Goldman Sachs 2003 Annual Report Download - page 37

Management’s Discussion and Analysis
GOLDMAN SACHS 2003 ANNUAL REPORT 35
Exchange Commission (SEC) investigations into
the stock specialist business could adversely
impact our trading businesses and impair the
value of our goodwill and identifiable intangible
assets. For a further discussion of our goodwill
and identifiable intangible assets, see “— Critical
Accounting Policies— Goodwill and Identifiable
Intangible Assets.”
•Reductions in the level of the equities markets also
tend to reduce the value of our clients’ portfolios,
which in turn may reduce the fees we earn for
managing assets. Even in the absence of uncertain
or unfavorable economic or market conditions,
investment performance by our asset management
business below the performance of benchmarks or
competitors could result in a decline in assets
under management and therefore in the incentive
and management fees we receive.
credit risk – We are exposed to the risk that third par-
ties 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 liquid-
ity, operational failure or other reasons. The amount and
duration of our credit exposures have been increasing
over the past several years, as has the breadth of the enti-
ties to which we have credit exposure. As a clearing mem-
ber firm, we finance our customer positions and we could
be held responsible for the defaults or misconduct of our
customers. In addition, we have experienced, due to
competitive factors, pressure to extend credit and price
more aggressively the credit risks we take. In particular,
corporate clients sometimes seek to require credit com-
mitments from us in connection with investment banking
and other assignments. 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. In addition, concerns about, or a
default by, one institution could lead to significant liquid-
ity problems, losses or defaults by other institutions,
which in turn could adversely affect Goldman Sachs.
liquidity risk – Liquidity (i.e., ready access to funds)
is essential to our businesses. Our liquidity could be
impaired by an inability to access secured and/or unse-
cured debt markets, an inability to access funds from
our subsidiaries or an inability to sell assets. This situa-
tion 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. Further, our ability to sell assets may be impaired if
other market participants are seeking to sell similar
assets at the same time.
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 bilateral provisions in some of
our trading and collateralized financing contracts.
Under such provisions, counterparties could be permit-
ted 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 move-
ments. For a discussion of the potential impact on
Goldman Sachs of a reduction in our credit ratings, see
“— Capital and Funding — Credit Ratings.”
operational and infrastructure risk – Our busi-
nesses are highly dependent on our ability to process, on
a daily basis, a large number of transactions across
numerous and diverse markets in many currencies, and
the transactions we process have become increasingly
complex. Shortcomings or failures in our internal
processes, people or systems could lead to, among other
consequences, financial loss and reputational damage. In
addition, despite the contingency plans we have in place,
our ability to conduct business may be adversely
impacted by a disruption in the infrastructure that sup-
ports our businesses and the communities in which they
are located. This may include a disruption involving elec-
trical, communications, transportation or other services
used by Goldman Sachs or third parties with which we
conduct business.
legal and regulatory risk – Substantial legal liability
or a significant regulatory action against Goldman Sachs
could have material adverse financial effects or cause sig-
nificant reputational harm to Goldman Sachs, 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 claimed in litigation
and regulatory proceedings against financial intermedi-
aries have been increasing. For a discussion of how we
account for our legal and regulatory exposures, see
“— Use of Estimates.”