Goldman Sachs 2007 Annual Report Download - page 66

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Management’s Discussion and Analysis
JUNIOR SUBORDINATED DEBT ISSUED TO A TRUST IN
CONNECTION WITH TRUST PREFERRED SECURITIES. We issued
$2.84 billion of junior subordinated debentures in the first
quarter of 2004 to Goldman Sachs Capital I, a Delaware
statutory trust that, in turn, issued $2.75 billion of guaranteed
preferred beneficial interests to third parties and $85 million
of common beneficial interests to Goldman Sachs. The junior
subordinated debentures are included in “Unsecured long-term
borrowings” in the consolidated statements of financial condition.
Because of certain characteristics of the junior subordinated
debt (and the associated trust preferred securities), including
its long-term nature, our ability to defer coupon interest for up
to ten consecutive semiannual periods and the subordinated
nature of the debt in our capital structure, it qualifies as
regulatory capital for CSE purposes and is included as part of
our equity capital.
SUBORDINATED DEBT. In addition to junior subordinated debt
issued to trusts, we had other outstanding subordinated debt
of $11.23 billion as of November 2007. Although not part of our
shareholders’ equity, subordinated debt may be used to meet a
portion of our consolidated capital requirements as a CSE.
JUNIOR SUBORDINATED DEBT ISSUED TO TRUSTS IN CONNECTION
WITH NORMAL AUTOMATIC PREFERRED ENHANCED CAPITAL
SECURITIES. In the second quarter of 2007, we issued
$1.75 billion of fixed rate junior subordinated debt to
Goldman Sachs Capital II and $500 million of floating rate
junior subordinated debt to Goldman Sachs Capital III,
Delaware statutory trusts that, in turn, issued $2.25 billion of
guaranteed perpetual Automatic Preferred Enhanced Capital
Securities (APEX) to third parties and a de minimis amount of
common securities to Goldman Sachs. The junior subordinated
debt is included in “Unsecured long-term borrowings” in the
consolidated statements of financial condition. In connection
with the APEX issuance, we entered into stock purchase contracts
with Goldman Sachs Capital II and III under which we will be
obligated to sell and these entities will be obligated to purchase
$2.25 billion of perpetual non-cumulative preferred stock that
we will issue in the future. Goldman Sachs Capital II and III
are required to remarket the junior subordinated debt in order
to fund their purchase of the preferred stock, but in the event
that a remarketing is unsuccessful, they will relinquish the
subordinated debt to us in exchange for the preferred stock.
Because of certain characteristics of the junior subordinated
debt (and the associated APEX), including its long-term nature,
the future issuance of perpetual non-cumulative preferred stock
under the stock purchase contracts, our ability to defer payments
due on the debt and the subordinated nature of the debt in our
capital structure, it qualifies as regulatory capital for CSE
purposes and is included as part of our equity capital.
64 Goldman Sachs 2007 Annual Report