Goldman Sachs 2015 Annual Report Download - page 42

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
To the extent that we have positions through our market-
making or origination activities or we make investments
directly through our investing activities, including private
equity, that do not have an established liquid trading
market or are otherwise subject to restrictions on sale or
hedging, we may not be able to reduce our positions and
therefore reduce our risk associated with such positions. In
addition, to the extent permitted by applicable law and
regulation, we invest our own capital in private equity,
credit, real estate and hedge funds that we manage and
limitations on our ability to withdraw some or all of our
investments in these funds, whether for legal, reputational
or other reasons, may make it more difficult for us to
control the risk exposures relating to these investments. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Regulatory
Developments — Volcker Rule” in Part II, Item 7 of the
2015 Form 10-K for information about our plans to reduce
our interests in covered funds in order to comply with the
Volcker Rule.
Prudent risk management, as well as regulatory restrictions,
may cause us to limit our exposure to counterparties,
geographic areas or markets, which may limit our business
opportunities and increase the cost of our funding or
hedging activities.
For further information about our risk management
policies and procedures, see “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — Risk Management” in Part II, Item 7 of the
2015 Form 10-K.
Our liquidity, profitability and businesses may be
adversely affected by an inability to access the debt
capital markets or to sell assets or by a reduction in
our credit ratings or by an increase in our credit
spreads.
Liquidity is essential to our businesses. Our liquidity may
be impaired by an inability to access secured and/or
unsecured debt markets, an inability to access funds from
our subsidiaries or otherwise allocate liquidity optimally
across our firm, an inability to sell assets or redeem our
investments, or unforeseen outflows of cash or collateral.
This situation may arise due to circumstances that we may
be unable to control, such as a general market disruption or
an operational problem that affects third parties or us, or
even by the perception among market participants that we,
or other market participants, are experiencing greater
liquidity risk.
We employ structured products to benefit our clients and
hedge our own risks. The financial instruments that we
hold and the contracts to which we are a party are often
complex, and these complex structured products often do
not have readily available markets to access in times of
liquidity stress. Our investing and lending activities may
lead to situations where the holdings from these activities
represent a significant portion of specific markets, which
could restrict liquidity for our positions.
Further, our ability to sell assets may be impaired if other
market participants are seeking to sell similar assets at the
same time, as is likely to occur in a liquidity or other market
crisis or in response to changes to rules or regulations. In
addition, financial institutions with which we interact may
exercise set-off rights or the right to require additional
collateral, including in difficult market conditions, which
could further impair our access to liquidity.
Our credit ratings are important to our liquidity. A
reduction in our credit ratings could adversely affect our
liquidity and competitive position, increase our borrowing
costs, limit our access to the capital markets or trigger our
obligations under certain provisions in some of our trading
and collateralized financing contracts. Under these
provisions, counterparties could be permitted to terminate
contracts with us or require us to post additional collateral.
Termination of our trading and collateralized financing
contracts could cause us to sustain losses and impair our
liquidity by requiring us to find other sources of financing
or to make significant cash payments or securities
movements. As of December 2015, in the event of a one-
notch and two-notch downgrade of our credit ratings our
counterparties could have called for additional collateral or
termination payments related to our net derivative
liabilities under bilateral agreements in an aggregate
amount of $1.06 billion and $2.69 billion, respectively.
A downgrade by any one rating agency, depending on the
agency’s relative ratings of the firm at the time of the
downgrade, may have an impact which is comparable to
the impact of a downgrade by all rating agencies. For
further information about our credit ratings, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Risk
Management — Liquidity Risk Management — Credit
Ratings” in Part II, Item 7 of the 2015 Form 10-K.
30 Goldman Sachs 2015 Form 10-K