Goldman Sachs 2003 Annual Report Download - page 52

Management’s Discussion and Analysis
50 GOLDMAN SACHS 2003 ANNUAL REPORT
OFF-BALANCE-SHEET ARRANGEMENTS
We have various types of off-balance-sheet arrangements
that we enter into in the ordinary course of business. We
enter into nonderivative guarantees, hold retained or con-
tingent interests in assets transferred by us to nonconsol-
idated entities, and incur obligations arising out of
variable interests we have in nonconsolidated entities, for
a variety of business purposes, including securitizing
commercial and residential mortgages and home equity
loans, government and corporate bonds, and other types
of financial assets. Variable interest entities (VIEs) and, to
a greater extent, qualifying special-purpose entities
(QSPEs) are utilized in the securitization process. VIEs
and QSPEs are critical to the functioning of several sig-
nificant investor markets, including the mortgage-backed
and asset-backed securities markets, since they provide
market liquidity to financial assets by offering investors
access to specific cash flows and risks created through the
securitization process.
Other reasons for entering into these arrangements
include underwriting client securitization transactions;
providing secondary market liquidity; making principal
investments in performing and nonperforming debt, real
estate and other assets; providing investors with credit-
linked and asset-repackaged notes; receiving or posting
collateral under derivative and other margin agreements;
and facilitating the clearance and settlement process.
Our involvement in these arrangements can take many
different forms, including purchasing and retaining resid-
ual and other interests in mortgage-backed and asset-
backed securitization vehicles; holding senior and
subordinated debt, limited and general partnership inter-
ests, and preferred and common stock; entering into
interest rate, foreign currency, equity, commodity and
credit derivatives; and providing guarantees, indemnifica-
tions, letters of credit, representations and warranties.
Our financial interests in, and derivative transactions
with, nonconsolidated entities are accounted for at fair
value, in the same manner as our other financial instru-
ments, except in cases where we exert significant influence
over an entity and apply the equity method of accounting.
Our other types of off-balance-sheet arrangements include derivative transactions, leases, letters of credit, and loan and
other commitments. The following table sets forth where a discussion of these and other off-balance-sheet arrangements
may be found in this Annual Report:
Type of Off-Balance-Sheet Arrangement Disclosure in Annual Report
Nonderivative guarantees See Note 6 to the consolidated financial statements.
Retained interests or contingent interests in assets See Note 3 to the consolidated financial statements.
transferred by us to nonconsolidated entities
Other obligations, including contingent obligations, See Note 3 to the consolidated financial statements.
arising out of variable interests we have in
nonconsolidated entities
Derivative contracts See “—Critical Accounting Policies” and “—Risk
Management” and Note 3 to the consolidated
financial statements.
Leases, letters of credit, and loans and See “—Capital and Funding” and Note 6 to the
other commitments consolidated financial statements.
In addition, see Note 2 to the consolidated financial statements for a discussion of our consolidation policies.