Goldman Sachs 2002 Annual Report Download - page 59

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Principal Investments
In valuing our corporate and real estate principal investments, we separate our portfolio into two categories – public
securities and private securities. The following table sets forth the carrying value of our principal investments portfolio
as of November 2002:
Managem ent’s D iscussion and A nalysis
56 G O L D M A N SA CH S 2002 AN N UA L R EPO RT
PRINCIPAL INVESTMENTS
(IN MILLIONS) CORPORATE REAL ESTATE TOTAL
Private $ 881 $736 $1,617
Public 154 8 162
Total $1,035 $744 $1,779
Our public principal investments, which tend to be large,
concentrated holdings that resulted from initial public
offerings or other corporate transactions, are valued using
quoted market prices discounted for restrictions on sale.
Our private principal investments, by their nature, have
little to no price transparency. Such investments are ini-
tially carried at cost as an approximation of fair value.
Adjustments to cost (above or below) are made if there are
third-party transactions evidencing a change in value.
Downward adjustments are also made if we determine
that the expected realizable value of the investment is less
than the carrying value. In reaching that determination,
we consider many factors including, but not limited to, the
operating cash flows and financial performance of the
companies or properties relative to budgets or projections,
trends within sectors and/or regions, underlying business
models, expected exit timing and strategy, and any specific
rights or terms associated with the investment, such as
conversion features and liquidation preferences.
Controls Over Valuation of Financial Instruments
Proper controls, independent of the trading and principal
investing functions, are fundamental to ensuring that
financial instruments are appropriately valued and the
resulting fair value measurements are reliable, particu-
larly where certain levels of price discovery may require
additional analysis. These controls include independent
review of valuation models and price verification by
personnel with technical knowledge of relevant markets
and products.