Goldman Sachs 2004 Annual Report Download - page 86

notes฀to฀consolidated฀financial฀statements
84฀฀฀G O L D M A N ฀ S A C H S ฀ 2004฀ ANNUAL฀REPO RT
84฀฀฀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
losses on derivatives used for trading purposes are generally
included in “Trading and principal investments” in the consoli-
dated statements of earnings.
In addition to derivative transactions entered into for trading
purposes, the firm enters into derivative contracts to hedge its
net investment in non-U.S. operations (see Note 2 for further
information regarding the firm’s policy on foreign currency
translation) and to manage the interest rate and currency expo-
sure on its long-term borrowings and certain short-term bor-
rowings. To manage exposure on its borrowings, the firm uses
derivatives to effectively convert a substantial portion of its
long-term borrowings into U.S. dollar-based floating rate obliga-
tions. The firm applies fair-value hedge accounting to derivative
contracts that hedge the benchmark interest rate (i.e., LIBOR)
on its long-term borrowings.
Fair values of the firm’s derivative contracts reflect cash paid or received pursuant to credit support agreements and are reported
on a net-by-counterparty basis in the firm’s consolidated statements of financial condition when management believes a legal right
of setoff exists under an enforceable netting agreement. The fair value of derivative financial instruments, computed in accordance
with the firm’s netting policy, is set forth below:
฀ ฀ AS฀OF฀NOVEMBER฀
฀ ฀ 2004฀ 2003
(IN฀MILLIONS)฀ ASSETS฀ LIABILITIES฀ ASSETS฀ LIABILITIES
Forward settlement contracts $13,137฀ $14,578 $฀฀8,134฀ $฀฀9,271
Swap agreements 34,727฀ 30,836 25,471฀ 17,317
Option contracts 14,631฀ 18,587 12,128฀ 15,298
Total $62,495฀ $64,001 $45,733฀ $41,886
SECURITIZATION฀ACTIVITIES฀
The firm securitizes commercial and residential mortgages,
home equity loans, government and corporate bonds, and other
types of financial assets. The firm acts as underwriter of the
beneficial interests that are sold to investors. The firm derecog-
nizes financial assets transferred in securitizations provided it
has relinquished control over such assets. Transferred assets are
accounted for at fair value prior to securitization. Net revenues
related to these underwriting activities are recognized in
connection with the sales of the underlying beneficial interests
to investors.
The firm may retain interests in securitized financial assets.
Retained interests are accounted for at fair value and included
in “Total financial instruments owned, at fair value” in the
consolidated statements of financial condition.
During the years ended November 2004 and November 2003,
the firm securitized $62.93 billion and $95.00 billion,
respectively, of financial assets, including $21.24 billion and
$70.89 billion, respectively, of agency mortgage-backed securities.
Cash flows received on retained interests and other securitiza-
tion cash flows were approximately $984 million and $1 billion
for the years ended November 2004 and November 2003,
respectively.
As of November 2004 and November 2003, the firm held
$4.33 billion and $3.20 billion of retained interests, respec-
tively, including $4.11 billion and $3.04 billion, respectively,
held in QSPEs. As of November 2004 and November 2003, the
fair value of $949 million and $1.05 billion, respectively,
of retained interests was based on quoted market prices in
active markets.
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀16฀•฀Proof฀14฀•฀2/4/05฀•฀RUSH