Goldman Sachs 2012 Annual Report Download - page 61

Management’s Discussion and Analysis
While many aspects of the Volcker Rule remain unclear,
we evaluated the prohibition on “proprietary trading”
and determined that businesses that engage in “bright
line” proprietary trading are most likely to be
prohibited. In 2011 and 2010, we liquidated
substantially all of our Principal Strategies and Global
Macro Proprietary trading positions.
In addition, we have evaluated the limitations on
sponsorship of, and investments in, hedge funds and private
equity funds. The firm earns management fees and incentive
fees for investment management services from hedge funds
and private equity funds, which are included in our
Investment Management segment. The firm also makes
investments in funds, and the gains and losses from these
investments are included in our Investing & Lending
segment; these gains and losses will be impacted by the
Volcker Rule. The Volcker Rule limitation on investments
in hedge funds and private equity funds requires the firm to
reduce its investment in each hedge fund and private equity
fund to 3% or less of the fund’s net asset value, and to
reduce the firm’s aggregate investment in all such funds to
3% or less of the firm’s Tier 1 capital. The firm’s aggregate
net revenues from its investments in hedge funds and
private equity funds were not material to the firm’s
aggregate total net revenues over the period from 1999
through 2012. We continue to manage our existing private
equity funds, taking into account the transition periods
under the Volcker Rule. With respect to our hedge funds,
we currently plan to comply with the Volcker Rule by
redeeming certain of our interests in the funds. Since
March 2012, we have been redeeming up to approximately
10% of certain hedge funds’ total redeemable units per
quarter, and expect to continue to do so through
June 2014. We redeemed approximately $1.06 billion of
these interests in hedge funds during the year ended
December 2012. In addition, we have limited the firm’s
initial investment to 3% for certain new investments in
hedge funds and private equity funds.
As required by the Dodd-Frank Act, the Federal Reserve
Board and FDIC have jointly issued a rule requiring each
bank holding company with over $50 billion in assets and
each designated systemically important financial institution
to provide to regulators an annual plan for its rapid and
orderly resolution in the event of material financial distress
or failure (resolution plan). Our resolution plan must,
among other things, demonstrate that Goldman Sachs Bank
USA (GS Bank USA) is adequately protected from risks
arising from our other entities. The regulators’ joint rule
sets specific standards for the resolution plans, including
requiring a detailed resolution strategy and analyses of the
company’s material entities, organizational structure,
interconnections and interdependencies, and management
information systems, among other elements. We submitted
our resolution plan to the regulators on June 29, 2012.
GS Bank USA also submitted its resolution plan on
June 29, 2012, as required by the FDIC.
In September 2011, the SEC proposed rules to implement
the Dodd-Frank Act’s prohibition against securitization
participants’ engaging in any transaction that would
involve or result in any material conflict of interest with an
investor in a securitization transaction. The proposed rules
would except bona fide market-making activities and
risk-mitigating hedging activities in connection with
securitization activities from the general prohibition. We
will also be affected by rules to be adopted by federal
agencies pursuant to the Dodd-Frank Act that require any
person who organizes or initiates an asset-backed security
transaction to retain a portion (generally, at least five
percent) of any credit risk that the person conveys to a
third party.
In December 2011, the Federal Reserve Board proposed
regulations designed to strengthen the regulation and
supervision of large bank holding companies and
systemically important nonbank financial institutions.
These proposals address, among other things, risk-based
capital and leverage requirements, liquidity requirements,
overall risk management requirements, single counterparty
limits and early remediation requirements that are designed
to address financial weakness at an early stage. Although
many of the proposals mirror initiatives to which bank
holding companies are already subject, their full impact on
the firm will not be known with certainty until the rules are
finalized and market practices and structures develop under
the final rules. In addition, in October 2012, the Federal
Reserve Board issued final rules for stress testing
requirements for certain bank holding companies, including
the firm. See “Equity Capital” below for further
information about our Comprehensive Capital Analysis
and Review (CCAR).
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