Goldman Sachs 2003 Annual Report Download - page 64

62 GOLDMAN SACHS 2003 ANNUAL REPORT
Management’s Discussion and Analysis
that can call collateral through marking transac-
tions to market will do so continually;
•additional collateral that could be called in the
event of a downgrade in our debt ratings;
•draws on our unfunded commitments not sup-
ported by our William Street credit extension
program(1); and
•upcoming cash outflows, such as tax and bonus
payments.
As a result of our policy to pre-fund liquidity that we esti-
mate may be needed in a crisis, we hold more unencum-
bered securities and larger unsecured debt balances than
our business would otherwise require.
other unencumbered assets – In addition to our
Global Core Excess liquidity described above, we have a
significant amount of other unencumbered securities as a
result of our business activities. These assets, which are
located in the United States, Europe and Asia, include
other government bonds, high-grade money market secu-
rities, corporate bonds and marginable equities.
Our policy is to maintain Global Core Excess liquidity
and other unencumbered assets in an amount that, if
pledged or sold, would provide the funds necessary to
replace at least 100% of our unsecured obligations that
are scheduled to mature (or where holders have the
option to redeem) within the next twelve months. This
policy is intended to ensure that we could fund our posi-
tions on a secured basis for one year in the event we were
unable to issue new unsecured debt or liquidate assets. To
determine the amount of unencumbered assets required,
we assume conservative loan values that are based on
stress-scenario borrowing capacity. We review these
assumptions asset-by-asset at least annually. The esti-
mated aggregate loan value of our Global Core Excess
liquidity and our other unencumbered assets averaged
$76.42 billion in 2003 and $68.55 billion in 2002.
committed bank facilities – While we assume com-
mitted or advised bank facilities will be unavailable in the
event of a liquidity crisis, Goldman Sachs maintains over
$1 billion in committed undrawn bank facilities as an
additional liquidity resource.
asset-liability management policies
maintenance of a highly liquid balance sheet –
Goldman Sachs seeks to maintain a highly liquid balance
sheet and substantially all of our inventory is marked-to-
market daily. Many of our assets are readily funded in the
repurchase agreement and securities lending markets.
Our balance sheet fluctuates significantly between financial
statement dates and is lower at fiscal period end than
would be observed on an average basis. We require our
businesses to reduce balance sheet usage on a quarterly
basis to demonstrate compliance with limits set by man-
agement, thereby providing a disincentive to committing
our capital over longer periods of time. These balance
sheet reductions are generally achieved during the last
several weeks of each fiscal quarter through ordinary-
course, open-market transactions in the most liquid por-
tions of our balance sheet, principally U.S. government
and agency securities, securities of foreign sovereigns,
and mortgage and money market instruments, as well as
through the roll-off of repurchase agreements and cer-
tain collateralized financing arrangements. Accordingly,
over the last six quarters, our total assets and adjusted
assets at quarter end have been, on average, 18% lower
and 14% lower, respectively, than amounts that would
have been observed, based on a weekly average, over
that period. These differences, however, have not
resulted in material changes to our credit risk, market
risk or excess liquidity position because they are gener-
ally in highly liquid assets that are typically financed on
a secured basis.
funding of assets with longer term liabilities –
We seek to maintain total capital (long-term borrowings
plus shareholders’ equity) substantially in excess of the
aggregate of the following long-term financing requirements:
•the portion of financial instruments owned that
we believe could not be funded on a secured basis
in periods of market stress;
•goodwill and identifiable intangible assets, prop-
erty, leasehold improvements and equipment, and
other illiquid assets;
•derivatives margin requirements and collateral
outflows; and
•anticipated draws on our unfunded commit-
ments, including the William Street credit exten-
sion program.
Our total capital of $79.11 billion and $57.71 billion as
of November 2003 and November 2002, respectively,
substantially exceeded these requirements.
We assume conservative loan values when we estimate
the portion of a financial instrument that we believe
could not be funded on a secured basis in a stress sce-
nario. Certain financial instruments that may be difficult
to fund on a secured basis during times of market stress,
such as certain mortgage whole loans, mortgage-backed
(1) The Global Core Excess liquidity excludes liquid assets that Funding Corp
holds separately to support the William Street credit extension program.