Goldman Sachs 2012 Annual Report Download - page 84

Management’s Discussion and Analysis
The table below presents the fair value of our GCE by
asset class.
Average for the
Year Ended December
in millions 2012 2011
Overnight cash deposits $ 52,233 $ 34,622
U.S. government obligations 72,379 88,528
U.S. federal agency obligations, including
highly liquid U.S. federal agency
mortgage-backed obligations 2,313 5,018
German, French, Japanese and United
Kingdom government obligations 45,170 37,791
Total $172,095 $165,959
The GCE is held at Group Inc. and our major broker-dealer
and bank subsidiaries, as presented in the table below.
Average for the
Year Ended December
in millions 2012 2011
Group Inc. $ 37,405 $ 49,548
Major broker-dealer subsidiaries 78,229 75,086
Major bank subsidiaries 56,461 41,325
Total $172,095 $165,959
Our GCE reflects the following principles:
‰The first days or weeks of a liquidity crisis are the most
critical to a company’s survival.
‰Focus must be maintained on all potential cash and
collateral outflows, not just disruptions to financing
flows. Our businesses are diverse, and our liquidity needs
are determined by many factors, including market
movements, collateral requirements and client
commitments, all of which can change dramatically in a
difficult funding environment.
‰During a liquidity crisis, credit-sensitive funding,
including unsecured debt and some types of secured
financing agreements, may be unavailable, and the terms
(e.g., interest rates, collateral provisions and tenor) or
availability of other types of secured financing
may change.
‰As a result of our policy to pre-fund liquidity that we
estimate may be needed in a crisis, we hold more
unencumbered securities and have larger debt balances
than our businesses would otherwise require. We believe
that our liquidity is stronger with greater balances of
highly liquid unencumbered securities, even though it
increases our total assets and our funding costs.
We believe that our GCE provides us with a resilient
source of funds that would be available in advance of
potential cash and collateral outflows and gives us
significant flexibility in managing through a difficult
funding environment.
In order to determine the appropriate size of our GCE, we
use an internal liquidity model, referred to as the Modeled
Liquidity Outflow, which captures and quantifies the firm’s
liquidity risks. We also consider other factors including, but
not limited to, an assessment of our potential intraday
liquidity needs and a qualitative assessment of the condition
of the financial markets and the firm.
We distribute our GCE across entities, asset types, and
clearing agents to provide us with sufficient operating
liquidity to ensure timely settlement in all major markets,
even in a difficult funding environment.
We maintain our GCE to enable us to meet current and
potential liquidity requirements of our parent company,
Group Inc., and our major broker-dealer and bank
subsidiaries. The Modeled Liquidity Outflow incorporates
a consolidated requirement as well as a standalone
requirement for each of our major broker-dealer and bank
subsidiaries. Liquidity held directly in each of these
subsidiaries is intended for use only by that subsidiary to
meet its liquidity requirements and is assumed not to be
available to Group Inc. unless (i) legally provided for and
(ii) there are no additional regulatory, tax or other
restrictions. We hold a portion of our GCE directly at
Group Inc. to support consolidated requirements not
accounted for in the major subsidiaries. In addition to the
GCE, we maintain operating cash balances in several of our
other operating entities, primarily for use in specific
currencies, entities, or jurisdictions where we do not have
immediate access to parent company liquidity.
In addition to our GCE, we have a significant amount of
other unencumbered cash and financial instruments,
including other government obligations, high-grade money
market securities, corporate obligations, marginable
equities, loans and cash deposits not included in our GCE.
The fair value of these assets averaged $87.09 billion and
$83.32 billion for the years ended December 2012 and
December 2011, respectively. We do not consider these
assets liquid enough to be eligible for our GCE liquidity
pool and therefore conservatively do not assume we will
generate liquidity from these assets in our Modeled
Liquidity Outflow.
82 Goldman Sachs 2012 Annual Report