Goldman Sachs 2004 Annual Report Download - page 87

Download and view the complete annual report

Please find page 87 of the 2004 Goldman Sachs annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 120

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120

GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 8 5
notes฀to฀consolidated฀financial฀statements
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 8 5
The preceding table does not give effect to the offsetting benefit
of other financial instruments that are held to hedge risks inher-
ent in these retained interests. Changes in fair value based on a
10% adverse variation in assumptions generally cannot be
extrapolated because the relationship of the change in assump-
tions to the change in fair value is not usually linear. In addi-
tion, the impact of a change in a particular assumption is
calculated independently of changes in any other assumption.
In practice, simultaneous changes in assumptions might
magnify or counteract the sensitivities disclosed above.
In addition to the retained interests described above, the firm also
held interests in QSPEs, primarily agency mortgage-backed securities,
purchased in connection with secondary market-making
activities. These purchased interests approximated $5 billion
and $6 billion as of November 2004 and November 2003,
respectively.
In connection with the issuance of asset-repackaged notes to
investors, the firm had derivative receivables from QSPEs, to
which the firm has transferred assets, with a fair value of
$126 million and $188 million as of November 2004 and
November 2003, respectively. These receivables are collateral-
ized by a first-priority interest in the assets held by each QSPE.
VARIABLE฀ INTEREST฀ENTITIES฀(VIES)
The firm, in the ordinary course of its business, retains interests
in VIEs in connection with its securitization activities. The firm
also purchases and sells variable interests in VIEs, primarily
mortgage-backed and asset-backed interests, in connection with
its market-making activities and makes investments in and
loans to VIEs that hold performing and nonperforming debt,
real estate and other assets. In addition, the firm utilizes VIEs to
provide investors with credit-linked and asset-repackaged notes
designed to meet their objectives.
VIEs generally purchase assets by issuing debt and equity instru-
ments and through other contractual arrangements. In certain
instances, the firm has provided guarantees to certain VIEs or
holders of variable interests in these VIEs. In such cases, the
maximum exposure to loss included in the tables set forth
below is the notional amount of such guarantees. Such amounts
do not represent anticipated losses in connection with these
guarantees. The firm’s variable interests in these VIEs include
BES฀•฀Phone฀(201)฀635-5240฀฀•฀FAX฀(201)฀635-5199
BPX/S10829฀•฀Flow฀16฀•฀Proof฀12฀•฀2/4/05฀•฀RUSH
The following table sets forth the weighted average key economic assumptions used in measuring the fair value of $3.38 billion
and $2.15 billion, respectively, as of November 2004 and November 2003, of retained interests for which fair value is based on
alternative pricing sources with reasonable, little or no price transparency and the sensitivity of those fair values to immediate
adverse changes of 10% and 20% in those assumptions:
฀ ฀ AS฀OF฀NOVEMBER฀2004฀ AS฀OF฀NOVEMBER฀2003
฀ ฀ TYPE฀OF฀RETAINED฀INTERESTS฀ TYPE฀OF฀RETAINED฀INTERESTS
฀ ฀ ฀ ฀ CORPORATE฀DEBT฀ ฀ CORPORATE฀DEBT฀฀
($฀IN฀MILLIONS)฀ ฀MORTGAGE-BACKED฀AND฀OTHER(3)฀ MORTGAGE-BACKED฀ AND฀OTHER(3)
Fair value of retained interests $1,798฀ $1,578 $1,199฀ $954
Weighted average life (years) 4.2฀ 3.7 3.8฀ 3.4
Annual constant prepayment rate 21.5%฀ N/A 22.0%฀ N/A
Impact of 10% adverse change $฀฀฀ ฀ ฀(6)฀ $฀฀฀฀฀— $฀฀฀฀฀฀(3)฀ $฀฀—
Impact of 20% adverse change (10)฀ — (7)฀ —
Annual credit losses(1) 4.0%฀ 4.1% 2.9%฀ 1.3%
Impact of 10% adverse change(2) $฀฀฀(10)฀ $฀฀฀฀฀(1) $฀฀฀฀(11)฀ $฀฀ (6)
Impact of 20% adverse change(2) (14)฀ (2) (19)฀ (11)
Annual discount rate 8.5%฀ 4.9% 15.0%฀ 8.3%
Impact of 10% adverse change $฀฀฀฀(39)฀ $฀฀฀(24) $฀ ฀฀(27)฀ $฀฀ (6)
Impact of 20% adverse change (75)฀ (48) (51)฀ (11)
(1)฀Annual฀percentage฀credit฀loss฀is฀based฀only฀on฀positions฀in฀which฀expected฀credit฀loss฀is฀a฀key฀assumption฀in฀the฀determination฀of฀fair฀values.฀
(2)฀฀The฀impacts฀of฀adverse฀change฀take฀into฀account฀credit฀mitigants฀incorporated฀in฀the฀retained฀interests,฀including฀over฀collateralization฀and฀subordination฀provisions.
(3)฀Includes฀retained฀interests฀in฀bonds฀and฀other฀types฀of฀financial฀assets฀that฀are฀not฀subject฀to฀prepayment฀risk.