Goldman Sachs 2004 Annual Report Download - page 91

GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 8 9
notes฀to฀consolidated฀financial฀statements
GOLDMAN฀SAC H S ฀ 2004฀ A N N U A L ฀ R E P ORT ฀ ฀ ฀ 8 9
DEFERRABLE฀INTEREST฀ ฀
JUNIOR฀SUBORDINATED฀ DEBENTURES
In February 2004, Goldman Sachs Capital I (the Trust), a
wholly owned Delaware statutory trust, was formed by the firm
for the exclusive purposes of (i) issuing $2.75 billion of guaran-
teed preferred beneficial interests and $85 million of common
beneficial interests in the Trust, (ii) investing the proceeds from the
sale to purchase junior subordinated debentures from Group Inc.
and (iii) engaging in only those other activities necessary or
incidental to these purposes. The preferred beneficial interests
were purchased by third parties, and, as of November 2004, the firm
held all of the common beneficial interests.
The Trust is a wholly owned finance subsidiary of the firm for
legal and regulatory purposes. However, for accounting pur-
poses, under FIN No. 46-R, the Trust is not a consolidated sub-
sidiary of the firm because the firm’s ownership of the common
beneficial interest is not considered at risk, since the Trust’s prin-
cipal asset is the $2.84 billion of junior subordinated debentures
issued by the firm. The firm pays interest semiannually on these
debentures at an annual rate of 6.345% and the debentures
mature on February 15, 2034. The coupon rate and payment
dates applicable to the beneficial interests are the same as the
interest rate and payment dates applicable to the debentures. See
Note 6 for further information regarding the firm’s guarantee of
the preferred beneficial interests issued by the Trust.
The firm has the right, from time to time, to defer payment of
interest on the junior subordinated debentures, and, therefore,
cause payment of dividends on the Trust’s preferred beneficial
interests to be deferred, in each case for up to ten consecutive
semiannual periods, and during any such extension period Group
Inc. will not be permitted to, among other things, pay dividends
on or make certain repurchases of its common stock. The Trust is
not permitted to pay any distributions on the common beneficial
interests held by the firm unless all dividends payable on the
preferred beneficial interests have been paid in full.
NOTE฀6
Commitments, Contingencies and Guarantees
COMMITMENTS
The firm had commitments to enter into forward secured
financing transactions, including certain repurchase and resale
agreements and secured borrowing and lending arrangements,
of $48.32 billion and $35.25 billion as of November 2004 and
November 2003, respectively.
In connection with its lending activities, the firm had outstand-
ing commitments of $27.72 billion and $15.83 billion as of
November 2004 and November 2003, respectively. The firm’s
commitments to extend credit are agreements to lend to coun-
terparties that have fixed termination dates and are contingent
on all conditions to borrowing set forth in the contract having
been met. Since these commitments may expire unused, the
total commitment amount does not necessarily reflect the actual
future cash flow requirements.
As of November 2004 and November 2003, $9.40 billion and
$4.32 billion, respectively, of the firm’s outstanding commit-
ments to extend credit have been issued through the William
Street credit extension program. These commitments were pri-
marily issued through William Street Commitment Corporation
(Commitment Corp), a consolidated wholly owned subsidiary
of Group Inc. Another consolidated wholly owned subsidiary,
William Street Funding Corporation (Funding Corp), was
formed to raise funding to support the William Street credit
extension program. Commitment Corp and Funding Corp are
each separate corporate entities, with assets and liabilities that
are legally separated from the other assets and liabilities of the
firm. Accordingly, the assets of Commitment Corp and of
Funding Corp will not be available to their respective share-
holders until the claims of their respective creditors have been
paid. In addition, no affiliate of either Commitment Corp or
Funding Corp, except in limited cases as expressly agreed in
writing, is responsible for any obligation of either entity.
Substantially all of the credit risk associated with these commit-
ments has been covered by credit loss protection provided to the
firm by SMFG. The firm has also hedged the credit risk of cer-
tain non-William Street commitments using a variety of other
financial instruments.
The firm provides letters of credit issued by various banks to
counterparties in lieu of securities or cash to satisfy various col-
lateral and margin deposit requirements. Letters of credit out-
standing were $11.15 billion and $12.60 billion as of
November 2004 and November 2003, respectively.
The firm acts as an investor in merchant banking transac-
tions, which includes making long-term investments in equity
and debt securities in privately negotiated transactions,
corporate acquisitions and real estate transactions. In con-
nection with these activities, the firm had commitments to
invest up to $1.04 billion and $1.38 billion in corporate and
real estate investment funds as of November 2004 and
November 2003, respectively.
The firm had construction-related commitments of $107 million
and $87 million as of November 2004 and November 2003,
respectively, and other purchase commitments of
$242 million and $255 million as of November 2004 and
November 2003, respectively.
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