Goldman Sachs 2009 Annual Report Download - page 38

these or other factors. Our businesses and pro tability have
been and may continue to be adversely affected by market
conditions in many ways, including the following:
▪
Many of our businesses, such as our merchant banking
businesses, our mortgages, leveraged loan and credit
products businesses in our FICC segment, and our equity
principal strategies business, have net “long” positions
in debt securities, loans, derivatives, mortgages, equities
(including private equity) and most other asset classes. In
addition, many of our market-making and other businesses
in which we act as a principal to facilitate our clients’
activities, including our exchange-based market-making
businesses, commit large amounts of capital to maintain
trading positions in interest rate and credit products, as
well as currencies, commodities and equities. Because
nearly all of these investing and trading positions are
marked-to-market on a daily basis, declines in asset values
directly and immediately impact our earnings, unless we
have effectively “hedged” our exposures to such declines.
In certain circumstances (particularly in the case of
leveraged loans and private equities or other securities
that are not freely tradable or lack established and liquid
trading markets), it may not be possible or economic to
hedge such exposures and to the extent that we do so
the hedge may be ineffective or may greatly reduce our
ability to pro t from increases in the values of the assets.
Sudden declines and signi cant volatility in the prices of
assets may substantially curtail or eliminate the trading
markets for certain assets, which may make it very dif cult
to sell, hedge or value such assets. The inability to sell or
effectively hedge assets reduces our ability to limit losses
in such positions and the dif culty in valuing assets may
require us to maintain additional capital and increase our
funding costs.
▪
Our cost of obtaining long-term unsecured funding is
directly related to our credit spreads. Credit spreads are
in uenced by marketperceptions of our creditworthiness.
Widening credit spreads, as well as signi cant declines
in the availability of credit, have in the past adversely
affected our ability to borrow on a secured and unsecured
basis and may do so in the future. We fund ourselves on
an unsecured basis by issuing long-term debt, promissory
notes and commercial paper, by accepting deposits at our
bank subsidiaries or by obtaining bank loans or lines of
credit. We seek to  nance many of our assets on a secured
basis, including by entering into repurchase agreements.
Any disruptions in the credit markets may make it harder
and more expensive to obtain funding for our businesses.
If our available funding is limited or we are forced to
fund our operations at a higher cost, these conditions may
require us to curtail our business activities and increase
our cost of funding, both of which could reduce our
pro tability, particularly in our businesses that involve
investing, lending and taking principal positions, including
marketmaking.
▪
Our investment banking business has been and may
continue to be adversely affected by market conditions.
Poor economic conditions and other adverse geopolitical
conditions can adversely affect and have adversely
affected investor and CEO con dence, resulting in
signi cant industry-wide declines in the size and number
of underwritings and of  nancial advisory transactions,
which could have an adverse effect on our revenues and
our pro t margins. In addition, our clients engaging in
mergers and acquisitions often rely on access to the secured
and unsecured credit markets to  nance their transactions.
A lack of available credit or an increased cost of credit
can adversely affect the size, volume and timing of our
clients’ merger and acquisition transactions — particularly
large transactions. Because a signi cant portion of
our investment banking revenues is derived from our
participation in large transactions, a decline in the number
of large transactions would adversely affect our investment
banking business.
▪
Certain of our trading businesses depend on market
volatility to provide trading and arbitrage opportunities,
and decreases in volatility may reduce these opportunities
and adversely affect the results of these businesses. On
the other hand, increased volatility, while it can increase
trading volumes and spreads, also increases risk as
measured by VaR and may expose us to increased risks
in connection with our market-making and proprietary
businesses or cause us to reduce the size of these businesses
in order to avoid increasing our VaR. Limiting the size of
our market-making positions and investing businesses can
adversely affect our pro tability.
▪
We receive asset-based management fees based on the
value of our clients’ portfolios or investment in funds
managed by us and, in some cases, we also receive incentive
fees based on increases in the value of such investments.
Declines in asset values reduce the value of our clients’
portfolios or fund assets, which in turn reduce the fees
Goldman Sachs 2009 Annual Report
36
Management’s Discussion and Analysis