Goldman Sachs 2007 Annual Report Download - page 49

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Management’s Discussion and Analysis
The following table sets forth the fair values of assets classified as level 3 within the fair value hierarchy, along with a brief
description of the valuation technique for each type of asset:
Level 3 Assets at Fair Value
(in millions)
As of
Description November 2007 Valuation Technique
Private equity and real estate fund investments
(1) $ 18,006 Initially valued at transaction price. Subsequently
valued based on third-party investments, pending
transactions or changes in financial ratios (e.g.,
earnings multiples) and discounted cash flows.
Bank loans
(2) 13,334 Initially valued at transaction price. Subsequently
valued using market data for similar instruments
(e.g., recent transactions or broker quotes), comparisons
to benchmark derivative indices or movements in
Corporate debt securities and other debt obligations
(3) 6,111 underlying credit spreads.
Mortgage and other asset-backed loans and securities
Loans and securities backed by commercial real estate
(4) 7,410 Initially valued at transaction price. Subsequently
valued transactions for similar instruments and
discounted cash flow techniques (calibrated to trading
activity, where applicable).
Loans and securities backed by residential real estate
(5) 2,484 Initially valued at transaction price. Subsequently
valued by comparison to transactions in instruments
with similar collateral and risk profiles, discounted
cash flow techniques, option adjusted spread analyses,
and hypothetical securitization analyses.
Loan portfolios
(6) 6,106 Initially valued at transaction price. Subsequently
valued using transactions for similar instruments and
discounted cash flow techniques.
Cash instruments 53,451
Derivative contracts 15,700 Valuation models are calibrated to initial trade price.
Subsequent valuations are based on observable inputs to
the valuation model (e.g., interest rates, credit spreads,
volatilities, etc.). Model inputs are changed only when
corroborated by market data.
Total level 3 assets at fair value 69,151
Level 3 assets for which we do not
bear economic exposure
(7) (14,437)
Level 3 assets for which we bear economic exposure $ 54,714
(1) Includes $7.06 billion of assets for which we do not bear economic exposure. Also includes $2.02 billion of real estate fund investments.
(2) Includes mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt.
(3) Includes $2.49 billion of collateralized debt obligations (CDOs) backed by corporate obligations.
(4) Loans and securities backed by commercial real estate were $19.02 billion, of which $7.41 billion were classified as level 3.
(5) Includes subprime mortgage exposure of $507 million, including $316 million of CDOs backed by subprime mortgages.
(6) Consists of acquired portfolios of distressed loans. These loans are primarily backed by commercial and residential real estate collateral.
(7) We do not bear economic exposure to these level 3 assets as they are financed by nonrecourse debt, attributable to minority investors or attributable to employee
interests in certain consolidated funds.
47Goldman Sachs 2007 Annual Report