Goldman Sachs 2004 Annual Report Download - page 67

GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 6 5
management’s฀discussion฀and฀analysis
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 6 5
on any one day or during any single week or year and have
average maturity targets for our unsecured debt programs.
We seek to maintain broad and diversified funding sources glob-
ally for both secured and unsecured funding. We have imposed
various internal guidelines, including the amount of our com-
mercial paper that can be owned and letters of credit that can
be issued by any single investor or group of investors. We ben-
efit from distributing our debt issuances through our own sales
force to a large, diverse global creditor base and we believe that
our relationships with our creditors are critical to our liquidity.
We access funding in a variety of markets in the United States,
Europe and Asia. We issue debt through syndicated U.S. regis-
tered offerings, U.S. registered and 144A medium-term notes
programs, offshore medium-term notes offerings and other
bond offerings, U.S. and non-U.S. commercial paper and prom-
issory note issuances, and other methods. We make extensive
use of the repurchase agreement and securities lending markets
and arrange for letters of credit to be issued on our behalf.
Additionally, senior unsecured debt issued by Group Inc. does
not contain provisions that would, based solely upon an adverse
change in our credit ratings, financial ratios, earnings, cash
flows or our stock price, trigger a requirement for an early
payment, collateral support, change in terms, acceleration of
maturity or the creation of an additional financial obligation.
Intercompany฀Funding
subsidia ry฀ fund i n g ฀ policies฀–฀Substantially all of our
unsecured funding is raised by our parent company, Group Inc.
The parent company then lends the necessary funds to its sub-
sidiaries, some of which are regulated, to meet their asset
financing and capital requirements. In addition, the parent com-
pany provides its regulated subsidiaries the necessary capital to
meet their regulatory requirements. The benefits of this strategy
include enhanced control and greater flexibility to meet the
funding requirements of our subsidiaries.
Our intercompany funding policies are predicated on our
assumption that, unless legally provided for, funds or securities
are not freely available from a subsidiary to its parent company
or other subsidiaries. As such, we assume that capital or other
financing provided to our regulated subsidiaries is not available
to our parent company or other subsidiaries. In addition, we
assume that the Global Core Excess held in our principal
non-U.S. operating entities will not be available to our parent
company or other subsidiaries and therefore is available only to
meet the potential liquidity requirements of those entities.
In particular, many of our subsidiaries are subject to laws that
authorize regulatory bodies to block or reduce the flow of funds
from those subsidiaries to Group Inc. Regulatory action of that
kind could impede access to funds that Group Inc. needs to
make payments on obligations, including debt obligations.
Group Inc. has provided substantial amounts of equity and
subordinated indebtedness, directly or indirectly, to its regulated
subsidiaries; for example, as of November 2004, Group Inc.
had $16.21 billion of such equity and subordinated indebted-
ness invested in Goldman, Sachs & Co., its principal U.S. regu-
lated broker-dealer, $12.14 billion invested in Goldman Sachs
International, a registered U.K. broker-dealer, $2.55 billion
invested in Goldman Sachs Execution & Clearing, L.P.(1), a U.S.
regulated broker-dealer, and $2.07 billion invested in Goldman
Sachs (Japan) Ltd., a Tokyo-based broker-dealer. Group Inc.
also had $46.84 billion of unsubordinated loans to these entities
as of November 2004, as well as significant amounts of capital
invested in and loans to its other regulated subsidiaries.
We also manage our intercompany exposure by requiring senior
and subordinated intercompany loans to have maturities equal
to or shorter than the maturities of the aggregate borrowings of
the parent company. This policy ensures that the subsidiaries’
obligations to the parent company will generally mature in
advance of the parent company’s third-party borrowings. In
addition, many of our subsidiaries and affiliates pledge collat-
eral at loan value to the parent company to cover their inter-
company borrowings (other than subordinated debt) in order to
mitigate parent company liquidity risk. Equity investments in
subsidiaries are generally funded with parent company equity
capital. As of November 2004, Group Inc.’s equity investment
in subsidiaries was $23.67 billion compared with its sharehold-
ers’ equity of $25.08 billion.
subsidia ry฀ fore i g n ฀ exchan g e ฀ p olicies฀–฀Our capital
invested in non-U.S. subsidiaries is generally exposed to foreign
exchange risk, substantially all of which is hedged. “Currency
translation adjustment, net of tax” in the consolidated state-
ments of comprehensive income decreased to $5 million for
2004 compared with $128 million for 2003, primarily due to
an expansion of our policy for hedging our net investment in
non-U.S. subsidiaries. In addition, we generally hedge the non-
trading exposure to foreign exchange risk that arises from
transactions denominated in currencies other than the trans-
acting entity’s functional currency.
(1)฀฀Group฀Inc.฀renamed฀Spear,฀Leeds฀&฀Kellogg,฀L.P.,฀Goldman฀Sachs฀Execution฀
&฀Clearing,฀L.P.,฀effective฀January฀14,฀2005.฀
BES฀•฀Phone฀(212)฀924-5500฀•฀FAX฀(212)฀229-7392
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