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management’s฀discussion฀and฀analysis
36฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
36฀฀฀G O L D M A N ฀ S A C H S ฀ 2 004฀ A N N U A L ฀ R E P O RT
c a s h฀ t r a d i ng฀ i n st r um e n t s ฀– ฀Fair values of our cash
trading instruments are generally obtained from quoted mar-
ket prices in active markets, broker or dealer price quotations,
or alternative pricing sources with reasonable levels of price
transparency. The types of instruments valued in this manner
include U.S. government and agency securities, other sovereign
government obligations, liquid mortgage products, invest-
ment-grade corporate bonds, listed equities, money market
securities, state, municipal and provincial obligations, and
physical commodities.
Certain cash trading instruments trade infrequently and, there-
fore, have little or no price transparency. Such instruments may
include certain high-yield debt, corporate bank loans, mortgage
whole loans and distressed debt. We value these instruments
using methodologies such as the present value of known or
estimated cash flows and generally do not adjust underlying
valuation assumptions unless there is substantive evidence sup-
porting a change in the value of the underlying instrument or
valuation assumptions (such as similar market transactions,
changes in financial ratios and changes in credit ratings of the
underlying companies).
Critical Accounting Policies
FAIR฀VALUE
“Total financial instruments owned, at fair value” and “Financial
instruments sold, but not yet purchased, at fair value” in the
consolidated statements of financial condition consist of finan-
cial instruments carried at fair value or amounts that approxi-
mate fair value, with related unrealized gains or losses recognized
in our results of operations. The use of fair value to measure
these financial instruments, with related unrealized gains and
losses recognized immediately in our results of operations, is
fundamental to our financial statements and is our most critical
accounting policy. The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a cur-
rent transaction between willing parties, other than in a forced
or liquidation sale.
disruption in the infrastructure that supports our businesses
and the communities in which we are located. This may
include a disruption involving electrical, communications,
transportation or other services used by Goldman Sachs or
third parties with which we conduct business.
le ga l฀ a nd ฀ re gu lat ory ฀ ri sk฀– ฀Substantial legal liability or
a significant regulatory action against Goldman Sachs could have
material adverse financial effects or cause significant reputational
harm to Goldman Sachs, which in turn could seriously harm our
business prospects. Firms in the financial services industry have
been operating in a difficult regulatory environment. We face
significant legal risks in our businesses, and the volume of claims
and amount of damages and penalties claimed in litigation and
regulatory proceedings against financial institutions have been
increasing. For a discussion of how we account for our legal and
regulatory exposures, see “— Use of Estimates” included below.
In determining fair value, we separate our financial instruments into three categories – cash (i.e., nonderivative) trading instruments,
derivative contracts and principal investments, as set forth in the following table:
financial฀instruments฀by฀category
฀ ฀ AS฀OF฀NOVEMBER฀
฀2004฀ 2003
฀FINANCIAL฀ FINANCIAL฀INSTRUMENTS฀ FINANCIAL฀ FINANCIAL฀INSTRUMENTS฀
฀INSTRUMENTS฀ ฀SOLD,฀BUT฀NOT฀YET฀ INSTRUMENTS฀ SOLD,฀BUT฀NOT฀YET฀
฀OWNED,฀AT฀ PURCHASED,฀AT฀ OWNED,฀AT฀ PURCHASED,฀AT฀
(IN฀MILLIONS)฀ FAIR฀VALUE฀ ฀FAIR฀VALUE฀ FAIR฀VALUE฀ FAIR฀VALUE
Cash trading instruments $143,376฀ $฀ 68,096 $110,157฀ $฀฀60,813
Derivative contracts 62,495฀ 64,001 45,733฀ 41,886
Principal investments 4,654(1)฀ — 3,755(1)฀ —
Total $210,525฀ $132,097 $159,645฀ $102,699
(1)฀Excludes฀assets฀of฀$1.28฀billion฀and฀$1.07฀billion฀in฀consolidated฀employee-owned฀merchant฀banking฀funds฀as฀of฀November฀2004฀and฀November฀2003,฀respectively.
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