Goldman Sachs 2015 Annual Report Download - page 39

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
We are also subject to laws and regulations relating to the
privacy of the information of clients, employees or others,
and any failure to comply with these regulations could
expose us to liability and/or reputational damage. In
addition, our businesses are increasingly subject to laws and
regulations relating to surveillance, encryption and data on-
shoring in the jurisdictions in which we operate.
Compliance with these laws and regulations may require us
to change our policies, procedures and technology for
information security, which could, among other things,
make us more vulnerable to cyber attacks and
misappropriation, corruption or loss of information or
technology.
Increasingly, regulators and courts have sought to hold
financial institutions liable for the misconduct of their
clients where such regulators and courts have determined
that the financial institution should have detected that the
client was engaged in wrongdoing, even though the
financial institution had no direct knowledge of the
activities engaged in by its client. Regulators and courts
have also increasingly found liability as a “control person”
for activities of entities in which financial institutions or
funds controlled by financial institutions have an
investment, but which they do not actively manage. In
addition, regulators and courts continue to seek to establish
“fiduciary” obligations to counterparties to which no such
duty had been assumed to exist. To the extent that such
efforts are successful, the cost of, and liabilities associated
with, engaging in brokerage, clearing, market-making,
prime brokerage, investing and other similar activities
could increase significantly. To the extent that we have
fiduciary obligations in connection with acting as a
financial adviser, investment adviser or in other roles for
individual, institutional, sovereign or investment fund
clients, any breach, or even an alleged breach, of such
obligations could have materially negative legal, regulatory
and reputational consequences.
For information about the extensive regulation to which
our businesses are subject, see “Business — Regulation” in
Part I, Item 1 of the 2015 Form 10-K.
Our businesses have been and may be adversely
affected by declining asset values. This is particularly
true for those businesses in which we have net “long”
positions, receive fees based on the value of assets
managed, or receive or post collateral.
Many of our businesses have net “long” positions in debt
securities, loans, derivatives, mortgages, equities (including
private equity and real estate) and most other asset classes.
These include positions we take when we act as a principal
to facilitate our clients’ activities, including our exchange-
based market-making activities, or commit large amounts
of capital to maintain positions in interest rate and credit
products, as well as through our currencies, commodities,
equities and mortgage-related activities. Because
substantially all of these investing, lending and market-
making positions are marked-to-market on a daily basis,
declines in asset values directly and immediately impact our
earnings, unless we have effectively “hedged” our
exposures to such declines.
In certain circumstances (particularly in the case of credit
products, including leveraged loans, and private equities or
other securities that are not freely tradable or lack
established and liquid trading markets), it may not be
possible or economic to hedge such exposures and to the
extent that we do so the hedge may be ineffective or may
greatly reduce our ability to profit from increases in the
values of the assets. Sudden declines and significant
volatility in the prices of assets may substantially curtail or
eliminate the trading markets for certain assets, which may
make it difficult to sell, hedge or value such assets. The
inability to sell or effectively hedge assets reduces our ability
to limit losses in such positions and the difficulty in valuing
assets may negatively affect our capital, liquidity or leverage
ratios, increase our funding costs and generally require us to
maintain additional capital.
In our exchange-based market-making activities, we are
obligated by stock exchange rules to maintain an orderly
market, including by purchasing securities in a declining
market. In markets where asset values are declining and in
volatile markets, this results in losses and an increased need
for liquidity.
Goldman Sachs 2015 Form 10-K 27