Goldman Sachs 2003 Annual Report Download - page 84

Notes to Consolidated Financial Statements
82 GOLDMAN SACHS 2003 ANNUAL REPORT
are accounted for at fair value and included in “Total
financial instruments owned, at fair value” in the consoli-
dated statements of financial condition.
During the years ended November 2003 and November
2002, the firm securitized $95.00 billion and $107.05 bil-
lion, respectively, of financial assets, including $70.89 bil-
lion and $89.33 billion, respectively, of agency
mortgage-backed securities. Cash flows received on
retained interests and other securitization cash flows were
approximately $1 billion and $534 million for the years
ended November 2003 and November 2002, respectively.
As of November 2003, the firm held $3.20 billion of
retained interests, including $3.04 billion held in QSPEs.
Securitization Activities
The firm securitizes commercial and residential mort-
gages, home equity loans, government and corporate
bonds, and other types of financial assets. The firm acts
as underwriter of the beneficial interests that are sold to
investors. The firm derecognizes financial assets trans-
ferred in securitizations provided it has relinquished con-
trol over such assets. Transferred assets are accounted
for at fair value prior to securitization. Net revenues
related to these underwriting activities are recognized in
connection with the sales of the underlying beneficial
interests to investors.
The firm may retain interests in securitized financial assets,
which it generally attempts to sell as quickly as possible,
subject to prevailing market conditions. Retained interests
The fair value of $1.05 billion of retained interests was based on quoted market prices in active markets. The following
table sets forth the weighted average key economic assumptions used in measuring the fair value of $2.15 billion of
retained interests for which fair value is based on alternative pricing sources with reasonable, little or no price trans-
parency and the sensitivity of those fair values to immediate adverse changes of 10% and 20% in those assumptions:
AS OF NOVEMBER 2003
TYPE OF RETAINED INTERESTS
($ IN MILLIONS) MORTGAGE-BACKED OTHER ASSET-BACKED(3)
Fair value of retained interests $1,199 $954
Weighted average life (years) 3.8 3.4
Annual constant prepayment rate 22.0% N/A
Impact of 10% adverse change $ (3) $ —
Impact of 20% adverse change (7) —
Annual credit losses(1) 2.9% 1.3%
Impact of 10% adverse change(2) $ (11) $ (6)
Impact of 20% adverse change(2) (19) (11)
Annual discount rate 15.0% 8.3%
Impact of 10% adverse change $ (27) $ (6)
Impact of 20% adverse change (51) (11)
(1) Annual percentage credit loss is based only on positions in which expected credit loss is a key assumption in the determination of fair values.
(2) The impacts of adverse change take into account credit mitigants incorporated in the retained interests, including over-collateralization and sub-
ordination provisions.
(3) Includes retained interests in government and corporate bonds and other types of financial assets that are not subject to prepayment risk.
The preceding table does not give effect to the offsetting
benefit of other financial instruments that are held to
hedge risks inherent in these retained interests. Changes
in fair value based on a 10% adverse variation in
assumptions generally cannot be extrapolated because
the relationship of the change in assumptions to the
change in fair value is not usually linear. In addition, the
impact of a change in a particular assumption is calcu-
lated independently of changes in any other assumption.
In practice, simultaneous changes in assumptions might
magnify or counteract the sensitivities disclosed above.
In addition to the retained interests described above, the
firm also held interests in QSPEs, primarily agency
mortgage-backed securities, purchased in connection
with secondary market-making activities. These pur-
chased interests approximated $6 billion and $3 billion
as of November 2003 and November 2002, respectively.