Goldman Sachs 2015 Annual Report Download - page 41

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Our investment banking, client execution and
investment management businesses have been
adversely affected and may in the future be adversely
affected by market uncertainty or lack of confidence
among investors and CEOs due to general declines in
economic activity and other unfavorable economic,
geopolitical or market conditions.
Our investment banking business has been and may
continue to be adversely affected by market conditions.
Poor economic conditions and other adverse geopolitical
conditions can adversely affect and have in the past
adversely affected investor and CEO confidence, resulting
in significant industry-wide declines in the size and number
of underwritings and of financial advisory transactions,
which could have an adverse effect on our revenues and our
profit margins. In particular, because a significant portion
of our investment banking revenues is derived from our
participation in large transactions, a decline in the number
of large transactions would adversely affect our investment
banking business.
In certain circumstances, market uncertainty or general
declines in market or economic activity may affect our
client execution businesses by decreasing levels of overall
activity or by decreasing volatility, but at other times
market uncertainty and even declining economic activity
may result in higher trading volumes or higher spreads or
both.
Market uncertainty, volatility and adverse economic
conditions, as well as declines in asset values, may cause our
clients to transfer their assets out of our funds or other
products or their brokerage accounts and result in reduced
net revenues, principally in our investment management
business. To the extent that clients do not withdraw their
funds, they may invest them in products that generate less
fee income.
Our investment management business may be
affected by the poor investment performance of our
investment products.
Poor investment returns in our investment management
business, due to either general market conditions or
underperformance (relative to our competitors or to
benchmarks) by funds or accounts that we manage or
investment products that we design or sell, affects our
ability to retain existing assets and to attract new clients or
additional assets from existing clients. This could affect the
management and incentive fees that we earn on assets under
supervision or the commissions and net spreads that we
earn for selling other investment products, such as
structured notes or derivatives.
We may incur losses as a result of ineffective risk
management processes and strategies.
We seek to monitor and control our risk exposure through
a risk and control framework encompassing a variety of
separate but complementary financial, credit, operational,
compliance and legal reporting systems, internal controls,
management review processes and other mechanisms. Our
risk management process seeks to balance our ability to
profit from market-making, investing or lending positions
with our exposure to potential losses. While we employ a
broad and diversified set of risk monitoring and risk
mitigation techniques, those techniques and the judgments
that accompany their application cannot anticipate every
economic and financial outcome or the specifics and timing
of such outcomes. Thus, we may, in the course of our
activities, incur losses. Market conditions in recent years
have involved unprecedented dislocations and highlight the
limitations inherent in using historical data to manage risk.
The models that we use to assess and control our risk
exposures reflect assumptions about the degrees of
correlation or lack thereof among prices of various asset
classes or other market indicators. In times of market stress
or other unforeseen circumstances, such as occurred during
2008 and early 2009, and to some extent since 2011,
previously uncorrelated indicators may become correlated,
or conversely previously correlated indicators may move in
different directions. These types of market movements have
at times limited the effectiveness of our hedging strategies
and have caused us to incur significant losses, and they may
do so in the future. These changes in correlation can be
exacerbated where other market participants are using risk
or trading models with assumptions or algorithms that are
similar to ours. In these and other cases, it may be difficult
to reduce our risk positions due to the activity of other
market participants or widespread market dislocations,
including circumstances where asset values are declining
significantly or no market exists for certain assets.
Goldman Sachs 2015 Form 10-K 29