Goldman Sachs 2012 Annual Report Download - page 124

Notes to Consolidated Financial Statements
Significant Unobservable Inputs
The table below presents the ranges of significant
unobservable inputs used to value the firm’s level 3 cash
instruments. These ranges represent the significant
unobservable inputs that were used in the valuation of each
type of cash instrument. The ranges and weighted averages
of these inputs are not representative of the appropriate
inputs to use when calculating the fair value of any one cash
instrument. For example, the highest multiple presented in
the table for private equity investments is appropriate for
valuing a specific private equity investment but may not be
appropriate for valuing any other private equity
investment. Accordingly, the ranges of inputs presented
below do not represent uncertainty in, or possible ranges of,
fair value measurements of the firm’s level 3
cash instruments.
Level 3 Cash Instruments
Level 3 Assets as of
December 2012
(in millions)
Significant Unobservable Inputs
by Valuation Technique
Range of Significant Unobservable
Inputs (Weighted Average 1)as
of December 2012
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
$3,389 Discounted cash flows:
‰Yield 4.0% to 43.3% (9.8%)
‰Recovery rate 337.0% to 96.2% (81.7%)
‰Duration (years) 40.1 to 7.0 (2.6)
‰Basis (13) points to 18 points
(2 points)
Loans and securities backed by residential
real estate
‰Collateralized by portfolios of residential
real estate
‰May include tranches of varying levels
of subordination
$1,619 Discounted cash flows:
‰Yield 3.1% to 17.0% (9.7%)
‰Cumulative loss rate 0.0% to 61.6% (31.6%)
‰Duration (years) 41.3 to 5.9 (3.7)
Bank loans and bridge loans $11,235 Discounted cash flows:
‰Yield 0.3% to 34.5% (8.3%)
‰Recovery rate 316.5% to 85.0% (56.0%)
‰Duration (years) 40.2 to 4.4 (1.9)
Non-U.S. government and agency obligations
Corporate debt securities
State and municipal obligations
Other debt obligations
$4,651 Discounted cash flows:
‰Yield 0.6% to 33.7% (8.6%)
‰Recovery rate 30.0% to 70.0% (53.4%)
‰Duration (years) 40.5 to 15.5 (4.0)
Equities and convertible debentures (including
private equity investments and investments in
real estate entities)
$14,855 2Comparable multiples:
‰Multiples 0.7x to 21.0x (7.2x)
Discounted cash flows:
‰Discount rate 10.0% to 25.0% (14.3%)
‰Long-term growth rate/
compound annual growth rate 0.7% to 25.0% (9.3%)
‰Capitalization rate 3.9% to 11.4% (7.3%)
1. Weighted averages are calculated by weighting each input by the relative fair value of the respective financial instruments.
2. The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be
used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.
3. Recovery rate is a measure of expected future cash flows in a default scenario, expressed as a percentage of notional or face value of the instrument, and reflects
the benefit of credit enhancement on certain instruments.
4. Duration is an estimate of the timing of future cash flows and, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds).
Increases in yield, discount rate, capitalization rate,
duration or cumulative loss rate used in the valuation of the
firm’s level 3 cash instruments would result in a lower fair
value measurement, while increases in recovery rate, basis,
multiples, long-term growth rate or compound annual
growth rate would result in a higher fair value
measurement. Due to the distinctive nature of each of the
firm’s level 3 cash instruments, the interrelationship of
inputs is not necessarily uniform within each product type.
122 Goldman Sachs 2012 Annual Report