Goldman Sachs 2007 Annual Report Download - page 82

Management’s Discussion and Analysis
Crisis Planning
In order to be prepared for a liquidity event, or a period of
market stress, we base our liquidity risk management framework
and our resulting funding and liquidity policies on conservative
stress-scenario assumptions. Our planning incorporates
several market-based and operational stress scenarios. We also
periodically conduct liquidity crisis drills to test our lines of
communication and backup funding procedures.
In addition, we maintain a liquidity crisis plan that specifies an
approach for analyzing and responding to a liquidity-threatening
event. The plan provides the framework to estimate the likely
impact of a liquidity event on Goldman Sachs based on some
of the risks identified above 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 external parties to be
contacted to ensure effective distribution of information.
Credit Ratings
We rely upon the short-term and long-term debt capital markets
to fund a significant portion of our day-to-day operations.
The cost and availability of debt financing is influenced by
our credit ratings. Credit ratings are important when we are
competing in certain markets and when we seek to engage
in longer term transactions, including OTC derivatives. We
believe our credit ratings are primarily based on the credit
rating agencies’ assessment of our liquidity, market, credit and
operational risk management practices, the level and variability
of our earnings, our capital base, our franchise, reputation and
management, our corporate governance and the external
operating environment. See “
— Certain Risk Factors That
May Affect Our Business” above for a discussion of the risks
associated with a reduction in our credit ratings.
SUBSIDIARY FUNDING 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 and capital requirements. In addition, the parent
company provides its regulated subsidiaries with the necessary
capital to meet their regulatory requirements. The benefits
of this approach to subsidiary funding include enhanced control
and greater flexibility to meet the funding requirements of
our subsidiaries.
Our intercompany funding policies are predicated on an
assumption that, unless legally provided for, funds or securities
are not freely available from a subsidiary to its parent company
or other subsidiaries. In particular, many of our subsidiaries
are subject to laws that authorize regulatory bodies to block
or limit 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. As such, we assume that capital or
other financing provided to our regulated subsidiaries is not
available to our parent company or other subsidiaries. In
addition, we assume that the Global Core Excess held in our
principal non-U.S. operating entities will not be available to
our parent company or other subsidiaries and therefore is
available only to meet the potential liquidity requirements of
those entities.
We also manage our liquidity risk by requiring senior and
subordinated 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 subsidiaries’
obligations to the parent company will generally mature in
advance of the parent company’s third-party borrowings. In
addition, many of our subsidiaries and affiliates maintain
unencumbered assets to cover their intercompany borrowings
(other than subordinated debt) in order to mitigate parent
company liquidity risk.
Group Inc. has provided substantial amounts of equity
and subordinated indebtedness, directly or indirectly, to its
regulated subsidiaries; for example, as of November 2007,
Group Inc. had $24.49 billion of such equity and subordinated
indebtedness invested in Goldman, Sachs & Co., its principal
U.S. registered broker-dealer; $27.51 billion invested in
Goldman Sachs International, a regulated U.K. broker-dealer;
$2.40 billion invested in Goldman Sachs Execution &
Clearing, L.P., a U.S. registered broker-dealer; and $3.15 billion
invested in Goldman Sachs Japan Co., Ltd., a regulated
Japanese broker-dealer. Group Inc. also had $44.99 billion of
unsubordinated loans to these entities as of November 2007,
as well as significant amounts of capital invested in and loans
to its other regulated subsidiaries.
80 Goldman Sachs 2007 Annual Report