item 5 and Note 19
to the consolidated financial statements in Part II,
Item 8 of this
Form 10-K
for additional information on our repurchase program.
See Notes 16 and 19 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about our preferred stock, junior
subordinated debt issued to trusts and other subordinated debt.
Other Capital
Metrics
The table below presents information on our shareholders
equity and book value per common share.
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|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
|
$ in millions, except per share amounts
|
|
2010
|
|
|
2009
|
|
|
|
|
Total shareholders equity
|
|
$
|
77,356
|
|
|
$
|
70,714
|
|
|
|
Common shareholders equity
|
|
|
70,399
|
|
|
|
63,757
|
|
|
|
Tangible common shareholders equity
|
|
|
64,877
|
|
|
|
58,837
|
|
|
|
Book value per common share
|
|
|
128.72
|
|
|
|
117.48
|
|
|
|
Tangible book value per common share
|
|
|
118.63
|
|
|
|
108.42
|
|
|
|
|
|
70
Tangible common shareholders
equity. Tangible common shareholders equity
equals total shareholders equity less preferred stock,
goodwill and identifiable intangible assets. Tangible book value
per common share is computed by dividing tangible common
shareholders equity by the number of common shares
outstanding, including restricted stock units (RSUs) granted to
employees with no future service requirements. We believe that
tangible common shareholders equity and tangible book
value per common share are meaningful because they are measures
that we and investors use to assess capital adequacy.
The table below presents the reconciliation of total
shareholders equity to tangible common shareholders
equity.
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|
|
|
|
|
|
|
|
|
|
|
|
|
As of December
|
in millions
|
|
2010
|
|
|
2009
|
|
|
|
|
Total shareholders equity
|
|
$
|
77,356
|
|
|
$
|
70,714
|
|
|
|
Deduct: Preferred stock
|
|
|
(6,957
|
)
|
|
|
(6,957
|
)
|
|
|
|
|
Common shareholders equity
|
|
|
70,399
|
|
|
|
63,757
|
|
|
|
Deduct: Goodwill and identifiable intangible assets
|
|
|
(5,522
|
)
|
|
|
(4,920
|
)
|
|
|
|
|
Tangible common shareholders equity
|
|
$
|
64,877
|
|
|
$
|
58,837
|
|
|
|
|
|
Book value and tangible book value per common
share. Book value and tangible book value per
common share are based on common shares outstanding, including
RSUs granted to employees with no future service requirements,
of 546.9 million and 542.7 million as of
December 2010 and December 2009, respectively.
Off-Balance-Sheet
Arrangements
and Contractual Obligations
Off-Balance-Sheet
Arrangements
We have various types of
off-balance-sheet
arrangements that we enter into in the ordinary course of
business. Our involvement in these arrangements can take many
different forms, including:
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|
|
purchasing or retaining residual and other interests in special
purpose entities such as
mortgage-backed
and other
asset-backed
securitization vehicles;
|
|
|
|
holding senior and subordinated debt, interests in limited and
general partnerships, and preferred and common stock in other
nonconsolidated vehicles;
|
|
|
entering into interest rate, foreign currency, equity, commodity
and credit derivatives, including total return swaps;
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entering into operating leases; and
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|
|
providing guarantees, indemnifications, loan commitments,
letters of credit and representations and warranties.
|
We enter into these arrangements for a variety of business
purposes, including securitizations. The securitization vehicles
that purchase mortgages, corporate bonds, and other types of
financial assets are critical to the functioning of several
significant investor markets, including the
mortgage-backed
and other
asset-backed
securities markets, since they offer investors access to
specific cash flows and risks created through the securitization
process.
We also enter into these arrangements to underwrite client
securitization transactions; provide secondary market liquidity;
make investments in performing and nonperforming debt, equity,
real estate and other assets; provide investors with
credit-linked
and
asset-repackaged
notes; and receive or provide letters of credit to satisfy
margin requirements and to facilitate the clearance and
settlement process.
Our financial interests in, and derivative transactions with,
such nonconsolidated entities are accounted for at fair value,
in the same manner as our other financial instruments, except in
cases where we apply the equity method of accounting.
When we transfer a security that has very little, if any,
default risk under an agreement to repurchase the security where
the maturity date of the repurchase agreement matches the
maturity date of the underlying security (such that we
effectively no longer have a repurchase obligation) and we have
relinquished control over the underlying security, we record
such transactions as sales. These transactions are referred to
as repos to maturity. We had no such transactions
outstanding as of December 2010 or December 2009.
71
In the table above:
|
|
|
Obligations maturing within one year of our financial statement
date or redeemable within one year of our financial statement
date at the option of the holder are excluded and are treated as
short-term
obligations.
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|
|
Obligations that are repayable prior to maturity at the option
of Goldman Sachs are reflected at their contractual maturity
dates and obligations that are redeemable prior to maturity at
the option of the holder are reflected at the dates such options
become exercisable.
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Amounts included in the table do not necessarily reflect the
actual future cash flow requirements for these arrangements
because commitments and guarantees represent notional amounts
and may expire unused or be reduced or cancelled at the
counterpartys request.
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Due to the uncertainty of the timing and amounts that will
ultimately be paid, our liability for unrecognized tax benefits
has been excluded. See Note 26 to the consolidated
financial statements in Part II, Item 8 of this
Form 10-K
for further information about our unrecognized tax benefits.
|
See Notes 15 and 18 to the consolidated financial
statements in Part II, Item 8 of this
Form 10-K
for further information about our
short-term
borrowings, and commitments and guarantees.
As of December 2010, our unsecured
long-term
borrowings were $174.40 billion, with maturities extending
to 2060, and consisted principally of senior borrowings. See
Note 16 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information about our unsecured
long-term
borrowings.
As of December 2010, our future minimum rental payments net
of minimum sublease rentals under noncancelable leases were
$3.39 billion. These lease commitments, principally for
office space, expire on various dates through 2069. Certain
agreements are subject to periodic escalation provisions for
increases in real estate taxes and other charges. See
Note 18 to the consolidated financial statements in
Part II, Item 8 of this
Form 10-K
for further information about our leases.
Our occupancy expenses include costs associated with office
space held in excess of our current requirements. This excess
space, the cost of which is charged to earnings as incurred, is
being held for potential growth or to replace currently occupied
space that we may exit in the future. We regularly evaluate our
current and future space capacity in relation to current and
projected staffing levels. For the year ended
December 2010, total occupancy expenses for space
held in excess of our current requirements were
$130 million, which includes costs related to the
transition to our new headquarters in New York City. In
addition, in 2010, we incurred exit costs of $28 million,
related to our office space (included in Occupancy
and Depreciation and amortization in the
consolidated statements of earnings). We may incur exit costs in
the future to the extent we (i) reduce our space capacity
or (ii) commit to, or occupy, new properties in the
locations in which we operate and, consequently, dispose of
existing space that had been held for potential growth. These
exit costs may be material to our results of operations in a
given period.
Overview and
Structure of Risk Management
Overview
We believe that effective risk management is of primary
importance to the success of the firm. Accordingly, we have
comprehensive risk management processes through which we
monitor, evaluate and manage the risks we assume in conducting
our activities. These include market, credit, liquidity,
operational, legal, regulatory and reputational risk exposures.
Our risk management framework is built around three core
components: governance, processes and people.
Governance. Risk management governance starts
with our Board, which plays an important role in reviewing and
approving risk management policies and practices, both directly
and through its Risk Committee, which consists of all of our
independent directors. The Board also receives periodic updates
on firmwide risks from our independent control and support
functions. Next, at the most senior levels of the firm, our
leaders are experienced risk managers, with a sophisticated and
detailed understanding of the risks we take. Our senior managers
lead and participate in
risk-oriented
committees, as do the leaders of our independent control and
support
functions including
those in internal audit, compliance, controllers, credit risk
management, human capital management, legal, market risk
management, operations, operational risk management, tax,
technology and treasury.
The firms governance structure provides the protocol and
responsibility for decision-making on risk management issues and
ensures implementation of those decisions. We make extensive use
of
risk-related
committees that meet regularly and serve as an important means
to facilitate and foster ongoing discussions to identify, manage
and mitigate risks.
74
We maintain strong communication about risk and we have a
culture of collaboration in decision-making among the
revenue-producing units, independent control and support
functions, committees and senior management. While we believe
that the first line of defense in managing risk rests with the
managers in our revenue-producing units, we dedicate extensive
resources to independent control and support functions in order
to ensure a strong oversight structure and an appropriate
segregation of duties.
Processes. We maintain various processes and
procedures that are critical components of our risk management.
First and foremost is our daily discipline of marking
substantially all of the firms inventory to current market
levels. Goldman Sachs carries its inventory at fair value, with
changes in valuation reflected immediately in our risk
management systems and in net revenues. We do so because we
believe this discipline is one of the most effective tools for
assessing and managing risk and that it provides transparent and
realistic insight into our financial exposures.
We also apply a rigorous framework of limits to control risk
across multiple transactions, products, businesses and markets.
This includes setting credit and market risk limits at a variety
of levels and monitoring these limits on a daily basis. Limits
are typically set at levels that will be periodically exceeded,
rather than at levels which reflect our maximum risk appetite.
This fosters an ongoing dialogue on risk among
revenue-producing
units, independent control and support functions, committees and
senior management, as well as rapid escalation of
risk-related
matters. See Market Risk Management and Credit
Risk Management for further information on our risk limits.
Active management of our positions is another important process.
Proactive mitigation of our market and credit exposures
minimizes the risk that we will be required to take outsized
actions during periods of stress.
We also focus on the rigor and effectiveness of the firms
risk systems. The goal of our risk management technology is to
get the right information to the right people at the right time,
which requires systems that are comprehensive, reliable and
timely. We devote significant time and resources to our risk
management technology to ensure that it consistently provides us
with complete, accurate and timely information.
People. Even the best technology serves only
as a tool for helping to make informed decisions in real time
about the risks we are taking. Ultimately, effective risk
management requires our people to make ongoing portfolio
interpretations and adjustments. In both our revenue-producing
units and our independent control and support functions, the
experience of our professionals, and their understanding of the
nuances and limitations of each risk measure, guide the firm in
assessing exposures and maintaining them within prudent levels.
Structure
Ultimate oversight of risk is the responsibility of the
firms Board. The Board oversees risk both directly and
through its Risk Committee. Within the firm, a series of
committees with specific risk management mandates have oversight
or decision-making responsibilities for risk management
activities. Committee membership generally consists of senior
managers from both our revenue-producing units and our
independent control and support functions. We have established
procedures for these committees to ensure that appropriate
information barriers are in place. Our primary risk committees,
most of which also have additional
sub-committees
or working groups, are described below. In addition to these
committees, we have other
risk-oriented
committees which provide oversight for different businesses,
activities, products, regions and legal entities.
Membership of the firms risk committees is reviewed
regularly and updated to reflect changes in the responsibilities
of the committee members. Accordingly, the length of time that
members serve on the respective committees varies as determined
by the relevant committee charter or the committee chairs, and
based on the responsibilities of the members within the firm.
In addition, independent control and support functions, which
report to the chief financial officer, general counsels, chief
administrative officer, or in the case of Internal Audit, to the
Audit Committee of the Board, are responsible for
day-to-day
oversight of risk, as discussed in greater detail in the
following sections.
75
Liquidity
Risk
Liquidity is of critical importance to financial institutions.
Most of the recent failures of financial institutions have
occurred in large part due to insufficient liquidity.
Accordingly, the firm has in place a comprehensive and
conservative set of liquidity and funding policies to address
both firm-specific and broader industry or market liquidity
events. Our principal objective is to be able to fund the firm
and to enable our core businesses to continue to generate
revenues, even under adverse circumstances.
We manage liquidity risk according to the following principles:
Excess Liquidity. We maintain substantial
excess liquidity to meet a broad range of potential cash
outflows and collateral needs in a stressed environment.
Asset-Liability
Management. We assess anticipated holding periods
for our assets and their potential illiquidity in a stressed
environment. We manage the maturities and diversity of our
funding across markets, products and counterparties; and seek to
maintain liabilities of appropriate tenor relative to our asset
base.
Contingency Funding Plan. We maintain a
contingency funding plan to provide a framework for analyzing
and responding to a liquidity crisis situation or periods of
market stress. This framework sets forth the plan of action to
fund normal business activity in emergency and stress
situations. These principles are discussed in more detail below.
Excess
Liquidity
Our most important liquidity policy is to
pre-fund our
estimated potential cash needs during a liquidity crisis and
hold this excess liquidity in the form of unencumbered, highly
liquid securities and cash instruments. We believe that this
global core excess would be readily convertible to cash in a
matter of days, through liquidation, by entering into repurchase
agreements or from maturities of reverse repurchase agreements,
and that this cash would allow us to meet immediate obligations
without needing to sell other
assets or depend on additional funding from
credit-sensitive
markets.
As of Decemb