Goldman Sachs 2007 Annual Report Download - page 80

Management’s Discussion and Analysis
■ We fund a substantial portion of our inventory on a secured
basis. We believe secured financing provides Goldman Sachs
with a more stable source of liquidity than unsecured
financing, as it is less sensitive to changes in our credit due
to the underlying collateral.
■
Our liquidity depends to an important degree on the stability
of our short-term unsecured financing base. Accordingly, we
prefer the use of promissory notes (in which Goldman Sachs
does not make a market) over commercial paper, which we
may repurchase prior to maturity through the ordinary course
of business as a market maker. As of November 2007 and
November 2006, our unsecured short-term borrowings,
including the current portion of unsecured long-term
borrowings, were $71.56 billion and $47.90 billion,
respectively. See Note 4 to the consolidated financial
statements for further information regarding our unsecured
short-term borrowings.
■ We recognize that secured funding transactions have greater
refinancing risk when the underlying collateral is more difficult
to fund. Consequently, we seek longer maturities for secured
funding transactions collateralized by these assets. In some
cases, we use extendible maturity features to obtain a rolling
minimum term to the funding.
■
We issue substantially all of our unsecured debt without
provisions that would, based solely upon an adverse change
in our credit ratings, financial ratios, earnings, cash flows
or stock price, trigger a requirement for an early payment,
collateral support, change in terms, acceleration of maturity
or the creation of an additional financial obligation.
We seek to maintain broad and diversified funding sources
globally for both secured and unsecured funding. We make
extensive use of the repurchase agreement and securities lending
markets, as well as other secured funding markets. In addition,
we issue debt through syndicated U.S. registered offerings, U.S.
registered and 144A medium-term note programs, offshore
medium-term note offerings and other bond offerings, U.S. and
non-U.S. commercial paper and promissory note issuances, and
other methods. We also arrange for letters of credit to be issued
on our behalf.
We benefit from distributing our debt issuances through
our own sales force to a large, diverse global creditor base and
we believe that our relationships with our creditors are critical
to our liquidity. Our creditors include banks, governments,
securities lenders, pension funds, insurance companies and
mutual funds. We access funding in a variety of markets in the
Americas, Europe and Asia. We have imposed various internal
guidelines on investor concentration, 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.
Certain financial instruments may be more difficult to fund
on a secured basis during times of market stress. Accordingly,
we generally hold higher levels of total capital for these assets
than more liquid types of financial instruments. The table
below sets forth our aggregate holdings in these categories of
financial instruments:
As of November
(in millions) 2007 2006
Mortgage and other asset-backed
loans and securities
(1) $46,436 $41,017
Bank loans
(2) 49,154 28,196
High-yield securities 12,807 9,403
Emerging market debt securities 3,343 2,291
Private equity and real estate
fund investments
(3) 16,244 5,968
Emerging market equity securities 8,014 3,046
ICBC ordinary shares
(4) 6,807 5,194
SMFG convertible preferred stock 4,060 4,505
Other restricted public
equity securities 3,455 1,730
Other investments in funds
(5) 3,437 260
(1) Excludes $7.64 billion of mortgage whole loans that were transferred to
securitization vehicles where such transfers were accounted for as secured
financings rather than sales under SFAS No. 140. We distributed to investors the
securities that were issued by the securitization vehicles and therefore do not
bear economic exposure to the underlying mortgage whole loans.
(2)
Includes funded commitments and inventory held in connection with our origination
and secondary trading activities.
(3) Includes interests in our merchant banking funds. Such amounts exclude assets
related to consolidated investment funds of $8.13 billion and $6.03 billion as of
November 2007 and November 2006, respectively, for which Goldman Sachs
does not bear economic exposure.
(4) Includes interests of $4.30 billion and $3.28 billion as of November 2007 and
November 2006, respectively, held by investment funds managed by
Goldman Sachs.
(5) Includes interests in other investment funds that we manage.
A large portion of these assets are funded through secured
funding markets or nonrecourse financing. We focus on
demonstrating a consistent ability to fund these assets on a
secured basis for extended periods of time to reduce refinancing
risk and to help ensure that they have an established amount
of loan value in order that they can be funded in periods of
market stress.
See Note 3 to the consolidated financial statements for further
information regarding the financial instruments we hold.
Conservative Liability Structure
We seek to structure our liabilities conservatively to reduce
refinancing risk and the risk that we may redeem or
repurchase certain of our borrowings prior to their contractual
maturity. Our conservative liability structure reflects the
following policies:
78 Goldman Sachs 2007 Annual Report