Goldman Sachs 2009 Annual Report Download - page 84

Operational Risk
Operational risk relates to the risk of loss arising from
shortcomings 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  nancial loss.
We manage operational risk through the application of
long-standing, but continuously evolving,  rmwide 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  rmwide control
culture that serves as the foundation of our efforts to minimize
operational risk exposure.
Operational Risk Management & Analysis, a risk
management function independent of our revenue-producing
units, is responsible for developing and implementing a
formalized 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 “— Certain Risk Factors That May
Affect Our Businesses” above, and “— Risk Factors” in PartI,
Item 1A of our Annual Report on Form 10-K.
Recent Accounting Developments
See Note2 to the consolidated  nancial statements for
information regarding Recent Accounting Developments.
On February 25, 2010, Moody’s Investors Service lowered
the ratings on Group Inc.’s non-cumulative preferred stock
and the APEX from A3 to Baa2, and the rating on the Trust
Preferred from A2 to A3.
Based on our credit ratings as of December2009, additional
collateral or termination payments pursuant to bilateral
agreements with certain counterparties of approximately
$1.12billion and $2.36billion could have been called by
counterparties in the event of a one-notch and two-notch
reduction, respectively, in our long-term credit ratings. In
evaluating our liquidity requirements, we consider additional
collateral or termination payments that may be required in the
event of a two-notch reduction in our long-term credit ratings,
as well as collateral that has not been called by counterparties,
but is available to them.
CASH FLOWS
As a global  nancial institution, our cash  ows are complex
and interrelated and bear little relation to our net earnings
and net assets and, consequently, we believe that traditional
cash  ow analysis is less meaningful in evaluating our
liquidity position than the excess liquidity and asset-liability
management policies described above. Cash  ow analysis may,
however, be helpful in highlighting certain macro trends and
strategic initiatives in our businesses.
Year Ended December2009. Our cash and cash equivalents
increased by $24.49billion to $38.29billion at the end
of 2009. We generated $48.88billion in net cash from
operating activities. We used net cash of $24.39billion
for investing and  nancing activities, primarily for net
repayments in unsecured and secured short-term borrowings
and the repurchases of Series H Preferred Stock and the
related common stock warrant from the U.S. Treasury,
partially offset by an increase in bank deposits and the
issuance of common stock.
Year Ended November2008. Our cash and cash equivalents
increased by $5.46billion to $15.74billion at the end of
2008. We raised $9.80billion in net cash from  nancing and
operating activities, primarily from common and preferred
stock issuances and deposits, partially offset by repayments of
short-term borrowings. We used net cash of $4.34billion in
our investing activities.
Goldman Sachs 2009 Annual Report
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Management’s Discussion and Analysis