Goldman Sachs 2012 Annual Report Download - page 123

Notes to Consolidated Financial Statements
The table below presents the valuation techniques and the
nature of significant inputs generally used to determine the
fair values of each type of level 3 cash instrument.
Level 3 Cash Instruments Valuation Techniques and Significant Inputs
Loans and securities backed by
commercial real estate
‰Collateralized by a single commercial
real estate property or a portfolio
of properties
‰May include tranches of varying
levels of subordination
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses and include:
‰Transaction prices in both the underlying collateral and instruments with the same or similar
underlying collateral and the basis, or price difference, to such prices
‰Market yields implied by transactions of similar or related assets and/or current levels and
changes in market indices such as the CMBX (an index that tracks the performance of
commercial mortgage bonds)
‰Recovery rates implied by the value of the underlying collateral, which is mainly driven by current
performance of the underlying collateral, capitalization rates and multiples
‰Timing of expected future cash flows (duration)
Loans and securities backed by
residential real estate
‰Collateralized by portfolios of
residential real estate
‰May include tranches of varying levels
of subordination
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate
comparisons to instruments with similar collateral and risk profiles, including relevant indices such as
the ABX (an index that tracks the performance of subprime residential mortgage bonds). Significant
inputs include:
‰Transaction prices in both the underlying collateral and instruments with the same or similar
underlying collateral
‰Market yields implied by transactions of similar or related assets
‰Cumulative loss expectations, driven by default rates, home price projections, residential property
liquidation timelines and related costs
‰Duration, driven by underlying loan prepayment speeds and residential property
liquidation timelines
Bank loans and bridge loans Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate
comparisons both to prices of credit default swaps that reference the same or similar underlying
instrument or entity and to other debt instruments for the same issuer for which observable prices or
broker quotations are available. Significant inputs include:
‰Market yields implied by transactions of similar or related assets and/or current levels and trends
of market indices such as CDX and LCDX (indices that track the performance of corporate credit
and loans, respectively)
‰Current performance and recovery assumptions and, where the firm uses credit default swaps to
value the related cash instrument, the cost of borrowing the underlying reference obligation
‰Duration
Non-U.S. government and
agency obligations
Corporate debt securities
State and municipal obligations
Other debt obligations
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.
Significant inputs are generally determined based on relative value analyses, which incorporate
comparisons both to prices of credit default swaps that reference the same or similar underlying
instrument or entity and to other debt instruments for the same issuer for which observable prices or
broker quotations are available. Significant inputs include:
‰Market yields implied by transactions of similar or related assets and/or current levels and trends
of market indices such as CDX, LCDX and MCDX (an index that tracks the performance of
municipal obligations)
‰Current performance and recovery assumptions and, where the firm uses credit default swaps to
value the related cash instrument, the cost of borrowing the underlying reference obligation
‰Duration
Equities and convertible debentures
(including private equity investments
and investments in real estate entities)
Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt
restructurings) are considered to be the best evidence for any change in fair value. When these are not
available, the following valuation methodologies are used, as appropriate:
‰Industry multiples (primarily EBITDA multiples) and public comparables
‰Transactions in similar instruments
‰Discounted cash flow techniques
‰Third-party appraisals
The firm also considers changes in the outlook for the relevant industry and financial performance of
the issuer as compared to projected performance. Significant inputs include:
‰Market and transaction multiples
‰Discount rates, long-term growth rates, earnings compound annual growth rates and
capitalization rates
‰For equity instruments with debt-like features: market yields implied by transactions of similar or
related assets, current performance and recovery assumptions, and duration
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