Goldman Sachs 2007 Annual Report Download - page 105

Notes to Consolidated Financial Statements
As of November 2007 and November 2006, the firm held
$45.75 billion (4% of total assets) and $46.20 billion (6% of
total assets), respectively, of U.S. government and federal agency
obligations (including securities guaranteed by the Federal
National Mortgage Association and the Federal Home Loan
Mortgage Corporation) included in “Financial instruments
owned, at fair value” and “Cash and securities segregated for
regulatory and other purposes” in the consolidated statements of
financial condition. As of November 2007 and November 2006,
the firm held $31.65 billion (3% of total assets) and $23.64 billion
(3% of total assets), respectively, of other sovereign obligations,
principally consisting of securities issued by the governments of
Japan and the United Kingdom. In addition, as of November 2007
and November 2006, $144.92 billion and $104.76 billion of
the firm’s financial instruments purchased under agreements to
resell and securities borrowed, respectively, were collateralized
by U.S. government and federal agency obligations. As of
November 2007 and 2006, $41.26 billion and $38.22 billion
of the firm’s financial instruments purchased under agreements
to resell and securities borrowed, respectively, were collateralized
by other sovereign obligations. As of November 2007 and
November 2006, the firm did not have credit exposure to any
other counterparty that exceeded 2% of the firm’s total assets.
Derivative Activities
Derivative contracts are instruments, such as futures, forwards,
swaps or option contracts, that derive their value from
underlying assets, indices, reference rates or a combination of
these factors. Derivative instruments may be privately negotiated
contracts, which are often referred to as OTC derivatives,
or they may be listed and traded on an exchange. Derivatives
may involve future commitments to purchase or sell financial
instruments or commodities, or to exchange currency or interest
payment streams. The amounts exchanged are based on the
specific terms of the contract with reference to specified rates,
securities, commodities, currencies or indices.
Certain cash instruments, such as mortgage-backed securities,
interest-only and principal-only obligations, and indexed debt
instruments, are not considered derivatives even though
their values or contractually required cash flows are derived
from the price of some other security or index. However,
certain commodity-related contracts are included in the firm’s
derivatives disclosure, as these contracts may be settled in cash
or the assets to be delivered under the contract are readily
convertible into cash.
The firm enters into derivative transactions to facilitate client
transactions, to take proprietary positions and as a means of
risk management. Risk exposures are managed through
diversification, by controlling position sizes and by entering
into offsetting positions. For example, the firm may manage
the risk related to a portfolio of common stock by entering into
an offsetting position in a related equity-index futures contract.
The following table sets forth the gains and (losses) included
in earnings for the year ended November 2007 related to financial
assets and liabilities for which the firm has elected to apply the
fair value option under SFAS No. 155 and SFAS No. 159. The
table does not reflect the impact to the firm’s earnings of adopting
SFAS No. 159 because a significant amount of these gains and
losses would have also been recognized under previously issued
generally accepted accounting principles. In addition, instruments
for which the firm has elected the fair value option are
economically hedged with instruments accounted for at fair
value under other generally accepted accounting principles that
are not reflected in the table below.
(in millions) Year Ended November 2007
Unsecured long-term borrowings $(1,979)
Other secured financings
(1)
1,896
Unsecured short-term borrowings (1,064)
Financial instruments owned, at fair value
(2) (43)
Other
(3)
18
Total
(4)
$(1,172)
(1)
Includes gains of $2.08 billion related to financings recorded as a result of certain
mortgage securitizations that are accounted for as secured financings rather than
sales under SFAS No. 140. Changes in the fair value of the secured financings are
equally offset by changes in the fair value of the related mortgage whole loans,
which are included within the firm’s “Financial instruments owned, at fair value”
in the consolidated statement of financial condition.
(2)
Consists of investments where the firm would otherwise have applied the equity
method of accounting as well as securities held in GS Bank USA (previously
accounted for as available-for-sale).
(3) Consists of resale and repurchase agreements and securities borrowed and
loaned within Trading and Principal Investments and certificates of deposit issued
by GS Bank USA.
(4) Reported within “Trading and principal investments” within the consolidated
statements of earnings. The amounts exclude contractual interest, which is
included in “Interest Income” and “Interest Expense,” for all instruments other
than hybrid financial instruments.
Credit Concentrations
Credit concentrations may arise from trading, investing,
underwriting and securities borrowing activities and may be
impacted by changes in economic, industry or political factors.
The firm seeks to mitigate credit risk by actively monitoring
exposures and obtaining collateral as deemed appropriate.
While the firm’s activities expose it to many different industries
and counterparties, the firm routinely executes a high volume
of transactions with counterparties in the financial services
industry, including brokers and dealers, commercial banks,
investment funds and other institutional clients, resulting in
significant credit concentration with respect to this industry. In
the ordinary course of business, the firm may also be subject
to a concentration of credit risk to a particular counterparty,
borrower or issuer.
103Goldman Sachs 2007 Annual Report