Goldman Sachs 2007 Annual Report Download - page 74

Management’s Discussion and Analysis
instruments, completed or pending third-party transactions in
the underlying investment or comparable entities, subsequent
rounds of financing, recapitalizations and other transactions
across the capital structure, offerings in the equity or debt capital
markets, and changes in financial ratios or cash flows.
The sensitivity analysis of our investment in the ordinary shares
of ICBC excludes interests held by investment funds managed
by Goldman Sachs.
The sensitivity analysis of our investment in the convertible
preferred stock of SMFG, net of the economic hedge on a
substantial portion of the common stock underlying our
investment, is measured by the impact of a decline in the SMFG
common stock price. This sensitivity should not be extrapolated
to a significant decline in the SMFG common stock price, as
the relationship between the fair value of our investment and
the SMFG common stock price would be nonlinear due to
downside protection on the conversion stock price.
In addition, as of November 2007 and November 2006, in
our bank and insurance subsidiaries we held approximately
$10.58 billion and $9.95 billion of securities, respectively,
primarily consisting of mortgage-backed, federal agency and
investment-grade corporate bonds.
The following table sets forth market risk for positions not included in VaR. These measures do not reflect diversification benefits
across asset categories and, given the differing likelihood of the potential declines in asset categories, these measures have not
been aggregated:
(in millions) 10% Sensitivity
Amount as of November
Asset Categories 10% Sensitivity Measure 2007 2006
Trading Risk
(1)
Equity Underlying asset value $1,325 $377
Debt Underlying asset value 1,020 725
Non-trading Risk
ICBC ICBC ordinary share price 250 191
SMFG SMFG common stock price 41 140
Other Equity Underlying asset value 1,013 390
Debt Underlying asset value 500 199
Real Estate
(2) Underlying asset value 1,108 341
(1)
In addition to the positions in these portfolios, which are accounted for at fair value, we make investments accounted for under the equity method and we also make
direct investments in real estate, both of which are included in “Other assets” in the consolidated statements of financial condition. Direct investments in real estate
are accounted for at cost less accumulated depreciation. See Note 10 to the consolidated financial statements for information on “Other assets.”
(2) Relates to interests in our real estate investment funds.
Other Market Risk Measures
Certain portfolios and individual positions are not included in
VaR, where VaR is not the most appropriate measure of risk
(e.g., due to transfer restrictions and/or illiquidity). The market
risk related to our investments in the ordinary shares of ICBC
and the convertible preferred stock of SMFG is measured by
estimating the potential reduction in net revenues associated
with a 10% decline in the ICBC ordinary share price and a
10% decline in the SMFG common stock price, respectively.
The market risk related to the remaining positions is measured
by estimating the potential reduction in net revenues associated
with a 10% decline in asset values.
The sensitivity analyses for equity and debt positions in
our trading portfolio and equity, debt (primarily mezzanine
instruments) and real estate positions in our non-trading
portfolio are measured by the impact of a decline in the asset
values (including the impact of leverage in the underlying
investments for real estate positions in our non-trading portfolio)
of such positions. The fair value of the underlying positions
may be impacted by factors such as transactions in similar
The increase in our 10% sensitivity measures during 2007 in
our trading and non-trading portfolios (excluding ICBC and
SMFG) was primarily due to new investments.
72 Goldman Sachs 2007 Annual Report