Goldman Sachs 2003 Annual Report Download - page 66

64 GOLDMAN SACHS 2003 ANNUAL REPORT
Management’s Discussion and Analysis
Our capital invested in non-U.S. subsidiaries is generally
exposed to foreign exchange risk, substantially all of
which is hedged. In addition, we generally hedge the non-
trading exposure to foreign exchange risk that arises
from transactions denominated in currencies other than
the transacting entity’s functional currency.
liquidity crisis plan
Goldman Sachs maintains a Liquidity Crisis Plan that
identifies a structure for analyzing and responding to a
liquidity-threatening event. The Liquidity Crisis Plan pro-
vides the framework to estimate the likely impact of a
liquidity event on Goldman Sachs and outlines which and
to what extent liquidity maintenance activities should be
implemented based on the severity of the event. It also
lists the crisis management team and internal and exter-
nal parties to be contacted to ensure effective distribution
of information.
cash flows
As a global financial institution, our cash flows are com-
plex and interrelated and bear little relation to our net
earnings and net assets and, consequently, we believe that
traditional cash flow analysis is less meaningful in evalu-
ating our liquidity position than the excess liquidity and
asset-liability management policies described above. Cash
flow analysis may, however, be helpful in highlighting cer-
tain macro trends and strategic initiatives in our business.
A further discussion of our cash flows follows.
year ended november 2003 – Our cash and cash
equivalents increased by $2.27 billion to $7.09 billion at
the end of 2003. We raised $20.58 billion in net cash
from financing activities, primarily in long-term debt. We
used net cash of $18.32 billion in our operating and
investing activities primarily to capitalize on opportuni-
ties in our trading and principal investing businesses,
including the purchase of investments that could be diffi-
cult to fund in periods of market stress. We also increased
our Global Core Excess liquidity, provided funding sup-
port for our William Street loan commitments program,
invested in the convertible preferred stock of SMFG and
financed the acquisition of East Coast Power L.L.C.
year ended november 2002 – Our cash and cash
equivalents decreased by $2.09 billion to $4.82 billion at
the end of 2002. We raised $9.09 billion in net cash from
financing activities, primarily in net short-term debt and
long-term debt (net of repayments of long-term debt). We
used net cash of $11.18 billion in our operating and
investing activities, primarily to capitalize on opportuni-
ties in our trading and principal investing businesses,
including the purchase of investments that could be diffi-
cult to fund in periods of market stress. We also increased
our Global Core Excess liquidity, made leasehold
improvements, and purchased telecommunications and
technology-related equipment.
year ended november 2001 – Our cash and cash equiva-
lents increased by $3.04 billion to $6.91 billion at the end
of 2001. We raised net cash of $2.08 billion from financ-
ing activities, primarily from long-term debt issuances (net
of repayments of long-term debt) and net short-term bor-
rowings, partially offset by common stock repurchased.
Net cash of $2.87 billion was provided from our operat-
ing activities. We used net cash of $1.91 billion in our
investing activities, primarily to make leasehold improve-
ments and to purchase technology-related equipment.
Operational Risks
Operational risk is a broad concept that relates to the risk
of loss arising from shortcomings or failures in internal
processes, people or systems. Operational risk can arise
from many factors ranging from more or less “routine”
processing errors to potentially costly incidents arising,
for example, from major systems failures. Operational
risk may also entail reputational harm. Thus, efforts to
identify, manage and mitigate operational risk must be
equally sensitive to the risk of reputational damage as
well as the risk of financial loss.
We manage operational risk through the application of
long standing, but continuously evolving, firmwide con-
trol standards; the training, supervision and development
of our people; the active participation and commitment
of senior management in a continuous process of iden-
tifying and mitigating key operational risks at both
the business unit level and for the firm as a whole
and a framework of strong and independent control
departments that monitor quantitative and qualitative
indicators of operational risk. Together, these elements
comprise a strong firmwide control culture that is at the
center of our efforts aimed at minimizing operational
shortcomings and the damage they can cause.
The Operational Risk Management Department is
responsible for the oversight and coordination of the
design, implementation and maintenance of our overall
operational risk management framework. This frame-
work, which evolves with the changing needs of busi-
ness complexities and regulatory guidance, takes into
account internal and external operational risk events,
business unit specific risk assessments, the ongoing
analysis of business specific risk metrics and the use of
scenario analyses. While the direct responsibility for the
control and mitigation of operational risk lies with the
individual business units, this framework provides a
consistent methodology for identifying and monitoring
operational risk factors for both individual business
unit managers and senior management.