Goldman Sachs 2009 Annual Report Download - page 115

Goldman Sachs 2009 Annual Report
113
Notes to Consolidated Financial Statements
Credit Concentrations
Credit concentrations may arise from trading, investing,
underwriting, lending and securities borrowing activities
and may be impacted by changes in economic, industry or
political factors. The  rm seeks to mitigate credit risk by
actively monitoring exposures and obtaining collateral as
deemed appropriate. While the  rm’s activities expose it
to many different industries and counterparties, the  rm
routinely executes a high volume of transactions with
counterparties in the  nancial services industry, including
brokers and dealers, commercial banks, clearing houses,
exchanges and investment funds. This has resulted in
signi cant credit concentration with respect to this industry.
In the ordinary course of business, the  rm may also be
subject to a concentration of credit risk to a particular
counterparty, borrower or issuer, including sovereign issuers,
or to a particular clearing house orexchange.
As of December2009 and November2008, the  rm held
$83.83billion (10% of total assets) and $53.98billion
(6% of total assets), respectively, of U.S. government and
federal agency obligations included in “Trading assets, at fair
value” and “Cash and securities segregated for regulatory and
other purposes” in the consolidated statements of  nancial
condition. As of December2009 and November2008, the
 rm held $38.61billion (5% of total assets) and $21.13billion
(2% of total assets), respectively, of other sovereign
obligations, principally consisting of securities issued by the
governments of the United Kingdom and Japan. In addition,
as of December2009 and November2008, $87.63billion
and $126.27billion of the  rm’s securities purchased under
agreements to resell and securities borrowed (including
those in “Cash and securities segregated for regulatory
and other purposes”), respectively, were collateralized by
U.S. government and federal agency obligations. As of
December2009 and November2008, $77.99billion and
$65.37billion of the  rm’s securities purchased under
agreements to resell and securities borrowed, respectively,
were collateralized by other sovereign obligations, principally
consisting of securities issued by the governments of Germany,
the United Kingdom and Japan. As of December2009 and
November2008, the  rm did not have credit exposure to any
other counterparty that exceeded 2% of the  rm’s totalassets.
Derivative Activities
Derivative contracts are instruments, such as futures, forwards,
swaps or option contracts, that derive their value from
underlying assets, indices, reference rates or a combination
of these factors. Derivative instruments may be privately
negotiated contracts, which are often referred to as OTC
derivatives, or they may be listed and traded on an exchange.
Derivatives may involve future commitments to purchase or sell
 nancial instruments or commodities, or to exchange currency
or interest payment streams. The amounts exchanged are based
on the speci c terms of the contract with reference to speci ed
rates, securities, commodities, currencies or indices.
Certain cash instruments, such as mortgage-backed securities,
interest-only and principal-only obligations, and indexed
debt instruments, are not considered derivatives even though
their values or contractually required cash  ows are derived
from the price of some other security or index. However,
certain commodity-related contracts are included in the  rm’s
derivatives disclosure, as these contracts may be settled in
cash or the assets to be delivered under the contract are readily
convertible into cash.
The  rm enters into derivative transactions to facilitate
client transactions, to take proprietary positions and as a
means of risk management. Risk exposures are managed
through diversi cation, by controlling position sizes and by
entering into offsetting positions. For example, the  rm may
manage the risk related to a portfolio of common stock by
entering into an offsetting position in a related equity-index
futurescontract.
The  rm applies hedge accounting to certain derivative
contracts. The  rm uses these derivatives to manage certain
interest rate and currency exposures, including the  rm’s net
investment in non-U.S. operations. The  rm designates certain
interest rate swap contracts as fair value hedges. These interest
rate swap contracts hedge changes in the relevant benchmark
interest rate (e.g.,London Interbank Offered Rate (LIBOR)),
effectively converting a substantial portion of the  rm’s
unsecured long-term borrowings, certain unsecured short-
term borrowings and certi cates of deposit into  oating rate
obligations. See Note2 for information regarding the  rm’s
accounting policy for foreign currency forward contracts used
to hedge its net investment in non-U.S. operations.