Goldman Sachs 2013 Annual Report Download - page 75

Management’s Discussion and Analysis
GSI. Our regulated U.K. broker-dealer, GSI, is one of the
firm’s principal non-U.S. regulated subsidiaries and is
regulated by the PRA and the FCA. As of December 2013
and December 2012, GSI was subject to capital regulations,
which were based on the Basel Committee’s June 2006
Framework (Basel II) as modified by the Basel Committee’s
February 2011 Revisions to the Basel II market risk
framework and as implemented in the European Union
through the Capital Requirements Directives. As of
December 2013 and December 2012, GSI had a Tier 1
capital ratio of 14.4% and 11.5%, respectively, and a Total
capital ratio of 18.5% and 16.9%, respectively. The
minimum Tier 1 capital ratio under PRA rules was 4%, and
the minimum Total capital ratio was 8%. The PRA has
significantly revised its capital regulations effective beginning
January 1, 2014; the revised regulations are largely based on
Basel III and, similar to the Revised Capital Framework, also
introduce leverage ratio reporting requirements.
Other Subsidiaries. We expect that the capital
requirements of several of our subsidiaries are likely to
increase in the future due to the various developments
arising from the Basel Committee, the Dodd-Frank Act, and
other governmental entities and regulators. See Note 20 to
the consolidated financial statements for information about
the capital requirements of our other regulated subsidiaries
and the potential impact of regulatory reform.
Subsidiaries not subject to separate regulatory capital
requirements may hold capital to satisfy local tax and legal
guidelines, rating agency requirements (for entities with
assigned credit ratings) or internal policies, including
policies concerning the minimum amount of capital a
subsidiary should hold based on its underlying level of risk.
In certain instances, Group Inc. may be limited in its ability
to access capital held at certain subsidiaries as a result of
regulatory, tax or other constraints. As of December 2013
and December 2012, Group Inc.’s equity investment in
subsidiaries was $73.39 billion and $73.32 billion,
respectively, compared with its total shareholders’ equity of
$78.47 billion and $75.72 billion, respectively.
Guarantees of Subsidiaries. Group Inc. has guaranteed
the payment obligations of GS&Co., GS Bank USA, and
Goldman Sachs Execution & Clearing, L.P. (GSEC) subject
to certain exceptions. In November 2008, Group Inc.
contributed subsidiaries into GS Bank USA, and Group Inc.
agreed to guarantee certain losses, including credit-related
losses, relating to assets held by the contributed entities. In
connection with this guarantee, Group Inc. also agreed to
pledge to GS Bank USA certain collateral, including
interests in subsidiaries and other illiquid assets.
Our capital invested in non-U.S. subsidiaries is generally
exposed to foreign exchange risk, substantially all of which
is managed through a combination of derivatives and non-
U.S. denominated debt.
Equity Capital Management
We principally manage our capital through issuances and
repurchases of our common stock. We may also, from time
to time, issue or repurchase our preferred stock, junior
subordinated debt issued to trusts, and other subordinated
debt or other forms of capital as business conditions
warrant and subject to approval of the Federal Reserve
Board. We manage our capital requirements principally by
setting limits on balance sheet assets and/or limits on risk, in
each case both at the consolidated and business levels. We
attribute capital usage to each of our businesses based upon
our regulatory capital requirements, as well as our internal
risk-based capital assessment. We manage the levels of our
capital usage based upon the established balance sheet and
risk limits.
See Notes 16 and 19 to the consolidated financial
statements for further information about our preferred
stock, junior subordinated debt issued to trusts and other
subordinated debt.
Berkshire Hathaway Warrant. On October 1, 2013,
Berkshire Hathaway exercised in full a warrant to purchase
shares of the firm’s common stock. The warrant, as
amended in March 2013, required net share settlement, and
the firm delivered 13.1 million shares of common stock to
Berkshire Hathaway on October 4, 2013. The number of
shares delivered represented the value of the difference
between the average closing price of the firm’s common
stock over the 10 trading days preceding October 1, 2013
and the exercise price of $115.00 multiplied by the number
of shares of common stock (43.5 million) covered by the
warrant. The impact to both the firm’s book value per
common share and tangible book value per common share
was a reduction of approximately 3%.
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