Goldman Sachs 2015 Annual Report Download - page 49

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
The application of Group Inc.’s proposed resolution
strategy could result in greater losses for Group Inc.’s
security holders, and failure to address shortcomings
in our resolution plan could subject us to increased
regulatory requirements.
In our resolution plan, Group Inc. would be resolved under
the U.S. Bankruptcy Code. The strategy described in our
resolution plan is a variant of the single point of entry
strategy: Group Inc. would recapitalize and provide
liquidity to certain major subsidiaries, including through
the forgiveness of intercompany indebtedness, the
extension of the maturities of intercompany indebtedness
and the extension of additional intercompany loans. If this
strategy were successful, creditors of some or all of Group
Inc.’s major subsidiaries would receive full recoveries on
their claims, while Group Inc.’s security holders could face
significant losses. If this strategy were not successful, Group
Inc.’s financial condition would be adversely impacted and
Group Inc.’s security holders, including debt holders, may
as a consequence be in a worse position than if the strategy
had not been implemented. In all cases, any payments to
debt holders are dependent on our ability to make such
payments and are therefore subject to our credit risk.
In August 2014, the Federal Reserve Board and the FDIC
indicated that Group Inc., along with other large industry
participants, had certain shortcomings in the 2013
resolution plans that were required to have been addressed
in the 2015 resolution plans. If it is determined that Group
Inc. did not effectively address these shortcomings, the
Federal Reserve Board and the FDIC could, after any
permitted resubmission, find our resolution plan not
credible and require us to hold more capital, change our
business structure or dispose of businesses, which could
have a negative impact on our ability to return capital to
shareholders, financial condition, results of operations or
competitive position.
Our businesses, profitability and liquidity may be
adversely affected by deterioration in the credit
quality of, or defaults by, third parties who owe us
money, securities or other assets or whose securities
or obligations we hold.
We are exposed to the risk that third parties that owe us
money, securities or other assets will not perform their
obligations. These parties may default on their obligations
to us due to bankruptcy, lack of liquidity, operational
failure or other reasons. A failure of a significant market
participant, or even concerns about a default by such an
institution, could lead to significant liquidity problems,
losses or defaults by other institutions, which in turn could
adversely affect us.
We are also subject to the risk that our rights against third
parties may not be enforceable in all circumstances. In
addition, deterioration in the credit quality of third parties
whose securities or obligations we hold, including a
deterioration in the value of collateral posted by third
parties to secure their obligations to us under derivatives
contracts and loan agreements, could result in losses and/or
adversely affect our ability to rehypothecate or otherwise
use those securities or obligations for liquidity purposes.
A significant downgrade in the credit ratings of our
counterparties could also have a negative impact on our
results. While in many cases we are permitted to require
additional collateral from counterparties that experience
financial difficulty, disputes may arise as to the amount of
collateral we are entitled to receive and the value of pledged
assets. The termination of contracts and the foreclosure on
collateral may subject us to claims for the improper exercise
of our rights. Default rates, downgrades and disputes with
counterparties as to the valuation of collateral increase
significantly in times of market stress and illiquidity.
As part of our clearing and prime brokerage activities, we
finance our clients’ positions, and we could be held
responsible for the defaults or misconduct of our clients.
Although we regularly review credit exposures to specific
clients and counterparties and to specific industries,
countries and regions that we believe may present credit
concerns, default risk may arise from events or
circumstances that are difficult to detect or foresee.
Goldman Sachs 2015 Form 10-K 37