Goldman Sachs 2004 Annual Report Download - page 68

management’s฀discussion฀and฀analysis
66฀฀฀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
Crisis฀Planning
In order to be prepared for a liquidity event, or a period of
market stress, we base our liquidity risk management frame-
work and our resulting funding and liquidity policies on conser-
vative stress-scenario planning.
In addition, we maintain a Liquidity Crisis Plan that specifies an
approach for analyzing and responding to a liquidity-threaten-
ing event. The Plan provides the framework to estimate the
likely impact of a liquidity event on Goldman Sachs based on
some of the risks identified above and outlines which and to
what extent liquidity maintenance activities should be imple-
mented based on the severity of the event. It also lists the crisis
management team and internal and external parties to be con-
tacted to ensure effective distribution of information.
Cash฀Flows
As a global financial institution, our cash flows are complex and
interrelated and bear little relation to our net earnings and net
assets and, consequently, we believe that traditional cash flow
analysis is less meaningful in evaluating our liquidity position
than the excess liquidity and asset-liability management policies
described above. Cash flow analysis may, however, be helpful in
highlighting certain macro trends and strategic initiatives in
our business.
year฀ ende d ฀ n ov e m b er฀ 2004฀–฀Our cash and cash equiva-
lents decreased by $2.72 billion to $4.37 billion at the end of
2004. We raised $31.75 billion in net cash from financing activi-
ties, primarily in long-term debt, in light of the favorable debt
financing environment. We used net cash of $34.47 billion in our
operating and investing activities, primarily to capitalize on trad-
ing and investing opportunities for ourselves and our clients, to
meet additional collateral requirements at securities exchanges
and clearing organizations and to provide additional funding sup-
port for our William Street loan commitments program.
yea r฀ e nd ed ฀ nov em be r฀ 2 00 3฀–฀Our cash and cash equiva-
lents increased by $2.27 billion to $7.09 billion at the end of
2003. We raised $20.58 billion in net cash from financing
activities, primarily in long-term debt. We used net cash of
$18.32 billion in our operating and investing activities primarily
to capitalize on opportunities in our trading and principal
investing businesses, including the purchase of investments that
could be difficult to fund in periods of market stress. We also
increased our Global Core Excess liquidity, provided funding
support for our William Street loan commitments program,
invested in the convertible preferred stock of SMFG and
financed the acquisition of East Coast Power L.L.C.
yea r฀ e nd ed ฀ nov em be r฀ 2 00 2฀–฀Our cash and cash equiva-
lents decreased by $2.09 billion to $4.82 billion at the end of
2002. We raised $9.09 billion in net cash from financing
activities, primarily in net short-term debt and long-term debt
(net of repayments of long-term debt). We used net cash of
$11.18 billion in our operating and investing activities, primar-
ily to capitalize on opportunities in our trading and principal
investing businesses, including the purchase of investments that
could be difficult to fund in periods of market stress. We also
increased our Global Core Excess liquidity, made leasehold
improvements, and purchased telecommunications and technol-
ogy-related equipment.
OPERATIONAL฀RISK
Operational risk relates to the risk of loss arising from short-
comings or failures in internal processes, people or systems, and
from external events. Operational risk can arise from many fac-
tors ranging from more or less routine processing errors to
potentially costly incidents arising, for example, from major
systems failures. Operational risk may also entail reputational
harm. Thus, efforts to identify, manage and mitigate opera-
tional risk must be equally sensitive to the risk of reputational
damage as well as the risk of financial loss.
We manage operational risk through the application of long
standing, but continuously evolving, firmwide control stan-
dards; the training, supervision and development of our people;
the active participation and commitment of senior management
in a continuous process of identifying and mitigating key opera-
tional risks at both the business unit level and for the firm as a
whole; and a framework of strong and independent control
departments that monitor quantitative and qualitative indica-
tors of operational risk. Together, these elements comprise a
strong firmwide control culture that is at the center of our
efforts aimed at minimizing operational shortcomings and the
damage they can cause.
The Operational Risk Department is responsible for the over-
sight and coordination of the design, implementation and main-
tenance of our overall operational risk management framework.
This framework, which evolves with the changing needs of busi-
ness complexities and regulatory guidance, takes into account
internal and external operational risk events, business unit spe-
cific risk assessments, the ongoing analysis of business specific
risk metrics and the use of scenario analysis. While the direct
responsibility for the control and mitigation of operational risk
lies with the individual business units, this framework provides
a consistent methodology for identifying and monitoring opera-
tional risk factors for both individual business unit managers
and senior management.
BES฀•฀Phone฀(201)฀635-5240฀•฀FAX฀(201)฀635-5199
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