Goldman Sachs 2000 Annual Report Download - page 57

Note 4/Financial Instruments
Financial instruments, including both cash instruments and
derivatives, are used to manage market risk, facilitate cus-
tomer transactions, engage in proprietary transactions and
meet financing objectives. These instruments can be either
executed on an exchange or negotiated in the OTC market.
Transactions involving financial instruments sold, but not
yet purchased, entail an obligation to purchase a financial
instrument at a future date. The firm may incur a loss if the
market value of the financial instrument subsequently
increases prior to the purchase of the instrument.
Fair Value of Financial Instruments
Substantially all of the firm’s assets and liabilities are car-
ried at fair value or amounts that approximate fair value.
Trading assets and liabilities, including derivative contracts
used for trading purposes, are carried at fair value and
reported as “Financial instruments owned” and “Financial
instruments sold, but not yet purchased,” on the consoli-
dated statements of financial condition. Nontrading assets
and liabilities are generally carried at fair value or amounts
that approximate fair value.
Nontrading assets include cash and cash equivalents; cash
and securities segregated in compliance with U.S. federal
and other regulations; receivables from brokers, dealers
and clearing organizations; receivables from customers and
counterparties; securities borrowed; securities purchased
under agreements to resell; right to receive securities; and
certain investments, primarily those made in connection
with the firm’s merchant banking activities.
Nontrading liabilities include short-term borrowings;
payables to brokers, dealers and clearing organizations;
payables to customers and counterparties; securities loaned;
securities sold under agreements to repurchase; obligation to
return securities; other liabilities and accrued expenses;
and long-term borrowings. The fair value of the firm’s long-
term borrowings and associated hedges is discussed in Note 6.
Trading and Principal Investments
The firm’s Trading and Principal Investments business, a
component of the Global Capital Markets segment, facili-
tates customer transactions, takes proprietary positions
through market making in and trading of securities, curren-
cies, commodities and swaps, and other derivatives, and
engages in floor-based market making as a specialist on
U.S. equities and options exchanges. Derivative financial
instruments are often used to hedge cash instruments or
other derivative financial instruments as an integral part of
the firm’s strategies. As a result, it is necessary to view the
results of any activity on a fully integrated basis, including
cash positions, the effect of related derivatives and the
financing of the underlying positions.
Net revenues 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, the underlying positions. See Note
14 for further information regarding the firm’s segments.
The following table sets forth the net revenues of Trading
and Principal Investments:
Year Ended November
(in millions) 2000 1999 1998
FICC $3,004 $2,862 $1,438
Equities 3,489 1,961 795
Principal Investments 134 950 146
Total $6,627 $5,773 $2,379
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The following table sets forth the unaudited pro forma combined operating results of the firm and SLK for the years ended
November 2000 and November 1999. These pro forma results were prepared as if the firm’s combination with SLK had taken
place at the beginning of the periods presented.
Pro Forma Operating Results
(unaudited)
Year Ended November
(in millions, except per share amounts) 2000 1999
Revenues, net of interest expense $18,630 $14,652
Net earnings 3,459 2,595
Basic EPS 6.66 5.06
Diluted EPS 6.32 4.97