Goldman Sachs 2002 Annual Report Download - page 43

Download and view the complete annual report

Please find page 43 of the 2002 Goldman Sachs annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 105

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105

to continue to generate revenue and provide services to
our clients, even under adverse circumstances.
Management has implemented a number of policies that
are designed to achieve this objective. Our liquidity poli-
cies are intended to be conservative and, accordingly,
reflect the following general assumptions:
•During a liquidity crisis, credit-sensitive funding,
including unsecured debt and some types of collat-
eralized financing agreements, may be unavailable
and the terms or availability of other types of
secured financing may change.
•Liquidity needs will come in different forms and
may occur simultaneously; therefore, we assume
that the same pool of funds cannot satisfy multiple
liquidity needs.
•Because legal and regulatory requirements can
restrict the flow of funds between entities, unless
legally provided for, we assume funds or securities
are not freely available from a subsidiary to the par-
ent company.
Our liquidity policies are focused on the maintenance
of excess liquidity and conservative asset-liability
management.
Excess Liquidity Policies
maint enance o f a po ol o f h igh l y l iq uid secur it ies
Our most important liquidity policy is to maintain
excess liquidity in the form of unencumbered, highly
liquid securities. This liquidity is intended to allow us to
meet immediate obligations without needing to sell
other assets or depend on additional funding from
credit-sensitive markets.
Our primary liquidity cushion consists of cash and unen-
cumbered U.S. government and agency securities and
highly liquid mortgage securities that may be sold or
pledged to provide same-day liquidity. This pool of highly
liquid assets averaged $30.06 billion during 2002 and
$24.55 billion during 2001. We also maintain smaller
pools of unencumbered French, German, United
Kingdom and Japanese government bonds that can be
used in a similar fashion to address local market crises.
These pools, in the aggregate, averaged $6.73 billion dur-
ing 2002.
The size of our liquidity cushion is determined by an inter-
nal liquidity model together with a qualitative assessment
of the condition of the financial markets and Goldman
Sachs. The liquidity model identifies and estimates poten-
tial uses of liquidity over a short-term horizon, including:
•upcoming maturities of unsecured debt;
•potential buybacks of a portion of our outstanding
negotiable debt;
•collateral outflows, assuming that collateral that
has not been called by counterparties, but is avail-
able to them, will be called and all counterparties
that can call collateral through marking transac-
tions to market will do so continually;
•draws on our unfunded commitments; and
•upcoming cash outflows, such as tax or bonus
payments.
In addition to the liquidity risk assumptions described
above, we assume that no assets other than the liquidity
cushion are available to source liquidity and that com-
mitted or advised bank facilities will be unavailable.
o t h er unencumber ed asset s
In addition to the liquidity cushion described above, we
maintain a significant amount of other unencumbered
securities in the United States, Europe and Asia, including
other government bonds, high-grade money market secu-
rities, corporate bonds and marginable equities.
maint enance o f l iq uid it y r at io
Our policy is to maintain total unencumbered assets,
including our liquidity cushion and other unencumbered
assets described above, in an amount that, if pledged or
sold, is intended to provide the funds necessary to replace
at least 100% of unsecured obligations that are scheduled
to mature (or where holders have the option to redeem)
within the coming year. This “liquidity ratio” of unen-
cumbered assets at loan value divided by short-term unse-
cured liabilities is intended to ensure that we could fund
our positions on a secured basis in the event we were
unable to replace our unsecured debt maturing within
one year. In calculating this ratio, we assume conservative
loan values (the estimated amount of cash that would be
advanced by counterparties against securities we own)
that are based on stress-scenario borrowing capacity. The
estimated loan value of the aggregate of our liquidity
cushion and the other unencumbered assets averaged
$68.55 billion during 2002.
co mmit t ed bank f acil it ies
While we assume committed or advised bank facilities
will be unavailable in the event of a liquidity crisis,
Goldman Sachs maintains over $1 billion in undrawn
bank facilities as an additional liquidity resource.
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 41