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Management’s Discussion and Analysis
Operational Risk
Operational risk relates to the risk of loss arising from short-
comings or failures in internal processes, people or systems, or
from external events. Operational risk can arise from many
factors ranging from routine processing errors to potentially
costly incidents related to, for example, major systems failures.
Operational risk may also cause reputational harm. Thus,
efforts to identify, manage and mitigate operational risk must
be equally sensitive to the risk of reputational damage as well
as the risk of financial loss.
We manage operational risk through the application of long-
standing, but continuously evolving, firmwide control standards
which are supported by the training, supervision and development
of our people; the active participation and commitment of
senior management in a continuous process of identifying and
mitigating key operational risks across Goldman Sachs; and a
framework of strong and independent control departments
that monitor operational risk on a daily basis. Together, these
elements form a strong firmwide control culture that serves as the
foundation of our efforts to minimize operational risk exposure.
The Operational Risk Department, an independent risk
management function, is responsible for developing and
implementing a standardized framework to identify, measure,
monitor, and report operational risks to support active risk
management across Goldman Sachs. This framework, which
evolves with the changing needs of our businesses and regulatory
guidance, incorporates analysis of internal and external
operational risk events, business environment and internal
control factors, and scenario analysis. The framework also
provides regular reporting of our operational risk exposures to
our Board, risk committees and senior management. For a
further discussion of operational risk see “
—
Risk Factors” in
Part I, Item 1A of the Annual Report on Form 10-K.
As of November 2007, collateral or termination payments
pursuant to bilateral agreements with certain counterparties of
approximately $728 million would have been required in the
event of a one-notch reduction in our long-term credit ratings.
In evaluating our liquidity requirements, we consider additional
collateral or termination payments that would be required in
the event of a two-notch downgrade in our long-term credit
ratings, as well as collateral that has not been called by counter-
parties, but is available to them.
Cash Flows
As a global financial institution, our cash flows are complex
and interrelated and bear little relation to our net earnings and
net assets and, consequently, we believe that traditional cash
flow analysis is less meaningful in evaluating our liquidity position
than the excess liquidity and asset-liability management policies
described above. Cash flow analysis may, however, be helpful
in highlighting certain macro trends and strategic initiatives in
our business.
YEAR ENDED NOVEMBER 2007. Our cash and cash equivalents
increased by $5.59 billion to $11.88 billion at the end of 2007.
We raised $73.79 billion in net cash from financing and investing
activities, primarily through the issuance of unsecured borrowings,
partially offset by common stock repurchases. We used net
cash of $68.20 billion in our operating activities, primarily to
capitalize on trading and investing opportunities for our clients
and ourselves.
YEAR ENDED NOVEMBER 2006. Our cash and cash equivalents
decreased by $3.97 billion to $6.29 billion at the end of 2006.
We raised $64.09 billion in net cash from financing activities,
primarily in long-term borrowings as well as through secured
financings, partially offset by common stock repurchases. We
used net cash of $68.06 billion in our operating and investing
activities, primarily to capitalize on trading and investing
opportunities for our clients and ourselves.
The following table sets forth our unsecured credit ratings as of November 2007:
Short-Term Debt Long-Term Debt Subordinated Debt Preferred Stock
Dominion Bond Rating Service Limited R-1 (middle) AA (low) A (high) A
Fitch, Inc. F1+ AA- A+ A+
Moody’s Investors Service P-1 Aa3 A1 A2
Standard & Poor’s A-1+ AA- A+ A
Rating and Investment Information, Inc. a-1+ AA Not Applicable Not Applicable
81Goldman Sachs 2007 Annual Report