Goldman Sachs 2002 Annual Report Download - page 45

S U B S I D I ARY F U N D I N G A N D F O R E I G N E XC H AN G E P O L I C I E S
Most of our unsecured funding is raised by our parent
company, The Goldman Sachs Group, Inc. The parent
company then lends the necessary funds to its sub-
sidiaries. We manage our intercompany exposure by gen-
erally requiring intercompany loans to have maturities
equal to or shorter than the maturities of the aggregate
borrowings of the parent company. This policy ensures
that the subsidiaries’ obligations to the parent company
will generally mature in advance of the parent company’s
third-party long-term borrowings. In addition, many of
our subsidiaries and affiliates pledge collateral to cover
their intercompany borrowings. We generally fund our
equity investments in subsidiaries with equity capital.
Our capital invested in foreign subsidiaries is generally
exposed to foreign exchange risk, which we selectively
hedge. In addition, we generally hedge the nontrading
exposure to foreign exchange risk that arises from trans-
actions denominated in currencies other than the trans-
acting entity’s functional currency.
CAPITAL AND FUNDING
Capital
Our capital requirements are determined by factors such
as subsidiary regulatory requirements, rating agency
guidelines, our capital policies regarding asset composi-
tion, leverage and risk of loss, business opportunities, and
capital availability and cost. Goldman Sachs’ total capital
increased 17% to $57.71 billion as of November 2002
compared with $49.25 billion as of November 2001.
The increase in total capital resulted primarily from an
increase in long-term borrowings to $38.71 billion as of
November 2002 from $31.02 billion as of November
2001. The weighted average maturity of our long-term
borrowings as of November 2002 was approximately
5 years. We swap a substantial portion of our long-term
borrowings into U.S. dollar obligations with short-term
floating interest rates in order to minimize our exposure
to interest rates and foreign exchange movements.
Shareholders’ equity increased by 4% to $19.00 billion as
of November 2002 from $18.23 billion as of November
2001. During 2002, we repurchased 19.4 million shares
of our common stock. The principal purpose of our stock
repurchase program is to substantially offset the dilutive
effect of employee equity-based compensation. The
repurchase program has been effected through regular
open-market purchases, the sizes of which have been and
will be influenced by, among other factors, prevailing
prices and market conditions. As of November 2002, we
were authorized to repurchase up to 19.3 million addi-
tional shares of common stock pursuant to our common
stock repurchase program. The average price paid per
share for repurchased shares was $76.49, $88.22 and
$99.90 for the years ended November 2002, November
2001 and November 2000, respectively.
The following table sets forth information on our
assets, shareholders’ equity, leverage ratios and book
value per share:
AS OF NOVEMBER
($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 2002 2001
Total assets $355,574 $312,218
Adjusted assets(1) 215,547 194,518
Shareholders’ equity 19,003 18,231
Tangible shareholders’ equity(2) 14,164 13,423
Leverage ratio(3) 18.7x 17.1x
Adjusted leverage ratio(4) 15.2x 14.5x
Book value per share(5) $ 38.69 $ 36.33
(1) Adjusted assets excludes (i) low-risk collateralized assets generally
associated with our matched book and securities lending businesses
(which we calculate by adding our securities purchased under agree-
ments to resell and securities borrowed, and then subtracting our
nonderivative short positions), (ii) cash and securities we segregate
in compliance with regulations and (iii) goodwill and identifiable
intangible assets. The following table sets forth a reconciliation of
total assets to adjusted assets:
AS OF NOVEMBER
(IN MILLIONS) 2002 2001
Total assets $ 355,574 $ 312,218
Deduct: Securities purchased under
agreements to resell (45,772) (27,651)
Securities borrowed (113,579) (101,164)
Add: Financial instruments sold, but
not purchased, at fair value
(excluding derivatives) 44,552 38,057
Deduct: Cash and securities segregated
in compliance with U.S.
federal and other regulations (20,389) (22,134)
Goodwill and identifiable
intangible assets (4,839) (4,808)
Adjusted assets $ 215,547 $ 194,518
(2) Tangible shareholders’ equity equals total shareholders’ equity less
goodwill and identifiable intangible assets. The following table sets
forth a reconciliation of shareholders’ equity to tangible share-
holders’ equity:
AS OF NOVEMBER
(IN MILLIONS) 2002 2001
Shareholders’ equity $19,003 $18,231
Deduct: Goodwill and identifiable
intangible assets 4,839 4,808
Tangible shareholders’ equity $14,164 $13,423
(3) Leverage ratio equals total assets divided by shareholders’ equity.
(4) Adjusted leverage ratio equals adjusted assets divided by tangible
shareholders’ equity. We believe that the adjusted leverage ratio is a
more meaningful measure of our capital adequacy because it
excludes certain low-risk collateralized assets that are generally
supported with little or no capital and reflects the tangible equity
deployed in our businesses.
(5) Book value per share is based on common shares outstanding,
including restricted stock units granted to employees with no future
service requirements, of 491.2 million as of November 2002 and
501.8 million as of November 2001.
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 43