Goldman Sachs 2003 Annual Report Download - page 65

GOLDMAN SACHS 2003 ANNUAL REPORT 63
Management’s Discussion and Analysis
securities, bank loans and high-yield securities, generally
require higher levels of unsecured long-term financing
than more liquid types of financial instruments, such as
U.S. government and agency securities. See Note 3 to the
consolidated financial statements for information on the
financial instruments we hold and Note 10 to the consol-
idated financial statements for further information
regarding other assets.
While Goldman Sachs generally does not rely on imme-
diate sales of assets (other than from our Global Core
Excess liquidity) to maintain liquidity in a distressed envi-
ronment, we recognize that orderly asset sales may be
prudent, and could be necessary, in a persistent liquidity
crisis. As a result, we seek to manage the composition of
our asset base and the maturity profile of our funding
such that we should be able to liquidate our assets prior
to our liabilities coming due, even in times of prolonged
or severe liquidity stress.
diversification of funding sources – Goldman
Sachs seeks to maintain broad and diversified funding
sources globally. We have imposed various internal guide-
lines, including the amount of our commercial paper that
can be owned and letters of credit that can be issued by
any single investor or group of investors. We benefit from
distributing our debt issuances through our own sales
force to a large, diverse global creditor base, including
insurance companies, mutual funds, banks, bank trust
departments, corporations, individuals and other asset
managers. We believe that our relationships with our
creditors are critical to our liquidity.
We access funding in a variety of markets in the United
States, Europe and Asia. We make extensive use of the
repurchase agreement and securities lending markets,
arrange for letters of credit to be issued on our behalf,
and raise funding in the public and private markets. In
particular, we issue debt through syndicated U.S. regis-
tered offerings, U.S. registered and 144A medium-term
notes programs, offshore medium-term notes offerings
and other bond offerings, U.S. and non-U.S. commercial
paper and promissory note issuances, and other methods.
We emphasize the use of promissory notes (short-term
unsecured debt that is nontransferable and in which
Goldman Sachs does not make a market) over commer-
cial paper in order to improve the stability of our unse-
cured financing base.
avoidance of debt maturity concentrations – We
seek to structure our liabilities to avoid maturity concen-
trations. To that end, we have created internal guidelines
on the principal amount of debt maturing on any one day
or during any single week or year. We also have average
maturity targets for our long-term and total unsecured
debt programs.
subsidiary funding and foreign exchange policies –
Substantially all of our unsecured funding is raised by
our parent company, Group Inc. The parent company
then lends the necessary funds to its subsidiaries, some of
which are regulated, to meet their asset financing
requirements. The benefits of this strategy include
enhanced control and greater flexibility to meet the
funding requirements of our subsidiaries.
We recognize that regulatory and other legal restrictions
may limit the free flow of funds from subsidiaries where
assets are held, to the parent company, or other sub-
sidiaries. In particular, many of our subsidiaries are sub-
ject to laws that authorize regulatory bodies to block or
reduce the flow of funds from those subsidiaries to Group
Inc. Regulatory action of that kind could impede access
to funds that Group Inc. needs to make payments on
obligations, including debt obligations. Group Inc. has
substantial amounts of equity and subordinated indebt-
edness invested, directly or indirectly, in its regulated sub-
sidiaries; for example, as of November 2003, Group Inc.
had $12.79 billion of such equity and subordinated
indebtedness invested in Goldman, Sachs & Co., its prin-
cipal U.S. regulated broker-dealer, $8.58 billion invested
in Goldman Sachs International, a registered U.K. bro-
ker-dealer, $2.30 billion invested in Spear, Leeds &
Kellogg, L.P., a U.S. regulated broker-dealer, and $1.91
billion invested in Goldman Sachs (Japan) Limited, a
Tokyo-based broker-dealer. Group Inc. also had $39.98
billion of unsubordinated loans to these entities as of
November 2003, as well as significant amounts of capital
invested in and loans to its other regulated subsidiaries.
Because of these restrictions, we manage our intercom-
pany exposure by generally requiring senior and subordi-
nated intercompany loans to have maturities equal to or
shorter than the maturities of the aggregate borrowings
of the parent company. This policy ensures that the sub-
sidiaries’ obligations to the parent company will gener-
ally mature in advance of the parent company’s
third-party borrowings. In addition, many of our sub-
sidiaries and affiliates pledge collateral at loan value to
the parent company to cover their intercompany bor-
rowings (other than subordinated debt) in order to miti-
gate parent company liquidity risk. Equity investments in
subsidiaries are generally funded with parent company
equity capital. As of November 2003, Group Inc.’s equity
investment in subsidiaries was $20.62 billion compared
with its shareholders’ equity of $21.63 billion.