Goldman Sachs 2009 Annual Report Download - page 45

▪ Loans and securities backed by residential real estate.
Valuations are based on both proprietary and industry
recognized models (including Intex and Bloomberg), and
discounted cash  ow techniques. In the recent market
environment, the most signi cant inputs to the valuation
of these instruments are rates and timing of delinquency,
default and loss expectations, which are driven in part by
housing prices. Inputs are determined based on relative value
analyses, which incorporate comparisons to instruments
with similar collateral and risk pro les, including relevant
indices such as the ABX (1).
▪ Loan portfolios. Valuations are based on discounted cash
 ow techniques, for which the key inputs are the amount and
timing of expected future cash  ows and market yields for
such instruments. Inputs are determined based on relative
value analyses which incorporate comparisons to recent
auction data for other similar loan portfolios.
▪ Derivative contracts. Valuation models are calibrated to
initial transaction price. Subsequent changes in valuations
are based on observable inputs to the valuation models
(e.g.,interest rates, credit spreads, volatilities, etc.). Inputs
are changed only when corroborated by market data.
Valuations of less liquid OTC derivatives are typically
based on level 1 or level 2 inputs that can be observed in the
market, as well as unobservable inputs, such as correlations
and volatilities.
Total level 3 assets were $46.48billion and $66.19billion as
of December2009 and November2008, respectively. The
decrease in level 3 assets as of December2009 compared
with November2008 primarily re ected unrealized losses
(principally on private equity investments and real estate
fund investments, loans and securities backed by commercial
real estate, and bank loans and bridge loans) and sales and
paydowns (principally on loans and securities backed by
commercial real estate, bank loans and bridge loans, and other
debt obligations).
The following table sets forth the fair values of  nancial assets classi ed within level 3 of the fair value hierarchy:
Level 3 Financial Assets at Fair Value
As of
December November
(inmillions)
2009 2008
Equities and convertible debentures (1) $11,871 $16,006
Bank loans and bridge loans (2) 9,560 11,9 57
Corporate debt securities and other debt obligations (3) 5,584 7,5 9 6
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate 4,620 9,340
Loans and securities backed by residential real estate 1,880 2,049
Loan portfolios (4) 1,364 4,118
Cash instruments 34,879 51,066
Derivative contracts 11,596 15,124
Total level 3 assets at fair value 46,475 66,190
Level 3 assets for which we do not bear economic exposure (5) (3,127) (6,616)
Level 3 assets for which we bear economic exposure $43,348 $59,574
(1) Substantially all consists of private equity investments and real estate fund investments. Real estate investments were $1.23billion and $2.62billion as of
December2009 and November2008, respectively.
(2) Includes certain mezzanine  nancing, leveraged loans arising from capital market transactions and other corporate bank debt.
(3) Includes $741million and $804million as of December2009 and November2008, respectively, of CDOs and collateralized loan obligations backed by
corporate obligations.
(4) Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral.
(5) We do not bear economic exposure to these level 3 assets as they are  nanced by nonrecourse debt, attributable to minority investors or attributable to
employee interests in certain consolidated funds.
(1) The CMBX and ABX are indices that track the performance of commercial
mortgage bonds and subprime residential mortgage bonds, respectively.
Goldman Sachs 2009 Annual Report
43
Management’s Discussion and Analysis