Goldman Sachs 2000 Annual Report Download - page 39

funding, even in periods of market stress. A substantial
portion of our inventory turns over rapidly and is marked-
to-market daily. We maintain long-term borrowings and
shareholders’ equity substantially in excess of our less
liquid assets.
Excess Liquidity. In addition to maintaining a highly liquid
balance sheet and a significant amount of longer term liabil-
ities to assure liquidity even during adverse conditions, we
seek to maintain a liquidity cushion that consists principally
of unencumbered U.S. government and agency obligations
that may be sold or pledged to provide immediate liquidity.
This pool of highly liquid assets averaged $18.19 billion
during 2000 and $17.99 billion during 1999.
Dynamic Liquidity Management. Goldman Sachs seeks to
manage the composition of its asset base and the maturity
profile of its funding such that it should be able to liquidate
its assets prior to its liabilities coming due, even in times of
liquidity stress. We have traditionally been able to fund our
liquidity needs through security-based and collateralized
funding, such as repurchase transactions and securities
lending, as well as short-term and long-term borrowings
and equity capital. To further evaluate the adequacy of our
liquidity management policies and guidelines, we perform
weekly “stress funding” simulations of disruptions to our
access to unsecured credit.
Liquidity Ratio Maintenance. It is Goldman Sachs’ policy to
further manage its liquidity by maintaining a “liquidity ratio”
of at least 100%. Under this policy, we seek to maintain
unencumbered assets in an amount that, if pledged or sold,
would provide the funds necessary to replace unsecured
obligations that are scheduled to mature (or where holders
have the option to redeem) within the coming year. The
maintenance of this liquidity ratio is intended to permit us to
fund our positions on a fully secured basis in the event that
we were unable to replace our unsecured debt maturing
within one year.
Intercompany Funding. Most of the liquidity of Goldman
Sachs is raised by the parent company, The Goldman Sachs
Group, Inc. The parent company then lends the necessary
funds to its subsidiaries and affiliates. We carefully manage
our intercompany exposure by generally requiring inter-
company loans to have maturities equal to or shorter than
the maturities of the aggregate borrowings of the parent
company. This policy ensures that the subsidiaries’ obliga-
tions to the parent company will generally mature in
advance of the parent company’s third-party long-term
borrowings. In addition, many of our subsidiaries and affili-
ates generally pledge collateral to cover their intercompany
borrowings. We generally fund our equity investments in
subsidiaries with equity capital.
The Balance Sheet
Goldman Sachs maintains a highly liquid balance sheet that
fluctuates significantly between financial statement dates.
The following table sets forth our total assets, adjusted
assets, leverage ratios and book value per share:
As of November
($ in billions, except per share amounts) 2000 1999
Total assets $ 290 $ 250
Adjusted assets(1) 217 188
Leverage ratio(2) 17.5x 24.7x
Adjusted leverage ratio(3) 13.1x 18.5x
Book value per share(4) $32.18 $20.94
(1) Adjusted assets represent total assets less securities purchased
under agreements to resell, certain securities borrowed transactions
and the increase in total assets related to certain provisions of
Statement of Financial Accounting Standards No. 125.
(2) Leverage ratio equals total assets divided by shareholders’ equity.
(3) Adjusted leverage ratio equals adjusted assets divided by share-
holders’ equity.
(4) Book value per share is based on common shares outstanding,
including restricted stock units granted to employees with no future
service requirements, of 513.7 million as of November 2000 and
484.6 million as of November 1999.
As of November 2000 and 1999, we held approximately
$2.74 billion and $2.62 billion, respectively, in high-yield
debt and emerging market securities and $2.83 billion and
$1.80 billion, respectively, in bank loans. These assets may
be relatively illiquid during times of market stress. We seek
to diversify our holdings of these assets by industry and by
geographic location.
As of November 2000 and 1999, the aggregate carrying
value of our principal investments held directly or through
our merchant banking funds was approximately $3.52 billion
and $2.88 billion, respectively. These carrying values were
comprised of corporate principal investments with an
aggregate carrying value of approximately $2.51 billion and
$1.95 billion, respectively, and real estate investments with
an aggregate carrying value of approximately $1.01 billion
and $928 million, respectively.
37