Goldman Sachs 2004 Annual Report Download - page 66

management’s฀discussion฀and฀analysis
64฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
64฀฀฀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฀11฀•฀2/4/05฀•฀RUSH
Asset-Liability฀Management฀
ass e t ฀quality฀a n d ฀ba l a n ce฀sheet ฀c o mpositio n ฀–฀We
seek to maintain a highly liquid balance sheet and substantially
all of our inventory is marked-to-market daily. Our balance
sheet fluctuates significantly between financial statement dates
and is lower at fiscal period end than would be observed on an
average basis. We require certain of our businesses to reduce
balance sheet usage on a quarterly basis to demonstrate compli-
ance with limits set by management, thereby providing a disin-
centive to committing our capital over longer periods of time.
These balance sheet reductions are generally achieved during
the last several weeks of each fiscal quarter through ordinary-
course, open-market transactions in the most liquid portions of
our balance sheet, principally U.S. government and agency secu-
rities, securities of foreign sovereigns, and mortgage and money
market instruments, as well as through the roll-off of repur-
chase agreements and certain collateralized financing arrange-
ments. Accordingly, over the last six quarters, our total assets
and adjusted assets at quarter end have been, on average, 17%
lower and 16% lower, respectively, than amounts that would
have been observed, based on a weekly average, over that
period. These differences, however, have not resulted in material
changes to our credit risk, market risk or liquidity position
because they are generally in highly liquid assets that are typi-
cally financed on a secured basis.
Certain financial instruments may be more difficult to fund on
a secured basis during times of market stress and, accordingly,
we generally hold higher levels of capital for these assets than
more liquid types of financial instruments.
The table below sets forth our aggregate holdings in these cat-
egories of financial instruments:
฀ ฀ AS฀OF฀NOVEMBER
(IN฀MILLIONS)฀ 2004฀ 2003
Mortgage whole loans and
collateralized debt obligations(1) $18,346 $11,768
Bank loans(2) 8,900 6,706
High-yield securities 6,057 4,817
Emerging market debt securities 1,653 1,247
SMFG convertible preferred stock 2,556 1,683
Other corporate principal investments(3) 1,278 1,273
Real estate principal investments(3) 820 799
(1)฀฀Includes฀certain฀retained฀interests฀held฀in฀QSPEs.฀See฀Note฀3฀to฀the฀consoli-
dated฀financial฀statements฀for฀further฀information฀regarding฀our฀securitization฀
activities.฀
(2)฀฀Includes฀ both฀ funded฀ commitments฀ and฀ inventory฀ held฀ in฀ connection฀ with฀
our฀trading฀and฀lending฀activities.
(3)฀฀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.
A large proportion of these assets are continually funded on a
secured basis through normal secured funding markets and
nonrecourse funding. We focus on developing capacity for fund-
ing these assets on a term secured basis in order to ensure that
these assets maintain a certain amount of loan value in periods
of market stress.
See Note 3 to the consolidated financial statements for further
information regarding the financial instruments we hold.
appro p r i ate฀ f i n a nc ing฀ of฀ as set฀ base฀–฀We seek to
manage the maturity profile of our funding base such that we
should be able to liquidate our assets prior to our liabilities
coming due, even in times of prolonged or severe liquidity stress.
We generally do not rely on immediate sales of assets (other than
our Global Core Excess) to maintain liquidity in a distressed
environment. However, we recognize that orderly asset sales
may be prudent and necessary in a persistent liquidity crisis.
In order to avoid reliance on asset sales, we ensure that we have
sufficient total capital (long-term borrowings plus shareholders’
equity) to fund our balance sheet for at least one year. We there-
fore seek to maintain total capital in excess of the aggregate of
the following long-term financing requirements:
• the portion of financial instruments owned that we believe
could not be funded on a secured basis in periods of market
stress, assuming conservative loan values;
• goodwill and identifiable intangible assets, property, lease-
hold improvements and equipment, and other illiquid assets;
• derivatives and other margin and collateral requirements;
• anticipated draws on our unfunded commitments; and
• capital or other forms of financing in our regulated subsid-
iaries that is in excess of their long-term financing require-
ments. See “—Intercompany Funding” included below for
further discussion on how we fund our subsidiaries.
Our total capital of $105.78 billion and $79.11 billion as of
November 2004 and November 2003, respectively, exceeded
the aggregate of these requirements.
conservative฀ lia b i l ity฀ stru cture฀– ฀We structure our
liabilities conservatively to minimize refinancing and buy-back
risk. For example, we emphasize the use of promissory notes
over commercial paper in order to improve the stability of our
short-term unsecured financing base. We have also created inter-
nal guidelines regarding the principal amount of debt maturing