Goldman Sachs 2007 Annual Report Download - page 79

Management’s Discussion and Analysis
We maintain Global Core Excess and other unencumbered
assets in an amount that, if pledged or sold, would provide the
funds necessary to replace at least 110% of our unsecured
obligations that are scheduled to mature (or where holders
have the option to redeem) within the next 12 months. We
assume conservative loan values that are based on stress-
scenario borrowing capacity and we regularly review these
assumptions asset class by asset class. The estimated aggregate
loan value of our Global Core Excess and our other unencumbered
assets averaged $156.74 billion and $134.38 billion for the
fiscal years ended 2007 and 2006, respectively.
Asset-Liability Management
We seek to maintain a highly liquid balance sheet and substantially
all of our inventory is marked-to-market daily. We utilize aged
inventory limits for certain financial instruments as a disincentive
to our businesses to hold inventory over longer periods of time.
We believe that these limits provide a complementary mechanism
for ensuring appropriate balance sheet liquidity in addition to
our standard position limits. Although our balance sheet fluctuates
due to seasonal activity, market conventions and periodic market
opportunities in certain of our businesses, our total assets and
adjusted assets at financial statement dates are not materially
different from those occurring within our reporting periods.
We seek to manage the maturity profile of our funding base
such that we should be able to liquidate our assets prior to our
liabilities coming due, even in times of prolonged or severe
liquidity stress. We do not rely on immediate sales of assets
(other than our Global Core Excess) to maintain liquidity in a
distressed environment, although we recognize orderly asset sales
may be prudent and necessary in a persistent liquidity crisis.
In order to avoid reliance on asset sales, our goal is to ensure
that we have sufficient total capital (unsecured long-term
borrowings plus total shareholders’ equity) to fund our balance
sheet for at least one year. The amount of our total capital is
based on an internal liquidity model, which incorporates,
among other things, the following long-term financing
requirements:
■
the portion of financial instruments owned that we believe
could not be funded on a secured basis in periods of market
stress, assuming conservative loan values;
■ goodwill and identifiable intangible assets, property, leasehold
improvements and equipment, and other illiquid assets;
■ derivative and other margin and collateral requirements;
■ anticipated draws on our unfunded loan commitments; and
■
capital or other forms of financing in our regulated subsidiaries
that is in excess of their long-term financing requirements. See
“ — Conservative Liability Structure” below for a further
discussion of how we fund our subsidiaries.
■ potential cash outflows associated with our prime brokerage
business;
■ additional collateral that could be called in the event of a
two-notch downgrade in our credit ratings;
■ draws on our unfunded commitments not supported by
William Street Funding Corporation
(1); and
■ upcoming cash outflows, such as tax and other large
payments.
The following table sets forth the average loan value (the
estimated amount of cash that would be advanced by counter-
parties against these securities) of our Global Core Excess:
Year Ended November
(in millions) 2007 2006
U.S. dollar-denominated $48,635 $40,862
Non-U.S. dollar-denominated 11,928 10,202
Total Global Core Excess $60,563 $51,064
The U.S. dollar-denominated excess is comprised of only
unencumbered U.S. government securities, U.S. agency securities
and highly liquid U.S. agency mortgage-backed securities, all of
which are Federal Reserve repo-eligible, as well as overnight cash
deposits. Our non-U.S. dollar-denominated excess is comprised
of only unencumbered French, German, United Kingdom and
Japanese government bonds and euro, British pound and
Japanese yen overnight cash deposits. We strictly limit our
Global Core Excess to this narrowly defined list of securities
and cash because we believe they are highly liquid, even in a
difficult funding environment. We do not believe other potential
sources of excess liquidity, such as lower-quality unencumbered
securities or committed credit facilities, are as reliable in a
liquidity crisis.
The majority of our Global Core Excess is structured such that
it is available to meet the liquidity requirements of our parent
company, Group Inc., and all of its subsidiaries. The remainder
is held in our principal non-U.S. operating entities, primarily
to better match the currency and timing requirements for those
entities’ potential liquidity obligations.
In addition to our Global Core Excess, we have a significant
amount of other unencumbered securities as a result of our
business activities. These assets, which are located in the United
States, Europe and Asia, include other government bonds,
high-grade money market securities, corporate bonds and
marginable equities. We do not include these securities in our
Global Core Excess.
(1) The Global Core Excess excludes liquid assets of $6.17 billion held separately
by William Street Funding Corporation. See “
— Contractual Obligations
and Commitments” above for a further discussion of the William Street credit
extension program.
77Goldman Sachs 2007 Annual Report