Goldman Sachs 2009 Annual Report Download - page 39

we earn for managing such assets. Market uncertainty,
volatility and adverse economic conditions, as well as
declines in asset values, may cause our clients to transfer
their assets out of our funds or other products or their
brokerage accounts or affect our ability to attract new
clients or additional assets from existing clients and
result in reduced net revenues, principally in our asset
management business. To the extent that clients do not
withdraw their funds, they may invest them in products
that generate less fee income.
▪
Concentration of risk increases the potential for signi cant
losses in our market-making, proprietary trading,
investing, block trading, merchant banking, underwriting
and lending businesses. This risk may increase to the extent
we expand our market-making, trading, investing and
lending businesses.
Liquidity Risk. Liquidity is essential to our businesses. Our
liquidity may be impaired by an inability to access secured
and/or unsecured debt markets, an inability to access funds
from our subsidiaries, an inability to sell assets or redeem
our investments, or unforeseen out ows of cash or collateral.
This situation may arise due to circumstances that we may be
unable to control, such as a general market disruption or an
operational problem that affects third parties or us, or even by
theperception among market participants that we, or other
market participants, are experiencing greater liquidity risk.
The  nancial instruments that we hold and the contracts to
which we are a party are complex, as we employ structured
products to bene t our clients and ourselves, and these
complex structured products often do not have readily
available markets to access in times of liquidity stress. Our
investing activities may lead to situations where the holdings
from these activities represent a signi cant portion of speci c
markets, which could restrict liquidity for our positions.
Further, our ability to sell assets may be impaired if other
market participants are seeking to sell similar assets at the
same time, as is likely to occur in a liquidity or other market
crisis. In addition,  nancial institutions with which we interact
may exercise set-off rights or the right to require additional
collateral, including in dif cult market conditions, which
could further impair our access to liquidity.
Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger our obligations under
certain bilateral provisions in some of our trading and
collateralized  nancing contracts. Under these provisions,
counterparties could bepermitted to terminate contracts
with Goldman Sachs or require us to post additional
collateral. Termination of our trading and collateralized
 nancing contracts could cause us to sustain losses and
impair our liquidity by requiring us to  nd other sources of
 nancing or to make signi cant cash payments or securities
movements. For a discussion of the potential impact on
Goldman Sachs of a reduction in our credit ratings, see
“— Liquidity and Funding Risk — Credit Ratings” below.
Group Inc. has guaranteed the payment obligations of
Goldman, Sachs & Co. (GS&Co.), Goldman Sachs Bank
USA (GSBank USA) and Goldman Sachs Bank (Europe)
PLC (GSBank Europe), subject to certain exceptions, and
has pledged signi cant assets to GSBank USA to support
obligations to GSBank USA. In addition, Group Inc.
guarantees many of the obligations of its other consolidated
subsidiaries on a transaction-by-transaction basis, as
negotiated with counterparties. These guarantees may
require Group Inc. to provide substantial funds or assets
to its subsidiaries or their creditors or counterparties at
a time when Group Inc. is in need of liquidity to fund its
ownobligations.
Credit Risk. We are exposed to the risk that third
parties that owe us money, securities or other assets will
notperform their obligations. These parties may default
on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. A failure of
a signi cant market participant, or even concerns about
a default by such an institution, could lead to signi cant
liquidity problems, losses or defaults by other institutions,
which in turn could adversely affect us. We are also
subject to the risk that our rights against third parties
may not be enforceable in all circumstances. In addition,
deterioration in the credit quality of third parties whose
securities or obligations we hold could result in losses
and/or adversely affect our ability to rehypothecate or
otherwise use those securities or obligations for liquidity
purposes. A signi cant downgrade in the credit ratings of
our counterparties could also have a negative impact on our
results. While in many cases we arepermitted to require
additional collateral from counterparties that experience
 nancial dif culty, disputes may arise as to the amount of
collateral we are entitled to receive and the value of pledged
Goldman Sachs 2009 Annual Report
37
Management’s Discussion and Analysis