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management’s฀discussion฀and฀analysis
62฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
62฀฀฀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
BES฀•฀Phone฀(201)฀635-5240฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀16฀•฀Proof฀10฀•฀2/4/05฀•RUSH
The following tables set forth our OTC derivative credit exposure, net of collateral, by remaining contractual maturity:
exposure฀net฀of฀collateral
(IN฀MILLIONS)
฀0–6฀ 6–12฀ 1–5฀ 5–10฀ 10฀YEARS฀ ฀
CREDIT฀RATING฀EQUIVALENT฀ MONTHS฀ MONTHS฀ YEARS฀ YEARS฀ OR฀GREATER฀ TOTAL(1)
AAA/Aaa $฀฀1,458฀ $฀฀฀328฀ $฀฀1,309฀ $฀฀฀830฀ $฀฀฀฀฀639฀ $฀฀4,564
AA/Aa2 3,365฀ 851฀ 3,587฀ 2,324฀ 1,959฀ 12,086
A/A2 4,348฀ 859฀ 2,533฀ 1,091฀ 8,302฀ 17,133
BBB/Baa2 1,782฀ 800฀ 3,020฀ 1,552฀ 951฀ 8,105
BB/Ba2 or lower 2,151฀ 467฀ 2,027฀ 809฀ 370฀ 5,824
Unrated 212฀ 35฀ 11฀ 1฀ 85฀ 344
Total $13,316฀ $3,340฀ $12,487฀ $6,607฀ $12,306฀ $48,056
฀ ฀ 0–6฀฀ 6–12฀ 1–5฀ 5–10฀ 10฀YEARS฀
CONTRACT฀TYPE฀ MONTHS฀ MONTHS฀ YEARS฀ YEARS฀ OR฀GREATER฀ TOTAL(1)
Interest rates $฀฀1,296฀ $฀฀฀360฀ $฀฀4,166฀ $3,582฀ $11,626฀ $21,030
Currencies 8,260฀ 1,364฀ 3,273฀ 2,094฀ 594฀ 15,585
Commodities 2,628฀ 1,033฀ 4,688฀ 825฀ 85฀ 9,259
Equities 1,132฀ 583฀ 360฀ 106฀ 1฀ 2,182
Total $13,316฀ $3,340฀ $12,487฀ $6,607฀ $12,306฀ $48,056
(1)฀฀฀Where฀we฀have฀obtained฀collateral฀from฀a฀counterparty฀under฀a฀master฀trading฀agreement฀that฀covers฀multiple฀products฀and฀transactions,฀we฀have฀allocated฀the฀
collateral฀ratably฀based฀on฀exposure฀before฀giving฀effect฀to฀such฀collateral.
Derivative transactions may also involve legal risks including,
among other risks, that they are not authorized or appropriate
for a counterparty, that documentation has not been properly
executed or that executed agreements may not be enforceable
against the counterparty. We attempt to minimize these risks by
obtaining advice of counsel on the enforceability of agreements
as well as on the authority of a counterparty to effect the
derivative transaction.
LIQUIDITY฀RISK
Liquidity is of critical importance to companies in the financial
services sector. Most failures of financial institutions have
occurred in large part due to insufficient liquidity resulting from
adverse circumstances. Accordingly, Goldman Sachs has in
place a comprehensive set of liquidity and funding policies that
are intended to maintain significant flexibility to address both
firm-specific and broader industry or market liquidity events.
Our principal objective is to be able to fund Goldman Sachs and
to enable our core businesses to continue to generate revenue
even under adverse circumstances.
Management has implemented a number of policies according
to the following liquidity risk management framework:
• exces s ฀l i q u idity฀–฀maintain substantial excess liquidity
to meet a broad range of potential cash outflows in a
stressed environment including financing obligations.
• ass e t- liabilit y ฀ m a nage m e n t฀–฀ensure we fund our
assets with the appropriate financing.
• interc o m pa n y฀ funding ฀–฀maintain parent company
liquidity and manage the distribution of liquidity across the
group structure.
• c ri s is ฀ pl a nn i ng ฀– ฀ensure all funding and liquidity man-
agement is based on stress-scenario planning and feeds into
our liquidity crisis plan.
Excess฀Liquidity
maintenance฀ of฀ a฀ pool฀ of฀ highly฀ liquid฀ securities฀–฀฀
Our most important liquidity policy is to pre-fund what we
estimate will be our likely cash needs during a liquidity crisis
and hold such excess liquidity in the form of unencumbered,
highly liquid securities that may be sold or pledged to provide
same-day liquidity. This “Global Core Excess” 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. We believe that this pre-funded
pool of excess liquidity provides us with a resilient source of
funds and gives us significant flexibility in managing through a
difficult funding environment. Our Global Core Excess reflects
the following principles:
• Focus must be maintained on all potential cash outflows,
not just disruptions to financing flows. Goldman Sachs’