Goldman Sachs 2007 Annual Report Download - page 118

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Notes to Consolidated Financial Statements
In the ordinary course of business, the firm indemnifies and
guarantees certain service providers, such as clearing and custody
agents, trustees and administrators, against specified potential
losses in connection with their acting as an agent of, or providing
services to, the firm or its affiliates. The firm also indemnifies
some clients against potential losses incurred in the event specified
third-party service providers, including sub-custodians and
third-party brokers, improperly execute transactions. In addition,
the firm is a member of payment, clearing and settlement networks
as well as securities exchanges around the world that may require
the firm to meet the obligations of such networks and exchanges
in the event of member defaults. In connection with its prime
brokerage and clearing businesses, the firm agrees to clear and
settle on behalf of its clients the transactions entered into by
them with other brokerage firms. The firm’s obligations in
respect of such transactions are secured by the assets in the
client’s account as well as any proceeds received from the
transactions cleared and settled by the firm on behalf of the
client. In connection with joint venture investments, the firm
The firm has established trusts, including Goldman Sachs
Capital I, II and III, and other entities for the limited purpose of
issuing securities to third parties, lending the proceeds to the firm
and entering into contractual arrangements with the firm and
third parties related to this purpose. (See Note 5 for information
regarding the transactions involving Goldman Sachs Capital I,
II and III.) The firm effectively provides for the full and
unconditional guarantee of the securities issued by these entities,
which are not consolidated for accounting purposes. Timely
payment by the firm of amounts due to these entities under the
borrowing, preferred stock and related contractual arrangements
will be sufficient to cover payments due on the securities issued
by these entities. Management believes that it is unlikely that any
circumstances will occur, such as nonperformance on the part
of paying agents or other service providers, that would make
it necessary for the firm to make payments related to these entities
other than those required under the terms of the borrowing,
preferred stock and related contractual arrangements and in
connection with certain expenses incurred by these entities.
The following tables set forth certain information about the firm’s derivative contracts that meet the definition of a guarantee
and certain other guarantees as of November 2007 and November 2006:
As of November 2007
Maximum Payout/Notional Amount by Period of Expiration
(1)
(in millions) 2008 2009 – 2010 2011– 2012 2013 – Thereafter Total
Derivatives
(2) $580,769 $492,563 $457,511 $514,498 $2,045,341
Securities lending indemnifications
(3)
26,673 — — — 26,673
Performance bonds
(4)
2,046 — — — 2,046
Other financial guarantees
(5)
381 121 258 46 806
As of November 2006
Maximum Payout/Notional Amount by Period of Expiration
(1)
(in millions) 2007 2008 – 2009 2010 – 2011 2012– Thereafter Total
Derivatives
(2) $379,256 $428,258 $460,088 $399,449 $1,667,051
Securities lending indemnifications
(3) 19,023 — — — 19,023
Performance bonds — — — — —
Other financial guarantees
(5) 592 99 76 86 853
(1) Such amounts do not represent the anticipated losses in connection with these contracts.
(2)
The aggregate carrying value of these derivatives as of November 2007 was a liability of $33.10 billion. The aggregate carrying value of these derivatives as of November 2006
was an asset of $1.12 billion, consisting of contracts with an asset value of $11.06 billion and contracts with a liability value of $9.94 billion. The carrying value excludes
the effect of a legal right of setoff that may exist under an enforceable netting agreement. These derivative contracts are risk managed together with derivative contracts
that are not considered guarantees under FIN No. 45, and therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities.
(3) Collateral held by the lenders in connection with securities lending indemnifications was $27.49 billion and $19.70 billion as of November 2007 and November 2006,
respectively.
(4) Excludes collateral of $2.05 billion related to these obligations.
(5) The carrying value of these guarantees was a liability of $43 million and $15 million as of November 2007 and November 2006, respectively.
116 Goldman Sachs 2007 Annual Report