Goldman Sachs 2002 Annual Report Download - page 44

Asset-Liability Management Policies
M AI N T E N A N C E O F A H I G H LY L I Q U I D B AL AN C E S H E E T
Goldman Sachs seeks to maintain a highly liquid balance
sheet. Many of our assets are readily funded in the repur-
chase agreement and securities lending markets, which
generally have proven to be a consistent source of fund-
ing, even in periods of market stress. Substantially all of
our inventory is marked-to-market daily.
Our balance sheet fluctuates significantly between finan-
cial statement dates and is lower at fiscal year end than
would be observed on an average basis. We require our
businesses to reduce balance sheet usage on a quarterly
basis to demonstrate compliance with limits set by man-
agement, thereby providing a disincentive to committing
our capital over longer periods of time. These balance
sheet reductions are generally achieved during the last
several weeks of each fiscal quarter through ordinary-
course, open-market transactions in the most liquid por-
tions of our balance sheet, principally U.S. government
and agency securities, securities of foreign sovereigns, and
mortgage and money market instruments, as well as
through the roll-off of repurchase agreements and certain
collateralized financing arrangements. Accordingly, over
the last six quarters, our total assets and adjusted assets
at quarter end have been, on average, 18% lower and
16% lower, respectively, than amounts that would have
been observed, based on a weekly average, over that
period. These differences, however, have not resulted in
material changes to our credit risk, market risk or excess
liquidity position because they are generally in highly
liquid assets that are typically financed on a secured basis.
F U N D I N G O F AS S E T S W I T H L O N G E R T E R M L I A B I L I T I E S
While Goldman Sachs’ liquidity policies generally do not
rely on sales of assets (other than the liquidity cushions)
to maintain liquidity in a distressed environment, we rec-
ognize that orderly asset sales may be prudent, and could
be necessary, in a persistent liquidity crisis. As a result, we
seek to manage the composition of our asset base and the
maturity profile of our funding such that we should be
able to liquidate our assets prior to our liabilities coming
due, even in times of prolonged or severe liquidity stress.
We seek to maintain total capital (long-term borrowings
plus shareholders’ equity) substantially in excess of our
less liquid assets. Our total capital of $57.71 billion and
$49.25 billion as of November 2002 and November
2001, respectively, exceeded the assets that we believe may
be more difficult to fund or sell, particularly during times
of market stress. Such assets include, but are not limited
to, bank loans, high-yield debt securities, emerging mar-
ket debt securities and principal investments.
As of November 2002 and 2001, we held $2.97 billion
and $3.45 billion, respectively, in bank loans, $1.94 bil-
lion and $1.78 billion, respectively, in high-yield debt
securities and $0.76 billion and $1.32 billion, respec-
tively, in emerging market debt securities. As of
November 2002 and 2001, the aggregate carrying value
of our principal investments held directly or through our
merchant banking funds was $1.78 billion and $2.85 bil-
lion, respectively. These carrying values were comprised
of corporate principal investments with an aggregate car-
rying value of $1.04 billion and $1.85 billion, respec-
tively, and real estate investments with an aggregate
carrying value of $0.74 billion and $1.00 billion, respec-
tively. In addition, we held other financial assets such as
certain mortgage whole loans, certain mortgage-backed
securities and other distressed assets that could be less
liquid, particularly during times of market stress.
In addition, we had illiquid non-financial assets of
$12.30 billion and $12.01 billion as of November 2002
and November 2001, respectively. These assets, which
are reported as “Other assets” in the consolidated state-
ments of financial condition, include goodwill and iden-
tifiable intangible assets, property, plant and equipment,
deferred tax assets, prepaid assets and our equity
method investments.
D I VE R SI F I C AT I O N O F F U N D I N G S O U R C E S
Goldman Sachs seeks to maintain broad and diversified
funding sources globally. These sources include insurance
companies, mutual funds, banks, bank trust departments,
corporations, individuals and other asset managers. We
have imposed internal guidelines on how much of our
commercial paper can be owned by any single investor or
group of investors. We believe that our relationships with
our creditors are critical to our liquidity.
We access funding in a variety of markets in the United
States, Europe and Asia. We make extensive use of the
repurchase agreement and securities lending markets,
arrange for letters of credit to be issued on our behalf and
raise funding in the public and private markets. In par-
ticular, we issue debt through syndicated U.S. registered
offerings, U.S. registered and 144A medium-term notes
programs, offshore medium-term notes offerings and
other bond offerings, U.S. and non-U.S. commercial
paper and promissory note issuances, and other methods.
AVO I D A N C E O F D E B T M AT U R I T Y C O N C E N T R AT I O N S
We seek to structure our liabilities to avoid maturity con-
centrations. To that end, we have created internal guide-
lines on the principal amount of debt maturing on any
one day or during any single week or year. We also have
average maturity targets for our long-term and total
unsecured debt programs.
Managem ent’s D iscussion and A nalysis
42 G O L D M A N SA CH S 2002 AN N UA L R EPO RT