Goldman Sachs 2002 Annual Report Download - page 41

These types of economic and market conditions have in
the past adversely affected, and may in the future
adversely affect, our business and profitability in many
ways, including the following:
•We generally maintain large trading, specialist and
investment positions. Market fluctuations and
volatility may adversely affect the value of those posi-
tions, including our interest rate and credit products,
currency, commodity and equity positions and our
merchant banking investments, or may reduce our
willingness to enter into some new transactions.
•A continuation of the industry-wide declines in the
volume of equity underwritings and mergers and
acquisitions is likely to have a continuing adverse
effect on our revenues and, because we may be
unable to reduce expenses correspondingly, our
profit margins. In particular, because a significant
portion of our investment banking revenues are
derived from our participation in large transactions,
a decrease in the number of large transactions due
to uncertain or unfavorable market conditions may
adversely affect our investment banking business.
•Declines in the volume and number of investment
banking transactions may continue to increase
price competition.
•Reductions in the level of the equities markets also
tend to reduce the value of our clients’ portfolios,
which in turn may reduce the fees we earn for man-
aging assets. Even in the absence of uncertain or
unfavorable economic or market conditions,
investment performance by our asset management
business below the performance of benchmarks or
competitors could result in a decline in assets under
management and therefore in the fees we receive.
•Concentration of risk in the past has increased the
losses that we have incurred in our proprietary
trading, market-making, block trading, merchant
banking, underwriting and lending businesses and
may continue to do so in the future.
•The volume of transactions that we execute for our
customers and as a specialist may decline, which
would reduce the revenues we receive from com-
missions and spreads. In our specialist businesses,
we are obligated by stock exchange rules to main-
tain an orderly market, including by purchasing
shares in a declining market. This may result in
trading losses and an increased need for liquidity.
Finally, further weakness in global equities markets
could adversely impact our trading businesses and
impair the value of our goodwill and identifiable
intangible assets.
If any of the variety of instruments and strategies we uti-
lize to hedge or otherwise manage our exposure to vari-
ous types of risk are not effective, we may incur losses.
Our hedging strategies and other risk management tech-
niques may not be fully effective in mitigating our risk
exposure in all market environments or against all types
of risk.
Liquidity (i.e., ready access to funds) is essential to our
businesses. Our liquidity could be impaired by an inabil-
ity to access the long-term or short-term debt markets,
an inability to access the repurchase and securities lend-
ing markets, or an inability to sell assets. This situation
may arise due to circumstances that we may be unable to
control, such as a general market disruption, perceptions
about our creditworthiness, or an operational problem
that affects third parties or us. Further, our ability to sell
assets may be impaired if other market participants are
seeking to sell similar assets at the same time.
Our credit ratings are important to our liquidity. A
reduction in our credit ratings could adversely affect our
liquidity and competitive position, increase our borrow-
ing costs or trigger our obligations under certain bilat-
eral provisions in some of our trading and collateralized
financing contracts. Under such provisions, counterpar-
ties could be permitted to terminate contracts with
Goldman Sachs or require us to post additional collat-
eral. 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.
The Goldman Sachs Group, Inc. (Group Inc.) is a hold-
ing company and, therefore, it depends on dividends,
distributions and other payments from its subsidiaries to
fund dividend payments and to fund all payments on its
obligations, including debt obligations. Many of our
subsidiaries, including Goldman, Sachs & Co., are sub-
ject to laws that authorize regulatory bodies to block or
reduce the flow of funds from those subsidiaries to
Group Inc. Regulatory action of that kind could impede
access to funds that Group Inc. needs to make payments
on obligations, including debt obligations, or dividend
payments.
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 obliga-
tions to us due to bankruptcy, lack of liquidity, opera-
tional failure or other reasons. The amount and duration
of our credit exposures have been increasing over the
past several years, as has the breadth of the entities to
which we have such exposure. As a clearing member
firm, we finance our customer positions and we could be
Managem ent’s D iscussion and A nalysis
GO L D M A N SA CH S 2002 A N N UAL R EPO RT 39