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GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 6 3
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 6 3
The size of our Global Core Excess is determined by an internal
liquidity model together with a qualitative assessment of the
condition of the financial markets and of Goldman Sachs. Our
liquidity model identifies and estimates cash and collateral out-
flows over a short-term horizon in a liquidity crisis, including,
but not limited to:
• upcoming maturities of unsecured debt;
• potential buybacks of a portion of our outstanding nego-
tiable unsecured debt;
• adverse changes in the terms or availability of secured
funding;
• derivatives and other margin and collateral outflows due to
market moves or increased requirements;
• additional collateral that could be called in the event of a
downgrade in our credit ratings;
• draws on our unfunded commitments not supported by
William Street Funding Corporation(1); and
• upcoming cash outflows, such as tax and other large pay-
ments.
o th er ฀ un en cu mb er e d฀ as se ts ฀– ฀In addition to our Global
Core Excess described above, we have a significant amount of
other unencumbered securities as a result of our business activi-
ties. These assets, which are located in the United States, Europe
and Asia, include other government bonds, high-grade money
market securities, corporate bonds and marginable equities. We
do not include these securities in our Global Core Excess.
We maintain Global Core Excess and other unencumbered
assets in an amount that, if pledged or sold, would provide the
funds necessary to replace at least 110% of our unsecured obli-
gations that are scheduled to mature (or where holders have the
option to redeem) within the next twelve months. This implies
that we could fund our positions on a secured basis for one year
in the event we were unable to issue new unsecured debt or
liquidate assets. We assume conservative loan values that are
based on stress-scenario borrowing capacity and we review
these assumptions asset-by-asset at least annually. The esti-
mated aggregate loan value of our Global Core Excess and our
other unencumbered assets averaged $100.51 billion in 2004
and $76.42 billion in 2003.
(1)฀฀The฀Global฀Core฀Excess฀excludes฀liquid฀assets฀held฀separately฀to฀support฀the฀
William฀Street฀credit฀extension฀program.
BES฀•฀Phone฀(212)฀924-5500฀•฀FAX฀(212)฀229-7392
BPX/S10829฀•฀Flow฀15฀•฀Proof฀8฀•฀2/4/05฀•฀0700
businesses are diverse, and its cash needs are driven by
many factors, including market movements, collateral
requirements and client commitments, all of which can
change dramatically in a difficult funding environment.
• During a liquidity crisis, credit-sensitive funding, including
unsecured debt and some types of secured financing agree-
ments, may be unavailable and the terms or availability of
other types of secured financing may change.
• As a result of our policy to pre-fund liquidity that we esti-
mate may be needed in a crisis, we hold more unencum-
bered securities and larger unsecured debt balances than
our businesses would otherwise require. We believe that
the firm’s liquidity is stronger with greater balances of
highly liquid unencumbered securities, even though it
increases our unsecured liabilities.
• The first days or weeks of a liquidity crisis are the most
critical to a company’s survival.
The loan value (the estimated amount of cash that would be
advanced by counterparties against these securities) of our
Global Core Excess averaged $41.99 billion in 2004 and
$38.46 billion in 2003.
The following table sets forth the average loan value of our
Global Core Excess:
฀ ฀ YEAR฀ENDED฀NOVEMBER
(IN฀MILLIONS)฀ 2004฀ 2003
U.S. dollar-denominated $33,858 $32,223
Non-U.S. dollar-denominated 8,135 6,234
Total Global Core Excess $41,993 $38,457
The U.S. dollar-denominated excess includes only overnight cash
deposits and unencumbered U.S. government and agency securi-
ties and highly liquid mortgage securities, all of which are Federal
Reserve repo-eligible. Our non-U.S. dollar-denominated excess
includes only unencumbered French, German, United Kingdom
and Japanese government bonds and non-U.S. dollar overnight
cash deposits. We strictly limit our Global Core Excess to this
narrowly defined list of securities and cash which we believe are
highly liquid, even in a difficult funding environment.
The majority of our Global Core Excess is structured such that
it is available to meet the liquidity requirements of our parent
company, Group Inc., and all of its subsidiaries. The remainder
is held in our principal non-U.S. operating entities, primarily to
better match the currency and timing requirements for those
entities’ potential liquidity obligations.