UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

For the fiscal year ended December 31, 2011

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended December 31, 20112014

 Commission File Number: 001-14965

The Goldman Sachs Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 13-4019460

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

200 West Street

10282

New York, N.Y.

10282

(Zip Code)

(Address of principal executive offices)

 (Zip Code)

(212) 902-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class: Name of each exchange on which registered:

Common stock, par value $.01 per share

 

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate

Non-Cumulative Preferred Stock, Series A

 

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.20%

Non-Cumulative Preferred Stock, Series B

 

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate

Non-Cumulative Preferred Stock, Series C

 

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate

Non-Cumulative Preferred Stock, Series D

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate

Non-Cumulative Preferred Stock, Series I

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 5.50%

Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series DJ

New York Stock Exchange

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.375%

Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K

 

New York Stock Exchange

5.793% Fixed-to-Floating Rate Normal Automatic Preferred Enhanced Capital SecuritiesSee Exhibit 99.2 for debt and trust securities registered under Section 12(b) of Goldman Sachs Capital II (and Registrant’s guarantee with respect thereto)the Act 

New York Stock Exchange

Floating Rate Normal Automatic Preferred Enhanced Capital Securities of Goldman Sachs Capital III (and Registrant’s guarantee with respect thereto)

New York Stock Exchange

Medium-Term Notes, Series B, Index-Linked Notes due February 2013; Index-Linked Notes due April 2013; and Index-Linked Notes due May 2013

NYSE Amex

Medium-Term Notes, Series A, Index-Linked Notes due 2037 of GS Finance Corp. (and Registrant’s guarantee with respect thereto)

NYSE Arca

Medium-Term Notes, Series B, Index-Linked Notes due 2037

NYSE Arca

Medium-Term Notes, Series D, 7.50% Notes due 2019

New York Stock Exchange

6.125% Notes due 2060

New York Stock Exchange

6.50% Notes due 2061

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yesx NoYes¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes¨ NoYesx No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx NoYes¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx NoYes¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Annual Report on Form 10-K or any amendment to the Annual Report on Form 10-K.x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer ¨

 

Non-accelerated filer ¨

 

Smaller reporting company ¨

  

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ NoYesx No

As of June 30, 2011,2014, the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant was approximately $66.6$72.4 billion.

As of February 17, 2012,6, 2015, there were 494,904,018435,621,157 shares of the registrant’s common stock outstanding.

Documents incorporated by reference: Portions of The Goldman Sachs Group, Inc.’s Proxy Statement for its 20122015 Annual Meeting of Shareholders are incorporated by reference in the Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.


THE GOLDMAN SACHS GROUP, INC.

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 20112014

INDEX

 

INDEX

Form 10-K Item Number  Page No.
 

PART I

   1
 

Item 1

 

Business

  1
 
 

Introduction

  1
 
 

Our Business Segments and Segment Operating Results

  1
 
 

Investment Banking

  2
 
 

Institutional Client Services

  3
 
 

Investing & Lending

  5
 
 

Investment Management

  5
 
 

Business Continuity and Information Security

  6
 
 

Employees

  6
 
 

Competition

  67
 
 

Regulation

  8
 
 

Available Information

  2319
 
 

Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995

  2420
 

Item 1A

 

Risk Factors

  2125
 

Item 1B

 

Unresolved Staff Comments

  3443
 

Item 2

 

Properties

  3443
 

Item 3

 

Legal Proceedings

  3443
 

Item 4

 

Mine Safety Disclosures

  3443
 
 

Executive Officers of The Goldman Sachs Group, Inc.

  4435
 

PART II

   4537
 

Item 5

 

Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities

  3745
 

Item 6

 

Selected Financial Data

  3745
 

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  3846
 

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

  106114
 

Item 8

 

Financial Statements and Supplementary Data

  107115
 

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  223229
 

Item 9A

 

Controls and Procedures

  223229
 

Item 9B

 

Other Information

  223229
 

PART III

   223229
 

Item 10

 

Directors, Executive Officers and Corporate Governance

  223229
 

Item 11

 

Executive Compensation

  223229
 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  224230
 

Item 13

 

Certain Relationships and Related Transactions, and Director Independence

  224230
 

Item 14

 

Principal AccountantAccounting Fees and Services

  224230
 

PART IV

   225231
 

Item 15

 

Exhibits, and Financial Statement Schedules

  225231
 

SIGNATURES

  II-1II-1

 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

PART I

Item 1.Business1.    Business

 

Introduction

Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals.

When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries.

References to “this“the 2014 Form 10-K” are to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.2014. All references to 2011, 20102014, 2013 and 20092012 refer to our fiscal years ended, or the dates, as the context requires, December 31, 2011,2014, December 31, 20102013 and December 31, 2009,2012, respectively.

Group Inc. is a bank holding company and a financial holding company regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Our U.S. depository institution subsidiary, Goldman Sachs Bank USA (GS Bank USA), is a New York State-chartered bank.

As of December 2011,2014, we had offices in over 30 countries and 48%49% of our total staff was based outside the Americas (which includes the countries in North and South America).Americas. Our clients are located worldwide, and we are an active participant in financial markets around the world. In 2011,2014, we generated 38%42% of our net revenues outside the Americas. For more information onabout our geographic results, see Note 25 to the consolidated financial statements in Part II, Item 8 of this the 2014Form 10-K.

Our Business Segments and Segment Operating Results

We report our activities in four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. The chart below presents our four business segments.

 

 

 

 Goldman Sachs 20112014 Form 10-K 1


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

The table below presents our segment operating results.

 

   Year Ended December 1     % of 2011  Year Ended December 1 % of 2014 
$ in millions   2011     2010     2009     Net
Revenues
   2014    2013    2012    
 
Net
Revenues
  
  

Investment Banking

  Net revenues $4,355      $4,810      $4,984       15    

Net revenues

  $  6,464    $  6,004    $  4,926    19%  
  Operating expenses  2,962       3,511       3,482         

Operating expenses

  3,688    3,479    3,333   

Pre-tax earnings

  $  2,776    $  2,525    $  1,593   

Institutional Client Services

Institutional Client Services

  

   

Net revenues

  $15,197    $15,721    $18,124    44%  
  Pre-tax earnings $1,393      $1,299      $1,502         

Operating expenses

  10,880    11,792    12,490   

Pre-tax earnings

  $  4,317    $  3,929    $  5,634   

Investing & Lending

    

Net revenues

  $  6,825    $  7,018    $  5,891    20%  
 

Institutional Client Services

  Net revenues $17,280      $21,796      $32,719       60

Operating expenses

  2,819    2,686    2,668   

Pre-tax earnings

  $  4,006    $  4,332    $  3,223   

Investment Management

Investment Management

  

   

Net revenues

  $  6,042    $  5,463    $  5,222    17%  
  Operating expenses  12,697       14,291       13,691         

Operating expenses

  4,647    4,357    4,296   

Pre-tax earnings

  $  1,395    $  1,106    $     926   

Total net revenues

  $34,528    $34,206    $34,163   
  Pre-tax earnings $4,583      $7,505      $19,028         

Investing & Lending

  Net revenues $2,142      $7,541      $2,863       7
  Operating expenses  2,673       3,361       3,523       
  Pre-tax earnings/(loss) $(531    $4,180      $(660     

Investment Management

  Net revenues $5,034      $5,014      $4,607       18
  Operating expenses  4,018       4,051       3,673       
  Pre-tax earnings $1,016      $963      $934       

Total

  Net revenues $28,811      $39,161      $45,173       
  Operating expenses 2  22,642       26,269       25,344       
  Pre-tax earnings $6,169      $12,892      $19,829       

Total operating expenses 2

  22,171    22,469    22,956   

Total pre-tax earnings

  $12,357    $11,737    $11,207   

 

1.

Financial information concerning our business segments for 2011, 20102014, 2013 and 20092012 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data,” which are in Part II, Items 7 and 8, respectively, of thisthe 2014 Form 10-K. See Note 25 to the consolidated financial statements in Part II, Item 8 of thisthe 2014 Form 10-K for a further breakdownsummary of our total net revenues.revenues, pre-tax earnings and net earnings by geographic region.

 

2.

Includes the following expensescharitable contributions that have not been allocated to our segments: (i) net provisions for a numbersegments of litigation and regulatory proceedings of $175 million, $682 million and $104$137 million for the years ended December 2011, December 2010 and December 2009, respectively; (ii) charitable contributions of $103 million, $345 million and $8102014, $155 million for the years ended December 2011, December 20102013 and December 2009, respectively; and (iii)$169 million for 2012. Operating expenses related to real estate-related exit costs, previously not allocated to our segments, have now been allocated. This allocation reflects the change in the manner in which management views the performance of $14 million, $28 million and $61 million forour segments. Reclassifications have been made to previously reported segment amounts to conform to the years ended December 2011, December 2010 and December 2009, respectively.current presentation.

Investment Banking

Investment Banking serves corporatepublic and governmentprivate sector clients around the world. We provide financial advisory services and help companies raise capital to strengthen and grow their businesses. We seek to develop and maintain long-term relationships with a diverse global group of institutional clients, including governments, states and municipalities. Our goal is to deliver to our institutional clients the entire resources of the firm in a seamless fashion, with investment banking serving as the main initial point of contact with Goldman Sachs.

Financial AdvisoryAdvisory.. Financial Advisory includes strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management, restructurings and spin-offs.management. In particular, we help clients execute large, complex transactions for which we provide multiple services, including “one-stop” acquisition financing and cross-border structuring expertise. Financial Advisory also includes revenues from derivative transactions directly related to these client advisory assignments.

We also assist our clients in managing their asset and liability exposures and their capital. In addition, we may provide lending commitments and bank loan and bridge loan facilities in connection with our advisory assignments.

UnderwritingUnderwriting.. The other core activity of Investment Banking is helping companies raise capital to fund their businesses. As a financial intermediary, our job is to match the capital of our investing clients — who aim to grow the savings of millions of people — with the needs of our corporatepublic and governmentprivate sector clients — who need financing to generate growth, create jobs and deliver products and services. Our underwriting activities include public offerings and private placements, including domesticlocal and cross-border transactions, of a wide range of securities and other financial instruments. Underwriting also includes revenues from derivative transactions entered into with institutionalpublic and private sector clients in connection with our underwriting activities.

2Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Equity Underwriting. We underwrite common and preferred stock and convertible and exchangeable securities. We regularly receive mandates for large, complex transactions and have held a leading position in worldwide public common stock offerings and worldwide initial public offerings for many years.

Debt Underwriting.We underwrite and originate various types of debt instruments, including investment-grade and high-yield debt, bank loans and bridge loans, and emerging- and growth-market debt, which may be issued by, among others, corporate, sovereign, municipal and agency issuers. In addition, we underwrite and originate structured securities, which include mortgage-related securities and other asset-backed securities.

2Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Institutional Client Services

Institutional Client Services serves our clients who come to the firm to buy and sell financial products, raise funding and manage risk. We do this by acting as a market maker and offering market expertise on a global basis. Institutional Client Services makes markets and facilitates client transactions in fixed income, equity, currency and commodity products. In addition, we make markets in and clear client transactions on major stock, options and futures exchanges worldwide. Market makers provide liquidity and play a critical role in price discovery, which contributes to the overall efficiency of the capital markets. Our willingness to make markets, commit capital and take risk in a broad range of products is crucial to our client relationships.

Our clients are primarily institutions that are professional market participants, including investment entities whose ultimate customers include individual investors investing for their retirement, buying insurance or putting aside surplus cash in a deposit account.

Through our global sales force, we maintain relationships with our clients, receiving orders and distributing investment research, trading ideas, market information and analysis. As a market maker, we provide prices to clients globally across thousands of products in all major asset classes and markets. At times we take the other side of transactions ourselves if a buyer or seller is not readily available and at other times we connect our clients to other parties who want to transact. Much of this connectivity between the firm and its clients is maintained on technology platforms and operates globally wherever and whenever markets are open for trading.

Institutional Client Services and our other businesses are supported by our Global Investment Research division, which, as of December 2011,2014, provided fundamental research on more than 3,7003,600 companies worldwide and more than 40 national economies, as well as on industries, currencies and commodities.

Institutional Client Services generates revenues in four ways:

 

Ÿ 

In large, highly liquid markets (such as markets for U.S. Treasury bills, large capitalization S&P 500 stocks or certain mortgage pass-through securities), we execute a high volume of transactions for our clients for modest spreads and fees.fees;

 

Ÿ 

In less liquid markets (such as mid-cap corporate bonds, growth market currencies andor certain non-agency mortgage-backed securities), we execute transactions for our clients for spreads and fees that are generally somewhat larger.larger;

 

Ÿ 

We also structure and execute transactions involving customized or tailor-made products that address our clients’ risk exposures, investment objectives or other complex needs (such as a jet fuel hedge for an airline).; and

 

Ÿ 

We provide financing to our clients for their securities trading activities, as well as securities lending and other prime brokerage services.

Institutional Client Services activities are organized by asset class and include both “cash” and “derivative” instruments. “Cash” refers to trading the underlying instrument (such as a stock, bond or barrel of oil). “Derivative” refers to instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors (such as an option, which is the right or obligation to buy or sell a certain bond or stock index on a specified date in the future at a certain price, or an interest rate swap, which is the agreement to convert a fixed rate of interest into a floating rate or vice versa).

 

 

 Goldman Sachs 20112014 Form 10-K 3


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Fixed Income, Currency and Commodities Client Execution. Includes interest rate products, credit products, mortgages, currencies and commodities.

 

Ÿ 

Interest Rate Products. Government bonds, money market instruments such as commercial paper, treasury bills, repurchase agreements and other highly liquid securities and instruments, as well as interest rate swaps, options and other derivatives.

 

Ÿ 

Credit Products.Investment-grade corporate securities, high-yield securities, credit derivatives, bank and securedbridge loans, municipal securities, emerging market and distressed debt, and credit derivatives.trade claims.

 

Ÿ 

Mortgages.Commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations, other prime, subprime and Alt-A securities and loans), and other asset-backed securities, loans and derivatives.

 

Ÿ 

Currencies.Most currencies, including growth-market currencies.

 

Ÿ 

Commodities.Oil Crude oil and petroleum products, natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products.

Equities.Includes equityequities client execution, commissions and fees, and securities services.

Equities Client Execution.Execution.We make markets in equity securities and equity-related products, including convertible securities, options, futures and over-the-counter (OTC) derivative instruments, on a global basis. As a principal, we facilitate client transactions by providing liquidity to our clients with large blocks of stocks or options,derivatives, requiring the commitment of our capital. In addition, we engage in insurance activities where we reinsure and purchase portfolios of insurance risk and pension liabilities.

We also structure and executemake markets in derivatives on indices, industry groups, financial measures and individual company stocks. We develop strategies and provide information about portfolio hedging and restructuring and asset allocation transactions for our clients. We also work with our clients to create specially tailored instruments to enable sophisticated investors to establish or liquidate

investment positions or undertake hedging strategies. We are one of the leading participants in the trading and development of equity derivative instruments.

Our exchange-based market-making activities include making markets in stocks and exchange-traded funds. In the United States, we are one of the leading Designated Market Makers (DMMs) for stocks traded on the NYSE. For ETFs, we are registered market makers on NYSE Arca. In listed options, we are registered as a primary or lead market maker or otherwise make markets on the International Securities Exchange, the Chicago Board Options Exchange, NYSE Arca, the Boston Options Exchange, the Philadelphia Stock Exchange and NYSE Amex. Infunds, futures and options on futures, we are market makers on the Chicago Mercantile Exchange and the Chicago Board of Trade.major exchanges worldwide.

Commissions and Fees. We generate commissions and fees from executing and clearing institutional client transactions on major stock, options and futures exchanges worldwide.worldwide, as well as OTC transactions. We increasingly provide our clients with access to a broad spectrum of equity execution services, including electronic “low-touch” equity trading platforms,access and electronic trades account formore traditional “high-touch” execution. While the majority of our equity trading activity. However, aactivity is “low-touch,” the majority of our net revenues in these activities continue to be derived from our traditional “high-touch” handling of more complex trades.activity. We expect both types of activity to remain important.

Securities Services.Includes financing, securities lending and other prime brokerage services.

 

Ÿ 

Financing Services.We provide financing to our clients for their securities trading activities through margin loans that are collateralized by securities, cash or other acceptable collateral. We earn a spread equal to the difference between the amount we pay for funds and the amount we receive from our client.

 

Ÿ 

Securities Lending Services.We provide services that principally involve borrowing and lending securities to cover institutional clients’ short sales and borrowing securities to cover our short sales and otherwise to make deliveries into the market. In addition, we are an active participant in broker-to-broker securities lending and third-party agency lending activities.

Ÿ

Other Prime Brokerage Services. We earn fees by providing clearing, settlement and custody services globally. In addition, we provide our hedge fund and other clients with a technology platform and reporting which enables them to monitor their security portfolios and manage risk exposures.

 

 

4 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Ÿ

Other Prime Brokerage Services.We earn fees by providing clearing, custody and settlement services globally. In addition, we help our hedge fund and other clients maintain the infrastructure that supports their investing activity by providing a suite of services from the moment a client begins the process of establishing a new investing business. We provide a technology platform and reporting which enables clients to monitor their security portfolios, and manage risk exposures.

Investing & Lending

Our investing and lending activities, which are typically longer-term, include the firm’s investing and relationship lending activities across various asset classes, primarily including debt securities and loans, public and private equity securities, and real estate. These activities include investing directly in publicly and privately traded securities and in loans, and also through certain investment funds that we manage. We also provide financing to our clients. We manage a diversified global portfolio of investments in equity securities and debt securities and other investments in privately negotiated transactions, leveraged buyouts, acquisitions and investments in funds managed by external parties.

ICBC. We have an investment in the ordinary shares of ICBC, the largest bank in China.also provide financing to our clients.

Equity Securities (excluding ICBC)Securities.. We make corporate, real estate and infrastructure equity-related investments.

Debt Securities and LoansLoans.. We make corporate, real estate, infrastructure and infrastructureother debt security-related investments. In addition, we provide credit to corporate clients through loan facilities and to high-net-worth individuals primarily through secured loans.

OtherOther.. Our other investments primarily include our consolidated investment entities,investments, for which are entities we hold for investment purposes strictly for capital appreciation. These entities have a definedan exit strategy and which are engaged in activities that are not closely related to our principal businesses. We also invest directly in distressed assets, currencies, commodities and other assets, including power generation facilities.

Investment Management

Investment Management provides investment and wealth advisory services to help clients preserve and grow their financial assets. Our clients include institutions and high-net-worth individuals, as well as retail investors who access our products through a network of third-party distributors around the world.

We manage client assets across a broad range of asset classes and investment strategies, including equity, fixed income and alternative investments. Alternative investments primarily include hedge funds, credit funds, private equity, real estate, currencies, commodities, and asset allocation strategies. Our investment offerings include those managed on a fiduciary basis by our portfolio managers as well as strategies managed by third-party managers. We offer our investments in a variety of structures, including separately managed accounts, mutual funds, private partnerships, and other commingled vehicles.

We also provide customized investment advisory solutions designed to address our clients’ investment needs. These solutions begin with identifying clients’ objectives and continue through portfolio construction, ongoing asset allocation and risk management and investment realization. We draw from a variety of third-party managers as well as our proprietary offerings to implement solutions for clients.

We supplement our investment advisory solutions for high-net-worth clients with wealth advisory services that include income and liability management, trust and estate planning, philanthropic giving and tax planning. We also use the firm’s global securities and derivatives market-making capabilities to address clients’ specific investment needs.

Management and Other Fees. The majority of revenues in management and other fees is comprised of asset-based management fees on client assets. The fees that we charge vary by asset class and are affected by investment performance as well as asset inflows and redemptions. Other fees we receive include financial counseling fees generated through our wealth advisory services and fees related to the administration of real estate assets.

Goldman Sachs 2011 Form 10-K5


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Assets under supervision include assets under management and other client assets. Assets under management include only those client assets where we earn a fee for managing assets on a discretionary basis. This includes net assets in our mutual funds, hedge funds, credit funds and private equity funds (including real estate funds), and separately managed accounts for institutional and individual investors. Other client assets include client assets invested with third-party managers, bank deposits and advisory relationships where we earn a fee for advisory and other services, but do not have investment discretion. Assets under managementsupervision do not include the self-directed brokerage assets of our clients, including brokerage accounts, or interest-bearing deposits held through ourclients. Long-term assets under supervision represent assets under supervision excluding liquidity products. Liquidity products represent money markets and bank depository institution subsidiaries.deposit assets.

Goldman Sachs 2014 Form 10-K5


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Incentive Fees.In certain circumstances, we are also entitled to receive incentive fees based on a percentage of a fund’s or a separately managed account’s return, or when the return exceeds a specified benchmark or other performance targets. Such fees include overrides, which

consist of the increased share of the income and gains derived primarily from our private equity funds when the return on a fund’s investments over the life of the fund exceeds certain threshold returns. Incentive fees are recognized only when all material contingencies are resolved.

Transaction Revenues.We receive commissions and net spreads for facilitating transactional activity in high-net-worth client accounts. In addition, we earn net interest income primarily associated with client deposits and margin lending activity undertaken by such clients.

The tables below present assets under management by asset class and by distribution channel and client category.

   As of December 
in billions  2011     2010     2009 

Alternative investments

  $142      $148      $146  

Equity

   126       144       146  

Fixed income

   340       340       315  

Total non-money market assets

   608       632       607  

Money markets

   220       208       264  

Total assets under management

  $828      $840      $871  
   As of December 
in billions  2011     2010     2009 

Directly Distributed:

          

Institutional

  $283      $286      $297  

High-net-worth individuals

   227       229       231  

Third-Party Distributed:

          

Institutional, high-net-worth individuals and retail

   318       325       343  

Total

  $828      $840      $871  

Business Continuity and Information Security

Business continuity and information security, including cybersecurity,cyber security, are high priorities for Goldman Sachs. Their importance has been highlighted by Hurricane Sandy and several recent highly publicized cyber attacks against financial institutions and large consumer-based companies that resulted in the unauthorized disclosure of personal information of clients and/or customers, as well as other cyber attacks involving the theft and destruction of corporate information.

Our Business Continuity Program has been developed to provide reasonable assurance of business continuity in the event of disruptions at the firm’s critical facilities and to comply with regulatory requirements, including those of FINRA. Because we are a bank holding company, our Business Continuity Program is also subject to review by the Federal Reserve Board. The key elements of the program are crisis planning and management, people recovery, facilities, business recovery, systems and data recovery, and process improvement. In the area of information security, we have developed and implemented a framework of principles,

policies and technology to protect the information assets provided to us by our clients and thosethat of the firm from cyber attacks and other misappropriation, corruption or loss. Safeguards are applied to maintain the confidentiality, integrity and availability of information resources.information.

Employees

Management believes that a major strength and principal reason for the success of Goldman Sachs is the quality and dedication of our people and the shared sense of being part of a team. We strive to maintain a work environment that fosters professionalism, excellence, diversity, cooperation among our employees worldwide and high standards of business ethics.

6Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Instilling the Goldman Sachs culture in all employees is a continuous process, in which training plays an important part. All employees are offered the opportunity to participate in education and periodic seminars that we sponsor at various locations throughout the world. Another important part of instilling the Goldman Sachs culture is our employee review process. Employees are reviewed by supervisors, co-workers and employees they supervise in a 360-degree review process that is integral to our team approach, and includes an evaluation of an employee’s performance with respect to risk management, compliance and diversity.

As of December 2011,2014, we had 33,30034,000 total staff, excluding staff at consolidated entities held for investment purposes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Operating Expenses” in Part II, Item 7 of this Form 10-K for additional information on our consolidated entities held for investment purposes.staff.

Competition

The financial services industry — and all of our businesses — are intensely competitive, and we expect them to remain so. Our competitors are other entities that provide investment banking, securities and investment management services, as well as those entities that make investments in securities, commodities, derivatives, real estate, loans and other financial assets. These entities include brokers and dealers, investment banking firms, commercial banks, insurance companies, investment advisers, mutual funds, hedge funds, private equity funds and merchant banks. We compete with some entities globally and with others on a regional, product or niche basis. Our competition is based on a number of factors, including transaction execution, products and services, innovation, reputation and price.

We also face intense competition in attracting and retaining qualified employees. Our ability to continue to compete effectively will depend upon our ability to attract new employees, retain and motivate our existing employees and to continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of large financial institutions. Our pay practices and those of our principal competitors are subject to review by, and the standards of, the Federal Reserve Board and regulators outside the United States, including the Financial Services Authority (FSA) in the United Kingdom. See “Regulation — Banking Regulation” and “Regulation — Compensation Practices” below and “Risk Factors — Our businesses may be adversely affected if we are unable to hire and retain qualified employees” in Part I, Item 1A of this Form 10-K for more information on the regulation of our compensation practices.

6Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Over time, there has been substantial consolidation and convergence among companies in the financial services industry. This trend acceleratedindustry and, in recent years asparticular, the credit crisis caused numerous mergers and asset acquisitions among industry participants. Many commercial banks and other broad-based financial services firms have the ability to support investment banking and securities products with commercial banking, insurance and other financial services revenues in an effortEfforts by our competitors to gain market share which hashave resulted in pricing pressure in our investment banking and client execution businesses and could result in pricing pressure in other of our businesses.

Moreover, we have faced, and expect to continue to face, pressure to retain market share by committing capital to businesses or transactions on terms that offer returns that may not be commensurate with their risks. In particular, corporate clients seek such commitments (such as agreements to participate in their commercial paper backstop or other loan facilities) from financial services firms in connection with investment banking and other assignments.

Goldman Sachs 2011 Form 10-K7


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidation and convergence have significantly increased the capital base and geographic reach of some of our competitors, and have also hastened the globalization of the securities and other financial services markets. As a result, we have had to commit capital to support our international operations and to execute large global transactions. To take advantage of some of our most significant opportunities, we will have to compete successfully with financial institutions that are larger and have more capital and that may have a stronger local presence and longer operating history outside the United States. We also compete with smaller institutions that offer more targeted services, such as independent advisory firms. Some clients may perceive these firms to be less susceptible to potential conflicts of interest than we are, and, as discussed below, our ability to effectively compete with them could be affected by regulations and limitations on activities that apply to us but may not apply to them.

We have experienced intense price competition in some of our businesses in recent years. For example, over the past several years the increasing volume of trades executed electronically, through the internet and through alternative trading systems, has increased the pressure on trading commissions, in that commissions for “low-touch” electronic trading are generally lower than for “high-touch” non-electronic trading. It appears that this trend toward electronic and other “low-touch,” low-commission trading will continue. In addition, we believe that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by further reducing prices.

The provisions of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the requirements promulgated by the Basel Committee on Banking Supervision (Basel Committee) and other financial regulation could affect our competitive position to the extent that limitations on activities, increased fees and compliance costs or other regulatory requirements do not apply, or do not apply equally, to all of our competitors or are not implemented uniformly across different jurisdictions. For example, the provisions of the Dodd-Frank Act that prohibit proprietary trading and restrict investments in certain hedge and private equity funds differentiate between U.S.-based and non-U.S.-based banking organizations and give non-U.S.-based banking organizations greater flexibility to trade outside of the United States and to form and invest in funds outside the United States. Likewise, the obligations with respect to derivative transactions under Title VII of the Dodd-Frank Act depend, in part, on the location of the counterparties to the transaction. The impact of the Dodd-Frank Act and other regulatory developments on our competitive position will depend to a large extent on the manner in which the required rulemaking and regulatory guidance evolve, the extent of international convergence, and the development of market practice and structures under the new regulatory regimes as discussed further under “Regulation” below.

We also face intense competition in attracting and retaining qualified employees. Our ability to continue to compete effectively will depend upon our ability to attract new employees, retain and motivate our existing employees and to continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of large financial institutions. Our pay practices and those of certain of our competitors are subject to review by, and the standards of, the Federal Reserve Board and regulators outside the United States, including the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in the United Kingdom. We also compete for employees with institutions whose pay practices are not subject to regulatory oversight. See “Regulation — Bank Holding Company Regulation” and “Regulation — Compensation Practices” below and “Risk Factors — Our businesses may be adversely affected if we are unable to hire and retain qualified employees” in Part I, Item 1A of the 2014 Form 10-K for more information about the regulation of our compensation practices.

Goldman Sachs 2014 Form 10-K7


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Regulation

As a participant in the banking, securities, investment management, OTCand derivatives futures and options and insurance industries, we are subject to extensive regulation worldwide. Regulatory bodies around the world are generally charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of the customers of market participants, including depositors in banking entities and the customers of broker-dealers.banks, broker-dealers, investment advisers, swap dealers and security-based swap dealers.

The financial services industry has been the subject of intense regulatory scrutiny in recent years. Our businesses have been subject to increasing regulation and supervision in the United States and other countries, and we expect this trend to continue in the future. In particular, the Dodd-Frank Act, which was enacted in July 2010, significantly altered the financial regulatory regime within which we operate. Not all the rules required or expected to be implemented under the Dodd-Frank Act have been proposed or adopted, and certain of the rules that have been proposed or adopted under the Dodd-Frank Act are subject to phase-in or transitional periods. The implications of the Dodd-Frank Act for our businesses willcontinue to depend to a large extent on the rules that will be adoptedimplementation of the legislation by the Federal Reserve Board, the FDIC, the SEC, the CFTCU.S. Commodity Futures Trading Commission (CFTC) and other agencies, to implement the legislation, as well as the development of market practices and structures under the regime established by the legislation and the implementing rules. SimilarOther reforms have been adopted or are being considered by other regulators and policy makers worldwide, as discussed further throughout this section. We will continue to assessupdate our business, risk management, and compliance practices to conform to developments in the regulatory environment.

BankingBank Holding Company Regulation

Group Inc. is a bank holding company under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under amendments to the BHC Act effected by the U.S. Gramm-Leach-Bliley Act of 1999 (GLB Act).

8Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supervision and Regulation

As a bank holding company and a financial holding company under the BHC Act, Group Inc. is subject to supervision and examination by the Federal Reserve Board. Under the system of “functional regulation” established under the BHC Act, the Federal Reserve Board serves as the primary regulator of our consolidated organization, but generally defers to the primary regulators of our U.S. non-bank subsidiaries with respect to the activities of those subsidiaries. Such “functionally regulated” U.S. non-bank subsidiaries include broker-dealers registered with the SEC, such as our principal U.S. broker-dealer, Goldman, Sachs & Co. (GS&Co.), insurance companiesentities registered with or regulated by state insurance authorities,the CFTC with respect to futures-related and swaps-related activities and investment advisers registered with the SEC with respect to their investment advisory activitiesactivities.

As discussed further below, our principal U.S. bank subsidiary, GS Bank USA, is supervised and entities regulated by the CFTC with respectFederal Reserve Board, the FDIC, the New York State Department of Financial Services and the Consumer Financial Protection Bureau (CFPB). In addition, Group Inc. has two limited purpose trust company subsidiaries that are not permitted to certain futures-related activities.accept deposits or make loans (other than as incidental to their trust activities) and are not insured by the FDIC. The Goldman Sachs Trust Company, N.A., a national banking association that is limited to fiduciary activities, is regulated by the Office of the Comptroller of the Currency and is a member bank of the Federal Reserve System. The Goldman Sachs Trust Company of Delaware, a Delaware limited purpose trust company, is regulated by the Office of the Delaware State Bank Commissioner.

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Activities

The BHC Act generally restricts bank holding companies from engaging in business activities other than the business of banking and certain closely related activities. As a financialFinancial holding company, we maycompanies, however, generally can engage in a broader range of financial and related activities than are otherwise permissible for bank holding companies as long as wethey continue to meet the eligibility requirements for financial holding companies. These requirements include Group Inc.that the financial holding company and oureach of its U.S. depository institution subsidiaries (currently GS Bank USA and our national bank trust company subsidiary) each maintainingmaintain their respective status as “well-capitalized” and “well-managed.” The broader range of permissible activities for financial holding companies

includes underwriting, dealing and making markets in securities insurance underwriting and making investments in nonfinancialnon-financial companies. In addition, wefinancial holding companies are permitted under the GLB Act to continue to engage in certain commodities activities in the United States that may otherwise be impermissible for bank holding companies, so long as the assets held pursuant to these activities do not equal 5% or more of ourtheir consolidated assets.

AsThe Federal Reserve Board, however, has the authority to limit our ability to conduct activities that would otherwise be permissible for a bankfinancial holding company, and will do so if we do not satisfactorily meet certain requirements of the Federal Reserve Board. In addition, we are required to obtain prior Federal Reserve Board approval before engaging in certain banking and other financial activities both in the United States and abroad.

We expectVolcker Rule

In December 2013, the final rules to face additional limitations on our activities upon implementation of thoseimplement the provisions of the Dodd-Frank Act referred to as the “Volcker Rule” were adopted.

The Volcker Rule prohibits “proprietary trading,which will prohibit “proprietary trading” (but will allowbut permits activities such as underwriting, market-making related activitiesmarket making and risk-mitigation hedging activities)hedging. We are also required to calculate daily quantitative metrics on covered trading activities (as defined in the rule) and will limitprovide these metrics to regulators on a monthly basis. In addition, the Volcker Rule limits the sponsorship of, and investment in, hedge funds and private equity funds“covered funds” (as defined in the rule) by banking entities, including bank holding companies.Group Inc. and its subsidiaries. It also limits certain types of transactions between us and our sponsored funds, similar to the limitations on transactions between depository institutions and their affiliates as described below under “Regulation of GS Bank USA — Transactions with Affiliates.” Covered funds include our private equity funds, certain of our credit and real estate funds, our hedge funds and certain other investment structures.

We are required to be in compliance with the prohibition on proprietary trading and to develop an extensive compliance program by July 2015. In October 2011, federal regulators proposed rulesDecember 2014, the Federal Reserve Board extended the compliance period through July 2016 for investments in, and relationships with, covered funds that were in place prior to implementDecember 31, 2013, and indicated that it intends to further extend the compliance period through July 2017.

The limitation on investments in covered funds requires us to reduce our investment in each such fund to 3% or less of the fund’s net asset value, and to reduce our aggregate investment in all such funds to 3% or less of our Tier 1 capital. In anticipation of the final rule, we limited our initial investment in certain new covered funds to 3% of the fund’s net asset value.

We continue to manage our existing funds, taking into account the transition periods under the Volcker RuleRule. We plan to continue to conduct our investing and lending activities in ways that included an extensive request for comments onare permissible under the proposal. The proposed rules are highly complex,Volcker Rule.

See “Management’s Discussion and many aspectsAnalysis of Financial Condition and Results of Operations — Regulatory Developments — Volcker Rule” in Part II, Item 7 of the Volcker Rule remain unclear. The full impact on us will not be known with certainty until the rules are finalized. The Volcker Rule provisions are scheduled to take effect no later than July 2012, and companies will be required to come into compliance within two years after the effective date (subject to possible extensions).2014 Form 10-K for information about our investments in covered funds.

 

 

 Goldman Sachs 20112014 Form 10-K 9


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

While many aspectsLeveraged Lending

During the past several years, the U.S. federal bank regulatory agencies have raised concerns over origination and other practices in leveraged lending markets. The agencies have issued guidance that focuses on transaction structures and risk management frameworks and outlined high-level principles for safe-and-sound leveraged lending, including underwriting standards, valuation and stress testing. Although the full impact of the Volcker Rule remain unclear, we evaluated the prohibition on “proprietary trading”guidance remains uncertain, implementation of this guidance and determined that businesses that engage in “bright line” proprietary trading are most likely to be prohibited. In 2011 and 2010, we liquidated substantially all of our Principal Strategies and global macro proprietary trading positions.

In addition, we evaluated the limitations on sponsorship of, and investments in, hedge funds and private equity funds. The firm earns management fees and incentive fees for investment management services from private equity and hedge funds, which are included in our Investment Management segment. The firm also makes investments in funds, and the gains and losses from such investments are included in our Investing & Lending segment; these gains and losses will be impacted by the Volcker Rule. The Volcker Rule limitation on investments in hedge funds and private equity funds requires the firm to reduce its investment in each private equity and hedge fund to 3% or less of net asset value, and to reduce the firm’s aggregate investment in all such funds to 3% or less of the firm’s Tier 1 capital. Over the period from 1999 through 2011, the firm’s aggregate net revenues from its investments in hedge funds and private equity funds were not material to the firm’s aggregate total net revenues over the same period. We are continuing to manage our existing private equity funds, taking into account the transition periods under the Volcker Rule. With respect to our hedge funds, we currently plan to comply with the Volcker Rule by redeeming certain of our interestsany related changes in the funds. We currently expect to redeem up to approximately 10% of certain hedge funds’ total redeemable units per quarter over ten consecutive quarters, beginning in the quarter ending March 2012 and ending in June 2014. In addition, we have limited the firm’s initial investment to 3% for certain new funds.

The Dodd-Frank Act also establishes a Bureau of Consumer Financial Protection having broad authority to regulate providers of credit, payment and other consumer financial products and services, and this Bureau has oversight over certain ofleveraged lending market could adversely affect our products and services.leveraged lending business.

Capital and Liquidity Requirements

As a bank holding company, we are subject to consolidated regulatory capital requirements administered by the Federal Reserve Board.Board, and GS Bank USA is subject to broadlysubstantially similar capital requirements as(as discussed below. below), also administered by the Federal Reserve Board.

Under the Federal Reserve Board’s capital adequacy requirements, and the regulatory framework for prompt corrective action that is applicable to GS Bank USA, both Group Inc. and GS Bank USA must meet specific regulatory capital requirements that involve quantitative measures of assets, liabilities and certain off-balance-sheet items. The sufficiency of our capital levels and those of GS Bank USA, as well as GS Bank USA’s prompt corrective action classification, areis also subject to qualitative judgments by regulators.

Other regulated subsidiaries, including GS&Co. and Goldman Sachs International (GSI), are also subject to capital requirements. We expect Group Inc., GS Bank USA, GS&Co., GSI and other regulated subsidiaries to become subject to increased capital requirements over time.

Capital Ratios. Since January 1, 2014, we have been subject to the Federal Reserve Board’s revised risk-based capital and leverage ratio regulations, inclusive of certain transitional provisions (Revised Capital Framework). These regulations are largely based on the Basel Committee’s final capital framework for strengthening international capital standards (Basel III), and also implement certain provisions of the Dodd-Frank Act. The Revised Capital Framework also introduces a new Tier 1 Leveragesupplementary leverage ratio (supplementary leverage ratio) for Advanced approach banking organizations.

See “Management’s Discussion and Basel 1Analysis of Financial Condition and Results of Operations — Equity Capital Ratios.SeeManagement and Regulatory Capital” in Part II, Item 7 of the 2014 Form 10-K and Note 20 to the consolidated financial statements in Part II, Item 8 of this the 2014Form 10-K for the aspects of the Revised Capital Framework that are most relevant to us as an Advanced approach banking organization, including information onabout our Common Equity Tier 1 (CET1), CET1 ratio, Tier 1 capital, Tier 1 capital ratio, Total capital, Total capital ratio, risk-weighted assets (RWAs), Tier 1 capital, total capital, risk-weighted assetsleverage ratio and Tier 1supplementary leverage ratio, and for a discussion of minimum required ratios. For information on our Tier 1 common ratio, see “— Equity Capital — Consolidated Regulatory Capital Ratios” in Part II, Item 7 of this Form 10-K.

Pending Changes in Capital Requirements.We are currently working to implement the requirements set out in the Federal Reserve Board’s Risk-Based Capital Standards: Advanced Capital Adequacy Framework — Basel 2, as applicable to us as a bank holding company (Basel 2), which are based on the advanced approaches under the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee. U.S. banking regulators have incorporated the Basel 2 framework into the existing risk-based capital requirements by requiring that internationally active banking organizations, such as us, adopt Basel 2, once approved to do so by regulators. As required by the Dodd-Frank Act, U.S. banking regulators have adopted a rule that requires large banking organizations, upon adoption of Basel 2, to continue to calculate risk-based capital ratios under both Basel 2 and the Federal Reserve Board’s regulatory requirements currently applicable to bank holding companies (Basel 1), which are based on the 1988 Capital Accord of the Basel Committee. For each of the Tier 1 and Total capital ratios, the lower of the Basel 1 and Basel 2 ratios calculated will be used to determine whether the bank meets its minimum risk-based capital requirements.

 

 

10 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The U.S. federal bank regulatory agencies have issued revised proposals to modify their market risk regulatory capital requirements for banking organizations in the United States that have significant trading activities. These modifications are designed to address the adjustments to the market risk framework that were announced by the Basel Committee in June 2010 (Basel 2.5), as well as the prohibition on the use of credit ratings, as required by the Dodd-Frank Act. Once implemented, it is likely that these changes will result in increased capital requirements for market risk.

Additionally, the guidelines issued by the Basel Committee in December 2010 (Basel 3) revise the definition of Tier 1 capital, introduce Tier 1 common equity as a regulatory metric, set new minimum capital ratios (including a new “capital conservation buffer,” which must be composed exclusively of Tier 1 common equity and will be in addition to the minimum capital ratios), introduce a Tier 1 leverage ratio within international guidelines for the first time, and make substantial revisions to the computation of risk-weighted assets (RWAs) for credit exposures. Implementation of the new requirements is expected to take place over the next several years. The federal banking agencies have not yet proposed rules to implement the Basel 3 guidelines in the United States.

In addition, both the Basel Committee and U.S. banking regulators implementing the Dodd-Frank Act have indicated that they will impose more stringent capital standards on systemically important financial institutions. In November 2011, the Basel Committee published its final provisions for assessing the global systemic importance of banking institutions and the range of additional Tier 1 common equity that should be maintained by banking institutions deemed to be globally systemically important. The additional capital for these institutions would initially range from 1% to 2.5% of Tier 1 common equity and could be as much as 3.5% for a bank that increases its systemic footprint (e.g., by increasing total assets). The firm was one of 29 institutions identified by the Financial Stability Board (established at the direction of the Group of 20) as globally systemically important under the Basel Committee’s methodology. Therefore, depending upon the manner and timing of the U.S. banking regulators’ implementation of the Basel Committee’s methodology, we expect that the minimum Tier 1 common ratio requirement applicable to us will include this additional capital assessment. The final determination of whether an institution is classified as globally systemically important and the calculation of the required additional capital amount is expected to be disclosed by the Basel Committee no later than November 2014 based on data through the end of 2013.

In December 2011, the Federal Reserve Board proposed rules to implement the enhanced prudential standards and early remediation requirements contemplated by the Dodd-Frank Act. The proposed rules would apply to bank holding companies with $50 billion or more in total consolidated assets such as us, as well as systemically important nonbank financial institutions. With respect to the enhanced prudential standards, the proposed rules address risk-based capital and leverage requirements, liquidity requirements, overall risk management requirements and concentration/credit exposure limits. The proposed rules do not include the additional capital requirements for globally systemically important banking institutions but contemplate the Federal Reserve Board’s adopting such requirements. The proposed rules require increased involvement by boards of directors in liquidity and risk management and stress testing, single-counterparty credit limits (including more stringent requirements for credit exposure among major financial institutions) and public disclosure of the Federal Reserve Board’s annual stress tests and a bank holding company’s annual and semi-annual internal stress tests. The proposed early remediation rules are modeled after the prompt corrective action regime, described below, but are designed to require action beginning in earlier stages of a company’s financial distress by mandating action on the basis of a range of triggers, including capital and leverage, stress test results, liquidity and risk management.

The Dodd-Frank Act will subject us at a firmwide level to the same leverage and risk-based capital requirements that apply to depository institutions and directs banking regulators to impose additional capital requirements. The Federal Reserve Board is expected to adopt the new leverage and risk-based capital regulations in 2012. As a consequence of these changes, Tier 1 capital treatment for our junior subordinated debt issued to trusts will be phased out over a three-year period beginning on January 1, 2013. The interaction among the Dodd-Frank Act, the Basel Committee’s proposed changes and other proposed or announced changes from other governmental entities and regulators adds further uncertainty to our future capital requirements and those of our subsidiaries.

Goldman Sachs 2011 Form 10-K11


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Liquidity Ratios under Basel 3.III.Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, both in the United States and internationally, without required formulaic measures. Basel 3 will requireIII, which is subject to implementation by national regulators, requires banks and bank holding companies to measure their liquidity against two specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be mandated by regulation. One test, referred to as the liquidity coverage ratio (LCR), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute short-term liquidity stress scenario. The other, referred to as the net stable funding ratio (NSFR), is designed to promote more medium- and long-term stable funding of the assets and off-balance-sheet activities of bankingthese entities over a one-year time horizon. These requirements may incentivize banking entities to increase their holdings of U.S. Treasury securities and certain other sovereign debtthat qualify as a component ofhigh-quality liquid assets and increase the use of long-term debt as a funding source. The liquidity coverage ratio is not expected

During 2014, the U.S. federal bank regulatory agencies approved final rules implementing the LCR for Advanced approach banking organizations that are generally consistent with the Basel Committee’s framework as described above, but which include accelerated transitional provisions and more stringent requirements related to be introducedboth the range of assets that qualify as a requirement untilhigh-quality liquid assets and cash outflow assumptions for certain types of funding. Under the accelerated transition timeline, the LCR became effective in the United States on January 1, 2015, with a phase-in period whereby firms must meet an 80% minimum ratio in 2015, which will increase 10% per year until 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity Risk Management” in Part II, Item 7 of the net stable funding ratio is not expected to2014Form 10-K for information about the LCR.

During 2014, the Basel Committee issued its final framework for calculation of the NSFR. Under the Basel Committee framework, the NSFR will be introduced as a requirement untileffective on January 1, 2018. WhileThe U.S. federal bank regulatory agencies have not yet proposed rules implementing the principles behindNSFR for U.S. banking organizations. We are currently evaluating the new framework are broadly consistent with our current liquidity management framework, it is possible thatimpact of the refinement andBasel Committee’s NSFR framework.

The implementation of these standards, and any amendments or modifications adopted by the U.S. federal bank regulatory agencies, could impact our liquidity and funding requirements and practices.

We also expect that liquidity requirements applicable to us and several of our subsidiaries will be impactedpractices in the future byfuture.

Stress Tests. The Federal Reserve Board has issued final rules implementing the various developments arising from the Basel Committee,requirements of the Dodd-Frank Act and actions by other governmental entities and regulators.

Payment of Dividends and Stock Repurchases

Dividend payments by Group Inc.concerning the Dodd-Frank Act supervisory stress tests to its shareholders and stock repurchases by Group Inc. are subject to the oversight of the Federal Reserve Board. Under rules adoptedbe conducted by the Federal Reserve Board and semi-annual company-run stress tests for bank holding companies with total consolidated assets of $50 billion or more. The stress test rules require increased involvement by boards of directors in November 2011,stress testing and public disclosure of the dividendresults of both the Federal Reserve Board’s annual stress tests and share repurchase policiesa bank holding company’s annual supervisory stress tests, and semi-annual internal stress tests. Certain stress test requirements are also applicable to GS Bank USA, as discussed below.

Our internally developed severely adverse scenario is designed to stress the firm’s risks and idiosyncratic vulnerabilities and assess the firm’s pro-forma capital position and ratios under the hypothetical stressed environment. We publish summaries of our annual and mid-cycle stress tests results on our web site as described under “Available Information” below. Our annual Dodd-Frank Act stress test submission is incorporated into the annual capital plans that we are required to submit to the Federal Reserve Board as part of the Comprehensive Capital Analysis and Review (CCAR). The purpose of CCAR is to ensure that large bank holding companies

such as Group Inc., are reviewed by the Federal Reserve Board based on capital plans and stress tests submitted by the bank holding company, and will be assessed against, among other things, the bank holding company’s ability to meet and exceed minimum regulatory capital ratios, its expected sources and uses of capital over the planning horizon (generally a period of two years) under baseline and stressed scenarios, and any potential impact of changes to its business plan and activities on its capital adequacy and liquidity. The purpose of the capital plan review is to ensure that these institutions have robust, forward-looking capital planning processes that account for each institution’s unique risks and that permit continued operations during times of economic and financial stress. As part of the capital plan review,CCAR, the Federal Reserve Board will evaluateevaluates an institution’s plan to make capital distributions, such as repurchasing or redeeming stock or increasing dividend payments.payments, across a range of macro-economic and firm-specific assumptions.

Goldman Sachs 2014 Form 10-K11


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Federal

Payment of Dividends and state law impose limitations on the payment of dividendsStock Repurchases. Dividend payments by our depository institution subsidiaries to Group Inc. to its shareholders and stock repurchases by Group Inc. are subject to the oversight of the Federal Reserve Board. The dividend and share repurchase policies of large bank holding companies, such as Group Inc., are reviewed by the Federal Reserve Board, through the CCAR process, based on capital plans and stress tests submitted by the bank holding company, and are assessed against, among other things, the bank holding company’s ability to meet and exceed minimum regulatory capital ratios under stressed scenarios, its expected sources and uses of capital over the planning horizon under baseline and stressed scenarios, and any potential impact of changes to its business plan and activities on its capital adequacy and liquidity.

In general,October 2014, the Federal Reserve Board issued a final rule modifying the regulations for capital planning and stress testing. The modifications change the dates for submitting the capital plan and stress test results beginning with the 2016 cycle and include a limitation on capital distributions to the extent that actual capital issuances are less than the amount indicated in the capital plan submission.

The Federal Reserve Board informed us that it did not object to our proposed capital actions through the first quarter of dividends that may be paid by GS Bank USA or2015, including the repurchase of outstanding common stock, an increase in our national bank trust company subsidiary is limitedquarterly common stock dividend, and the possible issuance, redemption and modification of other capital securities. We submitted our 2015 capital plan and proposed capital actions to the lesserFederal Reserve Board in January 2015 and expect to publish a summary of our annual Dodd-Frank Act stress test results in March 2015.

Enhanced Prudential Standards. In February 2014, the Federal Reserve Board adopted rules to implement certain of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declaredenhanced prudential standards contemplated by the entityDodd-Frank Act. Effective on January 1, 2015, the rules require bank holding companies with $50 billion or more in any calendar yeartotal consolidated assets to comply with enhanced liquidity and overall risk management standards, including a buffer of highly liquid assets based on projected funding needs for 30 days, and increased involvement by boards of directors in liquidity and overall risk management. Although the liquidity buffer under these rules has some similarities to the LCR (and is described by the agencies as complementary to the LCR), it is a separate requirement that is in excessaddition to the LCR. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management and Risk Factors — Overview and Structure of Risk Management” and “— Liquidity Risk Management” in Part II, Item 7 of the current year’s net income combined with the retained net income of the two preceding years, unless the entity obtains prior regulatory approval. Under the undivided profits test, a dividend may not be paid in excess of the entity’s “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus). The payment of all dividends is subject to approval by the banking regulators, which have authority to prohibit or limit the payment if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.2014 Form 10-K for information about our risk management practices and liquidity.

Regulatory Proposals

In addition certainto the regulatory rule changes that have already been adopted (as discussed above), both the Federal Reserve Board and the Basel Committee have proposed other changes, which are discussed below. The full impact of Group Inc.’s non-bank subsidiariesthese proposals on the firm will not be known with certainty until after any resulting rules are subjectfinalized and market practices develop under the final rules. Furthermore, these proposals, the Dodd-Frank Act, other reform initiatives proposed and announced by the U.S. federal bank regulatory agencies, the Basel Committee, and other governmental entities and regulators (including the European Union (EU), the PRA and the FCA) are not in all cases consistent with one another, which adds further uncertainty to separate regulatory limitations on dividendsour future capital, leverage and distributions, includingliquidity requirements, and those of our broker-dealer and our insurance subsidiaries as described below.subsidiaries.

 

 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Federal Reserve Board Proposals. In December 2014, the Federal Reserve Board proposed a rule to establish risk-based capital surcharges for U.S. Global Systemically Important Banks (G-SIBs). For these institutions, the proposed rule would implement the framework developed by the Basel Committee for assessing the global systemic importance of banking institutions and determining the range of additional CET1 that should be maintained by those deemed to be G-SIBs. Under the Basel Committee’s framework, the required amount of additional CET1 forG-SIBs will initially range from 1% to 2.5% and could be higher in the future for a banking institution that increases its systemic footprint (e.g., by increasing total assets). The Federal Reserve Board stated that its framework would result in surcharges higher than those calculated under the methodology published by the Basel Committee, with expected surcharges ranging from 1% to 4.5%. The proposed rule treats the Basel Committee’s methodology as a floor and introduces an alternative calculation to determine the applicable surcharge, which includes a significantly higher surcharge for systemic risk and, as part of the calculation of the applicable surcharge, a new factor based on a G-SIB’s use of short-term wholesale funding. Under the Federal Reserve Board’s proposed rule, U.S.G-SIBs would be required to meet the capital surcharges on a phased-in basis beginning in 2016 through 2019. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Capital Management and Regulatory Capital” in Part II, Item 7 of the 2014 Form 10-K for additional information about our minimum capital ratios and capital buffers.

In December 2011, the Federal Reserve Board proposed rules to implement the enhanced prudential standards and early remediation requirements contemplated by the Dodd-Frank Act. Although most components of these proposals have now been addressed in final rules that are described above, the single-counterparty credit limits and early remediation requirements are still under consideration. The proposed single-counterparty credit limits impose more stringent requirements for credit exposure among major financial institutions, which (together with other provisions incorporated into the Basel III capital rules) may affect our ability to transact or hedge with other financial institutions. The proposed early remediation rules are modeled on the prompt corrective action regime, described below, but are designed to require action to begin in earlier stages of a company’s financial distress, based on a range of triggers, including capital and leverage, stress test results, liquidity and risk management.

Basel Committee and Financial Stability Board Proposals. The Basel Committee published its final guidelines for calculating incremental capital requirements for domestic systemically important banking institutions (D-SIBs). These guidelines are complementary to the framework outlined above for G-SIBs, but are more principles-based in order to provide an appropriate degree of national discretion. The impact of these guidelines on the regulatory capital requirements of GS Bank USA, GSI and other of our subsidiaries will depend on how they are implemented by the banking and non-banking regulators in the United States and other jurisdictions.

The Basel Committee has recently issued several updates which propose further changes to capital regulations. In particular, it has finalized a revised standard approach for calculating RWAs for counterparty credit risk on derivatives exposures (“Standardized Approach for measuring Counterparty Credit Risk exposures,” known as “SA-CCR”). In addition, it has published guidelines for measuring and controlling large exposures (“Supervisory Framework for measuring and controlling Large Exposures”), and issued an updated framework for regulatory capital treatment of banking book securitizations.

The Basel Committee has also issued consultation papers on a “Fundamental Review of the Trading Book” and on the design of a capital floor framework based on the standardized approach. The impact of all of these developments on the firm (including RWAs and regulatory capital ratios) will not be known until after any resulting rules are finalized by the U.S. federal bank regulatory agencies.

In November 2014, the Financial Stability Board issued a set of principles and a term sheet on a new minimum standard for “total loss-absorbing capacity” of G-SIBs and indicated that it expects to finalize its proposal by late 2015. The proposal would require G-SIBs to maintain minimum ratios of regulatory capital plus certain types of debt instruments to RWAs and leverage exposure. Under the proposal, the requirements will be effective no earlier than January 1, 2019. The proposal is subject to change, and its impact on us will depend on, among other things, how it is implemented by the U.S. federal bank regulatory agencies.

Goldman Sachs 2014 Form 10-K13


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Resolution and Recovery Plans

As required by the Dodd-Frank Act, the Federal Reserve Board and FDIC have jointly issued a rule requiring each bank holding company with over $50 billion in assets and each designated systemically important financial institution to provide to regulators an annual plan for its rapid and orderly resolution in the event of material financial distress or failure (resolution plan). Our resolution plan must, among other things, demonstrate that GS Bank USA is adequately protected from risks arising from our other entities. The regulators’ joint rule sets specific standards for the resolution plans, including requiring a detailed resolution strategy and analyses of the company’s material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. Group Inc. submitted resolution plans to its regulators in 2012, 2013 and 2014. In August 2014, the Federal Reserve Board and the FDIC indicated that Group Inc. and other large industry participants had certain shortcomings in the 2013 resolution plans that must be addressed in the 2015 resolution plans, which are required to be submitted on or before July 1, 2015. If we fail to cure the deficiencies in a timely manner and the Federal Reserve Board and the FDIC jointly determine that our resolution plan, after any permitted resubmission, is not credible, the Federal Reserve Board and the FDIC may jointly impose more stringent capital, leverage or liquidity requirements on us or restrictions on our growth, activities or operations until we submit a plan that remedies the deficiencies. If the Federal Reserve Board and the FDIC ultimately determine that we have been unable to remedy the deficiencies, they may jointly order us to divest assets or operations in order to facilitate our orderly resolution in the event of our failure.

Group Inc. is also required by the Federal Reserve Board to submit, on an annual basis, a global recovery plan that outlines the steps that management could take to reduce risk, maintain sufficient liquidity, and conserve capital in times of prolonged stress. We have been submitting plans annually since 2010.

The European Banking Authority and the national resolution authorities of the EU are in the process of implementing the Bank Recovery and Resolution Directive (BRRD), which will impact the firm’s EU-regulated entities. Certain of the provisions of BRRD, including the requirements for contractual recognition of the “bail-in” powers of EU resolution authorities to recapitalize a failing entity by writing down its unsecured debt or converting its unsecured debt into equity, came into force on January 1, 2015, and the remainder of the BRRD’s provisions are expected to be implemented by January 2016.

Source of Strength

Federal Reserve Board policy historically has required bank holding companies to act as a source of strength to their bank subsidiaries and to commit capital and financial resources to support those subsidiaries. The Dodd-Frank Act codifies this policy as a statutory requirement. This support may be required by the Federal Reserve Board at times when we might otherwise determine not to provide it. Capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In addition, if a bank holding company commits to a federal bank regulator that it will maintain the capital of its bank subsidiary, whether in response to the Federal Reserve Board’s invoking its source-of-strength authority or in response to other regulatory measures, that commitment will be assumed by the bankruptcy trustee and the bank will be entitled to priority payment in respect of that commitment, ahead of other creditors of the bank holding company.

The BHC Act provides for regulation of bank holding company activities by various functional regulators and prohibits the Federal Reserve Board from requiring a payment by a holding company subsidiary to a depository institution if the functional regulator of that subsidiary objects to such payment. In such a case, the Federal Reserve Board could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture.

Compensation Practices

Our compensation practices are subject to oversight by the Federal Reserve Board and, with respect to some of our subsidiaries and employees, by other financial regulatory bodies worldwide. The scope and content of compensation regulation in the financial industry are continuing to develop, and we expect that these policiesregulations and resulting market practices will evolve over a number of years.

In June 2010, the Federal Reserve Board and other financial regulators jointly issued

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The U.S. federal bank regulatory agencies have provided guidance designed to ensure that incentive compensation arrangements at banking organizations take into account risk and are consistent with safe and sound practices. The guidance sets forth the following three key principles with respect to incentive compensation arrangements: (i) the arrangements should provide employees with incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (ii) the arrangements should be compatible with effective controls and risk management; and (iii) the arrangements should

be supported by strong corporate governance. In addition, the Federal Reserve Board has conducted a review of the incentive compensation policies and practices of a number of large, complex banking organizations, including us. The June 2010 guidance provides that supervisory findings with respect to incentive compensation will be incorporated, as appropriate, into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The guidance also provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk management, control or governance processes pose a risk to the organization’s safety and soundness.

The Financial Stability Board has released standards for implementing certain compensation principles for banks and other financial companies designed to encourage sound compensation practices. These standards are to be implemented by local regulators. The European Parliament has adopted amendments toIn the EU, the Fourth Capital Requirements Directive (CRD4) includes compensation provisions designed to implement the Financial Stability Board’s compensation standards withinstandards. These rules have been implemented by EU member states and, among other things, limit the EU. Regulators inratio of variable to fixed compensation of certain employees, including those identified as having a numbermaterial impact on the risk profile of countries,EU-regulated entities, including the United Kingdom, France and Germany, have proposed or adopted compensation policies or regulations applicable to financial institutions pursuant to the Capital Requirements Directive.GSI. These requirements are in addition to the guidance issued by U.S. financial regulators discussed above and the Dodd-Frank Act provision discussed below.

The Dodd-Frank Act requires the U.S. financial regulators, including the Federal Reserve Board, to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (which would include Group Inc. and some of its depository institution, broker-dealer and investment advisor subsidiaries) that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The initial version of these regulations was proposed by the U.S. financial regulators in early 2011 andbut the regulations may become effective in 2012.have not yet been finalized. The proposed regulations incorporate the three key principles from the June 2010 regulatory guidance discussed above. If the regulations are adopted in the form initially proposed, they will impose limitations onmay restrict our flexibility with respect to the manner in which we may structure compensation for our executives.

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

compensation.

Regulation of GS Bank USA

Our subsidiary, GS Bank USA, an FDIC-insured, New York State-chartered bank and a member of the Federal Reserve System, is supervised and regulated by the Federal Reserve Board, the FDIC, and the New York State Department of Financial Services (formerlyand the New York State Banking Department)CFPB, and is subject to minimum capital requirements (described below) that are calculated in a manner similar to those applicable to bank holding companies. A number of our activities are conducted partially or entirely through GS Bank USA and its subsidiaries, including: origination of and market making in bank loans; interest rate, credit, currency and other derivatives; leveraged finance; commercial mortgage origination and trading;origination; structured finance; and agency lending, custody and hedge fund administration services. These activities are subject to regulationlending.

Under rules adopted by the Federal Reserve Board in 2012 under the Dodd-Frank Act, GS Bank USA is required to conduct stress tests on an annual basis, to submit the results to the Federal Reserve Board, and to make a summary of those results public. The rules require that the board of directors of GS Bank USA, among other things, consider the results of the stress tests in the normal course of the bank’s business including, but not limited to, its capital planning, assessment of capital adequacy and risk management practices.

In addition, New York State Departmentbanking law imposes lending limits (which take into account credit exposure from derivative transactions) and other requirements that could impact the manner and scope of Financial Services and the FDIC.

The Dodd-Frank Act contains “derivative push-out” provisions that, beginning in July 2012, may prevent us from conducting certain swaps-related activities through GS Bank USA or another insured depository institution subsidiary, subject to exceptions for certain interest rate and currency swaps and for hedging or risk mitigation activities directly related to the bank’s business. These precluded activities may be conducted elsewhere within the firm, subject to certain requirements.USA’s activities.

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Transactions with AffiliatesAffiliates.

Transactions between GS Bank USA or its subsidiaries, on the one hand, and Group Inc. or its other subsidiaries and affiliates, on the other hand, are regulated by the Federal Reserve Board. These regulations generally limit the types and amounts of transactions (including loans to and credit extensions from GS Bank USA or its subsidiaries to Group Inc. or its other subsidiaries and affiliates) that may take place and generally require those transactions to be on an arm’s-length basis.market terms or better to GS Bank USA. These regulations generally do not apply to transactions between GS Bank USA and its subsidiaries. The Dodd-Frank Act significantly expandsexpanded the coverage and scope of thethese regulations, that limit affiliate transactions within a banking organization, including by applying these regulationsthem to the credit exposure arising under derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions,transactions.

Federal and transactions with sponsored hedge funds and private equity funds.

state laws impose limitations on the payment of dividends by our depository institution subsidiaries to Group Inc. has, subject to certain exceptions, guaranteedIn general, the payment obligationsamount of dividends that may be paid by GS Bank USA alongor our national bank trust company subsidiary is limited to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by the entity in any calendar year is in excess of the current year’s net income combined with thosethe retained net income of GS&Co., Goldman Sachs Bank (Europe) plc (GS Bank Europe) and Goldman Sachs Execution & Clearing, L.P. (GSEC)the two preceding years, unless the entity obtains prior regulatory approval. Under the undivided profits test, a dividend may not be paid in excess of the entity’s “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus). The banking regulators have authority to prohibit or limit the payment of dividends if, in the banking regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the banking organization.

“Living Will”

As required by the Dodd-Frank Act, the Federal Reserve Board and FDIC have jointly issued a rule that requires each bank holding company with more than $50 billion in assets and each designated systemically important financial institution to prepare and provide to regulators an annual plan (a so-called “living will”) for its rapid and orderly resolution in the event of material financial distress or failure. The firm’s resolution plan must, among other things, ensure that GS Bank USA is adequately protected from risks arising from our other entities. The regulators’ joint rule sets specific standards for the resolution plans, including requiring a detailed resolution strategy and analyses of the company’s material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. We have commenced work on our first resolution plan, which we must submit to the regulators by July 1, 2012. GS Bank USA is also required by the FDIC to submit a plan for its rapid and orderly resolution in the event of material financial distress or failure by July 1, 2012.

Deposit InsuranceInsurance.

GS Bank USA accepts deposits, and those deposits have the benefit of FDIC insurance up to the applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, such as GS Bank USA. The amounts of these assessments for larger depository institutions (generally those that have $10 billion in assets or more), such as GS Bank USA, are currently based on the average total consolidated assets less the average tangible equity of the insured depository institution during the assessment period, andthe supervisory ratings of the insured depository institution and specified forward-looking financial measures used to calculate the assessment rate. The assessment rate which is subject to adjustmentsadjustment by the FDIC. The FDIC required all insured depository institutions to prepay estimated assessments for all of 2010, 2011 and 2012 on December 30, 2009. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.

Prompt Corrective Action and Capital Ratios.

The U.S. Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, requires the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet specified capital requirements. FDICIA establishes five capital categories for FDIC-insured banks: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

A depository institution is generally deemed to be “well-capitalized,” the highest category, if it has aGS Bank USA computes its CET1, Tier 1 capital, ratio of at least 6%, a totalTotal capital ratio of at least 10% and a Tier 1 leverage ratio of at least 5%.ratios in accordance with the Revised Capital Framework. In addition, commencing January 1, 2018, GS Bank USA has agreed with the Federal Reserve Boardwill be subject to maintain minimum capital ratios in excess of these “well-capitalized” levels.supplementary leverage ratio requirements.

See Note 20 to the consolidated financial statements in Part II, Item 8 of thisthe 2014 Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Capital Management and Regulatory Capital” in Part II, Item 7 of the 2014Form 10-Kfor information on the calculation ofabout GS Bank USA’s regulatory capital ratios under Basel 1 and for a discussion of minimum required ratios.supplementary leverage ratio.

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GS Bank USA computes its capital ratios in accordance with the regulatory capital requirements currently applicable to state member banks, which are based on Basel 1 as implemented by the Federal Reserve Board.

An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, as the capital category of an institution declines. Failure to meet the capital requirements could also subjectrequire a depository institution to capital raising requirements.raise capital. Ultimately, critically undercapitalized institutions are subject to the appointment of a receiver or conservator, as described under “— Insolvency of an Insured Depository Institution or a Bank Holding Company” below.

The prompt corrective action regulations apply only to depository institutions and not to bank holding companies such as Group Inc. However, the Federal Reserve Board is authorized to take appropriate action at the holding company level, based upon the undercapitalized status of the holding company’s depository institution subsidiaries. In certain instances relating to an undercapitalized depository institution subsidiary, the bank holding company would be required to guarantee the performance of the undercapitalized subsidiary’s capital restoration plan and might be liable for civil money damages for failure to fulfill its commitments on that guarantee. Furthermore, in the event of the bankruptcy of the holding company, the guarantee would take priority over the holding company’s general unsecured creditors, as described under “— Source of Strength” above.

Resolution Plan. The FDIC issued a rule requiring each insured depository institution with $50 billion or more in assets, such as GS Bank USA, to provide a resolution plan. Similar to our resolution plan for Group Inc., our resolution plan for GS Bank USA must, among other things, demonstrate that it is adequately protected from risks arising from our other entities. GS Bank USA submitted its 2013 resolution plan to its regulators in September 2013 and its 2014 resolution plan in June 2014. In December 2014, the FDIC issued guidance relating to insured depository institutions’ resolution plans. GS Bank USA’s 2015 resolution plan is required to be submitted on or before July 1, 2015.

Insolvency of an Insured Depository Institution or a Bank Holding Company

IfUnder the Federal Deposit Insurance Act of 1950, if the FDIC is appointed as conservator or receiver for an insured depository institution such as GS Bank USA, upon its insolvency or in certain other events, the FDIC has broad powers, including the power:

 

Ÿ 

toTo transfer any of the depository institution’s assets and liabilities to a new obligor, including a newly formed “bridge” bank, without the approval of the depository institution’s creditors;

 

Ÿ 

toTo enforce the terms of the depository institution’s contracts pursuant to their terms without regard to any provisions triggered by the appointment of the FDIC in that capacity; or

 

Ÿ 

toTo repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.

In addition, under federal law, the claims of holders of domestic deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded a priority over other general unsecured claims, against such an institution, including deposits at non-U.S. branches and claims of debt holders of the institution, in the “liquidation or other resolution” of such an institution by any receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of GS Bank USA, the debt holders (other than depositors) would be treated differently from, and could receive, if anything, substantially less than, the depositors of GS Bank USA.

The Dodd-Frank Act created a new resolution regime (known as “orderly liquidation authority”) for bank holding companies and their affiliates andthat are systemically important and certain non-bank financial companies. Under the orderly liquidation authority, the FDIC may be appointed as receiver for the systemically important institution and its failed non-bank subsidiaries for purposes of liquidating the entity if, among other conditions, it is determined at the time of the institution’s failure that it is in default or in danger of default and the failure poses a risk to the stability of the U.S. financial system.

 

 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

If the FDIC is appointed as receiver under the orderly liquidation authority, then the powers of the receiver, and the rights and obligations of creditors and other parties who have dealt with the institution, would be determined under the Dodd-Frank Act provisions,orderly liquidation authority, and not under the bankruptcy or insolvency law that would otherwise apply. The powers of the receiver under the orderly liquidation authority were generally based on the powers of the FDIC as receiver for depository institutions under the Federal Deposit Insurance Act (FDIA). However, the provisions governing the rights of creditors under the orderly liquidation authority were modified from the FDIA regime in certain respects to reduce disparities with the treatment of creditors’ claims under the U.S. Bankruptcy Code as compared to the treatment of those claims under the new authority. Nonetheless, substantialAct. Substantial differences in the rights of creditors exist between these two regimes,the orderly liquidation authority and the U.S. Bankruptcy Code, including the right of the FDIC under the Dodd-Frank Act provisionsorderly liquidation authority to disregard the strict priority of creditor claims in some circumstances, the use of an administrative claims procedure to determine creditors’ claims (as opposed to the judicial procedure utilized in bankruptcy proceedings), and the right of the FDIC to transfer claims to a “bridge” entity. In addition, the orderly liquidation authority limits the ability of creditors to enforce certain contractual cross-defaults against affiliates of the institution in receivership.

The orderly liquidation authority provisions of the Dodd-Frank Act became effective upon enactment. However, a number of rulemakings are required under the terms of the Act, and a number of provisions of the new authority require clarification. The FDIC has completed its initial phase of rulemakingseveral rulemakings and taken other actions under the orderly liquidation authority, but may provide additional guidance. New guidance may affectincluding the mannerissuance of a notice in whichDecember 2013 describing some elements of its “single point of entry” or “SPOE” strategy pursuant to the neworderly liquidation authority is applied, particularly with respect to broker-dealer and futures commission merchant subsidiaries of bank holding companies.

Trust Companies

Group Inc.’s two limited purpose trust company subsidiaries are not permitted to and do not accept deposits or make loans (other than as incidental to their trust activities) and, as a result, are not insured by the FDIC. The Goldman Sachs Trust Company, N.A., a national banking association that is limited to fiduciary activities, is regulated by the Officeprovisions of the ComptrollerDodd-Frank Act. Under this strategy, the FDIC would, among other things, resolve a failed financial holding company by transferring its assets to a “bridge” holding company.

In November 2014, we, along with a number of other major global banking organizations, adhered to a new International Swaps and Derivatives Association Resolution Stay Protocol (the ISDA Protocol) that was developed in coordination with the CurrencyFinancial Stability Board and that took effect in January 2015. The ISDA Protocol imposes a stay on certain cross-default and early termination rights within standard ISDA derivatives contracts between adhering parties in the event that one of them is subject to resolution in its home jurisdiction, including a member bankresolution under the orderly liquidation authority in the United States. The ISDA Protocol is expected to be adopted more broadly in the future, following the adoption of regulations by banking regulators, and expanded to include instances where a U.S. financial holding company becomes subject to proceedings under the Federal Reserve System. The Goldman Sachs Trust Company of Delaware, a Delaware limited purpose trust company, is regulated by the Office of the Delaware State Bank Commissioner.U.S. bankruptcy code.

U.S.Broker-Dealer and Securities and Commodities Regulation

Goldman Sachs’ broker-dealer subsidiaries are subject to regulations that cover all aspects of the securities business, including sales methods, trade practices, use and safekeeping of clients’ funds and securities, capital structure, recordkeeping, the financing of clients’ purchases, and the conduct of directors, officers and employees. In the United States, the SEC is the federal agency responsible for the administration of the federal securities laws. GS&Co. is registered as a broker-dealer, a municipal advisor and an investment adviser with the SEC and as a broker-dealer in all 50 states and the District of Columbia. Self-regulatory organizations, such as FINRA and the NYSE, adopt rules that apply to, and examine, broker-dealers such as GS&Co.

In addition, state securities and other regulators also have regulatory or oversight authority over GS&Co. Similarly, our businesses are also subject to regulation by various non-U.S. governmental and regulatory bodies and self-regulatory authorities in virtually all countries where we have offices.offices, as discussed further under “Other Regulation” below. GSEC and one of its subsidiaries are registered U.S. broker-dealers and are regulated by the SEC, the NYSE and FINRA. Goldman Sachs Financial Markets, L.P. is registered with the SEC as an OTC derivatives dealer and conducts certain OTC derivatives activities.

The commodity futures and commodity options industry in the United States is subject to regulation under the U.S. Commodity Exchange Act (CEA). The CFTC is the federal agency charged with the administration of the CEA. Several of Goldman Sachs’ subsidiaries, including GS&Co. and GSEC, are registered with the CFTC and act as futures commission merchants, commodity pool operators or commodity trading advisors and are subject to CEA regulations. The rules and regulations of various self-regulatory organizations, such as the Chicago Board of Trade and the Chicago Mercantile Exchange, other futures exchanges and the National Futures Association, also govern the commodity futures and commodity options activities of these entities.

For a discussion of net capital requirements applicable to GS&Co. and GSEC, see Note 20 to the consolidated financial statements in Part II, Item 8 of thisthe 2014 Form 10-K.

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Our exchange-based market-making activities are subject to extensive regulation by a number of securities exchanges. As a DMM on the NYSE and as a market maker on other exchanges, we are required to maintain orderly markets in the securities to which we are assigned. Under the NYSE’s DMM rules, this may require us to supply liquidity to these markets in certain circumstances.

J. Aron & Company is authorized by the U.S. Federal Energy Regulatory Commission (FERC) to sell wholesale physical power at market-based rates. As a FERC-authorized power marketer, J. Aron & Company is subject to regulation under the U.S. Federal Power Act and FERC regulations and to the oversight of FERC. As a result of our investing activities, GS&Co. is also an “exempt holding company” under the U.S. Public Utility Holding Company Act of 2005 and applicable FERC rules.

In addition, as a result of our power-related and commodities activities, we are subject to extensive and evolving energy, environmental and other governmental laws and regulations, as discussed under “Risk Factors — Our commodities activities, particularly our power generation interests and our physical commodities activities, subject us to extensive regulation, potential catastrophic events and environmental, reputational and other risks that may expose us to significant liabilities and costs” in Part I, Item 1A of this Form 10-K.

The Dodd-Frank Act will result in additional regulation by the CFTC,SEC, the SECCFTC and other regulators of our broker-dealer and regulated subsidiaries in a number of respects. The legislation calls for the imposition of expanded standards of care by market participants in dealing with clients and customers, including by providing the SEC with authority to adopt rules establishing fiduciary duties for broker-dealers and directing the SEC to examine and improve sales practices and disclosure by broker-dealers and investment advisers. The Dodd-Frank Act

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Our broker-dealer and other subsidiaries will also contains provisions designedbe affected by rules recently adopted by federal agencies pursuant to increase transparency in over-the-counter derivatives markets, including by requiring the registration of all swap dealers and security-based swap dealers, and the clearing and execution of swaps through regulated facilities (subject to limited exceptions, including swaps with non-financial end users and swaps that are not cleared by a clearing agency), in accordance with CFTC and SEC rulemaking. Furthermore, federal banking agencies are required under the Dodd-Frank Act to develop rules whereby anyonethat require any person who organizes or initiates an asset-backed security transaction mustto retain a portion (generally, at least five percent) of any credit risk that the person conveys to a third party.

In Securitizations will also be affected by rules proposed by the SEC in September 2011 the SEC proposed rules to implement the Dodd-Frank Act’s prohibition against securitization participants’participants engaging in any transaction that would involve or result in any material conflict of interest with an investor in a securitization transaction. The proposed rules would exceptexempt bona fide market-making activities and risk-mitigating hedging activities in connection with securitization activities from the general prohibition.

InsuranceThe SEC, FINRA and regulators in various non-U.S. jurisdictions have imposed both conduct-based and disclosure-based requirements with respect to research reports and research analysts and may impose additional regulations.

Swaps, Derivatives and Commodities Regulation

The commodity futures, commodity options and swaps industry in the United States is subject to regulation under the U.S. Commodity Exchange Act. The CFTC is the federal agency charged with the administration of the CEA. In addition, the SEC is the federal agency charged with the regulation of security-based swaps. Several of Goldman Sachs’ subsidiaries, including GS&Co. and GSEC, are registered with the CFTC and act as futures commission merchants, commodity pool operators, commodity trading advisors or (as discussed below) swap dealers, and are subject to CFTC regulations. The rules and regulations of various self-regulatory organizations, such as the Chicago Board of Trade and the Chicago Mercantile Exchange, other futures exchanges and the National Futures Association, also govern the commodity futures, commodity options and swaps activities of these entities. In addition, Goldman Sachs Financial Markets, L.P. is registered with the SEC as an OTC derivatives dealer and conducts certain OTC derivatives activities.

The Dodd-Frank Act provides for significantly increased regulation of, and restrictions on, derivative markets and transactions. In particular, the Dodd-Frank Act imposes the following requirements relating to swaps and security-based swaps:

Ÿ

Real-time public and regulatory reporting of trade information for swaps and security-based swaps and large trader reporting for swaps;

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Registration of swap dealers and major swap participants with the CFTC and of security-based swap dealers and major security-based swap participants with the SEC;

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Position limits that cap exposure to derivatives on certain physical commodities;

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Mandated clearing through central counterparties and execution through regulated exchanges or electronic facilities for certain swaps and security-based swaps;

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New business conduct standards and other requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants, covering their relationships with counterparties, internal oversight and compliance structures, conflict of interest rules, internal information barriers, general and trade-specific record-keeping and risk management;

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Margin requirements for trades that are not cleared through a central counterparty; and

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Entity-level capital requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants.

The terms “swaps” and “security-based swaps” are generally defined broadly for purposes of these requirements, and can include a wide variety of derivative instruments in addition to those conventionally called swaps. The definition includes certain forward contracts, options, certain loan participations and guarantees of swaps, subject to certain exceptions, and relates to a wide variety of underlying assets or obligations, including currencies, commodities, interest or other monetary rates, yields, indices, securities, credit events, loans and other financial obligations.

Goldman Sachs 2014 Form 10-K19


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The CFTC is responsible for issuing rules relating to swaps, swap dealers and major swap participants, and the SEC is responsible for issuing rules relating to security-based swaps, security-based swap dealers and major security-based swap participants. Although the CFTC has not yet finalized its margin requirements or capital regulations, certain of the requirements, including registration of swap dealers, mandatory clearing of certain swaps, business conduct standards and real-time public trade reporting, have taken effect already under CFTC rules, and the SEC and the CFTC have finalized the definitions of a number of key terms. Finally, the CFTC has commenced making determinations regarding which swaps must be traded on swap execution facilities or exchanges, and certain interest rate swaps and credit default swaps are now subject to these trade-execution requirements. The CFTC is expected to continue to make such determinations during 2015.

In September 2014, the U.S. federal bank regulatory agencies (acting jointly) and the CFTC issued separate but similar proposals that would impose mandatory margining requirements for certain swaps that are not cleared.

The SEC has proposed rules to impose margin, capital and segregation requirements for security-based swap dealers and major security-based swap participants. The SEC has also proposed rules relating to registration of security-based swap dealers and major security-based swap participants, trade reporting and real-time reporting, and business conduct requirements for security-based swap dealers and major security-based swap participants. The SEC has proposed, but not yet finalized, rules that would govern the design of new trading venues for security-based swaps and establish the process for determining which products must be traded on these venues.

We have registered certain subsidiaries as “swap dealers” under the CFTC rules, including GS&Co., GS Bank USA, GSI and J. Aron & Company. We expect that these entities, and our businesses more broadly, will be subject to significant and developing regulation and regulatory oversight in connection with swap-related activities.

Similar regulations have been proposed or adopted in jurisdictions outside the United States, including the adoption of standardized execution and clearing, margining and reporting requirements for OTC derivatives. For instance, the EU has established regulatory requirements for OTC derivatives activities under the European Market Infrastructure Regulation, including requirements relating to portfolio reconciliation and reporting, which have already taken effect, as well as requirements relating to clearing and margining for uncleared derivatives, which are currently expected to be finalized during 2015.

The full application of new derivatives rules across different national and regulatory jurisdictions has not yet been fully established. In July 2013, the CFTC finalized guidance and timing on the cross-border regulation of swaps and announced that it had reached an understanding with the European Commission regarding the cross-border regulation of derivatives and the common goals underlying their respective regulations. In June 2014, the SEC issued rules and guidance on cross-border security-based swap activities. However, specific determinations of the extent to which regulators in each of the relevant jurisdictions will defer to regulations in other jurisdictions have not yet been completed. The full impact of the various U.S. and non-U.S. regulatory developments in this area will not be known with certainty until all the rules are finalized and implemented and market practices and structures develop under the final rules.

J. Aron & Company is authorized by the U.S. Federal Energy Regulatory Commission (FERC) to sell wholesale physical power at market-based rates. As a FERC-authorized power marketer, J. Aron & Company is subject to regulation under the U.S. Federal Power Act and FERC regulations and to the oversight of FERC. As a result of our investing activities, Group Inc. is also an “exempt holding company” under the U.S. Public Utility Holding Company Act of 2005 and applicable FERC rules.

In addition, as a result of our power-related and commodities activities, we are subject to energy, environmental and other governmental laws and regulations, as discussed under “Risk Factors — Our commodities activities, particularly our physical commodities activities, subject us to extensive regulation and involve certain potential risks, including environmental, reputational and other risks that may expose us to significant liabilities and costs” in Part I, Item 1A of the 2014 Form 10-K.

20Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Investment Management Regulation

Our investment management business is subject to significant regulation in numerous jurisdictions around the world relating to, among other things, the safeguarding of client assets, offerings of funds, marketing activities, transactions among affiliates and our management of client funds.

Certain of our subsidiaries are registered with, and subject to oversight by, the SEC as investment advisers. In July 2014, the SEC adopted amendments to the rules that govern SEC-registered money market mutual funds. The new rules require institutional prime money market funds to value their portfolio securities using market-based factors and to sell and redeem their shares based on a floating net asset value. In addition, the rules allow, in certain circumstances, for the board of directors of money market mutual funds to impose liquidity fees and redemption gates and also require additional disclosure, reporting and stress testing. We are currently evaluating the impact of the rules. The firm’s money market mutual funds will be required to comply with the amendments relating to floating net asset value, fees and redemption gates in 2016, with certain reporting requirements becoming effective in 2015.

Other Regulation

OurThe U.S. insurance subsidiaries are subject toand non-U.S. government agencies, regulatory bodies and self-regulatory organizations, as well as state insurance regulationsecurities commissions and oversightother state regulators in the statesUnited States, are empowered to conduct administrative proceedings that can result in which they are domiciled and incensure, fine, the other states in which they are licensed, and Group Inc. is subject to oversight as an insurance holding company in states where our insurance subsidiaries are domiciled. State insurance regulations limitissuance of cease-and-desist orders, or the abilitysuspension or expulsion of our insurance subsidiaries to pay dividends to Group Inc. in certain circumstances, and could require regulatory approval for any change in “control” of Group Inc., which may include control of 10%a regulated entity or more of our voting stock.its directors, officers or employees. In addition, a number of our other activities require us to obtain licenses, adhere to applicable regulations and be subject to the oversight of various regulators in the statesjurisdictions in which we conduct these activities.

Regulation Outside Regulatory oversight has been increasing, as well as the United Stateslevel of fines and penalties imposed by regulatory agencies. Our subsidiaries are subject to various and numerous requests for information, investigations and proceedings, and sanctions have been imposed for infractions of various regulations relating to our activities.

Goldman Sachs providesIn Europe, we provide investment services outside the United States that are subject to oversight by national regulators as well as the EU.EU regulators. These investment services are regulated in accordance with national laws, many of which implement EU directives, and increasingly by directly applicable EU regulations. These national and EU laws require, among other things, compliance with certain capital adequacy standards, customer protection requirements and market conduct and trade reporting rules.

Goldman Sachs providesWe provide investment services in and from the United Kingdom under the regulation of the FSA. Goldman Sachs International (GSI),PRA and the FCA. GSI, our regulated U.K. broker-dealer subsidiary, is subject to the capital requirements imposed by the FSA.PRA. Other subsidiaries, including Goldman Sachs International Bank (GSIB), our regulated U.K. bank, and Rothesay Life Limited (Rothesay Life), our U.K. insurance subsidiary, are also regulated by the FSA.PRA and the FCA. As of December 2011,2014, GSI GSIB and Rothesay LifeGSIB were in compliance with the FSAPRA capital requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Equity Capital Management and Regulatory Capital — Subsidiary Capital Requirements” in Part II, Item 7 of the 2014 Form 10-K for information about GSI’s capital ratios.

Goldman Sachs 2011 Form 10-K17


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Various of our other Goldman Sachs entities are regulated by the banking insurance and securities regulatory authorities of the European countries in which they operate, including, among others, the Federal Financial Supervisory Authority (BaFin) and the Bundesbank in Germany, the Autorité de Contrôle Prudentiel and the Autorité des Marchés Financiers in France, Banca d’Italia and the Commissione Nazionale per le Società e la Borsa (CONSOB) in Italy, the Federal Financial Markets Service and the Central Bank of the Russian Federation and the Swiss Financial Market Supervisory Authority. GS Bank Europe, our regulated Irish bank, is subject to minimum capital requirements imposed byIn November 2014, a new Single Supervisory Mechanism became effective, under which the European Central Bank and national supervisors both have certain regulatory responsibilities for banks in participating EU member states. While the U.K. does not participate in this new mechanism, it gives new powers to the European Central Bank to take regulatory action with regard to the firm’s banks in Germany and France.

Goldman Sachs 2014 Form 10-K21


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The EU finalized the Markets in Financial Instruments Regulation and a revision of Ireland. Asthe Markets in Financial Instruments Directive, both of December 2011, this bank waswhich will become effective in compliance with allJanuary 2017. These will include new market structure-related, reporting, investor protection-related and organizational requirements, including requirements on pre- and post-trade transparency, requirements to use certain venues when trading financial instruments (which includes certain derivative instruments), requirements affecting the way investment managers can obtain research, powers of regulators to impose position limits and provisions on regulatory capital requirements.sanctions.

The EU and national financial legislators and regulators have proposed or adopted numerous further market reforms that may impact our businesses. These include stricter capital and liquidity requirements, (including the adoption ofincluding finalized legislation to implement Basel 2.5, which has resulted in increasedIII capital requirements for market risk for certain of our EU subsidiaries); risk retention and enhanced disclosure requirements for asset-backed security offerings, reporting requirements and restrictions on short selling and credit default swaps, the introduction of standardized execution and clearing, margining and reporting requirements for OTC derivatives, and additional obligations and restrictionssubsidiaries (such as GSI). These market reforms also include rules on the managementseparation of certain trading activities from deposit taking and marketing of funds in the EU.on indices that are used as benchmarks for financial instruments or funds. In addition, the European Commission, the European Securities Market Authority and the European Banking Authority and the European Insurance and Occupational Pensions Authorityhave announced or are formulating regulatory standards and other measures which will be of increasing importance forimpact our European operations. Certain Goldman Sachs entities are also regulated by the European securities, derivatives and commodities exchanges of which they are members.

In September 2011, the European Commission published a draft proposal for a common system of financial transactions tax. The proposed financial transactions tax is broad in scope and would apply to transactions in a wide variety of financial instruments and derivatives. The draft legislation is still subject to agreement by the EU member states, as well as legislative approval, and the full impact of the proposal will not be known until the legislation is finalized.

Goldman Sachs Japan Co., Ltd. (GSJCL), our regulated Japanese broker-dealer, is subject to the capital requirements imposed by Japan’s Financial Services Agency. As of December 2011,2014, GSJCL was in compliance with its capital adequacy requirements. GSJCL is also regulated by the Tokyo Stock Exchange, the Osaka Securities Exchange, the Tokyo Financial Exchange, the Japan Securities Dealers Association, the Tokyo Commodity Exchange, Securities and Exchange Surveillance Commission, Bank of Japan, the Ministry of Finance and the Ministry of Economy, Trade and Industry, among others.

Also, the Securities and Futures Commission in Hong Kong, the Monetary Authority of Singapore, the China Securities Regulatory Commission, the Korean Financial Supervisory Service, the Reserve Bank of India, the Securities and Exchange Board of India, the Australian Securities and Investments Commission and the Australian Securities Exchange, among others, regulate various of our subsidiaries and also have capital standards and other requirements comparable to the rules of the SEC.

Various other Goldman Sachs entities are regulated by the banking and regulatory authorities in countriesjurisdictions in which Goldman Sachs operates, including, among others, Brazil and Dubai. In addition, certain of our insurance subsidiaries are regulated by the Bermuda Monetary Authority.

Regulations Applicable in and Outside the United States

The U.S. and non-U.S. government agencies, regulatory bodies and self-regulatory organizations, as well as state securities commissions and other state regulators in the United States, are empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease and desist orders, or the suspension or expulsion of a broker-dealer or its directors, officers or employees. From time to time, our subsidiaries have been subject to investigations and proceedings, and sanctions have been imposed for infractions of various regulations relating to our activities.

18Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The U.S. Bank Secrecy Act (BSA), as amended by the USA PATRIOT Act of 2001 (PATRIOT Act), contains anti-money laundering and financial transparency laws and mandated the implementation of various regulations applicable to all financial institutions, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. Through these and other provisions, the BSA and the PATRIOT Act seek to promote the identification of parties that may be involved in terrorism, money laundering or other suspicious activities. Anti-money laundering laws outside the United States contain some similar provisions.

22Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

In addition, we are subject to laws and regulations worldwide, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, relating to corrupt and illegal payments to, and hiring practices with regard to, government officials and others. The obligation of financial institutions, including Goldman Sachs, to identify their clients, to monitor for and report suspicious transactions, to monitor direct and indirect payments to government officials, to respond to requests for information by regulatory authorities and law enforcement agencies, and to share information with other financial institutions, has required the implementation and maintenance of internal practices, procedures and controls that have increased, and may continue to increase, our costs, and any failure with respect to our programs in this area could subject us to substantial liability and regulatory fines.

The SEC, FINRA and regulators in various non-U.S. jurisdictions have imposed both conduct-based and disclosure-based requirements with respect to research reports and research analysts and may impose additional regulations.

Our investment management business is subject to significant regulation in numerous jurisdictions around the world relating to, among other things, the safeguarding of client assets and our management of client funds.

As discussed above, many of our subsidiaries are subject to regulatory capital requirements in jurisdictions throughout the world. Subsidiaries not subject to separate regulation may hold capital to satisfy local tax guidelines, rating agency requirements or internal policies, including policies concerning the minimum amount of capital a subsidiary should hold based upon its underlying risk.

Certain of our businesses are subject to compliance with regulations enacted by U.S. federal and state governments, the EU or other jurisdictions and/or enacted by various regulatory organizations or exchanges relating to the privacy of the information of clients, employees or others, and any failure to comply with these regulations could expose us to liability and/or reputational damage.

Available Information

Our internet address iswww.gs.com and the investor relations section of our web site is located atwww.gs.com/shareholders. We make available free of charge through the investor relations section of our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934 (Exchange Act), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our web site, and available in print upon request of any shareholder to our Investor Relations Department, are our certificate of incorporation and by-laws, charters for our Audit Committee, Risk Committee, Compensation Committee, and Corporate Governance, Nominating and NominatingPublic Responsibilities Committee, our Policy Regarding Director Independence Determinations, our Policy on Reporting of Concerns Regarding Accounting and Other Matters, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Within the time period required by the SEC, we will post on our web site any amendment to the Code of Business Conduct and Ethics and any waiver applicable to any executive officer, director or senior financial officer.

In addition, our web site includes information concerning purchases and sales of our equity securities by our executive officers and directors, as well as disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.concerning:

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Purchases and sales of our equity securities by our executive officers and directors;

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Disclosure relating to certain non-GAAP financial measures (as defined in the SEC’s Regulation G) that we may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time;

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Dodd-Frank Act stress test results; and

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The firm’s risk management practices and regulatory capital ratios, as required under the disclosure-related provisions of the Revised Capital Framework, which are based on the third pillar of Basel III.

Our Investor Relations Department can be contacted at The Goldman Sachs Group, Inc., 200 West Street, 29th Floor, New York, New York 10282, Attn: Investor Relations, telephone: 212-902-0300, e-mail:gs-investor-relations@gs.com.

 

 

 Goldman Sachs 20112014 Form 10-K 1923


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995

Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995

 

We have included or incorporated by reference in thisthe 2014 Form 10-K, and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. These statements include statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, and may also include our belief regardingstatements about the effect of changes to the capital and leverage rules applicable to banks and bank holding companies, the impact of the Dodd-Frank Act on our businesses and operations, and various legal proceedings or mortgage-related contingencies as set forth under “Legal Proceedings” and “Certain Mortgage-Related Contingencies” in NoteNotes 27 and 18, respectively, to the consolidated financial statements in Part II, Item 8 of thisthe 2014 Form 10-K, as well as statements about the results of our Dodd-Frank Act and firm stress tests, statements about the objectives and effectiveness of our business continuity plan, information security program, risk management and liquidity policies, statements about trends in or growth opportunities for our businesses, statements about our future status, activities or reporting under U.S. or non-U.S. banking and financial regulation, and statements about our investment banking transaction backlog.

By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in the forward-looking statements include, among others, those discussed below and under “Risk Factors” in Part I, Item 1A of this the 2014Form 10-K.

In the case of statements about our investment banking transaction backlog, such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues, if any, that we actually earn from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline or continued weakness in general economic conditions, outbreak of hostilities, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an inability to obtain adequate financing, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. For a discussion of other important factors that could adversely affect our investment banking transactions, see “Risk Factors” in Part I, Item 1A of this the 2014Form 10-K.

We have voluntarily provided in this filing information regarding the firm’s capital ratios, including the estimated CET1 ratios under the Advanced and Standardized approaches on a fully phased-in basis, as well as the LCR and estimated supplementary leverage ratios for the firm and GS Bank USA. The statements with respect to these estimated ratios are forward-looking statements, based on our current interpretation, expectations and understandings of the relevant regulatory rules and guidance, and reflect significant assumptions concerning the treatment of various assets and liabilities and the manner in which the ratios are calculated. As a result, the methods used to calculate these ratios may differ, possibly materially, from those used in calculating the estimates for any future voluntary disclosures as well as those used when such ratios are required to be disclosed. The ultimate methods of calculating the ratios will depend on, among other things, implementation guidance or further rulemaking from the U.S. federal bank regulatory agencies and the development of market practices and standards.

 

 

2024 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Item 1A.    Risk Factors

 

We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal, regulatory and reputational risks. The following are some of the more important factors that could affect our businesses.

Our businesses have been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally.

Our businesses, by their nature, do not produce predictable earnings, and all of our businesses are materially affected by conditions in the global financial markets and economic conditions generally. In the past several years, thesegenerally, both directly and through their impact on client activity levels. These conditions have changedcan change suddenly and for a period of time, very negatively. In 2008 and through early 2009, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. In 2011, concerns about European sovereign debt risk and its impact on the European banking system, and about U.S. growth and uncertainty regarding the U.S. federal debt ceiling, resulted in significant volatility and declines in the prices of most financial asset classes. In addition, declines in the value of sovereign debt held by financial institutions, as well as increased capital and other regulatory requirements and higher funding costs, have negatively impacted the cost of borrowing and access to debt markets for many financial institutions, including us. Such developments have negatively affected client activity.

Since 2008, governments, regulators and central banks in the United States and worldwide have taken numerous steps to increase liquidity and to restore investor and public confidence. In addition, there are numerous legislative and regulatory actions that have been taken to deal with what regulators, politicians and others believe to be the root causes of the financial crisis, including laws and regulations relating to financial institution capital requirements and compensation practices, restrictions on the type of activities

in which financial institutions are permitted to engage, and generally increased regulatory scrutiny. In some cases, additional taxes have been (or have been proposed to be) imposed on us and certain other financial institutions. Many of the regulations that are required to implement this legislation (including the Dodd-Frank Act) are still being drafted or are not yet in effect; therefore, the exact impact that these regulations will have on our businesses, results of operations and cash flows is presently unclear.

National and local governments continue to face difficult financial conditions due to significant reductions in tax revenues, particularly from corporate and personal income taxes, as well as increased outlays for unemployment benefits due to high unemployment levels and the cost of stimulus programs.

Declines in asset values, the lack of liquidity, general uncertainty about economic and market activities and a lack of consumer, investor and CEO confidence have negatively impacted many of our businesses.

Our financial performance is highly dependent on the environment in which our businesses operate. A favorable business environment is generally characterized by, among other factors, high global gross domestic product growth, transparent, liquid and efficient capital markets, low inflation, high business and investor confidence, stable geopolitical conditions, regulatory certainty and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by: concerns about sovereign defaults; uncertainty in U.S. federal fiscal or monetary policy, the U.S. federal debt ceiling and the continued funding of the U.S. government; uncertainty about the timing and nature of regulatory reforms; declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation, interest rates, exchange rate volatility, default rates or the price of basic commodities; outbreaks of hostilities or other geopolitical instability; corporate, political or other scandals that reduce investor confidence in capital markets; extreme weather events or other natural disasters or pandemics; or a combination of these or other factors.

In 2008 and through early 2009, the financial services industry and the securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. Since 2011, concerns about European sovereign debt risk and its impact on the European banking system, and about changes in market conditions or actual changes in market conditions, have resulted, at times, in significant volatility while negatively impacting the levels of client activity.

General uncertainty about economic, political and market activities, and the timing and final implementation of regulatory reform, as well as weak consumer, investor and CEO confidence resulting in large part from such uncertainty, continues to negatively impact client activity, which adversely affects many of our businesses. Periods of low volatility and periods of high volatility combined with a lack of liquidity, have at times had an unfavorable impact on our market-making businesses.

Our revenues and profitability and those of our competitors have been and will continue to be impacted by requirements relating to capital, leverage, minimum liquidity and long-term funding levels, requirements related to resolution and recovery planning, derivatives clearing and margin rules and levels of regulatory oversight, as well as limitations on whether and how certain business activities may be carried out by financial institutions. Although interest rates are at or near historically low levels, financial institution returns have also been negatively impacted by increased funding costs due in part to the withdrawal of perceived government support of such institutions in the event of future financial crises. In addition, liquidity in the financial markets may also be negatively impacted as market participants and market practices and structures adjust to new regulations.

The degree to which these and other changes resulting from the financial crisis will have a long-term impact on the profitability of financial institutions will depend on the final interpretation and implementation of new regulations, the manner in which markets, market participants and financial institutions adapt to the new landscape, and the prevailing economic and financial market conditions. However, there is a risk that such changes will, at least in the near-term, continue to negatively impact the absolute level of revenues, profitability and return on equity at our firm and at other financial institutions.

 

 

 Goldman Sachs 20112014 Form 10-K 2125


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Our businesses and those of our clients are subject to extensive and pervasive regulation around the world.

As a participant in the financial services industry and a systemically important financial institution, we are subject to extensive regulation in jurisdictions around the world. We face the risk of significant intervention by regulatory and taxing authorities in all jurisdictions in which we conduct our businesses. Among other things, as a result of regulators or private parties challenging our compliance with existing laws and regulations, we could be fined, prohibited from engaging in some of our business activities, subject to limitations or conditions on our business activities or subjected to new or substantially higher taxes or other governmental charges in connection with the conduct of our businesses or with respect to our employees. In many cases, our activities may be subject to overlapping and divergent regulation in different jurisdictions.

There is also the risk that new laws or regulations or changes in enforcement of existing laws or regulations applicable to our businesses or those of our clients, including capital, liquidity, leverage and margin requirements, restrictions on leveraged lending or other business practices, reporting requirements, tax burdens and compensation restrictions, could be imposed on a limited subset of financial institutions (either based on size, activities, geography or other criteria), which may adversely affect our ability to compete effectively with other institutions that are not affected in the same way. In addition, regulation imposed on financial institutions or market participants generally, such as taxes on financial transactions, could adversely impact levels of market activity more broadly, and thus impact our businesses.

These developments could impact our profitability in the affected jurisdictions, or even make it uneconomic for us to continue to conduct all or certain of our businesses in such jurisdictions, or could cause us to incur significant costs associated with changing our business practices, restructuring our businesses, moving all or certain of our businesses and our employees to other locations or complying with applicable capital requirements, including liquidating assets or raising capital in a manner that adversely increases our funding costs or otherwise adversely affects our shareholders and creditors.

U.S. and non-U.S. regulatory developments, in particular the Dodd-Frank Act and Basel III, have significantly altered the regulatory framework within which we operate and may adversely affect our competitive position and profitability. As discussed further under “Business — Regulation,” in Part I, Item 1 of the 2014 Form 10-K, in December 2013, final rules were adopted to implement the provisions of the Dodd-Frank Act referred to as the “Volcker Rule,” which will prohibit proprietary trading and will limit our sponsorship of, and investment in, covered funds. Based on what we know as of the date of this filing, we do not expect the impact of the prohibition on proprietary trading to be material to our financial condition, results of operations or cash flows.

However, given that the rule is highly complex, and its full impact will not be known until market practices are fully developed, the implementation of the rule and the related market changes could negatively impact our businesses and expose us to increased liability for inadvertent breaches and reporting failures. Among the other aspects of the Dodd-Frank Act most likely to affect our businesses are: increased capital, liquidity and reporting requirements; increased regulation of and restrictions on OTC derivatives markets and transactions; limitations on incentive compensation; limitations on affiliate transactions; requirements to reorganize or limit activities in connection with recovery and resolution planning; increased deposit insurance assessments; and increased standards of care for broker-dealers in dealing with clients. The implementation of higher capital requirements, the liquidity coverage ratio and the net stable funding ratio under Basel III may also adversely affect our profitability and competitive position, particularly if the requirements do not apply, or do not apply equally, to our competitors or are not implemented uniformly across jurisdictions.

As discussed under “Business — Regulation — Capital and Liquidity Requirements — Payment of Dividends and Stock Repurchases” in Part I, Item 1 of the 2014 Form 10-K, Group Inc.’s proposed capital actions and capital plan are reviewed by the Federal Reserve Board as part of the CCAR process. If the Federal Reserve Board objects to our proposed capital actions in our capital plan, Group Inc. could be prohibited from taking such capital actions, including increasing or paying dividends on common or preferred stock or repurchasing common stock or other capital securities. Our inability to carry out our proposed capital actions could, among other things, prevent us from returning capital to our shareholders and impact our return on equity.

26Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

We are also subject to laws and regulations relating to the privacy of the information of clients, employees or others, and any failure to comply with these regulations could expose us to liability and/or reputational damage. In addition, our businesses are increasingly subject to laws and regulations relating to surveillance, encryption and data on-shoring in the jurisdictions in which we operate. Compliance with these laws and regulations may require us to change our policies, procedures and technology for information security (including cyber security), which could, among other things, make us more vulnerable to cyber attacks and misappropriation, corruption or loss of information or technology.

In addition, the attorneys general of a number of states have filed lawsuits against financial institutions alleging, among other things, that the centralized system of recording mortgages and designating a common entity as the mortgage holder is in violation of state law, and other authorities have brought similar actions or indicated that they are contemplating bringing such actions. If this system and related practices are deemed invalid, it may call into question the validity or enforceability of certain mortgage-related obligations under securitizations and other transactions in which we have participated, negatively impact the market for mortgages and mortgage-related products and our mortgage-related activities, or subject us to additional costs or penalties.

Increasingly, regulators and courts have sought to hold financial institutions liable for the misconduct of their clients where such regulators and courts have determined that the financial institution should have detected that the client was engaged in wrongdoing, even though the financial institution had no direct knowledge of the activities engaged in by its client. Regulators and courts have also increasingly found liability as a “control person” for activities of entities in which financial institutions or funds controlled by financial institutions have an investment, but which they do not actively manage. In addition, regulators and courts continue to seek to establish “fiduciary” obligations to counterparties to which no such duty had been assumed to exist. To the extent that such efforts are successful, the cost of, and liabilities associated with, engaging in brokerage, clearing, market-making, prime brokerage, investing and other similar activities could increase significantly.

For a discussion of the extensive regulation to which our businesses are subject, see “Business — Regulation” in Part I, Item 1 of the 2014 Form 10-K.

Our businesses have been and may be adversely affected by declining asset values. This is particularly true for those businesses in which we have net “long” positions, receive fees based on the value of assets managed, or receive or post collateral.

Many of our businesses have net “long” positions in debt securities, loans, derivatives, mortgages, equities (including private equity and real estate) and most other asset classes. These include positions we take when we act as a principal to facilitate our clients’ activities, including our exchange-based market-making activities, or commit large amounts of capital to maintain positions in interest rate and credit products, as well as through our currencies, commodities, equities and equitiesmortgage-related activities. Because nearlysubstantially all of these investing, lending and market-making 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 profit from increases in the values of the assets. Sudden declines and significant volatility in the prices of assets may substantially curtail or eliminate the trading markets for certain assets, which may make it very difficult 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 difficulty in valuing assets may negatively affect our capital, liquidity or leverage ratios, increase our funding costs and generally require us to maintain additional capital and increase our funding costs.capital.

In our exchange-based market-making activities, we are obligated by stock exchange rules to maintain an orderly market, including by purchasing sharessecurities in a declining market. In markets where asset values are declining and in volatile markets, this results in losses and an increased need for liquidity.

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 we earn for managing such assets.

If financial markets decline, revenues from our variable annuity products are likely to decrease. In addition, unanticipated changes in reinvestment returns, policy lapses or mortality rates may also impact earnings from our insurance activities.

Goldman Sachs 2014 Form 10-K27


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

We post collateral to support our obligations and receive collateral to support the obligations of our clients and counterparties in connection with our client execution businesses. When the value of the assets posted as collateral declines, the party posting the collateral may need to provide additional collateral or, if possible, reduce its trading position. A classic example of such a situation is a “margin call” in connection with a brokerage account. Therefore, declines in the value of asset classes used as collateral mean that either the cost of funding positions is increased or the size of positions is decreased. If we are the party providing collateral, this can increase our costs and reduce our profitability and if we are the party receiving collateral, this can also reduce our profitability by reducing the level of business done with our clients and counterparties. In addition, volatile or less liquid markets increase the difficulty of valuing assets which can lead to costly and time-consuming disputes over asset values and the level of required collateral, as well as increased credit risk to the recipient of the collateral due to delays in receiving adequate collateral.

22Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Our businesses have been and may be adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs of obtaining credit.

Widening credit spreads, as well as significant 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, by accepting deposits at our bank subsidiaries, by issuing promissory notes and commercial paperhybrid financial instruments, or by obtaining bank loans or lines of credit. We seek to finance many of our assets on a secured basis, including by entering into repurchase agreements.basis. 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 profitability, particularly in our businesses that involve investing, lending and market making.

Our clients engaging in mergers and acquisitions often rely on access to the secured and unsecured credit markets to finance 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 — and adversely affect our financial advisory and underwriting businesses.

In addition, we may incur significant unrealized gains or losses due solely to changes in our credit spreads or those of third parties, as these changes may affect the fair value of our derivative instruments and the debt securities that we hold or issue.issue, which may in turn adversely affect our results of operations and capital ratios.

Our market-making activities have been and may be affected by changes in the levels of market volatility.

Certain of our market-making activities depend on market volatility to provide trading and arbitrage opportunities to our clients, and decreases in volatility may reduce these opportunities and adversely affect the results of these activities. On the other hand, increased volatility, while it can increase trading volumes and spreads, also increases risk as measured by Value-at-Risk (VaR) and may expose us to increased risks in connection with our market-making activities or cause us to reduce our market-making positions in order to avoid increasing our VaR. Limiting the size of our market-making positions can adversely affect our profitability, even though spreads are widening and we may earn more on each trade.profitability. In periods when volatility is increasing, but asset values are declining significantly, it

may not be possible to sell assets at all or it may only be possible to do so at steep discounts. In such circumstances we may be forced to either take on additional risk or to incur losses in order to decrease our VaR. In addition, increases in volatility increase the level of our risk weighted assets and increaseRWAs, which increases our capital requirements, both of which in turn increase our funding costs.requirements.

Our investment banking, client execution and investment management businesses have been adversely affected and may continue to be adversely affected by market uncertainty or lack of confidence among investors and CEOs due to general declines in economic activity and other unfavorable economic, geopolitical or market conditions.

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 in the past adversely affected investor and CEO confidence, resulting in significant industry-wide declines in the size and number of underwritings and of financial advisory transactions, which could have an adverse effect on our revenues and our profit margins. In particular, because a significant 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.

28Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

In certain circumstances, market uncertainty or general declines in market or economic activity may affect our client execution businesses by decreasing levels of overall activity or by decreasing volatility, but at other times market uncertainty and even declining economic activity may result in higher trading volumes or higher spreads or both.

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 and result in reduced net revenues, principally in our investment management business. To the extent that clients do not withdraw their funds, they may invest them in products that generate less fee income.

Goldman Sachs 2011 Form 10-K23


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Our investment management business may be affected by the poor investment performance of our investment products.

Poor investment returns in our investment management business, due to either general market conditions or underperformance (relative to our competitors or to benchmarks) by funds or accounts that we manage or investment products that we design or sell, affects our ability to retain existing assets and to attract new clients or additional assets from existing clients. This could affect the management and incentive fees that we earn on assets under managementsupervision or the commissions and net spreads that we earn for selling other investment products, such as structured notes or derivatives.

We may incur losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. Our risk management process seeks to balance our ability to profit from market-making, investing or lending positions with our exposure to potential losses. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Thus, we may, in the course of our activities, incur losses. Market conditions in recent years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.

The models that we use to assess and control our risk exposures reflect assumptions about the degrees of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, such as occurred during 2008 and early 2009, and to some extent insince 2011, previously uncorrelated indicators may become correlated, or conversely previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other

market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets.

To the extent that we have positions through our market-making or origination activities or we make investments directly through our investing activities, in securities, including private equity, that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions. In addition, to the extent permitted by applicable law and regulation, we invest our own capital in private equity, debt,credit, real estate and hedge funds that we manage and limitations on our ability to withdraw some or all of our investments in these funds, whether for legal, reputational or other reasons, may make it more difficult for us to control the risk exposures relating to these investments.

Goldman Sachs 2014 Form 10-K29


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Prudent risk management, as well as regulatory restrictions, may cause us to limit our exposure to counterparties, geographic areas or markets, which may limit our business opportunities and increase the cost of our funding or hedging activities.

For a further discussion of our risk management policies and procedures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management”Management and Risk Factors” in Part II, Item 7 of thisthe 2014 Form 10-K.

Our liquidity, profitability and businesses may be adversely affected by an inability to access the debt capital markets or to sell assets or by a reduction in our credit ratings or by an increase in our credit spreads.

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 outflows 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 financial instruments that we hold and the contracts to which we are a party are often complex, as we employ structured products to benefit our clients and ourselves,hedge our own risks, and these complex structured products often do not have readily available markets to access in times of liquidity stress. Our investing and lending activities may lead to situations where the holdings from these activities represent a significant portion of specific markets, which could restrict liquidity for our positions.

24Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

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.crisis or in response to changes to rules or regulations. In addition, financial institutions with which we interact may exercise set-off rights or the right to require additional collateral, including in difficult 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 provisions in some of our trading and collateralized financing 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 financing contracts could cause us to sustain losses and impair our liquidity by requiring us to find other sources of financing or to make significant cash payments or securities movements. Certain rating agencies have indicated that the Dodd-Frank Act could result in the rating agencies reducing their assumed level of government support and therefore result in ratings downgrades for certain large financial institutions, including Goldman Sachs. As of December 2011,2014, each of Moody’s Investors Service, Standard & Poor’s Ratings Services and Ratings and Investment Information, Inc. had issued a negative outlook on our long-term credit ratings. As of December 2011,2014, in the event of a one-notch and two-notch downgrade of our credit ratings our counterparties could have called for additional collateral or termination payments related to our net derivative liabilities under bilateral agreements in an aggregate amount of $1.30$1.07 billion and $2.18$2.82 billion, respectively. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. For a further discussion of our credit ratings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity Risk Management — Credit Ratings” in Part II, Item 7 of the 2014 Form 10-K.

30Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Our cost of obtaining long-term unsecured funding is directly related to our credit spreads (the amount in excess of the interest rate of U.S. Treasury securities (or other benchmark securities) of the same maturity that we need to pay to our debt investors). Increases in our credit spreads can significantly increase our cost of this funding. Changes in credit spreads are continuous, market-driven, and subject at times to unpredictable and highly volatile movements. CreditOur credit spreads are also influenced by market perceptions of our creditworthiness. In addition, our credit spreads may be influenced by movements in the costs to purchasers of credit default swaps referenced to our long-term debt. The market for credit default swaps, although very large, has proven to be extremely volatile and currently lacksat times may lack a high degree of structure or transparency.

Regulatory changes relating to liquidity may also negatively impact our results of operations and competitive position. Recently, numerous regulations have been adopted or proposed, and additional regulations are under consideration, to introduce more stringent liquidity requirements for large financial institutions. These regulations and others being considered address, among other matters, liquidity stress testing, minimum liquidity requirements, wholesale funding, limitations on the issuance of short-term debt and structured notes. These may overlap with, and be impacted by, other regulatory changes, including new guidance on the treatment of brokered deposits and the capital, leverage and resolution and recovery frameworks applicable to large financial institutions, as well as proposals relating to minimum long-term debt requirements and total loss-absorbing capacity. Given the overlap and complex interactions among these new and prospective regulations, they may have unintended cumulative effects, and their full impact will remain uncertain until implementation of post-financial crisis regulatory reform is complete.

Conflicts of interest are increasing and aA failure to appropriately identify and address potential conflicts of interest could adversely affect our businesses.

As we have expandedDue to the broad scope of our businesses and our client base, we increasingly mustregularly address potential conflicts of interest, including situations where our services to a particular client or our own investments or other interests conflict, or are perceived to conflict, with the interests of another client, as well as situations where one or more of our businesses have access to material non-public information that may not be shared with other businesses within the firm and situations where we may be a creditor of an entity with which we also have an advisory or other relationship.

In addition, our status as a bank holding company subjects us to heightened regulation and increased regulatory scrutiny by the Federal Reserve Board with respect to transactions between GS Bank USA and entities that are or could be viewed as affiliates of ours.

We have extensive procedures and controls that are designed to identify and address conflicts of interest, including those designed to prevent the improper sharing of information among our businesses. However, appropriately identifying and dealing with conflicts of interest is complex and difficult, and our reputation, which is one of our most important assets, could be damaged and the willingness of clients to enter into transactions with us may be affected if we fail, or appear to fail, to identify, disclose and deal appropriately with conflicts of interest. In addition, potential or perceived conflicts could give rise to litigation or regulatory enforcement actions.

Goldman Sachs 2011 Form 10-K25


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Group Inc. is a holding company and is dependent for liquidity on payments from its subsidiaries, many of which are subject to restrictions.

Group Inc. is a holding company and, therefore, depends on dividends, distributions and other payments from its subsidiaries to fund dividend payments and to fund all payments on its obligations, including debt obligations. Many of our subsidiaries, including our broker-dealer bank and insurancebank subsidiaries, are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Group Inc.

Goldman Sachs 2014 Form 10-K31


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

In addition, our broker-dealer bank and insurancebank subsidiaries are subject to restrictions on their ability to lend or transact with affiliates and to minimum regulatory capital and other requirements, as well as restrictions on their ability to use funds deposited with them in brokerage or bank accounts to fund their businesses. Additional restrictions on related-party transactions, increased capital and liquidity requirements and additional limitations on the use of funds on deposit in bank or brokerage accounts, as well as lower earnings, can reduce the amount of funds available to meet the obligations of Group Inc., including under the Federal Reserve Board’s source of strength policy, and even require Group Inc. to provide additional funding to such subsidiaries. Restrictions or regulatory action of that kind could impede access to funds that Group Inc. needs to make payments on its obligations, including debt obligations, or dividend payments. In addition, Group Inc.’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

As a result of the 2008 financial crisis, there has been a trend towards increased regulation and supervision of our subsidiaries by the governments and regulators in the countries in which those subsidiaries are located or do business. Concerns about protecting clients and creditors of financial institutions that are controlled by persons or entities located outside of the country in which such entities are located or do business have caused or may cause a number of governments and regulators to take additional steps to “ring fence” such entities in order to protect clients and creditors of such entities in the event of financial difficulties involving such entities. The result has been and may continue to be additional limitations on our ability to efficiently move capital and liquidity among our affiliated entities, thereby increasing the overall level of capital and liquidity required by the firm on a consolidated basis.

Furthermore, Group Inc. has guaranteed the payment obligations of certain of its subsidiaries, including GS&Co., GS Bank USA GS Bank Europe and GSEC subject to certain exceptions, and has pledged significant 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.

The requirements for Group Inc. and GS Bank USA to develop and submit recovery and resolution plans to regulators, and the incorporation of feedback received from regulators, may require us to reduce our reliance on short-term funding, increase capital or liquidity levels at Group Inc. or particular subsidiaries or otherwise incur additional or duplicative operational or other costs at multiple entities, and may reduce our ability to provide Group Inc. guarantees of the obligations of our subsidiaries or raise debt at Group Inc. Resolution planning may also impair our ability to structure our intercompany and external activities in a manner that we may otherwise deem most operationally efficient. Furthermore, we may incur additional taxes. Any such limitations or requirements would be in addition to the legal and regulatory restrictions discussed above on our ability to engage in capital actions or make intercompany dividends or payments.

See “Business — Regulation” in Part I, Item 1 of thisthe 2014 Form 10-K for a further discussion of regulatory restrictions.

32Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The application of regulatory strategies and requirements in the United States and non-U.S. jurisdictions to facilitate the orderly resolution of large financial institutions could create greater risk of loss for Group Inc.’s security holders.

As discussed under “Business — Regulation — Insolvency of an Insured Depository Institution or a Bank Holding Company,” if the FDIC is appointed as receiver under the orderly liquidation authority, the rights of Group Inc.’s creditors would be determined under the orderly liquidation authority, and substantial differences exist in the rights of creditors between the orderly liquidation authority and the U.S. Bankruptcy Code, including the right of the FDIC under the orderly liquidation authority to disregard the strict priority of creditor claims in some circumstances, which could have a material adverse effect on debt holders.

Although the FDIC’s single point of entry strategy is intended to result in better outcomes for creditors in connection with the resolution of a large financial institution, it is possible that this may not occur. One goal of the FDIC’s single point of entry strategy is to resolve a large financial institution in a manner that would, among other things, impose losses on shareholders, debt holders (including holders of structured notes) and other creditors of the top-tier holding company and permit the holding company’s subsidiaries to continue to operate. It is possible that the application of the single point of entry strategy could result in greater losses to Group Inc.’s security holders, including holders of structured notes and other debt securities, than the losses that could result from the application of a bankruptcy proceeding or a different resolution strategy for the firm.

In addition, certain jurisdictions, including the United Kingdom and the EU, have implemented, or are considering, changes to resolution regimes to provide resolution authorities with the ability to recapitalize a failing entity by writing down its unsecured debt or converting its unsecured debt into equity. Such “bail-in” powers are intended to enable the recapitalization of a failing institution by allocating losses to its shareholders and unsecured debt holders. U.S. and non-U.S. regulators are also considering requirements that large financial institutions and certain of their subsidiaries maintain minimum amounts of equity and debt (total loss-absorbing capacity) that would absorb losses in the event of failure.

Our resolution plan assumes that, in certain adverse scenarios, Group Inc. would recapitalize certain major subsidiaries, including through the forgiveness of intercompany indebtedness. If these recapitalization actions were unsuccessful in stabilizing these subsidiaries, Group Inc.’s financial condition would be adversely impacted and equity and debt holders of Group Inc. may as a consequence be in a worse position than if the recapitalizations did not occur.

In August 2014, the Federal Reserve Board and the FDIC indicated that Group Inc., along with other large industry participants, had certain shortcomings in the 2013 resolution plans that must be addressed in the 2015 resolution plans. If Group Inc. is unable to effectively address these shortcomings, the Federal Reserve Board and the FDIC could, after any permitted resubmission, find our resolution plan not credible and require us to hold more capital, change our business structure or dispose of businesses, which could have a negative impact on our ability to return capital to shareholders, financial condition, results of operations or competitive position.

Goldman Sachs 2014 Form 10-K33


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Our businesses, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold.

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 significant market participant, or even concerns about a default by such an institution, could lead to significant 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, including a deterioration in the value of collateral posted by third parties to secure their obligations to us under derivatives contracts and loan agreements, could result in losses and/or adversely affect our ability to rehypothecate or otherwise use those securities or obligations for liquidity purposes.

A significant 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 financial difficulty, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of our rights. Default rates, downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress and illiquidity.

As part of our clearing and prime brokerage activities, we finance our clients’ positions, and we could be held responsible for the defaults or misconduct of our clients. Although we regularly review credit exposures to specific clients and counterparties and to specific industries, countries and regions that we believe may present credit concerns, default risk may arise from events or circumstances that are difficult to detect or foresee.

26Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Concentration of risk increases the potential for significant losses in our market-making, underwriting, investing and lending activities.

Concentration of risk increases the potential for significant losses in our market-making, underwriting, investing and lending activities. The number and size of such transactions may affect our results of operations in a given period. Moreover, because of concentration of risk, we may suffer losses even when economic and market conditions are generally favorable for our competitors. Disruptions in the credit markets can make it difficult to hedge these credit exposures effectively or economically. In addition, we extend large commitments as part of our credit origination activities. The

Rules adopted under the Dodd-Frank Act will require issuers of asset-backed securities and any person who organizes and initiates an asset-backed securities transaction to retain economic exposure to the asset, which couldis likely to significantly increase the cost to us of engaging in securitization activities. Our inability to reduce our credit risk by selling, syndicating or securitizing these positions, including during periods of market stress, could negatively affect our results of operations due to a decrease in the fair value of the positions, including due to the insolvency or bankruptcy of the borrower, as well as the loss of revenues associated with selling such securities or loans.

In the ordinary course of business, we may be subject to a concentration of credit risk to a particular counterparty, borrower, or issuer, including sovereign issuers, or geographic area or group of related countries, such as the EU, and a failure or downgrade of, or default by, such entity could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have anticipated. While our activities expose us to many different industries, counterparties and counterparties,countries, we routinely execute a high volume of transactions with counterparties engaged in financial services activities, including brokers and dealers, commercial banks, clearing houses, exchanges and investment funds. This has resulted in significant credit concentration with respect to these counterparties. Provisions of the Dodd-Frank Act are expected to lead to increased centralization of trading activity through particular clearing houses, central agents or exchanges, which may increase our concentration of risk with respect to these entities.

34Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

The financial services industry is both highly competitive.competitive and interrelated.

The financial services industry and all of our businesses are intensely competitive, and we expect them to remain so. We compete on the basis of a number of factors, including transaction execution, our products and services, innovation, reputation, creditworthiness and price. Over time, there has been substantial consolidation and convergence among companies in the financial services industry. This trend accelerated over recent years as a result of numerous mergers and asset acquisitions among industry participants. This trend has also hastened the globalization of the securities and other financial services markets.

As a result, we have had to commit capital to support our international operations and to execute large global transactions. To the extent we expand into new business areas and new geographic regions, we will face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to expand. Governments and regulators have recently adopted regulations, imposed taxes, adopted compensation restrictions or otherwise put forward various proposals that have or may impact our ability to conduct certain of our businesses in a cost-effective manner or at all in certain or all jurisdictions, including proposals relating to restrictions on the type of activities in which financial institutions are permitted to engage. These or other similar rules, many of which do not apply to all our U.S. or non-U.S. competitors, could impact our ability to compete effectively.

Pricing and other competitive pressures in our businesses have continued to increase, particularly in situations where some of our competitors may seek to increase market share by reducing prices. For example, in connection with investment banking and other assignments, we have experienced pressure to extend and price credit at levels that may not always fully compensate us for the risks we take.

The financial services industry is highly interrelated in that a very significant volume of transactions occur among members of that industry. Many transactions are syndicated to other financial institutions and financial institutions are often counterparties in transactions. This has led to claims by other market participants and regulators that such institutions have colluded in order to manipulate markets or market prices, including allegations that antitrust laws have been violated. While we have extensive procedures and controls that are designed to identify and prevent such activities, allegations of such activities, particularly by regulators, can have a very negative reputational impact and, if we are found to have engaged in such activities, subject us to large fines and settlements, and potentially very significant penalties, including treble damages.

Goldman Sachs 2011 Form 10-K27


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

We face enhanced risks as new business initiatives lead us to transact with a broader array of clients and counterparties and expose us to new asset classes and new markets.

A number of our recent and planned business initiatives and expansions of existing businesses may bring us into contact, directly or indirectly, with individuals and entities that are not within our traditional client and counterparty base and expose us to new asset classes and new markets. For example, we are increasingly transactingcontinue to transact business and investinginvest in new regions, including a widerwide range of emerging and growth markets. Furthermore, in a number of our businesses, including where we make markets, invest and lend, we directly or indirectly own interests in, or otherwise become affiliated with the ownership and operation of public services, such as airports, toll roads and shipping ports, as well as power generation facilities, physical commodities, mines, commodity warehouses and other commodities infrastructure components, both within and outside the United States. RecentDeteriorating market conditions may lead to an increase in opportunities to acquire distressed assets and we may determine opportunistically to increase our exposure to these types of assets.

These activities expose us to new and enhanced risks, including risks associated with dealing with governmental entities, reputational concerns arising from dealing with less sophisticated counterparties and investors, greater regulatory scrutiny of these activities, increased credit-related, market, sovereign and operational risks, risks arising from accidents or acts of terrorism, and reputational concerns with the manner in which these assets are being operated or held.

Goldman Sachs 2014 Form 10-K35


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Derivative transactions and delayed settlements may expose us to unexpected risk and potential losses.

We are party to a large number of derivative transactions, including credit derivatives. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling positions difficult. Many credit derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold the underlying security, loan or other obligation and may not be able to obtain the underlying security, loan or other obligation. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to the firm.

Derivative transactions may also involve the risk that they are not authorized or appropriate for a counterparty,

that documentation has not been properly executed, or that executed agreements may not be enforceable against the counterparty, or that obligations under such agreements may not be able to be “netted” against other obligations with such counterparty. In addition, counterparties may claim that such transactions were not appropriate or authorized.

As a signatory to the ISDA Protocol, we may not be able to exercise remedies against counterparties and, as this new regime has not yet been tested, we may suffer risks or losses that we would not have expected to suffer if we could immediately close out transactions upon a termination event. The ISDA Protocol contemplates adoption of implementing regulations by various U.S. and non-U.S. regulators, and the ISDA Protocol’s impact will depend on, among other things, how it is implemented.

Derivative contracts and other transactions, including secondary bank loan purchases and sales, entered into with third parties are not always confirmed by the counterparties or settled on a timely basis. While the transaction remains unconfirmed or during any delay in settlement, we are subject to heightened credit and operational risk and in the event of a default may find it more difficult to enforce our rights. In addition, as new and more complex derivative products are created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying contracts could arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs. The provisions of the Dodd-Frank Act requiring central clearing of credit derivatives and other OTC derivatives, or a market shift toward standardized derivatives, could reduce the risk associated with such transactions, but under certain circumstances could also limit our ability to develop derivatives that best suit the needs of our clients and ourselvesto hedge our own risks, and could adversely affect our profitability and increase our credit exposure to such platform.

Our businesses may be adversely affected if we are unable to hire and retain qualified employees.

Our performance is largely dependent on the talents and efforts of highly skilled individuals; therefore, our continued ability to compete effectively in our businesses, to manage our businesses effectively and to expand into new businesses and geographic areas depends on our ability to attract new talented and diverse employees and to retain and motivate our existing employees. Factors that affect our ability to attract and retain such employees include our compensation and benefits, and our reputation as a successful business with a culture of fairly hiring, training and promoting qualified employees.

Competition from within the financial services industry and from businesses outside the financial services industry for qualified employees has often been intense. This is particularly the case in emerging and growth markets, where we are often competing for qualified employees with entities that have a significantly greater presence or more extensive experience in the region.

Changes in law or regulation in jurisdictions in which our operations are located that affect taxes on our employees’ income, or the amount or composition of compensation, may also adversely affect our ability to hire and retain qualified employees in those jurisdictions.

 

 

2836 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

As described further in “Business — Regulation — BankingBank Holding Company Regulation” and “Regulation“ — Regulation — Compensation Practices” in Part I, Item 1 of thisthe 2014 Form 10-K, our compensation practices are subject to review by, and the standards of, the Federal Reserve Board. As a large financial and banking institution, we are subject to limitations on compensation practices (which may or may not affect our competitors) by the Federal Reserve Board, the FSA,PRA, the FCA, the FDIC orand other regulators worldwide. These limitations, including any imposed by or as a result of future legislation or regulation, may require us to alter our compensation practices in ways that could adversely affect our ability to attract and retain talented employees. We may also be required to make additional disclosure with respect to the compensation of employees, including non-executive officers, in a manner that directly or indirectly results in the identity of such employees and their compensation being made public. Any such additional public disclosure of employee compensation may also make it difficult to attract and retain talented employees.

Our businesses and those of our clients are subject to extensive and pervasive regulation around the world.

As a participant in the financial services industry and a bank holding company, we are subject to extensive regulation in jurisdictions around the world. We face the risk of significant intervention by regulatory and taxing authorities in all jurisdictions in which we conduct our businesses. Among other things, as a result of regulators enforcing existing laws and regulations, we could be fined, prohibited from engaging in some of our business activities, subject to limitations or conditions on our business activities or subjected to new or substantially higher taxes or other governmental charges in connection with the conduct of our business or with respect to our employees.

There is also the risk that new laws or regulations or changes in enforcement of existing laws or regulations applicable to our businesses or those of our clients, including capital, liquidity and margin requirements, tax burdens and compensation restrictions, could be imposed on a limited subset of financial institutions (either based on size, activities, geography or other criteria), which may adversely affect our ability to compete effectively with other institutions that are not affected in the same way. In addition, regulation imposed on financial institutions or market participants generally, such as taxes on financial transactions, could adversely impact levels of market activity more broadly, and thus impact our businesses.

The impact of such developments could impact our profitability in the affected jurisdictions, or even make it uneconomic for us to continue to conduct all or certain of our businesses in such jurisdictions, or could cause us to incur significant costs associated with changing our business practices, restructuring our businesses, moving all or certain of our businesses and our employees to other locations or complying with applicable capital requirements, including liquidating assets or raising capital in a manner that adversely increases our funding costs or otherwise adversely affects our shareholders and creditors.

U.S. and non-U.S. regulatory developments, in particular the Dodd-Frank Act and Basel 3, will significantly alter the regulatory framework within which we operate and may adversely affect our competitive position and profitability. Among the aspects of the Dodd-Frank Act most likely to affect our businesses are: the prohibition on proprietary trading and the limitation on the sponsorship of, and investment in, hedge funds and private equity funds by bank holding companies and other banking entities; increased capital requirements; increased regulation of and restrictions on over-the-counter derivatives markets and transactions; limitations on incentive compensation; the prohibition on certain swaps-based activities through an insured depository institution; limitations on affiliate transactions; the establishment and annual updating of a resolution plan; the creation of a new systemic oversight body, the FSOC; increased deposit insurance assessments; and increased standards of care for broker-dealers in dealing with clients. The implementation of higher capital requirements, the liquidity coverage ratio and the net stable funding ratio under Basel 3 may adversely affect our profitability and competitive position, particularly if the requirements do not apply, or do not apply equally, to our competitors or are not implemented uniformly across jurisdictions.

Goldman Sachs 2011 Form 10-K29


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

In addition, the attorneys general of a number of states have filed lawsuits against financial institutions alleging, among other things, that the centralized system of recording mortgages and designating a common entity as the mortgage holder is in violation of state law, and other authorities have indicated that they are contemplating similar actions. If this system and related practices are deemed invalid, it may call into question the validity or enforceability of certain mortgage-related obligations under securitizations and other transactions in which we have participated, negatively impact the market for mortgages and mortgage-related products and our mortgage-related activities, or subject us to additional costs or penalties.

For a discussion of the extensive regulation to which our businesses are subject, see “Business — Regulation” in Part I, Item 1 of this Form 10-K.

We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.

Governmental scrutiny from regulators, legislative bodies and law enforcement agencies with respect to matters relating to compensation, our business practices, our past actions and other matters has increased dramatically in the past several years. The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or other government officials. Press coverage and other public statements that assert some form of wrongdoing often result in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits.

Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, is time consumingtime-consuming and expensive and can divert the time and effort of our senior management from our business. Penalties and fines sought by regulatory authorities have increased substantially over the last several years, and certain regulators have been more likely in recent years to commence enforcement actions or to advance or support legislation targeted at the financial services industry. Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.

Certain regulators, including the SEC, have announced policies that make it more likely that they will seek an admission of wrongdoing as part of any settlement of a matter brought by them against a regulated entity or individual, which could lead to increased exposure to civil litigation and could adversely affect our reputation and ability to do business in certain jurisdictions with so-called “bad actor” disqualification laws and could have other negative effects.

A failure in our operational systems or infrastructure, or those of third parties, as well as cyber attacks and human error, could impair our liquidity, disrupt our businesses, result in the disclosure of confidential information, damage our reputation and cause losses.

Our businesses are highly dependent on our ability to process and monitor, on a daily basis, a very large number of transactions, many of which are highly complex and occur at very high volumes and frequencies, across numerous and diverse markets in many currencies. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards.

As our client base, and our geographical reach expands, and the volume, speed, frequency and complexity of transactions, especially electronic transactions (as well as the requirements to report such transactions on a real-time basis to clients, regulators and exchanges) increases, developing and maintaining our operational systems and infrastructure becomes increasingly challenging. more challenging, and the risk of systems or human error in connection with such transactions increases, as well as the potential consequences of such errors due to the speed and volume of transactions involved and the potential difficulty associated with discovering such errors quickly enough to limit the resulting consequences.

Our financial, accounting, data processing or other operational systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, adversely affecting our ability to process these transactions or provide these services. We must continuously update these systems to support our operations and growth and to respond to changes in regulations and markets. This updating entailsmarkets, and invest heavily in systemic controls and training to ensure that such transactions do not violate applicable rules and regulations or, due to errors in processing such transactions, adversely affect markets, our clients and counterparties or the firm.

Goldman Sachs 2014 Form 10-K37


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Systems enhancements and updates, as well as the requisite training, entail significant costs and createscreate risks associated with implementing new systems and integrating them with existing ones.

In addition, we also face the risk of operational failure, termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediaries we use to facilitate our securities and derivatives transactions, and as our interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.

30Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

In recent years, there has been significant consolidation among clearing agents, exchanges and clearing houses and an increasing number of derivative transactions are now or in the near future will be cleared on exchanges, which has increased our exposure to operational failure, termination or capacity constraints of the particular financial intermediaries that we use and could affect our ability to find adequate and cost-effective alternatives in the event of any such failure, termination or constraint. Industry consolidation, whether among market participants or financial intermediaries, increases the risk of operational failure as disparate complex systems need to be integrated, often on an accelerated basis.

Furthermore, the interconnectivity of multiple financial institutions with central agents, exchanges and clearing houses, and the increased centrality of these entities, increases the risk that an operational failure at one institution or entity may cause an industry-wide operational failure that could materially impact our ability to conduct business. Any such failure, termination or constraint could adversely affect our ability to effect transactions, service our clients, manage our exposure to risk or expand our businesses or result in financial loss or liability to our clients, impairment of our liquidity, disruption of our businesses, regulatory intervention or reputational damage.

Despite the resiliency plans and facilities we have in place, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which we are located. This may include a disruption involving electrical, satellite, undersea cable or other communications, internet, transportation or other services facilities used by us or third parties with which we conduct business. These disruptions may occur as a result of events that affect only our buildings or systems or those of such third parties, or as a result of events with a broader impact globally, regionally or in the cities where those buildings or systems are located.located, including, but not limited, to natural disasters, war, civil unrest, economic or political developments, pandemics and weather events.

Nearly all of our employees in our primary locations, including the New York metropolitan area, London, Bangalore,Bengaluru, Hong Kong, Tokyo and Salt Lake City, work in close proximity to one another, in one or more buildings. Notwithstanding our efforts to maintain business continuity, given that our headquarters and the largest concentration of our employees are in the New York metropolitan area and our two principal office buildings in the New York area both are located on the waterfront of the Hudson River, depending on the intensity and longevity of the event, a catastrophic event impacting our New York metropolitan area offices, including a terrorist attack, extreme weather event or other hostile or catastrophic event, could very negatively affect our

business. If a disruption occurs in one location and our employees in that location are unable to occupy our offices or communicate with or travel to other locations, our ability to service and interact with our clients may suffer, and we may not be able to successfully implement contingency plans that depend on communication or travel.

Our operations rely on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. There have been several recent highly publicized cases involving financial services and consumer-based companies reporting the unauthorized disclosure of client or customer information, as well as cyber attacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure to follow procedures by employees or contractors or as a result of actions by third-parties, including actions by foreign governments.

38Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

We are regularly the target of attempted cyber attacks, including denial-of-service attacks, and must continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. In addition, due to our interconnectivity with third-party vendors, central agents, exchanges, clearing houses and other financial institutions, we could be adversely impacted if any of them is subject to a successful cyber attack or other information security event. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize our or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our clients’, our counterparties’ or third parties’ operations, which could impact their ability to transact with us or otherwise result in significant losses or reputational damage.

The increased use of mobile and cloud technologies can heighten these and other operational risks. We expect to expend significant additional resources on an ongoing basis to modify our protective measures and to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us.

We routinely transmit and receive personal, confidential and proprietary information by email and other electronic means. We have discussed and worked with clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and preventprotect against cyber attacks, but we do not have, and may be unable to put in place, secure capabilities with all of our clients, vendors, service providers, counterparties and other third parties and we may not be able to ensure that these third parties have appropriate controls in place to protect the confidentiality of the information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a client, vendor, service provider, counterparty or other third party could result in legal liability, regulatory action and reputational harm.

Notwithstanding the proliferation of technology and technology-based risk and control systems, our businesses ultimately rely on human beings as our greatest resource, and from time-to-time, they make mistakes that are not always caught immediately by our technological processes or by our other procedures which are intended to prevent and detect such errors. These can include calculation errors, mistakes in addressing emails, errors in software development or implementation, or simple errors in judgment. We strive to eliminate such human errors through training, supervision, technology and by redundant processes and controls. Human errors, even if promptly discovered and remediated, can result in material losses and liabilities for the firm.

Goldman Sachs 2011 Form 10-K31


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause us significant reputational harm, which in turn could seriously harm our business prospects.

We face significant legal risks in our businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. See “Legal Proceedings”Note 27 to the consolidated financial statements in Part I,II, Item 38 of thisthe 2014 Form 10-K for a discussion of certain legal proceedings in which we are involved.involved and Note 18 to the consolidated financial statements in Part II, Item 8 of the 2014 Form 10-K for information regarding certain mortgage-related contingencies. Our experience has been that legal claims by customers and clients increase in a market downturn and that employment-related claims increase following periods in which we have reduced our staff. Additionally, governmental entities are plaintiffs in certain of the legal proceedings in which we are involved, and we may face future actions or claims by the same or other governmental entities.

Goldman Sachs 2014 Form 10-K39


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Recently, significant settlements by several large financial institutions with governmental entities have been publicly announced. The trend of large settlements with governmental entities may adversely affect the outcomes for other financial institutions in similar actions, especially where governmental officials have announced that the large settlements will be used as the basis or a template for other settlements. The uncertain regulatory enforcement environment makes it difficult to estimate probable losses, which can lead to substantial disparities between legal reserves and subsequent actual settlements or penalties. Further, the SEC has announced a policy of seeking admissions of liability in certain settled cases, which could adversely impact the defense of private litigation or result in penalties or limitations in business under “bad actor” statutes in jurisdictions in which we operate.

The growth of electronic trading and the introduction of new trading technology may adversely affect our business and may increase competition.

Technology is fundamental to our business and our industry. The growth of electronic trading and the introduction of new technologies is changing our businesses and presenting us with new challenges. Securities, futures and options transactions are increasingly occurring electronically, both on our own systems and through other alternative trading systems, and it appears that the trend toward alternative trading systems will continue and probably accelerate. Some of these alternative trading systems compete with us, particularly our exchange-based market-making activities, and we may experience continued competitive pressures in these and other areas. In addition, the increased use by our clients of low-cost electronic trading systems and direct electronic access to trading markets could cause a reduction in commissions and spreads. As our clients increasingly use our systems to trade directly in the markets, we may incur liabilities as a result of their use of our order routing and execution infrastructure. We have invested significant resources into the development of electronic trading systems and expect to continue to do so, but there is no assurance that the revenues generated by these systems will yield an adequate return on our investment, particularly given the relatively lower commissions arising from electronic trades.

Our commodities activities, particularly our power generation interests and our physical commodities activities, subject us to extensive regulation and involve certain potential catastrophic events andrisks, including environmental, reputational and other risks that may expose us to significant liabilities and costs.

We engage in, orAs part of our commodities business, we purchase and sell certain physical commodities and arrange for their storage and transport. In our investing and lending businesses, we invest in entities that engage in the production, storage, transportation, marketing and trading of numerous commodities. The commodities includinginvolved in these activities and investments may include crude oil, oil products, natural gas, electric power, agricultural products, metals (base and precious), minerals (including unenriched uranium), emission credits, coal, freight, liquefied natural gas and related products and indices.

These activities subject us and/or the entities in which we invest to extensive and evolving federal, state and local energy, environmental, antitrust and other governmental laws and regulations worldwide, including environmental laws and regulations relating to, among others, air quality, water quality, waste management, transportation of hazardous substances, natural resources, site remediation and health and safety. Additionally, rising climate change concerns may lead to additional regulation that could increase the operating costs and profitability of our investments.

WeThere may incurbe substantial costs in complying with current or future laws and regulations relating to our commodities-related activities and investments, particularly electric power generation, transportation and storage of physical commodities and wholesale sales and trading of electricity and natural gas.investments. Compliance with these laws and regulations could require us to commit significant commitments of capital toward environmental monitoring, installation of pollution control equipment, renovation of storage facilities or transport vessels, payment of emission fees and carbon or other taxes, and application for, and holding of, permits and licenses.

 

 

3240 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Our commodities-relatedCommodities involved in our intermediation activities and investments are also subject to the risk of unforeseen or catastrophic events, many of which are likely to be outside of our control, including those arising from the breakdown or failure of power generation equipment, transmission lines, transport vessels, storage facilities or other equipment or processes or other mechanical malfunctions, fires, leaks, spills or release of hazardous substances, performance below expected levels of output or efficiency, terrorist attacks, extreme weather events or other natural disasters or other hostile or catastrophic events. In addition, we rely on third-party suppliers or service providers to perform their contractual obligations and any failure on their part, including the failure to obtain raw materials at reasonable prices or to safely transport or store commodities, could adversely affect our activities.expose us to costs or losses. Also, while we seek to insure against potential risks, we may not be able to obtain insurance to cover some of these risks and the insurance that we have may be inadequate to cover our losses.

The occurrence of any of such events may prevent us from performing under our agreements with clients, may impair our operations or financial results and may result in litigation, regulatory action, negative publicity or other reputational harm.

We may also be required to divest or discontinue certain of these activities for regulatory or legal reasons. If that occurs, the firm may receive a value that is less than the then carrying value, as the firm may be unable to exit these activities in an orderly transaction.

In conducting our businesses around the world, we are subject to political, economic, legal, operational and other risks that are inherent in operating in many countries.

In conducting our businesses and maintaining and supporting our global operations, we are subject to risks of possible nationalization, expropriation, price controls, capital controls, exchange controls and other restrictive governmental actions, as well as the outbreak of hostilities or acts of terrorism. For example, there has recently been significant conflict between Russia and Ukraine, and sanctions have been imposed by the U.S. and EU on certain individuals and companies in Russia. In many countries, the laws and regulations applicable to the securities and financial services industries and many of the transactions in which we are involved are uncertain and evolving, and it may be difficult for us to determine the exact requirements of local laws in every market. Any determination by local regulators that we have not acted in compliance with the application of local laws in a particular market or our failure to develop effective working relationships with local regulators could have a significant and negative effect not only on our businesses in that market but also on our reputation generally. We are also subject to the enhanced risk that transactions we structure might not be legally enforceable in all cases.

Our businesses and operations are increasingly expanding into new regions throughout the world, including emerging and growth markets, and we expect this trend to continue. Various emerging and growth market countries have experienced severe economic and financial disruptions, including significant devaluations of their currencies, defaults or threatened defaults on sovereign debt, capital and currency exchange controls, and low or negative growth rates in their economies, as well as military activity, civil unrest or acts of terrorism. The possible effects of any of these conditions include an adverse impact on our businesses and increased volatility in financial markets generally.

Goldman Sachs 2014 Form 10-K41


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

While business and other practices throughout the world differ, our principal legal entities are subject in their operations worldwide to rules and regulations relating to corrupt and illegal payments, hiring practices and money laundering, as well as laws relating to doing business with certain individuals, groups and countries, such as the U.S. Foreign Corrupt Practices Act, the USA PATRIOT Act and U.K. Bribery Act. While we have invested and continue to invest significant resources in training and in compliance monitoring, the geographical diversity of our operations, employees, clients and customers, as well as the vendors and other third parties that we deal with, greatly increases the risk that we may be found in violation of such rules or regulations and any such violation could subject us to significant penalties or adversely affect our reputation.

In addition, there have been a number of highly publicized cases around the world, involving actual or alleged fraud or other misconduct by employees in the financial services industry in recent years, and we run the risk that employee misconduct could occur. This misconduct has included and may include in the future the theft of proprietary information, including proprietary software. It is not always possible to deter or prevent employee misconduct and the precautions we take to prevent and detect this activity have not been and may not be effective in all cases.

We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.

The occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as Ebola, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks, extreme terrestrial or solar weather events or other natural disasters, could create economic and financial disruptions, and could lead to operational difficulties (including travel limitations) that could impair our ability to manage our businesses.

 

 

42 Goldman Sachs 20112014 Form 10-K 33


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

In our life and our property catastrophe insurance activities, losses related to unforeseen or catastrophic events could significantly exceed the related reserves and reinsurance proceeds.

Item 1B.    Unresolved Staff Comments

There are no material unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.

Item 2.    Properties

Our principal executive offices are located at 200 West Street, New York, New York and comprise approximately 2.1 million gross square feet. The building is located on a parcel leased from Battery Park City Authority pursuant to a ground lease. Under the lease, Battery Park City Authority holds title to all improvements, including the office building, subject to Goldman Sachs’ right of exclusive possession and use until June 2069, the expiration date of the lease. Under the terms of the ground lease, we made a lump sum ground rent payment in June 2007 of $161 million for rent through the term of the lease.

We have offices at 30 Hudson Street in Jersey City, New Jersey, which we own and which include approximately 1.6 million gross square feet of office space, and we own over 700,000 square feet of additional commercial space spread among four locations in New York and New Jersey. We lease approximately 1.1 million rentable square feet in the New York Metropolitan Area.space.

We have additional offices and commercial space in the U.S.United States and elsewhere in the Americas, which together comprise approximately 2.22.5 million rentable square feet of leased and owned space.

In Europe, the Middle East and Africa, we have offices that total approximately 2.01.5 million rentable square feet of leased and owned space. Our European headquarters is located in London at Peterborough Court, pursuant to a lease expiring in 2026. In total, we leasehave offices with approximately 1.61.1 million rentable square feet in London, through various leases, relating to various properties.

In Asia (including India), Australia and New Zealand, we have offices that totalwith approximately 2.11.9 million rentable square feet. Our headquarters in this region are in Tokyo, at the Roppongi Hills Mori Tower, and in Hong Kong, at the Cheung Kong Center. In Tokyo,Japan, we currently leasehave offices with approximately 400,000 rentable220,000 square feet, the majority of which have leases that will expire in 2018. In Hong Kong, we currently leasehave offices with approximately 340,000 rentable315,000 square feet, under lease agreements, the majority of which have leases that will expire in 2017.

In the preceding paragraphs, square footage figures are provided only for properties that are used in the operation of our businesses.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Off-Balance-Sheet Arrangements and Contractual Obligations — Contractual Obligations” in Part II, Item 7 of thisthe 2014 Form 10-K for a discussion of exit costs we may incur in the future to the extent we (i) reduce our space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate and, consequently, dispose of existing space that had been held for potential growth.

Item 3.    Legal Proceedings

We are involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of our businesses. Many of these proceedings are at preliminaryin early stages, and many of these cases seek an indeterminate amount of damages. However, we believe, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on our financial condition, but may be material to our operating results for any particular period, depending, in part, upon the operating results for such period. Given the range of litigation and investigations presently under way, our litigation expenses can be expected to remain high. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Use of Estimates” in Part II, Item 7 of thisthe 2014 Form 10-K. See Note 27 to the consolidated financial statements in Part II, Item 8 of thisthe 2014 Form 10-K for information onabout certain judicial, regulatory and legal proceedings.

Item 4.    Mine Safety Disclosures

Not applicable.

 

 

34 Goldman Sachs 20112014 Form 10-K 43


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Executive Officers of The Goldman Sachs Group, Inc.

Executive Officers of The Goldman Sachs Group, Inc.

 

Set forth below are the name, age, present title, principal occupation and certain biographical information as of February 1, 2012 for our executive officers. All of our executive officers have been appointed by and serve at the pleasure of our board of directors.

Lloyd C. Blankfein, 5760

Mr. Blankfein has been our Chairman and Chief Executive Officer since June 2006, and a director since April 2003. Previously, he had been our President and Chief Operating Officer since January 2004. Prior to that, from April 2002 until January 2004, he was a Vice Chairman of Goldman Sachs, with management responsibility for Goldman Sachs’ Fixed Income, Currency and Commodities Division (FICC) and Equities Division (Equities). Prior to becoming a Vice Chairman, he had served as co-head of FICC since its formation in 1997. From 1994 to 1997, he headed or co-headed the Currency and Commodities Division. Mr. Blankfein is not currently on the board of any public company other than Goldman Sachs. He is affiliated with certain non-profit organizations, including as a member of the Dean’s Advisory Board at Harvard Law School, the Dean’s Council at Harvard University and the Advisory Board of the Tsinghua University School of Economics and Management, an overseer of the Weill Medical College of Cornell University, and a member of the Board of Directors of the Partnership for New York City.

Alan M. Cohen, 6164

Mr. Cohen has been an Executive Vice President of Goldman Sachs and our Global Head of Compliance since February 2004. From 1991 until January 2004, he was a partner in the law firm of O’Melveny & Myers LLP. He is affiliated with certain non-profit organizations, including as a board member of the New York Stem Cell Foundation.

Gary D. Cohn, 5154

Mr. Cohn has been our President and Chief Operating Officer (or Co-Chief Operating Officer) and a director since June 2006. From December 2003 to June 2006, he was the co-head of our global Securities businesses, having been the co-head of FICC since September 2002. Prior to that, Mr. Cohn served as co-chief operating officer of FICC after having been responsible for Commodities and a number of other FICC businesses from 1999 to 2002. He was the head of Commodities from 1996 to 1999. Mr. Cohn is not currently on the board of any public company other than Goldman Sachs. He is affiliated with certain non-profit organizations, including NYU Hospital, NYU Medical School, the Harlem Children’s Zone and American University.

Edith W. Cooper, 5053

Ms. Cooper has been an Executive Vice President of Goldman Sachs since April 2011 and our Global Head of Human Capital Management since March 2008. From 2002 to 2008, she served in various positions at the firm, including sales management within the Securities Division. In 2002, she was responsible for the firm’s Futures business and, prior to that, she was co-head of the commodities business in Europe and Asia.

J. Michael Evans, 54

Mr. Evans has been the global head of Growth Markets since January 2011, a Vice Chairman of Goldman Sachs since February 2008 and chairman of Goldman Sachs Asia since 2004. Prior to becoming a Vice Chairman, he had served as global co-head of Goldman Sachs’ securities business since 2003. Previously, he had been co-head of the Equities Division since 2001. Mr. Evans serves as a trustee of the Bendheim Center for Finance at Princeton University, serves as Chairman of the Board of Right to Play, USA, is a member of the Board of City Harvest and is a trustee of The Asia Society.

Goldman Sachs 2011 Form 10-K35


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Gregory K. Palm, 6366

Mr. Palm has been an Executive Vice President of Goldman Sachs since May 1999, and our General Counsel and head or co-head of the Legal Department since May 1992.

John F.W. Rogers, 5558

Mr. Rogers has been an Executive Vice President of Goldman Sachs since April 2011 and Chief of Staff and Secretary to the Board of Directors of Goldman Sachs since NovemberDecember 2001. He joined the firm in 1994 in the Fixed Income division and served in various positions from 1994 to 2001. Prior to joining Goldman Sachs, he was a senior fellow at the Baker Institute at Rice University, having served as Under Secretary of State for Management at the U.S. Department of State from 1991 to 1993. From 1988 to 1991, he was

Harvey M. Schwartz, 50

Mr. Schwartz has been an Executive Vice President of the Oliver Carr CompanyGoldman Sachs and priorour Chief Financial Officer since January 2013. From February 2008 to that, Assistant SecretaryJanuary 2013, Mr. Schwartz was global co-head of the Treasury from 1985 to 1987 and Assistant to the President for Management and Administration from 1981 to 1985. Securities Division.

Mark Schwartz, 60

Mr. Rogers is chairmanSchwartz has been a Vice Chairman of the boards of the Goldman Sachs Foundation and Chairman of Goldman Sachs Gives.Asia Pacific since rejoining the firm in June 2012. From 2006 to June 2012, he was Chairman of MissionPoint Capital Partners, an investment firm he co-founded.

Michael S. Sherwood, 4649

Mr. Sherwood has been a Vice Chairman of Goldman Sachs since February 2008 and co-chief executive officer of Goldman Sachs International since 2005. Prior to becoming a Vice Chairman, he had served as global co-head of Goldman Sachs’ securities business since 2003. Prior to that, he had been head of the Fixed Income, Currency and Commodities Division in Europe since 2001.

David A. Viniar, 56

Mr. Viniar has been an Executive Vice President of Goldman Sachs and our Chief Financial Officer since May 1999. He has been the head of Operations, Technology, Finance and Services Division since December 2002. He was head of the Finance Division and co-head of Credit Risk Management and Advisory and Firmwide Risk from December 2001 to December 2002. Mr. Viniar was co-head of Operations, Finance and Resources from March 1999 to December 2001. He was Chief Financial Officer of The Goldman Sachs Group, L.P. from March 1999 to May 1999. From July 1998 until March 1999, he was Deputy Chief Financial Officer and from 1994 until July 1998, he was head of Finance, withassumed responsibility for Controllerscoordinating the firm’s business and Treasury. From 1992 to 1994, he was head of Treasury and prior to that wasactivities around Growth Markets in the Structured Finance Department of Investment Banking. He also serves on the Board of Trustees of Union College.November 2013.

John S. Weinberg, 5458

Mr. Weinberg has been a Vice Chairman of Goldman Sachs since June 2006. He has beencurrently focuses on client development and initiatives across our major divisions. He was a co-head of Goldman Sachs’ Investment Banking Division sincefrom December 2002. From January 2002 to December 2002, he was co-head of the Investment Banking Division in the Americas. Prior to that, he served as co-head of the Investment Banking Services Department since 1997. He is affiliated with certain non-profit organizations, including as a trustee of New York-Presbyterian Hospital and the Brunswick School, and as a member of the Board of Directors of The Steppingstone Foundation. Mr. Weinberg also serves on the Visiting Committee for Harvard Business School.2014.

 

 

3644 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The principal market on which our common stock is traded is the NYSE. Information relating to the high and low sales prices per share of our common stock, as reported by the Consolidated Tape Association, for each full quarterly period during fiscal 20102012, 2013 and 20112014 is set forth under the heading “Supplemental Financial Information — Common Stock Price Range” in Part II, Item 8 of thisthe 2014 Form 10-K. As of February 17, 2012,6, 2015, there were 13,34010,230 holders of record of our common stock.

During fiscal 20102013 and fiscal 2011,2014, dividends of $0.35$0.50 per common share were declared on January 19, 2010,15, 2013, April 19, 2010,15, 2013 and July 19, 2010,15, 2013, dividends of $0.55 per common share were declared on October 18, 2010,16, 2013, January 18, 2011,15, 2014, April 18, 2011,16, 2014 and July 18, 201114, 2014 and a dividend of $0.60 per common share was declared on October 17, 2011.15, 2014. The holders of our common stock share proportionately on a per share basis in all dividends and other distributions on common stock declared by the Board of Directors of Group Inc. (Board).

The declaration of dividends by Goldman SachsGroup Inc. is subject to the discretion of our Board. Our Board will take into account such matters as general business conditions, our financial results, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by us to our shareholders or by our subsidiaries to us, the effect on our debt ratings and such other factors as our Board may deem relevant. See “Business — Regulation” in Part I, Item 1 of thisthe 2014 Form 10-K for a discussion of potential regulatory limitations on our receipt of funds from our regulated subsidiaries and our payment of dividends to shareholders of Group Inc.

The table below sets forth the information with respect to purchases made by or on behalf of Group Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the fourth quarter of our fiscal year ended December 2011.2014.

 

Period

  Total Number of
Shares
Purchased
   Average Price
Paid per
Share
   Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs 1
   Maximum Number of
Shares That May Yet Be
Purchased Under the
Plans or Programs 1
 

Month #1

(October 1, 2011 to October 31, 2011)

   1,700,868    $105.83     1,700,868     71,038,522  

Month #2

(November 1, 2011 to November 30, 2011)

   5,219,606    $96.59     5,219,606     65,818,916  

Month #3

(December 1, 2011 to December 31, 2011)

   2,295,716    $97.58     2,295,577     63,523,339  

Total

   9,216,190          9,216,051       
   
 
 
 
Total
Number
of Shares
Purchased
  
  
  
  
 Average Price Paid Per Share  

 

 
 
 
 
 
 
 

Total

Number

of Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs

  

  

  
  
  
  
  
  
 1 

  

 

 
 
 
 
 
 
 

Maximum

Number

of Shares
That May
Yet Be
Purchased
Under the
Plans or
Programs

  

  

  
  
  
  
  
  
 1 

Month #1

(October 1, 2014 to

October 31, 2014)

  1,759,498   $181.86  1,759,498    30,235,389  
  
Month #2

(November 1, 2014 to

November 30, 2014)

  2,728,586   189.98  2,728,586    27,506,803  
  
Month #3

(December 1, 2014 to

December 31, 2014)

  2,156,373 2  190.95  2,155,759    25,351,044  
Total  6,644,457      6,643,843      

 

1.

On March 21, 2000, we announced that our Board had approved a repurchase program, pursuant to which up to 15 million shares of our common stock may be repurchased. This repurchase program was increased by an aggregate of 325430 million shares by resolutions of our Board adopted onfrom June 18, 2001 March 18, 2002, November 20, 2002, January 30, 2004, January 25, 2005, September 16, 2005, September 11, 2006, December 17, 2007 and July 18, 2011.through April 2013. We use our share repurchase program to help maintain the appropriate level of common equity and to substantially offset increases in share count over time resulting from employee share-based compensation.equity. The repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), the amounts and timing of which are determined primarily by the firm’s current and projected capital position, (i.e., comparisons of our desired level and composition of capital to our actual level and composition of capital) and its issuance of shares resulting from employee share-based compensation, but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock. The repurchase program has no set expiration or termination date. Any repurchase of ourPrior to repurchasing common stock, requires approval bythe firm must receive confirmation that the Board of Governors of the Federal Reserve Board.System does not object to such capital actions.

 

2.

Includes 614 shares remitted by employees to satisfy minimum statutory withholding taxes on equity-based awards that were delivered to employees during the period.

Information relating to compensation plans under which our equity securities are authorized for issuance is presented in Part III, Item 12 of thisthe 2014 Form 10-K.

Item 6.    Selected Financial Data

The Selected Financial Data table is set forth under Part II, Item 8 of thisthe 2014 Form 10-K.

 

 

 Goldman Sachs 20112014 Form 10-K 3745


Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

INDEX

 

   Page No. 

Introduction

  3947
 

Executive Overview

  4048
 

Business Environment

  4349
 

Critical Accounting Policies

  4550

Recent Accounting Developments

53
 

Use of Estimates

  4953
 

Results of Operations

  5054
 

Balance Sheet and Funding Sources

  67  

Equity Capital Management and Regulatory Capital

  74

Regulatory Developments

81
 

Off-Balance-Sheet Arrangements and Contractual Obligations

  7983
 

Risk Management and Risk Factors

85

Overview and Structure of Risk Management

  8286
 

Liquidity Risk Management

  8691
 

Market Risk Management

93

Credit Risk Management

  98  

OperationalCredit Risk Management

  104  

Recent Accounting DevelopmentsOperational Risk Management

  105112
 

Certain Risk Factors That May  Affect Our Businesses

  105113  

 

3846 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Introduction

 

The Goldman Sachs Group, Inc. (Group Inc.) is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

We report our activities in four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. See “Results of Operations” below for further information about our business segments.

When we use the terms “Goldman Sachs,” “the firm,” “we,” “us” and “our,” we mean Group Inc., a Delaware corporation, and its consolidated subsidiaries.

References to “this“the 2014 Form 10-K” are to our Annual Report on Form 10-K for the year ended December 31, 2011.2014. All references to 2011, 2010“the consolidated financial statements” or “Supplemental Financial Information” are to Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2014. All references to 2014, 2013 and 20092012 refer to our years ended, or the dates, as the context requires, December 31, 2011,2014, December 31, 20102013 and December 31, 2009,2012, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

In this discussion and analysis of our financial condition and results of operations, we have included information that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. This information includes statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, and may also include statements about the effect of changes to the capital and leverage rules applicable to banks and bank holding companies, the impact of the Dodd-Frank Act on our businesses and operations, and various legal proceedings or mortgage-related contingencies as set forth under “Legal Proceedings” and “Certain Mortgage-Related Contingencies” in Notes 27 and 18, respectively, to the consolidated financial statements, as well as statements about the results of our Dodd-Frank Act and firm stress tests, statements about the objectives and effectiveness of our business continuity plan, information security program, risk management and liquidity policies, statements about trends in or growth opportunities for our businesses, statements about our future status, activities or reporting under U.S. or non-U.S. banking and financial regulation, and statements about our investment banking transaction backlog.

By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in these forward-looking statements include, among others, those discussed below under “Certain Risk Factors That May Affect Our Businesses” as well as “Risk Factors” in Part I, Item 1A of thisthe 2014 Form 10-K and “Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995” in Part I, Item 1 of thisthe 2014 Form 10-K.

 

 

 Goldman Sachs 20112014 Form 10-K 3947


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Executive Overview

2014 versus 2013.The firm generated net earnings of $4.44$8.48 billion for 2011, compared with $8.35 billion and $13.39 billion for 2010 and 2009, respectively. Our diluted earnings per common share were $4.51of $17.07 for the year ended December 2011,2014, an increase of 5% and 10%, respectively, compared with $13.181$8.04 billion and $15.46 per share for the year ended December 2010 and $22.13 for the year ended December 2009.2013. Return on average common shareholders’ equity (ROE)2 was 3.7%11.2% for 2011,2014, compared with 11.5%111.0% for 2010 and 22.5% for 2009. During 2011, we redeemed the 50,000 shares of our 10% Cumulative Perpetual Preferred Stock, Series G (Series G Preferred Stock) held by Berkshire Hathaway Inc. and certain of its subsidiaries (collectively, Berkshire Hathaway). Excluding the impact of the $1.64 billion preferred dividend related to this redemption, diluted earnings per common share were $7.463 and ROE was 5.9%3 for 2011.

2013. Book value per common share was $130.31$163.01 and tangible book value per common share41 was $119.72$153.79 as of December 2011,2014, both approximately 1%7% higher compared with the end of 2010.2013.

Net revenues were $34.53 billion for 2014, essentially unchanged compared with 2013, as higher net revenues in both Investment Management and Investment Banking, reflecting strong performances in these businesses, were largely offset by slightly lower net revenues in both Institutional Client Services and Investing & Lending.

Operating expenses were $22.17 billion for 2014, essentially unchanged compared with 2013. Non-compensation expenses were slightly lower compared with the prior year, primarily reflecting lower net provisions for litigation and regulatory proceedings, while compensation and benefits expenses were essentially unchanged.

During 2014, as part of a firmwide initiative to reduce activities with lower returns, total assets were reduced by $55 billion to $856 billion as of December 2014, while pre-tax margin improved approximately 150 basis points to 35.8%.

We also maintained strong capital ratios and liquidity, while returning $6.52 billion of capital to shareholders during 2014. During the year, the firm repurchased 47.031.8 million shares of its common stock for a total cost of $6.04$5.47 billion and paid common dividends of $1.05 billion. Our Common Equity Tier 1 capital ratio under Basel 1 was 13.8% and our Tier 1 common ratio under Basel 152 was 12.1%12.2% as of December 2011.2014, under the Basel III Advanced approach reflecting the applicable transitional provisions. In addition, our global core liquid assets 3were $183 billion as of December 2014.

20112013 versus 2010.2012. The firm generated net earnings of $8.04 billion and diluted earnings per common share of $15.46 for 2013, an increase of 8% and 9%, respectively, compared with $7.48 billion and $14.13 per share for 2012. ROE was 11.0% for 2013, compared with 10.7% for 2012. Book value per common share increased approximately 5% to $152.48 and tangible book value per common share 1 increased approximately 7% to $143.11 compared with the end of 2012.

Net revenues of $28.81were $34.21 billion for 2011. These results reflected2013, essentially unchanged compared with 2012, as significantly lower net revenues in Investing & Lending and Institutional Client Services, as well as lowerhigher net revenues in Investment Banking compared with 2010. Netand higher net revenues in both Investing & Lending and Investment Management were essentially unchanged compared with 2010.

An overview of net revenues for each of our business segments is provided below.

Investment Banking

The decrease in Investment Banking primarily reflected lower net revenues in our Underwriting business. Net revenues in equity underwriting were significantly lower than 2010, principally due to a decline in industry-wide activity. Net revenues in debt underwriting were essentially unchanged compared with 2010. Net revenues in Financial Advisory decreased slightly compared with 2010.

Institutional Client Services

The decrease in Institutional Client Services compared with 2010 reflected significantly lower net revenues in Fixed Income, Currency and Commodities Client Execution. Although activity levels in Fixed Income, Currency and Commodities Client Execution during 2011 were generally consistent with 2010 levels, and results were solid during the first quarter of 2011, the environment during the remainder of 2011 was characterized by broad market concerns and uncertainty, resulting in volatile markets and significantly wider credit spreads, which contributed to difficult market-making conditions and led to reductions in risk by us and our clients. As a result of these conditions, net revenues across the franchise were lower, including significant declines in mortgages and credit products, compared with 2010.

Net revenues in Equities were slightly higher compared with 2010. During 2011, average volatility levels increased and equity prices in Europe and Asia declined significantly, particularly during the third quarter. The increase in net revenues reflected higher commissions and fees, primarily due to higher transaction volumes, particularly during the third quarter of 2011. In addition, net revenues in securities services increased compared with 2010, reflecting the impact of higher average customer balances. Equities client execution net revenues were lower than 2010, primarily reflecting significantly lower net revenues in shares.

40Goldman Sachs 2011 Form 10-K
1.

Excluding the impact of the $465 million related to the U.K. bank payroll tax, the $550 million related to the SEC settlement and the $305 million impairment of our New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights, diluted earnings per common share were $15.22 and ROE was 13.1% for 2010. We believe that presenting our 2010 results excluding the impact of these items is meaningful because it increases the comparability of period-to-period results. Diluted earnings per common share and ROE excluding these items are non-GAAP measures and may not be comparable to similar non-GAAP measures used by other companies. See “Results of Operations — Financial Overview” below for further information about our calculation of diluted earnings per common share and ROE excluding the impact of these items.

2.

See “Results of Operations — Financial Overview” below for further information about our calculation of ROE.

3.

We believe that presenting our 2011 results excluding the impact of the $1.64 billion preferred dividend related to the redemption of our Series G Preferred Stock (calculated as the difference between the carrying value and the redemption value of the preferred stock) is meaningful because it increases the comparability of period-to-period results. Diluted earnings per common share and ROE excluding this item are non-GAAP measures and may not be comparable to similar non-GAAP measures used by other companies. See “Results of Operations — Financial Overview” below for further information about our calculation of diluted earnings per common share and ROE excluding the impact of this dividend.

4.

Tangible book value per common share is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. See “Equity Capital — Other Capital Metrics” below for further information about our calculation of tangible book value per common share.

5.

Tier 1 common ratio is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. See “Equity Capital — Consolidated Regulatory Capital Ratios” below for further information about our Tier 1 common ratio.


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Investing & Lending

Net revenues in Investing & Lending were $2.14 billion and $7.54 billion for 2011 and 2010, respectively. Results for 2011 included a loss of $517 million from our investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC) and net gains of $1.12 billion from other investments in equities, primarily in private equity positions, partially offset by losses from public equities. In addition, Investing & Lending included net revenues of $96 million from debt securities and loans. This amount includes approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, offset by net interest income and net gains from other debt securities and loans. Results for 2011 also included other net revenues of $1.44 billion, principally related to our consolidated entities held for investment purposes.

Investment Management

Net revenues in Investment Management were essentially unchanged compared with 2010, primarily due to higher management and other fees, reflecting favorable changes in the mix of assets under management, offset by lower incentive fees. During the year, assets under management decreased $12 billion to $828 billion, reflecting net outflows of $17 billion, partially offset by net market appreciation of $5 billion. Net outflows primarily reflected outflows in fixed income and equity assets, partially offset by inflows in money market assets.

2010 versus 2009.The firm generated net revenues of $39.16 billion for 2010, despite a challenging operating environment. These results reflected significantly lower net revenues in Institutional Client ServicesServices.

Operating expenses were $22.47 billion for 2013, 2% lower than 2012, as both compensation and slightlybenefits expenses and non-compensation expenses decreased slightly. The decline in non-compensation expenses reflected the sale of a majority stake in our Americas reinsurance business and lower net revenues in Investment Banking compared with 2009. These decreases weredepreciation and amortization expenses, partially offset by significantly higher net revenues in Investing & Lendingprovisions for litigation and higherregulatory proceedings.

During 2013, the firm repurchased 39.3 million shares of its common stock for a total cost of $6.17 billion, while maintaining strong capital levels. In addition, our global core liquid assets 3 were $184 billion as of December 2013.

See “Results of Operations — Segment Operating Results” below for information about net revenues in Investment Management.

An overview of net revenuesand pre-tax earnings for each of our business segments is provided below.

Investment Banking

The decrease in Investment Banking reflected lower net revenues in our Underwriting business, partially offset by higher net revenues in Financial Advisory. The decline in Underwriting reflected lower net revenues in equity underwriting, principally due to a decline in client activity in comparison to 2009, which included significant capital-raising activity by financial institution clients. Net revenues in debt underwriting were essentially unchanged compared with 2009. The increase in Financial Advisory primarily reflected an increase in client activity.

Institutional Client Services

The decrease in Institutional Client Services reflected significantly lower net revenues in Fixed Income, Currency and Commodities Client Execution and, to a lesser extent, Equities. During 2010, Fixed Income, Currency and Commodities Client Execution operated in a challenging environment characterized by lower client activity levels, which reflected broad market concerns including European sovereign debt risk and uncertainty over regulatory reform, as well as tighter bid/offer spreads. The decrease in net revenues compared with a particularly strong 2009 primarily reflected significantly lower results in interest rate products, credit products, commodities and, to a lesser extent, currencies. These decreases were partially offset by higher net revenues in mortgages, as 2009 included approximately $1 billion of losses related to commercial mortgage loans.

The decline in Equities compared with 2009 primarily reflected significantly lower net revenues in equities client execution, principally due to significantly lower results in derivatives and shares. Commissions and fees were also lower than 2009, primarily reflecting lower client activity levels. In addition, securities services net revenues were significantly lower compared with 2009, primarily reflecting tighter securities lending spreads, principally due to the impact of changes in the composition of customer balances, partially offset by the impact of higher average customer balances. During 2010, although equity markets were volatile during the first half of the year, equity prices generally improved and volatility levels declined in the second half of the year.

Goldman Sachs 2011 Form 10-K41


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Investing & Lending

Net revenues in Investing & Lending were $7.54 billion and $2.86 billion for 2010 and 2009, respectively. During 2010, an increase in global equity markets and tighter credit spreads provided a favorable backdrop for our Investing & Lending business. Results in Investing & Lending for 2010 included a gain of $747 million from our investment in the ordinary shares of ICBC, a net gain of $2.69 billion from other investments in equities, a net gain of $2.60 billion from debt securities and loans and other net revenues of $1.51 billion, principally related to our consolidated entities held for investment purposes.

Investment Management

The increase in Investment Management primarily reflected higher incentive fees across our alternative investment products. Management and other fees also increased, reflecting favorable changes in the mix of assets under management, as well as the impact of appreciation in the value of client assets. During 2010, assets under management decreased 4% to $840 billion, primarily reflecting outflows in money market assets, consistent with industry trends.segments.

Our business,businesses, by itstheir nature, doesdo not produce predictable earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally and other factors. For a further discussion of the factors that may affect our future operating results, see “Certain Risk Factors That May Affect Our Businesses” below, as well as “Risk Factors” in Part I, Item 1A of thisthe 2014 Form 10-K.

 
1.

Tangible book value per common share is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. See “Balance Sheet and Funding Sources — Balance Sheet Analysis and Metrics” below for further information about our calculation of tangible book value per common share.

2.

See Note 20 to the consolidated financial statements for further information about our capital ratios.

3.

See “Risk Management and Risk Factors — Liquidity Risk Management” for further information about our global core liquid assets.

 

4248 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Business Environment

 

Global economic growth generally moderated in 2011, asDuring 2014, real gross domestic product (GDP) grewgrowth appeared stable and subdued in most major economies, supported by solid private sector growth in the United States and emergingthe reduction of fiscal headwinds, particularly in the United States and the Euro area. Ongoing U.S. labor market improvements and robust U.S. consumer activity were notable trends in 2014. Monetary policy generally remained accommodative, helping most major advanced-economy equity markets but at a slower pace than in 2010. Certain unfavorable market conditions that emerged in 2010 continuedto increase during the year, including concerns about European sovereign debt risk and uncertainty regarding financial regulatory reform. Additional concerns that emerged during the first half of the year that affected our businesses included political unrest in the Middle East, the earthquake and tsunami in Japan and inflation in emerging markets.while longer-dated government bond yields generally declined. During the second half of 2014, the U.S. dollar strengthened and oil prices declined. Although macroeconomic conditions were fairly stable, U.S. equity market volatility increased towards the end of the year, concerns about European sovereign debt risk and its impact on the European banking system intensified, while concerns about U.S. growthalongside political uncertainty, particularly in Greece, Russia and the uncertainty regarding the U.S. federalMiddle East, as well as short-lived Ebola concerns. In investment banking, industry-wide underwriting activity remained strong in both equity and debt, ceiling emerged, contributing to higher volatility levels, significantly lower global equity prices and significantly wider corporate credit spreads. This prompted the U.S. Federal Reserveindustry-wide completed mergers and the European Central Bank to announce easing measures in order to stimulate economic growth in the U.S. and to alleviate concerns about Europe.acquisitions activity increased compared with 2013. Industry-wide completed and announced mergers and acquisitions volumesactivity significantly increased compared with 2010, but declined during the second half of the year. Industry-wide equity and equity-related offerings and industry-wide debt offerings both decreased compared with 2010, including significant declines during the second half of the year.2013. For a further discussion of how market conditions may affect our businesses, see “Certain Risk Factors That May Affect Our Businesses” below, as well as “Risk Factors” in Part I, Item 1A of thisthe 2014 Form 10-K.

Global

During 2011,2014, real GDP growth appeared to improve in advanced economies and slow in emerging markets. Developed market growth improvements were largest in the United Kingdom and Euro area, while Japan’s growth declined and the United States’ growth improvement was modest. In emerging markets, headwinds from slowing domestic demand offset improving current account balances and contributed to a general slowdown in growth. Unemployment rates in both the United States and United Kingdom declined in most major economies2014 and emerging markets.at faster paces than in 2013. The slowdownEuro area unemployment rate declined in economic growth primarily reflected slower growth2014, following an increase in domestic demand compared with 2010, while international trade continued to grow strongly during 2011. Unemployment levels declined slightly compared with 2010, although the rate of unemployment remained

elevated in some economies. During 2011, the2013. The U.S. Federal Reserve ended its monthly asset purchase program in the fourth quarter of 2014, after tapering its purchases for several months. The European Central Bank of England(ECB) reduced its policy interest rate twice during the year, and along with the Bank of Japan left interest rates unchanged, while the European Central Bank increased and then reduced its interest rate during the year, ending the year unchanged compared with 2010. In addition, the People’s Bank of China increased its one-year benchmark lending rate during the year. The price of crude oil increased during 2011. The U.S. dollar strengthened against the Euro and was essentially unchanged against the British pound, while it weakened against the Japanese yen.(BOJ), announced further easing policies.

United States

In the United States, real GDP increased by 1.7%2.4% in 2011,2014, compared with an increase of 3.0%2.2% in 2010. Growth moderated,2013. Consumer expenditures growth and business fixed investment growth both improved, while residential investment growth slowed. The pickup in consumer expenditures was primarily reflecting a decline in government spending and reduceddriven by growth in exports, although business investment and consumer expenditure increased. Business andreal disposable income, which contracted in 2013. Measures of consumer confidence declined during most ofimproved, as the year, primarily reflecting increased global economic concerns and uncertainties. In addition, residential investment remained weak and measures of core inflation increasedunemployment rate fell during the year from low levels. Growthyear. House prices, housing starts and house sales increased in industrial production decreased, primarily reflecting2014, but the impactpace of supply-chain disruptions associatedimprovements, particularly for starts and sales, slowed compared with Japan earlier in the year. The unemployment rate declined slightly2013. Measures of inflation were mostly stable during the year, although it remained high.2014. The U.S. Federal Reserve maintained its federal funds rate at a target range of zero to 0.25% during the year. In addition, the U.S. Federal Reserve concluded quantitative easing measures that included theyear, ended its monthly program to purchase of significant amounts of U.S. Treasury debtsecurities and announced further easing measures by extendingmortgage-backed securities in the durationfourth quarter of the U.S. Treasury debt it holds.2014 and kept forward guidance broadly unchanged. The yield on the 10-year U.S. Treasury note felldeclined by 14187 basis points during 20112014 to 1.89%2.17%. In equity markets, the NASDAQ Composite Index, the S&P 500 Index and the Dow Jones Industrial Average increased by 13%, 11% and 8%, respectively, during 2014.

Europe

In the Euro area, real GDP increased by 0.9% in 2014, compared with a contraction of 0.4% in 2013. While an improvement from 2013, growth remained at a suppressed level. Fixed investment and consumer spending both grew modestly in 2014, after contracting in 2013, and measures of inflation remain subdued. The ECB cut the main refinancing operations and deposit rates by 20 basis points to 0.05% and (0.20)%, respectively, announced a purchase program for asset-backed securities and covered bonds in the fourth quarter of 2014, and discussed the possibility of a quantitative easing program targeting sovereign bonds. The Euro depreciated by 12% against the U.S. dollar. In the United Kingdom, real GDP increased by 2.6% in 2014, compared with an increase of 1.7% in 2013. The Bank of England maintained its official bank rate at 0.50%. The British pound depreciated by 6% against the U.S. dollar. Yields on 10-year government bonds in the region generally fell during the year. In equity markets, the DAX Index and the Euro Stoxx 50 Index increased by 3% and 1%, respectively, while the NASDAQ CompositeFTSE 100 Index and the CAC 40 Index decreased by 2%3% and the S&P 500 Index ended the year essentially unchanged.1%, respectively, during 2014.

 

 

 Goldman Sachs 20112014 Form 10-K 4349


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Europe

Real GDP in the Euro area economies increased by an estimated 1.6% in 2011, compared with an increase of 1.8% in 2010. Growth moderated slightly, primarily reflecting reduced growth in consumer expenditure and exports, although fixed investment increased. Surveys of business and consumer confidence deteriorated over the course of the year. Measures of core inflation increased during the year from low levels. Concerns about fiscal challenges in several Euro area economies intensified during the year, weighing on economic growth in these economies and on risk appetite more broadly. In addition, concerns about European sovereign debt risk contributed to higher market volatility and funding pressures. The European Central Bank and governments in the Euro area took a range of policy measures to address these issues. The European Central Bank increased its main refinancing operations rate by 25 basis points during both the second and third quarters, but reversed these increases during the fourth quarter, such that the rate ended the year at 1.00%, unchanged compared with the end of 2010. In the United Kingdom, real GDP increased by 0.8% for 2011, compared with an increase of 2.1% in 2010. The Bank of England maintained its official bank rate at 0.50% during the year. Long-term government bond yields generally declined during the year, although long-term government bond yields in certain Euro area economies increased significantly. In addition, spreads between German bond yields and those of most Euro area economies widened during the year. The Euro depreciated by 3% and the British pound was essentially unchanged against the U.S. dollar. The Euro Stoxx 50 Index and the CAC 40 Index both declined by 17%, while the DAX Index and the FTSE 100 Index decreased by 15% and 6%, respectively, compared with the end of 2010.

Asia

In Japan, real GDP decreased by 0.9%had no growth in 2011,2014, a sharp slowdown compared with an increase of 4.4%1.6% in 2010. Net exports and business investment declined2013. Real GDP contracted significantly during the year due tosecond and third quarters of 2014, as consumer expenditures fell, in part resulting from a consumption tax hike in April. However, real GDP picked up again in the economicfourth quarter of 2014. Although measures of inflation increased in 2014, inflation remained below the BOJ’s 2% inflation target excluding the impact of the earthquakeconsumption tax hike. During the fourth quarter of 2014, the BOJ announced further quantitative and tsunami inqualitative monetary easing and removed the first quarter. Measures of inflation remained negative during 2011. The Bank of Japan maintained its2-year timing target overnight call rate at a range of zero to 0.10% andfor achieving 2% price stability, making the timeframe open ended. During the year, the yield on 10-year Japanese government bonds felldeclined, the U.S. dollar appreciated by 14 basis points to 0.99%. The14% against the Japanese yen appreciated by 5% againstand, in equity markets, the U.S. dollar. The Nikkei 225 Index decreasedincreased by 17% during the year. 7%.

In China, real GDP increased by 9.2%7.4% in 20112014, compared with an increase of 10.4%7.7% in 2010. Growth moderated, primarily reflecting a slowdown in net exports and fixed investment growth, although consumer spending increased.2013. Measures of inflation increased significantly during 2011, reflectingremained moderate and the impact of higher food and energy prices, but decreased towards the end of the year. The People’s Bank of China raisedcut its one-year benchmark lending rate by 75 basis points to 6.56% and increased the reserve requirement ratio by 25040 basis points during the year. In addition,fourth quarter of 2014. The U.S. dollar appreciated by 2% against the Chinese yuan appreciated by 4% against the U.S. dollar and, in equity markets, the Shanghai Composite Index decreasedincreased by 22% during 2011. 53%, as regulatory changes influenced sentiment. In contrast, in Hong Kong, the Hang Seng Index increased by 1%.

In India, real GDP increased by an estimated 6.9%at a solid pace in 2011 compared with an increase of 8.5% in 2010. Growth moderated, primarily reflecting a slowdown in consumer expenditureboth 2014 and fixed investment growth.2013. The rate of wholesale inflation remained at elevated levels, but decreased duringdeclined compared with 2013. The U.S. dollar appreciated by 2% against the year. The Indian rupee depreciated by 19% against the U.S. dollar. Equity marketsand, in Hong Kong and India declined significantly and equity markets, in South Korea ended the year lower.BSE Sensex Index increased by 30% during 2014.

Other Markets

In Brazil, estimated real GDP increased by an estimated 3.0%had no growth in 2011,2014, compared with an increase of 7.5%2.5% in 2010. Growth moderated, primarily reflecting a slowdown in2013, as private consumption growth decelerated and fixed investment and consumer expenditure growth.spending contracted. The U.S. dollar appreciated by 12% against the Brazilian real weakened againstand, in equity markets, the U.S. dollar. Brazilian equity prices ended the year significantly lower compared with the end of 2010.Bovespa Index decreased by 3%. In Russia, real GDP increased by an estimated 4.2%0.6% in 2011,2014, compared with an increase of 4.0%1.3% in 2010. Growth was driven by an increase2013. Tensions related to the political situation in domestic demand, particularlyUkraine and Russia generated concern during the second half of the year. The U.S. dollar appreciated by 76% against the Russian ruble weakened againstand, in equity markets, the U.S. dollar and Russian equity prices ended the year significantly lower compared with the end of 2010.MICEX Index decreased by 7% during 2014.

44Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Critical Accounting Policies

Fair Value

Fair Value Hierarchy.Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value (i.e., inventory), as well as certain other financial assets and financial liabilities, are reflected in our consolidated statements of financial condition at fair value (i.e., marked-to-market), with related gains or losses generally recognized in our consolidated statements of earnings. The use of fair value to measure financial instruments is fundamental to our risk management practices and is our most critical accounting policy.

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We measure certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks). In determining fair value, the hierarchy under U.S. generally accepted accounting principles (U.S. GAAP) gives (i) the highest priority to unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities (level 1 inputs), (ii) the next priority to inputs other than level 1 inputs that are observable, either directly or indirectly (level 2 inputs), and (iii) the lowest priority to inputs that cannot be observed in market activity (level 3 inputs). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

The fair values for substantially all of our financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.

50Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Instruments categorized within level 3 of the fair value hierarchy are those which represent approximately 5% of the firm’s total assets, require one or more significant inputs that are not observable. As of December 2014 and December 2013, level 3 financial assets represented 4.9% and 4.4%, respectively, of our total assets. Absent evidence to the contrary, instruments classified within level 3 of the fair value hierarchy are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequent to the transaction date, we use other methodologies to determine fair value, which vary based on the type of instrument. Estimating the fair value of level 3 financial instruments requires judgments to be made. These judgments include:

 

Ÿ 

determiningDetermining the appropriate valuation methodology and/or model for each type of level 3 financial instrument;

 

Ÿ 

determiningDetermining model inputs based on an evaluation of all relevant empirical market data, including prices evidenced by market transactions, interest rates, credit spreads, volatilities and correlations; and

 

Ÿ 

determiningDetermining appropriate valuation adjustments, including those related to illiquidity or counterparty credit quality.

Regardless of the methodology, valuation inputs and assumptions are only changed when corroborated by substantive evidence.

Controls Over Valuation of Financial Instruments.Market makers and investment professionals in our revenue-producing units are responsible for pricing our financial instruments. Our control infrastructure is independent of the revenue-producing units and is fundamental to ensuring that all of our financial instruments are appropriately valued at market-clearing levels. In the event that there is a difference of opinion in situations where estimating the fair value of financial instruments requires judgment (e.g., calibration to market comparables or trade comparison, as described below), the final valuation decision is made by senior managers in control and support functions that are independent of the revenue-producing units (independent control and support functions).units. This independent price verification is critical to ensuring that our financial instruments are properly valued.

Goldman Sachs 2011 Form 10-K45


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Price Verification. All financial instruments at fair value in levels 1, 2 and 3 of the fair value hierarchy are subject to our independent price verification process. The objective of price verification is to have an informed and independent opinion with regard to the valuation of financial instruments under review. Instruments that have one or more significant inputs which cannot be corroborated by external market data are classified within level 3 of the fair value hierarchy. Price verification strategies utilized by our independent control and support functions include:

 

Ÿ 

Trade ComparisonComparison..Analysis of trade data (both internal and external where available) is used to determine the most relevant pricing inputs and valuations.

 

Ÿ 

External Price ComparisonComparison..Valuations and prices are compared to pricing data obtained from third parties (e.g., broker or dealers, MarkIt, Bloomberg, IDC, TRACE). Data obtained from various sources is compared to ensure consistency and validity. When broker or dealer quotations or third-party pricing vendors are used for valuation or price verification, greater priority is generally given to executable quotations.

 

Ÿ 

Calibration to Market ComparablesComparables..Market-based transactions are used to corroborate the valuation of positions with similar characteristics, risks and components.

 

Ÿ 

Relative Value AnalysesAnalyses..Market-based transactions are analyzed to determine the similarity, measured in terms of risk, liquidity and return, of one instrument relative to another or, for a given instrument, of one maturity relative to another.

 

Ÿ 

Collateral AnalysesAnalyses..Margin disputescalls on derivatives are examined and investigatedanalyzed to determine the impact, if any, onimplied values which are used to corroborate our valuations.

 

Ÿ 

Execution of TradesTrades..Where appropriate, trading desks are instructed to execute trades in order to provide evidence of market-clearing levels.

 

Ÿ 

BacktestingBacktesting.Valuations are corroborated by comparison to values realized upon sales.

See Notes 5 through 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about fair value measurements.

Goldman Sachs 2014 Form 10-K51


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Review of Net Revenues.Independent control and support functions ensure adherence to our pricing policy through a combination of daily procedures, including the explanation and attribution of net revenues based on the underlying factors. Through this process we independently validate net revenues, identify and resolve potential fair value or trade booking issues on a timely basis and seek to ensure that risks are being properly categorized and quantified.

Review of Valuation Models.Quantitative The firm’s independent model validation group, consisting of quantitative professionals within our Market Risk Management department (Market Risk Management) performwho are separate from model developers, performs an independent model approval process. This process incorporates a review of a diverse set of model and trade parameters across a broad range of values (including extreme and/or improbable conditions) in order to critically evaluate:

 

Ÿ 

theThe model’s suitability for valuation and risk management of a particular instrument type;

 

Ÿ 

theThe model’s accuracy in reflecting the characteristics of the related product and its significant risks;

 

Ÿ 

theThe suitability and properties of the numerical algorithmscalculation techniques incorporated in the model;

 

Ÿ 

theThe model’s consistency with models for similar products; and

 

Ÿ 

theThe model’s sensitivity to input parameters and assumptions.

New or changed models are reviewed and approved.approved prior to being put into use. Models are evaluated and re-approved annually to assess the impact of any changes in the product or market and any market developments in pricing theories.

46Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Level 3 Financial Assets at Fair ValueValue.. The table below presents financial assets measured at fair value and the amount of such assets that are classified within level 3 of the fair value hierarchy.

Total level 3 financial assets were $47.94$42.01 billion and $45.38$40.01 billion as of December 20112014 and December 2010,2013, respectively.

See Notes 5 through 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about level 3 financial assets, including changes in level 3 financial assets and related fair value measurements.

  As of December 2011     As of December 2010 
in millions 

Total at

Fair Value

     

Level 3

Total

      

Total at

Fair Value

     Level 3
Total
 

Commercial paper, certificates of deposit, time deposits
and other money market instruments

 $13,440      $      $11,262      $  

U.S. government and federal agency obligations

  87,040              84,928         

Non-U.S. government obligations

  49,205       148       40,675         

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

  6,699       3,346       7,510       3,976  

Loans and securities backed by residential real estate

  7,592       1,709       9,532       2,501  

Bank loans and bridge loans

  19,745       11,285       18,039       9,905  

Corporate debt securities

  22,131       2,480       24,719       2,737  

State and municipal obligations

  3,089       599       2,792       754  

Other debt obligations

  4,362       1,451       3,232       1,274  

Equities and convertible debentures

  65,113       13,667       67,833       11,060  

Commodities

  5,762              13,138         

Total cash instruments

  284,178       34,685       283,660       32,207  

Derivatives

  80,028       11,900       73,293       12,772  

Financial instruments owned, at fair value

  364,206       46,585       356,953       44,979  

Securities segregated for regulatory and other purposes

  42,014              36,182         

Securities purchased under agreements to resell

  187,789       557       188,355       100  

Securities borrowed

  47,621              48,822         

Receivables from customers and counterparties

  9,682       795       7,202       298  

Total

 $651,312      $47,937      $637,514      $45,377  

Goldman Sachs 2011 Form 10-K47


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Goodwill and Identifiable Intangible Assets

Goodwill. Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. Goodwill is assessed annually in the fourth quarter for impairment, or more frequently if events occur or circumstances change that indicate an impairment may exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative assessment are not conclusive, a quantitative goodwill impairment test iswould be performed by comparing the estimated fair value of each reporting unit with its estimated net book value. We derive

During the fair value basedfourth quarter of 2014, we assessed goodwill for impairment. The qualitative assessment required management to make judgments and to evaluate several factors, which included, but were not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific events, events affecting reporting units and sustained changes in our stock price. Based on valuation techniquesour evaluation of these factors, we believe market participants would use (i.e., observable price-to-earnings multiples and price-to-book multiples). We derive the net book value by estimating the amount of shareholders’ equity required to support the activities of each reporting unit. Estimatingdetermined that it was more likely than not that the fair value of oureach of the reporting units requires management to make judgments. Critical inputs include (i) projected earnings, (ii) estimated long-term growth ratesexceeded its respective carrying amount, and (iii) cost of equity.

During the second half of 2011, consistent with the decline in stock prices in the broader financial services sector, our stock price declined and throughout most of this period, our market capitalization was below book value. Accordingly,therefore, we performed a quantitative impairment test during the fourth quarter of 2011 and determined that goodwill was not impaired. The estimated fair value of our reporting units in whichimpaired and that a quantitative goodwill impairment test was not required.

If we hold substantially all of our goodwill significantly exceeded the estimated carrying values. We believe that it is appropriate to consider market capitalization, among other factors, as an indicator of fair value overexperience a reasonable period of time.

If the current economic market conditions persist and if there is a prolonged or severe period of weakness in the business environment andor financial markets, our earnings maygoodwill could be adversely affected, which could result in an impairment of goodwillimpaired in the future. In addition, significant changes to other critical inputs of the quantitative goodwill impairment test (e.g., cost of equity) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future.

See Note 3 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about amendments to the accounting guidance for goodwill impairment testing and Note 13 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for the carrying value offurther information about our goodwill.

52Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Identifiable Intangible Assets. We amortize our identifiable intangible assets (i) over their estimated useful lives (ii)using the straight-line method or based on economic usage or (iii) in proportion to estimated gross profits or premium revenues.for certain commodities-related intangibles. Identifiable intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable.

An impairment loss, generally calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value. See Note 13 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for the carrying value and estimated remaining useful lives of our identifiable intangible assets by major asset class and impairments of our identifiable intangible assets.class.

A prolonged or severe period of market weakness, or significant changes in regulation could adversely impact our businesses and impair the value of our identifiable intangible assets. In addition, certain events could indicate a potential impairment of our identifiable intangible assets, including (i)weaker business performance resulting in a decrease in our customer base and decreases in revenues from commodity-relatedcommodities-related transportation rights, customer contracts and relationships, (ii) decreases in cash receipts from television broadcast royalties, (iii) an adverse action or assessment by a regulator or (iv) adverse actual experience on the contracts in our variable annuity and life insurance business.relationships. Management judgment is required to evaluate whether indications of potential impairment have occurred, and to test intangiblesintangible assets for impairment if required.

48Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

An impairment, generally calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the total of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

See Note 13 to the consolidated financial statements for information about impairments of our identifiable intangible assets.

Management’s Discussion and AnalysisRecent Accounting Developments

See Note 3 to the consolidated financial statements for information about Recent Accounting Developments.

Use of Estimates

The use of generally accepted accounting principles requires management to make certain estimates and assumptions. In addition to the estimates we make in connection with fair value measurements, and the accounting for goodwill and identifiable intangible assets, the use of estimates and assumptions is also important in determining provisions for losses that may arise from litigation, regulatory proceedings and tax audits.

We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. In accounting for income taxes,addition, we estimate the upper end of the range of reasonably possible aggregate loss in excess of the related reserves for litigation proceedings where the firm believes the risk of loss is more than slight. See Notes 18 and provide for potential liabilities that may arise out of tax audits to the extent that uncertain tax positions fail to meet the recognition standard under FASB Accounting Standards

Codification 740. See Note 2427 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about accounting for income taxes.certain judicial, regulatory and legal proceedings.

Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel.

In accounting for income taxes, we recognize tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. See Notes 18 and 27Note 24 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information on certain judicial, regulatory and legal proceedings.about accounting for income taxes.

 

 

 Goldman Sachs 20112014 Form 10-K 4953


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Results of Operations

 

The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. See “Certain Risk Factors That May Affect Our Businesses” below and “Risk

Factors” in Part I, Item 1A of thisthe 2014 Form 10-K for a further discussion of the impact of economic and market conditions on our results of operations.

Financial Overview

The table below presents an overview of our financial results.

 

 Year Ended December 
$ in millions, except per share amounts 2011   2010 2009  Year Ended December 

$ in millions, except

per share amounts

 2014     2013     2012  
 $28,811    $39,161   $45,173    $34,528     $34,206     $34,163  
 

Pre-tax earnings

  6,169     12,892    19,829    12,357     11,737     11,207  
 

Net earnings

  4,442     8,354    13,385    8,477     8,040     7,475  
 

Net earnings applicable to common shareholders

  2,510     7,713    12,192    8,077     7,726     7,292  
 

Diluted earnings per common share

  4.51     13.18    22.13    17.07     15.46     14.13  
 

Return on average common shareholders’ equity 1

  3.7   11.5  22.5  11.2%     11.0%     10.7%  

Diluted earnings per common share, excluding the impact of the Series G Preferred Stock dividend 2

 $7.46     N/A    N/A  

Return on average common shareholders’ equity, excluding the impact of the Series G Preferred Stock dividend 2

  5.9   N/A    N/A  

Diluted earnings per common share, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment 3

  N/A    $15.22    N/A  

Return on average common shareholders’ equity, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment 3

  N/A     13.1  N/A  

 

1.

ROE is computed by dividing net earnings applicable to common shareholders by average monthly common shareholders’ equity. The table below presents our average common shareholders’ equity.

 

 

Average for the

Year Ended December

  

Average for the

Year Ended December

 
in millions 2011   2010   2009 
$ in millions  2014     2013     2012  

Total shareholders’ equity

 $72,708    $74,257    $65,527    $80,839     $77,353     $72,530  
 

Preferred stock

  (3,990   (6,957   (11,363  (8,585   (6,892   (4,392

Common shareholders’ equity

 $68,718    $67,300    $54,164    $72,254     $70,461     $68,138  

The table below presents selected financial ratios.

  Year Ended December 
   2014     2013     2012  

Net earnings to average assets

  0.9%     0.9%     0.8%  
  

Return on average total shareholders’ equity 1

  10.5%     10.4%     10.3%  
  

Total average equity to average assets

  9.0%     8.2%     7.7%  
  

Dividend payout ratio 2

  13.2%     13.3%     12.5%  

1.

Return on average total shareholders’ equity is computed by dividing net earnings by average monthly total shareholders’ equity.

 

2.

We believe that presenting our results excluding the impact of the $1.64 billion Series G Preferred Stock dividendDividend payout ratio is meaningful, as it increases the comparability of period-to-period results. Diluted earningscomputed by dividing dividends declared per common share and ROE excluding this item are non-GAAP measures and may not be comparable to similar non-GAAP measures used by other companies. The tables below present the calculation of net earnings applicable to common shareholders, diluted earnings per common shareshare.

Net Revenues

The table below presents our net revenues by line item on the consolidated statements of earnings.

  Year Ended December 
$ in millions  2014     2013     2012  

Investment banking

  $  6,464     $  6,004     $  4,941  
  

Investment management

  5,748     5,194     4,968  
  

Commissions and fees

  3,316     3,255     3,161  
  

Market making

  8,365     9,368     11,348  
  

Other principal transactions

  6,588     6,993     5,865  

Total non-interest revenues

  30,481     30,814     30,283  

Interest income

  9,604     10,060     11,381  
  

Interest expense

  5,557     6,668     7,501  

Net interest income

  4,047     3,392     3,880  

Total net revenues

  $34,528     $34,206     $34,163  

In the table above:

Ÿ

“Investment banking” is comprised of revenues (excluding net interest) from financial advisory and average common shareholders’ equity excluding the impact of this dividend.underwriting assignments, as well as derivative transactions directly related to these assignments. These activities are included in our Investment Banking segment.

 

in millions, except per share amountŸ Year Ended
December 2011

Net earnings applicable“Investment management” is comprised of revenues (excluding net interest) from providing investment management services to common shareholders

$2,510

Impacta diverse set of the Series G Preferred Stock dividend

1,643

Net earnings applicableclients, as well as wealth advisory services and certain transaction services to common shareholders, excluding the impact of the Series G Preferred Stock dividendhigh-net-worth individuals and families. These activities are included in our Investment Management segment.

4,153

Divided by: average diluted common shares outstanding

556.9

Diluted earnings per common share, excluding the impact of the Series G Preferred Stock dividend

$  7.46

 

in millionsŸ 

“Commissions and fees” is comprised of revenues from executing and clearing client transactions on major stock, options and futures exchanges worldwide, as well as over-the-counter (OTC) transactions. These activities are included in our Institutional Client Services and Investment Management segments.

Average for the
Year Ended
December 2011
Ÿ
 

“Market making” is comprised of revenues (excluding net interest) from client execution activities related to making markets in interest rate products, credit products, mortgages, currencies, commodities and equity products. These activities are included in our Institutional Client Services segment.

Total shareholders’ equity

Ÿ
 $72,708

Preferred stock

(3,990

Common shareholders’ equity

68,718

Impact“Other principal transactions” is comprised of revenues (excluding net interest) from our investing activities and the Series G Preferred Stock dividend

1,264

Common shareholders’ equity, excluding the impactorigination of the Series G Preferred Stock dividendloans to provide financing to clients. In addition, “Other principal transactions” includes revenues related to our consolidated investments. These activities are included in our Investing & Lending segment.

$69,982

 

5054 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

3.

We believe that presenting our results excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment is meaningful, as it increases the comparability of period-to-period results. Diluted earnings per common share and ROE excluding these items are non-GAAP measures and may not be comparable to similar non-GAAP measures used by other companies. The tables below present the calculation of net earnings applicable to common shareholders, diluted earnings per common share and average common shareholders’ equity excluding the impact of these items.

 

in millions, except per share amountsYear Ended
December 2010

Net earnings applicable to common shareholders

$  7,713

Impact of the U.K. bank payroll tax

465

Pre-tax impact of the SEC settlement

550

Tax impact of the SEC settlement

(6

Pre-tax impact of the NYSE DMM rights impairment

305

Tax impact of the NYSE DMM rights impairment

(118

Net earnings applicable to common shareholders, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment

8,909

Divided by: average diluted common shares outstanding

585.3

Diluted earnings per common share, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment

$  15.22
in millionsAverage for the
Year Ended
December 2010

Total shareholders’ equity

$74,257

Preferred stock

(6,957

Common shareholders’ equity

67,300

Impact of the U.K. bank payroll tax

359

Impact of the SEC settlement

293

Impact of the NYSE DMM rights impairment

14

Common shareholders’ equity, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment

$67,966

2014 versus 2013

Net revenues on the consolidated statements of earnings were $34.53 billion for 2014, essentially unchanged compared with 2013, reflecting higher net interest income, investment management revenues and investment banking revenues, as well as slightly higher commissions and fees, largely offset by lower market-making revenues and other principal transactions revenues.

During 2014, the operating environment was favorable for investment banking activities, as industry-wide underwriting activity was strong and industry-wide mergers and acquisitions activity increased. Improved asset prices resulted in appreciation in the value of client assets in investment management. In addition, other principal transactions were impacted by favorable company-specific events and strong corporate performance. However, the operating environment remained challenging for market-making activities as economic uncertainty and low volatility levels contributed to generally low levels of activity, particularly in fixed income products. If macroeconomic concerns continue over the long term, and client activity levels in investment banking broadly decline or market-making activity levels remain low, or if asset prices were to decline, net revenues would likely be negatively impacted. See “Segment Operating Results” below for further information about material trends and uncertainties that may impact our results of operations.

Non-Interest Revenues. Investment banking revenues on the consolidated statements of earnings were $6.46 billion for 2014, 8% higher than 2013, due to significantly higher revenues in financial advisory, reflecting an increase in industry-wide completed mergers and acquisitions, primarily in the United States. Revenues in underwriting were essentially unchanged compared with a strong 2013, as industry-wide activity levels remained high. Revenues in debt underwriting were slightly lower compared with 2013, reflecting lower revenues from commercial mortgage-related activity, while revenues in equity underwriting were slightly higher, principally from initial public offerings.

Investment management revenues on the consolidated statements of earnings were $5.75 billion for 2014, 11% higher than 2013, reflecting higher management and other fees, primarily due to higher average assets under supervision, as well as higher incentive fees and transaction revenues.

Commissions and fees on the consolidated statements of earnings were $3.32 billion for 2014, 2% higher than 2013, due to higher commissions and fees in both Europe and the United States, reflecting generally higher client activity, consistent with increases in listed cash equity market volumes in these regions.

Market-making revenues on the consolidated statements of earnings were $8.37 billion for 2014, 11% lower than 2013. Results for 2014 included a gain of $289 million ($270 million of which was recorded at extinguishment in the third quarter) related to the extinguishment of certain of our junior subordinated debt. Excluding this gain and a gain of $211 million on the sale of a majority stake in our European insurance business in 2013, the decrease in market-making revenues compared with 2013 reflected significantly lower revenues in both credit products and equity derivatives, lower revenues in mortgages and the sale of our Americas reinsurance business in 2013. These decreases were partially offset by significantly higher revenues in commodities, as well as higher revenues in equity cash products, currencies and interest rate products.

Other principal transactions revenues on the consolidated statements of earnings were $6.59 billion for 2014, 6% lower than 2013. Net gains from investments in equity securities were slightly lower due to a significant decrease in net gains from investments in public equities, as movements in global equity prices during 2014 were less favorable compared with 2013, partially offset by an increase in net gains from investments in private equities, primarily driven by company-specific events. Net gains from debt securities and loans were slightly higher than 2013, primarily due to sales of certain investments during 2014. Revenues related to our consolidated investments were significantly lower compared with 2013, reflecting a decrease in operating revenues from commodities-related consolidated investments.

Net Interest Income. Net interest income on the consolidated statements of earnings was $4.05 billion for 2014, 19% higher than 2013. The increase compared with 2013 was primarily due to lower interest expense resulting from a reduction in our total liabilities, lower costs of long-term funding due to a decline in interest rates and the impact of rebates in the securities services business, partially offset by lower interest income due to a reduction in our total assets. See “Supplemental Financial Information — Statistical Disclosures — Distribution of Assets, Liabilities and Shareholders’ Equity” for further information about our sources of net interest income.

2013 versus 2012

Net revenues on the consolidated statements of earnings were $34.21 billion for 2013, essentially unchanged compared with 2012. 2013 included significantly higher investment banking revenues, as well as higher other principal transactions revenues and investment management revenues. In addition, commissions and fees were slightly higher compared with 2012. These increases were offset by lower market-making revenues and lower net interest income compared with 2012.

 

 Goldman Sachs 20112014 Form 10-K 5155


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Net RevenuesDuring 2013, a significant increase in global equity prices contributed to improved industry-wide equity underwriting activity in investment banking, appreciation in the value of client assets in investment management and net gains from investments in public equities in other principal transactions. Other principal transactions were also impacted by favorable company-specific events and strong corporate performance, and industry-wide debt underwriting activity in investment banking remained solid, as interest rates remained low. However, macroeconomic concerns continued to weigh on industry-wide mergers and acquisitions activity in investment banking, and contributed to a challenging operating environment for market-making activities, resulting in fluctuations in activity levels during 2013. See “Segment Operating Results” below for further information about material trends and uncertainties that may impact our results of operations.

2011 versus 2010.Non-Interest Revenues.Net Investment banking revenues on the consolidated statements of earnings were $28.81$6.00 billion for 2011, 26% lower2013, 22% higher than 2010,2012, reflecting significantly lower nethigher revenues in Investing & Lending and Institutional Client Services, as well as lower netunderwriting, due to strong revenues in Investment Banking. Net revenuesboth equity and debt underwriting. Revenues in Investment Managementequity underwriting were significantly higher compared with 2012, reflecting an increase in client activity, particularly in initial public offerings. Revenues in debt underwriting were significantly higher compared with 2012, principally due to leveraged finance activity. Revenues in financial advisory were essentially unchanged compared with 2010.2012.

2010 versus 2009.NetInvestment management revenues on the consolidated statements of earnings were $39.16$5.19 billion for 2010, 13%2013, 5% higher than 2012, reflecting higher management and other fees, primarily due to higher average assets under supervision.

Commissions and fees on the consolidated statements of earnings were $3.26 billion for 2013, slightly higher than 2012, primarily reflecting higher commissions and fees in Asia and Europe. During 2013, our average daily volumes were higher in Asia and Europe and lower in the United States compared with 2012, consistent with listed cash equity market volumes.

Market-making revenues on the consolidated statements of earnings were $9.37 billion for 2013, 17% lower than 2009, reflecting2012. The decrease compared with 2012 was primarily due to significantly lower net revenues in Institutional Client Servicesequity products, mortgages and slightlyinterest rate products, as well as lower net revenues in Investment Banking. These decreases werecurrencies. The decrease in equity products was due to the sale of our Americas reinsurance business in 2013, the sale of our hedge fund administration business in 2012 (2012 included a gain on sale of $494 million) and lower revenues in derivatives, partially offset by significantly higher net revenues in Investing & Lending andcash products compared with 2012. Revenues in commodities were higher, netwhile revenues in Investment Management.credit products were essentially unchanged compared with 2012. In December 2013, we completed the sale of a majority stake in our European insurance business and recognized a gain of $211 million.

Other principal transactions revenues on the consolidated statements of earnings were $6.99 billion for 2013, 19% higher than 2012, reflecting a significant increase in net gains from investments in equity securities, driven by company-specific events and stronger corporate performance, as well as significantly higher global equity prices. In addition, net gains from debt securities and loans were slightly higher, while revenues related to our consolidated investments were lower compared with 2012.

Net Interest Income

2011 versus 2010.Income.Net interest income on the consolidated statements of earnings was $5.19$3.39 billion for 2011, 6%2013, 13% lower than 2010.2012. The decrease compared with 20102012 was primarily due to higherlower average yields on financial instruments owned, at fair value, partially offset by lower interest expense related to our long-term borrowings and higher dividend expense related toon financial instruments sold, but not yet purchased, partially offset by an increase inat fair value and collateralized financings. See “Supplemental Financial Information — Statistical Disclosures — Distribution of Assets, Liabilities and Shareholders’ Equity” for further information about our sources of net interest income from higher yielding collateralized agreements.

2010 versus 2009.Net interest income was $5.50 billion for 2010, 26% lower than 2009. The decrease compared with 2009 was primarily due to lower average fixed income assets, most notably U.S. federal agency obligations, higher interest expense related to our long-term borrowings and tighter securities lending spreads.

Non-interest Revenues

Investment banking

Investment banking revenues reflected an operating environment generally characterized by significant declines in industry-wide underwriting and mergers and acquisitions activity levels during the second half of 2011. These declines reflected increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk, which contributed to a significant widening in credit spreads, a sharp increase in volatility levels and a significant decline in global equity markets during the second half of 2011. If these concerns continue or if equity markets decline further, resulting in lower levels of client activity, revenues in investment banking would likely continue to be negatively impacted.

2011 versus 2010.Investment banking revenues on the consolidated statement of earnings were $4.36 billion for 2011, 9% lower than 2010, primarily reflecting lower revenues in our underwriting business. Revenues in equity underwriting were significantly lower than 2010, principally due to a decline in industry-wide activity. Revenues in debt underwriting were essentially unchanged compared with 2010. Revenues in financial advisory decreased slightly compared with 2010.

2010 versus 2009.Investment banking revenues on the consolidated statement of earnings were $4.81 billion for 2010, 3% lower than 2009, reflecting lower revenues in our underwriting business, partially offset by higher revenues in financial advisory. The decline in underwriting reflected lower revenues in equity underwriting, principally due to a decline in client activity in comparison to 2009, which included significant capital-raising activity by financial institution clients. Revenues in debt underwriting were essentially unchanged compared with 2009. Revenues in financial advisory increased compared with 2009, primarily reflecting an increase in client activity.

Investment management

During the first half of 2011, investment management revenues reflected an operating environment generally characterized by improved asset prices and a shift in investor assets away from money markets in favor of asset classes with potentially higher risk and returns. However, during the second half of 2011, asset prices declined, particularly in equities, in part driven by increased uncertainty regarding the global economic outlook. Declining asset prices and economic uncertainty contributed to investors shifting assets away from asset classes with potentially higher risk and returns to asset classes with lower risk and returns. If asset prices continue to decline or investors continue to favor lower risk asset classes or withdraw their assets, investment management revenues would likely continue to be negatively impacted.

2011 versus 2010.Investment management revenues on the consolidated statement of earnings were $4.69 billion for 2011, essentially unchanged compared with 2010, primarily due to higher management and other fees, reflecting favorable changes in the mix of assets under management, offset by lower incentive fees.income.

 

 

5256 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

2010 versus 2009.Investment management revenues on the consolidated statement of earnings were $4.67 billion for 2010, 10% higher than 2009, primarily reflecting higher incentive fees across our alternative investment products. Management and other fees also increased, reflecting favorable changes in the mix of assets under management, as well as the impact of appreciation in the value of client assets.

Commissions and fees

Broad market concerns and uncertainties that emerged during 2010, including concerns about European sovereign debt risk and the weakened state of global economies, heightened during 2011. These concerns and uncertainties resulted in an increase in average volatility levels and significantly lower equity prices in Europe and Asia, particularly during the third quarter of 2011. The macro challenges during the year resulted in volatile markets, which contributed to higher transaction volumes and fees. If these concerns and uncertainties continue, but were to result in lower transaction volumes, commissions and fees would likely be negatively impacted.

2011 versus 2010.Commissions and fees on the consolidated statement of earnings were $3.77 billion for 2011, 6% higher than 2010, reflecting higher transaction volumes, particularly during the third quarter of 2011.

2010 versus 2009.Commissions and fees on the consolidated statement of earnings were $3.57 billion for 2010, 7% lower than 2009, primarily reflecting lower client activity levels.

Market making

During 2011, market-making revenues were negatively impacted by increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk, and its impact on the European banking system and global financial institutions. These conditions also impacted expectations for economic prospects in the U.S. and were reflected in equity and debt markets more broadly. In addition, the downgrade in credit ratings of the U.S. government and federal agencies and many financial institutions during the second half of 2011 contributed to further uncertainty in the markets. These concerns, as well as other broad market concerns, such as uncertainty over financial regulatory reform, continued to have a negative impact on market-making revenues during 2011. If these concerns continue, and market-making conditions remain challenging, market-making revenues would likely continue to be negatively impacted.

2011 versus 2010. Market-making revenues on the consolidated statement of earnings were $9.29 billion for 2011, 32% lower than 2010. Although activity levels during 2011 were generally consistent with 2010 levels, and results were solid during the first quarter of 2011, the environment during the remainder of 2011 was characterized by broad market concerns and uncertainty, resulting in volatile markets and significantly wider credit spreads, which contributed to difficult market-making conditions and led to reductions in risk by us and our clients. As a result of these conditions, revenues across most of our major market-making activities were lower during 2011 compared with 2010.

2010 versus 2009.Market-making revenues on the consolidated statement of earnings were $13.68 billion for 2010, 38% lower than 2009. During 2010, market-making revenues were negatively impacted by lower client activity levels, which reflected broad market concerns including European sovereign debt risk and uncertainty over regulatory reform, as well as tighter bid/offer spreads. The decrease in revenues compared with a particularly strong 2009 primarily reflected lower results across most of our major market-making activities. These decreases were partially offset by higher revenues in mortgages, as 2009 included significant losses related to commercial mortgage loans.

Other principal transactions

During 2011, other principal transactions results reflected an operating environment characterized by a significant decline in equity markets in Europe and Asia, and unfavorable credit markets that were negatively impacted by increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk. If equity markets decline further and credit spreads widen further, other principal transactions revenues would likely continue to be negatively impacted.

Goldman Sachs 2011 Form 10-K53


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Management’s Discussion and Analysis

2011 versus 2010.Other principal transactions revenues on the consolidated statements of earnings were $1.51 billion and $6.93 billion for 2011 and 2010, respectively. Results for 2011 included a loss from our investment in the ordinary shares of ICBC and net gains from other investments in equities, primarily in private equity positions, partially offset by losses from public equities. In addition, revenues in other principal transactions included net losses from debt securities and loans, primarily reflecting approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, partially offset by net gains from other debt securities and loans. Results for 2011 also included revenues related to our consolidated entities held for investment purposes.

2010 versus 2009.Other principal transactions revenues on the consolidated statements of earnings were $6.93 billion and $2.62 billion for 2010 and 2009, respectively. During 2010, an increase in global equity markets and tighter credit spreads provided a favorable backdrop for other principal transactions revenues. Results for 2010 included a gain from our investment in the ordinary shares of ICBC, net gains from other investments in equities, net gains from debt securities and loans and revenues related to our consolidated entities held for investment purposes. Results for 2009 included a gain from our investment in the ordinary shares of ICBC, net gains from debt securities and loans, and revenues related to our consolidated entities held for investment purposes, partially offset by net losses from other investments in equities. During 2009, continued weakness in commercial real estate markets negatively impacted our results.

Operating Expenses

Our operating expenses are primarily influenced by compensation, headcount and levels of business activity. In addition, see “Use of Estimates” for expenses that may arise from litigation and regulatory proceedings. Compensation and benefits includes salaries, discretionary compensation, amortization of equity awards and other items such as benefits. Discretionary compensation is significantly impacted by, among other factors, the level of net revenues, overall financial performance, prevailing labor markets, business mix, the structure of our share-based compensation programs and the external environment.

In the context of more difficult economic and financial conditions, the firm launched an initiative during the second quarter of 2011 to identify areas where we can operate more efficiently and reduce our operating expenses. We targeted approximately $1.4 billion in annual run rate compensation and non-compensation reductions and will continue to monitor our expense run rate closely and make further adjustments as needed.

54Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The table below presents our operating expenses and total staff.staff (which includes employees, consultants and temporary staff).

 

 

Year Ended December

 Year Ended December 
$ in millions 2011    2010    2009  2014     2013     2012  

Compensation and benefits

 $12,223    $15,376    $16,193  $12,691     $12,613     $12,944  

U.K. bank payroll tax

     465    
 

Brokerage, clearing, exchange and distribution fees

 2,463    2,281    2,298  2,501     2,341     2,208  
 

Market development

 640    530    342  549     541     509  
 

Communications and technology

 828    758    709  779     776     782  
 

Depreciation and amortization

 1,865    1,889    1,734  1,337     1,322     1,738  
 

Occupancy

 1,030    1,086    950  827     839     875  
 

Professional fees

 992    927    678  902     930     867  
 

Insurance reserves 1

 529    398    334       176     598  
 

Other expenses

 2,072    2,559    2,106  2,585     2,931     2,435  

Total non-compensation expenses

 10,419    10,428    9,151  9,480     9,856     10,012  

Total operating expenses

 $22,642    $26,269    $25,344  $22,171     $22,469     $22,956  

Total staff at period-end 2

 33,300    35,700    32,500

Total staff at period-end including consolidated entities held for investment purposes 3

 34,700    38,700    36,200

Total staff at period-end

  34,000     32,900     32,400  

 

1.

RevenuesConsists of changes in reserves related to our insurance activities are included in “Market making” on the consolidated statements of earnings.

2.

Includes employees, consultantsAmericas reinsurance business, including interest credited to policyholder account balances, and temporary staff.

3.

Compensation and benefits and non-compensation expenses related to consolidated entities held for investment purposes are includedproperty catastrophe reinsurance claims. In April 2013, we completed the sale of a majority stake in their respective line items in the consolidated statements of earnings. Consolidated entities held for investment purposes are entities that are held strictly for capital appreciation, have a defined exit strategyour Americas reinsurance business and are engaged in activities that are not closely related to our principal businesses.no longer consolidate this business.

20112014 versus 2010.2013.Operating expenses on the consolidated statements of earnings were $22.64$22.17 billion for 2011, 14% lower than 2010.2014, essentially unchanged compared with 2013. Compensation and benefits expenses on the consolidated statements of earnings were $12.22$12.69 billion for 2011, a 21% decline2014, essentially unchanged compared with $15.38 billion for 2010.2013. The ratio of compensation and benefits to net revenues for 20112014 was 42.4%,36.8% compared with 39.3% 1 (which excludes the impact of the

U.K. bank payroll tax)36.9% for 2010. Operating expenses for 2010 included $465 million related to the U.K. bank payroll tax.2013. Total staff decreased 7%increased 3% during 2011. Total staff including consolidated entities held for investment purposes decreased 10% during 2011.2014.

1.

We believe that presenting our ratio of compensation and benefits to net revenues excluding the impact of the $465 million U.K. bank payroll tax is meaningful, as excluding it increases the comparability of period-to-period results. The ratio of compensation and benefits to net revenues excluding the impact of this item is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. The table below presents the calculation of the ratio of compensation and benefits to net revenues including and excluding the impact of this item.

$ in millions

Year Ended

December 2010

Compensation and benefits (which excludes the impact of the $465 million U.K. bank payroll tax)

$15,376

Ratio of compensation and benefits to net revenues

39.3

Compensation and benefits, including the impact of the $465 million U.K. bank payroll tax

$15,841

Ratio of compensation and benefits to net revenues, including the impact of the $465 million U.K. bank payroll tax

40.5

Goldman Sachs 2011 Form 10-K55


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Non-compensation expenses on the consolidated statements of earnings were $10.42$9.48 billion for 2011, essentially unchanged2014, 4% lower than 2013. The decrease compared with 2010. Non-compensation expenses for 20112013 included higher brokerage, clearing, exchange and distribution fees, increased reserves related to our insurance business and higher market development expenses compared with 2010. These increases were offset by lower other expenses during 2011. Thea decrease in other expenses, primarily reflecteddue to lower net provisions for litigation and regulatory proceedings (2010 included $550 million related to a settlement with the SEC). In addition, non-compensationand lower operating expenses during 2011 included impairment charges of approximately $440 million, primarily related to consolidated investments, as well as a decline in insurance reserves, reflecting the sale of our Americas reinsurance business in 2013. These decreases were partially offset by an increase in brokerage, clearing, exchange and Litton Loan Servicing LP. Charitable contributionsdistribution fees. Net provisions for litigation and regulatory proceedings for 2014 were $163$754 million during 2011,compared with $962 million for 2013 (both primarily including $78comprised of net provisions for mortgage-related matters). 2014 included a charitable contribution of $137 million to Goldman Sachs Gives, our donor-advised fund, and $25 million to The Goldman Sachs Foundation.fund. Compensation was reduced to fund thethis charitable contribution to Goldman Sachs Gives. The $78 million contribution is in addition to prior year contributions made to Goldman Sachs Gives. The firm asks its participating managing directors to make recommendations regarding potential charitable recipients for this contribution.

20102013 versus 2009.2012.Operating expenses on the consolidated statements of earnings were $26.27$22.47 billion for 2010, 4% higher2013, 2% lower than 2009.2012. Compensation and benefits expenses on the consolidated statements of earnings were $15.38$12.61 billion for 2010, a 5% decline2013, 3% lower compared with $16.19$12.94 billion for 2009, due to lower net revenues.2012. The ratio of compensation and benefits to net revenues for 20102013 was 39.3% (which excludes the impact of the $465 million U.K. bank payroll tax),36.9% compared with 35.8%37.9% for 2009.2012. Total staff increased 10%2% during 2010. Total staff including consolidated entities held for investment purposes increased 7% during 2010.2013.

During 2010, the United Kingdom enacted legislation that imposed a non-deductible 50% tax on certain financial institutions in respect of discretionary bonuses in excess of £25,000 awarded under arrangements made between December 9, 2009 and April 5, 2010 to “relevant banking employees.” Our operating expenses for 2010 included $465 million related to this tax.

Non-compensation expenses on the consolidated statements of earnings were $10.43$9.86 billion for 2010, 14%2013, 2% lower than 2012. The decrease compared with 2012 included a decline in insurance reserves, reflecting the sale of our Americas reinsurance business, and a decrease in depreciation and amortization expenses, primarily reflecting lower impairment charges and lower operating expenses related to consolidated investments. These decreases were partially offset by an increase in other expenses, due to higher than 2009. This increase was primarily attributable to the impact of net provisions for litigation and regulatory proceedings, and higher brokerage, clearing, exchange and distribution fees. Net provisions for litigation and regulatory proceedings for 2013 were $962 million (primarily comprised of $682net provisions for mortgage-related matters) compared with $448 million for 2012 (including $550 million related to a settlement with the SEC), and an impairmentBoard of our NYSE DMM rights of $305 million, each during 2010. The remainderGovernors of the increase compared with 2009 generally reflected higher professional fees, market development expenses and occupancy expenses. These increases were partially offset byFederal Reserve System (Federal Reserve Board) regarding the impactindependent foreclosure review). 2013 included a charitable contribution of significantly higher real estate impairment charges during 2009 related to our consolidated entities held for investment purposes, as well as higher charitable contributions during 2009. The real estate impairment charges, which were measured based on discounted cash flow analyses, are included in our Investing & Lending segment and reflected weakness in the commercial real estate markets. Charitable contributions were approximately $420 million during 2010, primarily including $25 million to The Goldman Sachs Foundation and $320$155 million to Goldman Sachs Gives, our donor-advised fund. Compensation was reduced to fund thethis charitable contribution to Goldman Sachs Gives. The firm asks its participating managing directors to make recommendations regarding potential charitable recipients for this contribution.

 

 

56 Goldman Sachs 20112014 Form 10-K 57


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Provision for Taxes

The effective income tax rate for 20112014 was 28.0%31.4%, down from 35.2%essentially unchanged compared with 31.5% for 2010. Excluding the impact of the $465 million U.K. bank payroll tax and the $550 million SEC settlement, substantially all of which was non-deductible, the effective income tax rate for 2010 was 32.7% 1. The decrease from 32.7% to 28.0% was primarily due to an increase in permanent benefits as a percentage of earnings and the earnings mix.2013.

The effective income tax rate for 2010 of 32.7% 12013 was essentially unchanged31.5%, down from the effective income tax rate33.3% for 2009 of 32.5%.2012. The decrease from 33.3% to 31.5% was primarily due to a determination that certain non-U.S. earnings will be permanently reinvested abroad.

In December 2010,2014, the rules related to the deferral of U.S. tax on certain non-repatriated active financing income were extended retroactively to January 1, 20102014 through December 31, 2011. If2014. The expiration of these rules areeffective December 31, 2014 is not extended, the expiration may materially increaseexpected to have a material impact on our effective income tax rate beginningfor 2015.

In March 2014, New York State enacted executive budget legislation for the 2014-2015 fiscal year which changes the taxation of corporations doing business in 2013.the state. This change did not have a material impact on our effective tax rate for 2014, and we do not expect it will have a material impact on our effective tax rate for 2015.

1.

We believe that presenting our effective income tax rate for 2010 excluding the impact of the U.K. bank payroll tax and the SEC settlement, substantially all of which was non-deductible, is meaningful as excluding these items increases the comparability of period-to-period results. The effective income tax rate excluding the impact of these items is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies. The table below presents the calculation of the effective income tax rate excluding the impact of these amounts.

  Year Ended December 2010 
$ in millions Pre-tax
earnings
     

Provision

for taxes

     Effective income
tax rate
 

As reported

  $12,892       $4,538       35.2

Add back:

Impact of the U.K. bank payroll tax

  465                

Impact of the SEC settlement

  550       6         

As adjusted

  $13,907       $4,544       32.7

Goldman Sachs 2011 Form 10-K57


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Segment Operating Results

The table below presents the net revenues, operating expenses and pre-tax earnings of our segments.

 

     Year Ended December 
in millions     2011     2010     2009 

Investment Banking

  Net revenues $4,355      $4,810      $4,984  
   Operating expenses  2,962       3,511       3,482  
   Pre-tax earnings $1,393      $1,299      $1,502  

Institutional Client Services

  Net revenues $17,280      $21,796      $32,719  
   Operating expenses  12,697       14,291       13,691  
   Pre-tax earnings $4,583      $7,505      $19,028  

Investing & Lending

  Net revenues $2,142      $7,541      $2,863  
   Operating expenses  2,673       3,361       3,523  
   Pre-tax earnings/(loss) $(531    $4,180      $(660

Investment Management

  Net revenues $5,034      $5,014      $4,607  
   Operating expenses  4,018       4,051       3,673  
   Pre-tax earnings $1,016      $963      $934  

Total

  Net revenues $28,811      $39,161      $45,173  
   Operating expenses  22,642       26,269       25,344  
   Pre-tax earnings $6,169      $12,892      $19,829  

Operating expenses in the table above include the following expenses that have not been allocated to our segments:

  Year Ended December 
$ in millions  2014     2013     2012  

Investment Banking

     

Net revenues

  $  6,464     $  6,004     $  4,926  
  

Operating expenses

  3,688     3,479     3,333  

Pre-tax earnings

  $  2,776     $  2,525     $  1,593  

 

Institutional Client Services

     

Net revenues

  $15,197     $15,721     $18,124  
  

Operating expenses

  10,880     11,792     12,490  

Pre-tax earnings

  $  4,317     $  3,929     $  5,634  

 

Investing & Lending

     

Net revenues

  $  6,825     $  7,018     $  5,891  
  

Operating expenses

  2,819     2,686     2,668  

Pre-tax earnings

  $  4,006     $  4,332     $  3,223  

 

Investment Management

     

Net revenues

  $  6,042     $  5,463     $  5,222  
  

Operating expenses

  4,647     4,357     4,296  

Pre-tax earnings

  $  1,395     $  1,106     $     926  

 

Total net revenues

  $34,528     $34,206     $34,163  
  

Total operating expenses 1

  22,171     22,469     22,956  

Total pre-tax earnings

  $12,357     $11,737     $11,207  

 

Ÿ1.

net provisions for a numberIncludes charitable contributions that have not been allocated to our segments of litigation and regulatory proceedings of $175 million, $682 million and $104$137 million for the years ended December 2011, December 2010 and December 2009, respectively;

Ÿ

charitable contributions of $103 million, $345 million and $8102014, $155 million for the years ended December 2011, December 20102013 and December 2009, respectively; and

Ÿ

$169 million for 2012. Operating expenses related to real estate-related exit costs, previously not allocated to our segments, have now been allocated. This allocation reflects the change in the manner in which management views the performance of $14 million, $28 million and $61 million forour segments. Reclassifications have been made to previously reported segment amounts to conform to the years ended December 2011, December 2010 and December 2009, respectively.current presentation.

Net revenues in our segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. See Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our business segments.

The cost drivers of Goldman Sachs taken as a whole — compensation, headcount and levels of business activity — are broadly similar in each of our business segments. Compensation and benefits expenses within our segments reflect, among other factors, the overall performance of Goldman Sachs as well as the performance of individual businesses. Consequently, pre-tax margins in one segment of our business may be significantly affected by the performance of our other business segments. A discussion of segment operating results follows.

 

 

58 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Investment Banking

Our Investment Banking segment is comprised of:

Financial Advisory.Includes strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs, risk management restructurings and spin-offs, and derivative transactions directly related to these client advisory assignments.

Underwriting.Includes public offerings and private placements, including local and cross-border transactions, of a wide range of securities, loans and other financial instruments, and derivative transactions directly related to these client underwriting activities.

The table below presents the operating results of our Investment Banking segment.

 

 Year Ended December  Year Ended December 
in millions 2011   2010   2009 
$ in millions  2014     2013     2012  

Financial Advisory

 $1,987    $2,062    $1,897    $2,474     $1,978     $1,975  

Equity underwriting

  1,085     1,462     1,797    1,750     1,659     987  
 

Debt underwriting

  1,283     1,286     1,290    2,240     2,367     1,964  

Total Underwriting

  2,368     2,748     3,087    3,990     4,026     2,951  

Total net revenues

  4,355     4,810     4,984    6,464     6,004     4,926  
 

Operating expenses

  2,962     3,511     3,482    3,688     3,479     3,333  

Pre-tax earnings

 $1,393    $1,299    $1,502    $2,776     $2,525     $1,593  

The table below presents our financial advisory and underwriting transaction volumes. 1

 

 Year Ended December  Year Ended December 
in billions 2011   2010   2009 
$ in billions  2014     2013     2012  

Announced mergers and acquisitions

 $638    $494    $543    $1,002     $   620     $   745  
 

Completed mergers and acquisitions

  635     436     593    659     632     575  
 

Equity and equity-related offerings 2

  55     67     84    78     91     58  
 

Debt offerings 3

  203     234     256    268     280     243  

 

1.

Source: Thomson Reuters. Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity and equity-related offerings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period. In addition, transaction volumes for prior periods may vary from amounts previously reported due to the subsequent withdrawal or a change in the value of a transaction.

 

2.

Includes Rule 144A and public common stock offerings, convertible offerings and rights offerings.

 

3.

Includes non-convertible preferred stock, mortgage-backed securities, asset-backed securities and taxable municipal debt. Includes publicly registered and Rule 144A issues. Excludes leveraged loans.

20112014 versus 2010.2013.Net revenues in Investment Banking were $4.36$6.46 billion for 2011, 9% lower2014, 8% higher than 2010.2013.

Net revenues in Financial Advisory were $1.99$2.47 billion, 4% lower25% higher than 2010.2013, reflecting an increase in industry-wide completed mergers and acquisitions, primarily in the United States. Net revenues in our Underwriting business were $2.37$3.99 billion, 14% lower than 2010, reflecting significantly lower net revenues in equity underwriting, principally due toessentially unchanged compared with a decline instrong 2013, as industry-wide activity.activity levels remained high. Net revenues in debt underwriting were essentially unchangedslightly lower compared with 2010.2013, reflecting lower net revenues from commercial mortgage-related activity, while net revenues in equity underwriting were slightly higher, principally from initial public offerings.

During 2014, Investment Banking operated in an environment generally characterized by significant declinesstrong industry-wide underwriting activity in both equity and debt, and an increase in industry-wide underwriting andcompleted mergers and acquisitions activity levels duringcompared with 2013. Industry-wide announced mergers and acquisitions activity significantly increased compared with 2013. In the second half of 2011. These declines reflected increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk, which contributed to a significant widening in credit spreads, a sharp increase in volatility levelsfuture, if market conditions become less favorable, and a significant decline in global equity markets during the second half of 2011. If these concerns continue or if equity markets decline further, resulting in lower levels of client activity levels broadly decline, net revenues in Investment Banking would likely continue to be negatively impacted.

OurDuring 2014, our investment banking transaction backlog increased significantly due to a significant increase in estimated net revenues from potential advisory transactions. Estimated net revenues from potential underwriting transactions were lower compared with the end of 2010. The increase compared with the end of 2010 was due to an increase2013, as a significant decrease in estimated net revenues from potential equity underwriting transactions, primarily reflectingparticularly in initial public offerings, was partially offset by an increase in client mandates to underwrite initial public offerings. Estimatedestimated net revenues from potential debt underwriting transactions, decreased slightly compared with the end of 2010. Estimated net revenues from potential advisory transactions were essentially unchanged compared with the end of 2010.reflecting increases across most products.

 

 

 Goldman Sachs 20112014 Form 10-K 59


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Our investment banking transaction backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not. We believe changes in our investment banking transaction backlog may be a useful indicator of client activity levels which, over the long term, impact our net revenues. However, the timeframetime frame for completion and corresponding revenue recognition of transactions in our backlog varies based on the nature of the assignment, as certain transactions may remain in our backlog for longer periods of time and others may enter and leave within the same reporting period. In addition, our transaction backlog is subject to certain limitations, such as assumptions about the likelihood that individual client transactions will occur in the future. Transactions may be cancelled or modified, and transactions not included in the estimate may also occur.

Operating expenses were $2.96$3.69 billion for 2011, 16% lower2014, 6% higher than 2010,2013, primarily due to decreasedincreased compensation and benefits expenses, primarily resulting from lowerreflecting higher net revenues. Pre-tax earnings were $1.39$2.78 billion in 2011, 7%2014, 10% higher than 2010.2013.

20102013 versus 2009.2012. Net revenues in Investment Banking were $4.81$6.00 billion for 2010, 3% lower2013, 22% higher than 2009.2012.

Net revenues in Financial Advisory were $2.06$1.98 billion, 9%essentially unchanged compared with 2012. Net revenues in Underwriting were $4.03 billion, 36% higher than 2009, primarily2012, due to strong net revenues in both equity and debt underwriting. Net revenues in equity underwriting were significantly higher compared with 2012, reflecting an increase in client activity. Net revenuesactivity, particularly in our Underwriting business were $2.75 billion, 11% lower than 2009, reflecting lower net revenues in equity underwriting, principally due to a decline in client activity in comparison to 2009, which included significant capital-raising activity by financial institution clients.initial public offerings. Net revenues in debt underwriting were essentially unchangedsignificantly higher compared with 2009.2012, principally due to leveraged finance activity.

During 2010,2013, Investment Banking operated in an environment generally characterized by a continuation of low levels ofimproved industry-wide equity underwriting activity, particularly in initial public offerings, as global equity prices significantly increased during the year. In addition, industry-wide debt underwriting activity remained solid, and included significantly higher leveraged finance activity, as interest rates remained low. However, ongoing macroeconomic concerns continued to weigh on investment banking activity as industry-wide mergers and acquisitions activity reflecting heightened uncertainty regarding the global economic outlook. Although certain additional unfavorable market conditions emerged in the first half of 2010, including lower equity prices and wider corporate credit spreads, interest rates remained low throughout the year and underwriting activity improved during the second half of the year as global equity prices recovered and corporate credit spreads narrowed.declined compared with 2012.

OurDuring 2013, our investment banking transaction backlog decreased compared with the end of 2009.increased significantly due to significantly higher estimated net revenues from both potential advisory transactions and potential underwriting transactions. The decrease compared with the end of 2009 reflected a declineincrease in underwriting reflects significantly higher estimated net revenues from potential equity underwriting transactions, primarily in initial public offerings, and higher estimated net revenues from potential debt and equity underwriting transactions, primarily related to client mandates to underwriteprincipally from leveraged finance transactions and common stock offerings. This decrease was partially offset by an increase in estimated net revenues from potential advisory transactions.activity.

Operating expenses were $3.51$3.48 billion for 2010, essentially unchanged2013, 4% higher than 2012, due to increased compensation and benefits expenses, primarily resulting from 2009.higher net revenues. Pre-tax earnings were $1.30$2.53 billion in 2010, 14% lower2013, 59% higher than 2009.2012.

60Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Institutional Client Services

Our Institutional Client Services segment is comprised of:

Fixed Income, Currency and Commodities Client Execution.Includes client execution activities related to making markets in interest rate products, credit products, mortgages, currencies and commodities.

We generate market-making revenues in these activities, in three ways:

 

Ÿ 

In large,Interest Rate Products. Government bonds, money market instruments such as commercial paper, treasury bills, repurchase agreements and other highly liquid markets (suchsecurities and instruments, as markets for U.S. Treasury bills, large capitalization S&P 500 stocks or certain mortgage pass-through certificates), we execute a high volume of transactions for our clients for modest spreadswell as interest rate swaps, options and fees.other derivatives.

 

Ÿ 

In less liquid markets (such as mid-capCredit Products. Investment-grade corporate bonds, growthsecurities, high-yield securities, credit derivatives, bank and bridge loans, municipal securities, emerging market currencies and certain non-agency mortgage-backed securities), we execute transactions for our clients for spreadsdistressed debt, and fees that are generally somewhat larger.trade claims.

 

Ÿ 

We also structureMortgages. Commercial mortgage-related securities, loans and execute transactions involving customized or tailor-made products that address our clients’ risk exposures, investment objectives orderivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations, other complex needs (such as a jet fuel hedge for an airline).prime, subprime and Alt-A securities and loans), and other asset-backed securities, loans and derivatives.

Given the focus on the mortgage market, our mortgage activities are further described below.

Our activities in mortgages include commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations, other prime, subprime and Alt-A securities and loans), and other asset-backed securities, loans and derivatives.

 

60Ÿ Goldman Sachs 2011 Form 10-K

Currencies. Most currencies, including growth-market currencies.

Ÿ 

Commodities. Crude oil and petroleum products, natural gas, base, precious and other metals, electricity, coal, agricultural and other commodity products.


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

We buy, hold and sell long and short mortgage positions, primarily for market making for our clients. Our inventory therefore changes based on client demands and is generally held for short-term periods.

See Notes 18 and 27 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about exposure to mortgage repurchase requests, mortgage rescissions and mortgage-related litigation.

Equities. Includes client execution activities related to making markets in equity products as well asand commissions and fees from executing and clearing institutional client transactions on major stock, options and futures exchanges worldwide.worldwide, as well as OTC transactions. Equities also includes our securities services business, which provides financing, securities lending and other prime brokerage services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and generates revenues primarily in the form of interest rate spreads or fees, and revenues related to our insurance activities.fees.

The table below presents the operating results of our Institutional Client Services segment.

 

 Year Ended December  Year Ended December 
in millions 2011   2010   2009 
$ in millions  2014     2013     2012  

Fixed Income, Currency and Commodities Client Execution

 $9,018    $13,707    $21,883    $  8,461     $  8,651     $  9,914  

Equities client execution

  3,031     3,231     5,237  

Equities client execution 1

  2,079     2,594     3,171  
 

Commissions and fees

  3,633     3,426     3,680    3,153     3,103     3,053  
 

Securities services

  1,598     1,432     1,919    1,504     1,373     1,986  

Total Equities

  8,262     8,089     10,836    6,736     7,070     8,210  

Total net revenues

  17,280     21,796     32,719    15,197     15,721     18,124  
 

Operating expenses

  12,697     14,291     13,691    10,880     11,792     12,490  

Pre-tax earnings

 $4,583    $7,505    $19,028    $  4,317     $  3,929     $  5,634  

 

1.

Net revenues related to the Americas reinsurance business were $317 million for 2013 and $1.08 billion for 2012. In April 2013, we completed the sale of a majority stake in our Americas reinsurance business and no longer consolidate this business.

Goldman Sachs 2014 Form 10-K61


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

2011Management’s Discussion and Analysis

2014 versus 2010.2013.Net revenues in Institutional Client Services were $17.28$15.20 billion for 2011, 21%2014, 3% lower than 2010.2013. Results for 2014 included a gain of $289 million ($270 million of which was recorded at extinguishment in the third quarter) related to the extinguishment of certain of our junior subordinated debt, of which $168 million was included in Fixed Income, Currency and Commodities Client Execution and $121 million in Equities ($30 million and $91 million included in equities client execution and securities services, respectively).

Net revenues in Fixed Income, Currency and Commodities Client Execution were $9.02$8.46 billion for 2011, 34%2014, 2% lower than 2010. Although activity2013. Excluding the gain related to the extinguishment of debt in 2014 and a gain of $211 million on the sale of a majority stake in our European insurance business in 2013, net revenues in Fixed Income, Currency and Commodities Client Execution were slightly lower compared with 2013. This decline reflected significantly lower net revenues in credit products and slightly lower net revenues in both interest rate products and mortgages. The decrease in credit products primarily reflected difficult market-making conditions, particularly during the second half of 2014, and generally low levels during 2011 were generally consistent with 2010 levels, andof activity. These results were solidlargely offset by significantly higher net revenues in commodities and higher net revenues in currencies. The increase in commodities reflected more favorable market-making conditions in certain energy products, primarily during the first quarter of 2011,2014. The increase in currencies reflected a stronger performance towards the environment duringend of the remainder of 2011year, as activity levels improved and volatility was characterized by broad market concerns and uncertainty, resulting in volatile markets and significantly wider credit spreads, which contributed to difficult market-making conditions and led to reductions in risk by us and our clients. As a result of these conditions, net revenues across the franchise were lower, including significant declines in mortgages and credit products, compared with 2010.higher.

Net revenues in Equities were $8.26$6.74 billion for 2011, 2% higher2014, 5% lower than 2010. During 2011, average volatility levels increased2013. Excluding the gain related to the extinguishment of debt in 2014 and equity prices in Europe and Asia declined significantly, particularly during the third quarter. The increase in net revenues of $317 million related to the sale of a majority stake in our Americas reinsurance business in 2013, net revenues in Equities were slightly lower compared with 2013. This decline reflected lower net revenues in derivatives, partially offset by slightly higher commissions and fees primarily due toand slightly higher transaction volumes, particularly during the third quarter of 2011. In addition, net revenues in securities services. The increase in securities services increased compared with 2010, reflectingnet revenues reflected the impact of higher average customer balances. EquitiesThe increase in commissions and fees was due to higher commissions and fees in both Europe and the United States, reflecting generally higher client execution net revenues were lower than 2010, primarily reflecting significantly lower net revenuesactivity, consistent with increases in shares.listed cash equity market volumes in these regions.

The net gain attributable to the impact of changes in our own credit spreads on borrowings for which the fair value option was elected was $596$144 million ($108 million and $198$36 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 20112014, compared with a net loss of $296 million ($220 million and 2010, respectively.$76 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2013.

During 2014, Institutional Client Services operatedcontinued to operate in ana challenging environment, as economic uncertainty contributed to subdued risk appetite for our clients and generally characterized bylow levels of activity, particularly in credit products, interest rate products and mortgages. In addition, volatility levels remained low, although volatility increased concerns regardingin certain businesses towards the weakened stateend of global economies, including heightened European sovereign debt risk, and its impact on the European banking system and global financial institutions. These conditionsyear. Debt markets were also impacted expectations for economic prospectsby the widening of high-yield credit spreads and the decline in the U.S. and were reflected in equity and debt markets more broadly. In addition, the downgrade in credit ratings of the U.S. government and federal agencies and many financial institutionsoil prices during the second half of 2011the year, which contributed to further uncertaintylow liquidity, particularly in credit. Equity markets, however, generally increased during the markets. These concerns, as well as other broad market concerns, such as uncertainty over financial regulatory reform, continued to have a negative impact on our net revenues during 2011.year. If thesemacroeconomic concerns continue over the long term and market-making conditionsactivity levels remain challenging,low, net revenues in Fixed Income, Currency and Commodities Client Execution and Equities would likely continue to be negatively impacted.

Operating expenses were $12.70$10.88 billion for 2011, 11%2014, 8% lower than 2010,2013, due to decreased compensation and benefits expenses, primarily resulting fromreflecting lower net revenues, the impactlower net provisions for litigation and regulatory proceedings, and lower expenses as a result of the U.K. bank payroll tax during 2010, as well as an impairmentsale of a majority stake in our NYSE DMM rights of $305 million during 2010. These decreases were partially offset by higher brokerage, clearing, exchange and distribution fees, principally reflecting higher transaction volumes in Equities.Americas reinsurance business. Pre-tax earnings were $4.58$4.32 billion in 2011, 39% lower2014, 10% higher than 2010.2013.

 

 

62 Goldman Sachs 20112014 Form 10-K 61


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

20102013 versus 2009.2012.Net revenues in Institutional Client Services were $21.80$15.72 billion for 2010, 33%2013, 13% lower than 2009.2012.

Net revenues in Fixed Income, Currency and Commodities Client Execution were $13.71$8.65 billion for 2010, 37%2013, 13% lower than a particularly strong 2009. During 2010, Fixed Income, Currency and Commodities Client Execution operated in a challenging environment characterized by lower client activity levels, which reflected broad market concerns including European sovereign debt risk and uncertainty over regulatory reform, as well as tighter bid/offer spreads. The decrease in net revenues compared with 2009 primarily reflected significantly lower results in interest rate products, credit products, commodities and, to a lesser extent, currencies. These decreases were partially offset by higher net revenues in mortgages, as 2009 included approximately $1 billion of losses related to commercial mortgage loans.

Net revenues in Equities were $8.09 billion for 2010, 25% lower than 2009, primarily2012, reflecting significantly lower net revenues in interest rate products compared with a solid 2012, and significantly lower net revenues in mortgages compared with a strong 2012. The decrease in interest rate products and mortgages primarily reflected the impact of a more challenging environment and lower activity levels compared with 2012. In addition, net revenues in currencies were slightly lower, while net revenues in credit products and commodities were essentially unchanged compared with 2012. In December 2013, we completed the sale of a majority stake in our European insurance business and recognized a gain of $211 million.

Net revenues in Equities were $7.07 billion for 2013, 14% lower compared with 2012, due to the sale of our Americas reinsurance business1 in 2013 and the sale of our hedge fund administration business in 2012. Net revenues in equities client execution principally due to(excluding net revenues from our Americas reinsurance business) were higher compared with 2012, including significantly higher net revenues in cash products, partially offset by significantly lower resultsnet revenues in derivatives and shares.derivatives. Commissions and fees were alsoslightly higher compared with 2012, reflecting higher commissions and fees in Asia and Europe, partially offset by lower than 2009, primarily reflectingcommissions and fees in the United States. Our average daily volumes during 2013 were higher in Asia and Europe and lower client activity levels. In addition, securitiesin the United States compared with 2012, consistent with listed cash equity market volumes. Securities services net revenues were significantly lower compared with 2009,2012, primarily reflecting tighter securities lending spreads, principally due to the impactsale of changesour hedge fund administration business in the composition2012 (2012 included a gain on sale of customer balances, partially offset$494 million). During 2013, Equities operated in an environment characterized by the impact of higher average customer balances. During 2010, although equity markets were volatile during the first half of the year,a significant increase in global equity prices, particularly in Japan and the U.S., and generally improved andlower volatility levels declined in the second half of the year.levels.

The net gain/(loss)loss attributable to the impact of changes in our own credit spreads on borrowings for which the fair value option was elected was $198$296 million ($220 million and $(1.10) billion$76 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 20102013, compared with a net loss of $714 million ($433 million and 2009, respectively.$281 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2012.

Results inDuring 2013, Institutional Client Services operated in a challenging environment that required continual reassessment of the outlook for 2010 were negatively impacted by a general decrease in client activity levels from very strong levels seen in 2009. Certain unfavorable conditions emerged during the second quarter of 2010 that madeglobal economy, as uncertainty about when the environment more challenging for our businesses, resulting in lower client activity levels. These conditions included broad market concerns, suchU.S. Federal Reserve would begin tapering its asset purchase program, as

European sovereign debt well as constant global political risk and uncertainty, regarding financial regulatory reform, sharply higher equity volatilitywere interspersed with improvements in the U.S. economy over the course of the year. As a result, our clients’ risk appetite and activity levels fluctuated during 2013. Compared with 2012, activity levels were generally lower, global equity prices significantly increased and wider corporate credit spreads. During the second half of 2010, some of these conditions reversed as equity volatility levels decreased, global equity prices recovered, corporate credit spreads narrowed and commercial real estate asset prices began to improve. However, lower client activity levels, reflecting broad market concerns, including European sovereign debt risk and uncertainty over regulatory reform, continued to negatively impact our results. In addition, bid/offer spreads remained tight relative to 2009, as financial markets continued to stabilize, the availability of funding improved and volatility levels in both corporate credit spreads and commodity prices declined.tightened.

Operating expenses were $14.29$11.79 billion for 2010, 4% higher2013, 6% lower than 2009,2012, due to the impactdecreased compensation and benefits expenses, primarily resulting from lower net revenues, and lower expenses as a result of the U.K. bank payroll tax, as well as an impairmentsale of a majority stake in our NYSE DMM rights of $305 million.Americas reinsurance business in April 2013. These increasesdecreases were partially offset by lower compensationincreased net provisions for litigation and benefits expenses, resulting from lower levelsregulatory proceedings, primarily comprised of discretionary compensation.net provisions for mortgage-related matters, and higher brokerage, clearing, exchange and distribution fees. Pre-tax earnings were $7.51$3.93 billion in 2010, 61%2013, 30% lower than 2009.2012.

1.

Net revenues related to the Americas reinsurance business were $317 million for 2013 and $1.08 billion for 2012. In April 2013, we completed the sale of a majority stake in our Americas reinsurance business and no longer consolidate this business.

Goldman Sachs 2014 Form 10-K63


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Investing & Lending

Investing & Lending includes our investing activities and the origination of loans to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, some of which are consolidated, directly and indirectly through funds that we manage, in debt securities and loans, public and private equity securities, and real estate consolidated investment entities and power generation facilities.entities.

The table below presents the operating results of our Investing & Lending segment.

 

 Year Ended December  Year Ended December 
in millions 2011   2010   2009 

ICBC

 $(517  $747    $1,582  

Equity securities (excluding ICBC)

  1,120     2,692     (596
$ in millions  2014     2013     2012  

Equity securities

  $3,813     $3,930     $2,800  
 

Debt securities and loans

  96     2,597     1,045    2,165     1,947     1,850  
 

Other 1

  1,443     1,505     832    847     1,141     1,241  

Total net revenues

  2,142     7,541     2,863    6,825     7,018     5,891  
 

Operating expenses

  2,673     3,361     3,523    2,819     2,686     2,668  

Pre-tax earnings/(loss)

 $(531  $4,180    $(660

Pre-tax earnings

  $4,006     $4,332     $3,223  

 

1.

Primarily includesIncludes net revenues of $325 million for 2014, $329 million for 2013 and $362 million for 2012 related to ourMetro International Trade Services LLC. We completed the sale of this consolidated entities held for investment purposes.in December 2014.

2014 versus 2013. Net revenues in Investing & Lending were $6.83 billion for 2014, 3% lower than 2013. Net gains from investments in equity securities were slightly lower due to a significant decrease in net gains from investments in public equities, as movements in global equity prices during 2014 were less favorable compared with 2013, partially offset by an increase in net gains from investments in private equities, primarily driven by company-specific events. Net revenues from debt securities and loans were higher than 2013, reflecting a significant increase in net interest income, primarily driven by increased lending, and a slight increase in net gains, primarily due to sales of certain investments during 2014. Other net revenues, related to our consolidated investments, were significantly lower compared with 2013, reflecting a decrease in operating revenues from commodities-related consolidated investments.

During 2014, net revenues in Investing & Lending generally reflected favorable company-specific events, including initial public offerings and financings, and strong corporate performance, as well as net gains from sales of certain investments. However, concerns about the outlook for the global economy and uncertainty over the impact of financial regulatory reform continue to be meaningful considerations for the global marketplace. If equity markets decline or credit spreads widen, net revenues in Investing & Lending would likely be negatively impacted.

Operating expenses were $2.82 billion for 2014, 5% higher than 2013, reflecting higher compensation and benefits expenses, partially offset by lower expenses related to consolidated investments. Pre-tax earnings were $4.01 billion in 2014, 8% lower than 2013.

2013 versus 2012. Net revenues in Investing & Lending were $7.02 billion for 2013, 19% higher than 2012, reflecting a significant increase in net gains from investments in equity securities, driven by company-specific events and stronger corporate performance, as well as significantly higher global equity prices. In addition, net gains and net interest income from debt securities and loans were slightly higher, while other net revenues, related to our consolidated investments, were lower compared with 2012.

During 2013, net revenues in Investing & Lending generally reflected favorable company-specific events and strong corporate performance, as well as the impact of significantly higher global equity prices and tighter corporate credit spreads.

Operating expenses were $2.69 billion for 2013, essentially unchanged compared with 2012. Operating expenses during 2013 included lower impairment charges and lower operating expenses related to consolidated investments, partially offset by increased compensation and benefits expenses due to higher net revenues compared with 2012. Pre-tax earnings were $4.33 billion in 2013, 34% higher than 2012.

 

 

6264 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

2011 versus 2010.Net revenues in Investing & Lending were $2.14 billion and $7.54 billion for 2011 and 2010, respectively. During 2011, Investing & Lending results reflected an operating environment characterized by a significant decline in equity markets in Europe and Asia, and unfavorable credit markets that were negatively impacted by increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk. Results for 2011 included a loss of $517 million from our investment in the ordinary shares of ICBC and net gains of $1.12 billion from other investments in equities, primarily in private equity positions, partially offset by losses from public equities. In addition, Investing & Lending included net revenues of $96 million from debt securities and loans. This amount includes approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, offset by net interest income and net gains from other debt securities and loans. Results for 2011 also included other net revenues of $1.44 billion, principally related to our consolidated entities held for investment purposes. If equity markets decline further and credit spreads widen further, net revenues in Investing & Lending would likely continue to be negatively impacted.

Operating expenses were $2.67 billion for 2011, 20% lower than 2010, due to decreased compensation and benefits expenses, primarily resulting from lower net revenues. This decrease was partially offset by the impact of impairment charges related to consolidated investments during 2011. Pre-tax loss was $531 million in 2011, compared with pre-tax earnings of $4.18 billion in 2010.

2010 versus 2009.Net revenues in Investing & Lending were $7.54 billion and $2.86 billion for 2010 and 2009, respectively. Results for 2010 included a gain of $747 million from our investment in the ordinary shares of ICBC, a net gain of $2.69 billion from other investments in equities, a net gain of $2.60 billion from debt securities and loans and other net revenues of $1.51 billion, principally related to our consolidated entities held for investment purposes. The net gain from other investments in equities was primarily driven by an increase in global equity markets, which resulted in appreciation of both our public and private equity positions and provided favorable conditions for initial public offerings. The net gains and net interest from debt securities and loans primarily reflected the impact of tighter credit spreads and favorable credit markets during the year, which provided favorable conditions for borrowers to refinance.

Results for 2009 included a gain of $1.58 billion from our investment in the ordinary shares of ICBC, a net gain of $1.05 billion from debt securities and loans, and other net revenues of $832 million, principally related to our consolidated entities held for investment purposes, partially offset by a net loss of $596 million from other investments in equities. During 2009, continued weakness in commercial real estate markets negatively impacted our results.

Operating expenses were $3.36 billion for 2010, 5% lower than 2009, due to the impact of significantly higher real estate impairment charges during 2009 related to consolidated entities held for investment purposes, as well as decreased compensation and benefits expenses, resulting from lower levels of discretionary compensation. Pre-tax earnings were $4.18 billion in 2010, compared with a pre-tax loss of $660 million for 2009.

Investment Management

Investment Management provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. Investment Management also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.

Assets under supervision include assets under management and other client assets. Assets under management include client assets where we earn a fee for managing assets on a discretionary basis. This includes net assets in our mutual funds, hedge funds, credit funds and private equity funds (including real estate funds), and separately managed accounts for institutional and individual investors. Other client assets include client assets invested with third-party managers, bank deposits and advisory relationships where we earn a fee for advisory and other services, but do not have investment discretion. Assets under supervision do not include the self-directed brokerage assets of our clients. Long-term assets under supervision represent assets under supervision excluding liquidity products. Liquidity products represent money markets and bank deposit assets.

Assets under supervision typically generate fees as a percentage of net asset value, which vary by asset class and are affected by investment performance as well as asset inflows and redemptions. Asset classes such as alternative investment and equity assets typically generate higher fees relative to fixed income and liquidity product assets. The average effective management fee (which excludes non-asset-based fees) we earned on our assets under supervision was 40 basis points for both 2014 and 2013, and 39 basis points for 2012.

In certain circumstances, we are also entitled to receive incentive fees based on a percentage of a fund’s or a separately managed account’s return, or when the return exceeds a specified benchmark or other performance targets. Incentive fees are recognized only when all material contingencies are resolved.

Goldman Sachs 2011 Form 10-K63


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The table below presents the operating results of our Investment Management segment.

 

  Year Ended December 
in millions 2011   2010   2009 

Management and other fees

 $4,188    $3,956    $3,860  

Incentive fees

  323     527     180  

Transaction revenues

  523     531     567  

Total net revenues

  5,034     5,014     4,607  

Operating expenses

  4,018     4,051     3,673  

Pre-tax earnings

 $1,016    $963    $934  

Assets under management include only client assets where we earn a fee for managing assets on a discretionary basis. This includes net assets in our mutual funds, hedge funds and private equity funds (including real estate funds), and separately managed accounts for institutional and individual investors. Assets under management do not include the self-directed assets of our clients, including brokerage accounts, or interest-bearing deposits held through our bank depository institution subsidiaries.

  Year Ended December 
$ in millions  2014     2013     2012  

Management and other fees

  $4,800     $4,386     $4,105  
  

Incentive fees

  776     662     701  
  

Transaction revenues

  466     415     416  

Total net revenues

  6,042     5,463     5,222  
  

Operating expenses

  4,647     4,357     4,296  

Pre-tax earnings

  $1,395     $1,106     $   926  

The tables below present our period-end assets under managementsupervision (AUS) by asset class and a summary of the changes in our assets under management.by distribution channel.

 

  As of December 31, 
in billions 2011   2010   2009 

Alternative investments 1

 $142    $148    $146  

Equity

  126     144     146  

Fixed income

  340     340     315  

Total non-money market assets

  608     632     607  

Money markets

  220     208     264  

Total assets under management

 $828    $840    $871  
  As of December 
$ in billions  2014     2013     2012  

Assets under management

  $1,027     $   919     $   854  
  

Other client assets

  151     123     111  

Total AUS

  $1,178     $1,042     $   965  

 

Asset Class

     

Alternative investments 1

  $   143     $   142     $   151  
  

Equity

  236     208     153  
  

Fixed income

  516     446     411  

Long-term AUS

  895     796     715  
  

Liquidity products

  283     246     250  

Total AUS

  $1,178     $1,042     $   965  

 

Distribution Channel

     

Directly distributed:

     

Institutional

  $   412     $   363     $   343  
  

High-net-worth individuals

  363     330     294  
  

Third-party distributed:

     

Institutional, high-net-worth individuals and retail

  403     349     328  

Total AUS

  $1,178     $1,042     $   965  

 

1.

Primarily includes hedge funds, credit funds, private equity, real estate, currencies, commodities and asset allocation strategies.

  Year Ended December 31, 
in billions 2011  2010   2009 

Balance, beginning of year

 $840   $871    $798  

Net inflows/(outflows)

    

Alternative investments

  (5  (1   (5

Equity

  (9  (21   (2

Fixed income

  (15  7     26  

Total non-money market net inflows/(outflows)

  (29  (15   19  

Money markets

  12    (56   (22

Total net inflows/(outflows)

  (17) 1   (71   (3

Net market appreciation/(depreciation)

  5    40     76  

Balance, end of year

 $828   $840    $871  

Goldman Sachs 2014 Form 10-K65


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The table below presents a summary of the changes in our assets under supervision.

  Year Ended December 
$ in billions  2014    2013    2012  

Balance, beginning of year

  $1,042    $   965    $895  
  

Net inflows/(outflows)

   

Alternative investments

  1    (13  1  
  

Equity

  15    13    (17
  

Fixed income

  58    41    34  

Long-term AUS net inflows/(outflows)

  74    41 2   18 3 
  

Liquidity products

  37    (4  3  

Total AUS net inflows/(outflows)

  111 1   37    21  
  

Net market appreciation/(depreciation)

  25    40    49  

Balance, end of year

  $1,178    $1,042    $965  

 

1.

Includes $6Net inflows in long-term assets under supervision include $19 billion of fixed income asset inflows in connection with our acquisitionsacquisition of Deutsche Asset & Wealth Management’s stable value business. Net inflows in liquidity products include $6 billion of inflows in connection with our acquisition of RBS Asset Management’s money market funds.

2.

Fixed income flows include $10 billion in assets managed by the firm related to our Americas reinsurance business, in which a majority stake was sold in April 2013, that were previously excluded from assets under supervision as they were assets of a consolidated subsidiary.

3.

Includes $34 billion of fixed income asset inflows in connection with our acquisition of Dwight Asset Management Company LLC and $5 billion of fixed income and equity asset outflows related to our liquidation of Goldman Sachs Australia Pty Ltd (GS Australia), formerly Goldman Sachs & Partners Australia Group Holdings Pty Ltd, and Benchmark Asset Management Company Private Limited.Korea Co., Ltd.

The table below presents our average monthly assets under supervision by asset class.

  

Average for the

Year Ended December

 
$ in billions  2014     2013     2012  

Alternative investments

  $   145     $   145     $149  
  

Equity

  225     180     153  
  

Fixed income

  499     425     384  

Long-term AUS

  869     750     686  
  

Liquidity products

  248     235     238  

Total AUS

  $1,117     $   985     $924  

20112014 versus 2010.2013.Net revenues in Investment Management were $5.03$6.04 billion for 2011, essentially unchanged compared with 2010, primarily due to2014, 11% higher than 2013, reflecting higher management and other fees, reflecting favorable changes in the mix ofprimarily due to higher average assets under management, offset by lowersupervision, as well as higher incentive fees.fees and transaction revenues. During the year, total assets under management decreased $12supervision increased $136 billion to $828$1.18 trillion. Long-term assets under supervision increased $99 billion, reflectingincluding net outflowsinflows of $17$74 billion partially offset by(including $19 billion of fixed income asset inflows in connection with our acquisition of Deutsche Asset & Wealth Management’s stable value business) and net market appreciation of $5 billion. Net outflows$25 billion, both primarily reflected outflows in fixed income and equity assets, partially offset byassets. In addition, liquidity products increased $37 billion (including $6 billion of inflows in connection with our acquisition of RBS Asset Management’s money market assets.funds).

During the first half of 2011,2014, Investment Management operated in an environment generally characterized by improved asset prices, primarily in equity and a shiftfixed income assets, resulting in investorappreciation in the value of client assets. In addition, the mix of average assets awayunder supervision shifted slightly from money marketsliquidity products to long-term assets under supervision, due to growth in favor of asset classesfixed income and equity assets, compared with potentially higher risk and returns. However, during2013. In the second half of 2011,future, if asset prices declined, particularly in equities, in part driven by increased uncertainty regarding the global economic outlook. Declining asset prices and economic uncertainty contributed to investors shifting assets away from asset classes with potentially higher risk and returns to asset classes with lower risk and returns. If asset prices continuewere to decline, or investors continue to favor lower risk asset classes that typically generate lower fees or investors withdraw their assets, net revenues in Investment Management would likely continue to be negatively impacted. In addition, concerns about the global economic outlook could result in downward pressure on assets under supervision.

Operating expenses were $4.02$4.65 billion for 2011, essentially unchanged compared with 2010.2014, 7% higher than 2013, primarily due to increased compensation and benefits expenses, reflecting higher net revenues, and higher fund distribution fees. Pre-tax earnings were $1.02$1.40 billion in 2011, 6%2014, 26% higher than 2010.

64Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

2013.

Management’s Discussion and Analysis

20102013 versus 2009.2012.Net revenues in Investment Management were $5.01$5.46 billion for 2010, 9%2013, 5% higher than 2009, primarily2012, reflecting higher incentive fees across our alternative investment products. Managementmanagement and other fees, also increased, reflecting favorable changes in the mix ofprimarily due to higher average assets under management, as well as the impact of appreciation in the value of client assets.supervision. During 2010,2013, total assets under management decreased 4%supervision increased $77 billion to $840$1.04 trillion. Long-term assets under supervision increased $81 billion, primarilyincluding net inflows of $41 billion (including $10 billion of fixed income asset inflows managed by the firm related to our Americas reinsurance business, in which a majority stake was sold in April 2013, that were previously excluded from assets under supervision as they were assets of a consolidated subsidiary), reflecting inflows in fixed income and equity assets, partially offset by outflows in moneyalternative investment assets. Net market assets, consistent with industry trends.appreciation of $40 billion during 2013 was primarily in equity assets. Liquidity products decreased $4 billion.

During 2010,2013, Investment Management operated in an environment generally characterized by a continuation of industry trends that emerged during 2009, as financial markets began to stabilize,improved asset prices, improved and investors began to shift assets away from money marketsparticularly in favor of asset classes with potentially higher risk and returns. This trend resultedequities, resulting in favorable changes in the mix of assets under management, as well as appreciation in the value of client assets. In addition, the mix of average assets under supervision shifted slightly compared with 2012 from liquidity products to long-term assets under supervision, primarily due to growth in equity and fixed income assets.

Operating expenses were $4.05$4.36 billion for 2010, 10%2013, up slightly compared to 2012, due to increased compensation and benefits expenses, primarily resulting from higher than 2009, primarily reflecting increased staff levels and the impact of growth initiatives.net revenues. Pre-tax earnings were $963 million$1.11 billion in 2010, 3%2013, 19% higher than 2009.2012.

Geographic Data

See Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a summary of our total net revenues, pre-tax earnings and net earnings by geographic region.

Regulatory Developments

The U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), enacted in July 2010, significantly altered the financial regulatory regime within which we operate. The implications of the Dodd-Frank Act for our businesses will depend to a large extent on the rules that will be adopted by the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), the SEC, the U.S. Commodity Futures Trading Commission (CFTC) and other agencies to implement the legislation, as well as the development of market practices and structures under the regime established by the legislation and the implementing rules. Similar reforms are being considered by other regulators and policy makers worldwide and these reforms may affect our businesses. We expect that the principal areas of impact from regulatory reform for us will be:

Ÿ

the Dodd-Frank prohibition on “proprietary trading” and the limitation on the sponsorship of, and investment in, hedge funds and private equity funds by banking entities, including bank holding companies, referred to as the “Volcker Rule”;

Ÿ

increased regulation of and restrictions on over-the-counter (OTC) derivatives markets and transactions; and

Ÿ

increased regulatory capital requirements.

Goldman Sachs 2011 Form 10-K65


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

In October 2011, the proposed rules to implement the Volcker Rule were issued and included an extensive request for comments on the proposal. The proposed rules are highly complex and many aspects of the Volcker Rule remain unclear. The full impact of the rule will depend upon the detailed scope of the prohibitions, permitted activities, exceptions and exclusions, and the full impact on the firm will not be known with certainty until the rules are finalized.

While many aspects of the Volcker Rule remain unclear, we evaluated the prohibition on “proprietary trading” and determined that businesses that engage in “bright line” proprietary trading are most likely to be prohibited. In 2011 and 2010, we liquidated substantially all of our Principal Strategies and global macro proprietary trading positions.

In addition, we evaluated the limitations on sponsorship of, and investments in, hedge funds and private equity funds. The firm earns management fees and incentive fees for investment management services from private equity and hedge funds, which are included in our Investment Management segment. The firm also makes investments in funds and the gains and losses from such investments are included in our Investing & Lending segment; these gains and losses will be impacted by the Volcker Rule. The Volcker Rule limitation on investments in hedge funds and private equity funds requires the firm to reduce its investment in each private equity and hedge fund to 3% or less of net asset value, and to reduce the firm’s aggregate investment in all such funds to 3% or less of the firm’s Tier 1 capital. Over the period from 1999 through 2011, the firm’s aggregate net revenues from its investments in hedge funds and private equity funds were not material to the firm’s aggregate total net revenues over the same period. We continue to manage our existing private equity funds taking into account the transition periods under the Volcker Rule. With respect to our hedge funds, we currently plan to comply with the Volcker Rule by redeeming certain of our interests in the funds. We currently expect to redeem up to approximately 10% of certain hedge funds’ total redeemable units per quarter over ten consecutive quarters, beginning March 2012 and ending June 2014. In addition, we have limited the firm’s initial investment to 3% for certain new funds.

As required by the Dodd-Frank Act, the Federal Reserve Board and FDIC have jointly issued a rule requiring each bank holding company with over $50 billion in assets and each designated systemically important financial institution to provide to regulators an annual plan for its rapid and orderly resolution in the event of material financial distress or failure (resolution plan). Our resolution plan must, among other things, ensure that Goldman Sachs Bank USA (GS Bank USA) is adequately protected from risks arising from our other entities. The regulators’ joint rule sets specific standards for the resolution plans, including requiring a detailed resolution strategy and analyses of the company’s material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. We have commenced work on our first resolution plan, which we must submit to the regulators by July 1, 2012. GS Bank USA is also required by the FDIC to submit a plan for its rapid and orderly resolution in the event of material financial distress or failure by July 1, 2012.

In September 2011, the SEC proposed rules to implement the Dodd-Frank Act’s prohibition against securitization participants’ engaging in any transaction that would involve or result in any material conflict of interest with an investor in a securitization transaction. The proposed rules would except bona fide market-making activities and risk-mitigating hedging activities in connection with securitization activities from the general prohibition.

In December 2011, the Federal Reserve Board proposed regulations designed to strengthen the regulation and supervision of large bank holding companies and systemically important nonbank financial firms. These proposals address risk-based capital and leverage requirements, liquidity requirements, stress tests, single counterparty limits and early remediation requirements that are designed to address financial weakness at an early stage. Although many of the proposals mirror initiatives to which bank holding companies are already subject, their full impact on the firm will not be known with certainty until the rules are finalized.

 

 

66 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

In addition, the U.S. federal bank regulatory agencies issued revised proposals to modify their market risk regulatory capital requirements for banking organizations in the United States that have significant trading activities. The modifications are designed to address the adjustments to the market risk framework that were announced by the Basel Committee in June 2010 (Basel 2.5), as well as the prohibition on the use of credit ratings, as required by the Dodd-Frank Act. We expect the federal banking agencies to propose further modifications to their capital adequacy regulations to address both Basel 3 and other aspects of the Dodd-Frank Act, including requirements for global systemically important banks. Once implemented, it is likely that these changes will result in increased capital requirements, although their full impact will not be known until the U.S. federal bank regulatory agencies publish their final rules.

The Dodd-Frank Act also establishes a Bureau of Consumer Financial Protection having broad authority to regulate providers of credit, payment and other consumer financial products and services, and this Bureau has oversight over certain of our products and services.

See “Business—Regulation” in Part I, Item 1 of this Form 10-K for more information.

Balance Sheet and Funding Sources

Balance Sheet Management

One of our most important risk management disciplines is our ability to manage the size and composition of our balance sheet. While our asset base changes due to client activity, market fluctuations and business opportunities, the size and composition of our balance sheet reflect (i) our overall risk tolerance, (ii) our ability to access stable funding sources and (iii) the amount of equity capital we hold. See “Equity Capital Management and Regulatory Capital — Equity Capital Management” for information about our equity capital management process.

Although our balance sheet fluctuates on a day-to-day basis, our total assets and adjusted assets at quarterly and year-end dates are generally not materially different from those occurring within our reporting periods.

In order to ensure appropriate risk management, we seek to maintain a liquid balance sheet and have processes in place to dynamically manage our assets and liabilities which include:

Ÿ

quarterly planning;

Ÿ

business-specific limits;

Ÿ

monitoring of key metrics; and

Ÿ

include (i) quarterly planning, (ii) business-specific limits, (iii) monitoring of key metrics and (iv) scenario analyses.

Quarterly Planning. We prepare a quarterly balance sheet plan that combines our projected total assets and composition of assets with our expected funding sources and capital levels for the upcoming quarter. The objectives of this quarterly planning process are:

 

Ÿ 

toTo develop our near-term balance sheet projections, taking into account the general state of the financial markets and expected client-driven and firm-drivenbusiness activity levels;levels, as well as current regulatory requirements;

 

Ÿ 

To determine the target amount, tenor and type of funding to ensure thatraise, based on our projected assets are supported by an adequate amount and tenor of funding and that our projected capital and liquidity metrics are within management guidelines;forecasted maturities; and

 

Ÿ 

toTo allow business risk managers and managers from our independent control and support functions to objectively evaluate balance sheet limit requests from business managers in the context of the firm’s overall balance sheet constraints. These constraints, includeincluding the firm’s liability profile and equity capital levels, maturities and plans for new debt and equity issuances, share repurchases, deposit trends and secured funding transactions.key metrics. Limits are typically set at levels that will be periodically exceeded, rather than at levels which reflect our maximum risk appetite.

To prepare our quarterly balance sheet plan, business risk managers and managers from our independent control and support functions meet with business managers to review current and prior period metrics and discuss expectations for the upcoming quarter. The specific metrics reviewed include asset and liability size and composition, aged inventory, limit utilization, risk and performance measures, and capital usage.

Our consolidated quarterly plan, including our balance sheet plans by business, funding and capital projections, and projected capital and liquiditykey metrics, is reviewed by the Firmwide Finance Committee. See “Overview and Structure of Risk Management.”Management” for an overview of our risk management structure.

Goldman Sachs 2011 Form 10-K67


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Business-Specific Limits. The Firmwide Finance Committee sets asset and liability limits for each business and aged inventory limits for certain financial instruments as a disincentive to hold inventory over longer periods of time. These limits are set at levels which are close to actual operating levels in order to ensure prompt escalation and discussion among business managers and managers in our independent control and support functions on a routine basis. The Firmwide Finance Committee reviews and approves balance sheet limits on a quarterly basis and may also approve changes in limits on an ad hoc basis in response to changing business needs or market conditions. Requests for changes in limits are evaluated after giving consideration to their impact on key firm metrics. Compliance with limits is monitored on a daily basis by business risk managers, as well as managers in our independent control and support functions.

Monitoring of Key Metrics. We monitor key balance sheet metrics daily both by business and on a consolidated basis, including asset and liability size and composition, aged inventory, limit utilization, risk measures and capital usage. We allocate assets to businesses and review and analyze movements resulting from new business activity as well as market fluctuations.

Goldman Sachs 2014 Form 10-K67


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Scenario Analyses. We conduct scenario analyses including as part of the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Tests (DFAST) as well as our resolution and recovery planning. See “Equity Capital Management and Regulatory Capital — Equity Capital Management” below for further information. These scenarios cover short-term and long-term time horizons using various macroeconomic and firm-specific assumptions, based on a range of economic scenarios. We use these analyses to determine how we would manageassist us in developing our longer-term balance sheet management strategy, including the sizelevel and composition of our balance sheetassets, funding and maintainequity capital. Additionally, these analyses help us develop approaches for maintaining appropriate funding, liquidity and capital positions inacross a variety of situations:situations, including a severely stressed environment.

Ÿ

These scenarios cover short-term and long-term time horizons using various macro-economic and firm-specific assumptions. We use these analyses to assist us in developing longer-term funding plans, including the level of unsecured debt issuances, the size of our secured funding program and the amount and composition of our equity capital. We also consider any potential future constraints, such as limits on our ability to grow our asset base in the absence of appropriate funding.

Ÿ

Through our Internal Capital Adequacy Assessment Process (ICAAP) and our resolution and recovery planning, we further analyze how we would manage our balance sheet through the duration of a severe crisis and we develop plans to access funding, generate liquidity, and/or redeploy equity capital, as appropriate.

Balance Sheet Allocation

In addition to preparing our consolidated statementstatements of financial condition in accordance with U.S. GAAP, we prepare a balance sheet that generally allocates assets to our businesses, which is a non-GAAP presentation and may not be comparable to similar non-GAAP presentations used by other companies. We believe that presenting our assets on this basis is meaningful because it is consistent with the way management views and manages risks associated with the firm’s assets and better enables investors to assess the liquidity of the firm’s assets. The table below presents a summary of thisour balance sheet allocation.

 

 As of December  As of December 
in millions 2011     2010 

Excess liquidity (Global Core Excess)

 $171,581      $174,776  
$ in millions  2014     2013  

Global Core Liquid Assets (GCLA)

  $182,947     $184,070  
 

Other cash

  7,888       7,565    7,805     5,793  

Excess liquidity and cash

  179,469       182,341  

GCLA and cash

  190,752     189,863  
 

Secured client financing

  283,707       279,291    210,641     263,386  
 

Inventory

  273,640       260,406    230,667     255,534  
 

Secured financing agreements

  71,103       70,921    74,767     79,635  
 

Receivables

  35,769       32,396    47,317     39,557  

Institutional Client Services

  380,512       363,723    352,751     374,726  

ICBC

  4,713       7,589  

Equity (excluding ICBC)

  23,041       22,972  

Debt

  23,311       24,066  

Receivables and other

  5,320       3,291  
 

Public equity

  4,041     4,308  
 

Private equity

  17,979     16,236  
 

Debt 1

  24,768     23,274  
 

Loans receivable 2

  28,938     14,895  
 

Other

  3,771     2,310  

Investing & Lending

  56,385       57,918    79,497     61,023  

Total inventory and related assets

  436,897       421,641    432,248     435,749  
 

Other assets

  23,152       28,059    22,599     22,509  

Total assets

 $923,225      $911,332    $856,240     $911,507  

1.

Includes $18.24 billion and $15.76 billion as of December 2014 and December 2013, respectively, of direct loans primarily extended to corporate and private wealth management clients that are accounted for at fair value.

2.

See Note 9 to the consolidated financial statements for further information about loans receivable.

Below is a description of the captions in the table above.

Ÿ

Global Core Liquid Assets and Cash. We maintain substantial liquidity to meet a broad range of potential cash outflows and collateral needs in the event of a stressed environment. See “Liquidity Risk Management” below for details on the composition and sizing of our “Global Core Liquid Assets” (GCLA), previously Global Core Excess (GCE). In addition to our GCLA, we maintain other operating cash balances, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.

Ÿ

Secured Client Financing. We provide collateralized financing for client positions, including margin loans secured by client collateral, securities borrowed, and resale agreements primarily collateralized by government obligations. As a result of client activities, we are required to segregate cash and securities to satisfy regulatory requirements. Our secured client financing arrangements, which are generally short-term, are accounted for at fair value or at amounts that approximate fair value, and include daily margin requirements to mitigate counterparty credit risk.

Ÿ

Institutional Client Services. In Institutional Client Services, we maintain inventory positions to facilitate market-making in fixed income, equity, currency and commodity products. Additionally, as part of market-making activities, we enter into resale or securities borrowing arrangements to obtain securities which we can use to cover transactions in which we or our clients have sold securities that have not yet been purchased. The receivables in Institutional Client Services primarily relate to securities transactions.

Ÿ

Investing & Lending. In Investing & Lending, we make investments and originate loans to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, directly and indirectly through funds that we manage, in debt securities, loans, public and private equity securities, real estate entities and other investments.

Ÿ

Other Assets. Other assets are generally less liquid, non-financial assets, including property, leasehold improvements and equipment, goodwill and identifiable intangible assets, income tax-related receivables, equity-method investments, assets classified as held for sale and miscellaneous receivables.

 

 

68 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The following is a description of the captions in the table above.

Excess Liquidity and Cash.We maintain substantial excess liquidity to meet a broad range of potential cash outflows and collateral needs in the event of a stressed environment. See “Liquidity Risk Management” below for details on the composition and sizing of our excess liquidity pool or “Global Core Excess” (GCE). In addition to our excess liquidity, we maintain other operating cash balances, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.

Secured Client Financing. We provide collateralized financing for client positions, including margin loans secured by client collateral, securities borrowed, and resale agreements primarily collateralized by government obligations. As a result of client activities, we are required to segregate cash and securities to satisfy regulatory requirements. Our secured client financing arrangements, which are generally short-term, are accounted for at fair value or at amounts that approximate fair value, and include daily margin requirements to mitigate counterparty credit risk.

Institutional Client Services. In Institutional Client Services, we maintain inventory positions to facilitate market-making in fixed income, equity, currency and commodity products. Additionally, as part of client market-making activities, we enter into resale or securities borrowing arrangements to obtain securities which we can use to cover transactions in which we or our clients have sold securities that have not yet been purchased. The receivables in Institutional Client Services primarily relate to securities transactions.

Investing & Lending. In Investing & Lending, we make investments and originate loans to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, directly and indirectly through funds that we manage, in debt securities, loans, public and private equity securities, real estate and other investments.

Other Assets.Other assets are generally less liquid, non-financial assets, including property, leasehold improvements and equipment, goodwill and identifiable intangible assets, income tax-related receivables, equity-method investments and miscellaneous receivables.

Goldman Sachs 2011 Form 10-K69


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

The tables below present the reconciliation of this balance sheet allocation to our U.S. GAAP balance sheet. In the tables below, total assets for Institutional Client Services and Investing & Lending represent the inventory and related assets. These amounts differ from total assets by

business segment disclosed in Note 25 to the consolidated financial

statements in Part II, Item 8 of this Form 10-K because total assets disclosed in Note 25 include allocations of our excess liquidityGCLA and cash, secured client financing and other assets. See “Balance Sheet Analysis and Metrics” below for explanations on the changes in our balance sheet from December 2013 to December 2014.

 

 

 As of December 2011  As of December 2014 
in millions Excess
Liquidity
and Cash  1
   Secured
Client
Financing
   Institutional
Client
Services
   

Investing &

Lending

   Other
Assets
   

Total

Assets

 
$ in millions  
 
GCLA
and Cash
  
 1 
  
 
 
Secured
Client
Financing
  
  
  
   
 
 
Institutional
Client
Services
  
  
  
   
 
Investing &
Lending
  
  
   
 
Other
Assets
  
  
   
 
Total
Assets
  
  

Cash and cash equivalents

 $56,008    $    $    $    $    $56,008    $  57,600    $         —     $         —     $       —     $       —     $  57,600  
 

Cash and securities segregated for regulatory and other purposes

       64,264                    64,264        51,716                    51,716  
 

Securities purchased under agreements to resell and federal funds sold

  70,220     98,445     18,671     453          187,789    66,928    34,506     24,940     1,564          127,938  
 

Securities borrowed

  14,919     85,990     52,432               153,341    32,311    78,584     49,827               160,722  
 

Receivables from brokers, dealers and clearing organizations

       3,252     10,612     340          14,204        8,908     21,656     107          30,671  
 

Receivables from customers and counterparties

       31,756     25,157     3,348          60,261        36,927     25,661     1,220          63,808  
 

Loans receivable

                28,938          28,938  
 

Financial instruments owned, at fair value

  38,322          273,640     52,244          364,206    33,913         230,667     47,668          312,248  
 

Other assets

                      23,152     23,152                       22,599     22,599  

Total assets

 $179,469    $283,707    $380,512    $56,385    $23,152    $923,225    $190,752    $210,641     $352,751     $79,497     $22,599     $856,240  
 As of December 2010  As of December 2013 
in millions Excess
Liquidity
and Cash  1
   Secured
Client
Financing
   Institutional
Client
Services
   

Investing &

Lending

   Other
Assets
   

Total

Assets

 
$ in millions  
 
GCLA
and Cash
  
 1 
  
 
 
Secured
Client
Financing
  
  
  
   
 
 
Institutional
Client
Services
  
  
  
   
 
Investing &
Lending
  
  
   
 
Other
Assets
  
  
   
 
Total
Assets
  
  

Cash and cash equivalents

 $39,788    $    $    $    $    $39,788    $  61,133    $         —     $         —     $       —     $       —     $  61,133  
 

Cash and securities segregated for regulatory and other purposes

       53,731                    53,731        49,671                    49,671  
 

Securities purchased under agreements to resell and federal funds sold

  62,854     102,537     22,866     98          188,355    64,595    61,510     35,081     546          161,732  
 

Securities borrowed

  37,938     80,313     48,055               166,306    25,113    94,899     44,554               164,566  
 

Receivables from brokers, dealers and clearing organizations

       3,702     6,698     37          10,437        6,650     17,098     92          23,840  
 

Receivables from customers and counterparties

       39,008     25,698     2,997          67,703        50,656     22,459     925          74,040  
 

Loans receivable

                14,895          14,895  
 

Financial instruments owned, at fair value

  41,761          260,406     54,786          356,953    39,022         255,534     44,565          339,121  
 

Other assets

                      28,059     28,059                       22,509     22,509  

Total assets

 $182,341    $279,291    $363,723    $57,918    $28,059    $911,332    $189,863    $263,386     $374,726     $61,023     $22,509     $911,507  

 

1.

Includes unencumbered cash, U.S. government and federal agency obligations (including highly liquid U.S. federal agency mortgage-backed obligations), and German, French, Japanese and United Kingdom government obligations.

 

70 Goldman Sachs 20112014 Form 10-K 69


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Less Liquid Inventory Composition

We seek to maintain a liquid balance sheet comprised of assets that can be readily sold or funded on a secured basis. However, we do hold certain financial instruments that may be more difficult to sell, or fund on a secured basis, especially during times of market stress. We focus on funding these assets with liabilities that have longer-term contractual maturities to reduce the need to refinance in periods of market stress. The table below presents our aggregate holdings in these categories of financial instruments.

 

  As of December 
in millions 2011     2010 

Bank loans and bridge loans 1

 $19,745      $18,039  

Private equity investments and restricted public equity securities 2

  15,463       14,923  

Mortgage and other asset-backed loans and securities

  14,291       17,042  

High-yield and other debt obligations

  11,118       11,553  

ICBC ordinary shares 3

  4,713       7,589  

Emerging market debt securities

  4,624       3,931  

Emerging market equity securities

  3,922       5,784  

Other investments in funds 4

  3,394       3,212  

1.

Includes funded commitments and inventory held in connection with our origination, investing and market-making activities.

2.

Includes interests in funds that we manage. Such amounts exclude assets for which the firm does not bear economic exposure of $2.38 billion and $1.68 billion as of December 2011 and December 2010, respectively, including assets related to consolidated investment funds and consolidated variable interest entities (VIEs).

3.

Includes interests of $2.60 billion and $4.73 billion as of December 2011 and December 2010, respectively, held by investment funds managed by Goldman Sachs. The decrease was primarily related to the sale of a portion of the ordinary shares of ICBC held by investment funds managed by Goldman Sachs.

4.

Includes interests in other investment funds that we manage. See “Results of Operations — Regulatory Developments” for information about our plans to redeem certain of our interests in hedge funds to comply with the Volcker Rule.

See Notes 4 through 6 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about the financial instruments we hold.

Balance Sheet Analysis and Metrics

During 2014, we undertook an initiative to reduce our balance sheet in response to regulatory developments, to improve the overall efficiency of our balance sheet and to position the firm to provide additional risk capacity to our clients. We performed a comprehensive analysis of our balance sheet and identified opportunities for reduction, primarily related to lower return activities within our matched book and other secured client financing activities.

As of December 2011,2014, total assets on our consolidated statementstatements of financial condition were $923.23$856.24 billion, an increasea decrease of $11.89$55.27 billion from December 2010.2013. This increasedecrease was primarily due to (i) an increasea decrease in cashcollateralized agreements of $37.64 billion, principally reflecting a decline in the matched book and cash equivalents of $16.22 billion, primarily due to increases in interest-bearing deposits with banks, (ii) an increase in cash and securities segregated for regulatory and other purposes of $10.53 billion, primarily due to an increase in reserve balances held by broker-dealer subsidiaries related to client activity, and (iii) an increasea decrease in financial instruments owned, at fair value of $7.25$26.87 billion, primarily due to increases in non-U.S. government obligations and derivatives, partially offset by a decrease in commodities.U.S. government and federal agency obligations. These increasesdecreases were partially offset by decreasesan increase in (i) collateralized agreementsloans receivable of $13.53 billion, primarily due to decreases in client and firm activity, and (ii) receivables from customers and counterparties of $7.44 billion, primarily due to decreases in client activity in secured client financing.$14.04 billion.

As of December 2011,2014, total liabilities on our consolidated statementstatements of financial condition were $852.85$773.44 billion, an increasea decrease of $18.87$59.60 billion from December 2010.2013. This increasedecrease was primarily due to (i)a decrease in collateralized financings of $91.75 billion, due to client activity and firm financing activity, including a decline in the matched book. This decrease was partially offset by an increase in deposits of $7.54$12.20 billion primarily dueused to increasesfund the growth in client activity and (ii)our loans receivable, an increase in payables to customers and counterparties of $7.36$7.52 billion primarily due to increasesand an increase in client activity.unsecured long-term borrowings of $6.61 billion.

As of December 2011,2014, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $164.50$88.22 billion, which was 7%3% lower and 26% lower than the daily average amount of repurchase agreements during the quarter ended and year ended December 2014, respectively. The decrease in our repurchase agreements relative to the daily average during 2014 resulted from a decrease in client and firm financing activity during the second half of the year, including a reduction in our matched book, primarily resulting from a firmwide initiative to reduce activities with lower returns.

As of December 2013, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $164.78 billion, which was 5% higher and 3%4% higher than the daily average amount of repurchase agreements during the quarter ended and year ended December 2011,2013, respectively. As of December 2011, theThe increase in our repurchase agreements relative to the daily average during the quarter and year2013 was primarily due to increases in client activity at the end of the year. As of December 2010, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $162.35 billion, which was 2% higher and 10% higher than the daily average amount of repurchase agreements during the quarter ended and year ended December 2010, respectively. As of December 2010, the increase in our repurchase agreements relative to the daily average during the quarter and year was due to an increase in client activity at the end of the year and an increase in firm financing activities. period.

The level of our repurchase agreements fluctuates between and within periods, primarily due to providing clients with access to highly liquid collateral, such as U.S. government and federal agency, and investment-grade sovereign obligations through collateralized financing activities.

 

 

70 Goldman Sachs 20112014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The table below presents information about our assets, unsecured long-term borrowings, shareholders’ equity and leverage ratios.

  As of December 
$ in millions  2014     2013  

Total assets

  $856,240     $911,507  
  

Unsecured long-term borrowings

  $167,571     $160,965  
  

Total shareholders’ equity

  $  82,797     $  78,467  
  

Leverage ratio

  10.3x     11.6x  
  

Debt to equity ratio

  2.0x     2.1x  

In the table above:

Ÿ

The leverage ratio equals total assets divided by total shareholders’ equity and measures the proportion of equity and debt the firm is using to finance assets. This ratio is different from the Tier 1 leverage ratio included in Note 20 to the consolidated financial statements.

Ÿ

The debt to equity ratio equals unsecured long-term borrowings divided by total shareholders’ equity.

The table below presents information about our shareholders’ equity and book value per common share, including the reconciliation of total shareholders’ equity to tangible common shareholders’ equity.

  As of December 
$ in millions, except per share amounts  2014     2013  

Total shareholders’ equity

  $  82,797     $  78,467  
  

Deduct: Preferred stock

  (9,200   (7,200

Common shareholders’ equity

  73,597     71,267  
  

Deduct: Goodwill and identifiable intangible assets

  (4,160   (4,376

Tangible common shareholders’ equity

  $  69,437     $  66,891  

Book value per common share

  $  163.01     $  152.48  
  

Tangible book value per common share

  153.79     143.11  

In the table above:

Ÿ

Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets. We believe that tangible common shareholders’ equity is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible common shareholders’ equity is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

Ÿ

Book value per common share and tangible book value per common share are based on common shares outstanding, including restricted stock units (RSUs) granted to employees with no future service requirements, of 451.5 million and 467.4 million as of December 2014 and December 2013, respectively. We believe that tangible book value per common share (tangible common shareholders’ equity divided by common shares outstanding, including RSUs granted to employees with no future service requirements) is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible book value per common share is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

Goldman Sachs 2014 Form 10-K 71


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The table below presents information on our assets, unsecured long-term borrowings, shareholders’ equity and leverage ratios.

 

  As of December 
$ in millions 2011     2010 

Total assets

 $923,225      $911,332  

Adjusted assets

 $604,391      $588,927  

Unsecured long-term borrowings

 $173,545      $174,399  

Total shareholders’ equity

 $70,379      $77,356  

Leverage ratio

  13.1x       11.8x  

Adjusted leverage ratio

  8.6x       7.6x  

Debt to equity ratio

  2.5x       2.3x  

Adjusted assets.Adjusted assets equals total assets less (i) low-risk collateralized assets generally associated with our secured client financing transactions, federal funds sold and excess liquidity (which includes financial instruments sold, but not yet purchased, at fair value, less derivative liabilities) and (ii) cash and securities we segregate for regulatory and other purposes. Adjusted assets is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

The table below presents the reconciliation of total assets to adjusted assets.

  As of December 

in millions

 2011   2010 

Total assets

 $923,225    $911,332  

Deduct:

 Securities borrowed  (153,341   (166,306
  

Securities purchased under agreements to resell and federal funds sold

  (187,789   (188,355

Add:

 

Financial instruments sold, but not yet purchased, at fair value

  145,013     140,717  
  

Less derivative liabilities

  (58,453   (54,730
  

Subtotal

  (254,570   (268,674

Deduct:

 

Cash and securities segregated for regulatory and other purposes

  (64,264   (53,731

Adjusted assets

 $604,391    $588,927  

Leverage ratio.The leverage ratio equals total assets divided by total shareholders’ equity and measures the proportion of equity and debt the firm is using to finance assets. This ratio is different from the Tier 1 leverage ratio included in “Equity Capital — Consolidated Regulatory Capital Ratios” below, and further described in Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

Adjusted leverage ratio.The adjusted leverage ratio equals adjusted assets divided by total shareholders’ equity. We believe that the adjusted leverage ratio is a more meaningful measure of our capital adequacy than the leverage ratio because it excludes certain low-risk collateralized assets that are generally supported with little or no capital. The adjusted leverage ratio is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

Our adjusted leverage ratio increased to 8.6x as of December 2011 from 7.6x as of December 2010 as our adjusted assets increased and our total shareholders’ equity decreased, primarily reflecting the redemption of the firm’s Series G Preferred Stock and the repurchase of 47.0 million shares of our common stock.

Debt to equity ratio.The debt to equity ratio equals unsecured long-term borrowings divided by total shareholders’ equity.

Funding Sources

Our primary sources of funding are secured financings, unsecured long-term and short-term borrowings, and deposits. We seek to maintain broad and diversified funding sources globally.globally across products, programs, markets, currencies and creditors to avoid funding concentrations.

We raise funding through a number of different products, including:

 

Ÿ 

collateralizedCollateralized financings, such as repurchase agreements, securities loaned and other secured financings;

 

Ÿ 

long-termLong-term unsecured debt (including structured notes) through syndicated U.S. registered offerings, U.S. registered and Rule 144A medium-term note programs, offshore medium-term note offerings and other debt offerings;

 

Ÿ 

demandSavings and savingsdemand deposits through cashdeposit sweep programs and time deposits through internal and third-party broker networks;broker-dealers; and

 

Ÿ 

short-termShort-term unsecured debt through U.S. and non-U.S. hybrid financial instruments, commercial paper and promissory note issuances and other methods.

72Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s DiscussionOur funding is primarily raised in U.S. dollar, Euro, British pound and Analysis

Japanese yen. We generally distribute our funding products through our own sales force and third-party distributors, to a large, diverse creditor base in a variety of markets in the Americas, Europe and Asia. We believe that our relationships with our creditors are critical to our liquidity. Our creditors include banks, governments, securities lenders, pension funds, insurance companies, mutual funds and individuals. We have imposed various internal guidelines to monitor creditor concentration across our funding programs.

Secured Funding.We fund a significant amount of our inventory on a secured basis. Secured funding is less sensitive to changes in our credit quality than unsecured funding, due to the natureour posting of the collateral we post to our lenders. However, becauseNonetheless, we continually analyze the terms or availabilityrefinancing risk of our secured funding particularly short-dated funding, can deteriorate rapidly in a difficult environment, we generally do not rely on short-datedactivities, taking into account trade tenors, maturity profiles, counterparty concentrations, collateral eligibility and counterparty rollover probabilities. We seek to mitigate our refinancing risk by executing term trades with staggered maturities, diversifying counterparties, raising excess secured funding, unless it isand pre-funding residual risk through our GCLA.

We seek to raise secured funding with a term appropriate for the liquidity of the assets that are being financed, and we seek longer maturities for secured funding collateralized with highly liquid securities such as government obligations.

by asset classes that may be harder to fund on a secured basis especially during times of market stress. Substantially all of our other secured funding, excluding funding collateralized by liquid government obligations, is executed for tenors of one month or greater. Additionally, we monitor counterparty concentrationAssets that may be harder to fund on a secured basis during times of market stress include certain financial instruments in the following categories: mortgage and holdother asset-backed loans and securities, non-investment-grade corporate debt securities, equities and convertible debentures and emerging market securities. Assets that are classified as level 3 in the fair value hierarchy are generally funded on an unsecured basis. See Notes 5 and 6 to the consolidated financial statements for further information about the classification of financial instruments in the fair value hierarchy and “— Unsecured Long-Term Borrowings” below for further information about the use of unsecured long-term borrowings as a portionsource of

our GCE for refinancing risk associated with our secured funding transactions. We seek longer terms for secured funding collateralized by lower-quality assets because these funding transactions may pose greater refinancing risk. funding.

The weighted average maturity of our secured funding, excluding funding collateralized by highly liquid securities eligible for inclusion in our GCE,GCLA, exceeded 100120 days as of December 2011.2014.

A majority of our secured funding for securities not eligible for inclusion in the GCEGCLA is executed through term repurchase agreements and securities lending contracts. We also raise financing through other types of collateralized financings, such as secured loans and notes.

Unsecured Long-Term Borrowings.We issue unsecured long-term borrowings as a source of In December 2014, Goldman Sachs Bank USA (GS Bank USA) received approval to access funding for inventory and other assets and to finance a portion of our GCE. We issue in different tenors, currencies, and products to maximizefrom the diversification of our investor base. The table below presents our quarterly unsecured long-term borrowings maturity profile through 2017 as of December 2011.

Goldman Sachs 2011 Form 10-K73


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The weighted average maturity of our unsecured long-term borrowings as of December 2011 was approximately eight years. To mitigate refinancing risk, we seek to limit the principal amount of debt maturing on any one day or during any week or year. We enter into interest rate swaps to convert a substantial portion of our long-term borrowings into floating-rate obligations in order to manage our exposure to interest rates. See Note 16 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unsecured long-term borrowings.

Temporary Liquidity Guarantee Program (TLGP).Federal Home Loan Bank. As of December 2011,2014, we had $8.53 billion of senior unsecured short-term debt outstanding guaranteed by the FDIC under the TLGP, all of which will mature on or prior to June 15, 2012. We have not issued long-term debt under the TLGP since March 2009 and the program has expired for new issuances.

Deposits.As of December 2011, our bank depository institution subsidiaries had $46.11 billion in customer deposits, including $13.27 billion of certificates of deposit and other time deposits with a weighted average maturity of three years, and $32.84 billion of other deposits, substantially all of which were from cash sweep programs. We utilize deposits to finance lending activities in our bank subsidiaries and to support potential outflows, such as draws on unfunded commitments.

Unsecured Short-Term Borrowings.A significant portion of our short-term borrowings were originally long-term debt that is scheduled to mature within one year of the reporting date. We use short-term borrowings to finance liquid assets and for other cash management purposes. We primarily issue commercial paper, promissory notes, and other hybrid instruments.

As of December 2011, our unsecured short-term borrowings, including the current portion of unsecured long-term borrowings, were $49.04 billion. See Note 15 to the consolidated financial statements in Part II, Item 8 ofaccessed this Form 10-K for further information about our unsecured short-term borrowings.

funding. In addition, GS Bank USA has access to funding through the Federal Reserve Bank discount window. While we do not rely on this funding in our liquidity planning and stress testing, we maintain policies and procedures necessary to access this funding and test discount window borrowing procedures.

72Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Unsecured Long-Term Borrowings. We issue unsecured long-term borrowings as a source of funding for inventory and other assets and to finance a portion of our GCLA. We issue in different tenors, currencies and products to

maximize the diversification of our investor base. The chart below presents our quarterly unsecured long-term borrowings maturity profile through the fourth quarter of 2020 as of December 2014.

The weighted average maturity of our unsecured long-term borrowings as of December 2014 was approximately eight years. To mitigate refinancing risk, we seek to limit the principal amount of debt maturing on any one day or during any week or year. We enter into interest rate swaps

to convert a substantial portion of our unsecured long-term borrowings into floating-rate obligations in order to manage our exposure to interest rates. See Note 16 to the consolidated financial statements for further information about our unsecured long-term borrowings.

Goldman Sachs 2014 Form 10-K73


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Deposits. As part of our efforts to diversify our funding base, we raise deposits mainly through GS Bank USA and Goldman Sachs International Bank (GSIB). The tables below present the types and sources of our deposits.

  As of December 2014 
$ in millions  
 
Savings and
Demand
  
 1 
   Time 2    Total  

Private bank deposits 3

  $33,590     $  1,609     $35,199  
       

Certificates of deposit

       25,908     25,908  
       

Deposit sweep programs 4

  15,691          15,691  
       

Institutional

  12     6,198     6,210  

Total 5

  $49,293     $33,715     $83,008  
  As of December 2013 
$ in millions  
 
Savings and
Demand
  
 1 
   Time 2    Total  

Private bank deposits 3

  $30,475     $     212     $30,687  
       

Certificates of deposit

       19,709     19,709  
       

Deposit sweep programs 4

  15,511          15,511  
       

Institutional

  33     4,867     4,900  

Total 5

  $46,019     $24,788     $70,807  

1.

Represents deposits with no stated maturity.

2.

Weighted average maturity of approximately three years as of both December 2014 and December 2013.

3.

Substantially all were from overnight deposit sweep programs related to private wealth management clients.

4.

Represents long-term contractual agreements with several U.S. broker-dealers who sweep client cash to FDIC-insured deposits.

5.

Deposits insured by the FDIC as of December 2014 and December 2013 were approximately $45.72 billion and $41.22 billion, respectively.

Unsecured Short-Term Borrowings. A significant portion of our unsecured short-term borrowings was originally long-term debt that is scheduled to mature within one year of the reporting date. We use unsecured short-term borrowings to finance liquid assets and for other cash management purposes. We issue hybrid financial instruments, commercial paper and promissory notes.

As of December 2014 and December 2013, our unsecured short-term borrowings, including the current portion of unsecured long-term borrowings, were $44.54 billion and $44.69 billion, respectively. See Note 15 to the consolidated financial statements for further information about our unsecured short-term borrowings.

Equity Capital Management and Regulatory Capital

Capital adequacy is of critical importance to us. Our principal objective is to be conservatively capitalized in terms of the amount and composition of our equity base.base, both relative to our risk exposures and compared to external requirements and benchmarks. Accordingly, we have in place a comprehensive capital management policy that serves asprovides a guideframework and set of guidelines to determineassist us in determining the amountlevel and composition of equity capital that we target and maintain.

TheEquity Capital Management

We determine the appropriate level and composition of our equity capital are determined by considering multiple factors including our current and future consolidated regulatory capital requirements, the results of our capital planning and ICAAP,stress testing process and may also be influenced by other factors such as rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets, and assessments of potential future losses due to adverse changes in our business and market environments. In addition, we maintain a capital plan which projects sources and uses of capital given a range of business environments, and a contingency capital plan which provides a framework for analyzing and responding to an actual or perceived capital shortfall.

Effective December 2011, as part of the Federal Reserve Board’s annual Comprehensive Capital Analysis and Review, U.S. bank holding companies with total consolidated assets of $50 billion or greater, are required to submit annual capital plans for review by the Federal Reserve Board. The capital plans should demonstrate the ability of a bank holding company to maintain its capital ratios above minimum regulatory capital requirements and above a Tier 1 common ratio of 5% on a pro forma basis under expected and stressed scenarios. The purpose of the Federal Reserve Board’s review is to ensure that these institutions have robust, forward-lookingOur capital planning processes that account for their unique risks and that permit continued operations during times of economicstress testing process incorporates our internally designed stress tests and financial stress. As part of the capital plan review, the Federal Reserve Board evaluates an institution’s plan to make capital distributions, such as increasing dividend payments or repurchasing or redeeming stock, across a range of macro-economicthose required under CCAR and firm-specific assumptions. The Federal Reserve Board began the annual capital plan reviews in early 2012.

Our consolidated regulatory capital requirements are determined by the Federal Reserve Board, as described below. Our ICAAP incorporates an internal risk-based capital assessmentDFAST rules, and is also designed to identify and measure material risks associated with our business activities, including market risk, credit risk and operational risk. We project sources and uses of capital given a range of business environments, including stressed conditions. In addition, as part of our comprehensive capital management policy, we maintain a contingency capital plan that provides a framework for analyzing and responding to an actual or perceived capital shortfall.

We principally manage the level and composition of our equity capital through issuances and repurchases of our common stock. We may also, from time to time, issue or repurchase our preferred stock, junior subordinated debt issued to trusts, and other subordinated debt or other forms of capital as business conditions warrant. Prior to any repurchases, we must receive confirmation that the Federal Reserve Board does not object to such capital actions. We manage our capital requirements and the levels of our capital usage principally by setting limits on balance sheet assets and/or limits on risk, in a manner that is closely aligned witheach case both at the consolidated and business levels. See Notes 16 and 19 to the consolidated financial statements for further information about our risk management practices. Our internal risk-based capital assessment is supplemented with the results of stress tests.preferred stock, junior subordinated debt issued to trusts and other subordinated debt.

 

 

74 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Capital Planning and Stress Testing Process.Our capital planning and stress testing process incorporates our internally designed stress tests and those required under CCAR and DFAST. The process is designed to identify and measure material risks associated with our business activities. We also perform an internal risk-based capital assessment, attribute capital usage to each of our businesses and maintain a contingency capital plan. The following is a description of our capital planning and stress testing process:

Ÿ

Stress Testing. Our stress testing process incorporates an internal capital adequacy assessment with the objective of ensuring that the firm is appropriately capitalized relative to the risks in our business. As part of our assessment, we project sources and uses of capital given a range of business environments, including stressed conditions. Our stress tests incorporate our internally designed stress scenarios, including our internally developed severely adverse scenario, and those required under CCAR and DFAST rules, and are designed to capture our specific vulnerabilities and risks and to analyze whether we hold an appropriate amount of capital. Our goal is to hold sufficient capital to ensure we remain adequately capitalized after experiencing a severe stress event. Our assessment of capital adequacy is viewed in tandem with our assessment of liquidity adequacy and is integrated into our overall risk management structure, governance and policy framework. We provide additional information about our stress test processes and a summary of the results on our web site as described under “Business — Available Information” in Part I, Item 1 of the 2014 Form 10-K.

Ÿ

Internal Risk-Based Capital Assessment. Our capital planning process includes an internal risk-based capital assessment. This assessment incorporates market risk, credit risk and operational risk. Market risk is calculated by using Value-at-Risk (VaR) calculations supplemented by risk-based add-ons which include risks related to rare events (tail risks). Credit risk utilizes assumptions about our counterparties’ probability of default and the size of our losses in the event of a default. Operational risk is calculated based on scenarios incorporating multiple types of operational failures as well as incorporating internal and external actual loss experience. Backtesting is used to gauge the effectiveness of models at capturing and measuring relevant risks.

Ÿ

Capital Attribution. We attribute capital usage to each of our businesses based upon regulatory capital requirements as well as our internal risk-based capital assessment. We manage the levels of our capital usage based upon balance sheet and risk limits, as well as capital return analyses of our businesses based on our capital attribution. We also attribute risk-weighted assets (RWAs) to our business segments. As of December 2014, approximately 70% of RWAs calculated under the Basel III Advanced Rules, subject to transitional provisions, were attributed to our Institutional Client Services segment and substantially all of the remaining RWAs were attributed to our Investing & Lending segment.

Ÿ

Contingency Capital Plan. As part of our comprehensive capital management policy, we maintain a contingency capital plan. Our contingency capital plan provides a framework for analyzing and responding to a perceived or actual capital deficiency, including, but not limited to, identification of drivers of a capital deficiency, as well as mitigants and potential actions. It outlines the appropriate communication procedures to follow during a crisis period, including internal dissemination of information as well as timely communication with external stakeholders.

As required by the Federal Reserve Board’s annual CCAR rules, we submit a capital plan for review by the Federal Reserve Board. The purpose of the Federal Reserve Board’s review is to ensure that we have a robust, forward-looking capital planning process that accounts for our unique risks and that permits continued operation during times of economic and financial stress.

Goldman Sachs 2014 Form 10-K75


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

The Federal Reserve Board evaluates us based, in part, on whether we have the capital necessary to continue operating under the baseline and stress scenarios provided by the Federal Reserve Board and those developed internally. This evaluation also takes into account our process for identifying risk, our controls and governance for capital planning, and our guidelines for making capital planning decisions. In addition, the Federal Reserve Board evaluates our plan to make capital distributions (i.e., dividend payments and repurchases or redemptions of stock, subordinated debt or other capital securities) and issue capital, across a range of macroeconomic scenarios and firm-specific assumptions.

In addition, the DFAST rules require us to conduct stress tests on a semi-annual basis and publish a summary of certain results. The annual DFAST submission is incorporated into our CCAR submission. The Federal Reserve Board also conducts its own annual stress tests and publishes a summary of certain results.

We submitted our initial 2014 CCAR to the Federal Reserve Board in January 2014 and, based on the Federal Reserve Board feedback, we submitted revised capital actions in March 2014. The Federal Reserve Board informed us that it did not object to our revised capital actions, including the repurchase of outstanding common stock, an increase in our quarterly common stock dividend and the possible issuance, redemption and modification of other capital securities through the first quarter of 2015. We published a summary of our annual DFAST results in March 2014. See “Business — Available Information” in Part I, Item 1 of the 2014 Form 10-K. We submitted our 2015 CCAR to the Federal Reserve Board in January 2015 and expect to publish a summary of our annual DFAST results in March 2015.

In addition, we submitted the results of our mid-cycle DFAST to the Federal Reserve Board in July 2014 and published a summary of our mid-cycle DFAST results under our internally developed severely adverse scenario in September 2014. We provide additional information on our internal stress test processes, our internally developed severely adverse scenario used for mid-cycle DFAST and a summary of the results on our web site as described under “Business — Available Information” in Part I, Item 1 of the 2014 Form 10-K.

In October 2014, the Federal Reserve Board issued a final rule modifying the regulations for capital planning and stress testing. The modifications change the dates for submitting the capital plan and stress test results beginning with the 2016 cycle and include a limitation on capital distributions to the extent that actual capital issuances are less than the amount indicated in the capital plan submission.

In addition, the rules adopted by the Federal Reserve Board under the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) require GS Bank USA to conduct stress tests on an annual basis and publish a summary of certain results. GS Bank USA submitted its 2014 annual DFAST stress results to the Federal Reserve Board in January 2014 and published a summary of its results in March 2014. See “Business — Available Information” in Part I, Item 1 of the 2014 Form 10-K. GS Bank USA submitted its 2015 annual DFAST results to the Federal Reserve Board in January 2015 and expects to publish a summary of its results in March 2015.

Share Repurchase Program. We use our share repurchase program to help maintain the appropriate level of common equity. The repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), the amounts and timing of which are determined primarily by our current and projected capital position, but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock.

As of December 2011, our total shareholders’ equity was $70.38 billion (consisting2014, under the share repurchase program approved by the Board of Directors of Group Inc. (Board), we can repurchase up to 25.4 million additional shares of common shareholders’ equitystock; however, prior to any such repurchases, we must receive confirmation that the Federal Reserve Board does not object to such capital actions. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of $67.28 billionEquity Securities” in Part II, Item 5 of the 2014 Form 10-K and preferred stockNote 19 to the consolidated financial statements for additional information about our share repurchase program and see above for information about our capital planning and stress testing process.

76Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Resolution and Recovery Plans

We are required by the Federal Reserve Board and the FDIC to submit an annual plan that describes our strategy for a rapid and orderly resolution in the event of $3.10 billion)material financial distress or failure (resolution plan). AsWe are also required by the Federal Reserve Board to submit, on an annual basis, a global recovery plan that outlines the steps that management could take to reduce risk, maintain sufficient liquidity, and conserve capital in times of December 2010,prolonged stress. We submitted our total shareholders’ equity was $77.36 billion (consisting of common shareholders’ equity of $70.40 billion2013 resolution plan in September 2013 and preferred stock of $6.96 billion). our 2014 resolution plan in June 2014. In August 2014, the Federal Reserve Board and the FDIC indicated that we and other large industry participants had certain shortcomings in the 2013 resolution plans that must be addressed in the 2015 resolution plans, which are required to be submitted on or before July 1, 2015.

In addition, our $5.00 billionGS Bank USA is required by the FDIC to submit a resolution plan. GS Bank USA submitted its 2013 resolution plan in September 2013 and its 2014 resolution plan in June 2014. GS Bank USA’s 2015 resolution plan is required to be submitted on or before July 1, 2015.

Rating Agency Guidelines

The credit rating agencies assign credit ratings to the obligations of junior subordinatedGroup Inc., which directly issues or guarantees substantially all of the firm’s senior unsecured obligations. Goldman, Sachs & Co. (GS&Co.), Goldman Sachs International (GSI) and GSIB have been assigned long- and short-term issuer ratings by certain credit rating agencies. GS Bank USA has also been assigned long- and short-term issuer ratings, as well as ratings on its long-term and short-term bank deposits. In addition, credit rating agencies have assigned ratings to debt issued to trusts qualifies asobligations of certain other subsidiaries of Group Inc.

The level and composition of our equity capital are among the many factors considered in determining our credit ratings. Each agency has its own definition of eligible capital and methodology for regulatoryevaluating capital adequacy, and certain rating agency purposes.assessments are generally based on a combination of factors rather than a single calculation. See “— Consolidated Regulatory Capital Ratios” below“Liquidity Risk Management — Credit Ratings” for further information regarding the impactabout credit ratings of regulatory developments.Group Inc., GS Bank USA, GSIB, GS&Co. and GSI.

Consolidated Regulatory CapitalRating Agency Guidelines

The Federal Reserve Board iscredit rating agencies assign credit ratings to the primary regulatorobligations of Group Inc., a bank holding company and a financial holding company under the U.S. Bank Holding Company Act of 1956. As a bank holding company, we are subject to consolidated regulatory capital requirements that are computed in accordance with the Federal Reserve Board’s capital adequacy regulations currently applicable to bank holding companies (which are based on the ‘Basel 1’ Capital Accord of the Basel Committee on Banking Supervision (Basel Committee)). These capital requirements are expressed as capital ratios that compare measures of capital to risk-weighted assets (RWAs). See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information regarding the firm’s RWAs. The firm’s capital levels are also subject to qualitative judgments by its regulators about components, risk weightings and other factors.

Federal Reserve Board regulations require bank holding companies to maintain a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio of 8%. The required minimum Tier 1 capital ratio and total capital ratio in order to be considered a “well-capitalized” bank holding company under the Federal Reserve Board guidelines are 6% and 10%, respectively. Bank holding companies may be expected to maintain ratios well above the minimum levels, depending on their particular condition, risk profile and growth plans. The minimum Tier 1 leverage ratio is 3% for bank holding companies that have received the highest supervisory rating under Federal Reserve Board guidelineswhich directly issues or that have implemented the Federal Reserve Board’s risk-based capital measure for market risk. Other bank holding companies must have a minimum Tier 1 leverage ratio of 4%.

Consolidated Regulatory Capital Ratios

The table below presents information about our regulatory capital ratios.

  As of December 
$ in millions 2011   2010 

Common shareholders’ equity

 $67,279    $70,399  

Less: Goodwill

  (3,802   (3,495

Less: Disallowable intangible assets

  (1,666   (2,027

Less: Other deductions 1

  (6,649   (5,601

Tier 1 Common Capital

  55,162     59,276  

Preferred stock

  3,100     6,957  

Junior subordinated debt issued to trusts

  5,000     5,000  

Tier 1 Capital

  63,262     71,233  

Qualifying subordinated debt 2

  13,828     13,880  

Other adjustments

  53     (220

Tier 2 Capital

  13,881     13,660  

Total Capital

 $77,143    $84,893  

Risk-Weighted Assets 3

 $457,027    $444,290  

Tier 1 Capital Ratio

  13.8   16.0

Total Capital Ratio

  16.9   19.1

Tier 1 Leverage Ratio 3

  7.0   8.0

Tier 1 Common Ratio 4

  12.1   13.3

1.

Principally includes equity investments in non-financial companies and the cumulative change in the fair value of our unsecured borrowings attributable to the impact of changes in our own credit spreads, disallowed deferred tax assets, and investments in certain nonconsolidated entities.

2.

Substantiallyguarantees substantially all of our subordinated debt qualifies as Tier 2 capital for Basel 1 purposes.

3.

See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information about the firm’s RWAs and Tier 1 leverage ratio.

4.

The Tier 1 common ratio equals Tier 1 common capital divided by RWAs. We believe that the Tier 1 common ratio is meaningful because it is one of the measures that we and investors use to assess capital adequacy and, while not currently a formal regulatory capital ratio, this measure is of increasing importance to regulators. The Tier 1 common ratio is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

Our Tier 1 capital ratio decreased to 13.8% as of December 2011 from 16.0% as of December 2010. Our Tier 1 leverage ratio decreased to 7.0% as of December 2011 from 8.0% as of December 2010. These decreases reflected a reduction in our Tier 1 capital primarily due to the impact of the redemption of the firm’s Series G Preferred Stocksenior unsecured obligations. Goldman, Sachs & Co. (GS&Co.), Goldman Sachs International (GSI) and the repurchase of 47.0 million shares of our common stock, partially offsetGSIB have been assigned long- and short-term issuer ratings by net earnings.

Goldman Sachs 2011 Form 10-K75


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussioncertain credit rating agencies. GS Bank USA has also been assigned long- and Analysis

We are currently working to implement the requirements set out in the Federal Reserve Board’s Risk-Based Capital Standards: Advanced Capital Adequacy Framework — Basel 2, as applicable to us as a bank holding company (Basel 2), which are based on the advanced approaches under the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee. U.S. banking regulators have incorporated the Basel 2 framework into the existing risk-based capital requirements by requiring that internationally active banking organizations, such as us, adopt Basel 2, once approved to do so by regulators. As required by the Dodd-Frank Act, U.S. banking regulators have adopted a rule that requires large banking organizations, upon adoption of Basel 2, to continue to calculate risk-based capital ratios under both Basel 1 and Basel 2. For each of the Tier 1 and Total capital ratios, the lower of the Basel 1 and Basel 2 ratios calculated will be used to determine whether the bank meets its minimum risk-based capital requirements.

The U.S. federal bank regulatory agencies have issued revised proposals to modify their market risk regulatory capital requirements for banking organizations in the United States that have significant trading activities. These modifications are designed to address the adjustments to Basel 2.5,short-term issuer ratings, as well as ratings on its long-term and short-term bank deposits. In addition, credit rating agencies have assigned ratings to debt obligations of certain other subsidiaries of Group Inc.

The level and composition of our equity capital are among the prohibitionmany factors considered in determining our credit ratings. Each agency has its own definition of eligible capital and methodology for evaluating capital adequacy, and assessments are generally based on the usea combination of factors rather than a single calculation. See “Liquidity Risk Management — Credit Ratings” for further information about credit ratings as required by the Dodd-Frank Act. Once implemented, it is likely that these changes will result in increased capital requirements for market risk.

Additionally, the guidelines issued by the Basel Committee in December 2010 (Basel 3) revise the definition of Tier 1 capital, introduce Tier 1 common equity as a regulatory metric, set new minimum capital ratios (including a new “capital conservation buffer,” which must be composed exclusively of Tier 1 common equityGroup Inc., GS Bank USA, GSIB, GS&Co. and will be in addition to the minimum capital ratios), introduce a Tier 1 leverage ratio within international guidelines for the first time, and make substantial revisions to the computation of RWAs for credit exposures. Implementation of the new requirements is expected to take place over the next several years. Although the U.S. federal banking agencies have now issued proposed rules that are intended to implement certain aspects of the Basel 2.5 guidelines, they have not yet addressed all aspects of those guidelines or the Basel 3 changes.GSI.

The Basel Committee has published its final provisions for assessing the global systemic importance of banking institutions and the range of additional Tier 1 common equity that should be maintained by banking institutions deemed to be globally systemically important. The additional capital for these institutions would initially range from 1% to 2.5% of Tier 1 common equity and could be as much as 3.5% for a bank that increases its systemic footprint (e.g., by increasing total assets). The firm was one of 29 institutions identified by the Financial Stability Board (established at the direction of the leaders of the Group of 20) as globally systemically important under the Basel Committee’s methodology. Therefore, depending upon the manner and timing of the U.S. banking regulators’ implementation of the Basel Committee’s methodology, we expect that the minimum Tier 1 common ratio requirement applicable to us will include this additional capital assessment. The final determination of whether an institution is classified as globally systemically important and the calculation of the required additional capital amount is expected to be disclosed by the Basel Committee no later than November 2014 based on data through the end of 2013.

The Dodd-Frank Act will subject us at a firmwide level to the same leverage and risk-based capital requirements that apply to depository institutions and directs banking regulators to impose additional capital requirements as disclosed above. The Federal Reserve Board is expected to adopt the new leverage and risk-based capital regulations in 2012. As a consequence of these changes, Tier 1 capital treatment for our junior subordinated debt issued to trusts will be phased out over a three-year period beginning on January 1, 2013. The interaction among the Dodd-Frank Act, the Basel Committee’s proposed changes and other proposed or announced changes from other governmental entities and regulators adds further uncertainty to our future capital requirements.

76Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

See “Business — Regulation” in Part I, Item 1 of this Form 10-K and Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information about our regulatory capital ratios and the related regulatory requirements.

Internal Capital Adequacy Assessment Process

We perform an ICAAP with the objective of ensuring that the firm is appropriately capitalized relative to the risks in our business.

As part of our ICAAP, we perform an internal risk-based capital assessment. This assessment incorporates market risk, credit risk and operational risk. Market risk is calculated by using Value-at-Risk (VaR) calculations supplemented by risk-based add-ons which include risks related to rare events (tail risks). Credit risk utilizes assumptions about our counterparties’ probability of default, the size of our losses in the event of a default and the maturity of our counterparties’ contractual obligations to us. Operational risk is calculated based on scenarios incorporating multiple types of operational failures. Backtesting is used to gauge the effectiveness of models at capturing and measuring relevant risks.

We evaluate capital adequacy based on the result of our internal risk-based capital assessment, supplemented with the results of stress tests which measure the firm’s performance under various market conditions. Our goal is to hold sufficient capital, under our internal risk-based capital framework, to ensure we remain adequately capitalized after experiencing a severe stress event. Our assessment of capital adequacy is viewed in tandem with our assessment of liquidity adequacy and integrated into the overall risk management structure, governance and policy framework of the firm.

We attribute capital usage to each of our businesses based upon our internal risk-based capital and regulatory frameworks and manage the levels of usage based upon the balance sheet and risk limits established.

Rating Agency Guidelines

The credit rating agencies assign credit ratings to the obligations of Group Inc., which directly issues or guarantees substantially all of the firm’s senior unsecured obligations. Goldman, Sachs & Co. (GS&Co.) and, Goldman Sachs International (GSI) and GSIB have been assigned long- and short-term issuer ratings by certain credit rating agencies. GS Bank USA has also been assigned long-termlong- and short-term issuer ratings, as well as ratings on its long-term and short-term bank deposits. In addition, credit rating agencies have assigned ratings to debt obligations of certain other subsidiaries of Group Inc.

The level and composition of our equity capital are among the many factors considered in determining our credit ratings. Each agency has its own definition of eligible capital and methodology for evaluating capital adequacy, and assessments are generally based on a combination of factors rather than a single calculation. See “Liquidity Risk Management — Credit Ratings” for further information about credit ratings of Group Inc., GS Bank USA, GSIB, GS&Co. and GSI.

Consolidated Regulatory Capital

As of December 2013, we were subject to the risk-based capital regulations of the Federal Reserve Board that were based on the Basel I Capital Accord of the Basel Committee on Banking Supervision (Basel Committee), GSI and GS Bank USA.incorporated the revised market risk regulatory capital requirements (together, the Prior Capital Rules).

As of January 1, 2014, we became subject to the Federal Reserve Board’s revised risk-based capital and leverage regulations, subject to certain transitional provisions (Revised Capital Framework). These regulations are largely based on the Basel Committee’s final capital framework for strengthening international capital standards (Basel III) and also implement certain provisions of the Dodd-Frank Act. Under the Revised Capital Framework, we are an “Advanced approach” banking organization.

We were notified in the first quarter of 2014 that we had completed a “parallel run” to the satisfaction of the Federal Reserve Board, as required under the Revised Capital Framework. As such, additional changes in our capital requirements became effective on April 1, 2014.

Beginning on January 1, 2014, regulatory capital was calculated based on the Revised Capital Framework. Beginning on April 1, 2014, there were no changes to the calculation of regulatory capital, but RWAs were calculated using (i) the Prior Capital Rules, adjusted for certain items related to capital deductions under the previous definition of regulatory capital and for the phase-in of new capital deductions (Hybrid Capital Rules), and (ii) the Advanced approach and market risk rules set out in the Revised Capital Framework (together, the Basel III Advanced Rules). The lower of the ratios calculated under the Hybrid Capital Rules and those calculated under the Basel III Advanced Rules are our binding regulatory capital requirements.

As a result of the changes in the applicable capital framework in 2014, our capital ratios as of December 2014 and those as of December 2013 included in Note 20 to the consolidated financial statements were calculated on a different basis and, accordingly, are not comparable. See Note 20 to the consolidated financial statements for our capital ratios as of December 2013, a description of the Prior Capital Rules, and for additional information about the Revised Capital Framework, including the transitional arrangements related to new deductions from Common Equity Tier 1 (CET1) and information about RWAs.

Goldman Sachs 2014 Form 10-K77


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Effective on January 1, 2015, regulatory capital continues to be calculated under the Revised Capital Framework, but RWAs are required to be calculated under the Basel III Advanced Rules, as well as the Standardized approach and market risk rules set out in the Revised Capital Framework (together, the Standardized Capital Rules) as discussed in Note 20 to the consolidated financial statements. The lower of the ratios calculated under the Basel III Advanced Rules and those calculated under the Standardized Capital Rules are our binding regulatory capital requirements.

Minimum Capital Ratios and Capital Buffers

The table below presents the minimum ratios under the Revised Capital Framework as of December 2014 and January 2015, as well as the minimum ratios that we expect will apply at the end of the transitional provisions beginning January 2019.

   
 
December 2014
Minimum Ratio
  
 1 
  
 
January 2015
Minimum Ratio
  
 1 
  
 
January 2019
Minimum Ratio
  
  

CET1 ratio

  4.0%    4.5%    8.5% 4 
  

Tier 1 capital ratio

  5.5%    6.0%    10.0% 4 
  

Total capital ratio

  8.0% 3   8.0% 3   12.0% 4 
  

Tier 1 leverage ratio 2

  4.0%    4.0%    4.0%  

1.

Does not reflect the capital conservation buffer or provisional Global Systemically Important Banks (G-SIB) buffer discussed below.

2.

Tier 1 leverage ratio is defined as Tier 1 capital divided by average adjusted total assets (which includes adjustments for goodwill and identifiable intangible assets, and certain investments in nonconsolidated financial institutions).

3.

In order to meet the quantitative requirements for being “well-capitalized” under the Federal Reserve Board’s capital regulations, the firm must meet a higher required minimum Total capital ratio of 10.0%.

4.

Includes the required increases in minimum ratios on January 1, 2015, the capital conservation buffer of 2.5% and a provisional G-SIB buffer of 1.5% under the Basel Committee’s methodology discussed below.

The table below presents the supplementary leverage ratio. See “Supplementary Leverage Ratio” below for further information.


January 2018
Minimum Ratio

Supplementary leverage ratio

5.0% 1

1.

Includes the minimum requirement of 3.0% and a buffer of 2.0% discussed below.

Under the Revised Capital Framework, on January 1, 2015, the minimum CET1 ratio increased from 4.0% to 4.5% and the minimum Tier 1 capital ratio increased from 5.5% to 6.0%. In addition, these minimum ratios will be supplemented by a new capital conservation buffer, consisting entirely of capital that qualifies as CET1, that phases in, beginning on January 1, 2016, in increments of 0.625% per year until it reaches 2.5% of RWAs on January 1, 2019.

The January 2019 minimum ratios in the table above assume the future implementation of an additional preliminary buffer for G-SIBs. Under the methodology published by the Basel Committee, the required amount of additional CET1 for these institutions will initially range from 1% to 2.5% and could be higher in the future for a banking institution that increases its systemic footprint (e.g., by increasing total assets). In November 2014, the Financial Stability Board (established at the direction of the leaders of the Group of 20) indicated that, based on our 2013 financial data, we would be required to hold an additional 1.5% of CET1 as a G-SIB.

In December 2014, the Federal Reserve Board proposed a rule which would establish risk-based capital surcharges for U.S. G-SIBs that are higher than those required by the Basel Committee. Under the proposed rule, U.S. G-SIBs would be required to meet these higher capital surcharges on a phased-in basis, beginning in 2016 through 2019. The proposed rule treats the Basel Committee’s methodology as a floor and introduces an alternative calculation to determine the applicable surcharge, which includes a significantly higher surcharge for systemic risk and, as part of the calculation of the applicable surcharge, a new factor based on a G-SIB’s use of short-term wholesale funding. Under a preliminary assessment of the proposed rule, our surcharge has been estimated to be 100 basis points higher than the 1.5% surcharge under the Basel Committee’s methodology. The table above does not reflect this additional surcharge. This preliminary estimate is subject to significant interpretive assumptions and may change in the future, perhaps materially, due to, among other things (i) any changes in the final rule, the interpretations we have made, or data used in the calculation; (ii) changes in foreign exchange rates, which may have the effect of increasing or decreasing the proportion of the systemic risk measures applicable to U.S. G-SIBs; (iii) increases or decreases in any of the indicators used in the assessment of our systemic risk, including our use of short-term wholesale funding; or (iv) increases or decreases in indicators at any of the other banks that are included in the Basel Committee’s methodology.

The Revised Capital Framework also provides a new counter-cyclical capital buffer of up to 2.5% (and also consisting entirely of CET1), to be imposed in the event that national supervisors deem it necessary in order to counteract excessive credit growth. The table above does not reflect this buffer.

Our regulators could change these buffers in the future. As a result, the minimum ratios we are subject to as of January 1, 2019 could be higher than the amounts presented in the table above.

78Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Fully Phased-in Capital Ratios

The table below presents our estimated ratio of CET1 to RWAs calculated under the Basel III Advanced Rules and the Standardized Capital Rules on a fully phased-in basis.

  As of December 
$ in millions  2014     2013  

Common shareholders’ equity

  $  73,597     $  71,267  
  

Deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities

  (3,196   (3,468
  

Deductions for investments in nonconsolidated financial institutions

  (4,928   (9,091
  

Other adjustments

  (1,213   (489

CET1

  $  64,260     $  58,219  

Basel III Advanced RWAs

  $577,869     $594,662  
  

Basel III Advanced CET1 ratio

  11.1%     9.8%  
  

Standardized RWAs

  $627,444     $635,092  
  

Standardized CET1 ratio

  10.2%     9.2%  

Although the fully phased-in capital ratios are not applicable until 2019, we believe that the estimated ratios in the table above are meaningful because they are measures that we, our regulators and investors use to assess our ability to meet future regulatory capital requirements. The estimated fully phased-in Basel III Advanced and Standardized CET1 ratios are non-GAAP measures as of both December 2014 and December 2013 and may not be comparable to similar non-GAAP measures used by other companies (as of those dates). These estimated ratios are based on our current interpretation, expectations and understanding of the Revised Capital Framework and may evolve as we discuss its interpretation and application with our regulators.

See Note 20 to the consolidated financial statements for information about our transitional capital ratios, which represent our binding ratios as of December 2014.

In the table above:

Ÿ

The deduction for goodwill and identifiable intangible assets, net of deferred tax liabilities, represents goodwill of $3.65 billion and $3.71 billion as of December 2014 and December 2013, respectively, and identifiable intangible assets of $515 million and $671 million as of December 2014 and December 2013, respectively, net of associated deferred tax liabilities of $964 million and $908 million as of December 2014 and December 2013, respectively.

Ÿ

The deduction for investments in nonconsolidated financial institutions represents the amount by which our investments in the capital of nonconsolidated financial institutions exceed certain prescribed thresholds. The decrease from December 2013 to December 2014 primarily reflects reductions in our fund investments.

Ÿ

Other adjustments primarily include the overfunded portion of our defined benefit pension plan obligation, net of associated deferred tax liabilities, and disallowed deferred tax assets, credit valuation adjustments on derivative liabilities and debt valuation adjustments, as well as other required credit risk-based deductions.

Supplementary Leverage Ratio

The Revised Capital Framework introduces a new supplementary leverage ratio for Advanced approach banking organizations. Under amendments to the Revised Capital Framework, the U.S. federal bank regulatory agencies approved a final rule that implements the supplementary leverage ratio aligned with the definition of leverage established by the Basel Committee. The supplementary leverage ratio compares Tier 1 capital to a measure of leverage exposure, defined as the sum of our quarterly average assets less certain deductions plus certain off-balance-sheet exposures, including a measure of derivatives exposures and commitments. The Revised Capital Framework requires a minimum supplementary leverage ratio of 5.0% (comprised of the minimum requirement of 3.0% and a 2.0% buffer) for U.S. banks deemed to be G-SIBs, effective on January 1, 2018. Certain disclosures regarding the supplementary leverage ratio are required beginning in the first quarter of 2015.

As of December 2014, our estimated supplementary leverage ratio was 5.0%, including Tier 1 capital on a fully phased-in basis of $73.17 billion (CET1 of $64.26 billion plus perpetual non-cumulative preferred stock of $9.20 billion less other adjustments of $290 million) divided by total leverage exposure of $1.45 trillion (total quarterly average assets of $873 billion plus adjustments of $579 billion, primarily comprised of off-balance-sheet exposure related to derivatives and commitments).

We believe that the estimated supplementary leverage ratio is meaningful because it is a measure that we, our regulators and investors use to assess our ability to meet future regulatory capital requirements. The supplementary leverage ratio is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

This estimated supplementary leverage ratio is based on our current interpretation and understanding of the U.S. federal bank regulatory agencies’ final rule and may evolve as we discuss its interpretation and application with our regulators.

Goldman Sachs 2014 Form 10-K79


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Subsidiary Capital Requirements

Many of our subsidiaries, including GS Bank USA and our broker-dealer subsidiaries, are subject to separate regulation and capital requirements of the jurisdictions in jurisdictions throughout the world. For purposes of assessing the adequacy of its capital,which they operate.

GS Bank USA. GS Bank USA has established an ICAAP which is subject to minimum capital requirements that are calculated in a manner similar to that used by Group Inc.those applicable to bank holding companies and computes its capital ratios in accordance with the regulatory capital requirements applicable to state member banks, which are based on the Revised Capital Framework. The capital regulations also include requirements with respect to leverage. See Note 20 to the consolidated financial statements for further information about the Revised Capital Framework as it relates to GS Bank USA, including GS Bank USA’s capital levelsratios and prompt corrective action classificationrequired minimum ratios.

The Basel Committee published its final guidelines for calculating incremental capital requirements for domestic systemically important banking institutions. These guidelines are complementary to the framework outlined above for G-SIBs. The impact of these guidelines on the regulatory capital requirements of GS Bank USA will depend on how they are implemented by the banking regulators in the United States.

In addition, under Federal Reserve Board rules, commencing on January 1, 2018, in order to be considered a “well-capitalized” depository institution, GS Bank USA must have a supplementary leverage ratio of 6.0% or greater. As of December 2014, GS Bank USA’s estimated supplementary leverage ratio under this rule and on a fully phased-in basis was 6.0%. This estimated supplementary leverage ratio is based on our current interpretation and understanding of this rule and may evolve as we discuss its interpretation and application with our regulators.

GSI. Our regulated U.K. broker-dealer, GSI, is one of the firm’s principal non-U.S. regulated subsidiaries and is regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Effective on January 1, 2014, GSI became subject to qualitative judgmentscapital regulations which are largely based on Basel III as implemented in the European Union (EU) through the Capital Requirements Directives and which, similar to the Revised Capital Framework, also introduce leverage ratio reporting requirements in the future. As of December 2014, GSI had an estimated CET1 ratio of 9.7%, an estimated Tier 1 capital ratio of 9.7% and an estimated Total capital ratio of 12.7% (all including approximately 80 basis points of 2014 unaudited results). These ratios will be finalized upon the completion of the 2014 GSI audit. Under PRA rules, as of December 2014, GSI is required to maintain a minimum CET1 ratio of 4.0%, Tier 1 capital ratio of 5.5%, and Total capital ratio of 8.0%. In January 2015, the minimum CET1 ratio requirement increased to 4.5%, and the minimum Tier 1 capital ratio requirement increased to 6.0%. GSI’s future capital requirements may also be impacted by its regulators about components,developments such as the introduction of capital buffers as described above in “— Minimum Capital Ratios and Capital Buffers.”

As of December 2013, GSI was subject to capital regulations, which were based on the Basel Committee’s June 2006 Framework (Basel II) as modified by the Basel Committee’s February 2011 Revisions to the Basel II market risk weightingsframework and other factors.as implemented in the EU through the Capital Requirements Directives. As of December 2013, GSI had a Tier 1 capital ratio of 14.4% and a Total capital ratio of 18.5%.

80Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Other Subsidiaries.We expect that the capital requirements of several of our subsidiaries will be impactedare likely to increase in the future bydue to the various developments arising from the Basel Committee, the Dodd-Frank Act, and other governmental entities and regulators.

See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about GS Bank USA’s capital ratios under Basel 1 as implemented by the Federal Reserve Board, and for further information about the capital requirements of our other regulated subsidiaries and the potential impact of regulatory reform.subsidiaries.

Subsidiaries not subject to separate regulatory capital requirements may hold capital to satisfy local tax and legal guidelines, rating agency requirements (for entities with assigned credit ratings) or internal policies, including policies concerning the minimum amount of capital a subsidiary should hold based on its underlying level of risk. In certain instances, Group Inc. may be limited in its ability to access capital held at certain subsidiaries as a result of regulatory, tax or other constraints. As of December 20112014 and December 2010,2013, Group Inc.’s equity investment in subsidiaries was $67.70$79.70 billion and $71.30$73.39 billion, respectively, compared with its total shareholders’ equity of $70.38$82.80 billion and $77.36$78.47 billion, respectively.

Goldman Sachs 2011 Form 10-K77


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Our capital invested in non-U.S. subsidiaries is generally exposed to foreign exchange risk, substantially all of which is managed through a combination of derivatives and non-U.S. denominated debt.

Management’s Discussion and AnalysisGuarantees of Subsidiaries.

Group Inc. has guaranteed the payment obligations of GS&Co., GS Bank USA, Goldman Sachs Bank (Europe) plc and Goldman Sachs Execution & Clearing, L.P. (GSEC), in each case subject to certain exceptions. In November 2008, Group Inc. contributed subsidiaries into GS Bank USA, and Group Inc. agreed to guarantee certain losses, including credit-related losses, relating to assets held by the contributed entities. In connection with this guarantee, Group Inc. also agreed to pledge to GS Bank USA certain collateral, including interests in subsidiaries and other illiquid assets.

Our capital invested in non-U.S. subsidiaries is generally exposed to foreign exchange risk, substantially all of which is managed through a combination of derivatives and non-U.S. denominated debt.

Contingency Capital PlanRegulatory Developments

Our contingency capital plan provides a framework for analyzing and responding to a perceived or actual capital deficiency, including, but not limited to, identification of drivers of a capital deficiency, as well as mitigants and potential actions. It outlines the appropriate communication procedures to follow during a crisis period, including internal dissemination of information as well as ensuring timely communication with external stakeholders.

Equity Capital Management

Our objective is to maintain a sufficient level and optimal composition of equity capital. We principally manage our capital through issuances and repurchases of our common stock. We may also, from time to time, issue or repurchase our preferred stock, junior subordinated debt issued to trusts and other subordinated debt or other forms of capital as business conditions warrant and subject to any regulatory approvals. We manage our capital requirements principally by setting limits on balance sheet assets and/or limits on risk, in each case both at the consolidated and business levels. We attribute capital usage to each of our businesses based upon our internal risk-based capital and regulatory frameworks and manage the levels of usage based upon the balance sheet and risk limits established.

Preferred Stock. During 2011, we redeemed the 50,000 shares of our Series G Preferred Stock held by Berkshire Hathaway for the stated redemption price of $5.50 billion ($110,000 per share), plus accrued and unpaid dividends. In connection with this redemption, we recognized a preferred dividend of $1.64 billion (calculated as the difference between the carrying value and the redemption value of the preferred stock), which is included in the consolidated statement of earnings for 2011. Berkshire Hathaway continues to hold a five-year warrant, issued in October 2008, to purchase up to 43.5 million shares of common stock at an exercise price of $115.00 per share.

Share Repurchase Program.We seek to use our share repurchase program to help maintain the appropriate level of common equity and to substantially offset increases in share count over time resulting from employee share-based compensation. The repurchase program is effected primarily through regular open-market purchases, the amounts and timing of which are determined primarily by our current and projected capital positions (i.e., comparisons of our desired level and composition of capital to our actual level and composition of capital) and the issuance of shares resulting from employee share-based compensation, but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock.

As of December 2011, under the share repurchase program approved by the Board of Directors of Group Inc. (Board), we can repurchase up to 63.5 million additional shares of common stock; however, any such repurchases are subject to significant and evolving regulation. The Dodd-Frank Act, enacted in July 2010, significantly altered the approvalfinancial regulatory regime within which we operate. In addition, other reforms have been adopted or are being considered by other regulators and policy makers worldwide. We expect that the principal areas of impact from regulatory reform for us will be increased regulatory capital requirements and increased regulation and restriction on certain activities. However, given that many of the Federal Reserve Board. new and proposed rules are highly complex, the full impact of regulatory reform will not be known until the rules are implemented and market practices develop under the final regulations.

There has been increased regulation of, and limitations on, our activities, including the Dodd-Frank Act prohibition on “proprietary trading” and the limitation on the sponsorship of, and investment in, covered funds (as defined in the Volcker Rule). In addition, there is increased regulation of, and restrictions on, OTC derivatives markets and transactions, particularly related to swaps and security-based swaps.

See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”“Business — Regulation” in Part II,I, Item 51 of the 2014 Form 10-K for more information about the laws, rules and regulations and proposed laws, rules and regulations that apply to us and our operations. In addition, see Note 1920 to the consolidated financial statements in Part II, Item��8 of this Form 10-K for additional information on our repurchase program.

See Notes 16 and 19 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about regulatory developments as they relate to our preferred stock, junior subordinated debt issued to trustsregulatory capital and other subordinated debt.leverage ratios, and “Liquidity Risk Management — Liquidity Regulatory Framework” below for information about the U.S. federal bank regulatory agencies’ final rules implementing the liquidity coverage ratio.

 

 

78 Goldman Sachs 20112014 Form 10-K 81


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Volcker Rule

In December 2013, the final rules to implement the provisions of the Dodd-Frank Act referred to as the “Volcker Rule” were adopted.

The Volcker Rule prohibits “proprietary trading,” but permits activities such as underwriting, market making and risk-mitigation hedging. We are also required to calculate daily quantitative metrics on covered trading activities (as defined in the rule) and provide these metrics to regulators on a monthly basis. We are required to be in compliance with the prohibition on proprietary trading and to develop an extensive compliance program by July 2015. Based on what we know as of the date of this filing, we do not expect the impact of the prohibition on proprietary trading to be material to our financial condition, results of operations or cash flows. However, the rule is highly complex, and its impact will not be known until market practices are fully developed.

In addition to the prohibition on proprietary trading, the Volcker Rule limits the sponsorship of, and investment in, “covered funds” (as defined in the rule) by banking entities, including Group Inc. and its subsidiaries. It also limits certain types of transactions between us and our sponsored funds, similar to the limitations on transactions between depository institutions and their affiliates as described in “Business — Regulation” in Part I, Item 1 of the 2014 Form 10-K. Covered funds include our private equity funds, certain of our credit and real estate funds, our hedge funds and certain other investment structures. The limitation on investments in covered funds requires us to reduce our investment in each such fund to 3% or less of the fund’s net asset value, and to reduce our aggregate investment in all such funds to 3% or less of our Tier 1 capital. In anticipation of the final rule, we limited our initial investment in certain new covered funds to 3% of the fund’s net asset value.

We continue to manage our existing funds, taking into account the transition periods under the Volcker Rule. We plan to continue to conduct our investing and lending activities in ways that are permissible under the Volcker Rule.

Our current investment in funds that are calculated using NAV is $9.84 billion as disclosed in Note 6 to the consolidated financial statements. In order to be compliant with the Volcker Rule, we will be required to reduce most of our interests in these funds by the prescribed compliance date. The Federal Reserve Board extended the conformance period through July 2016 for investments in, and relationships with, covered funds that were in place prior to December 31, 2013, and indicated that it intends to further extend the conformance period through July 2017. We currently expect to be able to exit substantially all such interests in these funds in orderly transactions prior to July 2017, subject to market conditions. However, to the extent that the underlying investments of particular funds are not sold, we may be required to sell our interests in such funds. If that occurs, we may receive a value for our interests that is less than the then carrying value as there could be a limited secondary market for these investments and we may be unable to sell them in orderly transactions.

Although our net revenues from our interests in private equity, credit, real estate and hedge funds may vary from period to period, our aggregate net revenues from these investments were approximately 3% and 6% of our aggregate total net revenues over the last 10 years and 5 years, respectively.

82Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Other Capital Metrics

The table below presents information on our shareholders’ equity and book value per common share.

 

  As of December 
$ in millions, except per share amounts 2011     2010 

Total shareholders’ equity

 $70,379      $77,356  

Common shareholders’ equity

  67,279       70,399  

Tangible common shareholders’ equity

  61,811       64,877  

Book value per common share

  130.31       128.72  

Tangible book value per common share

  119.72       118.63  

Tangible common shareholders’ equity. Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets. We believe that tangible common shareholders’ equity is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible common shareholders’ equity is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

The table below presents the reconciliation of total shareholders’ equity to tangible common shareholders’ equity.

  As of December 
in millions 2011   2010 

Total shareholders’ equity

 $70,379    $77,356  

Deduct: Preferred stock

  (3,100   (6,957

Common shareholders’ equity

  67,279     70,399  

Deduct: Goodwill and identifiable
intangible assets

  (5,468   (5,522

Tangible common shareholders’ equity

 $61,811    $64,877  

Book value and tangible book value per common share.Book value and tangible book value per common share are based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 516.3 million and 546.9 million as of December 2011 and December 2010, respectively. We believe that tangible book value per common share (tangible common shareholders’ equity divided by common shares outstanding) is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible book value per common share is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.

Off-Balance-Sheet Arrangements

and Contractual Obligations

Off-Balance-Sheet Arrangements

We have various types of off-balance-sheet arrangements that we enter into in the ordinary course of business. Our involvement in these arrangements can take many different forms, including:

 

Ÿ 

purchasingPurchasing or retaining residual and other interests in special purpose entities such as mortgage-backed and other asset-backed securitization vehicles;

 

Ÿ 

holdingHolding senior and subordinated debt, interests in limited and general partnerships, and preferred and common stock in other nonconsolidated vehicles;

 

Ÿ 

enteringEntering into interest rate, foreign currency, equity, commodity and credit derivatives, including total return swaps;

 

Ÿ 

enteringEntering into operating leases; and

 

Ÿ 

providingProviding guarantees, indemnifications, loan commitments, letters of credit and representations and warranties.

We enter into these arrangements for a variety of business purposes, including securitizations. The securitization vehicles that purchase mortgages, corporate bonds, and other types of financial assets are critical to the functioning of several significant investor markets, including the mortgage-backed and other asset-backed securities markets, since they offer investors access to specific cash flows and risks created through the securitization process.

We also enter into these arrangements to underwrite client securitization transactions; provide secondary market liquidity; make investments in performing and nonperforming debt, equity, real estate and other assets; provide investors with credit-linked and asset-repackaged notes; and receive or provide letters of credit to satisfy margin requirements and to facilitate the clearance and settlement process.

Goldman Sachs 2011 Form 10-K79


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Our financial interests in, and derivative transactions with, such nonconsolidated entities are generally accounted for at fair value, in the same manner as our other financial instruments, except in cases where we apply the equity method of accounting.

The table below presents where a discussion of our various off-balance-sheet arrangements may be found in Part II, Items 7 and 8 of thisthe 2014 Form 10-K. In addition, see Note 3 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a discussion of our consolidation policies.

 

Type of Off-Balance-Sheet Arrangement Disclosure in Form 10-K

Variable interests and other obligations, including contingent obligations, arising from variable interests in nonconsolidated VIEs

 

See Note 1112 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.statements.

Leases, letters of credit, and lending and other commitments

 

See “Contractual Obligations” below and Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.statements.

Guarantees 

Guarantees

See “Contractual Obligations” below and Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.statements.

Derivatives

 

See “Credit Risk Management — Credit Exposures — OTC Derivatives” below and Notes 4, 5, 7 and 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.statements.

 

80 Goldman Sachs 20112014 Form 10-K 83


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Contractual Obligations

We have certain contractual obligations which require us to make future cash payments. These contractual obligations include our unsecured long-term borrowings, secured long-term financings, time deposits and contractual interest payments, and insurance agreements, all of which are included in our consolidated statementstatements of financial condition. Our obligations to make

future cash payments

also include certain off-balance-sheet contractual obligations such as purchase obligations, minimum rental payments under noncancelable leases and commitments and guarantees.

The table below presents our contractual obligations, commitments and guarantees as of December 2011.2014.

 

 

in millions 2012   2013-2014   2015-2016   2017-
Thereafter
   Total 
$ in millions  2015     
 
2016 -
2017
  
  
   
 
2018 -
2019
  
  
   
 
2020 -
Thereafter
  
  
   Total  

Amounts related to on-balance-sheet obligations

                  

Time deposits 1

 $    $4,558    $1,754    $2,120    $8,432  

Secured long-term financings 2

       5,479     1,020     1,680     8,179  

Unsecured long-term borrowings 3

       45,548     42,520     85,477     173,545  

Contractual interest payments 4

  6,892     12,603     9,617     33,784     62,896  

Insurance liabilities 5

  1,211     2,191     1,823     18,118     23,343  

Time deposits

  $         —     $    7,830     $  5,308     $  5,704     $  18,842  
 

Secured long-term financings

       5,104     1,403     742     7,249  
 

Unsecured long-term borrowings

       44,342     40,345     82,884     167,571  
 

Contractual interest payments

  6,859     12,172     4,850     37,535     61,416  
 

Subordinated liabilities issued by consolidated VIEs

  47     36          1,007     1,090    3               840     843  
 

Amounts related to off-balance-sheet arrangements

                  

Commitments to extend credit

  12,172     14,685     37,692     1,196     65,745    15,154     23,235     50,423     7,137     95,949  
 

Contingent and forward starting resale and securities borrowing agreements

  54,522                    54,522    34,343     557     325          35,225  
 

Forward starting repurchase and secured lending agreements

  17,964                    17,964    8,180                    8,180  
 

Letters of credit

  1,145     58     145     5     1,353    280     14     10     4     308  

Investment commitments

  2,455     4,764     439     1,460     9,118  
 

Investment commitments 1

  1,684     2,818     25     637     5,164  
 

Other commitments

  5,200     101     34     7     5,342    6,136     87     42     56     6,321  
 

Minimum rental payments

  440     805     638     1,380     3,263    321     566     416     870     2,173  
 

Derivative guarantees

  486,244     206,853     53,743     49,576     796,416    351,308     150,989     51,927     58,511     612,735  
 

Securities lending indemnifications

  27,798                    27,798    27,567                    27,567  
 

Other financial guarantees

  625     795     1,209     939     3,568    471     935     1,390     1,690     4,486  

 

1.

Excludes $4.83$2.83 billion of time deposits maturing within one year.commitments to covered funds (as defined by the Volcker Rule) are included in the 2015 and 2016-2017 columns. We expect that substantially all of these commitments will not be called.

2.

The aggregate contractual principal amount of secured long-term financings for which the fair value option was elected, primarily consisting of transfers of financial assets accounted for as financings rather than sales and certain other nonrecourse financings, exceeded their related fair value by $239 million.

3.

Includes $10.84 billion related to interest rate hedges on certain unsecured long-term borrowings. In addition, the aggregate contractual principal amount of unsecured long-term borrowings (principal and non-principal protected) for which the fair value option was elected exceeded the related fair value by $693 million.

4.

Represents estimated future interest payments related to unsecured long-term borrowings, secured long-term financings and time deposits based on applicable interest rates as of December 2011. Includes stated coupons, if any, on structured notes.

5.

Represents estimated undiscounted payments related to future benefits and unpaid claims arising from policies associated with our insurance activities, excluding separate accounts and estimated recoveries under reinsurance contracts.

Goldman Sachs 2011 Form 10-K81


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

In the table above:

 

Ÿ 

Obligations maturing within one year of our financial statement date or redeemable within one year of our financial statement date at the option of the holder are excluded and are treated as short-term obligations.

 

Ÿ 

Obligations that are repayable prior to maturity at our option are reflected at their contractual maturity dates and obligations that are redeemable prior to maturity at the option of the holders are reflected at the dates such options become exercisable.

 

Ÿ 

Amounts included in the table do not necessarily reflect the actual future cash flow requirements for these arrangements because commitments and guarantees represent notional amounts and may expire unused or be reduced or cancelled at the counterparty’s request.

 

Ÿ 

Due to the uncertainty of the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded. See Note 24 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unrecognized tax benefits.

Ÿ

Unsecured long-term borrowings includes $9.54 billion of adjustments to the carrying value of certain unsecured long-term borrowings resulting from the application of hedge accounting.

Ÿ

The aggregate contractual principal amount of secured long-term financings and unsecured long-term borrowings for which the fair value option was elected exceeded the related fair value by $203 million and $163 million, respectively.

Ÿ

Contractual interest payments represents estimated future interest payments related to unsecured long-term borrowings, secured long-term financings and time deposits based on applicable interest rates as of December 2014, and includes stated coupons, if any, on structured notes.

84Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

See Notes 15 and 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our short-term borrowings and commitments and guarantees.guarantees, respectively.

As of December 2011,2014, our unsecured long-term borrowings were $173.55$167.57 billion, with maturities extending to 2061, and consisted principally of senior borrowings. See Note 16 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unsecured long-term borrowings.

As of December 2011,2014, our future minimum rental payments, net of minimum sublease rentals under noncancelable leases, were $3.26$2.17 billion. These lease commitments, principally for office space, expire on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. See Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our leases.

Our occupancy expenses include costs associated with office space held in excess of our current requirements. This excess space, the cost of which is charged to earnings as

incurred, is being held for potential growth or to replace currently occupied space that we may exit in the future. We regularly evaluate our current and future space capacity in relation to current and projected staffing levels. For the year ended December 2011,2014, total occupancy expenses for space held in excess of our current requirements were $85 million, which includes costs related to the transition to our new headquarters in New York City. In addition, for the year ended December 2011, we incurredand exit costs of $14 million related to our office space.space were not material. We may incur exit costs in the future to the extent we (i) reduce our space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate and, consequently, dispose of existing space that had been held for potential growth. These exit costs may be material to our results of operations in a given period.

Risk Management and Risk Factors

Risks are inherent in our business and include liquidity, market, credit, operational, legal, regulatory and reputational risks. For a further discussion of our risk management processes, see “— Overview and Structure of Risk Management” below. Our risks include the risks across our risk categories, regions or global businesses, as well as those which have uncertain outcomes and have the potential to materially impact our financial results, our liquidity and our reputation. For a further discussion of our areas of risk, see “— Liquidity Risk Management,” “— Market Risk Management,” “— Credit Risk Management,” “— Operational Risk Management” and “— Certain Risk Factors That May Affect Our Businesses” below.

Goldman Sachs 2014 Form 10-K85


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Overview and Structure of Risk

Management

Overview

We believe that effective risk management is of primary importance to the success of the firm. Accordingly, we have comprehensive risk management processes through which we monitor, evaluate and manage the risks we assume in conducting our activities. These include market, credit, liquidity, operational, legal, regulatory and reputational risk exposures. Our risk management framework is built around three core components: governance, processes and people.

Governance.Risk management governance starts with our Board, which plays an important role in reviewing and approving risk management policies and practices, both directly and through its committees, including its Risk Committee, which consists of all of our independent directors.Committee. The Board also receives periodic updatesregular briefings on firmwide risks, including market risk, liquidity risk, credit risk and operational risk from our independent control and support functions.functions, including the chief risk officer, and on matters impacting our reputation from the chair of our Firmwide Client and Business Standards Committee. The chief risk officer, as part of the review of the firmwide risk portfolio, regularly advises the Risk Committee of the Board of relevant risk metrics and material exposures. Next, at the most senior levels of the firm, our leaders are experienced risk managers, with a sophisticated and detailed understanding of the risks we take. Our senior managers lead and participate in risk-oriented committees, as do the leaders of our independent control and support functions — including those in internal audit, compliance, controllers, credit risk management, human capital management, legal, market risk management, operations, operational risk management, tax, technologyCompliance, Controllers, our Credit Risk Management department (Credit Risk Management), Human Capital Management, Legal, our Market Risk Management department (Market Risk Management), Operations, our Operational Risk Management department (Operational Risk Management), Tax, Technology and treasury.

82Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and AnalysisTreasury.

The firm’sOur governance structure provides the protocol and responsibility for decision-making on risk management issues and ensures implementation of those decisions. We make extensive use of risk-related committees that meet regularly and serve as an important means to facilitate and foster ongoing discussions to identify, manage and mitigate risks.

We maintain strong communication about risk and we have a culture of collaboration in decision-making among the revenue-producing units, independent control and support functions, committees and senior management. While we believe that the first line of defense in managing risk rests with the managers in our revenue-producing units, we dedicate extensive resources to independent control and support functions in order to ensure a strong oversight structure and an appropriate segregation of duties. We regularly reinforce our strong culture of escalation and accountability across all divisions and functions.

Processes.We maintain various processes and procedures that are critical components of our risk management. First and foremost is our daily discipline of marking substantially all of the firm’sour inventory to current market levels. Goldman Sachs carries its inventory at fair value, with changes in valuation reflected immediately in our risk management systems and in net revenues. We do so because we believe this discipline is one of the most effective tools for assessing and managing risk and that it provides transparent and realistic insight into our financial exposures.

We also apply a rigorous framework of limits to control risk across multiple transactions, products, businesses and markets. This includes setting credit and market risk limits at a variety of levels and monitoring these limits on a daily basis. Limits are typically set at levels that will be periodically exceeded, rather than at levels which reflect our maximum risk appetite. This fosters an ongoing dialogue on risk among revenue-producing units, independent control and support functions, committees and senior management, as well as rapid escalation of risk-related matters. See “Market Risk Management” and “Credit Risk Management” for further information onabout our risk limits.

Active management of our positions is another important process. Proactive mitigation of our market and credit exposures minimizes the risk that we will be required to take outsized actions during periods of stress.

86Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

We also focus on the rigor and effectiveness of the firm’sour risk systems. The goal of our risk management technology is to get the right information to the right people at the right time, which requires systems that are comprehensive, reliable and timely. We devote significant time and resources to our risk management technology to ensure that it consistently provides us with complete, accurate and timely information.

People. Even the best technology serves only as a tool for helping to make informed decisions in real time about the risks we are taking. Ultimately, effective risk management requires our people to interpret our risk data on an ongoing and timely basis and adjust risk positions accordingly. In both our revenue-producing units and our independent control and support functions, the experience of our professionals, and their understanding of the nuances and limitations of each risk measure, guide the firmus in assessing exposures and maintaining them within prudent levels.

We reinforce a culture of effective risk management in our training and development programs as well as the way we evaluate performance, and recognize and reward our people. Our training and development programs, including certain sessions led by our most senior leaders, are focused on the importance of risk management, client relationships and reputational excellence. As part of our annual performance review process, we assess reputational excellence including how an employee exercises good risk management and reputational judgment, and adheres to our code of conduct and compliance policies. Our review and reward processes are designed to communicate and reinforce to our professionals the link between behavior and how people are recognized, the need to focus on our clients and our reputation, and the need to always act in accordance with the highest standards of the firm.

Structure

Ultimate oversight of risk is the responsibility of the firm’sour Board. The Board oversees risk both directly and through its committees, including its Risk Committee. Within the firm, a series of committees with specific risk management mandates have oversight or decision-making responsibilities for risk management activities. Committee membership generally consists of senior managers from both our revenue-producing units and our independent control and support functions. We have established procedures for these committees to ensure that appropriate information barriers are in place. Our primary risk committees, most of which also have additional sub-committees or working groups, are described below. In addition to these committees, we have other risk-oriented committees which provide oversight for different businesses, activities, products, regions and legal entities. All of our firmwide, regional and divisional committees have responsibility for considering the impact of transactions and activities which they oversee on our reputation.

Membership of the firm’sour risk committees is reviewed regularly and updated to reflect changes in the responsibilities of the committee members. Accordingly, the length of time that members serve on the respective committees varies as determined by the committee chairs and based on the responsibilities of the members within the firm.

In addition, independent control and support functions, which report to the chief financial officer, the chief risk officer, the general counsel and the chief administrative officer, or in the case of Internal Audit, to the Audit Committee of the Board, are responsible for day-to-day oversight or monitoring of risk, as discussed in greater detail in the following sections. Internal Audit, which reports to the Audit Committee of the Board and includes professionals with a broad range of audit and industry experience, including risk management expertise, is responsible for independently assessing and validating key controls within the risk management framework.

 

 

 Goldman Sachs 20112014 Form 10-K 8387


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

The chart below presents an overview of our risk management governance structure, highlighting the oversight

oversight of our Board, our key risk-related committees and the independence of our control and support functions.

 

 

 

Management Committee.The Management Committee oversees theour global activities, of the firm, including all of the firm’sour independent control and support functions. It provides this oversight directly and through authority delegated to committees it has established. This committee is comprised of theour most senior leaders, of the firm, and is chaired by the firm’sour chief executive officer. The Management Committee has established various committees with delegated authority and the chairperson of the Management Committee appoints the chairpersons of these committees. Most members of the Management Committee are also members of other firmwide, divisional and regional committees. The following are the committees that are principally involved in firmwide risk management.

Firmwide Client and Business Standards Committee.The Firmwide Client and Business Standards Committee assesses and makes determinations regarding business standards and practices, reputational risk management, client relationships and client service, is chaired by the firm’sour president and chief operating officer, and reports to the Management Committee. This committee also has responsibility for overseeing the implementation of the recommendations of the Business Standards Committee. This committee periodically updates and receives guidance from the Public Responsibilities Subcommittee of the Corporate Governance, Nominating and Public Responsibilities Committee of the Board. This committee has established the following two risk-related committees that report to it:

 

 

8488 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Ÿ 

Firmwide New Activity Committee.The Firmwide New Activity Committee is responsible for reviewing new activities and for establishing a process to identify and review previously approved activities that are significant and that have changed in complexity and/or structure or present different reputational and suitability concerns over time to consider whether these activities remain appropriate. This committee is co-chaired by the firm’sour head of operations/chief operating officer for Europe, Middle East and Africa (EMEA) and the chief administrative officer of our Investment Management Division, who are appointed by the Firmwide Client and Business Standards Committee chairperson.

 

Ÿ 

Firmwide Suitability Committee. The Firmwide Suitability Committee is responsible for setting standards and policies for product, transaction and client suitability and providing a forum for consistency across divisions, regions and products on suitability assessments. This committee also reviews suitability matters escalated from other firm committees. This committee is co-chaired by the firm’s international general counseldeputy head of our Global Compliance Division and the co-head of our Investment Management DivisionGlobal Fixed Income, Currency and Commodities Sales, who are appointed by the Firmwide Client and Business Standards Committee.Committee chairperson.

Firmwide Risk Committee. The Firmwide Risk Committee is globally responsible for the ongoing monitoring and controlmanagement of the firm’s globalour financial risks. Through both direct and delegated authority, the Firmwide Risk Committee approves firmwide, product, divisional and business-level limits for both market and credit risks, approves sovereign credit risk limits and reviews results of stress tests and scenario analyses. This committee is co-chaired by the firm’sour chief financial officer and a senior managing director from the firm’s executive office,our chief risk officer, and reports to the Management Committee. The following fourare the primary committees that report to the Firmwide Risk Committee, which is responsible for appointing theCommittee. The chairperson of eachthe Securities Division Risk Committee is appointed by the chairpersons of these committees:the Firmwide Risk Committee; the chairpersons of the Credit Policy and Firmwide Operational Risk Committees are appointed by our chief risk officer; the chairpersons of the Firmwide Finance Committee, the Firmwide Technology Risk Committee, the Firmwide Model Risk Control Committee and the Global Business Resilience Committee are appointed by the Firmwide Risk Committee; and the chairpersons of the Firmwide Investment Policy Committee are appointed by our president and chief operating officer in conjunction with our chief financial officer.

Ÿ 

Securities Division Risk Committee.The Securities Division Risk Committee sets market risk limits, subject to overall firmwide risk limits, for our Fixed Income, Currency and Commodities Client Execution and Equities Client Execution businessesthe Securities Division based on a number of risk measures, including but not limited to VaR, stress tests, scenario analyses and inventorybalance sheet levels. This committee is chaired by the chief risk officer of our Securities Division.

Ÿ 

Credit Policy Committee.The Credit Policy Committee establishes and reviews broad firmwide credit policies and parameters that are implemented by our Credit Risk Management department (Credit Risk Management).Management. This committee is chaired by the firm’sour chief credit officer.

 

Ÿ 

Firmwide Operational Risk Committee.The Firmwide Operational Risk Committee provides oversight of the ongoing development and implementation of our operational risk policies, framework and methodologies, and monitors the effectiveness of operational risk management. This committee is chairedco-chaired by a managing director in Credit Risk Management and a managing director in Operational Risk Management.

 

Ÿ 

Firmwide Finance Committee. The Firmwide Finance Committee has oversight of firmwideresponsibility for liquidity risk, the size and composition of our balance sheet and capital base, and our credit ratings. This committee regularly reviews our liquidity, balance sheet, funding position and capitalization, approves related policies, and makes recommendations as to any adjustments to be made in light of current events, risks, and exposures and regulatory requirements. ThisAs a part of such oversight, among other things, this committee is also responsible for reviewingreviews and approvingapproves balance sheet limits and the size of our GCE.GCLA. This committee is co-chaired by our chief financial officer and our global treasurer.

Ÿ

Firmwide Technology Risk Committee. The Firmwide Technology Risk Committee reviews matters related to the design, development, deployment and use of technology. This committee oversees cyber security matters, as well as technology risk management frameworks and methodologies, and monitors their effectiveness. This committee is co-chaired by our chief information officer and the head of Global Investment Research.

Ÿ

Firmwide Investment Policy Committee. The Firmwide Investment Policy Committee reviews, approves and sets policies, and provides oversight, for certain illiquid principal investments. This committee is co-chaired by the firm’shead of our Merchant Banking Division and a co-head of our Securities Division.

Goldman Sachs 2014 Form 10-K89


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Ÿ

Firmwide Model Risk Control Committee. The Firmwide Model Risk Control Committee is responsible for oversight of the development and implementation of model risk controls, which includes governance, policies and procedures related to our reliance on financial models. This committee is chaired by our chief financial officermarket risk officer.

Ÿ

Global Business Resilience Committee. The Global Business Resilience Committee is responsible for oversight of business resilience initiatives, promoting increased levels of security and the firm’s global treasurer.resilience, and reviewing certain operating risks related to business resilience. This committee is chaired by our chief administrative officer.

The following committees report jointly to the Firmwide Risk Committee and the Firmwide Client and Business Standards Committee.Committee:

 

Ÿ 

Firmwide Commitments Committee.The Firmwide Commitments Committee reviews the firm’sour underwriting and distribution activities with respect to equity and equity-related product offerings, and sets and maintains policies and procedures designed to ensure that legal, reputational, regulatory and business standards are maintained on a global basis. In addition to reviewing specific transactions, this committee periodically conducts general strategic reviews of sectors and products and establishes policies in connection with transaction practices. This committee is co-chaired by our senior strategy officer and the global co-head of our Financial Institutions Group for Investment Banking and the head ofGlobal Mergers & Acquisitions, for Europe, Middle East, Africa and Asia Pacific for Investment Banking who are appointed by the Firmwide Client and Business Standards Committee chairperson.

 

Goldman Sachs 2011 Form 10-K85


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Ÿ 

Firmwide Capital Committee.The Firmwide Capital Committee provides approval and oversight of debt-related underwriting transactions, including relatedprincipal commitments of the firm’sour capital. This committee aims to ensure that business and reputational standards for underwritings and capital commitments are maintained on a global basis. This committee is co-chaired by the firm’sour global treasurer and the head of credit finance for Europe, Middle East and AfricaEMEA who are appointed by the Firmwide Risk Committee chairpersons.

Investment Management Division Risk Committee. The Investment Management Division Risk Committee is responsible for the ongoing monitoring and control of global market, counterparty credit and liquidity risks associated with the activities of our investment management businesses. The head of risk management for the Investment Management Division risk management is the chair of this committee. The Investment Management Division Risk Committee reports to the firm’sour chief risk officer.

Conflicts Management

Conflicts of interest and our approach to dealing with them are fundamental to our client relationships, our reputation and our long-term success. The term “conflict of interest” does not have a universally accepted meaning, and conflicts can arise in many forms within a business or between businesses. The responsibility for identifying potential conflicts, as well as complying with our policies and procedures, is shared by the entire firm.

We have a multilayered approach to resolving conflicts and addressing reputational risk. Our senior management oversees policies related to conflicts resolution, and, in conjunction with the Business Selection and Conflicts Resolution Group, the Legal Department and Compliance Division, the Firmwide Client and Business Standards Committee, and other internal committees, formulates policies, standards and principles, and assists in making judgments regarding the appropriate resolution of particular conflicts. Resolving potential conflicts necessarily depends on the facts and circumstances of a particular situation and the application of experienced and informed judgment.

As a general matter, the Business Selection and Conflicts Resolution Group reviews all financing and advisory assignments in Investment Banking and certain investing, lending and other activities of the firm. In addition, we have various transaction oversight committees, such as the Firmwide Capital, Commitments and Suitability Committees and other committees across the firm that also review new underwritings, loans, investments and structured products. These groups and committees work with internal and external counsel and the Compliance Division to evaluate and address any actual or potential conflicts.

We regularly assess our policies and procedures that address conflicts of interest in an effort to conduct our business in accordance with the highest ethical standards and in compliance with all applicable laws, rules, and regulations.

90Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Liquidity Risk Management

Liquidity is of critical importance to financial institutions. Most of the recent failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, the firm haswe have in place a comprehensive and conservative set of liquidity and funding policies to address both firm-specific and broader industry or market liquidity events. Our principal objective is to be able to fund the firm and to enable our core businesses to continue to serve clients and generate revenues, even under adverse circumstances.

We manage liquidity risk according to the following principles:

Excess Liquidity.Global Core Liquid Assets.We maintain substantial excess liquidity (GCLA, previously GCE) to meet a broad range of potential cash outflows and collateral needs in a stressed environment.

Asset-Liability Management.We assess anticipated holding periods for our assets and their expected liquidity in a stressed environment. We manage the maturities and diversity of our funding across markets, products and counterparties, and seek to maintain liabilities of appropriate tenor relative to our asset base.

Contingency Funding Plan.We maintain a contingency funding plan to provide a framework for analyzing and responding to a liquidity crisis situation or periods of market stress. This framework sets forth the plan of action to fund normal business activity in emergency and stress situations. These principles are discussed in more detail below.

Excess LiquidityGlobal Core Liquid Assets

Our most important liquidity policy is to pre-fund our estimated potential cash and collateral needs during a liquidity crisis and hold this excess liquidity in the form of unencumbered, highly liquid securities and cash. We believe that the securities held in our global core excessGCLA would be readily convertible to cash in a matter of days, through liquidation, by entering into repurchase agreements or from maturities of reverse repurchaseresale agreements, and that this cash would allow us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets.

As of December 20112014 and December 2010,2013, the fair value of the securities and certain overnight cash deposits included in our GCEGCLA, totaled $171.58$182.95 billion and $174.78$184.07 billion, respectively. Based on the results of our internal liquidity risk model,models, discussed below, as well as our consideration of other factors including, but not limited to, an assessment of our potential intraday liquidity needs and a qualitative assessment of the condition of the financial markets and the firm, we believe our liquidity position as of both December 20112014 and December 2013 was appropriate.

The table below presents the fair value of the securities and certain overnight cash deposits that are included in our GCE.GCLA.

 

  

Average for the

Year Ended December

in millions 2011    2010

U.S. dollar-denominated

 $125,668    $130,072

Non-U.S. dollar-denominated

 40,291    37,942

Total

 $165,959    $168,014

86Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

  

Average for the

Year Ended December

 
$ in millions  2014     2013  

U.S. dollar-denominated

  $134,223     $136,824  
  

Non-U.S. dollar-denominated

  45,410     45,826  

Total

  $179,633     $182,650  

The U.S. dollar-denominated excessGCLA is composed of (i) unencumbered U.S. government and federal agency obligations (including highly liquid U.S. federal agency mortgage-backed obligations), all of which are eligible as collateral in Federal Reserve open market operations and (ii) certain overnight U.S. dollar cash deposits. The non-U.S. dollar-denominated excessGCLA is composed of only unencumbered German, French, Japanese and United Kingdom government obligations and certain overnight cash deposits in highly liquid currencies. We strictly limit our excess liquidityGCLA to this narrowly defined list of securities and cash because they are highly liquid, even in a difficult funding environment. We do not include other potential sources of excess liquidity in our GCLA, such as lower-qualityless liquid unencumbered securities or committed credit facilities, in our GCE.facilities.

Goldman Sachs 2014 Form 10-K91


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The table below presents the fair value of our GCEGCLA by asset class.

 

  

Average for the

Year Ended December

 
in millions 2011     2010 

Overnight cash deposits

 $34,622      $25,040  

Federal funds sold

         75  

U.S. government obligations

  88,528       102,937  

U.S. federal agency obligations, including highly liquid U.S. federal agency mortgage-backed obligations

  5,018       3,194  

German, French, Japanese and United Kingdom government obligations

  37,791       36,768  

Total

 $165,959      $168,014  
  

Average for the

Year Ended December

 
$ in millions  2014     2013  

Overnight cash deposits

  $  57,177     $  61,265  
  

U.S. government obligations

  62,838     76,019  
  

U.S. federal agency obligations,
including highly liquid U.S.
federal agency mortgage-
backed obligations

  16,722     2,551  
  

German, French, Japanese
and United Kingdom
government obligations

  42,896     42,815  

Total

  $179,633     $182,650  

The GCE is held attable below presents the GCLA of Group Inc. and our major broker-dealer and bank subsidiaries, as presented in the table below.subsidiaries.

 

 

Average for the

Year Ended December

  

Average for the

Year Ended December

 
in millions 2011     2010 
$ in millions  2014     2013  

Group Inc.

 $49,548      $53,757    $  37,699     $  29,752  
 

Major broker-dealer subsidiaries

  75,086       69,223    89,549     93,103  
 

Major bank subsidiaries

  41,325       45,034    52,385     59,795  

Total

 $165,959      $168,014    $179,633     $182,650  

Our GCEGCLA reflects the following principles:

 

Ÿ 

The first days or weeks of a liquidity crisis are the most critical to a company’s survival.survival;

 

Ÿ 

Focus must be maintained on all potential cash and collateral outflows, not just disruptions to financing flows. Our businesses are diverse, and our liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment.environment;

Ÿ 

During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change.change; and

 

Ÿ 

As a result of our policy to pre-fund liquidity that we estimate may be needed in a crisis, we hold more unencumbered securities and have larger debt balances than our businesses would otherwise require. We believe that our liquidity is stronger with greater balances of highly liquid unencumbered securities, even though it increases our total assets and our funding costs.

We believe that our GCEGCLA provides us with a resilient source of funds that would be available in advance of potential cash and collateral outflows and gives us significant flexibility in managing through a difficult funding environment.

In order to determine the appropriate size of our GCE,GCLA, we use an internal liquidity model, referred to as the Modeled Liquidity Outflow, which captures and quantifies the firm’sour liquidity risks. We also consider other factors including, but not limited to, an assessment of our potential intraday liquidity needs through an additional internal liquidity model, referred to as the Intraday Liquidity Model, and a qualitative assessment of the condition of the financial markets and the firm.

We distribute our GCEGCLA across subsidiaries,entities, asset types, and clearing agents to provide us with sufficient operating liquidity to ensure timely settlement in all major markets, even in a difficult funding environment.

We maintain our GCEGCLA to enable us to meet current and potential liquidity requirements of our parent company, Group Inc., and our major broker-dealer and bankits subsidiaries. TheOur Modeled Liquidity Outflow incorporatesand Intraday Liquidity Model incorporate a consolidated requirement for Group Inc. as well as a standalone requirement for each of our major broker-dealer and bank subsidiaries. Liquidity held directly in each of these major subsidiaries is intended for use only by that subsidiary to meet its liquidity requirements and is assumed not to be available to Group Inc. unless (i) legally provided for and (ii) there are no additional regulatory, tax or other restrictions. WeIn addition, the Modeled Liquidity Outflow and Intraday Liquidity Model also incorporate a broader assessment of standalone liquidity requirements for other subsidiaries and we hold a portion of our GCEGCLA directly at Group Inc. to support consolidated requirements not accounted for in the major subsidiaries.such requirements. In addition to the GCE,GCLA, we maintain operating cash balances in several of our other operating entities, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.

Goldman Sachs 2011 Form 10-K87


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

In addition to our GCE,GCLA, we have a significant amount of other unencumbered cash and financial“Financial instruments owned, at fair value,” including other government obligations, high-grade money market securities, corporate obligations, marginable equities, loans and cash deposits not included in our GCE.GCLA. The fair value of these assets averaged $83.32 billion and $72.98$94.52 billion for the years ended December 20112014 and December 2010, respectively.$90.77 billion for 2013. We do not consider these assets liquid enough to be eligible for our GCE liquidity poolGCLA.

92Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and therefore conservatively do not assume we will generate liquidity from these assets in our Modeled Liquidity Outflow.Analysis

Modeled Liquidity Outflow.Our Modeled Liquidity Outflow is based on a scenarioconducting multiple scenarios that includes both ainclude combinations of market-wide stress and a firm-specific stress,stress. These scenarios are characterized by some or all of the following qualitative elements:

 

Ÿ 

Global recession, default by a medium-sized sovereign,Severely challenged market environments, including low consumer and corporate confidence, financial and general financial instability.

Ÿ

Severely challengedpolitical instability, adverse changes in market environment with materialvalues, including potential declines in equity markets and widening of credit spreads.

Ÿ

Damaging follow-on impacts to financial institutions leading to the failure of a large bank.spreads; and

 

Ÿ 

A firm-specific crisis potentially triggered by material losses, reputational damage, litigation, executive departure, and/or a ratings downgrade.

The following are the critical modeling parameters of the Modeled Liquidity Outflow:

 

Ÿ 

Liquidity needs over a 30-day scenario.scenario;

 

Ÿ 

A two-notch downgrade of the firm’sour long-term senior unsecured credit ratings.ratings;

 

Ÿ 

A combination of contractual outflows, such as upcoming maturities of unsecured debt, and contingent outflows (e.g., actions though not contractually required, we may deem necessary in a crisis). We assume that most contingent outflows will occur within the initial days and weeks of a crisis.crisis;

 

Ÿ 

No issuance of equity or unsecured debt.debt;

 

Ÿ 

No support from government funding facilities. Although we have access to various central bank funding programs, we do not assume reliance on them as a source of funding in a liquidity crisis.

Ÿ

No diversification benefit across liquidity risks. We assume that liquidity risks are additive.crisis; and

 

Ÿ 

Maintenance of our normal business levels. We do not assumeNo asset liquidation, other than the GCE.GCLA.

The Modeled Liquidity Outflow is calculated and reported to senior management on a daily basis. We regularly refine our model to reflect changes in market or economic conditions and the firm’sour business mix.

The potential contractual and contingent cash and collateral outflows covered in our Modeled Liquidity Outflow include:

Unsecured Funding

Ÿ 

Contractual: All upcoming maturities of unsecured long-term debt, commercial paper, promissory notes and other unsecured funding products. We assume that we will be unable to issue new unsecured debt or rollover any maturing debt.

 

Ÿ 

Contingent: Repurchases of our outstanding long-term debt, commercial paper and hybrid financial instruments in the ordinary course of business as a market maker.

Deposits

Ÿ 

Contractual: All upcoming maturities of term deposits. We assume that we will be unable to raise new term deposits or rollover any maturing term deposits.

 

Ÿ 

Contingent: Withdrawals of bank deposits that have no contractual maturity. The withdrawal assumptions reflect, among other factors, the type of deposit, whether the deposit is insured or uninsured, and the firm’sour relationship with the depositor.

Secured Funding

Ÿ 

Contractual: A portion of upcoming contractual maturities of secured funding due to either the inability to refinance or the ability to refinance only at wider haircuts (i.e., on terms which require us to post additional collateral). Our assumptions reflect, among other factors, the quality of the underlying collateral, counterparty roll probabilities (our assessment of the counterparty’s likelihood of continuing to provide funding on a secured basis at the maturity of the trade) and counterparty concentration.

 

Ÿ 

Contingent: A declineAdverse changes in value of financial assets pledged as collateral for financing transactions, which would necessitate additional collateral postings under those transactions.

88Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

OTC Derivatives

Ÿ 

Contingent: Collateral postings to counterparties due to adverse changes in the value of our OTC derivatives.derivatives, excluding those that are cleared and settled through central counterparties (OTC-cleared).

 

Ÿ 

Contingent: Other outflows of cash or collateral related to OTC derivatives, excluding OTC-cleared, including the impact of trade terminations, collateral substitutions, collateral disputes, loss of rehypothecation rights, collateral calls or termination payments required by a two-notch downgrade in our credit ratings, and collateral that has not been called by counterparties, but is available to them.

Goldman Sachs 2014 Form 10-K93


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Exchange-Traded and OTC-cleared Derivatives

Ÿ 

Contingent: Variation margin postings required due to adverse changes in the value of our outstanding exchange-traded and OTC-cleared derivatives.

 

Ÿ 

Contingent: An increase in initial margin and guaranty fund requirements by derivative clearing houses.

Customer Cash and Securities

Ÿ 

Contingent: Liquidity outflows associated with our prime brokerage business, including withdrawals of customer credit balances, and a reduction in customer short positions, which may serve as a funding source for long positions.

Firm Securities

Ÿ

Contingent: Liquidity outflows associated with a reduction or composition change in firm short positions, which may serve as a funding source for long positions.

Unfunded Commitments

Ÿ 

Contingent: Draws on our unfunded commitments. Draw assumptions reflect, among other things, the type of commitment and counterparty.

Other

Ÿ 

Other upcoming large cash outflows, such as tax payments.

Intraday Liquidity Model. Our Intraday Liquidity Model measures our intraday liquidity needs using a scenario analysis characterized by the same qualitative elements as our Modeled Liquidity Outflow. The model assesses the risk of increased intraday liquidity requirements during a scenario where access to sources of intraday liquidity may become constrained.

The following are key modeling elements of the Intraday Liquidity Model:

Ÿ

Liquidity needs over a one-day settlement period;

Ÿ

Delays in receipt of counterparty cash payments;

Ÿ

A reduction in the availability of intraday credit lines at our third-party clearing agents; and

Ÿ

Higher settlement volumes due to an increase in activity.

We regularly refine our model to reflect changes in market conditions, business mix and operational processes.

Asset-Liability Management

Our liquidity risk management policies are designed to ensure we have a sufficient amount of financing, even when funding markets experience persistent stress. We seek to maintain a long-dated and diversified funding profile, taking into consideration the characteristics and liquidity profile of our assets.

Our approach to asset-liability management includes:

 

Ÿ 

Conservatively managing the overall characteristics of our funding book, with a focus on maintaining long-term, diversified sources of funding in excess of our current requirements. See “Balance Sheet and Funding Sources — Funding Sources” for additional details.details;

 

Ÿ 

Actively managing and monitoring our asset base, with particular focus on the liquidity, holding period and our ability to fund assets on a secured basis. This enables us to determine the most appropriate funding products and tenors. Less liquid assets are more difficult to fund and therefore require funding of longer tenor. See “Balance Sheet and Funding Sources — Balance Sheet Management” for more detail on our balance sheet management process.process and “— Funding Sources — Secured Funding” for more detail on asset classes that may be harder to fund on a secured basis; and

 

Ÿ 

Raising secured and unsecured financing that has a sufficiently longer term thanlong tenor relative to the anticipated holding periodliquidity profile of our assets. This reduces the risk that our liabilities will come due in advance of our ability to generate liquidity from the sale of our assets. Because we maintain a highly liquid balance sheet, the holding period of certain of our assets may be materially shorter than their contractual maturity dates.

Our goal is to haveensure that we maintain sufficient liquidity to fund our assets and meet our contractual and contingent obligations in normal times as well as during periods of market stress. Through our dynamic balance sheet management process, we use actual and projected asset balances to determine secured and unsecured funding requirements. Funding plans are reviewed and approved by the Firmwide Finance Committee on a quarterly basis. In addition, senior managers in our independent control and support functions regularly analyze, and the Firmwide Finance Committee reviews, our consolidated total capital position (unsecured long-term borrowings plus total shareholders’ equity) so that we canmaintain a level of long-term funding that is sufficient to meet our long-term financing requirements. In a liquidity crisis, we would first use our GCLA in order to avoid reliance on asset sales (other than our GCE)GCLA). However, we recognize that orderly asset sales may be prudent or necessary in a severe or persistent liquidity crisis. The target amount of our total capital is based on an internal funding model which incorporates the following long-term financing requirements:

Ÿ

The portion of financial instruments owned, at fair value, that are not funded on a secured basis.

Ÿ

Goodwill and identifiable intangible assets, property, leasehold improvements and equipment, and other illiquid assets.

Ÿ

Derivative and other margin and collateral requirements.

Ÿ

Anticipated draws on our unfunded loan commitments.

Ÿ

Regulatory requirements to hold capital or other forms of financing in excess of what we would otherwise hold in regulated subsidiaries.

 

 

94 Goldman Sachs 20112014 Form 10-K 89


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Subsidiary Funding Policies.The majority of our unsecured funding is raised by Group Inc. which lends the necessary funds to its subsidiaries, some of which are regulated, to meet their asset financing, liquidity and capital requirements. In addition, Group Inc. provides its regulated subsidiaries with the necessary capital to meet their regulatory requirements. The benefits of this approach to subsidiary funding are enhanced control and greater flexibility to meet the funding requirements of our subsidiaries. Funding is also raised at the subsidiary level through a variety of products, including secured funding, unsecured borrowings and deposits.

Our intercompany funding policies assume that, unless legally provided for, a subsidiary’s funds or securities are not freely available to its parent company or other subsidiaries. In particular, many of our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Group Inc. Regulatory action of that kind could impede access to funds that Group Inc. needs to make payments on its obligations. Accordingly, we assume that the capital provided to our regulated subsidiaries is not available to Group Inc. or other subsidiaries and any other financing provided to our regulated subsidiaries is not available until the maturity of such financing.

Group Inc. has provided substantial amounts of equity and subordinated indebtedness, directly or indirectly, to its regulated subsidiaries. For example, as of December 2011,2014, Group Inc. had $28.16$29.90 billion of equity and subordinated indebtedness invested in GS&Co., its principal U.S. registered broker-dealer; $28.43$27.68 billion invested in GSI, a regulated U.K. broker-dealer; $2.67$2.28 billion invested in GSEC, a U.S. registered broker-dealer; $4.28$2.68 billion invested in Goldman Sachs Japan Co., Ltd. (GSJCL), a regulated Japanese broker-dealer; and $19.23$23.50 billion invested in GS Bank USA, a regulated New York State-chartered bank; and $3.53 billion invested in GSIB, a regulated U.K. bank. Group Inc. also provided, directly or indirectly, $84.83$80.23 billion of unsubordinated loans and $6.12$8.61 billion of collateral to these entities, substantially all of which was to GS&Co., GSI, GSJCL and GSI,GS Bank USA, as of December 2011.2014. In addition, as of December 2011,2014, Group Inc. had significant amounts of capital invested in and loans to its other regulated subsidiaries.

Contingency Funding Plan

The Goldman Sachs contingency funding planContingency Funding Plan sets out the plan of action we would use to fund business activity in crisis situations and periods of market stress. The contingency funding plan outlines a list of potential risk factors, key reports and metrics that are reviewed on an ongoing basis to assist in assessing the severity of, and managing through, a liquidity crisis and/or market dislocation. The contingency funding plan also describes in detail the firm’sour potential responses if our assessments indicate that the firm haswe have entered a liquidity crisis, which include pre-funding for what we estimate will be our potential cash and collateral needs as well as utilizing secondary sources of liquidity. Mitigants and action items to address specific risks which may arise are also described and assigned to individuals responsible for execution.

The contingency funding plan identifies key groups of individuals to foster effective coordination, control and distribution of information, all of which are critical in the management of a crisis or period of market stress. The contingency funding plan also details the responsibilities of these groups and individuals, which include making and disseminating key decisions, coordinating all contingency activities throughout the duration of the crisis or period of market stress, implementing liquidity maintenance activities and managing internal and external communication.

Liquidity Regulatory Framework

The Basel Committee’s international framework for liquidity risk measurement, standards and monitoring calls for a liquidity coverage ratio (LCR), designed to ensure that banks and bank holding companies maintain an adequate level of unencumbered high-quality liquid assets based on expected net cash outflows under an acute short-term liquidity stress scenario.

 

 

90 Goldman Sachs 20112014 Form 10-K 95


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

During 2014, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC approved the final rules on minimum liquidity standards that are generally consistent with the Basel Committee’s framework as described above, but include accelerated transition provisions, and more stringent requirements related to both the range of assets that qualify as high-quality liquid assets and cash outflow assumptions for certain types of funding and other liquidity risks. Under the accelerated transition timeline, the LCR became effective in the United States on January 1, 2015, with a phase-in period whereby firms have an 80% minimum in 2015, which will increase by 10% per year until 2017. As of December 2014, our calculation of the LCR exceeds the fully phased-in minimum requirement, however this is based on our interpretation and understanding of the finalized framework and may evolve as we review our interpretation and application with our regulators.

The Basel Committee’s international framework for liquidity risk measurement, standards and monitoring also calls for a net stable funding ratio (NSFR), designed to promote more medium- and long-term stable funding of the assets and off-balance-sheet activities of banks and bank holding companies over a one-year time horizon. In 2014, the Basel Committee issued the final rules on the calculation of the NSFR which requires banks and bank holding companies to maintain a stable funding profile in relation to the composition of their assets and off-balance-sheet activities. Under the Basel Committee framework, the NSFR will be effective on January 1, 2018. The U.S. federal bank regulatory agencies have not yet proposed rules implementing the NSFR for U.S. banking organizations. We are currently evaluating the impact of the Basel Committee’s NSFR framework.

The implementation of these rules, and any amendments adopted by the U.S. federal bank regulatory agencies, could impact our liquidity and funding requirements and practices in the future.

Credit Ratings

The table below presents our unsecured credit ratings (excluding debt guaranteed by the FDIC under the TLGP) and outlook.

As of December 2011

Short-Term

Debt



Long-Term

Debt



Subordinated

Debt



Trust
Preferred

 1

Preferred

Stock


 2


Rating

Outlook


DBRS, Inc.

R-1 (middleA (highAABBBStable 8

Fitch, Inc. 3, 4

F1AA-BBB+BBB+Stable 9

Moody’s Investors Service 5

P-1A1A2A3Baa2Negative 10

Standard & Poor’s Ratings Services 6, 7

A-2A-BBB+BB+BB+Negative 10

Rating and Investment Information, Inc.

a-1+AA-A+N/AN/ANegative 11

1.

Trust preferred securities issued by Goldman Sachs Capital I.

2.

Includes Group Inc.’s non-cumulative preferred stock and the Normal Automatic Preferred Enhanced Capital Securities (APEX) issued by Goldman Sachs Capital II and Goldman Sachs Capital III.

3.

GS Bank USA has been assigned a rating of A+ for long-term bank deposits, F1 for short-term bank deposits and A as a long-term issuer.

4.

GS&Co. has been assigned a rating of F1 as a short-term issuer and A as a long-term issuer.

5.

GS Bank USA has been assigned a rating of Aa3 for long-term bank deposits, P-1 for short-term bank deposits and Aa3 as a long-term issuer.

6.

GS&Co. has been assigned a rating of A-1 as a short-term issuer and A as a long-term issuer.

7.

GSI has been assigned a rating of A-1 as a short-term issuer and A as a long-term issuer.

8.

Applies to long-term and short-term ratings.

9.

Applies to long-term issuer default ratings.

10.

Applies to long-term ratings.

11.

Applies to issuer rating.

During the fourth quarter of 2011, after revising its global rating methodology for banks, Standard & Poor’s Ratings Services lowered Group Inc.’s ratings on long-term debt (from A to A-), short-term debt (from A-1 to A-2), subordinated debt (from A- to BBB+), trust preferred (from BBB- to BB+) and preferred stock (from BBB- to BB+), and retained its outlook of “negative.” In addition, as part of a global review of financial institutions, Fitch, Inc. lowered Group Inc.’s ratings on long-term debt (from A+ to A), short-term debt (from F1+ to F1), subordinated debt (from A to A-), trust preferred (from A- to BBB+) and preferred stock (from A- to BBB+), and retained its outlook of “stable.”

On February 10, 2012, Standard & Poor’s Ratings Services assigned GS Bank USA, a rating of A-1 as a short-term issuer and A as a long-term issuer.

On February 15, 2012, Moody’s Investors Service placed the long- and short-term debt ratings of Group Inc. under review for downgrade as part of a global review of financial institutions.

We rely on the short-term and long-term debt capital markets to fund a significant portion of our day-to-day operations and the cost and availability of debt financing is influenced by our credit ratings. Credit ratings are also important when we are competing in certain markets, such as OTC derivatives, and when we seek to engage in longer-term transactions. See “Certain Risk Factors That May Affect Our Businesses” below and “Risk Factors” in Part I, Item 1A of thisthe 2014 Form 10-K for a discussion of the risks associated with a reduction in our credit ratings.

The table below presents the unsecured credit ratings by DBRS, Inc. (DBRS), Fitch, Inc. (Fitch), Moody’s Investors Service (Moody’s), Standard & Poor’s Ratings Services (S&P), and Rating and Investment Information, Inc. (R&I) and outlook of Group Inc.

As of December 2014
DBRSFitchMoody’sS&PR&I

Short-term Debt

R-1 (middleF1P-2A-2a-1

Long-term Debt 1

A (highABaa1A-A+

Subordinated Debt

AA-Baa2BBB+A

Trust Preferred 2

ABBB-Baa3BBN/A

Preferred Stock 3

BBB (highBB+Ba2BBN/A

Ratings Outlook

StableStableStableNegativeNegative

1.

Fitch, Moody’s and S&P include the senior guaranteed trust securities issued by Murray Street Investment Trust I and Vesey Street Investment Trust I.

2.

Trust preferred securities issued by Goldman Sachs Capital I.

3.

DBRS, Fitch, Moody’s and S&P include Group Inc.’s non-cumulative preferred stock and the APEX issued by Goldman Sachs Capital II and Goldman Sachs Capital III.

The table below presents the unsecured credit ratings of GS Bank USA, GSIB, GS&Co. and GSI. During the fourth quarter of 2014, S&P raised its outlook of GS Bank USA, GSIB, GS&Co. and GSI from negative to stable as a result of its review of these subsidiaries’ operating trends in the current regulatory environment.

As of December 2014
FitchMoody’sS&P

GS Bank USA

Short-term Debt

F1P-1A-1

Long-term Debt

AA2A

Short-term Bank Deposits

F1P-1N/A

Long-term Bank Deposits

A+A2N/A

Ratings Outlook

StableStableStable

GSIB

Short-term Debt

F1P-1A-1

Long-term Debt

AA2A

Short-term Bank Deposits

F1P-1N/A

Long-term Bank Deposits

AA2N/A

Ratings Outlook

StableStableStable

GS&Co.

Short-term Debt

F1N/AA-1

Long-term Debt

AN/AA

Ratings Outlook

StableN/AStable

GSI

Short-term Debt

F1P-1A-1

Long-term Debt

AA2A

Ratings Outlook

StableStableStable

96Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

We believe our credit ratings are primarily based on the credit rating agencies’ assessment of:

 

Ÿ 

ourOur liquidity, market, credit and operational risk management practices;

 

Ÿ 

theThe level and variability of our earnings;

 

Ÿ 

ourOur capital base;

 

Ÿ 

ourOur franchise, reputation and management;

 

Ÿ 

ourOur corporate governance; and

 

Ÿ 

theThe external operating environment, including, in some cases, the assumed level of government or other systemic support.

Goldman Sachs 2011 Form 10-K91


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Certain of our derivatives have been transacted under bilateral agreements with counterparties who may require us to post collateral or terminate the transactions based on changes in our credit ratings. We assess the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of us at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. We allocate a portion of our GCEGCLA to ensure we would be able to make the 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. The table below presents the additional collateral or termination payments related to our net derivative liabilities under bilateral agreements that could have been called at the reporting date by counterparties in the event of a one-notch and two-notch downgrade in our credit ratings.

 

  As of December 
in millions 2011   2010 

Additional collateral or termination payments for a one-notch downgrade

 $1,303    $1,353  

Additional collateral or termination payments for a two-notch downgrade

  2,183     2,781  

The Basel Committee on Banking Supervision’s international framework for liquidity risk measurement, standards and monitoring calls for imposition of a liquidity coverage ratio, designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets based on expected cash outflows under an acute liquidity stress scenario, and a net stable funding ratio, designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. The liquidity coverage ratio is not expected to be introduced as a requirement until January 1, 2015, and the net stable funding ratio is not expected to be introduced as a requirement until January 1, 2018. While the principles behind the new framework are broadly consistent with our current liquidity management framework, it is possible that the implementation of these standards could impact our liquidity and funding requirements and practices.

  As of December 
$ in millions  2014     2013  

Additional collateral or termination
payments for a one-notch downgrade

  $1,072     $   911  
  

Additional collateral or termination
payments for a two-notch downgrade

  2,815     2,989  

Cash Flows

As a global financial institution, our cash flows are complex and bear little relation to our net earnings and net assets. Consequently, we believe that traditional cash flow analysis is less meaningful in evaluating our liquidity position than the excess liquidity and asset-liability management policies described above. Cash flow analysis may, however, be helpful in highlighting certain macro trends and strategic initiatives in our businesses.

Year Ended December 2011.2014.Our cash and cash equivalents increaseddecreased by $16.22$3.53 billion to $56.01$57.60 billion at the end of 2011.2014. We generated $23.13used $22.53 billion in net cash fromfor operating and investing activities. We used net cashactivities, which reflects an initiative to reduce our balance sheet, and the funding of $6.91 billion for financing activities, primarily for repurchases of our Series G Preferred Stock and common stock, partially offset by an increase in bank deposits.

Year Ended December 2010.Our cash and cash equivalents increased by $1.50 billion to $39.79 billion at the end of 2010.loans receivable. We generated $7.84$19.00 billion in net cash from financing activities primarily from an increase in bank deposits and net proceeds from issuances of short-term secured financings. We used net cash of $6.34 billion for operating and investing activities, primarily to fund an increase in securities purchased under agreements to resell and an increase in cash and securities segregated for regulatory and other purposes,unsecured long-term borrowings, partially offset by cash generated from a decrease in securities borrowed.repurchases of common stock.

Year Ended December 2009.2013.Our cash and cash equivalents increaseddecreased by $24.49$11.54 billion to $38.29$61.13 billion at the end of 2009.2013. We generated $48.88$4.54 billion in net cash from operating activities. We used net cash of $24.39$16.08 billion for investing and financing activities, primarily for net repayments in unsecuredto fund loans receivable and secured short-term borrowings and the repurchases of Series H Preferred Stockcommon stock.

Year Ended December 2012.Our cash and cash equivalents increased by $16.66 billion to $72.67 billion at the related common stock warrantend of 2012. We generated $9.14 billion in net cash from the U.S. Treasury, partially offset byoperating and investing activities. We generated $7.52 billion in net cash from financing activities from an increase in bank deposits, partially offset by net repayments of unsecured and the issuance of common stock.secured long-term borrowings.

 

 

92 Goldman Sachs 20112014 Form 10-K 97


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Market Risk Management

 

Overview

Market risk is the risk of loss in the value of our inventory, as well as certain other financial assets and financial liabilities, due to changes in market prices.conditions. We employ a variety of risk measures, each described in the respective sections below, to monitor market risk. We hold inventory primarily for market making for our clients and for our investing and lending activities. Our inventory therefore changes based on client demands and our investment opportunities. Our inventory is accounted for at fair value and therefore fluctuates on a daily basis.basis, with the related gains and losses included in “Market making,” and “Other principal transactions.” Categories of market risk include the following:

 

Ÿ 

Interest rate risk: results from exposures to changes in the level, slope and curvature of yield curves, the volatilities of interest rates, mortgage prepayment speeds and credit spreads.spreads;

 

Ÿ 

Equity price risk: results from exposures to changes in prices and volatilities of individual equities, baskets of equities and equity indices.indices;

 

Ÿ 

Currency rate risk: results from exposures to changes in spot prices, forward prices and volatilities of currency rates.rates; and

 

Ÿ 

Commodity price risk: results from exposures to changes in spot prices, forward prices and volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products, natural gas, electricity, and precious and base metals.

Market Risk Management Process

We manage our market risk by diversifying exposures, controlling position sizes and establishing economic hedges in related securities or derivatives. This includes:

 

Ÿ 

accurateAccurate and timely exposure information incorporating multiple risk metrics;

 

Ÿ 

aA dynamic limit setting framework; and

 

Ÿ 

constantConstant communication among revenue-producing units, risk managers and senior management.

Market Risk Management, which is independent of the revenue-producing units and reports to the firm’sour chief risk officer, has primary responsibility for assessing, monitoring and managing market risk at the firm. We monitor and control risks through strong firmwide oversight and independent control and support functions across the firm’sour global businesses.

Managers in revenue-producing units are accountable for managing risk within prescribed limits. These managers have in-depth knowledge of their positions, of markets and the instruments available to hedge their exposures.

Managers in revenue-producing units and Market Risk Management discuss market information, positions and estimated risk and loss scenarios on an ongoing basis.

Risk Measures

Market Risk Management produces risk measures and monitors them against market risk limits set by our firm’s risk committees. These measures reflect an extensive range of scenarios and the results are aggregated at trading desk, business and firmwide levels.

We use a variety of risk measures to estimate the size of potential losses for both moderate and more extreme market moves over both short-term and long-term time horizons. RiskOur primary risk measures are VaR, which is used for shorter-term periods, include VaR and sensitivity metrics. For longer-term horizons, our primary risk measures are stress tests. Our risk reports detail key risks, drivers and changes for each desk and business, and are distributed daily to senior management of both our revenue-producing units and our independent control and support functions.

Systems

We have made a significant investment in technology to monitor market risk including:

Ÿ

an independent calculation of VaR and stress measures;

Ÿ

risk measures calculated at individual position levels;

Ÿ

attribution of risk measures to individual risk factors of each position;

Ÿ

the ability to report many different views of the risk measures (e.g., by desk, business, product type or legal entity); and

Ÿ

the ability to produce ad hoc analyses in a timely manner.

Goldman Sachs 2011 Form 10-K93


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Value-at-Risk

VaR is the potential loss in value of inventory positions due to adverse market movements over a defined time horizon with a specified confidence level. For positions included in VaR, see “— Financial Statement Linkages to Market Risk Measures.” We typically employ a one-day time horizon with a 95% confidence level. TheWe use a single VaR model which captures risks including interest rates, equity prices, currency rates and commodity prices. As such, VaR facilitates comparison across portfolios of different risk characteristics. VaR also captures the diversification of aggregated risk at the firmwide level.

98Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

We are aware of the inherent limitations to VaR and therefore use a variety of risk measures in our market risk management process. Inherent limitations to VaR include:

 

Ÿ 

VaR does not estimate potential losses over longer time horizons where moves may be extreme.extreme;

 

Ÿ 

VaR does not take account of the relative liquidity of different risk positions.positions; and

 

Ÿ 

Previous moves in market risk factors may not produce accurate predictions of all future market moves.

When calculating VaR, we use historical simulations with full valuation of approximately 70,000 market factors. VaR is calculated at a position level based on simultaneously shocking the relevant market risk factors for that position. We sample from five years of historical data to generate the scenarios for our VaR calculation. The historical data used in our VaR calculation is weighted to giveso that the relative importance of the data reduces over time. This gives greater importance to more recent observations and reflectreflects current asset volatilities. Thisvolatilities, which improves the accuracy of our estimates of potential loss. As a result, even if our inventory positions included in VaR were unchanged, our VaR would increase with increasing market volatility and vice versa.

Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions.

We evaluate the accuracy of our VaR model through daily backtesting (i.e., comparing daily trading net revenues to the VaR measure calculated as of the prior business day) at the firmwide level and for each of our businesses and major regulated subsidiaries.

Our VaR measure does not include:

 

Ÿ 

positionsPositions that are best measured and monitored using sensitivity measures; and

 

Ÿ 

theThe impact of changes in counterparty and our own credit spreads on derivatives, as well as changes in our own credit spreads on unsecured borrowings for which the fair value option was elected.

Stress Testing

Stress testing is a method of determining the effect of various hypothetical stress scenarios. We use stress testing to examine risks of specific portfolios as well as the potential impact of significant risk exposures across the firm. We use a variety of scenariosstress testing techniques to calculate the potential loss from a wide range of market moves on the firm’s portfolios. These scenarios include the defaultour portfolios, including sensitivity analysis, scenario analysis and firmwide stress tests. The results of single corporate or sovereign entities,our various stress tests are analyzed together for risk management purposes.

Sensitivity analysis is used to quantify the impact of a market move in a single risk factor across all positions (e.g., equity prices or credit spreads) using a variety of defined market shocks, ranging from those that could be expected over a one-day time horizon up to those that could take many months to occur. We also use sensitivity analysis to quantify the impact of the default of a single corporate entity, which captures the risk of large or concentrated exposures.

Scenario analysis is used to quantify the impact of a combinationspecified event, including how the event impacts multiple risk factors simultaneously. For example, for sovereign stress testing we calculate potential direct exposure associated with our sovereign inventory as well as the corresponding debt, equity and currency exposures associated with our non-sovereign inventory that may be impacted by the sovereign distress. When conducting scenario analysis, we typically consider a number of two or morepossible outcomes for each scenario, ranging from moderate to severely adverse market impacts. In addition, these stress tests are constructed using both historical events and forward-looking hypothetical scenarios.

Firmwide stress testing combines market, credit, operational and liquidity risks into a single combined scenario. Firmwide stress tests are primarily used to assess capital adequacy as part of our capital planning and stress testing process; however, we also ensure that firmwide stress testing is integrated into our risk factors.governance framework. This includes selecting appropriate scenarios to use for our capital planning and stress testing process. See “Equity Capital Management and Regulatory Capital — Equity Capital Management” above for further information.

Goldman Sachs 2014 Form 10-K99


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Unlike VaR measures, which have an implied probability because they are calculated at a specified confidence level, there is generally no implied probability that our stress test scenarios will occur. Instead, stress tests are used to model both moderate and more extreme moves in underlying market factors. When estimating potential loss, we generally assume that our positions cannot be reduced or hedged (although experience demonstrates that we are generally able to do so).

Stress test scenarios are conducted on a regular basis as part of the firm’sour routine risk management process and on an ad hoc basis in response to market events or concerns. Stress testing is an important part of the firm’sour risk management process because it allows us to quantify our exposure to tail risks, highlight potential loss concentrations, undertake risk/reward analysis, and assess and mitigate our risk positions.

Limits

We use risk limits at various levels in the firm (including firmwide, product and business) to govern risk appetite by controlling the size of our exposures to market risk. Limits are set based on VaR and on a range of stress tests relevant to our exposures. Limits are reviewed frequently and amended on a permanent or temporary basis to reflect changing market conditions, business conditions or tolerance for risk.

The Firmwide Risk Committee sets market risk limits at firmwide and product levels and our Securities Division Risk Committee sets sub-limits for market-making and investing activities at a business level. The purpose of the firmwide limits is to assist senior management in controlling the firm’sour overall risk profile. Sub-limits set the desired maximum amount of exposure that may be managed by any particular business on a day-to-day basis without additional levels of senior management approval, effectively leaving day-to-day trading decisions to individual desk managers and traders. Accordingly, sub-limits are a management tool designed to ensure appropriate escalation rather than to establish maximum risk tolerance. Sub-limits also distribute risk among various businesses in a manner that is consistent with their level of activity and client demand, taking into account the relative performance of each area.

94Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Our market risk limits are monitored daily by Market Risk Management, which is responsible for identifying and escalating, on a timely basis, instances where limits have been exceeded. The business-level limits that are set by the Securities Division Risk Committee are subject to the same scrutiny and limit escalation policy as the firmwide limits.

When a risk limit has been exceeded (e.g., due to changes in market conditions, such as increased volatilities or changes in correlations), it is reported to the appropriate risk committee and a discussion takes place with the relevant desk managers, after which either the risk position is reduced or the risk limit is temporarily or permanently increased.

Model Review and Validation

Our VaR and stress testing models are subject to review and validation by our independent model validation group. This review includes:

Ÿ

A critical evaluation of the model, its theoretical soundness and adequacy for intended use;

Ÿ

Verification of the testing strategy utilized by the model developers to ensure that the model functions as intended; and

Ÿ

Verification of the suitability of the calculation techniques incorporated in the model.

Our VaR and stress testing models are regularly reviewed and enhanced in order to incorporate changes in the composition of positions included in our market risk measures, as well as variations in market conditions. Prior to implementing significant changes to our assumptions and/or models, we perform model validation and test runs. Significant changes to our VaR and stress testing models are reviewed with our chief risk officer and chief financial officer, and approved by the Firmwide Risk Committee.

We evaluate the accuracy of our VaR model through daily backtesting (i.e., by comparing daily trading net revenues to the VaR measure calculated as of the prior business day) at the firmwide level and for each of our businesses and major regulated subsidiaries.

100Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Systems

We have made a significant investment in technology to monitor market risk including:

Ÿ

An independent calculation of VaR and stress measures;

Ÿ

Risk measures calculated at individual position levels;

Ÿ

Attribution of risk measures to individual risk factors of each position;

Ÿ

The ability to report many different views of the risk measures (e.g., by desk, business, product type or legal entity); and

Ÿ

The ability to produce ad hoc analyses in a timely manner.

Metrics

We analyze VaR at the firmwide level and a variety of more detailed levels, including by risk category, business, and region. The tables below present, by risk category, average daily VaR and year-endperiod-end VaR, byas well as the high and low VaR for the period. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for the four risk category.categories. This effect arises because the four market risk categories are not perfectly correlated.

Average Daily VaRThe following table presents average daily VaR.

 

in millions Year Ended December 
Risk Categories 2011     2010     2009 

$ in millions

Risk Categories

 Year Ended December 
 2014     2013     2012  

Interest rates

 $94      $93      $176    $ 51     $ 63     $ 78  
 

Equity prices

  33       68       66    26     32     26  
 

Currency rates

  20       32       36    19     17     14  
 

Commodity prices

  32       33       36    21     19     22  

Diversification effect 1

  (66     (92     (96
 

Diversification effect

  (45   (51   (54

Total

 $113      $134      $218    $ 72     $ 80     $ 86  

1.

Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.

Our average daily VaR decreased to $113$72 million in 20112014 from $134$80 million in 2010,2013, primarily reflecting decreasesa decrease in the interest rates category due to decreased exposures and lower levels of volatility, and a decrease in the equity prices and currency rates categories,category principally due to reduced exposures.lower levels of volatility. These decreases were partially offset by a decrease in the diversification benefit across risk categories.

Our average daily VaR decreased to $134$80 million in 20102013 from $218$86 million in 2009, principally due to2012, primarily reflecting a decrease in the interest rates category which was primarilyprincipally due to reduced exposures, lower levels of volatility and tighter spreads.

Year-End VaR and High and Low VaR

in millions As of December     

Year Ended

December 2011

 
Risk Categories 2011     2010      High     Low 

Interest rates

 $100      $78      $147      $69  

Equity prices

  31       51       119       14  

Currency rates

  14       27       31       10  

Commodity prices

  23       25       53       20  

Diversification effect 1

  (69     (70       

Total

 $99      $111      $169      $82  

1.

Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.

Our daily VaR decreased to $99 million as of December 2011 from $111 million as of December 2010, primarily reflecting decreases in the equity prices and currency rates categories, principally due to reduced exposures. These decreases wereThis decrease was partially offset by an increase in the interestequity prices category principally due to increased exposures.

The following table presents year-end VaR, and high and low VaR.

$ in millions

 

Risk Categories

 As of December    Year Ended
December 2014
 
        2014     2013        High       Low  

Interest rates

  $ 53     $ 59     $  71     $37  
  

Equity prices

  19     35     80     16  
  

Currency rates

  24     16     36     10  
  

Commodity prices

  23     20     30     15  
  

Diversification effect

  (42   (45    

Total

  $ 77     $ 85      $116     $51  

Our daily VaR decreased to $77 million as of December 2014 from $85 million as of December 2013, primarily reflecting a decrease in the equity prices category principally due to decreased exposures. This decrease was partially offset by an increase in the currency rates category primarilyprincipally due to higher levels of volatility and wider credit spreads.increased exposures.

During the year ended December 2011,2014, the firmwide VaR risk limit was not exceeded, on one occasion. It was resolved by a temporary increase in the firmwide VaR risk limit, which was subsequently made permanent due to higher levels of volatility. The firmwide VaR risk limit had previously been reduced on one occasion in 2011, reflecting lower risk utilization and the market environment.raised or reduced.

During the year ended December 2010,2013, the firmwide VaR risk limit was not exceeded on one occasion in order to facilitate a client transaction and was resolved by a reduction in the risk position on the following day. Separately, during the year ended December 2010, the firmwide VaR risk limit was reduced on one occasion reflectingdue to lower risk utilization.levels of volatility.

 

 

 Goldman Sachs 20112014 Form 10-K 95101


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

The chart below reflects theour daily VaR over the last four quarters.

 

The chart below presents the frequency distribution of our daily trading net revenues for substantially all

inventory positions included in VaR for the year ended December 2011.

 

Daily trading net revenues are compared with VaR calculated as of the end of the prior business day. The firmTrading losses incurred trading losses on a single day in excess ofexceeded our 95%

one-day VaR on one occasion during 2014 (i.e., a VaR exception). Trading losses incurred on three occasionsa single day did not exceed our 95% one-day VaR during 2011 and on two occasions during 2010.2013.

96Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

During periods in which the firm haswe have significantly more positive net revenue days than net revenue loss days, we expect to have fewer VaR exceptions because, under normal conditions, our business model generally produces positive

net revenues. In periods in which our franchise revenues are adversely affected, we generally have more loss days, resulting in more VaR exceptions. In addition, VaR backtesting is performed against totalThe daily market-making revenues used to determine VaR exceptions reflect the impact of any intraday activity, including bid/offer net revenues, which are more likely than not to be positive by their nature.

The chart below presents the frequency distribution of our daily trading net revenues for substantially all positions included in VaR for 2014.

102Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Sensitivity Measures

Certain portfolios and individual positions are not included in VaR because VaR is not the most appropriate risk measure. Other sensitivity measures we use to analyze market risk are described below.

10% Sensitivity Measures. The table below presents market risk for inventory positions that are not included in VaR. The market risk of these positions is determined by estimating the potential reduction in net revenues of a 10% decline in the underlying asset value.

The table Equity positions below presents market risk for positionsrelate to private and restricted public equity securities, including interests in funds that invest in corporate equities and real estate and interests in hedge funds, which are not included in VaR.“Financial instruments owned, at fair value.” Debt positions include interests in funds that invest in corporate mezzanine and senior debt instruments, loans backed by commercial and residential real estate, corporate bank loans and other corporate debt, including acquired portfolios of distressed loans. These debt positions are included in “Financial instruments owned, at fair value.” See Note 6 to the consolidated financial statements for further information about cash instruments. These measures do not reflect diversification benefits across asset categories and therefore have not been aggregated.or across other market risk measures.

 

Asset Categories 10% Sensitivity 
  Amount as of December 
in millions 2011     2010 

ICBC 1

   $   212       $   286  

Equity (excluding ICBC) 2

  2,458       2,529  

Debt 3

  1,521       1,655  

$ in millions

 

Asset Categories

 As of December 
  2014     2013  

Equity

  $2,132     $2,256  
  

Debt

  1,686     1,522  

Total

  $3,818     $3,778  

1.

Excludes third-party interests held by investment funds managed by Goldman Sachs.

2.

Relates to private and restricted public equity securities, including interests in firm-sponsored funds that invest in corporate equities and real estate and interests in firm-sponsored hedge funds.

3.

Relates to corporate bank debt, loans backed by commercial and residential real estate, and other corporate debt, including acquired portfolios of distressed loans and interests in our firm-sponsored funds that invest in corporate mezzanine and senior debt instruments.

Credit Spread Sensitivity on Derivatives and Borrowings.VaR excludes the impact of changes in counterparty and our own credit spreads on derivatives as well as changes in our own credit spreads on unsecured borrowings for which the fair value option was elected. The estimated sensitivity to a one basis point increase in credit spreads (counterparty and our own) on derivatives was a gain of $3 million and $4 million gain(including hedges) as of December 2011.2014 and December 2013, respectively. In addition, the estimated sensitivity to a one basis point increase in our own credit spreads on unsecured borrowings for which the fair value option was elected was a $7gain of $10 million gainand $8 million (including hedges) as of December 2011.2014 and December 2013, respectively. However, the actual net impact of a change in our own credit spreads is also affected by the liquidity, duration and convexity (as the sensitivity is not linear to changes in yields) of those unsecured borrowings for which the fair value option was elected, as well as the relative performance of any hedges undertaken.

The firm engages in insurance activities where we reinsure and purchase portfolios of insurance risk and pension liabilities. The risks associated with these activities include, but are not limited to: equity, interest rate, reinvestment and mortality risk. The firm mitigates risks associated with insurance activities through the use of reinsurance and hedging. Certain of the assets associated with the firm’s insurance activities are included in VaR. In addition to the positions included in VaR we held $4.86 billion of securities accounted for as available-for-saleInterest Rate Sensitivity. “Loans receivable” as of December 2011,2014 and December 2013 were $28.94 billion and $14.90 billion, respectively, substantially all of which support the firm’s insurance subsidiaries.had floating interest rates. As of December 2011, our available-for-sale securities primarily consisted2014 and December 2013, the estimated sensitivity to a 100 basis point increase in interest rates on such loans was $254 million and $136 million, respectively, of $1.81 billionadditional interest income over a 12-month period, which does not take into account the potential impact of corporate debt securities with an average yield of 5%,increase in costs to fund such loans. See Note 9 to the majority of which will mature after five years, $1.42 billion of mortgage and other asset-backedconsolidated financial statements for further information about loans and securities with an average yield of 10%, the majority of which will mature after ten years, and $662 million of U.S. government and federal agency obligations with an average yield of 3%, the majority of which will mature after ten years. As of December 2010, we held $3.67 billion of securities accounted for as available-for-sale primarily consisting of $1.69 billion of corporate debt securities with an average yield of 6%, the majority of which will mature after five years, $670 million of mortgage and other asset-backed loans and securities with an average yield of 11%, which will mature after ten years, and $637 million of U.S. government and federal agency obligations with an average yield of 4%, the majority of which will mature after ten years.receivable.

Other Market Risk Considerations

In addition, as of December 20112014 and December 2010,2013, we had commitments and held loans under the William Streetfor which we have obtained credit extension program. As of December 2010, we also held money market instruments under this program.loss protection from Sumitomo Mitsui Financial Group, Inc. See Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our William Street credit extension program.such lending commitments.

Additionally, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in “Other assets” in the consolidated statements of financial condition.assets.” Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 1213 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information onabout “Other assets.”

 

 

 Goldman Sachs 20112014 Form 10-K 97103


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Financial Statement Linkages to Market Risk Measures

We employ a variety of risk measures, each described in the respective sections above, to monitor market risk across the consolidated statements of financial condition and consolidated statements of earnings. The related gains and losses on these positions are included in “Market making,” “Other principal transactions,” “Interest income” and “Interest expense.” The table below presents certain categories in our consolidated statements of financial condition and the market risk measures used to assess those assets and liabilities. Certain categories on the consolidated statements of financial condition are incorporated in more than one risk measure.

Categories on the
Consolidated Statements of
Financial Condition Included
in Market Risk Measures

Market Risk Measures

Securities segregated for regulatory and other purposes, at fair value

Ÿ   VaR

Collateralized agreements

Ÿ   Securities purchased under agreements to resell, at fair value

Ÿ   Securities borrowed, at fair value

Ÿ   VaR

Receivables from customers and counterparties

Ÿ   Certain secured loans, at fair value

Ÿ   VaR

Ÿ   Loans receivable

Ÿ    Interest Rate Sensitivity

Financial instruments owned, at fair value

Ÿ   VaR

Ÿ   10% Sensitivity Measures

Ÿ   Credit Spread
Sensitivity — Derivatives

Collateralized financings

Ÿ   Securities sold under agreements to repurchase, at fair value

Ÿ   Securities loaned, at
fair value

Ÿ   Other secured financings, at fair value

Ÿ   VaR

Financial instruments sold, but
not yet purchased, at fair value

Ÿ   VaR

Ÿ   Credit Spread
Sensitivity — Derivatives

Unsecured short-term borrowings and unsecuredlong-term borrowings,
at fair value

Ÿ   VaR

Ÿ   Credit Spread
Sensitivity — Borrowings

Credit Risk Management

Overview

Credit risk represents the potential for loss due to the default or deterioration in credit quality of a counterparty (e.g., an OTC derivatives counterparty or a borrower) or an issuer of securities or other instruments we hold. Our exposure to credit risk comes mostly from client transactions in OTC derivatives and loans and lending commitments. Credit risk also comes from cash placed with banks, securities financing transactions (i.e., resale and repurchase agreements and securities borrowing and lending activities) and receivables from brokers, dealers, clearing organizations, customers and counterparties.

Credit Risk Management, which is independent of the revenue-producing units and reports to the firm’sour chief risk officer, has primary responsibility for assessing, monitoring and managing credit risk at the firm. The Credit Policy Committee and the Firmwide Risk Committee establish and review credit policies and parameters. In addition, we hold other positions that give rise to credit risk (e.g., bonds held in our inventory and secondary bank loans). These credit risks are captured as a component of market risk measures, which are monitored and managed by Market Risk Management, consistent with other inventory positions. We also enter into derivatives to manage market risk exposures. Such derivatives also give rise to credit risk which is monitored and managed by Credit Risk Management.

Policies authorized by the Firmwide Risk Committee and the Credit Policy Committee prescribe the level of formal approval required for the firmus to assume credit exposure to a counterparty across all product areas, taking into account any enforceableapplicable netting provisions, collateral or other credit risk mitigants.

104Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Credit Risk Management Process

Effective management of credit risk requires accurate and timely information, a high level of communication and knowledge of customers, countries, industries and products. Our process for managing credit risk includes:

 

Ÿ 

approvingApproving transactions and setting and communicating credit exposure limits;

 

Ÿ 

monitoringMonitoring compliance with established credit exposure limits;

 

Ÿ 

assessingAssessing the likelihood that a counterparty will default on its payment obligations;

 

Ÿ 

measuring the firm’sMeasuring our current and potential credit exposure and losses resulting from counterparty default;

 

Ÿ 

reportingReporting of credit exposures to senior management, the Board and regulators;

Ÿ 

useUse of credit risk mitigants, including collateral and hedging; and

 

Ÿ 

communicationCommunication and collaboration with other independent control and support functions such as operations, legal and compliance.

As part of the risk assessment process, Credit Risk Management performs credit reviews which include initial and ongoing analyses of our counterparties. A credit review is an independent judgment about the capacity and willingness of a counterparty to meet its financial obligations. For substantially all of our credit exposures, the core of our process is an annual counterparty credit review. A counterpartycredit review is a writtenan independent analysis of the capacity and willingness of a counterparty’s business profile andcounterparty to meet its financial strengthobligations, resulting in an internal credit rating which represents the probability of default on financial obligations to the firm.rating. The determination of internal credit ratings also incorporates assumptions with respect to the counterparty’s future business performance, the nature of and outlook for the counterparty’s industry, and the economic environment. Senior personnel within Credit Risk Management, with expertise in specific industries, inspect and approve credit reviews and internal credit ratings.

Our global credit risk management systems capture credit exposure to individual counterparties and on an aggregate basis to counterparties and their subsidiaries (economic groups). These systems also provide management with comprehensive information on our aggregate credit risk by product, internal credit rating, industry, country and region.

Risk Measures and Limits

We measure our credit risk based on the potential loss in an event of non-payment by a counterparty. For derivatives and securities financing transactions, the primary measure is potential exposure, which is our estimate of the future exposure that could arise over the life of a transaction based on market movements within a specified confidence level. Potential exposure takes into account netting and collateral arrangements. For loans and lending commitments, the primary measure is a function of the notional amount of the position. We also monitor credit risk in terms of current exposure, which is the amount presently owed to the firmus after taking into account applicable netting and collateral.

98Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

We use credit limits at various levels (counterparty, economic group, industry, country) to control the size of our credit exposures. Limits for counterparties and economic groups are reviewed regularly and revised to reflect changing risk appetites for a given counterparty or group of counterparties. Limits for industries and countries are based on the firm’sour risk tolerance and are designed to allow for regular monitoring, review, escalation and management of credit risk concentrations.

Stress Tests/Scenario Analysis

We use regular stress tests to calculate the credit exposures, including potential concentrations that would result from applying shocks to counterparty credit ratings or credit risk factors (e.g., currency rates, interest rates, equity prices). These shocks include a wide range of moderate and more extreme market movements. Some of our stress tests include shocks to multiple risk factors, consistent with the occurrence of a severe market or economic event (e.g.,event. In the case of sovereign debt default).default, we estimate the direct impact of the default on our sovereign credit exposures, changes to our credit exposures arising from potential market moves in response to the default, and the impact of credit market deterioration on corporate borrowers and counterparties that may result from the sovereign default. Unlike potential exposure, which is calculated within a specified confidence level, with a stress test there is generally no assumed probability of these events occurring.

We run stress tests on a regular basis as part of our routine risk management processes and conduct tailored stress tests on an ad hoc basis in response to market developments. Stress tests are regularly conducted jointly with the firm’sour market and liquidity risk functions.

Goldman Sachs 2014 Form 10-K105


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Risk Mitigants

To reduce our credit exposures on derivatives and securities financing transactions, we may enter into netting agreements with counterparties that permit us to offset receivables and payables with such counterparties. We may also reduce credit risk with counterparties by entering into agreements that enable us to obtain collateral from them on an upfront or contingent basis and/or to terminate transactions if the counterparty’s credit rating falls below a specified level. We monitor the fair value of the collateral on a daily basis to ensure that our credit exposures are appropriately collateralized. We seek to minimize exposures where there is a significant positive correlation between the creditworthiness of our counterparties and the market value of collateral we receive.

For loans and lending commitments, we typically employ a variety of potential risk mitigants, depending on the credit quality of the borrower and other characteristics of the transaction.transaction, we employ a variety of potential risk mitigants. Risk mitigants include: collateral provisions, guarantees, covenants, structural seniority of the bank loan claims and, for certain lending commitments, provisions in the legal documentation that allow the firmus to adjust loan amounts, pricing, structure and other terms as market conditions change. The type and structure of risk mitigants employed can significantly influence the degree of credit risk involved in a loan.loan or lending commitment.

When we do not have sufficient visibility into a counterparty’s financial strength or when we believe a counterparty requires support from its parent company, we may obtain third-party guarantees of the counterparty’s obligations. We may also mitigate our credit risk using credit derivatives or participation agreements.

Credit Exposures

The firm’s credit exposures are described further below.

Cash and Cash Equivalents. Cash and cash equivalents include both interest-bearing and non-interest bearing deposits. To mitigate the risk of credit loss, we place substantially all of our deposits with highly rated banks and central banks.

OTC Derivatives.Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement.

Derivatives are accounted for at fair value net of cash collateral received or posted under credit support agreements. As credit risk is an essential component of fair value, the firm includes a credit valuation adjustment (CVA) in the fair value of derivatives to reflect counterparty credit risk, as described in Note 7 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. CVA is a function of the present value of expected exposure, the probability of counterparty default and the assumed recovery upon default.

Goldman Sachs 2011 Form 10-K99


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

The tables below present the distribution of our exposure to OTC derivatives by tenor, based on expected duration for mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives, both before and after the effect of collateral and netting agreements. Receivable and payable balances for the same counterparty across tenor categories are netted under

enforceable netting agreements, and cash collateral received is netted under credit support agreements. Receivable and payable balances with the same counterparty in the same tenor category are netted within such tenor category. The categories shown reflect our internally determined public rating agency equivalents.

  As of December 2011 

in millions

Credit Rating Equivalent

 0 - 12
Months
   1 - 5
Years
   

5 Years

or Greater

   Total   Netting  Exposure   Exposure
Net of
Collateral
 

AAA/Aaa

 $727    $786     $    2,297    $3,810    $(729  $  3,081     $  2,770  

AA/Aa2

  4,661     10,198     28,094     42,953     (22,972  19,981     12,954  

A/A2

  17,704     36,553     50,787     105,044     (73,873  31,171     17,109  

BBB/Baa2

  7,376     14,222     25,612     47,210     (36,214  10,996     6,895  

BB/Ba2 or lower

  2,896     4,497     6,597     13,990     (6,729  7,261     4,527  

Unrated

  752     664     391     1,807     (149  1,658     1,064  

Total

 $34,116    $66,920     $113,778    $214,814    $(140,666  $74,148     $45,319  

  As of December 2010 

in millions

Credit Rating Equivalent

 0 - 12
Months
   1 - 5
Years
   

5 Years

or Greater

   Total   Netting  Exposure   Exposure
Net of
Collateral
 

AAA/Aaa

 $504    $728     $  2,597    $3,829    $(491  $  3,338     $  3,088  

AA/Aa2

  5,234     8,875     15,579     29,688     (18,167  11,521     6,935  

A/A2

  13,556     38,522     49,568     101,646     (74,650  26,996     16,839  

BBB/Baa2

  3,818     18,062     19,625     41,505     (27,832  13,673     8,182  

BB/Ba2 or lower

  3,583     5,382     3,650     12,615     (4,553  8,062     5,439  

Unrated

  709     1,081     332     2,122     (20  2,102     1,539  

Total

 $27,404    $72,650     $91,351    $191,405    $(125,713  $65,692     $42,022  

100Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Lending Activities. We manage the firm’s traditional credit origination activities, including funded loans, lending commitments and the William Street credit extension program, using the credit risk process, measures and limits described above. Other lending positions, including secondary trading positions, are risk-managed as a component of market risk.

Other Credit Exposures. The firm is exposed to credit risk from its receivables from brokers, dealers and clearing organizations and customers and counterparties. Receivables from brokers, dealers and clearing organizations are primarily comprised of initial margin placed with clearing organizations and receivables related to sales of securities which have traded, but not yet settled. These receivables have minimal credit risk due to the low probability of clearing organization default and the short-term nature of receivables related to securities settlements. Receivables from customers and counterparties are generally comprised of collateralized receivables related to customer securities transactions and have minimal credit risk due to both the value of the collateral received and the short-term nature of these receivables.

Credit Exposures

During the year endedAs of December 2011,2014, our credit exposures increased as compared with December 2013, primarily reflecting growthincreases in loans and lending activity and OTC derivatives, and increased cash balances. While credit spreads widened during the year ended December 2011, thecommitments. The percentage of our credit exposure arising from non-investment-grade counterparties (based on our internally determined public rating agency equivalents) increased from December 2013, primarily reflecting an increase in loans and lending commitments. During 2014, the number of counterparty defaults was essentially unchanged from December 2010. Counterparty defaults and the associated credit losses have remained at low levels during the year ended December 2011 as compared with the same prior year period.

The tables below present the firm’s credit exposures related to cash, OTC derivatives,2013, and such defaults primarily occurred within loans and lending commitmentscommitments. The total number of counterparty defaults remained low, representing less than 0.5% of all counterparties. Estimated losses associated with traditionalcounterparty defaults were higher compared with the prior year. However, such estimated losses were not material to the firm. Our credit origination activities broken down by industry, regionexposures are described further below.

Cash and internalCash Equivalents. Cash and cash equivalents include both interest-bearing and non-interest-bearing deposits. To mitigate the risk of credit rating.loss, we place substantially all of our deposits with highly-rated banks and central banks.

OTC Derivatives. Our credit exposure on OTC derivatives arises primarily from our market-making activities. As a market maker, we enter into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. We also enter into derivatives to manage market risk exposures. We manage our credit exposure on OTC derivatives using the credit risk process, measures, limits and risk mitigants described above.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement. Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements. We generally enter into OTC derivatives transactions under bilateral collateral arrangements with daily exchange of collateral.

As credit risk is an essential component of fair value, we include a credit valuation adjustment (CVA) in the fair value of derivatives to reflect counterparty credit risk, as described in Note 7 to the consolidated financial statements. CVA is a function of the present value of expected exposure, the probability of counterparty default and the assumed recovery upon default.

 

 

106 Goldman Sachs 20112014 Form 10-K 101


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

The tables below present the distribution of our exposure to OTC derivatives by tenor, based on expected duration for mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives, both before and after the effect of collateral and netting agreements. Receivable and payable balances for the same counterparty across tenor categories are netted under enforceable netting agreements, and cash collateral received is netted under enforceable credit support agreements. Receivable and payable balances with the same counterparty in the same tenor category are netted within

such tenor category. Net credit exposure in the tables below represents OTC derivative assets, all of which are included in “Financial instruments owned, at fair value,” less cash collateral and the fair value of securities collateral, primarily U.S. government and federal agency obligations and non-U.S. government and agency obligations, received under credit support agreements, which management considers when determining credit risk, but such collateral is not eligible for netting under U.S. GAAP. The categories shown reflect our internally determined public rating agency equivalents.

  As of December 2014 

$ in millions

 

Credit Rating Equivalent

  
 
0 - 12
Months
  
  
   
 
1 - 5
Years
  
  
   
 
5 Years
or Greater
  
  
   Total     Netting     
 
 
OTC
Derivative
Assets
  
  
  
   
 
 
Net
Credit
Exposure
  
  
  

AAA/Aaa

  $  1,119     $     898     $    3,500     $    5,517     $    (2,163   $  3,354     $  3,135  
  

AA/Aa2

  8,260     12,182     40,443     60,885     (42,513   18,372     12,453  
  

A/A2

  13,719     18,949     26,649     59,317     (44,147   15,170     9,493  
  

BBB/Baa2

  7,049     8,758     26,087     41,894     (28,321   13,573     9,577  
  

BB/Ba2 or lower

  4,959     6,226     5,660     16,845     (7,062   9,783     8,506  
  

Unrated

  79     363     160     602     (117   485     188  

Total

  $35,185     $47,376     $102,499     $185,060     $(124,323   $60,737     $43,352  
  As of December 2013 

$ in millions

 

Credit Rating Equivalent

  
 
0 - 12
Months
  
  
   
 
1 - 5
Years
  
  
   
 
5 Years
or Greater
  
  
   Total     Netting     
 
 
OTC
Derivative
Assets
  
  
  
   
 
 
Net
Credit
Exposure
  
  
  

AAA/Aaa

  $     473     $  1,470     $    2,450     $    4,393     $    (2,087   $  2,306     $  2,159  
  

AA/Aa2

  3,463     7,642     29,926     41,031     (27,918   13,113     8,596  
  

A/A2

  12,693     25,666     29,701     68,060     (48,803   19,257     11,188  
  

BBB/Baa2

  4,377     10,112     24,013     38,502     (29,213   9,289     5,952  
  

BB/Ba2 or lower

  2,972     6,188     4,271     13,431     (5,357   8,074     6,381  
  

Unrated

  1,289     45     238     1,572     (9   1,563     1,144  

Total

  $25,267     $51,123     $  90,599     $166,989     $(113,387   $53,602     $35,420  

Goldman Sachs 2014 Form 10-K107


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Credit Exposure by Industry

 

  Cash   OTC Derivatives     Loans and Lending
Commitments 1
 
  As of December   As of December     As of December 
in millions 2011     2010   2011     2010      2011     2010 

Asset Managers & Funds

 $64      $    $10,582      $8,760      $1,290      $1,317  

Banks, Brokers & Other Financial Institutions

  12,535       11,020     25,041       23,255       3,591       3,485  

Consumer Products, Non-Durables, and Retail

  11            1,031       1,082       12,685       8,141  

Government & Central Banks

  43,389       28,766     16,642       11,705       1,828       1,370  

Healthcare & Education

              2,962       2,161       7,158       5,754  

Insurance

         1     2,828       2,462       2,891       3,054  

Natural Resources & Utilities

              4,803       5,259       14,795       11,021  

Real Estate

              327       528       2,695       1,523  

Technology, Media, Telecommunications & Services

  2       1     2,124       1,694       12,646       7,690  

Transportation

              1,104       962       5,753       3,822  

Other

  7            6,704       7,824       5,759       6,007  

Total 2

 $56,008      $39,788    $74,148      $65,692      $71,091      $53,184  

Credit Exposure by RegionLending and Financing Activities. We manage our lending and financing activities using the credit risk process, measures, limits and risk mitigants described above. Other lending positions, including secondary trading positions, are risk-managed as a component of market risk.

  Cash   OTC Derivatives     Loans and Lending
Commitments 1
 
  As of December   As of December     As of December 
in millions 2011     2010   2011     2010      2011     2010 

Americas

 $48,543      $34,528    $36,591      $34,468      $52,755      $38,151  

EMEA 3

  1,800       810     29,549       23,396       16,989       14,451  

Asia

  5,665       4,450     8,008       7,828       1,347       582  

Total 2

 $56,008      $39,788    $74,148      $65,692      $71,091      $53,184  

Credit Exposure by Credit Quality

  Cash   OTC Derivatives     Loans and Lending
Commitments 1
 
  As of December   As of December     As of December 
in millions 2011     2010   2011     2010      2011     2010 

Credit Rating Equivalent

                  

AAA/Aaa

 $40,559      $27,851    $3,081      $3,338      $2,192      $1,783  

AA/Aa2

  7,463       4,547     19,981       11,521       7,026       5,273  

A/A2

  6,464       5,603     31,171       26,996       21,055       15,766  

BBB/Baa2

  195       1,007     10,996       13,673       22,937       17,544  

BB/Ba2 or lower

  1,209       764     7,261       8,062       17,820       12,774  

Unrated

  118       16     1,658       2,102       61       44  

Total 2

 $56,008      $39,788    $74,148      $65,692      $71,091      $53,184  

 

1.Ÿ

Includes approximately $10 billionLending Activities. Our lending activities include lending to investment-grade and $4 billion of loans as of December 2011 and December 2010, respectively, and approximately $61 billion and $49 billion of lending commitments as of December 2011 and December 2010, respectively. Excludes approximately $10 billion and $14 billion of loans as of December 2011 and December 2010, respectively,non-investment-grade corporate borrowers. Loans and lending commitments associated with a total notional value of approximately $5 billionthese activities are principally used for operating liquidity and $3 billion as of December 2011 and December 2010, respectively,general corporate purposes or in connection with contingent acquisitions. Our lending activities also include extending loans to borrowers that are risk managed as part of market risk using VaRsecured by commercial and sensitivity measures.other real estate. See the tables below for further information about our credit exposures associated with these lending activities.

 

2.Ÿ

TheSecurities Financing Transactions. We enter into securities financing transactions in order to, among other things, facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm bearsactivities. We bear credit risk related to resale agreements and securities borrowed only to the extent that cash advanced or the value of securities pledged or delivered to the counterparty exceeds the value of the collateral received. The firmWe also hashave credit exposure on repurchase agreements and securities loaned to the extent that the value of securities pledged or delivered to the counterparty for these transactions exceeds the amount of cash or collateral received. Securities collateral obtained for securities financing transactions primarily includes U.S. government and federal agency obligations and non-U.S. government and agency obligations. We had approximately $41$36 billion and $31$29 billion as of December 20112014 and December 2010,2013, respectively, inof credit exposure related to securities financing transactions reflecting enforceableboth netting agreements.agreements and collateral that management considers when determining credit risk. As of both December 2014 and December 2013, substantially all of our credit exposure related to securities financing transactions was with investment-grade financial institutions, funds and governments, primarily located in the Americas and EMEA.

Ÿ

Other Credit Exposures. We are exposed to credit risk from our receivables from brokers, dealers and clearing organizations and customers and counterparties. Receivables from brokers, dealers and clearing organizations are primarily comprised of initial cash margin placed with clearing organizations and receivables related to sales of securities which have traded, but not yet settled. These receivables generally have minimal credit risk due to the low probability of clearing organization default and the short-term nature of receivables related to securities settlements. Receivables from customers and counterparties are generally comprised of collateralized receivables related to customer securities transactions and generally have minimal credit risk due to both the value of the collateral received and the short-term nature of these receivables. Our net credit exposure related to these activities was approximately $26 billion and $18 billion as of December 2014 and December 2013, respectively, and was primarily comprised of initial margin (both cash and securities) placed with investment-grade clearing organizations. The regional breakdown of our net credit exposure related to these activities was approximately 48% and 55% in the Americas, approximately 13% and 10% in Asia, and approximately 39% and 35% in EMEA as of December 2014 and December 2013, respectively.

 

3.

EMEA (Europe, Middle EastIn addition, we extend other loans and Africa).lending commitments to our private wealth management clients that are primarily secured by residential real estate, securities or other assets. The gross exposure related to such loans and lending commitments was approximately $17 billion and $11 billion as of December 2014 and December 2013, respectively, and was substantially all concentrated in the Americas region. The fair value of the collateral received against such loans and lending commitments exceeded the gross exposure as of both December 2014 and December 2013.

 

102108 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Credit Exposure by Industry, Region and Credit Quality

The tables below present our credit exposures related to cash, OTC derivatives, and loans and lending commitments (excluding credit exposures described above in “Securities Financing Transactions” and “Other Credit Exposures”) broken down by industry, region and credit quality. In the “Credit Exposure by Industry” table below, to be

consistent with changes in the manner in which management views credit exposure, we introduced new industries, aggregated certain industries and realigned exposures between industry classifications. Reclassifications have been made for December 2013 to conform to the current presentation.

$ in millions

 

Credit Exposure by Industry

 

Cash

as of December

    

OTC Derivatives

as of December

    

Loans and Lending
Commitments

as of December

 
  2014     2013      2014     2013      2014     2013  

Funds

  $       96     $     109     $13,114     $10,063     $    1,706     $       727  
  

Financial Institutions

  12,469     9,994     15,051     16,374     11,316     9,910  
  

Consumer, Retail & Healthcare

            3,325     5,041     30,216     27,891  
  

Sovereign

  45,029     51,024     10,004     8,603     450     276  
  

Municipalities & Nonprofit

            4,303     2,902     541     458  
  

Natural Resources & Utilities

            5,741 1    5,295     24,275 1    21,478  
  

Real Estate

  6     6     407     388     12,366     8,550  
  

Technology, Media & Telecommunications

            2,995     2,123     20,633     14,962  
  

Diversified Industrials

            4,321     1,733     16,392     16,085  
  

Other

             1,476     1,080      11,998     4,988  

Total

  $57,600     $61,133      $60,737     $53,602      $129,893     $105,325  

1.

See “— Selected Country and Industry Exposures — Industry Exposures” below for information about our credit and market exposure to the oil and gas industry.

$ in millions

 

Credit Exposure by Region

 

Cash

as of December

    

OTC Derivatives

as of December

    

Loans and Lending
Commitments

as of December

 
  2014     2013      2014     2013      2014     2013  

Americas

  $45,599     $54,470     $22,032     $21,423     $  91,378     $  77,710  
  

EMEA

  1,666     2,143     31,295     25,983     34,397     25,222  
  

Asia

  10,335     4,520      7,410     6,196      4,118     2,393  

Total

  $57,600     $61,133      $60,737     $53,602      $129,893     $105,325  

$ in millions

 

Credit Exposure by Credit Quality (Credit Rating Equivalent)

 

Cash

as of December

    

OTC Derivatives

as of December

    

Loans and Lending
Commitments

as of December

 
  2014     2013      2014     2013      2014     2013  

AAA/Aaa

  $38,778     $50,519     $  3,354     $  2,306     $    3,969     $    3,079  
  

AA/Aa2

  4,598     2,748     18,372     13,113     8,097     7,001  
  

A/A2

  13,346     6,821     15,170     19,257     22,623     23,250  
  

BBB/Baa2

  730     527     13,573     9,289     35,706     30,496  
  

BB/Ba2 or lower

  148     518     9,783     8,074     58,670     41,114  
  

Unrated

             485     1,563      828     385  

Total

  $57,600     $61,133      $60,737     $53,602      $129,893     $105,325  

Goldman Sachs 2014 Form 10-K109


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Selected Country and Industry Exposures

During 2011 and continuing into 2012, there have been concernsThe section below provides information about European sovereign debt risk and its impact on the European banking system and a number of European member states have been experiencing significant credit deterioration. The most pronounced market concerns relate to Greece, Ireland, Italy, Portugal and Spain. The table below presents our credit exposure (both gross and net of hedges) to all sovereigns, financial institutions and corporate counterparties or borrowers in these countries. In

addition, the table includes the market exposure to certain countries and industries that have had heightened focus due to recent events and broad market concerns. Credit exposure represents the potential for loss due to the default or deterioration in credit quality of a counterparty or borrower. Market exposure represents the potential for loss in value of our long and short inventory due to changes in whichmarket prices. There is no overlap between the issuer or underlier is locatedcredit and market exposures in these countries.

Thethe amounts below. We determine the country of risk is determined by the location of the counterparty, issuer or underlier’s assets, where they generate revenue, the country in which they are headquartered, and/or the government whose policies affect their ability to repay their obligations.

Country Exposures. During 2014, the political situations in Iraq, Russia and Ukraine have negatively affected market sentiment toward those countries. In addition, the U.S. and the EU have imposed sanctions against certain Russian individuals and institutions, and Argentina has defaulted on its sovereign debt. The decline in oil prices has also raised substantial concerns about Venezuela and its sovereign debt. In addition, recent events in Greece have led to renewed concerns about its economic and financial stability.

As of December 2014, our total credit exposure to Russia was $416 million and was substantially all with non-sovereign counterparties or borrowers. Such exposure was comprised of $257 million (including the benefit of $14 million of cash and securities collateral) related to securities financing transactions and other secured receivables, $104 million related to loans and lending commitments and $55 million (including the benefit of $190 million of cash collateral) related to OTC derivatives. In addition, our total market exposure to Russia as of December 2014 was $447 million, which was primarily with non-sovereign issuers or underliers. Such exposure was comprised of $309 million related to credit derivatives, $117 million related to debt and $21 million related to equities. Subsequent to December 2014, Russia’s sovereign debt was downgraded by S&P and Fitch. These downgrades did not have a material effect on our financial condition, results of operations, liquidity or capital resources.

As of December 2014, our total credit exposure to Greece was $1.0 billion and was primarily with non-sovereign counterparties or borrowers. Such exposure was comprised of $694 million (including the benefit of $1.2 billion of cash and securities collateral) related to securities financing transactions and other secured receivables and $317 million (including the benefit of $590 million of cash collateral) related to OTC derivatives. In addition, our total market exposure to Greece as of December 2014 was $54 million, which was primarily with non-sovereign issuers or underliers.

  As of December 2011 
  Credit Exposure     Market Exposure 
in billions Loans  OTC
Derivatives
  Other  Gross
Funded
  Hedges  

Total

Net Funded
Credit

Exposure

  

Unfunded

Credit
Exposure

  Total
Credit
Exposure
      Bonds  

Equities
and

Other

  Credit
Derivatives
  Total
Market
Exposure
 

Greece

              

Sovereign

 $   $   $   $   $   $   $   $      $0.33   $   $(0.02 $0.31  

Non-Sovereign

  0.02    0.05        0.07        0.07        0.07       0.03    0.01    0.02    0.06  

Total Greece

  0.02    0.05        0.07        0.07        0.07       0.36    0.01        0.37  

Ireland

              

Sovereign

          0.25    0.25        0.25        0.25       0.41        (0.35  0.06  

Non-Sovereign

      0.54    0.07    0.61    (0.01  0.60    0.06    0.66       0.41    0.09    0.11    0.61  

Total Ireland

      0.54    0.32    0.86    (0.01  0.85    0.06    0.91       0.82    0.09    (0.24  0.67  

Italy

              

Sovereign

      1.67        1.67    (1.41  0.26        0.26       0.21        0.20    0.41  

Non-Sovereign

  0.13    0.45        0.58    (0.02  0.56    0.40    0.96       0.19    0.30    (0.90  (0.41

Total Italy

  0.13    2.12        2.25    (1.43  0.82    0.40    1.22       0.40    0.30    (0.70    

Portugal

              

Sovereign

      0.15        0.15        0.15        0.15       (0.10      0.02    (0.08

Non-Sovereign

      0.06        0.06        0.06        0.06       0.23    0.01    (0.18  0.06  

Total Portugal

      0.21        0.21        0.21        0.21       0.13    0.01    (0.16  (0.02

Spain

              

Sovereign

      0.09        0.09        0.09        0.09       0.15        (0.55  (0.40

Non-Sovereign

  0.15    0.25    0.02    0.42    (0.14  0.28    0.15    0.43       0.35    0.24    (0.63  (0.04

Total Spain

  0.15    0.34    0.02    0.51    (0.14  0.37    0.15    0.52       0.50    0.24    (1.18  (0.44

Subtotal

 $0.30   $3.26 1  $0.34   $3.90 1  $(1.58 $2.32   $0.61   $2.93      $2.21   $0.65   $(2.28) 2  $0.58  

Our total credit and market exposure to Argentina, Iraq, Ukraine and Venezuela as of December 2014 was not material.

1.

Includes the benefit of $6.5 billion of cash and U.S. Treasury securities collateral and excludes non-U.S. government and corporate securities collateral of $341 million.

2.

Includes written and purchased credit derivative notionals reduced by the fair values of such credit derivatives.

We economically hedge our exposure to written credit derivatives by entering into offsetting purchased credit derivatives with identical underlyings.underliers. Where possible, we endeavor to match the tenor and credit default terms of such hedges to that of our written credit derivatives. Substantially all purchased credit derivatives included aboverelated to Russia and Greece are both bought from investment-grade counterparties domiciled outside of these countries and are collateralized with cash or U.S. Treasury securities. Thecash. As of December 2014, the gross purchased and written credit derivative notionals across the above countries for single-name and index credit default swaps (included in credit derivatives above) were

$147.3 $21.1 billion and $142.4$21.7 billion, respectively.respectively, related to Russia and $2.2 billion and $2.1 billion, respectively, related to Greece. Including netting under legally enforceable netting agreements, within each and across all of the countries above, the purchased and written credit derivative notionals for single-name and index credit default swaps were $21.1$3.6 billion and $16.2$4.3 billion, respectively.respectively, related to Russia and $908 million and $812 million, respectively, related to Greece as of December 2014. These notionals are not representative of our exposure because they exclude available netting under legally enforceable netting agreements on other derivatives outside of these countries and collateral received or posted under credit support agreements.

Goldman Sachs 2011 Form 10-K103


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

For information about the nature of or payout under trigger events related to written and purchased credit protection contracts see Note 7 to the consolidated financial statementsstatements.

110Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

During 2012, and continuing into early 2013, there were concerns about European sovereign debt risk and its impact on the European banking system, as a number of European member states, including Ireland, Italy, Portugal and Spain, experienced significant credit deterioration. Although many of the immediate concerns have subsided, some of the countries in Part II, Item 8the region face long-term economic and financial challenges. As of this Form 10-K.December 2014, our aggregate credit and market exposure to these four European countries was $10.1 billion ($8.8 billion of credit exposure and $1.3 billion of market exposure), including $4.0 billion to Ireland, $3.1 billion to Italy, $439 million to Portugal and $2.6 billion to Spain. We continue to closely monitor our risk exposure to these four countries as part of our risk management process.

To supplement our regular stress tests, we conduct tailored stress tests on an ad hoc basis in response to specific market events that we deem significant. For example, in response to the Euro area debt crisis, we conducted stress tests intended to estimate the direct and indirect impact that might result from a variety of possible events involving certain European member states, including sovereign defaults and the exit of one or more countries from the Euro area. In the stress tests, described in “Market Risk Management — Stress Testing” and “Credit Risk Management — Stress Tests/Scenario Analysis,” we estimated the direct impact of the event on our credit and market exposures resulting from shocks to risk factors including, but not limited to, currency rates, interest rates, and equity prices. The parameters of these shocks varied based on the scenario reflected in each stress test. We evaluatealso estimated the indirect impact on our exposures arising from potential market moves in response to the event, such as the impact of credit market deterioration on corporate borrowers and monitorcounterparties along with the effectsshocks to the risk factors described above. We reviewed estimated losses produced by the stress tests in order to understand their magnitude, highlight potential loss concentrations, and assess and mitigate our exposures where necessary.

The Euro area exit scenarios included analysis of indirectthe impacts on exposure that might result from the redenomination of assets in the exiting country or countries. We also tested our operational and risk management readiness and capability to respond to a redenomination event. Constructing stress tests for these countries. scenarios requires many assumptions about how exposures might be directly impacted and how resulting secondary market moves would indirectly impact such exposures. Given the multiple parameters involved in such scenarios, losses from such events are inherently difficult to quantify and may materially differ from our estimates.

See “Liquidity Risk Management — Global Core Liquid Assets — Modeled Liquidity Outflow,” “Market Risk Management — Stress Testing” and “Credit Risk Management — Stress Tests/Scenario Analysis” for further discussion.

On January 13, 2012, Standard & Poor’s Ratings Services loweredIndustry Exposures. Significant declines in the sovereign debt ratings on Italy from Aprice of oil have led to BBB+, Portugal from BBB-market concerns regarding the creditworthiness of certain companies in the oil and gas industry. As of December 2014, our credit exposure to BB,oil and Spain from AA-gas companies related to A. On January 27, 2012, Fitch, Inc. loweredloans and lending commitments was $10.9 billion ($2.1 billion of loans and $8.8 billion of lending commitments). Such exposure included $5.1 billion of exposure to non-investment-grade counterparties ($1.9 billion related to loans and $3.2 billion related to lending commitments). Our clients in the sovereign debt ratings on Italy from A+oil and gas industry also use derivatives to A-,hedge their exposure to oil prices. As of December 2014, our credit exposure related to derivatives and Spain from AA-receivables with oil and gas companies was $1.7 billion, substantially all of which were with investment-grade counterparties. As of December 2014, our market exposure related to A. On February 13, 2012, Moody’s Investors Service lowered the sovereign debt ratings on Italy from A2oil and gas companies was $805 million, substantially all of which was to A3, Portugal from Ba2 to Ba3,non-investment-grade issuers or underliers.

Goldman Sachs 2014 Form 10-K111


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Spain from A1 to A3. On February 22, 2012, Fitch, Inc. lowered the sovereign debt ratings on Greece from CCC to C. These downgrades did not have a material effect on our financial condition, results of operations, liquidity or capital resources.Analysis

Operational Risk Management

Overview

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Our exposure to operational risk arises from routine processing errors as well as extraordinary incidents, such as major systems failures. Potential types of loss events related to internal and external operational risk include:

 

Ÿ 

clients,Clients, products and business practices;

 

Ÿ 

execution,Execution, delivery and process management;

 

Ÿ 

businessBusiness disruption and system failures;

 

Ÿ 

employmentEmployment practices and workplace safety;

 

Ÿ 

damageDamage to physical assets;

 

Ÿ 

internalInternal fraud; and

 

Ÿ 

externalExternal fraud.

The firm maintainsWe maintain a comprehensive control framework designed to provide a well-controlled environment to minimize operational risks. The Firmwide Operational Risk Committee, along with the support of regional or entity-specific working groups or committees, provides oversight of the ongoing development and implementation of our operational risk policies and framework. Our Operational Risk Management

department (Operational Risk Management) is a risk management function independent of our revenue-producing units, reports to the firm’sour chief risk officer, and is responsible for developing and implementing policies, methodologies and a formalized framework for operational risk management with the goal of minimizing our exposure to operational risk.

Operational Risk Management Process

Managing operational risk requires timely and accurate information as well as a strong control culture. We seek to manage our operational risk through:

 

Ÿ 

theThe training, supervision and development of our people;

 

Ÿ 

theThe active participation of senior management in identifying and mitigating key operational risks across the firm;

 

Ÿ 

independentIndependent control and support functions that monitor operational risk on a daily basis, and have institutedimplementation of extensive policies and procedures, and implemented controls designed to prevent the occurrence of operational risk events;

 

Ÿ 

proactiveProactive communication between our revenue-producing units and our independent control and support functions; and

 

Ÿ 

aA network of systems throughout the firm to facilitate the collection of data used to analyze and assess our operational risk exposure.

We combine top-down and bottom-up approaches to manage and measure operational risk. From a top-down perspective, the firm’sour senior management assesses firmwide and business level operational risk profiles. From a bottom-up perspective, revenue-producing units and independent control and support functions are responsible for risk management on a day-to-day basis, including identifying, mitigating, and escalating operational risks to senior management.

Our operational risk framework is in part designed to comply with the operational risk measurement rules under Basel 2III and has evolved based on the changing needs of our businesses and regulatory guidance. Our framework includescomprises the following practices:

 

Ÿ 

Risk identification and reporting;

 

Ÿ 

Risk measurement; and

 

Ÿ 

Risk monitoring.

Internal Audit performs aan independent review of our operational risk framework, including our key controls, processes and applications, on an annual basis to ensureassess the effectiveness of our framework.

 

 

104112 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

 

Risk Identification and Reporting

The core of our operational risk management framework is risk identification and reporting. We have a comprehensive data collection process, including firmwide policies and procedures, for operational risk events.

We have established policies that require managers in our revenue-producing units and our independent control and support functions to escalate operational risk events. When operational risk events are identified, our policies require that the events be documented and analyzed to determine whether changes are required in the firm’sour systems and/or processes to further mitigate the risk of future events.

In addition, our firmwide systems capture internal operational risk event data, key metrics such as transaction volumes, and statistical information such as performance trends. We use an internally-developed operational risk management application to aggregate and organize this information. Managers from both revenue-producing units and independent control and support functions analyze the information to evaluate operational risk exposures and identify businesses, activities or products with heightened levels of operational risk. We also provide periodic operational risk reports to senior management, risk committees and the Board periodically.Board.

Risk Measurement

We measure the firm’sour operational risk exposure over a twelve-month time horizon using both statistical modeling and scenario analyses, which involve qualitative assessments of the potential frequency and extent of potential operational risk losses, for each of the firm’sour businesses. Operational risk measurement incorporates qualitative and quantitative assessments of factors including:

 

Ÿ 

internalInternal and external operational risk event data;

 

Ÿ 

assessmentsAssessments of the firm’sour internal controls;

 

Ÿ 

evaluationsEvaluations of the complexity of the firm’sour business activities;

 

Ÿ 

theThe degree of and potential for automation in the firm’sour processes;

 

Ÿ 

newNew product information;

 

Ÿ 

theThe legal and regulatory environment;

 

Ÿ 

changesChanges in the markets for the firm’sour products and services, including the diversity and sophistication of the firm’sour customers and counterparties; and

 

Ÿ 

theThe liquidity of the capital markets and the reliability of the infrastructure that supports the capital markets.

The results from these scenario analyses are used to monitor changes in operational risk and to determine business lines that may have heightened exposure to operational risk. These analyses ultimately are used to determinein the determination of the appropriate level of operational risk capital to hold.

Risk Monitoring

We evaluate changes in the operational risk profile of the firm and its businesses, including changes in business mix or jurisdictions in which the firm operates,we operate, by monitoring thesethe factors noted above at a firmwide entity and business level. The firm hasWe have both detective and preventive internal controls, which are designed to reduce the frequency and severity of operational risk losses and the probability of operational risk events. We monitor the results of assessments and independent internal audits of these internal controls.

Recent Accounting Developments

See Note 3 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about Recent Accounting Developments.

Certain Risk Factors That May Affect Our Businesses

We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal, regulatory and reputational risks. For a discussion of how management seeks to manage some of these risks, see “Overview and Structure of Risk Management.” A summary of the more important factors that could affect our businesses follows. For a further discussion of these and other important factors that could affect our businesses, financial condition, results of operations, cash flows and liquidity, see “Risk Factors” in Part I, Item 1A of thisthe 2014 Form 10-K.

 

Ÿ 

Our businesses have been and may continue to be adversely affected by conditions in the global financial markets and economic conditions generally.

Ÿ

Our businesses and those of our clients are subject to extensive and pervasive regulation around the world.

 

Ÿ 

Our businesses have been and may be adversely affected by declining asset values. This is particularly true for those businesses in which we have net “long” positions, receive fees based on the value of assets managed, or receive or post collateral.

 

Ÿ 

Our businesses have been and may be adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs of obtaining credit.

 

Goldman Sachs 2011 Form 10-K105


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Ÿ 

Our market-making activities have been and may be affected by changes in the levels of market volatility.

 

Goldman Sachs 2014 Form 10-K113


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis

Ÿ 

Our investment banking, client execution and investment management businesses have been adversely affected and may continue to be adversely affected by market uncertainty or lack of confidence among investors and CEOs due to general declines in economic activity and other unfavorable economic, geopolitical or market conditions.

 

Ÿ 

Our investment management business may be affected by the poor investment performance of our investment products.

 

Ÿ 

We may incur losses as a result of ineffective risk management processes and strategies.

 

Ÿ 

Our liquidity, profitability and businesses may be adversely affected by an inability to access the debt capital markets or to sell assets or by a reduction in our credit ratings or by an increase in our credit spreads.

 

Ÿ 

Conflicts of interest are increasing and aA failure to appropriately identify and address potential conflicts of interest could adversely affect our businesses.

 

Ÿ 

Group Inc. is a holding company and is dependent for liquidity on payments from its subsidiaries, many of which are subject to restrictions.

Ÿ

The application of regulatory strategies and requirements in the United States and non-U.S. jurisdictions to facilitate the orderly resolution of large financial institutions could create greater risk of loss for Group Inc.’s security holders.

 

Ÿ 

Our businesses, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold.

 

Ÿ 

Concentration of risk increases the potential for significant losses in our market-making, underwriting, investing and lending activities.

 

Ÿ 

The financial services industry is both highly competitive.competitive and interrelated.

 

Ÿ 

We face enhanced risks as new business initiatives lead us to transact with a broader array of clients and counterparties and expose us to new asset classes and new markets.

 

Ÿ 

Derivative transactions and delayed settlements may expose us to unexpected risk and potential losses.

Ÿ 

Our businesses may be adversely affected if we are unable to hire and retain qualified employees.

 

Ÿ 

Our businesses and those of our clients are subject to extensive and pervasive regulation around the world.

Ÿ

We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.

 

Ÿ 

A failure in our operational systems or infrastructure, or those of third parties, as well as cyber attacks and human error, could impair our liquidity, disrupt our businesses, result in the disclosure of confidential information, damage our reputation and cause losses.

 

Ÿ 

Substantial legal liability or significant regulatory action against us could have material adverse financial effects or cause us significant reputational harm, which in turn could seriously harm our business prospects.

 

Ÿ 

The growth of electronic trading and the introduction of new trading technology may adversely affect our business and may increase competition.

 

Ÿ 

Our commodities activities, particularly our power generation interests and our physical commodities activities, subject us to extensive regulation, and involve certain potential catastrophic events andrisks, including environmental, reputational and other risks that may expose us to significant liabilities and costs.

 

Ÿ 

In conducting our businesses around the world, we are subject to political, economic, legal, operational and other risks that are inherent in operating in many countries.

 

Ÿ 

We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview and Structure of Risk Management” in Part II, Item 7 of thisthe 2014 Form 10-K.

 

 

106114 Goldman Sachs 20112014 Form 10-K 


Item 8.    Financial Statements and Supplementary Data

INDEX

 

   Page No.
 

Management’s Report on Internal Control over Financial Reporting

 116108
 

Report of Independent Registered Public Accounting Firm

 117109
 

Consolidated Financial Statements

 118

Consolidated Statements of Earnings

 118

Consolidated Statements of Comprehensive Income

110119
 

Consolidated Statements of Financial Condition

 120111
 

Consolidated Statements of Changes in Shareholders’ Equity

 121112
 

Consolidated Statements of Cash Flows

 122113
 

Consolidated Statements of Comprehensive Income

114

Notes to Consolidated Financial Statements

 123

Note 1.       Description of Business

 Description of Business123115
 

Note 2.       Basis of Presentation

 Basis of Presentation123115
 

Note 3.       Significant Accounting Policies

 Significant Accounting Policies124116
 

Note 4.

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet

Purchased,at Fair Value

 129120
 

Note 5.       Fair Value Measurements

 Fair Value Measurements130121
 

Note 6.       Cash Instruments

 Cash Instruments132123
 

Note 7.

Derivatives and Hedging Activities

 141130
 

Note 8.       Fair Value Option

 Fair Value Option156143
 

Note 9.       Loans Receivable

 Collateralized Agreements and Financings163151
 

Note 10.     Collateralized Agreements and Financings

 Securitization Activities165154
 

Note 11.     Securitization Activities

 Variable Interest Entities169157
 

Note 12.     Variable Interest Entities

 Other Assets172162
 

Note 13.     Other Assets

 Goodwill and Identifiable Intangible Assets176163
 

Note 14.     Deposits

 Deposits180166
 

Note 15.     Short-Term Borrowings

 Short-Term Borrowings180166
 

Note 16.     Long-Term Borrowings

 Long-Term Borrowings181167
 

Note 17.

Other Liabilities and Accrued Expenses

 183170
 

Note 18.

Commitments, Contingencies and Guarantees

 184171
 

Note 19.     Shareholders’ Equity

 Shareholders’ Equity190177
 

Note 20.

Regulation and Capital Adequacy

 193180
 

Note 21.

Earnings Per Common Share

 203184
 

Note 22.

Transactions with Affiliated Funds

 203185
 

Note 23.

Interest Income and Interest Expense

 204186
 

Note 24.     Income Taxes

 Income Taxes204187
 

Note 25.     Business Segments

 Business Segments207190
 

Note 26.     Credit Concentrations

 Credit Concentrations209194
 

Note 27.     Legal Proceedings

 Legal Proceedings210195
 

Note 28.     Employee Benefit Plans

 Employee Benefit Plans218208
 

Note 29.     Employee Incentive Plans

 Employee Incentive Plans219209
 

Note 30.     Parent Company

221

Supplemental Financial Information

 Parent Company222212

Supplemental Financial Information

Quarterly Results

 222213
 

Common Stock Price Range

 223214
 

Common Stock Price Performance

 223214
 

Selected Financial Data

 224215
 

Statistical Disclosures

 216225

 

 Goldman Sachs 20112014 Form 10-K 107115


Management’s Report on Internal Control over Financial Reporting

 

Management of The Goldman Sachs Group, Inc., together with its consolidated subsidiaries (the firm), is responsible for establishing and maintaining adequate internal control over financial reporting. The firm’s internal control over financial reporting is a process designed under the supervision of the firm’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the firm’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As of December 31, 2011,2014, management conducted an assessment of the firm’s internal control over financial reporting based on the framework established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the firm’s internal control over financial reporting as of December 31, 20112014 was effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurancesassurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the firm; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the firm’s assets that could have a material effect on our financial statements.

The firm’s internal control over financial reporting as of December 31, 20112014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page 109,117, which expresses an unqualified opinion on the effectiveness of the firm’s internal control over financial reporting as of December 31, 2011.2014.

 

 

108116 Goldman Sachs 20112014 Form 10-K 


Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and the Shareholders of

The Goldman Sachs Group, Inc.:

 

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Goldman Sachs Group, Inc. and its subsidiaries (the Company) at December 31, 20112014 and 2010,2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2011,2014, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011,2014, based on criteria established inInternal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing on page 108.116. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York

February 28, 201220, 2015

 

 

 Goldman Sachs 20112014 Form 10-K 109117


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

  Year Ended December 
in millions, except per share amounts  2014     2013     2012  

Revenues

     

Investment banking

  $  6,464     $  6,004     $  4,941  
  

Investment management

  5,748     5,194     4,968  
  

Commissions and fees

  3,316     3,255     3,161  
  

Market making

  8,365     9,368     11,348  
  

Other principal transactions

  6,588     6,993     5,865  

Total non-interest revenues

  30,481     30,814     30,283  
  

 

Interest income

  9,604     10,060     11,381  
  

Interest expense

  5,557     6,668     7,501  

Net interest income

  4,047     3,392     3,880  

Net revenues, including net interest income

  34,528     34,206     34,163  

 

Operating expenses

     

Compensation and benefits

  12,691     12,613     12,944  
  

 

Brokerage, clearing, exchange and distribution fees

  2,501     2,341     2,208  
  

Market development

  549     541     509  
  

Communications and technology

  779     776     782  
  

Depreciation and amortization

  1,337     1,322     1,738  
  

Occupancy

  827     839     875  
  

Professional fees

  902     930     867  
  

Insurance reserves

       176     598  
  

Other expenses

  2,585     2,931     2,435  

Total non-compensation expenses

  9,480     9,856     10,012  

Total operating expenses

  22,171     22,469     22,956  

 

Pre-tax earnings

  12,357     11,737     11,207  
  

Provision for taxes

  3,880     3,697     3,732  

Net earnings

  8,477     8,040     7,475  
  

Preferred stock dividends

  400     314     183  

Net earnings applicable to common shareholders

  $  8,077     $  7,726     $  7,292  

 

Earnings per common share

     

Basic

  $  17.55     $  16.34     $  14.63  
  

Diluted

  17.07     15.46     14.13  
  

 

Average common shares outstanding

     

Basic

  458.9     471.3     496.2  
  

Diluted

  473.2     499.6     516.1  

The accompanying notes are an integral part of these consolidated financial statements.

118Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of EarningsComprehensive Income

 

  Year Ended December 
in millions, except per share amounts 2011     2010     2009 

Revenues

Investment banking

 $4,361      $4,810      $4,984  

Investment management

  4,691       4,669       4,233  

Commissions and fees

  3,773       3,569       3,840  

Market making

  9,287       13,678       22,088  

Other principal transactions

  1,507       6,932       2,621  

Total non-interest revenues

  23,619       33,658       37,766  

Interest income

  13,174       12,309       13,907  

Interest expense

  7,982       6,806       6,500  

Net interest income

  5,192       5,503       7,407  

Net revenues, including net interest income

  28,811       39,161       45,173  

Operating expenses

Compensation and benefits

  12,223       15,376       16,193  

U.K. bank payroll tax

         465         

Brokerage, clearing, exchange and distribution fees

  2,463       2,281       2,298  

Market development

  640       530       342  

Communications and technology

  828       758       709  

Depreciation and amortization

  1,865       1,889       1,734  

Occupancy

  1,030       1,086       950  

Professional fees

  992       927       678  

Insurance reserves

  529       398       334  

Other expenses

  2,072       2,559       2,106  

Total non-compensation expenses

  10,419       10,428       9,151  

Total operating expenses

  22,642       26,269       25,344  

Pre-tax earnings

  6,169       12,892       19,829  

Provision for taxes

  1,727       4,538       6,444  

Net earnings

  4,442       8,354       13,385  

Preferred stock dividends

  1,932       641       1,193  

Net earnings applicable to common shareholders

 $2,510      $7,713      $12,192  

Earnings per common share

         

Basic

 $4.71      $14.15      $23.74  

Diluted

  4.51       13.18       22.13  

Average common shares outstanding

         

Basic

  524.6       542.0       512.3  

Diluted

  556.9       585.3       550.9  
  Year Ended December 
$ in millions  2014     2013     2012  

Net earnings

  $8,477     $8,040     $7,475  
  

Other comprehensive income/(loss) adjustments, net of tax:

     

Currency translation

  (109   (50   (89
  

Pension and postretirement liabilities

  (102   38     168  
  

Available-for-sale securities

       (327   244  
  

Cash flow hedges

  (8   8       

Other comprehensive income/(loss)

  (219   (331   323  

Comprehensive income

  $8,258     $7,709     $7,798  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

110 Goldman Sachs 20112014 Form 10-K 119


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

 

  As of December 
in millions, except share and per share amounts 2011   2010 

Assets

Cash and cash equivalents

 $56,008    $39,788  

Cash and securities segregated for regulatory and other purposes (includes $42,014 and $36,182 at fair value as of December 2011 and December 2010, respectively)

  64,264     53,731  

Collateralized agreements:

Securities purchased under agreements to resell and federal funds sold (includes $187,789 and $188,355 at fair value as of December 2011 and December 2010, respectively)

  187,789     188,355  

Securities borrowed (includes $47,621 and $48,822 at fair value as of December 2011 and December 2010, respectively)

  153,341     166,306  

Receivables from brokers, dealers and clearing organizations

  14,204     10,437  

Receivables from customers and counterparties (includes $9,682 and $7,202 at fair value as of December 2011 and December 2010, respectively)

  60,261     67,703  

Financial instruments owned, at fair value (includes $53,989 and $51,010 pledged as collateral as of December 2011 and December 2010, respectively)

  364,206     356,953  

Other assets

  23,152     28,059  

Total assets

 $923,225    $911,332  

Liabilities and shareholders’ equity

Deposits (includes $4,526 and $1,975 at fair value as of December 2011 and December 2010, respectively)

 $46,109    $38,569  

Collateralized financings:

Securities sold under agreements to repurchase, at fair value

  164,502     162,345  

Securities loaned (includes $107 and $1,514 at fair value as of December 2011 and December 2010, respectively)

  7,182     11,212  

Other secured financings (includes $30,019 and $31,794 at fair value as of December 2011 and December 2010, respectively)

  37,364     38,377  

Payables to brokers, dealers and clearing organizations

  3,667     3,234  

Payables to customers and counterparties

  194,625     187,270  

Financial instruments sold, but not yet purchased, at fair value

  145,013     140,717  

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $17,854 and $22,116 at fair value as of December 2011 and December 2010, respectively)

  49,038     47,842  

Unsecured long-term borrowings (includes $17,162 and $18,171 at fair value as of December 2011 and
December 2010, respectively)

  173,545     174,399  

Other liabilities and accrued expenses (includes $9,486 and $2,972 at fair value as of December 2011 and December 2010, respectively)

  31,801     30,011  

Total liabilities

  852,846     833,976  

Commitments, contingencies and guarantees

Shareholders’ equity

Preferred stock, par value $0.01 per share; aggregate liquidation preference of $3,100 and $8,100 as of December 2011 and December 2010, respectively

  3,100     6,957  

Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 795,555,310 and 770,949,268 shares issued as of December 2011 and December 2010, respectively, and 485,467,565 and 507,530,772 shares outstanding as of December 2011 and December 2010, respectively

  8     8  

Restricted stock units and employee stock options

  5,681     7,706  

Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding

         

Additional paid-in capital

  45,553     42,103  

Retained earnings

  58,834     57,163  

Accumulated other comprehensive loss

  (516   (286

Stock held in treasury, at cost, par value $0.01 per share; 310,087,747 and 263,418,498 shares as of December 2011 and December 2010, respectively

  (42,281   (36,295

Total shareholders’ equity

  70,379     77,356  

Total liabilities and shareholders’ equity

 $923,225    $911,332  
  As of December 
$ in millions, except per share amounts  2014     2013  

Assets

   

Cash and cash equivalents

  $  57,600     $  61,133  
  

Cash and securities segregated for regulatory and other purposes (includes $34,291 and $31,937 at fair value as of December 2014 and December 2013, respectively)

  51,716     49,671  
  

Collateralized agreements:

   

Securities purchased under agreements to resell and federal funds sold (includes $126,036 and $161,297 at fair value as of December 2014 and December 2013, respectively)

  127,938     161,732  
  

Securities borrowed (includes $66,769 and $60,384 at fair value as of December 2014 and December 2013, respectively)

  160,722     164,566  
  

Receivables:

   

Brokers, dealers and clearing organizations

  30,671     23,840  
  

Customers and counterparties (includes $6,944 and $7,416 at fair value as of December 2014 and December 2013, respectively)

  63,808     74,040  
  

Loans receivable

  28,938     14,895  
  

Financial instruments owned, at fair value (includes $64,473 and $62,348 pledged as collateral as of December 2014 and December 2013, respectively)

  312,248     339,121  
  

Other assets (includes $18 at fair value as of December 2013)

  22,599     22,509  

Total assets

  $856,240     $911,507  

 

Liabilities and shareholders’ equity

   

Deposits (includes $13,523 and $7,255 at fair value as of December 2014 and December 2013, respectively)

  $  83,008     $  70,807  
  

Collateralized financings:

   

Securities sold under agreements to repurchase, at fair value

  88,215     164,782  
  

Securities loaned (includes $765 and $973 at fair value as of December 2014 and December 2013, respectively)

  5,570     18,745  
  

Other secured financings (includes $21,450 and $23,591 at fair value as of December 2014 and December 2013, respectively)

  22,809     24,814  
  

Payables:

   

Brokers, dealers and clearing organizations

  6,636     5,349  
  

Customers and counterparties

  206,936     199,416  
  

Financial instruments sold, but not yet purchased, at fair value

  132,083     127,426  
  

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $18,826 and $19,067 at fair value as of December 2014 and December 2013, respectively)

  44,540     44,692  
  

Unsecured long-term borrowings (includes $16,005 and $11,691 at fair value as of December 2014 and December 2013, respectively)

  167,571     160,965  
  

Other liabilities and accrued expenses (includes $831 and $388 at fair value as of December 2014 and December 2013, respectively)

  16,075     16,044  

Total liabilities

  773,443     833,040  
  

 

Commitments, contingencies and guarantees

   

 

Shareholders’ equity

   

Preferred stock, par value $0.01 per share; aggregate liquidation preference of $9,200 and $7,200 as of December 2014 and December 2013, respectively

  9,200     7,200  
  

Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 852,784,764 and 837,219,068 shares issued as of December 2014 and December 2013, respectively, and 430,259,102 and 446,359,012 shares outstanding as of December 2014 and December 2013, respectively

  9     8  
  

Share-based awards

  3,766     3,839  
  

Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding

         
  

Additional paid-in capital

  50,049     48,998  
  

Retained earnings

  78,984     71,961  
  

Accumulated other comprehensive loss

  (743   (524
  

Stock held in treasury, at cost, par value $0.01 per share; 422,525,664 and 390,860,058 shares as of December 2014 and December 2013, respectively

  (58,468   (53,015

Total shareholders’ equity

  82,797     78,467  

Total liabilities and shareholders’ equity

  $856,240     $911,507  

The accompanying notes are an integral part of these consolidated financial statements.

120Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

  Year Ended December 
$ in millions  2014     2013     2012  

Preferred stock

     

Balance, beginning of year

  $   7,200     $   6,200     $   3,100  
  

Issued

  2,000     1,000     3,100  

Balance, end of year

  9,200     7,200     6,200  
  

Common stock

     

Balance, beginning of year

  8     8     8  
  

Issued

  1            

Balance, end of year

  9     8     8  
  

Share-based awards

     

Balance, beginning of year

  3,839     3,298     5,681  
  

Issuance and amortization of share-based awards

  2,079     2,017     1,368  
  

Delivery of common stock underlying share-based awards

  (1,725   (1,378   (3,659
  

Forfeiture of share-based awards

  (92   (79   (90
  

Exercise of share-based awards

  (335   (19   (2

Balance, end of year

  3,766     3,839     3,298  
  

Additional paid-in capital

     

Balance, beginning of year

  48,998     48,030     45,553  
  

Delivery of common stock underlying share-based awards

  2,206     1,483     3,939  
  

Cancellation of share-based awards in satisfaction of withholding tax requirements

  (1,922   (599   (1,437
  

Preferred stock issuance costs

  (20   (9   (13
  

Excess net tax benefit/(provision) related to share-based awards

  788     94     (11
  

Cash settlement of share-based awards

  (1   (1   (1

Balance, end of year

  50,049     48,998     48,030  
  

Retained earnings

     

Balance, beginning of year

  71,961     65,223     58,834  
  

Net earnings

  8,477     8,040     7,475  
  

Dividends and dividend equivalents declared on common stock and share-based awards

  (1,054   (988   (903
  

Dividends declared on preferred stock

  (400   (314   (183

Balance, end of year

  78,984     71,961     65,223  
  

Accumulated other comprehensive loss

     

Balance, beginning of year

  (524   (193   (516
  

Other comprehensive income/(loss)

  (219   (331   323  

Balance, end of year

  (743   (524   (193
  

Stock held in treasury, at cost

     

Balance, beginning of year

  (53,015   (46,850   (42,281
  

Repurchased

  (5,469   (6,175   (4,637
  

Reissued

  49     40     77  
  

Other

  (33   (30   (9

Balance, end of year

  (58,468   (53,015   (46,850

Total shareholders’ equity

  $ 82,797     $ 78,467     $ 75,716  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 Goldman Sachs 20112014 Form 10-K 111121


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ EquityCash Flows

 

  Year Ended December 
$ in millions  2014     2013     2012  

Cash flows from operating activities

     

Net earnings

  $   8,477     $   8,040     $   7,475  
  

Adjustments to reconcile net earnings to net cash provided by/(used for) operating activities

     

Depreciation and amortization

  1,337     1,322     1,738  
  

Deferred income taxes

  495     29     (356
  

Share-based compensation

  2,085     2,015     1,319  
  

Gain on sale of hedge fund administration business

            (494
  

Gain on sale of European insurance business

       (211     
  

Gain on extinguishment of junior subordinated debt

  (289          
  

Changes in operating assets and liabilities

     

Cash and securities segregated for regulatory and other purposes

  (2,046   (143   10,817  
  

Receivables and payables (excluding loans receivable), net

  12,328     (3,682   (20,499
  

Collateralized transactions (excluding other secured financings), net

  (52,104   (51,669   76,558  
  

Financial instruments owned, at fair value

  27,547     51,079     (48,783
  

Financial instruments sold, but not yet purchased, at fair value

  4,642     933     (18,867
  

Other, net

  (10,095   (3,170   3,971  

Net cash provided by/(used for) operating activities

  (7,623   4,543     12,879  
  

Cash flows from investing activities

     

Purchase of property, leasehold improvements and equipment

  (678   (706   (961
  

Proceeds from sales of property, leasehold improvements and equipment

  30     62     49  
  

Business acquisitions, net of cash acquired

  (1,732   (2,274   (593
  

Proceeds from sales of investments

  1,514     2,503     1,195  
  

Purchase of available-for-sale securities

       (738   (5,220
  

Proceeds from sales of available-for-sale securities

       817     4,537  
  

Loans receivable, net

  (14,043   (8,392   (2,741

Net cash used for investing activities

  (14,909   (8,728   (3,734
  

Cash flows from financing activities

     

Unsecured short-term borrowings, net

  1,659     1,336     (1,952
  

Other secured financings (short-term), net

  (837   (7,272   1,540  
  

Proceeds from issuance of other secured financings (long-term)

  6,900     6,604     4,687  
  

Repayment of other secured financings (long-term), including the current portion

  (7,636   (3,630   (11,576
  

Proceeds from issuance of unsecured long-term borrowings

  39,857     30,851     27,734  
  

Repayment of unsecured long-term borrowings, including the current portion

  (28,138   (30,473   (36,435
  

Purchase of trust preferred securities

  (1,611          
  

Derivative contracts with a financing element, net

  643     874     1,696  
  

Deposits, net

  12,201     683     24,015  
  

Common stock repurchased

  (5,469   (6,175   (4,640
  

Dividends and dividend equivalents paid on common stock, preferred stock and share-based awards

  (1,454   (1,302   (1,086
  

Proceeds from issuance of preferred stock, net of issuance costs

  1,980     991     3,087  
  

Proceeds from issuance of common stock, including exercise of share-based awards

  123     65     317  
  

Excess tax benefit related to share-based awards

  782     98     130  
  

Cash settlement of share-based awards

  (1   (1   (1

Net cash provided by/(used for) financing activities

  18,999     (7,351   7,516  

Net increase/(decrease) in cash and cash equivalents

  (3,533)    (11,536   16,661  
  

Cash and cash equivalents, beginning of year

  61,133     72,669     56,008  

Cash and cash equivalents, end of year

  $ 57,600     $ 61,133     $ 72,669  

  Year Ended December 
in millions 2011   2010   2009 

Preferred stock

Balance, beginning of year

 $6,957    $6,957    $16,483  

Accretion

            48  

Repurchased

  (3,857        (9,574

Balance, end of year

  3,100     6,957     6,957  

Common stock

Balance, beginning of year

  8     8     7  

Issued

            1  

Balance, end of year

  8     8     8  

Restricted stock units and employee stock options

Balance, beginning of year

  7,706     6,245     9,463  

Issuance and amortization of restricted stock units and employee stock options

  2,863     4,137     2,064  

Delivery of common stock underlying restricted stock units

  (4,791   (2,521   (5,206

Forfeiture of restricted stock units and employee stock options

  (93   (149   (73

Exercise of employee stock options

  (4   (6   (3

Balance, end of year

  5,681     7,706     6,245  

Additional paid-in capital

Balance, beginning of year

  42,103     39,770     31,070  

Issuance of common stock

  103          5,750  

Repurchase of common stock warrants

            (1,100

Delivery of common stock underlying share-based awards

  5,160     3,067     5,708  

Cancellation of restricted stock units in satisfaction of withholding tax requirements

  (1,911   (972   (863

Excess net tax benefit/(provision) related to share-based awards

  138     239     (793

Cash settlement of share-based compensation

  (40   (1   (2

Balance, end of year

  45,553     42,103     39,770  

Retained earnings

Balance, beginning of year

  57,163     50,252     38,579  

Net earnings

  4,442     8,354     13,385  

Dividends and dividend equivalents declared on common stock and restricted stock units

  (769   (802   (588

Dividends on preferred stock

  (2,002   (641   (1,076

Preferred stock accretion

            (48

Balance, end of year

  58,834     57,163     50,252  

Accumulated other comprehensive income/(loss)

Balance, beginning of year

  (286   (362   (372

Currency translation adjustment, net of tax

  (55   (38   (70

Pension and postretirement liability adjustments, net of tax

  (145   88     (17

Net unrealized gains/(losses) on available-for-sale securities, net of tax

  (30   26     97  

Balance, end of year

  (516   (286   (362

Stock held in treasury, at cost

Balance, beginning of year

  (36,295   (32,156   (32,176

Repurchased

  (6,051   (4,185)    (2) 1 

Reissued

  65     46     22  

Balance, end of year

  (42,281   (36,295   (32,156

Total shareholders’ equity

 $70,379    $77,356    $70,714  

1.

Relates primarily to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business and shares withheld to satisfy withholding tax requirements.

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $6.43 billion, $5.69 billion and $9.25 billion for 2014, 2013 and 2012, respectively.

Cash payments for income taxes, net of refunds, were $3.05 billion, $4.07 billion and $1.88 billion for 2014, 2013 and 2012, respectively.

Non-cash activities:

During 2014, the firm exchanged $1.58 billion of Trust Preferred Securities, common beneficial interests and senior guaranteed trust securities held by the firm for $1.87 billion of the firm’s junior subordinated debt held by the issuing trusts. Following the exchange, this junior subordinated debt was extinguished.

During 2014, the firm sold certain consolidated investments and provided seller financing, which resulted in a non-cash increase to loans receivable of $115 million.

During 2012, the firm assumed $77 million of debt in connection with business acquisitions.

The accompanying notes are an integral part of these consolidated financial statements.

 

112122 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

  Year Ended December 
in millions 2011   2010   2009 

Cash flows from operating activities

Net earnings

 $4,442    $8,354    $13,385  

Non-cash items included in net earnings

Depreciation and amortization

  1,869     1,904     1,943  

Deferred income taxes

  726     1,339     (431

Share-based compensation

  2,849     4,035     2,009  

Changes in operating assets and liabilities

Cash and securities segregated for regulatory and other purposes

  (10,532   (17,094   76,531  

Net receivables from brokers, dealers and clearing organizations

  (3,780   201     6,265  

Net payables to customers and counterparties

  13,027     (5,437   (47,414

Securities borrowed, net of securities loaned

  8,940     19,638     7,033  

Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold

  122     (10,092   (146,807

Financial instruments owned, at fair value

  5,085     (9,231   186,295  

Financial instruments sold, but not yet purchased, at fair value

  4,243     11,602     (57,010

Other, net

  (5,346   (11,376   7,076  

Net cash provided by/(used for) operating activities

  21,645     (6,157   48,875  

Cash flows from investing activities

Purchase of property, leasehold improvements and equipment

  (1,184   (1,227   (1,556

Proceeds from sales of property, leasehold improvements and equipment

  78     72     82  

Business acquisitions, net of cash acquired

  (431   (804   (221

Proceeds from sales of investments

  2,645     1,371     303  

Purchase of available-for-sale securities

  (2,752   (1,885   (2,722

Proceeds from sales of available-for-sale securities

  3,129     2,288     2,553  

Net cash provided by/(used for) investing activities

  1,485     (185   (1,561

Cash flows from financing activities

Unsecured short-term borrowings, net

  (3,780   1,196     (9,790

Other secured financings (short-term), net

  (1,195   12,689     (10,451

Proceeds from issuance of other secured financings (long-term)

  9,809     5,500     4,767  

Repayment of other secured financings (long-term), including the current portion

  (8,878   (4,849   (6,667

Proceeds from issuance of unsecured long-term borrowings

  29,169     20,231     25,363  

Repayment of unsecured long-term borrowings, including the current portion

  (29,187   (22,607   (29,018

Repurchase of common stock warrants

            (1,100

Derivative contracts with a financing element, net

  1,602     1,222     2,168  

Deposits, net

  7,540     (849   7,288  

Preferred stock repurchased

  (3,857        (9,574

Common stock repurchased

  (6,048   (4,183   (2

Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units

  (2,771   (1,443   (2,205

Proceeds from issuance of common stock, including stock option exercises

  368     581     6,260  

Excess tax benefit related to share-based compensation

  358     352     135  

Cash settlement of share-based compensation

  (40   (1   (2

Net cash provided by/(used for) financing activities

  (6,910   7,839     (22,828

Net increase in cash and cash equivalents

  16,220     1,497     24,486  

Cash and cash equivalents, beginning of year

  39,788     38,291     13,805  

Cash and cash equivalents, end of year

 $56,008    $39,788    $38,291  

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $8.05 billion, $6.74 billion and $7.32 billion for the years ended December 2011, December 2010 and December 2009, respectively.

Cash payments for income taxes, net of refunds, were $1.78 billion, $4.48 billion and $4.78 billion for the years ended December 2011, December 2010 and December 2009, respectively.

Non-cash activities:

During the year ended December 2011, the firm assumed $2.09 billion of debt and issued $103 million of common stock in connection with the acquisition of Goldman Sachs Australia Pty Ltd (GS Australia), formerly Goldman Sachs & Partners Australia Group Holdings Pty Ltd. During the years ended December 2010 and December 2009, the firm assumed $90 million and $16 million, respectively, of debt in connection with business acquisitions. In addition, in the first quarter of 2010, the firm recorded an increase of approximately $3 billion in both assets (primarily financial instruments owned, at fair value) and liabilities (primarily unsecured short-term borrowings and other liabilities) upon adoption of Accounting Standards Update (ASU) No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”

The accompanying notes are an integral part of these consolidated financial statements.

Goldman Sachs 2011 Form 10-K113


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

  Year Ended December 
in millions 2011   2010   2009 

Net earnings

 $4,442    $8,354    $13,385  

Currency translation adjustment, net of tax

  (55   (38   (70

Pension and postretirement liability adjustments, net of tax

  (145   88     (17

Net unrealized gains/(losses) on available-for-sale securities, net of tax

  (30   26     97  

Comprehensive income

 $4,212    $8,430    $13,395  

The accompanying notes are an integral part of these consolidated financial statements.

114Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Description of Business

Note 1.

Description of Business

The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

The firm reports its activities in the following four business segments:

Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management, restructurings and spin-offs, and debt and equity underwriting of public offerings and private placements, including local and cross-border transactions, as well as derivative transactions directly related to these activities.

Institutional Client Services

The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporates,corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other prime brokerage services to institutional clients.

Investing & Lending

The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, some of which are consolidated, directly and indirectly through funds that the firm manages, in debt securities and loans, public and private equity securities, and real estate consolidated investment entities and power generation facilities.entities.

Investment Management

The firm provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. The firm also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.

Basis of Presentation

Note 2.

Basis of Presentation

These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.

All references to 2011, 20102014, 2013 and 20092012 refer to the firm’s years ended, or the dates, as the context requires, December 31, 2011,2014, December 31, 20102013 and December 31, 2009,2012, respectively. In connection with becoming a bank holding company in 2008, the firm was required to change its fiscal year-end from November to December. The beginning of the year ended December 2009 is December 27, 2008. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

 

 

 Goldman Sachs 20112014 Form 10-K 115123


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Significant Accounting Policies

Note 3.

Significant Accounting Policies

 

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 1112 for policies on consolidation accounting. All other significant accounting policies are either discussed below or included in the following footnotes:

 

Financial Instruments Owned, at Fair Value and

Financial Instruments Sold, But Not Yet Purchased,

at Fair Value

  Note 4  

Fair Value Measurements

  Note 5  

Cash Instruments

  Note 6  

Derivatives and Hedging Activities

  Note 7  

Fair Value Option

  Note 8  

Loans Receivable

Note 9

Collateralized Agreements and Financings

  Note 910  

Securitization Activities

  Note 1011  

Variable Interest Entities

  Note 1112  

Other Assets,

Note 12

including Goodwill and

Identifiable Intangible Assets

  Note 13  

Deposits

  Note 14  

Short-Term Borrowings

  Note 15  

Long-Term Borrowings

  Note 16  

Other Liabilities and Accrued Expenses

  Note 17  

Commitments, Contingencies and Guarantees

  Note 18  

Shareholders’ Equity

  Note 19  

Regulation and Capital Adequacy

  Note 20  

Earnings Per Common Share

  Note 21  

Transactions with Affiliated Funds

  Note 22  

Interest Income and Interest Expense

  Note 23  

Income Taxes

  Note 24  

Business Segments

  Note 25  

Credit Concentrations

  Note 26  

Legal Proceedings

  Note 27  

Employee Benefit Plans

  Note 28  

Employee Incentive Plans

  Note 29  

Parent Company

  Note 30  

Consolidation

The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

Voting Interest Entities.Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a majority voting interest in a voting interest entity, the entity is consolidated.

Variable Interest Entities.A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 1112 for further information about VIEs.

Equity-Method InvestmentsInvestments.. When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

116Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In general, the firm accounts for investments acquired subsequent to November 24, 2006, whenafter the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 1213 for further information about equity-method investments.

124Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Investment Funds. The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are included in “Financial instruments owned, at fair value.” See Notes 6, 18 and 22 for further information about investments in funds.

Use of Estimates

Preparation of these consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, and the provisionprovisions for losses that may arise from litigation, regulatory proceedings and tax audits. These estimates and assumptions are based on the best available information but actual results could be materially different.

Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value.Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

Investment Banking.Banking. Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.

Investment Management.The firm earns management fees and incentive fees for investment management services. Management fees for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of month-end net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or commitments and are received quarterly, semi-annually or annually, depending on the fund. All management fees are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund’s or separately managed account’s return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in “Investment management” revenues.

The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds. These payments are computed based on either a percentage of the management fee or the investment fund’s net asset value. Where the firm is principal to the arrangement, such costs are recorded on a gross basis and included in “Brokerage, clearing, exchange and distribution fees,” and where the firm is agent to the arrangement, such costs are recorded on a net basis in “Investment management” revenues.

Goldman Sachs 2014 Form 10-K125


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Commissions and Fees.The firm earns “Commissions and fees” from executing and clearing client transactions on stock, options and futures markets.markets, as well as over-the-counter (OTC) transactions. Commissions and fees are recognized on the day the trade is executed.

Goldman Sachs 2011 Form 10-K117


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Transfers of Assets

Transfers of assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of assets accounted for as sales, any related gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred assets are measured at fair value. For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 910 for further information about transfers of assets accounted for as collateralized financings and Note 1011 for further information about transfers of assets accounted for as sales.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of December 2014 and December 2013, “Cash and cash equivalents” included $5.79 billion and $4.14 billion, respectively, of cash and due from banks, and $51.81 billion and $56.99 billion, respectively, of interest-bearing deposits with banks.

Receivables from Customers and Counterparties

Receivables from customers and counterparties generally relate to collateralized transactions. Such receivables are primarily comprised of customer margin loans, certain transfers of assets accounted for as secured loans rather than purchases at fair value and collateral posted in connection with certain derivative transactions. Certain of the firm’s receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in “Market making” revenues. See Note 8 for further information about receivables from customers and counterparties accounted for at fair value under the fair values of these receivables. value option.

Receivables from customers and counterparties not accounted for at fair value are accounted for at amortized cost net of estimated uncollectible amounts, which generally approximates fair value. While these items are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these items been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of December 2014 and December 2013. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.”

Insurance ActivitiesReceivables from and Payables to Brokers, Dealers and Clearing Organizations

Certain of the firm’s insuranceReceivables from and reinsurance contractspayables to brokers, dealers and clearing organizations are accounted for at cost plus accrued interest, which generally approximates fair value. While these receivables and payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option with changes inor at fair value in accordance with other U.S. GAAP and therefore are not included in “Market making” revenues. See Note 8the firm’s fair value hierarchy in Notes 6 through 8. Had these receivables and payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of December 2014 and December 2013.

Payables to Customers and Counterparties

Payables to customers and counterparties primarily consist of customer credit balances related to the firm’s prime brokerage activities. Payables to customers and counterparties are accounted for further information about theat cost plus accrued interest, which generally approximates fair values ofvalue. While these insurance and reinsurance contracts.

Revenues from variable annuity and life insurance and reinsurance contractspayables are carried at amounts that approximate fair value, they are not accounted for at fair value generally consistunder the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of fees assessedDecember 2014 and December 2013. Interest on contract holder account balances for mortality charges, policy administration feespayables to customers and surrender charges. These revenues arecounterparties is recognized in earnings over the periodlife of the transaction and included in “Interest expense.”

126Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Offsetting Assets and Liabilities

To reduce credit exposures on derivatives and securities financing transactions, the firm may enter into master netting agreements or similar arrangements (collectively, netting agreements) with counterparties that servicespermit it to offset receivables and payables with such counterparties. A netting agreement is a contract with a counterparty that permits net settlement of multiple transactions with that counterparty, including upon the exercise of termination rights by a non-defaulting party. Upon exercise of such termination rights, all transactions governed by the netting agreement are providedterminated and a net settlement amount is calculated. In addition, the firm receives and posts cash and securities collateral with respect to its derivatives and securities financing transactions, subject to the terms of the related credit support agreements or similar arrangements (collectively, credit support agreements). An enforceable credit support agreement grants the non-defaulting party exercising termination rights the right to liquidate the collateral and apply the proceeds to any amounts owed. In order to assess enforceability of the firm’s right of setoff under netting and credit support agreements, the firm evaluates various factors including applicable bankruptcy laws, local statutes and regulatory provisions in the jurisdiction of the parties to the agreement.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) in the consolidated statements of financial condition when a legal right of setoff exists under an enforceable netting agreement. Resale and repurchase agreements and securities borrowed and loaned transactions with the same term and currency are presented on a net-by-counterparty basis in the consolidated statements of financial condition when such transactions meet certain settlement criteria and are included in “Market making” revenues. Changes in reserves, including interest creditedsubject to policyholder account balances,netting agreements.

In the consolidated statements of financial condition, derivatives are recognized in “Insurance reserves.”

Premiums earned for underwriting property catastrophe reinsurance are recognized in earnings over the coverage period,reported net of premiums ceded forcash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the costconsolidated statements of reinsurance,financial condition, resale and repurchase agreements, and securities borrowed and loaned, are included in “Market making” revenues. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported are included in “Insurance reserves.”net of the related cash and securities received or posted as collateral. See Note 10 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 10 for further information about offsetting.

Foreign Currency Translation

Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the consolidated statements of comprehensive income.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of December 2011 and December 2010, “Cash and cash equivalents” included $7.95 billion and $5.75 billion, respectively, of cash and due from banks, and $48.05 billion and $34.04 billion, respectively, of interest-bearing deposits with banks.

118Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Recent Accounting Developments

Improving Disclosures about Fair Value Measurements (FASB Accounting Standards Codification (ASC) 820)Investment Companies (ASC 946).In January 2010,June 2013, the FASB issued ASU No. 2010-06, “Fair Value Measurements2013-08, “Financial Services — Investment Companies (Topic 946) — Amendments to the Scope, Measurement, and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.Disclosure Requirements.” ASU No. 2010-062013-08 clarifies the approach to be used for determining whether an entity is an investment company and provides amendednew measurement and disclosure requirements related to fair value measurements. Certain of these disclosure requirements becamerequirements. ASU No. 2013-08 was effective for the firm beginninginterim and annual reporting periods in the first quarterfiscal years that began after December 15, 2013. Adoption of 2010, while others became effective for the firm beginning in the first quarter of 2011. Since these amended principles require only additional disclosures concerning fair value measurements, adoptionASU No. 2013-08 on January 1, 2014 did not affect the firm’s financial condition, results of operations, or cash flows.

ReconsiderationInclusion of the Fed Funds Effective ControlSwap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Repurchase AgreementsHedge Accounting Purposes (ASC 860)815).. In April 2011,July 2013, the FASB issued ASU No. 2011-03, “Transfers2013-10, “Derivatives and ServicingHedging (Topic 860)815) — ReconsiderationInclusion of the Fed Funds Effective ControlSwap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Repurchase Agreements.Hedge Accounting Purposes.” ASU No. 2011-03 changes2013-10 permits the assessmentuse of effective control by removing (i) the criterion that requiresFed Funds Effective Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes. The ASU also removes the transferor to have the ability to repurchase or redeem financial assetsrestriction on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion.using different benchmark rates for similar hedges. ASU No. 2011-03 is2013-10 was effective for periods beginning after December 15, 2011. The adoption of ASU No. 2011-03 will not affect the firm’s financial condition, results of operationsqualifying new or cash flows.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASC 820).In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. Adoption of ASU No. 2011-04 will not materially affect the firm’s financial condition, results of operations or cash flows.

Testing Goodwill for Impairment (ASC 350). In September 2011, the FASB issued ASU No. 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment.” ASU No. 2011-08 simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative, two-step goodwill impairment test. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The firm adopted these amended principles in conjunction with its goodwill impairment test performed in the fourth quarter of 2011. The adoption of ASU No. 2011-08 did not affect the firm’s financial condition, results of operations or cash flows.

Derecognition of in Substance Real Estate (ASC 360). In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant, and Equipment (Topic 360) — Derecognition of in Substance Real Estate — a Scope Clarification.” ASU No. 2011-10 clarifies that in order to deconsolidate a subsidiary (that is in substance real estate) as a result of a parent no longer controlling the subsidiary due to a default on the subsidiary’s nonrecourse debt, the parent also must satisfy the sale criteria in ASC 360-20, “Property, Plant, and Equipment — Real Estate Sales.” The ASU is effective for fiscal years beginningredesignated hedging relationships entered into on or after June 15, 2012. The firm will apply the provisions of the ASU to such events occurring on or after January 1, 2013. Adoption is not expected to materially affect the firm’s financial condition, results of operations or cash flows.

Disclosures about Offsetting Assets and Liabilities (ASC 210).In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 will require disclosure of the effect or potential effect of offsetting arrangements on the firm’s financial position as well as enhanced disclosure of the rights of setoff associated with the firm’s recognized assets and recognized liabilities. ASU No. 2011-11 is effective for annual reporting periods beginning on or after January 1,July 17, 2013 and interim periods within those annual periods. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption willdid not materially affect the firm’s financial condition, results of operations, or cash flows.

 

 

 Goldman Sachs 20112014 Form 10-K 119127


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The ASU requires expanded disclosures for discontinued operations and disposals of individually significant components of an entity that do not qualify for discontinued operations reporting. The ASU is effective for disposals and components classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted. The firm early adopted ASU No. 2014-08 in 2014 and adoption did not materially affect the firm’s financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers (ASC 606).In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The firm is still evaluating the effect of the ASU on its financial condition, results of operations, and cash flows.

Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASC 810).In August 2014, the FASB issued ASU No. 2014-13, “Consolidation (Topic 810) — Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (CFE).” ASU No. 2014-13 provides an alternative to reflect changes in the fair value of the financial assets and the financial liabilities of the CFE by measuring either the fair value of the assets or liabilities, whichever is more observable. ASU No. 2014-13 provides new disclosure requirements for those electing this approach, and is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. Adoption of ASU No. 2014-13 will not materially affect the firm’s financial condition, results of operations, or cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASC 860). In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860) — Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 changes the accounting for repurchase- and resale-to-maturity agreements by requiring that such agreements be recognized as financing arrangements, and requires that a transfer of a financial asset and a repurchase agreement entered into contemporaneously be accounted for separately. ASU No. 2014-11 also requires additional disclosures about certain transferred financial assets accounted for as sales and certain securities financing transactions. The accounting changes and additional disclosures about certain transferred financial assets accounted for as sales are effective for the first interim and annual reporting periods beginning after December 15, 2014. The additional disclosures for securities financing transactions are required for annual reporting periods beginning after December 15, 2014 and for interim reporting periods beginning after March 15, 2015. Adoption of the accounting changes in ASU No. 2014-11 on January 1, 2015 did not materially affect the firm’s financial condition, results of operations, or cash flows.

Amendments to the Consolidation Analysis (ASC 810). In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) — Amendments to the Consolidation Analysis.” ASU No. 2015-02 eliminates the deferral of the requirements of ASU No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” for certain interests in investment funds and provides a scope exception from Topic 810 for certain investments in money market funds. The ASU also makes several modifications to the consolidation guidance for VIEs and general partners’ investments in limited partnerships, as well as modifications to the evaluation of whether limited partnerships are VIEs or voting interest entities. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption is permitted. Adoption of ASU No. 2015-02 is not expected to materially affect the firm’s financial condition, results of operations, or cash flows.

128Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

Note 4.

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

Note 4.

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

 

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about other financial assets and

financial liabilities accounted for at fair value primarily under the fair value option. The table below presents the firm’s financial instruments owned, at fair value, including those pledged as collateral, and

financial instruments sold, but not yet purchased, at fair value. Financial instruments owned, at fair value included $4.86 billion and $3.67 billion as of December 2011 and December 2010, respectively, of securities accounted for as available-for-sale, substantially all of which are held in the firm’s insurance subsidiaries.

 

 

 As of December 2011   As of December 2010  As of December 2014   As of December 2013 
in millions Financial
Instruments
Owned
   

Financial
Instruments
Sold, But

Not Yet
Purchased

    Financial
Instruments
Owned
 

Financial
Instruments
Sold, But

Not Yet
Purchased

 
$ in millions  
 
 
Financial
Instruments
Owned
  
  
  
   
 
 
 
 
Financial
Instruments
Sold, But
Not Yet
Purchased
  
  
  
  
  
  
 
 
Financial
Instruments
Owned
  
  
  
   
 
 
 
 
Financial
Instruments
Sold, But
Not Yet
Purchased
  
  
  
  
  

Commercial paper, certificates of deposit, time deposits and other money market instruments

 $13,440    $   $11,262 3  $    $    3,654     $            —     $    8,608     $            —  
 

U.S. government and federal agency obligations

  87,040     21,006    84,928    23,264    48,002     12,762     71,072     20,920  

Non-U.S. government obligations

  49,205     34,886    40,675    29,009  

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

  6,699     27    7,510    5  
 

Non-U.S. government and agency obligations

  37,059     20,500     40,944     26,999  
 

Mortgage and other asset-backed loans and securities:

       

Loans and securities backed by commercial real estate

  6,582 1    1     6,596 1    1  
 

Loans and securities backed by residential real estate

  7,592     3    9,532    6    11,717 2         9,025 2    2  
 

Bank loans and bridge loans

  19,745     2,756 2   18,039    1,487 2   15,613     464 4    17,400     925 4 
 

Corporate debt securities

  22,131     6,553    24,719    7,219    21,603     5,800     17,412     5,253  
 

State and municipal obligations

  3,089     3    2,792        1,203          1,476     51  
 

Other debt obligations

  4,362         3,232        3,257 3    2     3,129 3    4  
 

Equities and convertible debentures

  65,113     21,326    67,833    24,988    96,442     28,314     101,024     22,583  
 

Commodities

  5,762         13,138    9    3,846     1,224    4,556     966  

Derivatives 1

  80,028     58,453    73,293    54,730  

Subtotal

  248,978     69,067     281,242     77,704  
 

Derivatives

  63,270     63,016    57,879     49,722  

Total

 $364,206    $145,013   $356,953   $140,717    $312,248     $132,083    $339,121     $127,426  

 

1.

NetIncludes $4.41 billion and $3.75 billion of cash collateral received or posted under credit support agreementsloans backed by commercial real estate as of December 2014 and reported on a net-by-counterparty basis when a legal right of setoff exists under an enforceable netting agreement.December 2013, respectively.

 

2.

Includes the fair value$6.43 billion and $4.17 billion of unfunded commitments to extend credit. The fair valueloans backed by residential real estate as of partially funded commitments is primarily included in “Financial instruments owned, at fair value.”December 2014 and December 2013, respectively.

 

3.

Includes $4.06 billion$618 million and $681 million of loans backed by consumer loans and other assets as of December 20102014 and December 2013, respectively.

4.

Primarily relates to the fair value of money market instruments held by William Street Funding Corporation (Funding Corp.) to supportunfunded lending commitments for which the William Street credit extension program. See Note 18 for further information about the William Street credit extension program.fair value option was elected.

 

120 Goldman Sachs 20112014 Form 10-K 129


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Gains and Losses from Market Making and Other Principal Transactions

The table below presents “Market making” revenues by major product type, the firm’s “Market making” andas well as “Other principal transactions” revenues. These gains/(losses) are primarily related to the firm’s financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments. These gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.

The gains/(losses) in the table below are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making and client facilitation and investing and lending strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm’s longer-term derivatives across product types are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.

 

$ in millions

 

Product Type

 Year Ended December 
  2014    2013     2012  

Interest rates

  $ (5,316) 2   $     930     $  4,445  
  

Credit

  2,982    1,845     4,263  
  

Currencies

  6,566    2,446     (1,001
  

Equities

  2,683    2,655     2,482  
  

Commodities

  1,450    902     492  
  

Other

      590 3    667 4 

Market making

  8,365    9,368     11,348  

Other principal transactions 1

  6,588    6,993     5,865  

Total

  $14,953    $16,361     $17,213  

 

  Year Ended December 
in millions 2011   2010   2009 

Interest rates

 $1,557    $(2,042  $6,540  

Credit

  2,715     8,679     6,691  

Currencies

  901     3,219     (817

Equities

  2,788     6,862     6,128  

Commodities

  1,588     1,567     4,591  

Other

  1,245     2,325     1,576  

Total

 $10,794    $20,610    $24,709  
1.

Other principal transactions are included in the firm’s Investing & Lending segment. See Note 25 for net revenues, including net interest income, by product type for Investing & Lending, as well as the amount of net interest income included in Investing & Lending. The “Other” category in Note 25 relates to the firm’s consolidated investments, and primarily includes commodities and real estate-related net revenues.

 

Fair Value Measurements
2.

Includes a gain of $289 million ($270 million of which was recorded at extinguishment in the third quarter) related to the extinguishment of certain of the firm’s junior subordinated debt. See Note 16 for further information.

3.

Includes a gain of $211 million on the sale of a majority stake in the firm’s European insurance business.

4.

Includes a gain of $494 million on the sale of the firm’s hedge fund administration business.

Note 5.

Fair Value Measurements

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).

The best evidence of fair value is a quoted price in an active market. If listedquoted prices or quotationsin active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use as inputs market-based or independently sourced parameters as inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commoditiescommodity prices, credit curvesspreads and funding rates.spreads (i.e., the spread, or difference, between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).

U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in the fair value hierarchy is based on the lowest level of input that is significant to its fair value measurement.

130Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The fair value hierarchy is as follows:

Level 1.Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.

Level 2.Inputs to valuation techniques are observable, either directly or indirectly.

Level 3.One or more inputs to valuation techniques are significant and unobservable.

The fair values for substantially all of ourthe firm’s financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence. See Notes 6, 7 and 8 for further information about valuation adjustments.

See Notes 6 and 7through 8 for further information about fair value measurements of cash instruments and derivatives, respectively, included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” and Note 8 for further information about other financial assets and financial liabilities accounted for at fair value under the fair value option.

Goldman Sachs 2011 Form 10-K121


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Financial assets and financial liabilities at fair value are summarized below.

  As of December 
$ in millions 2011  2010 

Total level 1 financial assets

 $136,780   $137,687  

Total level 2 financial assets

  587,416    566,535  

Total level 3 financial assets

  47,937    45,377  

Netting and collateral 1

  (120,821  (112,085

Total financial assets at fair value

 $651,312   $637,514  

Total assets

 $923,225   $911,332  

Total level 3 financial assets as a percentage of Total assets

  5.2  5.0

Total level 3 financial assets as a percentage of Total financial assets at fair value

  7.4  7.1

Total level 3 financial liabilities at fair value

 $25,498   $24,054  

Total financial liabilities at fair value

 $388,669   $381,604  

Total level 3 financial liabilities as a percentage of Total financial liabilities at fair value

  6.6  6.3

1.

Represents the impact on derivatives of cash collateral and counterparty netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

The increase in level 3 financial assets during the year ended December 2011 primarily reflected an increase in private equity investments, principally due to purchases and net transfers from level 2, partially offset by sales. Level 3 bank loans and bridge loans also increased, primarily reflecting purchases, partially offset by sales, settlements and net transfers to level 2.

See Notes 6, 7 and 8 for further information about level 3 cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value primarily under the fair value option respectively, including(including information about significant unrealized gains/(losses)gains and significantlosses related to level 3 financial assets and financial liabilities, and transfers in orand out of level 3.3), respectively.

The table below presents financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP. In the table below, counterparty and cash collateral netting represents the impact on derivatives of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

  As of December 
$ in millions  2014     2013  

Total level 1 financial assets

  $ 140,221     $156,030  
  

Total level 2 financial assets

  468,678     499,480  
  

Total level 3 financial assets

  42,005     40,013  
  

Counterparty and cash collateral netting

  (104,616   (95,350

Total financial assets at fair value

  $ 546,288     $600,173  
  

Total assets 1

  $ 856,240     $911,507  
  

Total level 3 financial assets as a percentage of Total assets

  4.9%     4.4%  
  

Total level 3 financial assets as a percentage of Total financial assets at fair value

  7.7%     6.7%  
  

Total level 1 financial liabilities

  $   59,697     $  68,412  
  

Total level 2 financial liabilities

  253,364     300,583  
  

Total level 3 financial liabilities

  15,904     12,046  
  

Counterparty and cash collateral netting

  (37,267   (25,868

Total financial liabilities at fair value

  $ 291,698     $355,173  
  

Total level 3 financial liabilities as a percentage of Total financial liabilities at fair value

  5.5%     3.4%  

1.

Includes approximately $834 billion and $890 billion as of December 2014 and December 2013, respectively, that is carried at fair value or at amounts that generally approximate fair value.

The table below presents a summary of Total level 3 financial assets. See Notes 6 through 8 for further information about level 3 financial assets.

  

Level 3 Financial Assets

as of December

 
$ in millions  2014      2013  

Cash instruments

  $34,875     $32,639  
  

Derivatives

  7,074     7,076  
  

Other financial assets

  56     298  

Total

  $42,005     $40,013  

Level 3 financial assets as of December 2014 increased compared with December 2013, reflecting an increase in cash instruments. See Note 6 for further information about changes in level 3 cash instruments.

 

 

122 Goldman Sachs 20112014 Form 10-K 131


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Cash Instruments

Note 6.

Cash Instruments

 

Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency obligations, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Cash Instruments

Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities, certain government agency obligations and certain money market instruments. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.

The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.

The fair value of a level 1 instrument is calculated as quantity held multiplied by quoted market price. U.S. GAAP prohibits valuation adjustments being applied to level 1 instruments even in situations where the firm holds a large position and a sale could impact the quoted price.

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, certain non-U.S. government obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, restricted or less liquid publicly listed equities, most state and municipal obligations and certain money market instruments and lending commitments.

Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

Level 3 Cash Instruments

Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of level 3 financial assets.

132Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Valuation Techniques and Significant Inputs

The table below presents the valuation techniques and the nature of significant inputs. These valuation techniques and

significant inputs are generally used to determine the fair values of each classtype of level 3 cash instrument.

 

 

Goldman Sachs 2011 Form 10-K123


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Level 3 Cash InstrumentInstruments  Valuation Techniques and Significant Inputs

 

Loans and securities backed by commercial real estate

 

Ÿ    Collateralized by a single commercial real estate property or a portfolio of properties

 

Ÿ    May include tranches of varying levels of subordination

  

 

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

 

Significant inputs for these valuationsare generally determined based on relative value analyses and include:

 

Ÿ    Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral and the basis, or price difference, to such prices

 

Ÿ   Current    Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds)

 

Ÿ   Market yields    A measure of expected future cash flows in a default scenario (recovery rates) implied by transactionsthe value of similar or related assets

Ÿ   Currentthe underlying collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and multiples. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments

 

Ÿ   Capitalization rates and multiples

Ÿ   Amount and timing    Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds)

 

 

Loans and securities backed by residential real estate

 

Ÿ    Collateralized by portfolios of residential real estate

 

Ÿ    May include tranches of varying levels of subordination

  

 

Valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof.techniques.

 

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices such as the ABX (an index that tracks the performance of subprime residential mortgage bonds).profiles. Significant inputs include:

 

Ÿ   Home price projections, residential property liquidation timelines and related costs

Ÿ   Underlying loan prepayment, default and cumulative loss expectations

Ÿ    Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral

 

Ÿ    Market yields implied by transactions of similar or related assets

Ÿ    Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines and related costs

Ÿ    Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines

 

 

Bank loans and bridge loans

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

Ÿ    Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively)

Ÿ    Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation

Ÿ    Duration

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

  

 

Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

 

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying credit riskinstrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

 

Ÿ   Amount and timing of expected future cash flows

Ÿ   Current    Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX, LCDX and MCDX (indices(an index that tracktracks the performance of corporate credit, loans and municipal obligations, respectively)obligations)

 

Ÿ   Market yields implied by transactions of similar or related assets

Ÿ    Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation

Ÿ    Duration

 

 

Equities and convertible debentures

Ÿ   Private (including private equity investments and investments in real estate entities)

  

 

Recent third-party investmentscompleted or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:appropriate:

 

Ÿ    Industry multiples (primarily EBITDA multiples) and public comparables

Ÿ    Transactions in similar instruments

 

Ÿ    Discounted cash flow techniques

 

Ÿ    Third-party appraisals

 

Ÿ   Industry multiples and public comparables    Net asset value per share (NAV)

 

Evidence includes recent or pending reorganizations (e.g., merger proposals, tender offers, debt restructurings) and significantThe firm also considers changes in financial metrics, such as:

Ÿ   Currentthe outlook for the relevant industry and financial performance of the issuer as compared to projected performanceperformance. Significant inputs include:

 

Ÿ    Market and transaction multiples

   CapitalizationŸ   ��Discount rates, long-term growth rates, earnings compound annual growth rates and multiplescapitalization rates

 

Ÿ   Market    For equity instruments with debt-like features: market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration

 

 

124 Goldman Sachs 20112014 Form 10-K 133


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Significant Unobservable Inputs

The tables below present the ranges of significant unobservable inputs used to value the firm’s level 3 cash instruments. These ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument. Weighted averages in the tables below are calculated by weighting each input by the relative fair value of the respective financial instruments. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when

calculating the fair value of any one cash instrument. For example, the highest multiple presented in the tables below for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 cash instruments.

Level 3 Cash Instruments

Level 3 Assets

as of December 2014     

($ in millions)

Valuation Techniques and

Significant Unobservable Inputs   

Range of Significant Unobservable Inputs (Weighted Average)

as of December 2014

Loans and securities backed by commercial real estate

Ÿ    Collateralized by a single commercial real estate property or a portfolio of properties

Ÿ    May include tranches of varying levels of subordination

$3,394

Discounted cash flows:

Ÿ    Yield

3.2% to 20.0% (10.5%)

Ÿ    Recovery rate

24.9% to 100.0% (68.3%)

Ÿ    Duration (years)

0.3 to 4.7 (2.0)

Ÿ    Basis

(8) points to 13 points (2 points)

Loans and securities backed by residential real estate

Ÿ    Collateralized by portfolios of residential real estate

Ÿ    May include tranches of varying levels of subordination

$2,545

Discounted cash flows:

Ÿ    Yield

1.9% to 17.5% (7.6%)

Ÿ    Cumulative loss rate

0.0% to 95.1% (24.4%)

Ÿ    Duration (years)

0.5 to 13.0 (4.3)

Bank loans and bridge loans

$7,346

Discounted cash flows:

Ÿ    Yield

1.4% to 29.5% (8.7%)

Ÿ    Recovery rate

26.6% to 92.5% (60.6%)

Ÿ    Duration (years)

0.3 to 7.8 (2.5)

Non-U.S. government and agency obligations

Corporate debt securities

State and municipal obligations

Other debt obligations

$4,931

Discounted cash flows:

Ÿ    Yield

0.9% to 24.4% (9.2%)

Ÿ    Recovery rate

0.0% to 71.9% (59.2%)

Ÿ    Duration (years)

0.5 to 19.6 (3.7)

Equities and convertible debentures (including private equity investments and investments in real estate entities)

$16,659 1

Comparable multiples:

Ÿ    Multiples

0.8x to 16.6x (6.5x)

Discounted cash flows:

Ÿ    Discount rate/yield

3.7% to 30.0% (14.4%)

Ÿ    Long-term growth rate/compound annual growth rate

1.0% to 10.0% (6.0%)

Ÿ    Capitalization rate

3.8% to 13.0% (7.6%)

1.

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

134Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Level 3 Cash Instruments

Level 3 Assets

as of December 2013     

($ in millions)

Valuation Techniques and

Significant Unobservable Inputs   

Range of Significant Unobservable Inputs (Weighted Average)

as of December 2013

Loans and securities backed by commercial real estate

Ÿ    Collateralized by a single commercial real estate property or a portfolio of properties

Ÿ    May include tranches of varying levels of subordination

$2,692

Discounted cash flows:

Ÿ    Yield

2.7% to 29.1% (10.1%)

Ÿ    Recovery rate

26.2% to 88.1% (74.4%)

Ÿ    Duration (years)

0.6 to 5.7 (2.0)

Ÿ    Basis

(9) points to 20 points (5 points)

Loans and securities backed by residential real estate

Ÿ    Collateralized by portfolios of residential real estate

Ÿ    May include tranches of varying levels of subordination

$1,961

Discounted cash flows:

Ÿ    Yield

2.6% to 25.8% (10.1%)

Ÿ    Cumulative loss rate

9.8% to 56.6% (24.9%)

Ÿ    Duration (years)

1.4 to 16.7 (3.6)

Bank loans and bridge loans

$9,324

Discounted cash flows:

Ÿ    Yield

1.0% to 39.6% (9.3%)

Ÿ    Recovery rate

40.0% to 85.0% (54.9%)

Ÿ    Duration (years)

0.5 to 5.3 (2.1)

Non-U.S. government and agency obligations

Corporate debt securities

State and municipal obligations

Other debt obligations

$3,977

Discounted cash flows:

Ÿ    Yield

1.5% to 40.2% (8.9%)

Ÿ    Recovery rate

0.0% to 70.0% (61.9%)

Ÿ    Duration (years)

0.6 to 16.1 (4.2)

Equities and convertible debentures (including private equity investments and investments in real estate entities)

$14,685 1

Comparable multiples:

Ÿ    Multiples

0.6x to 18.8x (6.9x)

Discounted cash flows:

Ÿ    Discount rate/yield

6.0% to 29.1% (14.6%)

Ÿ    Long-term  growth rate/
compound annual growth rate

1.0% to 19.0% (8.1%)

Ÿ    Capitalization rate

4.6% to 11.3% (7.1%)

1.

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm’s level 3 cash instruments would result in a lower fair value measurement, while increases in recovery rate, basis, multiples, long-term growth rate or compound annual

growth rate would result in a higher fair value measurement. Due to the distinctive nature of each of the firm’s level 3 cash instruments, the interrelationship of inputs is not necessarily uniform within each product type.

Goldman Sachs 2014 Form 10-K135


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Fair Value of Cash Instruments by Level

The tables below present, by level within the fair value hierarchy, cash instrument assets and liabilities, at fair value. Cash instrument assets and liabilities are included in

“Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

 

 

 Cash Instrument Assets at Fair Value as of December 2011  Cash Instrument Assets at Fair Value as of December 2014 
in millions Level 1     Level 2     Level 3     Total 
$ in millions  Level 1       Level 2       Level 3       Total  

Commercial paper, certificates of deposit, time deposits and other money market instruments

 $3,255      $10,185      $      $13,440    $          —       $  3,654       $       —       $    3,654  
 

U.S. government and federal agency obligations

  29,263       57,777              87,040    18,540       29,462              48,002  

Non-U.S. government obligations

  42,854       6,203       148       49,205  

Mortgage and other asset-backed loans and securities 1:
Loans and securities backed by commercial real estate

         3,353       3,346       6,699  
 

Non-U.S. government and agency obligations

  30,255       6,668       136       37,059  
 

Mortgage and other asset-backed loans and securities:

             

Loans and securities backed by commercial real estate

         3,188       3,394       6,582  
 

Loans and securities backed by residential real estate

         5,883       1,709       7,592           9,172       2,545       11,717  
 

Bank loans and bridge loans

         8,460       11,285       19,745           8,267       7,346       15,613  

Corporate debt securities 2

  133       19,518       2,480       22,131  
 

Corporate debt securities

  249       17,539       3,815       21,603  
 

State and municipal obligations

         2,490       599       3,089           1,093       110       1,203  

Other debt obligations 2

         2,911       1,451       4,362  
 

Other debt obligations

         2,387       870       3,257  
 

Equities and convertible debentures

  39,955 3      11,491 4      13,667 5      65,113    69,711       10,072       16,659 2      96,442  
 

Commodities

         3,846              3,846  

Total 1

  $118,755       $95,348       $34,875       $248,978  
 Cash Instrument Liabilities at Fair Value as of December 2014 
$ in millions  Level 1       Level 2       Level 3       Total  

U.S. government and federal agency obligations

  $  12,746       $       16       $       —       $  12,762  
 

Non-U.S. government and agency obligations

  19,256       1,244              20,500  
 

Mortgage and other asset-backed loans and securities:

             

Loans and securities backed by commercial real estate

         1              1  
 

Bank loans and bridge loans

         286       178       464  
 

Corporate debt securities

         5,741       59       5,800  
 

Other debt obligations

                2       2  
 

Equities and convertible debentures

  27,587       722       5       28,314  
 

Commodities

         5,762              5,762           1,224              1,224  

Total

 $115,460      $134,033      $34,685      $284,178    $  59,589       $  9,234       $     244       $  69,067  
 Cash Instrument Liabilities at Fair Value as of December 2011 
in millions Level 1     Level 2     Level 3     Total 

U.S. government and federal agency obligations

 $20,940      $66      $      $21,006  

Non-U.S. government obligations

  34,339       547              34,886  

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

         27              27  

Loans and securities backed by residential real estate

         3              3  

Bank loans and bridge loans

         1,891       865       2,756  

Corporate debt securities 6

         6,522       31       6,553  

State and municipal obligations

         3              3  

Equities and convertible debentures

  20,069 3      1,248 4      9       21,326  

Total

 $75,348      $10,307      $905      $86,560  

 

1.

Includes $213 million and $595 million of collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) backed by real estate and corporate obligations of $234 million in level 2 and $1.34 billion in level 3, respectively.3.

 

2.

Includes $403 million and $1.19 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

3.

Consists of publicly listed equity securities.

4.

Principally consists of restricted or less liquid publicly listed securities.

5.

Includes $12.07$14.93 billion of private equity investments, $1.10$1.17 billion of investments in real estate investmentsentities and $497$562 million of convertible debentures.

6.

Includes $27 million of CDOs and CLOs backed by corporate obligations in level 3.

 

136 Goldman Sachs 20112014 Form 10-K 125


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 Cash Instrument Assets at Fair Value as of December 2010  Cash Instrument Assets at Fair Value as of December 2013 
in millions Level 1     Level 2     Level 3     Total 
$ in millions  Level 1       Level 2       Level 3       Total  

Commercial paper, certificates of deposit, time deposits and other
money market instruments

 $4,344      $6,918      $      $11,262    $       216       $    8,392       $        —       $    8,608  
 

U.S. government and federal agency obligations

  36,184       48,744              84,928    29,582       41,490              71,072  

Non-U.S. government obligations

  35,504       5,171              40,675  

Mortgage and other asset-backed loans and securities 1:

Loans and securities backed by commercial real estate

         3,534       3,976       7,510  
 

Non-U.S. government and agency obligations

  29,451       11,453       40       40,944  
 

Mortgage and other asset-backed loans and securities:

             

Loans and securities backed by commercial real estate

         3,904       2,692       6,596  
 

Loans and securities backed by residential real estate

         7,031       2,501       9,532           7,064       1,961       9,025  
 

Bank loans and bridge loans

         8,134       9,905       18,039           8,076       9,324       17,400  

Corporate debt securities 2

  108       21,874       2,737       24,719  
 

Corporate debt securities

  240       14,299       2,873       17,412  
 

State and municipal obligations

         2,038       754       2,792           1,219       257       1,476  
 

Other debt obligations

         1,958       1,274       3,232           2,322       807       3,129  
 

Equities and convertible debentures

  41,660  3      15,113  4      11,060 5      67,833    76,945       9,394       14,685 2      101,024  
 

Commodities

         4,556              4,556  

Total 1

  $136,434       $112,169       $32,639       $281,242  
  Cash Instrument Liabilities at Fair Value as of December 2013  
$ in millions  Level 1       Level 2       Level 3       Total  

U.S. government and federal agency obligations

  $  20,871       $         49       $        —       $  20,920  
 

Non-U.S. government and agency obligations

  25,325       1,674              26,999  
 

Mortgage and other asset-backed loans and securities:

             

Loans and securities backed by commercial real estate

                1       1  
 

Loans and securities backed by residential real estate

         2              2  
 

Bank loans and bridge loans

         641       284       925  
 

Corporate debt securities

  10       5,241       2       5,253  
 

State and municipal obligations

         50       1       51  
 

Other debt obligations

         3       1       4  
 

Equities and convertible debentures

  22,107       468       8       22,583  
 

Commodities

         13,138              13,138           966              966  

Total

 $117,800      $133,653      $32,207      $283,660    $  68,313       $    9,094       $     297       $  77,704  
 Cash Instrument Liabilities at Fair Value as of December 2010 
in millions Level 1     Level 2     Level 3     Total 

U.S. government and federal agency obligations

 $23,191      $73      $      $23,264  

Non-U.S. government obligations

  28,168       841              29,009  

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

         5              5  

Loans and securities backed by residential real estate

         6              6  

Bank loans and bridge loans

         1,107       380       1,487  

Corporate debt securities 6

  26       7,133       60       7,219  

Equities and convertible debentures

  24,283 3      699 4      6       24,988  

Commodities

         9              9  

Total

 $75,668      $9,873      $446      $85,987  

 

1.

Includes $212 millionCDOs and $565 million of CDOsCLOs backed by real estate and corporate obligations of $746 million in level 2 and $2.03 billion in level 3, respectively.3.

 

2.

Includes $368 million and $1.07 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

3.

Consists of publicly listed equity securities.

4.

Substantially all consists of restricted or less liquid publicly listed securities.

5.

Includes $10.03$12.82 billion of private equity investments, $874 million$1.37 billion of investments in real estate investmentsentities and $156$491 million of convertible debentures.

Transfers Between Levels of the Fair Value Hierarchy

6.

Includes $35 million of CDOs and CLOs backed by corporate obligations in level 3.

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During 2014, transfers into level 2 from level 1 of cash instruments were $60 million, including $47 million of public equity securities and $13 million of U.S. government and federal agency obligations due to decreased market activity in these instruments. Transfers into level 1 from level 2 of cash instruments were $92 million, reflecting transfers of public equity securities due to increased market activity in these instruments.

During 2013, transfers into level 2 from level 1 of cash instruments were $1 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. Transfers into level 1 from level 2 of cash instruments were $79 million, reflecting transfers of public equity securities, primarily due to increased market activity in these instruments.

See level 3 rollforward below for information about transfers between level 2 and level 3.

 

126 Goldman Sachs 20112014 Form 10-K 137


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Level 3 Rollforward

If a cash instrument asset or liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are reported at the beginning of the reporting period in which they occur.

Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by

gains or losses attributable to level 1 or level 2 cash

instruments and/or level 1, level 2 or level 3 derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

The tables below present changes in fair value for all cash instrument assets and liabilities categorized as level 3 as of the end of the year. Purchases in the tables below include both originations and secondary market purchases.

 

 

  Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2011 
in millions Balance,
beginning
of year
   Net
realized
gains/
(losses)
  

Net unrealized
gains/(losses)
relating to
instruments
still held at

year-end

  Purchases 1  Sales  Settlements  Net
transfers
in and/or
(out) of
level 3
  Balance,
end of
year
 

Non-U.S. government obligations

 $    $25   $(63 $27   $(123 $(8 $290   $148  

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

  3,976     222    80    1,099    (1,124  (831  (76  3,346  

Loans and securities backed by residential real estate

  2,501     253    (81  768    (702  (456  (574  1,709  

Bank loans and bridge loans

  9,905     540    (216  6,725    (2,329  (1,554  (1,786  11,285  

Corporate debt securities

  2,737     391    (132  1,319    (1,137  (697  (1  2,480  

State and municipal obligations

  754     12    (1  448    (591  (13  (10  599  

Other debt obligations

  1,274     124    (17  560    (388  (212  110    1,451  

Equities and convertible debentures

  11,060     240    338    2,731    (1,196  (855  1,349    13,667  

Total

 $32,207    $1,807 2  $(92) 2  $13,677   $(7,590 $(4,626 $(698 $34,685  
  Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2011 
in millions Balance,
beginning
of year
   Net
realized
(gains)/
losses
  Net unrealized
(gains)/losses
relating to
instruments
still held at
year-end
  Purchases  Sales  Settlements  

Net
transfers
in and/or
(out) of

level 3

  Balance,
end of
year
 

Total

 $446    $(27 $218   $(491 $475   $272   $12   $905  

1.

Includes both originations and secondary market purchases.

2.

The aggregate amounts include approximately $(202) million, $623 million and $1.29 billion reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized loss on level 3 cash instrument assets and liabilities of $310 million for the year ended December 2011 primarily consisted of losses on bank loans and bridge loans and corporate debt securities, primarily reflecting the impact of unfavorable credit markets and losses on relationship lending. These losses were partially offset by gains in private equity investments, where prices were generally corroborated through market transactions in similar financial instruments during the year.

Significant transfers in or out of level 3 cash instrument assets during the year ended December 2011 included:

Ÿ

Bank loans and bridge loans: net transfer out of level 3 of $1.79 billion, primarily due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of market transactions in these or similar loans, partially offset by transfers to level 3 of other loans primarily due to reduced transparency of market prices as a result of less market activity in these loans.

Goldman Sachs 2011 Form 10-K127


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ

Equities and convertible debentures: net transfer into level 3 of $1.35 billion, primarily due to transfers to level 3 of certain private equity investments due to reduced transparency of market prices as a result of less market activity in these financial instruments, partially offset by transfers to level 2 of other private equity investments due to improved transparency of market prices as a result of market transactions in these financial instruments.

Ÿ

Loans and securities backed by residential real estate: net transfer out of level 3 of $574 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices used to value these loans, as well as unobservable inputs no longer being significant to the valuation of these loans.

There were no significant transfers in or out of level 3 cash instrument liabilities during the year ended December 2011.

 Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2010  Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2014 
in millions Balance,
beginning
of year
   Net
realized
gains/
(losses)
 

Net unrealized
gains/(losses)
relating to
instruments
still held at

year-end

 Net
purchases,
sales and
settlements
 Net
transfers
in and/or
(out) of
level 3
 Balance,
end of
year
 

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

 $5,794    $239   $108   $(1,335 $(830 $3,976  
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
   
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases     Sales    Settlements    
 
 
Transfers
into
level 3
  
  
  
   
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
year
  
  
  

Non-U.S. government and agency obligations

  $       40     $       7     $       3    $       95     $     (20  $        3    $       8     $       —     $     136  
 

Mortgage and other asset-backed loans and securities:

              

Loans and securities backed by commercial real estate

  2,692     173     64    1,891     (436  (977  176     (189   3,394  
 

Loans and securities backed by residential real estate

  2,070     178    37    163    53    2,501    1,961     123     224    1,008     (363  (497  235     (146   2,545  
 

Bank loans and bridge loans

  9,560     687    482    (735  (89  9,905    9,324     696     (194  3,863     (1,367  (4,673  294     (597   7,346  
 

Corporate debt securities

  2,235     239    348    488    (573  2,737    2,873     252     (9  2,645     (1,031  (926  427     (416   3,815  
 

State and municipal obligations

  1,114     1    (25  (393  57    754    257     4     3    12     (112  (2  25     (77   110  
 

Other debt obligations

  2,235     4    159    (263  (861  1,274    807     24     41    448     (212  (164  21     (95   870  
 

Equities and convertible debentures

  11,871     119    548    (847  (631  11,060    14,685     131     2,557    3,596     (1,902  (1,443  1,300     (2,265   16,659  

Total

 $34,879    $1,467 1  $1,657 1  $(2,922 $(2,874 $32,207    $32,639     $1,410 1    $2,689 1   $13,558     $(5,443  $(8,679  $2,486     $(3,785   $34,875  
 Level 3 Cash Instrument Liabilities at Fair Value for the Year  Ended December 2010  Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2014 
in millions Balance,
beginning
of year
   Net
realized
(gains)/
losses
 

Net unrealized
(gains)/losses
relating to
instruments
still held at

year-end

 Net
purchases,
sales and
settlements
 Net
transfers
in and/or
(out) of
level 3
 Balance,
end of
year
 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
   
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases     Sales    Settlements    
 
 
Transfers
into
level 3
  
  
  
   
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
year
  
  
  

Total

 $572    $5   $(17 $(97 $(17 $446    $     297     $   (12   $       1    $    (223   $    121    $      23    $     49     $     (12   $     244  

 

1.

The aggregate amounts include gains of approximately $836$247 million, $1.03$2.98 billion and $1.26 billion$875 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $2.69 billion (reflecting a $2.69 billion gain on cash instrument assets and liabilities of $1.67 billiona $1 million loss on cash instrument liabilities) for the year ended December 20102014 primarily consisted of unrealizedreflected gains on private equity investments principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during 2014 primarily reflected transfers of certain private equity investments and corporate debt securities from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during 2014 primarily reflected transfers of certain private equity investments, bank loansloan and bridge loans and corporate debt securities where prices were generally corroborated through sales and partial salesto level 2 principally due to increased price transparency as a result of similar assetsmarket evidence, including market transactions in these asset classes during the period.instruments.

Significant transfers in or out of level 3 cash instrument assets during the year ended December 2010 included:

Ÿ

Loans and securities backed by commercial real estate: net transfer out of level 3 of $830 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of partial sales.

Ÿ

Corporate debt securities: net transfer out of level 3 of $573 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE which holds intangible assets.

Ÿ

Other debt obligations: net transfer out of level 3 of $861 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE. The VIE holds real estate assets which are included in “Other assets.”

Ÿ

Equities and convertible debentures: net transfer out of level 3 of $631 million, principally due to transfers to level 2 of certain private equity investments due to improved transparency of market prices as a result of partial sales and initial public offerings.

 

 

128138 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

  Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2013 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
   
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
  
  
  
  
  
  
   Purchases     Sales     Settlements     
 
 
Transfers
into
level 3
  
  
  
   
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
year
  
  
  

Non-U.S. government and agency obligations

  $       26     $       7     $       5     $     12     $     (20   $       —     $      10     $       —     $       40  
  

Mortgage and other asset-backed loans and securities:

                 

Loans and securities backed by commercial real estate

  3,389     206     224     733     (894   (1,055   262     (173   2,692  
  

Loans and securities backed by residential real estate

  1,619     143     150     660     (467   (269   209     (84   1,961  
  

Bank loans and bridge loans

  11,235     529     444     3,725     (2,390   (4,778   942     (383   9,324  
  

Corporate debt securities

  2,821     407     398     1,140     (1,584   (576   404     (137   2,873  
  

State and municipal obligations

  619     6     (2   134     (492   (2   6     (12   257  
  

Other debt obligations

  1,185     47     38     648     (445   (161   14     (519   807  
  

Equities and convertible debentures

  14,855     189     1,709     1,866     (862   (1,610   882     (2,344   14,685  

Total

  $35,749     $1,534 1    $2,966 1    $8,918     $(7,154   $(8,451   $2,729     $(3,652   $32,639  
  Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2013 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
   
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
year-end
  
  
  
  
  
  
   Purchases     Sales     Settlements     
 
 
Transfers
into
level 3
  
  
  
   
 
 
Transfers
out of
level 3
  
  
  
   
 
 
Balance,
end of
year
  
  
  

Total

  $     642     $      (1   $    (64   $  (432   $    269     $        8     $     35     $   (160   $     297  

1.

The aggregate amounts include gains of approximately $1.09 billion, $2.69 billion and $723 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instruments of $3.03 billion (reflecting $2.97 billion on cash instrument assets and $64 million on cash instrument liabilities) for 2013 primarily consisted of gains on private equity investments, principally driven by strong corporate performance, bank loans and bridge loans, primarily due to tighter credit spreads and favorable company-specific events, and corporate debt securities, primarily due to tighter credit spreads.

Transfers into level 3 during 2013 primarily reflected transfers of certain bank loans and bridge loans and private equity investments from level 2, principally due to a lack of market transactions in these instruments.

Transfers out of level 3 during 2013 primarily reflected transfers of certain private equity investments to level 2, principally due to increased transparency of market prices as a result of market transactions in these instruments.

Goldman Sachs 2014 Form 10-K139


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Investments in Funds That Calculate Net Asset

Value Per Share

 

Investments in Funds That Are Calculated Using Net Asset Value Per Share

Cash instruments at fair value include investments in funds that are valuedcalculated based on the net asset value per share (NAV) of the investment fund. The firm uses NAV as its measure of fair value for fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.

The firm’s investments in funds that calculateare calculated using NAV primarily consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm co-invests with third-party investors.

Private equity funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. The private equity, private debtcredit and real estate funds are primarily closed-end funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are

liquidated or distributed.

The firm also invests in hedge funds, primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and it is estimated that substantially allstrategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage. As of December 2014, the firm’s investments in hedge funds primarily include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be received until the underlying assets are liquidated or distributed.

Many of existingthe funds will be liquidated over the next 10 years. The firm continues to manage its existing private equity funds taking into account the transition periods underdescribed above are “covered funds” as defined by the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), although. The Board of Governors of the rules have not yet been finalized.Federal Reserve System (Federal Reserve Board) extended the conformance period through July 2016 for investments in, and relationships with, covered funds that were in place prior to December 31, 2013, and indicated that it intends to further extend the conformance period through July 2017.

The firm’s investments in hedgefirm continues to manage its existing funds, are generally redeemable on a quarterly basis with 91 days’ notice, subject to a maximum redemption level of 25% oftaking into account the firm’s initial investments at any quarter-end. Theextension outlined above. Since March 2012, the firm currently plans to comply with the Volcker Rule by redeeming certainhas redeemed $2.97 billion of its interests in hedge funds.funds, including $762 million during 2014 and $1.15 billion during 2013. In order to be compliant with the Volcker Rule, the firm will be required to reduce most of its interests in the funds in the table below by the prescribed compliance date.

The tabletables below presentspresent the fair value of the firm’s investments in, and unfunded commitments to, funds that calculateare calculated using NAV.

 

  As of December 2011     As of December 2010 
in millions Fair Value of
Investments
     Unfunded
Commitments
      Fair Value of
Investments
     Unfunded
Commitments
 

Private equity funds 1

  $  8,074       $3,514       $  7,911       $  4,816  

Private debt funds 2

  3,596       3,568       4,267       3,721  

Hedge funds 3

  3,165              3,169         

Real estate and other funds 4

  1,531       1,613       1,424       1,931  

Total

  $16,366       $8,695       $16,771       $10,468  
  As of December 2014 
$ in millions  
 
Fair Value of
Investments
  
  
   
 
Unfunded
Commitments
  
  

Private equity funds

  $  6,356     $2,181  
  

Credit funds 1

  1,021     390  
  

Hedge funds

  863       
  

Real estate funds

  1,604     344  

Total

  $  9,844     $2,915  
  As of December 2013 
$ in millions  
 
Fair Value of
Investments
  
  
   
 
Unfunded
Commitments
  
  

Private equity funds

  $  7,446     $2,575  
  

Credit funds 1

  3,624     2,515  
  

Hedge funds

  1,394       
  

Real estate funds

  1,908     471  

Total

  $14,372     $5,561  

 

1.

These fundsThe decreases from December 2013 to December 2014 primarily invest in a broad rangereflect both cash and in-kind distributions received and the related cancellations of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations and growth investments.the firm’s commitments to certain credit funds.

2.

These funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers.

3.

These funds are primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage.

4.

These funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and direct property.

 

140 Goldman Sachs 20112014 Form 10-K 129


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Derivatives and Hedging Activities

Note 7.

Derivatives and Hedging Activities

Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as over-the-counter (OTC)OTC derivatives. Certain of the firm’s OTC derivatives or they may be listedare cleared and traded on an exchange (exchange-traded)settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC).

Market-Making.As a market maker, the firm enters into derivative transactions with clients and other market participants to provide liquidity to clients and to facilitate the transfer and hedging of risk.their risks. In this capacity, the firm typically acts as principal and is consequently required to commit capital to provide execution. As a market maker, it is essential to maintain an inventory of financial instruments sufficient to meet expected client and market demands.

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and lending activities in derivative and cash instruments. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits, to manage foreign currency exposure on the net investment in certain non-U.S. operations, and to manage interest ratethe exposure to the variability in cash flows associated with the forecasted sales of certain fixed-rate unsecured long-term and short-term borrowings, and certificatesenergy commodities by one of deposit.the firm’s consolidated investments.

The firm enters into various types of derivatives, including:

 

Ÿ 

Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.

 

Ÿ 

Swaps. Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.

 

Ÿ 

Options. Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.

Derivatives are accounted for at fair value, net of cash collateral received or posted under credit support agreements. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement.agreement (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

Substantially all gains and losses on derivatives not designated as hedges under ASC 815 are included in “Market making” and “Other principal transactions.”

The tables below present the fair value of derivatives on a net-by-counterparty basis.

  As of December 2014 
$ in millions  
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  

Exchange-traded

  $  2,533     $  2,070  
  

OTC

  60,737     60,946  

Total

  $63,270     $63,016  
  As of December 2013 
$ in millions  
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  

Exchange-traded

  $  4,277     $  6,366  
  

OTC

  53,602     43,356  

Total

  $57,879     $49,722  
 

 

130 Goldman Sachs 20112014 Form 10-K 141


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the fair value of derivatives on a net-by-counterparty basis.

  As of December 2011        As of December 2010 
in millions Derivative
Assets
     Derivative
Liabilities
         Derivative
Assets
     

Derivative

Liabilities

 

Exchange-traded

  $  5,880       $  3,172          $  7,601       $  2,794  

Over-the-counter

  74,148       55,281          65,692       51,936  

Total

  $80,028       $58,453          $73,293       $54,730  

 

The table below presents the fair value and the numbernotional amount of derivative contracts by major product type on a gross basis. Gross fair values in the table below exclude the effects of both counterparty netting under enforceable netting agreements and

netting of cash collateral, received or posted under credit support agreements, and therefore are not representative of the firm’s exposure. The table below also presents the amounts of counterparty and cash collateral netting in the consolidated statements of financial condition, as well as cash and securities collateral posted and received under enforceable credit support agreements

that do not meet the criteria for netting under U.S. GAAP. Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted in the table below. Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.

 

 

  As of December 2011   

 

 As of December 2010 
in millions, except number of contracts 

Derivative

Assets

   

Derivative

Liabilities

   Number of
Contracts
      

Derivative

Assets

   

Derivative

Liabilities

  Number of
Contracts
 

Derivatives not accounted for as hedges

Interest rates

 $624,189    $582,608     287,351      $463,145    $422,514    272,279  

Credit

  150,816     130,659     362,407       127,153     104,407    367,779  

Currencies

  88,654     71,736     203,205       87,959     70,273    222,706  

Commodities

  35,966     38,050     93,755       36,689     41,666    70,890  

Equities

  64,135     51,928     332,273       65,815     51,948    289,059  

Subtotal

  963,760     874,981     1,278,991       780,761     690,808    1,222,713  

Derivatives accounted for as hedges

Interest rates

  21,981     13     1,125       23,396     33    997  

Currencies

  124     21     71       6     162    72  

Subtotal

  22,105     34     1,196       23,402     195    1,069  

Gross fair value of derivatives

 $985,865    $875,015     1,280,187      $804,163    $691,003    1,223,782  

Counterparty netting 1

  (787,733   (787,733          (620,553   (620,553    

Cash collateral netting 2

  (118,104   (28,829          (110,317   (15,720    

Fair value included in financial instruments owned

 $80,028                $73,293           

Fair value included in financial instruments sold, but not yet purchased

      $58,453                $54,730      
  As of December 2014    As of December 2013 
$ in millions  

 

Derivative

Assets

  

  

   

 

Derivative

Liabilities

  

  

   

 

Notional

Amount

  

  

    

 

Derivative

Assets

  

  

   

 

Derivative

Liabilities

  

  

   

 

Notional

Amount

  

  

Derivatives not accounted for as hedges

           

Interest rates

  $   786,362     $739,607     $47,112,518     $  641,186     $587,110     $44,110,483  
  

Exchange-traded

  228     238     3,151,865     157     271     2,366,448  
  

OTC-cleared

  351,801     330,298     30,408,636     266,230     252,596     24,888,301  
  

Bilateral OTC

  434,333     409,071     13,552,017     374,799     334,243     16,855,734  
  

Credit

  54,848     50,154     2,500,958     60,751     56,340     2,946,376  
  

OTC-cleared

  5,812     5,663     378,099     3,943     4,482     348,848  
  

Bilateral OTC

  49,036     44,491     2,122,859     56,808     51,858     2,597,528  
  

Currencies

  109,916     108,607     5,566,203     70,757     63,659     4,311,971  
  

Exchange-traded

  69     69     17,214     98     122     23,908  
  

OTC-cleared

  100     96     13,304     88     97     11,319  
  

Bilateral OTC

  109,747     108,442     5,535,685     70,571     63,440     4,276,744  
  

Commodities

  28,990     28,546     669,479     18,007     18,228     701,101  
  

Exchange-traded

  7,683     7,166     321,378     4,323     3,661     346,057  
  

OTC-cleared

  313     315     3,036     11     12     135  
  

Bilateral OTC

  20,994     21,065     345,065     13,673     14,555     354,909  
  

Equities

  58,931     58,649     1,525,495     56,719     55,472     1,406,499  
  

Exchange-traded

  9,592     9,636     541,711     10,544     13,157     534,840  
  

Bilateral OTC

  49,339     49,013     983,784      46,175     42,315     871,659  

Subtotal

  1,039,047     985,563     57,374,653      847,420     780,809     53,476,430  

Derivatives accounted for as hedges

           

Interest rates

  14,272     262     126,498     11,403     429     132,879  
  

OTC-cleared

  2,713     228     31,109     1,327     27     10,637  
  

Bilateral OTC

  11,559     34     95,389     10,076     402     122,242  
  

Currencies

  125     16     9,636     74     56     9,296  
  

OTC-cleared

  12     3     1,205     1     10     869  
  

Bilateral OTC

  113     13     8,431     73     46     8,427  
  

Commodities

                 36          335  
  

Exchange-traded

                           23  
  

Bilateral OTC

                  36          312  

Subtotal

  14,397     278     136,134      11,513     485     142,510  

Gross fair value/notional amount of derivatives

  $1,053,444 1    $985,841 1    $57,510,787      $858,933 1    $781,294 1    $53,618,940  

Amounts that have been offset in the consolidated statements of financial condition

           

Counterparty netting

  (886,670   (886,670     (707,411   (707,411  
  

Exchange-traded

  (15,039   (15,039     (10,845   (10,845  
  

OTC-cleared

  (335,792   (335,792     (254,756   (254,756  
  

Bilateral OTC

  (535,839   (535,839     (441,810   (441,810  
  

Cash collateral netting

  (103,504   (36,155     (93,643   (24,161  
  

OTC-cleared

  (24,801   (738     (16,353   (2,515  
  

Bilateral OTC

  (78,703)    (35,417)          (77,290   (21,646     

Fair value included in financial instruments owned/financial instruments sold, but not yet purchased

  $     63,270     $  63,016           $  57,879     $  49,722       

Amounts that have not been offset in the consolidated statements of financial condition

           

Cash collateral received/posted

  (980   (2,940     (636   (2,806  
  

Securities collateral received/posted

  (14,742   (18,159         (13,225   (10,521     

Total

  $     47,548     $  41,917           $  44,018     $  36,395       

 

1.

Represents the nettingIncludes derivative assets and derivative liabilities of receivable balances with payable balances for the same counterparty under$25.93 billion and $26.19 billion, respectively, as of December 2014, and derivative assets and derivative liabilities of $23.18 billion and $23.46 billion, respectively, as of December 2013, which are not subject to an enforceable netting agreements.

2.

Representsagreement or are subject to a netting agreement that the netting of cash collateral received and posted on a counterparty basis under credit support agreements.firm has not yet determined to be enforceable.

 

142 Goldman Sachs 20112014 Form 10-K 131


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Valuation Techniques for Derivatives

The firm’s level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models, and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type.

Ÿ

Interest Rate. In general, the key inputs used to value interest rate derivatives are transparent, even for most long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate) are more complex, but the key inputs are generally observable.

Ÿ

Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to have less price transparency than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.

Ÿ

Currency. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the price transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.

Ÿ

Commodity. Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.

Ÿ

Equity. Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.

Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Derivatives

Exchange-tradedLevel 1 derivatives fall withininclude short-term contracts for future delivery of securities when the underlying security is a level 1 instrument, and exchange-traded derivatives if they are actively traded and are valued at their quoted market price.

Level 2 Derivatives

Level 2 derivatives include exchange-traded derivatives that are not actively traded and OTC derivatives for which all significant valuation inputs are corroborated by market evidence.

Level 2evidence and exchange-traded derivatives that are not actively traded and/or that are valued using models that calibrate to market-clearing levels of OTC derivatives. InputsIn evaluating the significance of a valuation input, the firm considers, among other factors, a portfolio’s net risk exposure to that input.

Goldman Sachs 2014 Form 10-K143


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The selection of a particular model to value a derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. For derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.

Valuation models require a variety of inputs, such as contractual terms, market prices, yield curves, discount rates (including those derived from interest rates on collateral received and posted as specified in credit support agreements for collateralized derivatives), credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. Significant inputs to the valuations of level 2 OTC derivatives can be verified to market-clearingmarket transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Where models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.

Price transparency of OTC derivatives can generally be characterized by product type.

Interest Rate.In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate), are more complex and are therefore less transparent, but the prices and other inputs are generally observable.

Credit.Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to be less transparent than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.

Currency.Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.

Commodity.Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.

132Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Equity.Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Exchange-traded and OTC equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.

Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs.

Level 3 Derivatives

Level 3 OTC derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs.

 

Ÿ 

For the majority of the firm’s interest rate and currency derivatives classified within level 3, the significant unobservable inputs areinclude correlations of certain currencies and interest rates (e.g., the correlation of Japanese yen foreign exchange rates to U.S. dollarbetween Euro inflation and Euro interest rates). and specific interest rate volatilities.

 

Ÿ 

For level 3 credit derivatives, classified within level 3, significant level 3unobservable inputs include long-datedilliquid credit spreads and funding spreads, as well asupfront credit points, which are unique to specific reference obligations and reference entities, recovery rates and certain correlation inputscorrelations required to value credit and mortgage derivatives (e.g., the likelihood of default of the underlying reference obligationsobligation relative to one another).

Ÿ 

For level 3 equity derivatives, significant level 3unobservable inputs generally include equity volatility inputs for options that are very long-dated and/or have strike prices that differ significantly from current market prices. In addition, the valuation of certain structured trades requires the use of level 3 correlation inputs, forsuch as the correlation of the price performance of two or more individual stocks or the correlation of the price performance for two or more individual stocks.a basket of stocks to another asset class such as commodities.

Ÿ 

For level 3 commodity derivatives, significant level 3unobservable inputs include volatilities for options with strike prices that differ significantly from current market prices and prices or spreads for certain products for which the product quality or physical location of the commodity is not aligned with benchmark indices.

Subsequent to the initial valuation of a level 3 OTC derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are recorded in level 3. Level 3 inputs are changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See below for further information about significant unobservable inputs used in the valuation of level 3 derivatives.

Valuation Adjustments

Valuation adjustments are integral to determining the fair value of derivativesderivative portfolios and are used to adjust the mid-market valuations produced by derivative pricing models to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity, on illiquid positions, credit valuation adjustments (CVA) and funding valuation adjustments, which account for the credit and funding risk inherent in the uncollateralized portion of derivative portfolios. The firm also makes funding valuation adjustments to collateralized derivatives where the terms of the agreement do not permit the firm to deliver or repledge collateral received. Market-based inputs are generally used when calibrating valuation adjustments to market-clearing levels.

In addition, for derivatives that include significant unobservable inputs, the firm makes model or exit price adjustments to account for the valuation uncertainty present in the transaction.

 

 

144 Goldman Sachs 20112014 Form 10-K 133


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Significant Unobservable Inputs

The tables below present the ranges of significant unobservable inputs used to value the firm’s level 3 derivatives as well as averages and medians of these inputs. The ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative. Averages represent the arithmetic average of the inputs and are not weighted by the relative fair value or notional of the respective financial instruments. An average greater than the median indicates that the majority of inputs are below the average. The ranges, averages and medians of these

inputs are not representative of the appropriate inputs to use when calculating the fair value of any one derivative. For example, the highest correlation presented in the tables below for interest rate derivatives is appropriate for valuing a specific interest rate derivative but may not be appropriate for valuing any other interest rate derivative. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 derivatives.

Level 3 Derivative

Product Type

Net Level 3 Assets/(Liabilities)     

as of December 2014

($ in millions)

Valuation Techniques and

Significant Unobservable Inputs

Range of Significant UnobservableInputs(Average / Median) as of December 2014

Interest rates

$(40)

Option pricing models:

Correlation1

Volatility

(16)% to 84% (37% / 40%)

36 basis points per annum (bpa) to 156 bpa (100 bpa / 115 bpa)

Credit

$3,530

Option pricing models, correlation models and discounted cash flows models 2:

Correlation1

5% to 99% (71% / 72%)

Credit spreads

1 basis points (bps) to 700 bps (116 bps / 79 bps)3

Upfront credit points

0 points to 99 points (40 points / 30 points)

Recovery rates

14% to 87% (44% / 40%)

Currencies

$(267)

Option pricing models:

Correlation1

55% to 80% (69% / 73%)

Commodities

$(1,142)

Option pricing models and discounted cash flows models 2:

Volatility

16% to 68% (33% / 32%)

Spread per million British Thermal units (MMBTU) of natural gas

$(1.66) to $4.45 ($(0.13) / $(0.03)) 3

Spread per Metric Tonne (MT) of coal

$(10.50) to $3.00 ($(4.04) / $(6.74))

Spread per barrel of oil and refined products

$(15.35) to $80.55 ($22.32 / $13.50) 3

Equities

$(1,375)

Option pricing models:

Correlation1

Volatility

30% to 99% (62% / 55%)

5% to 90% (23% / 21%)

1.

The range of unobservable inputs for correlation across derivative product types (i.e., cross-asset correlation) was (34)% to 80% (Average: 33% / Median: 35%) as of December 2014.

2.

The fair value of any one instrument may be determined using multiple valuation techniques. For example, option pricing models and discounted cash flows models are typically used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

3.

The difference between the average and the median for these spread inputs indicates that the majority of the inputs fall in the lower end of the range.

Goldman Sachs 2014 Form 10-K145


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Level 3 Derivative

Product Type

Net Level 3 Assets/(Liabilities)     

as of December 2013

($ in millions)

Valuation Techniques and

Significant Unobservable Inputs

Range of Significant UnobservableInputs(Average / Median) as of December 2013

Interest rates

$(86)

Option pricing models:

Correlation 1

Volatility

22% to 84% (58% / 60%)

36 bpa to 165 bpa (107 bpa / 112 bpa)

Credit

$4,176

Option pricing models, correlation models and discounted cash flows models 2:

Correlation 1

5% to 93% (61% / 61%)

Credit spreads

1 bps to 1,395 bps (153 bps / 116 bps) 3

Upfront credit points

0 points to 100 points (46 points / 43 points)

Recovery rates

20% to 85% (50% / 40%)

Currencies

$(200)

Option pricing models:

Correlation 1

65% to 79% (72% / 72%)

Commodities

$60

Option pricing models and discounted cash flows models 2:

Volatility

15% to 52% (23% / 21%)

Spread per MMBTU of natural gas

$(1.74) to $5.62 ($(0.11) / $(0.04))

Spread per MT of coal

$(17.00) to $0.50 ($(6.54) / $(5.00))

Equities

$(959)

Option pricing models:

Correlation 1

Volatility

23% to 99% (58% / 59%)

6% to 63% (20% / 20%)

1.

The range of unobservable inputs for correlation across derivative product types (i.e., cross-asset correlation) was (42)% to 78% (Average: 25% / Median: 30%) as of December 2013.

2.

The fair value of any one instrument may be determined using multiple valuation techniques. For example, option pricing models and discounted cash flows models are typically used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

3.

The difference between the average and the median for these credit spread inputs indicates that the majority of the inputs fall in the lower end of the range.

146Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Range of Significant Unobservable Inputs

The following provides further information about the ranges of significant unobservable inputs used to value the firm’s level 3 derivative instruments.

Ÿ

Correlation. Ranges for correlation cover a variety of underliers both within one market (e.g., equity index and equity single stock names) and across markets (e.g., correlation of an interest rate and a foreign exchange rate), as well as across regions. Generally, cross-asset correlation inputs are used to value more complex instruments and are lower than correlation inputs on assets within the same derivative product type.

Ÿ

Volatility. Ranges for volatility cover numerous underliers across a variety of markets, maturities and strike prices. For example, volatility of equity indices is generally lower than volatility of single stocks.

Ÿ

Credit spreads, upfront credit points and recovery rates. The ranges for credit spreads, upfront credit points and recovery rates cover a variety of underliers (index and single names), regions, sectors, maturities and credit qualities (high-yield and investment-grade). The broad range of this population gives rise to the width of the ranges of significant unobservable inputs.

Ÿ

Commodity prices and spreads. The ranges for commodity prices and spreads cover variability in products, maturities and locations.

Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs

The following provides a description of the directional sensitivity of the firm’s level 3 fair value measurements to changes in significant unobservable inputs, in isolation. Due to the distinctive nature of each of the firm’s level 3 derivatives, the interrelationship of inputs is not necessarily uniform within each product type.

Ÿ

Correlation. In general, for contracts where the holder benefits from the convergence of the underlying asset or index prices (e.g., interest rates, credit spreads, foreign exchange rates, inflation rates and equity prices), an increase in correlation results in a higher fair value measurement.

Ÿ

Volatility. In general, for purchased options an increase in volatility results in a higher fair value measurement.

Ÿ

Credit spreads, upfront credit points and recovery rates. In general, the fair value of purchased credit protection increases as credit spreads or upfront credit points increase or recovery rates decrease. Credit spreads, upfront credit points and recovery rates are strongly related to distinctive risk factors of the underlying reference obligations, which include reference entity-specific factors such as leverage, volatility and industry, market-based risk factors, such as borrowing costs or liquidity of the underlying reference obligation, and macroeconomic conditions.

Ÿ

Commodity prices and spreads. In general, for contracts where the holder is receiving a commodity, an increase in the spread (price difference from a benchmark index due to differences in quality or delivery location) or price results in a higher fair value measurement.

Goldman Sachs 2014 Form 10-K147


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Fair Value of Derivatives by Level

The tables below present the fair value of derivatives on a gross basis by level and major product type. Grosstype as well as the impact of netting. The gross fair values in the tables below exclude the effects of both counterparty netting under enforceableand collateral netting, agreements and netting of cash

received or posted under credit support agreements both in and across levels of the fair value hierarchy, and therefore are not representative of the firm’s exposure.

Counterparty netting is reflected in each level to the extent that receivable and payable balances are netted within the same level and is included in “Counterparty and cash collateral netting.” Where the counterparty netting is across levels, the netting is reflected in “Cross-Level Netting.”

 

 

  Derivative Assets at Fair Value as of December 2011 
in millions Level 1     Level 2     Level 3     

Cross-Level

Netting

     Total 

Interest rates

  $33      $645,923      $214       $      —      $646,170  

Credit

         137,110       13,706              150,816  

Currencies

         86,752       2,026              88,778  

Commodities

         35,062       904              35,966  

Equities

  24       62,684       1,427              64,135  

Gross fair value of derivative assets

  57       967,531       18,277              985,865  

Counterparty netting 1

         (778,639     (6,377     (2,717) 3      (787,733

Subtotal

  $57      $188,892      $11,900       $(2,717    $198,132  

Cash collateral netting 2

                              (118,104

Fair value included in financial instruments owned

                             $80,028  
  Derivative Liabilities at Fair Value as of December 2011 
in millions Level 1     Level 2     Level 3     

Cross-Level

Netting

     Total 

Interest rates

  $  24      $582,012      $585       $      —      $582,621  

Credit

         123,253       7,406              130,659  

Currencies

         70,573       1,184              71,757  

Commodities

         36,541       1,509              38,050  

Equities

  185       49,884       1,859              51,928  

Gross fair value of derivative liabilities

  209       862,263       12,543              875,015  

Counterparty netting 1

         (778,639     (6,377     (2,717) 3      (787,733

Subtotal

  $209      $83,624      $6,166       $(2,717    $87,282  

Cash collateral netting 2

                              (28,829

Fair value included in financial instruments sold,
but not yet purchased

                             $58,453  

1.

Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.

2.

Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

3.

Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements.

  Derivative Assets at Fair Value as of December 2014 
$ in millions  Level 1     Level 2     Level 3     
 
Cross-Level
Netting
  
  
   
 
 
Cash
Collateral
Netting
  
  
  
   Total  

Interest rates

  $123     $   800,028     $     483     $      —     $          —     $   800,634  
  

Credit

       47,190     7,658               54,848  
  

Currencies

       109,891     150               110,041  
  

Commodities

       28,124     866               28,990  
  

Equities

  175     58,122     634               58,931  

Gross fair value of derivative assets

  298     1,043,355     9,791               1,053,444  
  

Counterparty and cash collateral netting

       (882,841   (2,717   (1,112   (103,504   (990,174

Fair value included in financial instruments owned

  $298     $   160,514     $  7,074     $(1,112   $(103,504   $     63,270  
  Derivative Liabilities at Fair Value as of December 2014 
$ in millions  Level 1     Level 2     Level 3     
 
Cross-Level
Netting
  
  
   
 
 
Cash
Collateral
Netting
  
  
  
   Total  

Interest rates

  $  14     $   739,332     $     523     $      —     $          —     $   739,869  
  

Credit

       46,026     4,128               50,154  
  

Currencies

       108,206     417               108,623  
  

Commodities

       26,538     2,008               28,546  
  

Equities

  94     56,546     2,009               58,649  

Gross fair value of derivative liabilities

  108     976,648     9,085               985,841  
  

Counterparty and cash collateral netting

       (882,841   (2,717   (1,112   (36,155   (922,825

Fair value included in financial instruments sold,
but not yet purchased

  $108     $     93,807     $  6,368     $(1,112   $  (36,155   $     63,016  
  Derivative Assets at Fair Value as of December 2013 
$ in millions  Level 1     Level 2     Level 3     
 
Cross-Level
Netting
  
  
   
 
 
Cash
Collateral
Netting
  
  
  
   Total  

Interest rates

  $  91     $   652,104     $     394     $      —     $          —     $   652,589  
  

Credit

       52,834     7,917               60,751  
  

Currencies

       70,481     350               70,831  
  

Commodities

       17,517     526               18,043  
  

Equities

  3     55,826     890               56,719  

Gross fair value of derivative assets

  94     848,762     10,077               858,933  
  

Counterparty and cash collateral netting

       (702,703   (3,001   (1,707   (93,643   (801,054

Fair value included in financial instruments owned

  $  94     $   146,059     $  7,076     $(1,707   $  (93,643   $     57,879  
  Derivative Liabilities at Fair Value as of December 2013 
$ in millions  Level 1     Level 2     Level 3     
 
Cross-Level
Netting
  
  
   
 
 
Cash
Collateral
Netting
  
  
  
   Total  

Interest rates

  $  93     $   586,966     $     480     $      —     $          —     $   587,539  
  

Credit

       52,599     3,741               56,340  
  

Currencies

       63,165     550               63,715  
  

Commodities

       17,762     466               18,228  
  

Equities

  6     53,617     1,849               55,472  

Gross fair value of derivative liabilities

  99     774,109     7,086               781,294  
  

Counterparty and cash collateral netting

       (702,703   (3,001   (1,707   (24,161   (731,572

Fair value included in financial instruments sold,
but not yet purchased

  $  99     $     71,406     $  4,085     $(1,707   $  (24,161   $     49,722  

 

134148 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  Derivative Assets at Fair Value as of December 2010 
in millions Level 1     Level 2   Level 3   

Cross-Level

Netting

   Total 

Interest rates

 $49      $486,037    $455    $    $486,541  

Credit

         115,519     11,634          127,153  

Currencies

         86,158     1,807          87,965  

Commodities

         34,511     2,178          36,689  

Equities

  44       64,267     1,504          65,815  

Gross fair value of derivative assets

  93       786,492     17,578          804,163  

Counterparty netting 1

         (613,979   (4,806   (1,768) 3    (620,553

Subtotal

 $93      $172,513    $12,772    $(1,768  $183,610  

Cash collateral netting 2

                        (110,317

Fair value included in financial instruments owned

                       $73,293  
  Derivative Liabilities at Fair Value as of December 2010 
in millions Level 1     Level 2   Level 3   

Cross-Level

Netting

   Total 

Interest rates

 $18      $422,267    $262    $    $422,547  

Credit

         99,813     4,594          104,407  

Currencies

         69,726     709          70,435  

Commodities

         39,709     1,957          41,666  

Equities

  27       49,427     2,494          51,948  

Gross fair value of derivative liabilities

  45       680,942     10,016          691,003  

Counterparty netting 1

         (613,979   (4,806   (1,768) 3    (620,553

Subtotal

 $45      $66,963    $5,210    $(1,768  $70,450  

Cash collateral netting 2

                        (15,720

Fair value included in financial instruments sold, but not yet purchased

                       $54,730  

1.

Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.

2.

Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

3.

Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements.

Goldman Sachs 2011 Form 10-K135


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Level 3 Rollforward

If a derivative was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are reported at the beginning of the reporting period in which they occur. In the tables below, negative amounts for transfers into level 3 and positive amounts for transfers out of level 3 represent net transfers of derivative liabilities.

Gains and losses on level 3 derivatives should be considered in the context of the following:

 

Ÿ 

A derivative with level 1 and/or level 2 inputs is classified in level 3 in its entirety if it has at least one significant
level 3 input.

Ÿ 

If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2 inputs) is classified as level 3.

Ÿ 

Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to level 1 or level 2 derivatives and/or level 1, level 2 and level 3 cash instruments. As a result, gains/(losses) included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

The tables below present changes in fair value for all derivatives categorized as level 3 as of the end of the year.

 

 

 Level 3 Derivative Assets and Liabilities at Fair Value for the Year Ended December 2011  Level 3 Derivative Assets and Liabilities at Fair Value for the Year Ended December 2014 
in millions 

Asset/

(liability)
balance,
beginning
of year

   

Net

realized
gains/
(losses)

 Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
 Purchases   Sales Settlements Net
transfers
in and/or
(out) of
level 3
 

Asset/

(liability)

balance,
end of

year

 
$ in millions  
 
 
 
 
Asset/
(liability)
balance,
beginning
of year
  
  
  
  
  
   
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
  
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases     Sales     Settlements     
 
 
Transfers
into
level 3
  
  
  
   
 
 
Transfers
out of
level 3
  
  
  
   
 
 
 
 
Asset/
(liability)
balance,
end of
year
 
  
  
  
  

Interest rates — net

 $194    $(38 $(305 $23    $(29 $84   $(300 $(371  $    (86   $  (50  $   (101  $  97     $       (2   $      92     $   14     $    (4   $     (40
 

Credit — net

  7,040     46    2,525    348     (1,310  (1,713  (636  6,300    4,176     64    1,625    151     (138   (1,693   (194   (461   3,530  
 

Currencies — net

  1,098     (26  (351  29     (25  (54  171    842    (200   (70  (175  19          172     (9   (4   (267
 

Commodities — net

  220     (35  259    125     (835  150    (489  (605  60     (19  (1,096  38     (272   95     84     (32   (1,142
 

Equities — net

  (990   184    151    382     (683  159    365    (432  (959   (48  (436  344     (979   270     (115   548     (1,375

Total derivatives — net

 $7,562    $131 1  $2,279 1, 2  $907    $(2,882 $(1,374 $(889 $5,734    $2,991     $(1231   $   (183) 1   $649     $(1,391   $(1,064   $(220   $   47     $    706  

 

1.

The aggregate amounts include losses of approximately $2.35 billion$276 million and $62$30 million reported in “Market making” and “Other principal transactions,” respectively.

 

2.

Principally resulted from changes in level 2 inputs.

The net unrealized gainloss on level 3 derivatives of $2.28 billion$183 million for the year ended December 20112014 was primarily attributable to the impact of a decrease in commodity prices on certain commodity derivatives, a decrease in equity prices on certain equity derivatives, and the impact of changes in foreign exchange rates on certain currency derivatives, largely offset by the impact of tighter credit spreads and a decrease in interest rates and exchange rates underlyingon certain credit derivatives. Unrealized gains on

Transfers into level 3 derivatives were substantially offset by unrealized losses on derivatives classified withinduring 2014 primarily reflected transfers of certain credit derivative liabilities from level 2, which economically hedgeprincipally due to unobservable credit spread inputs becoming significant to the valuation of these derivatives classified withinand transfers of certain equity derivative liabilities from level 3.2, primarily due to reduced transparency of volatility inputs used to value these derivatives.

Significant transfers in orTransfers out of level 3 derivatives during 2014 primarily reflected transfers of certain equity derivative liabilities to level 2, principally due to unobservable correlation inputs no longer being significant to the year ended December 2011 included:valuation of these derivatives, and transfers of certain credit derivative assets to level 2, principally due to unobservable credit spread inputs no longer being significant to the net risk of certain portfolios.

Ÿ

Credit — net: net transfer out of level 3 of $636 million, primarily reflecting transfers to level 2 of certain credit derivative assets principally due to unobservable inputs no longer being significant to the valuation of these derivatives, and transfers into level 3 of certain credit

derivative liabilities due to reduced transparency of the correlation inputs used to value these derivatives. The impact of these transfers was partially offset by transfers into level 3 of certain credit and mortgage derivative assets, primarily due to reduced transparency of the correlation inputs used to value these derivatives.

Ÿ

Commodities — net: net transfer out of level 3 of $489 million, primarily reflecting transfers to level 2, due to increased transparency of market prices used to value certain commodity derivative assets as a result of market activity in similar instruments, and unobservable inputs becoming less significant to the valuation of other commodity derivative assets. In addition, certain commodity derivative liabilities were transferred into level 3 due to reduced transparency of volatility inputs used to value these derivatives.

 

 

136 Goldman Sachs 20112014 Form 10-K 149


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 Level 3 Derivative Assets and Liabilities at Fair Value for the  Year Ended December 2010  Level 3 Derivative Assets and Liabilities at Fair Value for the Year Ended December 2013 
in millions 

Asset/

(liability)
balance,
beginning
of year

   

Net

realized
gains/
(losses)

 

Net unrealized
gains/(losses)
relating to
instruments
still held at

year-end

 Net
purchases,
sales and
settlements
   

Net
transfers in

and/or (out)
of level 3

 Asset/
(liability)
balance,
end of
year
 
$ in millions  
 
 
 
 
Asset/
(liability)
balance,
beginning
of year
  
  
  
  
  
   
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
  
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases     Sales     Settlements     
 
 
Transfers
into
level 3
  
  
  
   
 
 
Transfers
out of
level 3
  
  
  
   
 
 
 
 
Asset/
(liability)
balance,
end of
year
 
  
  
  
  

Interest rates — net

 $(71  $(79 $156   $(118  $306   $194    $  (355   $  (78  $    168    $    1     $    (8   $    196     $   (9   $    (1   $    (86
 

Credit — net

  6,366     8    4,393    (2,663   (1,064  7,040    6,228     (1  (977  201     (315   (1,508   695     (147   4,176  
 

Currencies — net

  215     (83  317    110     539    1,098    35     (93  (419  22     (6   169     139     (47   (200
 

Commodities — net

  (90   48    312    33     (83  220    (304   (6  58    21     (48   281     50     8     60  
 

Equities — net

  (1,224   (38  6    43     223    (990  (1,248   (67  (202  77     (472   1,020     (15   (52   (959

Total derivatives — net

 $5,196    $(144) 1  $5,184 1, 2  $(2,595  $(79 $7,562    $4,356     $(2451   $(1,372) 1   $322     $(849   $    158     $860     $(239   $2,991  

 

1.

The aggregate amounts include losses of approximately $4.99$1.29 billion and $55$324 million reported in “Market making” and “Other principal transactions,” respectively.

 

2.

Principally resulted from changes in level 2 inputs.

The net unrealized gainloss on level 3 derivatives of $5.18$1.37 billion for the year ended December 20102013 principally resulted from changes in level 2 inputs and was primarily attributable to lower interest rates underlyinglosses on certain credit derivatives. These unrealized gains were substantially offset by unrealizedderivatives, principally due to the impact of tighter credit spreads, and losses on certain currency interest rate andderivatives, primarily due to changes in foreign exchange rates.

Transfers into level 3 derivatives during 2013 primarily reflected transfers of credit derivatives categorized inderivative assets from level 2, which economically hedge level 3principally due to reduced transparency of upfront credit points and correlation inputs used to value these derivatives.

Significant transfers in orTransfers out of level 3 derivatives during 2013 primarily reflected transfers of certain credit derivatives to level 2, principally due to unobservable credit spread and correlation inputs no longer being significant to the year ended December 2010 included:valuation of these derivatives and unobservable inputs not being significant to the net risk of certain portfolios.

Ÿ

Interest rates — net and Currencies — net: net transfer into level 3 of $306 million and $539 million, respectively, principally due to reduced transparency of the correlation inputs used to value these financial instruments.

Ÿ

Credit — net: net transfer out of level 3 of $1.06 billion, principally due to improved transparency of correlation inputs used to value certain mortgage derivatives.

Impact of Credit Spreads on Derivatives

On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk through the unwind of derivative contracts and changes in credit mitigants.

The net gaingain/(loss), including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $573 million, $68 million and $572$135 million for the years ended December 2011, December 20102014, $(66) million for 2013 and December 2009, respectively.$(735) million for 2012.

Bifurcated Embedded Derivatives

The table below presents derivatives, primarily equitythe fair value and interest rate products,the notional amount of derivatives that have been bifurcated from their related borrowings. These derivatives, which are recorded at fair value, primarily consist of interest rate, equity and commodity products and are included in “Unsecured short-term borrowings” and “Unsecured long-term borrowings” with the related borrowings. See Note 8 for further information.

 

  As of December 
in millions, except number of contracts 2011     2010 

Fair value of assets

 $422      $383  

Fair value of liabilities

  304       267  

Net

 $118      $116  

Number of contracts

  333       338  
  As of December 
$ in millions  2014     2013  

Fair value of assets

  $   390     $   285  
  

Fair value of liabilities

  690     373  

Net liability

  $   300     $     88  

Notional amount

  $7,735     $7,580  
 

 

150 Goldman Sachs 20112014 Form 10-K 137


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

OTC Derivatives

The tables below present the fair values of OTC derivative assets and liabilities by tenor and bymajor product type. Tenor is based on expected duration for mortgage-related credit

derivatives and generally on remaining contractual maturity for other derivatives. Counterparty netting within the same product type and tenor category is included within

such product type and tenor category. Counterparty netting across product types within the same tenor category is included in “Counterparty and cash collateral netting.” Where the counterparty netting is across tenor categories, the netting is reflected in “Cross-Tenor Netting.”

 

 

in millions OTC Derivatives as of December 2011 

Assets

Product Type

 0 - 12
Months
     

1 - 5

Years

     5 Years or
Greater
     Total 

Interest rates

 $10,931      $32,194      $82,480      $125,605  

Credit

  3,054       15,468       13,687       32,209  

Currencies

  11,253       11,592       16,023       38,868  

Commodities

  5,286       5,931       147       11,364  

Equities

  6,663       7,768       7,468       21,899  

Netting across product types 1

  (3,071     (6,033     (6,027     (15,131

Subtotal

 $34,116      $66,920      $113,778       214,814  

Cross maturity netting 2

                       (22,562

Cash collateral netting 3

                       (118,104

Total

                      $74,148  

Liabilities

Product Type

 0 - 12
Months
     

1 - 5

Years

     5 Years or
Greater
     Total 

Interest rates

 $5,787      $18,607      $37,739      $62,133  

Credit

  1,200       6,957       3,894       12,051  

Currencies

  9,826       5,514       6,502       21,842  

Commodities

  6,322       5,174       2,727       14,223  

Equities

  3,290       4,018       4,246       11,554  

Netting across product types 1

  (3,071     (6,033     (6,027     (15,131

Subtotal

 $23,354      $34,237      $49,081       106,672  

Cross maturity netting 2

                       (22,562

Cash collateral netting 3

                       (28,829

Total

                      $55,281  

1.

Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category under enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category.

2.

Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories under enforceable netting agreements.

3.

Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

  OTC Derivative Assets as of December 2014 
$ in millions  
 
0 - 12
Months
  
  
   
 
1 - 5
Years
  
  
   
 
5 Years or
Greater
  
  
   
 
Cross-Tenor
Netting
  
  
   
 
Cash Collateral
Netting
  
  
   Total  

Interest rates

  $  7,064     $25,049     $  90,553     $         —     $            —     $ 122,666  
  

Credit

  1,696     6,093     5,707               13,496  
  

Currencies

  17,835     9,897     6,386               34,118  
  

Commodities

  8,298     4,068     161               12,527  
  

Equities

  4,771     9,285     3,750               17,806  
  

Counterparty and cash collateral netting

  (4,479   (7,016   (4,058   (20,819   (103,504   (139,876

Total

  $35,185     $47,376     $102,499     $(20,819   $ (103,504   $   60,737  
  OTC Derivative Liabilities as of December 2014 
$ in millions  
 
0 - 12
Months
  
  
   
 
1 - 5
Years
  
  
   
 
5 Years or
Greater
  
  
   
 
Cross-Tenor
Netting
  
  
   
 
Cash Collateral
Netting
  
  
   Total  

Interest rates

  $  7,001     $17,649     $  37,242     $         —     $            —     $   61,892  
  

Credit

  2,154     4,942     1,706               8,802  
  

Currencies

  18,549     7,667     6,482               32,698  
  

Commodities

  5,686     4,105     2,810               12,601  
  

Equities

  7,064     6,845     3,571               17,480  
  

Counterparty and cash collateral netting

  (4,479   (7,016   (4,058   (20,819   (36,155   (72,527

Total

  $35,975     $34,192     $  47,753     $(20,819   $   (36,155   $   60,946  
  OTC Derivative Assets as of December 2013 
$ in millions  
 
0 - 12
Months
  
  
   
 
1 - 5
Years
  
  
   
 
5 Years or
Greater
  
  
   
 
Cross-Tenor
Netting
  
  
   
 
Cash Collateral
Netting
  
  
   Total  

Interest rates

  $  7,235     $26,029     $  75,731     $         —     $                 $ 108,995  
  

Credit

  1,233     8,410     5,787               15,430  
  

Currencies

  9,499     8,478     7,361               25,338  
  

Commodities

  2,843     4,040     143               7,026  
  

Equities

  7,016     9,229     4,972               21,217  
  

Counterparty and cash collateral netting

  (2,559   (5,063   (3,395   (19,744   (93,643   (124,404

Total

  $25,267     $51,123     $  90,599     $(19,744   $   (93,643   $   53,602  
  OTC Derivative Liabilities as of December 2013 
$ in millions  
 
0 - 12
Months
  
  
   
 
1 - 5
Years
  
  
   
 
5 Years or
Greater
  
  
   
 
Cross-Tenor
Netting
  
  
   
 
Cash Collateral
Netting
  
  
   Total  

Interest rates

  $  5,019     $16,910     $  21,903     $         —     $           —     $   43,832  
  

Credit

  2,339     6,778     1,901               11,018  
  

Currencies

  8,843     5,042     4,313               18,198  
  

Commodities

  3,062     2,424     2,387               7,873  
  

Equities

  6,325     6,964     4,068               17,357  
  

Counterparty and cash collateral netting

  (2,559   (5,063   (3,395   (19,744   (24,161   (54,922

Total

  $23,029     $33,055     $  31,177     $(19,744   $   (24,161   $   43,356  

 

138 Goldman Sachs 20112014 Form 10-K 151


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

in millions OTC Derivatives as of December 2010 

Assets

 

Product Type

 0 - 12
Months
     1 - 5
Years
     5 Years or
Greater
     Total 

Interest rates

 $7,137      $34,384      $60,750      $102,271  

Credit

  2,777       16,145       13,525       32,447  

Currencies

  9,968       10,696       14,868       35,532  

Commodities

  5,664       5,996       248       11,908  

Equities

  4,795       10,942       7,037       22,774  

Netting across product types 1

  (2,937     (5,513     (5,077     (13,527

Subtotal

 $27,404      $72,650      $91,351      $191,405  

Cross maturity netting 2

                       (15,396

Cash collateral netting 3

                       (110,317

Total

                      $65,692  

Liabilities

 

Product Type

 0 - 12
Months
     1 - 5
Years
     5 Years or
Greater
     Total 

Interest rates

 $4,470      $14,072      $19,760      $38,302  

Credit

  1,024       4,862       3,816       9,702  

Currencies

  8,036       5,219       4,986       18,241  

Commodities

  7,279       7,838       2,528       17,645  

Equities

  3,962       4,977       3,750       12,689  

Netting across product types 1

  (2,937     (5,513     (5,077     (13,527

Subtotal

 $21,834      $31,455      $29,763      $83,052  

Cross maturity netting 2

                       (15,396

Cash collateral netting 3

                       (15,720

Total

                      $51,936  

1.

Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category under enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category.

2.

Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories under enforceable netting agreements.

3.

Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

Goldman Sachs 2011 Form 10-K139


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Derivatives with Credit-Related Contingent Features

Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies.

The table below presents the aggregate fair value of net derivative liabilities under such agreements (excluding application of collateral posted to reduce these liabilities), the related aggregate fair value of the assets posted as collateral, and the additional collateral or termination payments that could have been called at the reporting date by counterparties in the event of a one-notch and two-notch downgrade in the firm’s credit ratings.

 

 As of December  As of December 
in millions 2011   2010 
$ in millions  2014     2013  

Net derivative liabilities under bilateral agreements

 $35,066    $23,843    $35,764     $22,176  
 

Collateral posted

  29,002     16,640    30,824     18,178  
 

Additional collateral or termination payments for a one-notch downgrade

  1,303     1,353    1,072     911  
 

Additional collateral or termination payments for a two-notch downgrade

  2,183     2,781    2,815     2,989  

Credit Derivatives

The firm enters into a broad array of credit derivatives in locations around the world to facilitate client transactions and to manage the credit risk associated with market-making and investing and lending activities. Credit derivatives are actively managed based on the firm’s net risk position.

Credit derivatives are individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference entity.

Credit Default Swaps.Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event the issuer (reference entity) of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer of protection. However, if a credit event occurs, the seller of protection is required to make a payment to the buyer of protection, which is calculated in accordance with the terms of the contract.

Credit Indices, Baskets and Tranches.Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a pro-rata portion of the transaction’s total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss is covered by the next most senior tranche in the capital structure.

Total Return Swaps. A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives from the protection seller a floating rate of interest and protection against any reduction in fair value of the reference obligation, and in return the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation.

 

 

140152 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Credit Options.In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.

The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underlyings.underliers. Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default.

As of December 2011,2014, written and purchased credit derivatives had total gross notional amounts of $1.96$1.22 trillion and $2.08$1.28 trillion, respectively, for total net notional purchased protection of $116.93$59.35 billion. As of December 2010,2013, written and purchased credit derivatives had total gross notional amounts of $2.05$1.43 trillion and $2.19$1.52 trillion, respectively, for total net notional purchased protection of $140.63$81.55 billion. Substantially all of the firm’s written and purchased credit derivatives are in the form of credit default swaps.

The table below presents certain information about credit derivatives. In the table below:

 

Ÿ 

fairFair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s exposure;credit exposure.

 

Ÿ 

tenorTenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives; andderivatives.

 

Ÿ 

theThe credit spread on the underlying,underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower.

 

 

  

Maximum Payout/Notional Amount

of Written Credit Derivatives by Tenor

     Maximum Payout/Notional
Amount of Purchased
Credit Derivatives
     

Fair Value of

Written Credit Derivatives

 
$ in millions 0 - 12
Months
   

1 - 5

Years

   

5 Years

or

Greater

   Total      Offsetting
Purchased
Credit
Derivatives 1
   Other
Purchased
Credit
Derivatives  2
      Asset   Liability   

Net

Asset/

(Liability)

 

As of December 2011

                   

Credit spread on underlying

(basis points)

                   

0-250

 $282,851    $794,193    $141,688    $1,218,732      $1,122,296    $180,316      $17,572    $16,907    $665  

251-500

  42,682     269,687     69,864     382,233       345,942     47,739       4,517     20,810     (16,293

501-1,000

  29,377     140,389     21,819     191,585       181,003     23,176       138     15,398     (15,260

Greater than 1,000

  30,244     114,103     22,995     167,342       147,614     28,734       512     57,201     (56,689

Total

 $385,154    $1,318,372    $256,366    $1,959,892      $1,796,855    $279,965      $22,739    $110,316    $(87,577

As of December 2010

                   

Credit spread on underlying

(basis points)

                   

0-250

 $235,798    $1,094,308    $288,851    $1,618,957      $1,511,113    $232,506      $32,071    $14,780    $17,291  

251-500

  14,412     144,448     52,072     210,932       183,613     36,713       7,368     7,739     (371

501-1,000

  6,384     89,212     33,553     129,149       110,019     18,686       2,571     11,256     (8,685

Greater than 1,000

  11,721     63,982     12,022     87,725       70,945     23,795       483     33,670     (33,187

Total

 $268,315    $1,391,950    $386,498    $2,046,763      $1,875,690    $311,700      $42,493    $67,445    $(24,952
  

Maximum Payout/Notional Amount

of Written Credit Derivatives by Tenor

    

Maximum Payout/Notional
Amount of Purchased

Credit Derivatives

    

Fair Value of

Written Credit Derivatives

 
$ in millions  
 
0 - 12
Months
  
  
   

 

1 - 5

Years

  

  

   
 
5 Years or
Greater
  
  
   Total      
 
 
 
Offsetting
Purchased
Credit
Derivatives
  
  
  
 1 
  
 
 
 
Other
Purchased
Credit
Derivatives
  
  
  
 2 
    Asset     Liability     
 
 
Net
Asset/
(Liability)
  
  
  

As of December 2014

                

Credit spread on underlier

(basis points)

  

  

               

0 - 250

  $261,591     $   775,784     $68,830     $1,106,205     $1,012,874    $152,465     $28,004     $  3,629     $ 24,375  
  

251 - 500

  7,726     37,255     5,042     50,023     41,657    8,426     1,542     2,266     (724
  

501 - 1,000

  8,449     18,046     1,309     27,804     26,240    1,949     112     1,909     (1,797
  

Greater than 1,000

  8,728     26,834     1,279     36,841      33,112    3,499      82     13,943     (13,861

Total

  $286,494     $   857,919     $76,460     $1,220,873      $1,113,883    $166,339      $29,740     $21,747     $   7,993  

As of December 2013

                

Credit spread on underlier

(basis points)

                

0 - 250

  $286,029     $   950,126     $79,241     $1,315,396     $1,208,334    $183,665     $ 32,508     $  4,396     $ 28,112  
  

251 - 500

  7,148     42,570     10,086     59,804     44,642    16,884     2,837     1,147     1,690  
  

501 - 1,000

  3,968     18,637     1,854     24,459     22,748    2,992     101     1,762     (1,661
  

Greater than 1,000

  5,600     27,911     1,226     34,737      30,510    6,169      514     12,436     (11,922

Total

  $302,745     $1,039,244     $92,407     $1,434,396      $1,306,234    $209,710      $ 35,960     $19,741     $ 16,219  

 

1.

Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent theythat economically hedge written credit derivatives with identical underlyings.underliers.

 

2.

This purchased protection represents the notional amount of all other purchased credit derivatives in excess of the notional amountnot included in “Offsetting Purchased Credit Derivatives.”

 

 Goldman Sachs 20112014 Form 10-K 141153


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Hedge Accounting

The firm applies hedge accounting for (i) certain interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long-term and short-term borrowings and certain fixed-rate certificates of deposit, and (ii) certain foreign currency forward contracts and foreign currency-denominated debt used to manage foreign currency exposures on the firm’s net investment in certain non-U.S. operations.operations and (iii) certain commodities-related swap and forward contracts used to manage the exposure to the variability in cash flows associated with the forecasted sales of certain energy commodities by one of the firm’s consolidated investments.

To qualify for hedge accounting, the derivative hedge must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and test the hedging relationship at least on a quarterly basis to ensure the derivative hedge continues to be highly effective over the life of the hedging relationship.

Interest RateFair Value Hedges

The firm designates certain interest rate swaps as fair value hedges. These interest rate swaps hedge changes in fair value attributable to the relevantdesignated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR)) or OIS), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations.

The firm applies the “long-haul method” ina statistical method that utilizes regression analysis when assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk).

During the three months ended March 2010, the firm changed its method of prospectively and retrospectively assessing the effectiveness of all of its fair value hedging relationships from a dollar-offset method, which is a non-statistical method, to regression analysis, which is a statistical method.

An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%.

The dollar-offset method compared the change in the fair value of the hedging instrument to the change in the fair value of the hedged item, excluding the effect of the passage of time. The prospective dollar-offset assessment used scenario analyses to test hedge effectiveness through simulations of numerous parallel and slope shifts of the relevant yield curve. Parallel shifts changed the interest rate of all maturities by identical amounts. Slope shifts changed the curvature of the yield curve. For both the prospective assessment, in response to each of the simulated yield curve shifts, and the retrospective assessment, a hedging relationship was considered effective if the fair value of the hedging instrument and the hedged item changed inversely within a range of 80% to 125%.

For qualifying fair value hedges, gains or losses on derivatives are included in “Interest expense.” The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is subsequently amortized into interest expense over its remaining life. Gains or losses resulting from hedge ineffectiveness are included in “Interest expense.” When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense.

ForThe table below presents the years ended December 2011, December 2010 and December 2009, the gain/(loss) recognized ongains/(losses) from interest rate derivatives accounted for as hedges, was $4.68 billion, $1.62 billion and $(10.07) billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits, was $(6.30) billion, $(3.45) billion and $9.95 billion, respectively. Thethe hedge ineffectiveness recognized on these derivatives, for the years ended December 2011 and December 2010 was a losswhich primarily consists of $1.62 billion and $1.84 billion, respectively, and was not material for the year ended December 2009. These losses consisted primarily of the amortization of prepaid credit spreads. The gain/(loss) excludedspreads resulting from the assessmentpassage of hedge effectiveness was not material for the years ended December 2011 and December 2010, and was a loss of $1.23 billion for the year ended December 2009.time.

  Year Ended December 
$ in millions  2014     2013     2012  

Interest rate hedges

  $ 1,936     $(8,683   $(2,383
  

Hedged borrowings and bank deposits

  (2,451   6,999     665  

Hedge ineffectiveness

  $   (515   $(1,684   $(1,718
 

 

142154 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Net Investment Hedges

The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (i.e., based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates.

For qualifying net investment hedges, the gains or losses on the hedging instruments, to the extent effective, are included in “Currency translation” within the consolidated statements of comprehensive income.

The table below presents the gains/(losses) from net investment hedging. The gains/(losses) below are included in “Currency translation adjustment, net of tax.”

 

  Year Ended December 
in millions 2011   2010   2009 

Currency hedges

 $160    $(261  $(495

Foreign currency-denominated debt

  (147   (498   106  
  Year Ended December 
$ in millions  2014     2013     2012  

Foreign currency forward contract hedges

  $576     $150     $(233
  

Foreign currency-denominated debt hedges

  202     470     347  

The gain/(loss) related to ineffectiveness was not material forand the years ended December 2011, December 2010 and December 2009. The lossgain/(loss) reclassified to earnings from accumulated other comprehensive income was $186 million for the year ended December 2011 and wasincome/(loss) were not material for the years ended December 2010 and December 2009.2014, 2013 or 2012.

As of December 20112014 and December 2010,2013, the firm had designated $3.11$1.36 billion and $3.88$1.97 billion, respectively, of foreign currency-denominated debt, included in “Unsecured long-term borrowings” and “Unsecured short-term borrowings,” as hedges of net investments in non-U.S. subsidiaries.

Fair Value OptionCash Flow Hedges

Beginning in 2013, the firm designated certain commodities-related swap and forward contracts as cash flow hedges. These swap and forward contracts hedged the firm’s exposure to the variability in cash flows associated with the forecasted sales of certain energy commodities by one of the firm’s consolidated investments. During the fourth quarter of 2014, the firm de-designated these swaps and forward contracts as cash flow hedges as it became probable that the hedged forecasted sales would not occur.

Prior to de-designation, the firm applied a statistical method that utilized regression analysis when assessing hedge effectiveness. A cash flow hedge was considered highly effective in offsetting changes in forecasted cash flows attributable to the hedged risk when the regression analysis resulted in a coefficient of determination of 80% or greater and a slope between 80% and 125%.

For qualifying cash flow hedges, the gains or losses on derivatives, to the extent effective, were included in “Cash flow hedges” within the consolidated statements of comprehensive income. Such gains or losses were reclassified to “Other principal transactions” within the consolidated statements of earnings when it became probable that the hedged forecasted sales would not occur. Gains or losses resulting from hedge ineffectiveness were included in “Other principal transactions.”

The effective portion of the gains recognized on these cash flow hedges, gains reclassified to earnings from accumulated other comprehensive income and gains related to hedge ineffectiveness were not material for 2014 and 2013. There were no gains/(losses) excluded from the assessment of hedge effectiveness for 2014 and 2013.

Goldman Sachs 2014 Form 10-K155


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8.

Fair Value Option

Other Financial Assets and Financial Liabilities at Fair Value

In addition to all cash and derivative instruments included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” the firm has elected to accountaccounts for certain of its other financial assets and financial liabilities at fair value primarily under the fair value option.

The primary reasons for electing the fair value option are to:

 

Ÿ 

reflectReflect economic events in earnings on a timely basis;

 

Ÿ 

mitigateMitigate volatility in earnings from using different measurement attributes (e.g., transfers of financial instruments owned accounted for as financings are recorded at fair value whereas the related secured financing would be recorded on an accrual basis absent electing the fair value option); and

 

Ÿ 

addressAddress simplification and cost-benefit considerations (e.g., accounting for hybrid financial instruments at fair value in their entirety versus bifurcation of embedded derivatives and hedge accounting for debt hosts).

Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives and do not require settlement by physical delivery of non-financial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative from the associated debt, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedges. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option.

Other financial assets and financial liabilities accounted for at fair value under the fair value option include:

 

Ÿ 

resaleRepurchase agreements and repurchasesubstantially all resale agreements;

 

Ÿ 

securitiesSecurities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution;

 

Goldman Sachs 2011 Form 10-K143


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ 

certainSubstantially all other secured financings, primarilyincluding transfers of assets accounted for as financings rather than sales and certain other nonrecourse financings, including debt raised through the firm’s William Street credit extension program outstanding as of December 2010;sales;

 

Ÿ 

certainCertain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments;

 

Ÿ 

certainCertain unsecured long-term borrowings, including certain prepaid commodity transactions and certain hybrid financial instruments;

 

Ÿ 

certainCertain receivables from customers and counterparties, including certain margin loans and transfers of assets accounted for as secured loans rather than purchases;purchases and certain margin loans;

 

Ÿ 

certain insurance and reinsurance contract assets and liabilities and certain guarantees;

Ÿ

certain subordinated liabilities issued by consolidated VIEs; and

Ÿ

certainCertain time deposits issued by the firm’s bank subsidiaries. Depositssubsidiaries (deposits with no stated maturity are not eligible for a fair value option election.election), including structured certificates of deposit, which are hybrid financial instruments; and

Ÿ

Certain subordinated liabilities issued by consolidated VIEs.

These financial assets and financial liabilities at fair value are generally valued based on discounted cash flow techniques, which incorporate inputs with reasonable levels of price transparency, and are generally classified as level 2 because the inputs are observable. Valuation adjustments may be made for liquidity and for counterparty and the firm’s credit quality.

Significant

156Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

See below for information about the significant inputs forused to value other financial assets and financial liabilities at fair value, including the ranges of significant unobservable inputs used to value the level 3 instruments within these categories. These ranges represent the significant unobservable inputs that were used in the valuation of each categorytype of other financial assets and financial liabilities at fair value. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value are as follows:of any one instrument. For example, the highest yield presented below for resale and repurchase agreements is appropriate for valuing a specific agreement in that category but may not be appropriate for valuing any other agreements in that category. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 other financial assets and financial liabilities.

Resale and Repurchase Agreements and Securities Borrowed and Loaned.The significant inputs to the valuation of resale and repurchase agreements and securities borrowed and loaned are funding spreads, the amount and timing of expected future cash flows and interest ratesrates. As of both December 2014 and collateral funding spreads.December 2013, there were no level 3 securities borrowed or securities loaned. As of December 2014, the firm’s level 3 resale and repurchase agreements were not material. The range of significant unobservable inputs used to value level 3 resale and repurchase agreements as of December 2013 was 1.3% to 3.9% (weighted average: 1.4%) for yield, and 0.2 years to 2.7 years (weighted average: 2.5 years) for duration. Generally, increases in yield or duration, in isolation, would result in a lower fair value measurement. Due to the distinctive nature of each of the firm’s level 3 resale and repurchase agreements, the interrelationship of inputs is not necessarily uniform across such agreements. See Note 910 for further information.information about collateralized agreements and financings.

Other Secured Financings. The significant inputs to the valuation of other secured financings at fair value are the amount and timing of expected future cash flows, interest rates, funding spreads, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market prices, market yields and recovery assumptions), and the frequency of additional collateral calls andcalls. The ranges of significant unobservable inputs used to value level 3 other secured financings are as follows:

As of December 2014:

Ÿ

Funding spreads: 210 bps to 325 bps (weighted average: 278 bps)

Ÿ

Yield: 1.1% to 10.0% (weighted average: 3.1%)

Ÿ

Duration: 0.7 to 3.8 years (weighted average: 2.6 years)

As of December 2013:

Ÿ

Funding spreads: 40 bps to 250 bps (weighted average: 162 bps)

Ÿ

Yield: 0.9% to 14.3% (weighted average: 5.0%)

Ÿ

Duration: 0.8 to 16.1 years (weighted average: 3.7 years)

Generally, increases in funding spreads, yield or duration, in isolation, would result in a lower fair value measurement. Due to the credit spreadsdistinctive nature of each of the firm.firm’s level 3 other secured financings, the interrelationship of inputs is not necessarily uniform across such financings. See Note 910 for further information.information about collateralized agreements and financings.

Goldman Sachs 2014 Form 10-K157


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Unsecured Short-term and Long-term Borrowings.The significant inputs to the valuation of unsecured short-term and long-term borrowings at fair value are the amount and timing of expected future cash flows, interest rates, the credit spreads of the firm, as well as commodity prices in the case of prepaid commodity transactions and, for certaintransactions. The inputs used to value the embedded derivative component of hybrid financial instruments equity prices, inflation rates and index levels.are consistent with the inputs used to value the firm’s other derivative instruments. See Note 7 for further information about derivatives. See Notes 15 and 16 for further information.information about unsecured short-term and long-term borrowings, respectively.

Certain of the firm’s unsecured short-term and long-term instruments are included in level 3, substantially all of which are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these borrowings, these inputs are incorporated in the firm’s derivative disclosures related to unobservable inputs in Note 7.

Receivables from Customers and Counterparties. Receivables from customers and counterparties at fair value are primarily comprised of transfers of assets accounted for as secured loans rather than purchases. The significant inputs to the valuation of certainsuch receivables are commodity prices, interest rates, the amount and timing of expected future cash flows and funding spreads. As of December 2014, the firm’s level 3 receivables from customers and counterparties were not material. The range of significant unobservable inputs used to value level 3 secured loans as of December 2013 was 40 bps to 477 bps (weighted average: 142 bps) for funding spreads. Generally, an increase in funding spreads would result in a lower fair value measurement.

Deposits. The significant inputs to the valuation of time deposits are commodity prices, interest rates and the amount and timing of expected future cash flows. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm’s other derivative instruments. See Note 7 for further information about derivatives. See Note 14 for further information about deposits.

Insurance and Reinsurance Contracts.Insurance and reinsurance contracts at fair valueThe firm’s deposits that are included in “Receivables from customers and counterparties” and “Other liabilities and accrued expenses.” The insurance and reinsurance contracts for which the firm has elected the fair value optionlevel 3 are contracts that can be settled only in cash and that qualify for the fair value option because they are recognizedhybrid financial instruments. These contracts are valued using market transactions and other market evidence where possible, including market-based inputs to models, calibration to market-clearing transactions or other alternative pricing sources with reasonable levels of price transparency. Significant level 2 inputs typically include interest rates and inflation risk. Significant level 3 inputs typically include mortality or funding benefit assumptions. WhenAs the significant unobservable inputs used to a valuation model are significantvalue hybrid financial instruments primarily relate to the fair value measurementembedded derivative component of an instrument,these deposits, these inputs are incorporated in the instrument is classifiedfirm’s derivative disclosures related to unobservable inputs in level 3.

Deposits.The significant inputs to the valuation of deposits are interest rates.Note 7.

 

 

144158 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair Value of Other Financial Assets and Financial

Liabilities by Level

 

Fair Value of Other Financial Assets and Financial Liabilities by Level

The tables below present, by level within the fair value hierarchy, other financial assets and financial liabilities

accounted for at fair value primarily under the fair value option.

 

 

 Other Financial Assets at Fair Value as of December 2011  Other Financial Assets at Fair Value as of December 2014 
in millions Level 1     Level 2     Level 3     Total 
$ in millions  Level 1     Level 2     Level 3     Total  

Securities segregated for regulatory and other purposes 1

 $21,263      $20,751      $      $42,014    $21,168     $  13,123     $     —     $  34,291  
 

Securities purchased under agreements to resell

         187,232       557       187,789         126,036          126,036  
 

Securities borrowed

         47,621              47,621         66,769          66,769  
 

Receivables from customers and counterparties

         8,887       795       9,682         6,888     56     6,944  

Total

 $21,263      $264,491      $1,352      $287,106    $21,168     $212,816     $     56     $234,040  
 Other Financial Liabilities at Fair Value as of December 2011  Other Financial Liabilities at Fair Value as of December  2014 
in millions Level 1     Level 2     Level 3     Total 
$ in millions  Level 1     Level 2     Level 3     Total  

Deposits

 $      $4,513      $13      $4,526    $       —     $  12,458     $1,065     $  13,523  
 

Securities sold under agreements to repurchase

         162,321       2,181       164,502         88,091     124     88,215  
 

Securities loaned

         107              107         765          765  
 

Other secured financings

         28,267       1,752       30,019         20,359     1,091     21,450  
 

Unsecured short-term borrowings

         14,560       3,294       17,854         15,114     3,712     18,826  
 

Unsecured long-term borrowings

         14,971       2,191       17,162         13,420     2,585     16,005  
 

Other liabilities and accrued expenses

         490       8,996       9,486         116     715     831  

Total

 $      $225,229      $18,427      $243,656    $       —     $150,323     $9,292     $159,615  
 Other Financial Assets at Fair Value as of December 2013 
$ in millions  Level 1     Level 2     Level 3     Total  

Securities segregated for regulatory and other purposes 1

  $19,502     $  12,435     $     —     $  31,937  
 

Securities purchased under agreements to resell

       161,234     63     161,297  
 

Securities borrowed

       60,384          60,384  
 

Receivables from customers and counterparties

       7,181     235     7,416  
 

Other assets

       18          18  

Total

  $19,502     $241,252     $   298     $261,052  
 Other Financial Liabilities at Fair Value as of December 2013 
$ in millions  Level 1     Level 2     Level 3     Total  

Deposits

  $       —     $    6,870     $   385     $    7,255  
 

Securities sold under agreements to repurchase

       163,772     1,010     164,782  
 

Securities loaned

       973          973  
 

Other secured financings

       22,572     1,019     23,591  
 

Unsecured short-term borrowings

       15,680     3,387     19,067  
 

Unsecured long-term borrowings

       9,854     1,837     11,691  
 

Other liabilities and accrued expenses

       362     26     388  

Total

  $       —     $220,083     $7,664     $227,747  

 

1.

Includes securities segregated for regulatory and other purposes accounted for at fair value under the fair value option, which consists of securities borrowed and resale agreements. The table above also includes $21.26 billion ofIn addition, level 1 and $528 millionconsists of level 2 securities segregated for regulatory and other purposes accounted for at fair value under other U.S. GAAP, principally consisting of U.S. Treasury securities and money market instruments and insurance separate account assets.instruments.

 

Goldman Sachs 2011 Form 10-K145


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial StatementsTransfers Between Levels of the Fair Value Hierarchy

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. There were no transfers of other financial assets and financial liabilities between level 1 and level 2 during 2014 or 2013. The tables below present information about transfers between level 2 and level 3.

  

Other Financial Assets at Fair Value as of December 2010

in millions Level 1    Level 2    Level 3    Total

Securities segregated for regulatory and other purposes 1

 

$19,794

    $  16,388    $   —    $  36,182

Securities purchased under agreements to resell

     188,255    100    188,355

Securities borrowed

     48,822        48,822

Receivables from customers and counterparties

     6,904    298    7,202

Total

 

$19,794

    $260,369    $398    $280,561

  

Other Financial Liabilities at Fair Value as of December 2010

in millions Level 1    Level 2    Level 3    Total

Deposits

 $—    $   1,975    $       —    $    1,975

Securities sold under agreements to repurchase

     160,285    2,060    162,345

Securities loaned

     1,514        1,514

Other secured financings

     23,445    8,349    31,794

Unsecured short-term borrowings

     18,640    3,476    22,116

Unsecured long-term borrowings

     16,067    2,104    18,171

Other liabilities and accrued expenses

     563    2,409    2,972

Total

 $—    $222,489    $18,398    $240,887

1.

Includes securities segregated for regulatory and other purposes accounted for at fair value under the fair value option, which consists of securities borrowed and resale agreements. The table above also includes $19.79 billion of level 1 and $3.53 billion of level 2 securities segregated for regulatory and other purposes accounted for at fair value under other U.S. GAAP, principally consisting of U.S. Treasury securities, money market instruments and insurance separate account assets.

146Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Level 3 Rollforward

If a financial asset or financial liability was transferred to level 3 during a reporting period,year, its entire gain or loss for the periodyear is included in level 3. Transfers between levels are recognized at the beginning of the reporting period in which they occur.

Goldman Sachs 2014 Form 10-K159


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The tables below present changes in fair value for other financial assets and financial liabilities accounted for at fair value under the fair value option categorized as level 3 as of the end of the year.

Level 3 other financial assets and liabilities are frequently economically hedged with cash instruments and derivatives. Accordingly, gains or losses that are reported in level 3 can

be partially offset by gains or losses attributable to level 1, 2 or 3 cash instruments or derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

 

 

  

Level 3 Other Financial Assets at Fair Value for the Year Ended December 2011

in millions Balance,
beginning
of year
  Net
realized
gains/
(losses)
  

Net unrealized
gains/(losses)
relating to
instruments
still held at

year-end

  Purchases  Sales  Settlements  

Net
transfers
in and/or
(out) of

level 3

  Balance,
end of
year

Securities purchased under agreements to resell

 $100  $ 2  $—  $   620  $—  $(165)  $—  $   557

Receivables from customers and counterparties

 298    54  468    (25)    795

Total

 $398  $ 2  $54  $1,088  $—  $(190)  $—  $1,352

  

Level 3 Other Financial Liabilities at Fair Value for the Year Ended December 2011

in millions Balance,
beginning
of year
  Net
realized
(gains)/
losses
  

Net unrealized
(gains)/losses
relating to
instruments
still held at

year-end

  Purchases  Sales  Issuances  Settlements  

Net
transfers
in and/or
(out) of

level 3

  

Balance,
end of

year

Deposits

 $        —  $ —   $     —   $      —   $—  $      13  $       —   $       —   $       13

Securities sold under agreements to repurchase, at fair value

 2,060  —   —   —     299  (178)  —   2,181

Other secured financings

 8,349      —     483  (4,062)  (3,029)  1,752

Unsecured short-term borrowings

 3,476  (15)  (340)  (5)    815  (1,080)  443   3,294

Unsecured long-term borrowings

 2,104  25     —     441  (193)  (191)  2,191

Other liabilities and accrued expenses

 2,409  —   1,095   5,840       (348)  —   8,996

Total

 $18,398  $ 18   $    763  $5,835   $—  $2,051  $(5,861)  $(2,777)  $18,427
  Level 3 Other Financial Assets at Fair Value for the Year Ended December 2014 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
  
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
  
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases    Sales    Issuances    Settlements    
 
 
Transfers
into
level 3
  
  
  
  
 
 
Transfers
out of
level 3
  
  
  
  
 
 
Balance,
end of
year
  
  
  

Securities purchased under agreements to resell

  $     63    $ —    $    —    $     $ —    $      —    $     (63  $      —    $       —    $      —  
  

Receivables from customers and counterparties

  235    3    2    29            (33      (180  56  

Total

  $   298    $  3 1   $     2 1   $29    $ —    $      —    $     (96  $      —    $   (180  $     56  

 

1.
Goldman Sachs 2011 Form 10-K147

Included in “Market making.”


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

  Level 3 Other Financial Liabilities at Fair Value for the Year Ended December 2014 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
  
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
  
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases    Sales    Issuances    Settlements    
 
 
Transfers
into
level 3
  
  
  
  
 
 
Transfers
out of
level 3
  
  
  
  
 
 
Balance,
end of
year
  
  
  

Deposits

  $   385    $ —    $   21    $(5)    $ —    $   442    $       (6  $   280    $    (52)    $1,065  
  

Securities sold under agreements to repurchase

  1,010                        (886          124  
  

Other secured financings

  1,019    31    (27  20        402    (521  364    (197  1,091  
  

Unsecured short-term borrowings

  3,387    11    251    5        2,246    (1,828  981    (1,341  3,712  
  

Unsecured long-term borrowings

  1,837    46    (56  (3)        1,221    (446  1,344    (1,358  2,585  
  

Other liabilities and accrued expenses

  26    5    434        19        (20  301    (50  715  

Total

  $7,664    $93 1   $ 623 1   $17    $19    $4,311    $(3,707  $3,270    $(2,998  $9,292  

 

Notes to Consolidated Financial Statements
1.

The aggregate amounts include (gains)/losses of approximately $(150) million, $833 million and $33 million reported in “Market making,” “Other principal transactions” and “Interest expense,” respectively.

 

The net unrealized loss on level 3 other financial assets and liabilities at fair value of $709$621 million for the year ended December 2011 primarily consisted(reflecting $2 million of gains on other financial assets and $623 million of losses on other financial liabilities) for 2014 primarily reflected losses on certain subordinated liabilities included in other liabilities and accrued expenses, primarily attributableprincipally due to changes in the impactmarket value of a changethe related underlying investments, and certain hybrid financial instruments included in interest rates on certain insurance liabilities. These losses were partially offset by gains on unsecured short-term borrowings, primarily reflecting gains on certain equity-linked notes, principally due to a declinean increase in global equity markets.prices.

Significant transfers in orTransfers out of level 3 of other financial assets during 2014 primarily reflected transfers of certain secured loans included in receivables from customers and counterparties to level 2, principally due to unobservable inputs not being significant to the year ended December 2011 included:net risk of the portfolio.

Transfers into level 3 of other financial liabilities during 2014 primarily reflected transfers of certain hybrid financial instruments included in unsecured long-term and short-term borrowings from level 2, principally due to unobservable inputs being significant to the valuation of these instruments, and transfers from level 3 unsecured long-term borrowings to level 3 unsecured short-term borrowings, as these borrowings neared maturity.

Ÿ

Other secured financings: net transfer out of level 3 of $3.03 billion, principally due to transfers to level 2 of certain borrowings as unobservable inputs were no longer significant to the valuation of these borrowings as they neared maturity.

Ÿ

Unsecured short-term borrowings: net transfer into level 3 of $443 million, principally due to transfers to level 3 of certain borrowings due to less transparency of market prices as a result of less activity in these financial instruments.

  Level 3 Other Financial Assets at Fair Value for the Year Ended December 2010 
in millions Balance,
beginning
of year
   Net
realized
gains/
(losses)
   

Net unrealized
gains/(losses)
relating to
instruments
still held at

year-end

   Net
purchases,
sales and
settlements
   Net
transfers in
and/or
(out) of
level 3
   

Balance,
end of

year

 

Securities purchased under agreements to resell

  $        —     $    3     $  —     $     97     $       —     $     100  

Receivables from customers and counterparties

       22     (58        334     298  

Total

  $        —     $  25     $ (58   $     97     $    334     $     398  
  Level 3 Other Financial Liabilities at Fair Value for the Year Ended December 2010 
in millions Balance,
beginning
of year
   Net
realized
(gains)/
losses
   

Net unrealized
(gains)/losses
relating to
instruments
still held at

year-end

   Net
purchases,
sales,
issuances
and
settlements
   Net
transfers in
and/or
(out) of
level 3
   

Balance,
end of

year

 

Securities sold under agreements to repurchase, at fair value

  $     394     $  —     $   —     $1,666     $       —     $  2,060  

Other secured financings

  6,756     (1   25     1,605     (36   8,349  

Unsecured short-term borrowings

  2,310     91     35     (300   1,340     3,476  

Unsecured long-term borrowings

  3,077     23     41     216     (1,253   2,104  

Other liabilities and accrued expenses

  1,913     10     54     (155   587     2,409  

Total

  $14,450     $123     $155     $3,032     $    638     $18,398  

Significant transfers in orTransfers out of level 3 of other financial liabilities during the year ended December 2010, which were2014 primarily reflected transfers of certain hybrid financial instruments included in unsecured long-term and short-term borrowings to level 2, principally due to the consolidationincreased transparency of certain VIEs upon adoptioncorrelation and volatility inputs used to value these instruments, transfers of ASU No. 2009-17certain other hybrid financial instruments included in unsecured short-term borrowings to level 2, principally due to certain unobservable inputs not being significant to the valuation of these hybrid financial instruments, and transfers to level 3 unsecured short-term borrowings from level 3 unsecured long-term borrowings, as of January 1, 2010, included:these borrowings neared maturity.

Ÿ

Unsecured short-term borrowings: net transfer into level 3 of $1.34 billion, principally due to the consolidation of certain VIEs.

Ÿ

Unsecured long-term borrowings: net transfer out of level 3 of $1.25 billion, principally due to the consolidation of certain VIEs, which caused the firm’s borrowings from these VIEs to become intercompany borrowings which were eliminated in consolidation. Substantially all of these borrowings were level 3.

Ÿ

Other liabilities and accrued expenses: net transfer into level 3 of $587 million, principally due to an increase in subordinated liabilities issued by certain consolidated VIEs.

 

 

148160 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

  Level 3 Other Financial Assets at Fair Value for the Year Ended December 2013 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
  
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
  
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases    Sales    Issuances    Settlements    
 
 
Transfers
into
level 3
  
  
  
  
 
 
Transfers
out of
level 3
  
  
  
  
 
 
Balance,
end of
year
  
  
  

Securities purchased under agreements to resell

  $     278    $   4    $   —    $ —    $        —    $      —    $     (16  $      —    $   (203  $     63  
  

Receivables from customers and counterparties

  641    1    14    54    (474      (1          235  
  

Other assets

  507                (507                    

Total

  $  1,426    $   5 1   $  14 1   $54    $     (981  $      —    $     (17  $      —    $   (203  $   298  

1.

The aggregate amounts include gains of approximately $14 million, $1 million and $4 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

  Level 3 Other Financial Liabilities at Fair Value for the Year Ended December 2013 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
  
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
  
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
year-end
  
  
  
  
  
  
  Purchases    Sales    Issuances    Settlements    
 
 
Transfers
into
level 3
  
  
  
  
 
 
Transfers
out of
level 3
  
  
  
  
 
 
Balance,
end of
year
  
  
  

Deposits

  $     359    $ —    $   (6  $ —    $        —    $   109    $       (6  $      —    $     (71)    $   385  
  

Securities sold under agreements to repurchase

  1,927                        (917          1,010  
  

Other secured financings

  1,412    10    2            708    (894  126    (345  1,019  
  

Unsecured short-term borrowings

  2,584    1    239            1,624    (1,502  714    (273  3,387  
  

Unsecured long-term borrowings

  1,917    22    43    (3      470    (558  671    (725  1,837  
  

Other liabilities and accrued expenses

  11,274    (29  (2      (10,288      (426      (503  26  

Total

  $19,473    $   4 1   $276 1   $ (3  $(10,288  $2,911    $(4,303  $1,511    $(1,917  $7,664  

1.

The aggregate amounts include losses of approximately $184 million, $88 million and $8 million reported in “Market making,” “Other principal transactions” and “Interest expense,” respectively.

The net unrealized loss on level 3 other financial assets and liabilities of $262 million (reflecting $14 million of gains on other financial assets and $276 million of losses on other financial liabilities) for 2013 primarily reflected losses on certain hybrid financial instruments included in unsecured short-term borrowings, principally due to an increase in global equity prices.

Sales of other liabilities and accrued expenses during 2013 primarily reflected the sale of a majority stake in the firm’s European insurance business.

Transfers out of level 3 of other financial assets during 2013 primarily reflected transfers of certain resale agreements to level 2, principally due to increased price transparency as a result of market transactions in similar instruments.

Transfers into level 3 of other financial liabilities during 2013 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings from level 2, principally due to decreased transparency of certain correlation and volatility inputs used to value these instruments.

Transfers out of level 3 of other financial liabilities during 2013 primarily reflected transfers of certain hybrid financial instruments included in unsecured short-term and long-term borrowings to level 2, principally due to increased transparency of certain correlation and volatility inputs used to value these instruments, and transfers of subordinated liabilities included in other liabilities and accrued expenses to level 2, principally due to increased price transparency as a result of market transactions in the related underlying investments.

Goldman Sachs 2014 Form 10-K161


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Gains and Losses on Other Financial Assets and

Financial Liabilities Accounted for at Fair Value Under the Fair Value Option

The “Fair Value Option” columns in the table below presentpresents the gains and losses recognized as a result of the firm electing to apply the fair value option to certain financial assets and financial liabilities. These gains and losses are included in “Market making” and “Other principal transactions.” The table below also includes gains and losses on the embedded derivative component of hybrid financial instruments included in unsecured short-term borrowings, unsecured long-term borrowings and deposits. These gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account for the entire hybrid financial instrument at fair value.

The amounts in the table exclude contractual interest, which is included in “Interest income” and “Interest expense,” for all instruments other than hybrid financial instruments. See Note 23 for further information about interest income and interest expense. The table also excludes gains and losses related to financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value.

Included in the “Other” columns in the table below are:

  Gains/(Losses) on Financial Assets
and Financial Liabilities at
Fair Value  Under the Fair Value Option
 
  Year Ended December 
$ in millions  2014       2013       2012  

Unsecured short-term
borrowings 1

  $(1,180     $(1,145     $   (973
  

Unsecured long-term
borrowings 2

  (592     683       (1,523
  

Other liabilities and
accrued expenses 3

  (441     (167     (1,486
  

Other 4

  (366     (443     (81

Total

  $(2,579     $(1,072     $(4,063

 

Ÿ1.

Gains andIncludes losses on the embedded derivative component of hybrid financial instruments included in unsecured short-term borrowingsof $1.22 billion for 2014, $1.04 billion for 2013 and unsecured long-term borrowings. These gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account$814 million for the entire hybrid instrument at fair value.

Ÿ

Gains and losses on secured financings related to transfers of assets accounted for as financings rather than sales. These gains and losses are offset by gains and losses on the related instruments included in “Financial instruments owned, at fair value” and “Receivables from customers and counterparties.”

Ÿ

Gains and losses on receivables from customers and counterparties related to transfers of assets accounted for as receivables rather than purchases. These gains and losses are offset by gains and losses on the related financial instruments included in “Other secured financings.”

Ÿ

Gains and losses on subordinated liabilities issued by consolidated VIEs, which are included in “Other liabilities and accrued expenses.” These gains and losses are offset by gains and losses on the financial assets held by the consolidated VIEs.

  Gains/(Losses) on Other Financial Assets and Financial Liabilities at Fair Value 
  Year Ended December 
  2011     2010     2009 
in millions 

Fair

Value
Option

   Other      

Fair

Value

Option

   Other      

Fair

Value
Option

   Other 

Receivables from customers and counterparties 1

  $  (11   $    442       $(106   $    558       $    255     $      —  

Other secured financings

  123     (1,199     (35   (996     (822   48  

Unsecured short-term borrowings

  144     2,005       33     (1,488     (182   (3,150

Unsecured long-term borrowings

  535     1,801       152     (1,321     (884   (4,150

Other liabilities and accrued expenses 2

  (994   83       (88   138       (214     

Other 3

  90            (10          79       

Total

  $(113   $ 3,132       $  (54   $(3,109     $(1,768   $(7,252

1.

Primarily consists of gains/(losses) on certain transfers accounted for as receivables rather than purchases and certain reinsurance contracts.2012, respectively.

 

2.

Primarily consistsIncludes gains/(losses) on the embedded derivative component of hybrid financial instruments of $(697) million for 2014, $902 million for 2013 and $(887) million for 2012, respectively.

3.

Includes gains/(losses) on certain subordinated liabilities issued by consolidated VIEs. Gains/(losses) for 2013 and 2012 also includes gains on certain insurance contracts.

 

3.4.

Primarily consists of gains/(losses) on resale and repurchasesecurities purchased under agreements to resell, securities borrowed, receivables from customers and loanedcounterparties, deposits and deposits.other secured financings.

Excluding the gains and losses on the instruments accounted for under the fair value option described above, “Market making” and “Other principal transactions”

primarily representsrepresent gains and losses on “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value.”

Goldman Sachs 2011 Form 10-K149


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans and Lending Commitments

The table below presents the difference between the aggregate fair value and the aggregate contractual principal amount for loans and long-term receivables for which the fair value option was elected.

 

  As of December
in millions 2011  2010

Aggregate contractual principal amount
of performing loans and long-term
receivables in excess of the
related fair value

  $3,826    $3,090 

Aggregate contractual principal amount
of loans on nonaccrual status and/or more than 90 days past due in excess
of the related fair value

   23,034     26,653 

Total 1

  $26,860    $29,743 

Aggregate fair value of loans on nonaccrual status and/or more than 90 days past due

  $3,174    $3,994 
  As of December 
$ in millions  2014     2013  

Performing loans and long-term receivables

   

Aggregate contractual principal in excess of the related fair value

  $1,699     $3,106  
  

Loans on nonaccrual status and/or more than 90 days past due 1

   

Aggregate contractual principal in excess of the related fair value (excluding loans carried at zero fair value and considered uncollectible)

  13,106     11,041  
  

Aggregate fair value of loans on nonaccrual status and/or more than 90 days past due

  3,333     2,781  

 

1.

The aggregate contractual principal amount of these loans exceeds the related fair value primarily because the firm regularly purchases loans, such as distressed loans, at values significantly below contractual principal amounts.

As of December 20112014 and December 2010,2013, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $2.82 billion$402 million and $1.26$1.22 billion, respectively, and the related total contractual amount of these lending commitments was $66.12$26.19 billion and $51.20$51.54 billion, respectively. See Note 18 for further information about lending commitments.

162Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Long-termNotes to Consolidated Financial Statements

Long-Term Debt Instruments

The aggregate contractual principal amount of long-term debt instruments (principal and non-principal protected)other secured financings for which the fair value option was elected exceeded the related fair value by $932$203 million and $701$154 million as of December 20112014 and December 2010,2013, respectively. Of these amounts, $693The aggregate contractual principal amount of unsecured long-term borrowings for which the fair value option was elected exceeded the related fair value by $163 million and $349$92 million as of December 20112014 and December 2010, respectively, related to unsecured2013, respectively. The amounts above include both principal and non-principal-protected long-term borrowings and the remainder related to long-term other secured financings.borrowings.

Impact of Credit Spreads on Loans and Lending Commitments

The estimated net gain/(loss)gain attributable to changes in instrument-specific credit spreads on loans and lending commitments for which the fair value option was elected was $(805) million, $1.85 billion and $1.65$1.83 billion for the years ended December 2011, December 20102014, $2.69 billion for 2013 and December 2009,$3.07 billion for 2012, respectively. Changes in the fair value of loans and lending commitments are primarily attributable to changes in instrument-specific credit spreads. Substantially all of the firm’s performing loans and lending commitments are floating-rate.

Impact of Credit Spreads on Borrowings

The table below presents the net gains/(losses) attributable to the impact of changes in the firm’s own credit spreads on borrowings for which the fair value option was elected. The firm calculates the fair value of borrowings by discounting future cash flows at a rate which incorporates the firm’s credit spreads.

 

  Year Ended December 
$ in millions  2014     2013     2012  

Net gains/(losses) including hedges

  $144     $(296   $(714
  

Net gains/(losses) excluding hedges

  142     (317   (800

Note 9.

Loans Receivable

Loans receivable is comprised of loans held for investment that are accounted for at amortized cost net of allowance for loan losses. Interest on such loans is recognized over the life of the loan and is recorded on an accrual basis. The table below presents details about loans receivable.

 

  Year Ended December
in millions 2011  2010  2009

Net gains/(losses) including hedges

  $596    $198    $(1,103)

Net gains/(losses) excluding hedges

   714     199     (1,116)
  As of December 
$ in millions  2014     2013  

Corporate loans

  $15,044     $  7,667  
  

Loans to private wealth management clients

  11,289     6,558  
  

Loans backed by commercial real estate

  1,705     809  
  

Other loans

  1,128       

Subtotal

  29,166     15,034  
  

Allowance for loan losses

  (228   (139

Total loans receivable

  $28,938     $14,895  

As of December 2014 and December 2013, the fair value of “Loans receivable” was $28.90 billion and $14.91 billion, respectively. As of December 2014, had these loans been carried at fair value and included in the fair value hierarchy, $13.75 billion and $15.15 billion would have been classified in level 2 and level 3, respectively. As of December 2013, had these loans been carried at fair value and included in the fair value hierarchy, $6.16 billion and $8.75 billion would have been classified in level 2 and level 3, respectively.

The firm also extends lending commitments that are held for investment and accounted for on an accrual basis. As of December 2014 and December 2013, such lending commitments were $66.22 billion and $35.66 billion, respectively, substantially all of which were extended to corporate borrowers. The carrying value and the estimated fair value of such lending commitments were liabilities of $199 million and $1.86 billion, respectively, as of December 2014, and $132 million and $1.02 billion, respectively, as of December 2013. Had these commitments been included in the firm’s fair value hierarchy, they would have primarily been classified in level 3 as of both December 2014 and December 2013.

 

 

150 Goldman Sachs 20112014 Form 10-K 163


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Below is a description of the captions in the table above.

Ÿ

Corporate Loans. Corporate loans include term loans, revolving lines of credit, letter of credit facilities and bridge loans, and are principally used for operating liquidity and general corporate purposes, or in connection with acquisitions. Corporate loans may be secured or unsecured, depending on the loan purpose, the risk profile of the borrower and other factors. The majority of these loans have maturities between one year and five years and carry a floating interest rate.

Ÿ

Loans to Private Wealth Management Clients. Loans to the firm’s private wealth management clients include loans used by clients to finance private asset purchases, employ leverage for strategic investments in real or financial assets, bridge cash flow timing gaps or provide liquidity for other needs. Such loans are primarily secured by securities or other assets. The majority of these loans are demand or short-term loans and carry a floating interest rate.

Ÿ

Loans Backed by Commercial Real Estate. Loans backed by commercial real estate include loans collateralized by hotels, retail stores, multifamily housing complexes and commercial and industrial properties. The majority of these loans have maturities between one year and five years and carry a floating interest rate.

Ÿ

Other Loans. Other loans primarily include loans secured by consumer loans, residential real estate and other assets. The majority of these loans have maturities between one year and five years and carry a floating interest rate.

Credit Quality

The firm’s risk assessment process includes evaluating the credit quality of its loans receivable. The firm performs credit reviews which include initial and ongoing analyses of its borrowers. A credit review is an independent analysis of the capacity and willingness of a borrower to meet its financial obligations, resulting in an internal credit rating. The determination of internal credit ratings also incorporates assumptions with respect to the nature of and outlook for the borrower’s industry, and the economic environment. The firm also assigns a regulatory risk rating to such loans based on the definitions provided by the U.S. federal bank regulatory agencies.

As of December 2014 and December 2013, loans receivable were primarily extended to non-investment-grade borrowers and lending commitments held for investment and accounted for on an accrual basis were primarily extended to investment-grade borrowers. Substantially all of these loans and lending commitments align with the U.S. federal bank regulatory agencies’ definition of Pass. Loans and lending commitments meet the definition of Pass when they are performing and/or do not demonstrate adverse characteristics that are likely to result in a credit loss.

Impaired Loans and Loans on Non-Accrual Status

A loan is determined to be impaired when it is probable that the firm will not be able to collect all principal and interest due under the contractual terms of the loan. At that time, loans are placed on non-accrual status and all accrued but uncollected interest is reversed against interest income and interest subsequently collected is recognized on a cash basis to the extent the loan balance is deemed collectible. Otherwise all cash received is used to reduce the outstanding loan balance. As of December 2014 and December 2013, impaired loans receivable in non-accrual status were not material.

Allowance for Losses on Loans and Lending Commitments

The firm’s allowance for loan losses is comprised of two components: specific loan level reserves and a collective, portfolio level reserve. Specific loan level reserves are determined on loans that exhibit credit quality weakness and are therefore individually evaluated for impairment. Portfolio level reserves are determined on the remaining loans, not deemed impaired, by aggregating groups of loans with similar risk characteristics and estimating the probable loss inherent in the portfolio. As of December 2014 and December 2013, substantially all of the firm’s loans receivable were evaluated for impairment at the portfolio level.

164Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Collateralized Agreements

The allowance for loan losses is determined using various inputs, including industry default and Financingsloss data, current macroeconomic indicators, borrower’s capacity to meet its financial obligations, borrower’s country of risk, loan seniority, and collateral type. Management’s estimate of loan losses entails judgment about loan collectability based on available information at the reporting dates, and there are uncertainties inherent in those judgments. While management uses the best information available to determine this estimate, future adjustments to the allowance may be necessary based on, among other things, changes in the economic environment or variances between actual results and the original assumptions used. Loans are charged off against the allowance for loan losses when they are deemed to be uncollectible.

The firm also records an allowance for losses on lending commitments that are held for investment and accounted for on an accrual basis. Such allowance is determined using the same methodology as the allowance for loan losses, while also taking into consideration the probability of drawdowns or funding and is included in “Other liabilities and accrued expenses” in the consolidated statements of financial condition. As of December 2014 and December 2013, substantially all of such lending commitments were evaluated for impairment at the portfolio level.

The tables below present the changes in allowance for loan losses, and allowance for losses on lending commitments for the years ended December 2014 and December 2013.

$ in millions

 

Allowance for loan losses

 Year Ended December 
  2014       2013  

Balance, beginning of year

  $139       $  24  
  

Charge-offs

  (3       
  

Provision for loan losses

  92       115  

Balance, end of year

  $228       $139  

$ in millions

 

Allowance for losses on lending commitments

 Year Ended December 
  2014       2013  

Balance, beginning of year

  $  57       $  28  
  

Provision for losses on lending commitments

  29       29  

Balance, end of year

  $  86       $  57  

The provision for losses on loans and lending commitments is included in “Other principal transactions” in the consolidated statements of earnings. As of December 2014 and December 2013, substantially all of the allowance for loan losses and allowance for losses on lending commitments were related to corporate loans and corporate lending commitments. Substantially all of these allowances were determined at the portfolio level.

Note 9.10.

Collateralized Agreements and Financings

Collateralized agreements are securities purchased under agreements to resell (resale agreements or reverse repurchase agreements) and securities borrowed. Collateralized financings are securities sold under agreements to repurchase (repurchase agreements), securities loaned and other secured financings. The firm enters into these transactions in order to, among other things, facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities.

Collateralized agreements and financings are presented on a net-by-counterparty basis when a legal right of setoff exists. Interest on collateralized agreements and collateralized financings is recognized over the life of the transaction and included in “Interest income” and “Interest expense,” respectively. See Note 23 for further information about interest income and interest expense.

The table below presents the carrying value of resale and repurchase agreements and securities borrowed and loaned transactions.

 

  As of December 
in millions 2011   2010 

Securities purchased under agreements
to resell 1

 $187,789    $188,355  

Securities borrowed 2

  153,341     166,306  

Securities sold under agreements
to repurchase 1

  164,502     162,345  

Securities loaned 2

�� 7,182     11,212  
  As of December 
$ in millions  2014     2013  

Securities purchased under agreements to resell 1

  $127,938     $161,732  
  

Securities borrowed 2

  160,722     164,566  
  

Securities sold under agreements to repurchase 1

  88,215     164,782  
  

Securities loaned 2

  5,570     18,745  

 

1.

ResaleSubstantially all resale agreements and all repurchase agreements are carried at fair value under the fair value option. See Note 8 for further information about the valuation techniques and significant inputs used to determine fair value.

 

2.

As of December 20112014 and December 2010, $47.622013, $66.77 billion and $48.82$60.38 billion of securities borrowed, and $107$765 million and $1.51 billion$973 million of securities loaned were at fair value, respectively.

Goldman Sachs 2014 Form 10-K165


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Resale and Repurchase Agreements

A resale agreement is a transaction in which the firm purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller at a stated price plus accrued interest at a future date.

A repurchase agreement is a transaction in which the firm sells financial instruments to a buyer, typically in exchange for cash, and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date.

The financial instruments purchased or sold in resale and repurchase agreements typically include U.S. government and federal agency, and investment-grade sovereign obligations.

The firm receives financial instruments purchased under resale agreements, makes delivery of financial instruments sold under repurchase agreements, monitors the market value of these financial instruments on a daily basis, and delivers or obtains additional collateral due to changes in the market value of the financial instruments, as appropriate. For resale agreements, the firm typically requires delivery of collateral with a fair value approximately equal to the carrying value of the relevant assets in the consolidated statements of financial condition.

Even though repurchase and resale agreements involve the legal transfer of ownership of financial instruments, they are accounted for as financing arrangements because they require the financial instruments to be repurchased or resold at the maturity of the agreement. However, “repos to maturity”“repos-to-maturity” are accounted for as sales. A repo to maturityrepo-to-maturity is a transaction in which the firm transfers a security under an agreement to repurchase the security where the maturity date of the repurchase agreement matches the maturity date of the underlying security. Therefore, the firm effectively no longer has a repurchase obligation and has relinquished control over the underlying security and, accordingly, accounts for the transaction as a sale. See Note 3 for information about changes to the accounting for repos-to-maturity which became effective in January 2015. The firm had no repos to maturityrepos-to-maturity outstanding as of December 2011 or2014 and December 2010.2013.

Goldman Sachs 2011 Form 10-K151


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Securities Borrowed and Loaned Transactions

In a securities borrowed transaction, the firm borrows securities from a counterparty in exchange for cash.cash or securities. When the firm returns the securities, the counterparty returns the cash.cash or securities. Interest is generally paid periodically over the life of the transaction.

In a securities loaned transaction, the firm lends securities to a counterparty typically in exchange for cash or securities, or a letter of credit.securities. When the counterparty returns the securities, the firm returns the cash or securities posted as collateral. Interest is generally paid periodically over the life of the transaction.

The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of these securities on a daily basis, and delivers or obtains additional collateral due to changes in the market value of the securities, as appropriate. For securities borrowed transactions, the firm typically requires delivery of collateral with a fair value approximately equal to the carrying value of the securities borrowed transaction.

Securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution are recorded at fair value under the fair value option. See Note 8 for further information about securities borrowed and loaned accounted for at fair value.

Securities borrowed and loaned within Securities Services are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminated on demand, they exhibit little, if any, sensitivity to changes in interest rates.

As Therefore, the carrying value of such arrangements approximates fair value. While these arrangements are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these arrangements been included in the firm’s fair value hierarchy, they would have been classified in level 2 as of December 20112014 and December 2010,2013.

166Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Offsetting Arrangements

The tables below present the firm had $20.22 billiongross and $12.86 billion, respectively, of securities received undernet resale and repurchase agreements and securities borrowed and loaned transactions, that were segregated to satisfy certain regulatory requirements. These securities areand the related amount of netting with the same counterparty under enforceable netting agreements (i.e., counterparty netting) included in “Cashthe consolidated statements of financial condition. Substantially all of the gross carrying values of these arrangements are subject to enforceable netting agreements. The tables below also present the amounts not offset in the consolidated statements of financial condition including counterparty netting that does not meet the criteria for netting under U.S. GAAP and the fair value of cash or securities collateral received or posted subject to enforceable credit support agreements. Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted in the tables below.

  As of December 2014 
  Assets    Liabilities 
$ in millions  
 
Resale
agreements
  
  
  
 
Securities
borrowed
  
  
    
 
Repurchase
agreements
  
  
  
 
Securities
loaned
  
  

Amounts included in the consolidated statements of financial condition

     

Gross carrying value

  $ 160,644    $ 171,384     $ 114,879    $   9,150  
  

Counterparty netting

  (26,664  (3,580    (26,664  (3,580

Total

  133,980 1   167,804 1     88,215    5,570  

Amounts not offset in the consolidated statements of financial condition

     

Counterparty netting

  (3,834  (641   (3,834  (641
  

Collateral

  (124,528  (154,058    (78,457  (4,882

Total

  $     5,618    $   13,105      $     5,924    $        47  
  As of December 2013 
  Assets    Liabilities 
$ in millions  
 
Resale
agreements
  
  
  
 
Securities
borrowed
  
  
    
 
Repurchase
agreements
  
  
  
 
Securities
loaned
  
  

Amounts included in the consolidated statements of financial condition

     

Gross carrying value

  $ 190,536    $ 172,283     $ 183,913    $ 23,700  
  

Counterparty netting

  (19,131  (4,955    (19,131  (4,955

Total

  171,405 1   167,328 1     164,782    18,745  

Amounts not offset in the consolidated statements of financial condition

     

Counterparty netting

  (10,725  (2,224   (10,725  (2,224
  

Collateral

  (152,914  (147,223    (141,300  (16,278

Total

  $     7,766    $   17,881      $   12,757    $      243  

1.

As of December 2014 and December 2013, the firm had $6.04 billion and $9.67 billion, respectively, of securities received under resale agreements, and $7.08 billion and $2.77 billion, respectively, of securities borrowed transactions that were segregated to satisfy certain regulatory requirements. These securities are included in “Cash and securities segregated for regulatory and other purposes.”

Other Secured Financings

In addition to repurchase agreements and securities lending transactions, the firm funds certain assets through the use of other secured financings and pledges financial instruments and other assets as collateral in these transactions. These other secured financings consist of:

 

Ÿ 

liabilitiesLiabilities of consolidated VIEs;

 

Ÿ 

transfersTransfers of assets accounted for as financings rather than sales (primarily collateralized central bank financings, pledged commodities, bank loans and mortgage whole loans);

Ÿ

other structured financing arrangements; and

 

Ÿ 

debt raised through the firm’s William Street credit extension program outstanding as of December 2010.Other structured financing arrangements.

Other secured financings include arrangements that are nonrecourse. As of December 20112014 and December 2010,2013, nonrecourse other secured financings were $3.14$1.94 billion and $8.42$1.54 billion, respectively.

The firm has elected to apply the fair value option to the followingsubstantially all other secured financings because the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes:

Ÿ

transfers of assets accounted for as financings rather than sales;

Ÿ

certain other nonrecourse financings; and

Ÿ

debt raised through the firm’s William Street credit extension program outstanding as of December 2010.

attributes. See Note 8 for further information about other secured financings that are accounted for at fair value.

Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest, which generally approximates fair value. While these financings are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these financings been included in the firm’s fair value hierarchy, they would have primarily been classified in level 2 as of December 2014 and December 2013.

 

 

152 Goldman Sachs 20112014 Form 10-K 167


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The tabletables below presentspresent information about other secured financings.

  As of December 2014 
$ in millions  
 
U.S.
Dollar
  
  
   
 
Non-U.S.
Dollar
  
  
   Total  

Other secured financings(short-term):

     

At fair value

  $  7,887     $  7,668     $15,555  
  

At amortized cost

  5          5  
  

Weighted average interest rates

  4.33%     —%    
  

Other secured financings(long-term):

     

At fair value

  3,290     2,605     5,895  
  

At amortized cost

  580     774     1,354  
  

Weighted average interest rates

  2.69%     2.31%       

Total 1

  $11,762     $11,047     $22,809  

Amount of other secured financings collateralized by:

     

Financial instruments 2

  $11,460     $10,483     $21,943  
  

Other assets

  302     564     866  

  As of December 2013 
$ in millions  
 
U.S.
Dollar
  
  
   
 
Non-U.S.
Dollar
  
  
   Total  

Other secured financings(short-term):

     

At fair value

  $  9,374     $  7,828     $17,202  
  

At amortized cost

  88          88  
  

Weighted average interest rates

  2.86%     —%    
  

Other secured financings(long-term):

     

At fair value

  3,711     2,678     6,389  
  

At amortized cost

  372     763     1,135  
  

Weighted average interest rates

  3.78%     1.53%       

Total 1

  $13,545     $11,269     $24,814  

Amount of other secured financings collateralized by:

     

Financial instruments 2

  $13,366     $10,880     $24,246  
  

Other assets

  179     389     568  

1.

Includes $974 million and $1.54 billion related to transfers of financial assets accounted for as financings rather than sales as of December 2014 and December 2013, respectively. Such financings were collateralized by financial assets included in “Financial instruments owned, at fair value” of $995 million and $1.58 billion as of December 2014 and December 2013, respectively.

2.

Includes $10.24 billion and $14.75 billion of other secured financings collateralized by financial instruments owned, at fair value as of December 2014 and December 2013, respectively, and includes $11.70 billion and $9.50 billion of other secured financings collateralized by financial instruments received as collateral and repledged as of December 2014 and December 2013, respectively.

In the table below:tables above:

 

Ÿ 

short-termShort-term secured financings include financings maturing within one year of the financial statement date and financings that are redeemable within one year of the financial statement date at the option of the holder;holder.

 

Ÿ 

long-termLong-term secured financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates; anddates.

 

Ÿ 

long-termLong-term secured financings that are redeemable prior to maturity at the option of the holders are reflected at the dates such options become exercisable.

  As of December 2011      As of December 2010 
$ in millions U.S.
Dollar
  Non-U.S.
Dollar
  Total       U.S.
Dollar
  Non-U.S.
Dollar
  Total 

Other secured financings (short-term):

At fair value

 $18,519   $5,140   $23,659       $16,404   $3,684   $20,088  

At amortized cost

  155    5,371    5,526        99    4,342    4,441  

Interest rates 1

  3.85  0.22          2.96  0.71    

Other secured financings (long-term):

At fair value

  4,305    2,055    6,360        9,594    2,112    11,706  

At amortized cost

  1,024    795    1,819        1,565    577    2,142  

Interest rates 1

  1.88  3.28          2.14  1.94    

Total 2

 $24,003   $13,361   $37,364       $27,662   $10,715   $38,377  

Amount of other secured financings collateralized by:

Financial instruments 3

 $23,703   $12,169   $35,872       $27,014   $8,760   $35,774  

Other assets 4

  300    1,192    1,492        648    1,955    2,603  

 

1.Ÿ

The weightedWeighted average interest rates exclude secured financings at fair value and include the effect of hedging activities. See Note 7 for further information about hedging activities.

2.

Includes $9.36 billion and $8.32 billion related to transfers of financial assets accounted for as financings rather than sales as of December 2011 and December 2010, respectively. Such financings were collateralized by financial assets included in “Financial instruments owned, at fair value” of $9.51 billion and $8.53 billion as of December 2011 and December 2010, respectively.

3.

Includes $14.82 billion and $25.63 billion of other secured financings collateralized by financial instruments owned, at fair value and $21.06 billion and $10.14 billion of other secured financings collateralized by financial instruments received as collateral and repledged as of December 2011 and December 2010, respectively.

4.

Primarily real estate and cash.

The table below presents other secured financings by maturity.

 

$ in millions  
 
As of
December 2014
  
  

Other secured financings (short-term)

  $15,560  
  

Other secured financings (long-term):

 

2016

  3,304  
  

2017

  1,800  
  

2018

  938  
  

2019

  465  
  

2020-thereafter

  742  

Total other secured financings (long-term)

  7,249  

Total other secured financings

  $22,809  

 

in millions 

As of

December 2011

 

Other secured financings (short-term)

  $29,185  

Other secured financings (long-term):

2013

  1,852  

2014

  3,627  

2015

  583  

2016

  437  

2017-thereafter

  1,680  

Total other secured financings (long-term)

  8,179  

Total other secured financings

  $37,364  
168Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The aggregate contractual principal amount of other secured financings (long-term) for which the fair value option was elected exceeded the related fair value by $239 million and $352 million as of December 2011 and December 2010, respectively.

Collateral Received and Pledged

The firm receives financial instrumentscash and securities (e.g., U.S. government and federal agency, other sovereign and corporate obligations, as well as equities and convertible debentures) as collateral, primarily in connection with resale agreements, securities borrowed, derivative transactions and customer margin loans.

Goldman Sachs 2011 Form 10-K153


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes The firm obtains cash and securities as collateral on an upfront or contingent basis for derivative instruments and collateralized agreements to Consolidated Financial Statementsreduce its credit exposure to individual counterparties.

In many cases, the firm is permitted to deliver or repledge these financial instruments received as collateral when entering into repurchase agreements and securities lending agreements, primarily in connection with secured client financing activities. The firm is also permitted to deliver or repledge these financial instruments in connection with other secured financings, collateralizing derivative transactions and meeting firm or customer settlement requirements.

The table below presents financial instruments at fair value received as collateral that were available to be delivered or repledged and were delivered or repledged by the firm.

  As of December 
in millions 2011   2010 

Collateral available to be delivered
or repledged

 $622,926    $618,423  

Collateral that was delivered or repledged

  454,604     447,882  

The firm also pledges certain financial instruments owned, at fair value in connection with repurchase agreements, securities lending agreements and other secured financings, and other assets (primarily real estate and cash) in connection with other secured financings to counterparties who may or may not have the right to deliver or repledge them.

The table below presents financial instruments at fair value received as collateral that were available to be delivered or repledged and were delivered or repledged by the firm.

  As of December 
$ in millions  2014     2013  

Collateral available to be delivered or repledged 1

  $630,046     $608,390  
  

Collateral that was delivered or repledged

  474,057     450,127  

1.

As of December 2014 and December 2013, amounts exclude $6.04 billion and $9.67 billion, respectively, of securities received under resale agreements, and $7.08 billion and $2.77 billion, respectively, of securities borrowed transactions that contractually had the right to be delivered or repledged, but were segregated to satisfy certain regulatory requirements.

The table below presents information about assets pledged by the firm.pledged.

 

  As of December 
in millions 2011   2010 

Financial instruments owned, at fair value pledged to counterparties that:

Had the right to deliver or repledge

 $53,989    $51,010  

Did not have the right to deliver or repledge

  110,949     112,750  

Other assets pledged to counterparties that:

Did not have the right to deliver or repledge

  3,444     4,482  
  As of December 
$ in millions  2014     2013  

Financial instruments owned, at fair value pledged to counterparties that:

   

Had the right to deliver or repledge

  $64,473     $62,348  
  

Did not have the right to deliver or repledge

  68,027     84,799  
  

Other assets pledged to counterparties that:

   

Did not have the right to deliver or repledge

  1,304     769  
Securitization Activities

Note 10.11.

Securitization Activities

The firm securitizes residential and commercial mortgages, corporate bonds, loans and other types of financial assets by selling these assets to securitization vehicles (e.g., trusts, corporate entities and limited liability companies) andor through a resecuritization. The firm acts as underwriter of the beneficial interests that are sold to investors. The firm’s residential mortgage securitizations are substantially all in connection with government agency securitizations.

Beneficial interests issued by securitization entities are debt or equity securities that give the investors rights to receive all or portions of specified cash inflows to a securitization vehicle and include senior and subordinated shares ofinterests in principal, interest and/or other cash inflows. The proceeds from the sale of beneficial interests are used to pay the transferor for the financial assets sold to the securitization vehicle or to purchase securities which serve as collateral.

The firm accounts for a securitization as a sale when it has relinquished control over the transferred assets. Prior to securitization, the firm accounts for assets pending transfer at fair value and therefore does not typically recognize significant gains or losses upon the transfer of assets. Net revenues from underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.

For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Notes 910 and 23 for further information about collateralized financings and interest expense, respectively.

Goldman Sachs 2014 Form 10-K169


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The firm generally receives cash in exchange for the transferred assets but may also have continuing involvement with transferred assets, including ownership of beneficial interests in securitized financial assets, primarily in the form of senior or subordinated securities, and servicing rights that the firm retains at the time of securitization.securities. The firm may also purchase senior or subordinated securities issued by securitization vehicles (which are typically VIEs) in connection with secondary market-making activities.

154Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The primary risks included in beneficial interests and other interests from the firm’s continuing involvement with securitization vehicles are the performance of the underlying collateral, the position of the firm’s investment in the capital structure of the securitization vehicle and the market yield for the security. These interests are accounted for at fair value, and are included in “Financial instruments owned, at fair value” and are generallysubstantially all classified in level 2 of the fair value hierarchy. See Notes 5 through 8 for further information about fair value measurements.

The table below presents the amount of financial assets securitized and the cash flows received on retained interests in securitization entities in which the firm had continuing involvement.

 

  Year Ended December  Year Ended December 
in millions  2011   2010   2009 
$ in millions  2014     2013     2012  

Residential mortgages

  $40,131    $47,803    $45,846    $19,099     $29,772     $33,755  
 

Commercial mortgages

        1,451         2,810     6,086     300  
 

Other financial assets

   269     12     691    1,009            

Total

  $40,400    $49,266    $46,537    $22,918     $35,858     $34,055  

Cash flows on retained interests

  $569    $517    $507    $     215     $     249     $     389  

The tabletables below presentspresent the firm’s continuing involvement in nonconsolidated securitization entities to which the firm sold assets, as well as the total outstanding principal amount of transferred assets in which the firm has continuing involvement. In this table:these tables:

 

Ÿ 

theThe outstanding principal amount is presented for the purpose of providing information about the size of the securitization entities in which the firm has continuing involvement and is not representative of the firm’s risk of loss;loss.

 

Ÿ 

forFor retained or purchased interests, the firm’s risk of loss is limited to the fair value of these interests; andinterests.

 

Ÿ 

purchasedPurchased interests represent senior and subordinated interests, purchased in connection with secondary market-making activities, in securitization entities in which the firm also holds retained interests.

 

  As of December 2011     As of December 2010 
in millions Outstanding
Principal
Amount
   Fair Value of
Retained
Interests
   

Fair Value of

Purchased
Interests

      Outstanding
Principal
Amount
   Fair Value of
Retained
Interests
   

Fair Value of

Purchased
Interests

 

U.S. government agency-issued collateralized mortgage obligations 1

 $70,448    $5,038    $      $60,352    $5,929    $  

Other residential mortgage-backed 2

  4,459     101     3       13,318     125     5  

Commercial mortgage-backed 3

  3,398     606     331       5,040     849     82  

CDOs, CLOs and other 4

  9,972     32     211       12,872     62     229  

Total  5

 $88,277    $5,777    $545      $91,582    $6,965    $316  
  As of December 2014 
$ in millions  

 

 

Outstanding

Principal

Amount

  

  

  

   

 

 

Fair Value of

Retained

Interests

  

  

  

   

 

 

Fair Value of

Purchased

Interests

  

  

  

U.S. governmentagency-issued collateralized mortgage obligations

  $56,792     $2,140     $   —  
  

Other residential mortgage-backed

  2,273     144     5  
  

Other commercial mortgage-backed

  3,313     86     45  
  

CDOs, CLOs and other

  4,299     59     17  

Total

  $66,677     $2,429       67  
  As of December 2013 
$ in millions  

 

 

Outstanding

Principal

Amount

  

  

  

   

 

 

Fair Value of

Retained

Interests

  

  

  

   

 

 

Fair Value of

Purchased

Interests

  

  

  

U.S. governmentagency-issued collateralized mortgage obligations

  $61,543     $3,455     $   —  
  

Other residential mortgage-backed

  2,072     46       
  

Other commercial mortgage-backed

  7,087     140     153  
  

CDOs, CLOs and other

  6,861     86     8  

Total 1

  $77,563     $3,727     $161  

 

1.

Outstanding principal amount and fair value of retained interests primarily relate to securitizations during 2011 and 2010 as of December 2011, and securitizations during 2010 and 2009 as of December 2010.

2.

Outstanding principal amount and fair value of retained interests as of both December 2011 and December 2010 primarily relate to prime and Alt-A securitizations during 2007 and 2006.

3.

Outstanding principal amount as of both December 2011 and December 2010 primarily relate to securitizations during 2010, 2007 and 2006. Fair value of retained interests as of both December 2011 and December 2010 primarily relate to securitizations during 2010.

4.

Outstanding principal amount and fair value of retained interests as of both December 2011 and December 2010 primarily relate to CDO and CLO securitizations during 2007 and 2006.

5.

Outstanding principal amount and fair value of retained interests include $774includes $418 million and $0, respectively, as of December 2011, and $7.64 billion and $16 million, respectively, as of December 2010, related to securitization entities in which the firm’s only continuing involvement is retained servicing which is not a variable interest.

 

170 Goldman Sachs 20112014 Form 10-K 155


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

In addition, the outstanding principal and fair value of retained interests in the tables above relate to the following types of securitizations and vintage as described:

Ÿ

The outstanding principal amount and fair value of retained interests for U.S. government agency-issued collateralized mortgage obligations as of December 2014 primarily relate to securitizations during 2014 and 2013, and as of December 2013 primarily relate to securitizations during 2013 and 2012.

Ÿ

The outstanding principal amount and fair value of retained interests for other residential mortgage-backed obligations as of December 2014 primarily relate to resecuritizations during 2014, and prime and Alt-A securitizations during 2007, and as of December 2013 primarily relate to prime and Alt-A securitizations during 2007 and 2006.

Ÿ

The outstanding principal amount and fair value of retained interests for other commercial mortgage-backed obligations as of December 2014 primarily relate to securitizations during 2014, and as of December 2013 primarily relate to securitizations during 2013.

Ÿ

The outstanding principal amount and fair value of retained interests for CDOs, CLOs and other as of December 2014 primarily relate to securitizations during 2014 and 2007, and as of December 2013 primarily relate to securitizations during 2007.

In addition to the interests in the tabletables above, the firm had other continuing involvement in the form of derivative transactions and guarantees with certain nonconsolidated VIEs. The carrying value of these derivatives and guarantees was a net liabilityasset of $52$115 million and $98$26 million as of December 20112014 and December 2010,2013, respectively. The notional amounts of these derivatives and guarantees are included in maximum exposure to loss in the nonconsolidated VIE tables in Note 11.12.

The tabletables below presentspresent the weighted average key economic assumptions used in measuring the fair value of retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions.

  As of December 2014 
  Type of Retained Interests 
$ in millions  Mortgage-Backed     Other 1 

Fair value of retained interests

  $ 2,370     $    59  
  

Weighted average life (years)

  7.6     3.6  
  

Constant prepayment rate

  13.2%     N.M.  
  

Impact of 10% adverse change

  $     (33   N.M.  
  

Impact of 20% adverse change

  (66   N.M.  
  

Discount rate

  4.1%     N.M.  
  

Impact of 10% adverse change

  $     (50   N.M.  
  

Impact of 20% adverse change

  (97   N.M.  

 

 As of December 2011       As of December 2010  As of December 2013 
 Type of Retained Interests       Type of Retained Interests  Type of Retained Interests 
$ in millions Mortgage-Backed     Other 1        Mortgage-Backed   Other 1   Mortgage-Backed     Other 1 

Fair value of retained interests

 $5,745      $32       $6,903    $62    $3,641     $    86  
 

Weighted average life (years)

  7.1       4.7        7.4     4.2    8.3     1.9  
 

Constant prepayment rate 2

  14.1     N.M.        11.6   N.M.  

Impact of 10% adverse change 2

 $(55     N.M.       $(62   N.M.  

Impact of 20% adverse change 2

  (108     N.M.        (128   N.M.  

Constant prepayment rate

  7.5%     N.M.  
 

Discount rate 3

  5.4     N.M.        5.3   N.M.  

Impact of 10% adverse change

 $(125     N.M.       $(175   N.M.    $    (36   N.M.  
 

Impact of 20% adverse change

  (240     N.M.        (341   N.M.    (64   N.M.  
 

Discount rate

  3.9%     N.M.  
 

Impact of 10% adverse change

  $    (85   N.M.  
 

Impact of 20% adverse change

  (164   N.M.  

 

1.

Due to the nature and current fair value of certain of these retained interests, the weighted average assumptions for constant prepayment and discount rates and the related sensitivity to adverse changes are not meaningful as of December 20112014 and December 2010.2013. The firm’s maximum exposure to adverse changes in the value of these interests is the carrying value of $32$59 million and $62$86 million as of December 20112014 and December 2010,2013, respectively.

In the tables above:

Ÿ

Amounts do not reflect the benefit of other financial instruments that are held to mitigate risks inherent in these retained interests.

 

2.Ÿ

ConstantChanges in fair value based on an adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value is not usually linear.

Ÿ

The impact of a change in a particular assumption is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.

Ÿ

The constant prepayment rate is included only for positions for which constant prepayment rateit is a key assumption in the determination of fair value.

 

3.Ÿ

The majority of mortgage-backeddiscount rate for retained interests arethat relate to U.S. government agency-issued collateralized mortgage obligations for which there is no anticipateddoes not include any credit loss. For the remainder of retained interests, the expected

Ÿ

Expected credit loss assumptions are reflected in the discount rate.rate for the remainder of retained interests.

The preceding table does not give effect to the offsetting benefit of other financial instruments that are held to mitigate risks inherent in these retained interests. Changes in fair value based on an adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value is

not usually linear. In addition, the impact of a change in a particular assumption in the preceding table is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.

 

 

156 Goldman Sachs 20112014 Form 10-K 171


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Variable Interest Entities

Note 11.12.

Variable Interest Entities

 

VIEs generally finance the purchase of assets by issuing debt and equity securities that are either collateralized by or indexed to the assets held by the VIE. The debt and equity securities issued by a VIE may include tranches of varying levels of subordination. The firm’s involvement with VIEs includes securitization of financial assets, as described in Note 10,11, and investments in and loans to other types of VIEs, as described below. See Note 1011 for additional information about securitization activities, including the definition of beneficial interests. See Note 3 for the firm’s consolidation policies, including the definition of a VIE.

The firm is principally involved with VIEs through the following business activities:

Mortgage-Backed VIEs and Corporate CDO and CLO VIEs.The firm sells residential and commercial mortgage loans and securities to mortgage-backed VIEs and corporate bonds and loans to corporate CDO and CLO VIEs and may retain beneficial interests in the assets sold to these VIEs. The firm purchases and sells beneficial interests issued by mortgage-backed and corporate CDO and CLO VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain of these VIEs, primarily interest rate swaps, which are typically not variable interests. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs.

Certain mortgage-backed and corporate CDO and CLO VIEs, usually referred to as synthetic CDOs or credit-linked note VIEs, synthetically create the exposure for the beneficial interests they issue by entering into credit derivatives, rather than purchasing the underlying assets. These credit derivatives may reference a single asset, an index, or a portfolio/basket of assets or indices. See Note 7 for further information about credit derivatives. These VIEs use the funds from the sale of beneficial interests and the premiums received from credit derivative counterparties to purchase securities which serve to collateralize the beneficial interest holders and/or the credit derivative counterparty. These VIEs may enter into other derivatives, primarily interest rate swaps, which are typically not variable interests. The firm may be a counterparty to derivatives with these VIEs and generally enters into derivatives with other counterparties to mitigate its risk.

Real Estate, Credit-Related and Other Investing VIEs. The firm purchases equity and debt securities issued by and makes loans to VIEs that hold real estate, performing and nonperforming debt, distressed loans and equity securities. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.

Other Asset-Backed VIEs. The firm structures VIEs that issue notes to clients, and purchases and sells beneficial interests issued by other asset-backed VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain other asset-backed VIEs, primarily total return swaps on the collateral assets held by these VIEs under which the firm pays the VIE the return due to the note holders and receives the return on the collateral assets owned by the VIE. The firm generally can be removed as the total return swap counterparty. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs. The firm typically does not sell assets to the other asset-backed VIEs it structures.

Power-Related VIEs.The firm purchases debt and equity securities issued by and may provide guarantees to VIEs that hold power-related assets. The firm typically does not sell assets to or enter into derivatives with these VIEs.

Investment Funds. The firm purchases equity securities issued by and may provide guarantees to certain of the investment funds it manages. The firm typically does not sell assets to or enter into derivatives with these VIEs.

Principal-Protected Note VIEs. The firm structures VIEs that issue principal-protected notes to clients. These VIEs own portfolios of assets, principally with exposure to hedge funds. Substantially all of the principal protection on the notes issued by these VIEs is provided by the asset portfolio rebalancing that is required under the terms of the notes. The firm enters into total return swaps with these VIEs under which the firm pays the VIE the return due to the principal-protected note holders and receives the return on the assets owned by the VIE. The firm may enter into derivatives with other counterparties to mitigate the risk it has from the derivatives it enters into with these VIEs. The firm also obtains funding through these VIEs.

Other VIEs. Other primarily includes nonconsolidated power-related and investment fund VIEs. The firm purchases debt and equity securities issued by VIEs that hold power-related assets, and may provide commitments to these VIEs. The firm also makes equity investments in certain of the investment fund VIEs it manages, and is entitled to receive fees from these VIEs. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.

 

 

172 Goldman Sachs 20112014 Form 10-K 157


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Municipal Bond Securitizations. The firm sold municipal securities to VIEs that issued short-term qualifying tax-exempt securities. During 2011, the firm dissolved these VIEs after having redeemed and/or purchased the outstanding securities issued.

VIE Consolidation Analysis

A variable interest in a VIE is an investment (e.g., debt or equity securities) or other interest (e.g., derivatives or loans and lending commitments) in a VIE that will absorb portions of the VIE’s expected losses and/or receive portions of the VIE’s expected residual returns.

The firm’s variable interests in VIEs include senior and subordinated debt in residential and commercial mortgage-backed and other asset-backed securitization entities, CDOs and CLOs; loans and lending commitments; limited and general partnership interests; preferred and common equity; derivatives that may include foreign currency, equity and/or credit risk; guarantees; and certain of the fees the firm receives from investment funds. Certain interest rate, foreign currency and credit derivatives the firm enters into with VIEs are not variable interests because they create rather than absorb risk.

The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers:

 

Ÿ 

whichWhich variable interest holder has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance;

 

Ÿ 

whichWhich variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE;

 

Ÿ 

theThe VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders;

 

Ÿ 

theThe VIE’s capital structure;

 

Ÿ 

theThe terms between the VIE and its variable interest holders and other parties involved with the VIE; and

 

Ÿ 

related-partyRelated-party relationships.

The firm reassesses its initial evaluation of whether an entity is a VIE when certain reconsideration events occur. The firm reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.

Nonconsolidated VIEs

The firm’s exposure to the obligations of VIEs is generally limited to its interests in these entities. In certain instances, the firm provides guarantees, including derivative guarantees, to VIEs or holders of variable interests in VIEs.

The tables below present information about nonconsolidated VIEs in which the firm holds variable interests. Nonconsolidated VIEs are aggregated based on principal business activity. The nature of the firm’s variable interests can take different forms, as described in the rows under maximum exposure to loss. In the tables below:

 

Ÿ 

The maximum exposure to loss excludes the benefit of offsetting financial instruments that are held to mitigate the risks associated with these variable interests.

 

Ÿ 

For retained and purchased interests, and loans and investments, the maximum exposure to loss is the carrying value of these interests.

 

Ÿ 

For commitments and guarantees, and derivatives, the maximum exposure to loss is the notional amount, which does not represent anticipated losses and also has not been reduced by unrealized losses already recorded. As a result, the maximum exposure to loss exceeds liabilities recorded for commitments and guarantees, and derivatives provided to VIEs.

The carrying values of the firm’s variable interests in nonconsolidated VIEs are included in the consolidated statement of financial condition as follows:

 

Ÿ 

Substantially all assets held by the firm related to mortgage-backed, corporate CDO and CLO, and other asset-backed VIEs and investment funds are included in “Financial instruments owned, at fair value.” Substantially all liabilities held by the firm related to mortgage-backed, corporate CDO and CLO, and other asset-backed VIEs are included in “Financial instruments sold, but not yet purchased, at fair value.value;

 

158Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ 

AssetsSubstantially all assets held by the firm related to real estate, credit-related and other investing VIEs are included in “Financial instruments owned, at fair value,” “Loans receivable,” and “Other assets.” Substantially all liabilities held by the firm related to real estate, credit-related and other investing VIEs are primarily included in “Financial instruments owned, at fair value” and “Payables to customers and counterparties,” “Financial instrumentsInstruments sold, but not yet purchased, at fair value” and “Other liabilities and accrued expenses,expenses;respectively.and

Ÿ 

Assets and liabilitiesSubstantially all assets held by the firm related to power-relatedother VIEs are primarily included in “Other assets” and “Other liabilities and accrued expenses,“Financial instruments owned, at fair value. respectively.

 

 

Goldman Sachs 2014 Form 10-K173


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

 Nonconsolidated VIEs  Nonconsolidated VIEs as of December 2014 
$ in millions  
 
Mortgage-
backed
  
  
   
 
 
Corporate
CDOs and
CLOs
  
  
  
  
 
 
 
Real estate,
credit-related
and other
investing
  
  
  
  
     
 
 
Other
asset-
backed
  
  
  
     Other       Total  

Assets in VIE

  $78,107 2    $  8,317    $8,720       $8,253       $5,677       $109,074  
 As of December 2011   
in millions 

Mortgage-

backed

 Corporate
CDOs and
CLOs
   

Real estate,
credit-

related and
other
investing

   

Other
asset-

backed

   

Power-

related

   Investment
funds
   Total 

Assets in VIE

 $94,047 2  $20,340    $8,974    $4,593    $519    $2,208    $130,681  

Carrying Value of the Firm’s Variable Interests

                            

Assets

  7,004    911     1,495     352     289     5     10,056    4,348     463    3,051       509       290       8,661  
 

Liabilities

      63     3     24     2          92         3    3       16              22  
 

Maximum Exposure to Loss in Nonconsolidated VIEs

                            

Retained interests

  5,745    32                         5,777    2,370     4           55              2,429  
 

Purchased interests

  962    368          333               1,663    1,978     184           322              2,484  

Commitments and guarantees 1

      1     373          46          420  
 

Commitments and guarantees

           604       213       307       1,124  
 

Derivatives 1

  2,469    7,529          1,221               11,219    392     2,053           3,221       88       5,754  
 

Loans and investments

  82         1,495          288     5     1,870             3,051              290       3,341  

Total

 $9,258 2  $7,930    $1,868    $1,554    $334    $5    $20,949    $  4,740 2    $  2,241    $3,655       $3,811       $   685       $  15,132  
 Nonconsolidated VIEs  Nonconsolidated VIEs as of December 2013 
$ in millions  
 
Mortgage-
backed
  
  
   
 
 
Corporate
CDOs and
CLOs
  
  
  
  
 
 
 
Real estate,
credit-related
and other
investing
  
  
  
  
     
 
 
Other
asset-
backed
  
  
  
     Other       Total  

Assets in VIE

  $86,562 2    $19,761    $8,599       $4,401       $2,925       $122,248  
 As of December 2010   
in millions 

Mortgage-

backed

 Corporate
CDOs and
CLOs
   

Real estate,
credit-

related and
other
investing

   

Other
asset-

backed

   

Power-

related

   Investment
funds
   Total 

Assets in VIE

 $88,755 2  $21,644    $12,568    $5,513    $552    $2,330    $131,362  

Carrying Value of the Firm’s Variable Interests

                            

Assets

  8,076    909     1,063     266     239     5     10,558    5,269     1,063    2,756       284       165       9,537  
 

Liabilities

      114     1     19     14          148         3    2       40              45  
 

Maximum Exposure to Loss in Nonconsolidated VIEs

                            

Retained interests

  6,887    50          12               6,949    3,641     80           6              3,727  
 

Purchased interests

  839    353          247               1,439    1,627     659           142              2,428  

Commitments and guarantees 1

      1     125          69          195  
 

Commitments and guarantees

           485              281       766  
 

Derivatives 1

  3,128    7,593          1,105               11,826    586     4,809           2,115              7,510  
 

Loans and investments

  104         1,063          239     5     1,411             2,756              165       2,921  

Total

 $10,958 2  $7,997    $1,188    $1,364    $308    $5    $21,820    $  5,854 2    $  5,548    $3,241       $2,263       $   446       $  17,352  

 

1.

The aggregate amounts include $4.17$1.64 billion and $4.52$2.01 billion as of December 20112014 and December 2010,2013, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets.

 

2.

Assets in VIE and maximum exposure to loss include $6.15$3.57 billion and $2.62 billion,$662 million, respectively, as of December 2011,2014, and $6.14$4.55 billion and $3.25 billion,$900 million, respectively, as of December 2010,2013, related to CDOs backed by mortgage obligations.

 

174 Goldman Sachs 20112014 Form 10-K 159


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Consolidated VIEs

The tables below present the carrying amount and classification of assets and liabilities in consolidated VIEs, excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with the firm’s variable interests. Consolidated VIEs are aggregated based on principal business activity and their assets and liabilities are presented net of intercompany eliminations. The majority of the assets in principal-protected notes VIEs are intercompany and are eliminated in consolidation.

Substantially all the assets in consolidated VIEs can only be used to settle obligations of the VIE.

The tables below exclude VIEs in which the firm holds a majority voting interest if (i) the VIE meets the definition of a business and (ii) the VIE’s assets can be used for purposes other than the settlement of its obligations.

The liabilities of real estate, credit-related and other investing VIEs, and CDOs, mortgage-backed and other asset-backed VIEs do not have recourse to the general credit of the firm.

 

 

 Consolidated VIEs  Consolidated VIEs as of December 2014 
 As of December 2011 
in millions Real estate,
credit-related
and other
investing
   

CDOs,

mortgage-backed

and other

asset-backed

   

Principal-

protected

notes

   Total 
$ in millions  
 
 
 
Real estate,
credit-related
and other
investing
  
  
  
  
   
 
 
 
CDOs,
mortgage-backed
and other
asset-backed
  
  
  
  
     
 
 
Principal-
protected
notes
  
  
  
     Total  

Assets

                  

Cash and cash equivalents

 $660    $51    $1    $712    $   218     $  —       $      —       $   218  
 

Cash and securities segregated for regulatory and other purposes

  139               139    19            31       50  

Receivables from brokers, dealers and clearing organizations

  4               4  

Receivables from customers and counterparties

       16          16  
 

Loans receivable

  589                   589  
 

Financial instruments owned, at fair value

  2,369     352     112     2,833    2,608     121       276       3,005  
 

Other assets

  1,552     437          1,989    349                   349  

Total

 $4,724    $856    $113    $5,693    $3,783     $121       $   307       $4,211  

Liabilities

                  

Other secured financings

 $1,418    $298    $3,208    $4,924    $   419     $  99       $   439       $   957  

Payables to customers and counterparties

       9          9  
 

Financial instruments sold, but not yet purchased, at fair value

            2     2    10     8              18  
 

Unsecured short-term borrowings, including the current portion of
unsecured long-term borrowings

  185          1,941     2,126                1,090       1,090  
 

Unsecured long-term borrowings

  4          269     273    12            103       115  
 

Other liabilities and accrued expenses

  2,046     40          2,086    906                   906  

Total

 $3,653    $347    $5,420    $9,420    $1,347     $107       $1,632       $3,086  
 Consolidated VIEs as of December 2013 
$ in millions  
 
 
 
Real estate,
credit-related
and other
investing
  
  
  
  
   
 
 
 
CDOs,
mortgage-backed
and other
asset-backed
  
  
  
  
     
 
 
Principal-
protected
notes
  
  
  
     Total  

Assets

           

Cash and cash equivalents

  $   183     $   —       $      —       $   183  
 

Cash and securities segregated for regulatory and other purposes

  84            63       147  
 

Loans receivable

  50                   50  
 

Financial instruments owned, at fair value

  1,309     310       155       1,774  
 

Other assets

  921                   921  

Total

  $2,547     $310       $   218       $3,075  

Liabilities

           

Other secured financings

  $   417     $198       $   404       $1,019  
 

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings

              1,258       1,258  
 

Unsecured long-term borrowings

  57            193       250  
 

Other liabilities and accrued expenses

  556                   556  

Total

  $1,030     $198       $1,855       $3,083  

 

160 Goldman Sachs 20112014 Form 10-K 175


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  Consolidated VIEs 
  As of December 2010 
in millions Real estate,
credit-related
and other
investing
   Municipal
bond
securitizations
   

CDOs,

mortgage-backed
and other

asset-backed

   

Principal-

protected

notes

   Total 

Assets

         

Cash and cash equivalents

 $248    $    $39    $52    $339  

Cash and securities segregated for regulatory and other purposes

  205                    205  

Receivables from brokers, dealers and clearing organizations

  4                    4  

Receivables from customers and counterparties

  1          27          28  

Financial instruments owned, at fair value

  2,531     547     550     648     4,276  

Other assets

  3,369          499          3,868  

Total

 $6,358    $547    $1,115    $700    $8,720  

Liabilities

         

Other secured financings

 $2,434    $630    $417    $3,224    $6,705  

Payables to customers and counterparties

            12          12  

Financial instruments sold, but not yet purchased, at fair value

            55          55  

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings

  302               2,359     2,661  

Unsecured long-term borrowings

  6                    6  

Other liabilities and accrued expenses

  2,004          32          2,036  

Total

 $4,746    $630    $516    $5,583    $11,475  

Goldman Sachs 2011 Form 10-K161


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

Other Assets

Note 12.13.

Other Assets

 

Other assets are generally less liquid, non-financial assets. The table below presents other assets by type.

 

  As of December 
in millions 2011   2010 

Property, leasehold improvements and equipment 1

 $8,697    $11,106  

Goodwill and identifiable intangible assets 2

  5,468     5,522  

Income tax-related assets 3

  5,017     6,239  

Equity-method investments 4

  664     1,445  

Miscellaneous receivables and other

  3,306     3,747  

Total

 $23,152    $28,059  
  As of December 
$ in millions  2014     2013  

Property, leasehold improvements and equipment

  $  9,344     $  9,196  
  

Goodwill and identifiable intangible assets

  4,160     4,376  
  

Income tax-related assets

  5,181     5,241  
  

Equity-method investments 1

  360     417  
  

Miscellaneous receivables and other 2

  3,554     3,279  

Total

  $22,599     $22,509  

 

1.

Net of accumulated depreciation and amortization of $8.46 billion and $7.87 billion as of December 2011 and December 2010, respectively.

2.

See Note 13 for further information about goodwill and identifiable intangible assets.

3.

See Note 24 for further information about income taxes.

4.

Excludes investments accounted for at fair value under the fair value option where the firm would otherwise apply the equity method of accounting of $4.17$6.62 billion and $3.77$6.07 billion as of December 20112014 and December 2010,2013, respectively, which are included in “Financial instruments owned, at fair value.” The firm has generally elected the fair value option for such investments acquired after the fair value option became available.

2.

Includes $461 million related to investments in qualified affordable housing projects as of December 2014.

Property, Leasehold Improvements and Equipment

Property, leasehold improvements and equipment included $6.48in the table above is presented net of accumulated depreciation and amortization of $8.98 billion and $6.44$9.04 billion as of December 20112014 and December 2010,2013, respectively. Property, leasehold improvements and equipment included $5.81 billion and $6.02 billion as of December 2014 and December 2013, respectively, related to property, leasehold improvements and equipment that the firm uses in connection with its operations. The remainder is held by investment entities, including VIEs, consolidated by the firm.

Substantially all property and equipment are depreciated on a straight-line basis over the useful life of the asset.

Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter.

Certain costs of software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the useful life of the software.

Property, leasehold improvements and equipment are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. The firm’s policy for impairment testing of property, leasehold improvements and equipment is the same as is used for identifiable intangible assets with finite lives. See Note 13 for further information.

Impairments

In the first quarter of 2011, the firm classified certain assets as held for sale, primarily related to Litton Loan Servicing LP (Litton) and recognized impairment losses of approximately $220 million, principally in the firm’s Institutional Client Services segment. These impairment losses, which were included in “Depreciation and amortization,” represent the excess of (i) the carrying value of these assets over (ii) their estimated fair value less estimated cost to sell. These assets were sold in the third quarter of 2011. The firm received total consideration that approximated the firm’s adjusted carrying value for Litton. See Note 18 for further information about the sale of Litton.

As a result of a decline in the market conditions in which certain of the firm’s consolidated investments operate, during 2011 the firm tested certain commodity-related intangible assets and property, leasehold improvements and equipment associated with these investments for impairment in accordance with ASC 360. The carrying value of these assets exceeded the projected undiscounted cash flows over the estimated remaining useful lives of these assets; as such, the firm determined the assets were impaired and recorded an impairment loss of approximately $220 million ($120 million related to commodity-related intangible assets and $100 million related to property, leasehold improvements and equipment), which was included in “Depreciation and amortization” in the firm’s Investing & Lending segment. This impairment loss represented the excess of the carrying value of these assets over their estimated fair value, which is a level 3 measurement, using a combination of discounted cash flow analyses and relative value analyses, including the estimated cash flows expected to be received from the disposition of certain of these assets.

162Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

During the fourth quarter of 2010, as a result of continuing weak operating results in the firm’s NYSE DMM business, the firm tested its NYSE DMM rights for impairment in accordance with ASC 360. Because the carrying value of the firm’s NYSE DMM rights exceeded the projected undiscounted cash flows over the estimated remaining useful life of the firm’s NYSE DMM rights, the firm determined that the rights were impaired. The firm recorded an impairment loss of $305 million, which was included in “Depreciation and amortization” in the firm’s Institutional Client Services segment in the fourth quarter of 2010. This impairment loss represented the excess of the carrying value of the firm’s NYSE DMM rights over their estimated fair value. The firm estimated this fair value, which is a level 3 measurement, using a relative value analysis which incorporated a comparison to another DMM portfolio that was transacted between third parties.

Goodwill and Identifiable Intangible Assets

Note 13.

Goodwill and Identifiable Intangible Assets

The tables below present the carrying values of goodwill and identifiable intangible assets, which are included in “Other assets.

 

 

Goodwill

As of December

 Goodwill as of December 
in millions 2011  2010
$ in millions  2014       2013  

Investment Banking:

        

Financial Advisory 1

 $   104  $     —

Underwriting 1

 186  125

Financial Advisory

  $     98       $     98  
 

Underwriting

  183       183  
 

Institutional Client Services:

        

Fixed Income, Currency and Commodities Client Execution 2

 284  159

Equities Client Execution 1

 2,390  2,361

Fixed Income, Currency and
Commodities Client Execution

  269       269  
 

Equities Client Execution

  2,403       2,404  
 

Securities Services

 117  117  105       105  

Investing & Lending

 147  172
 

Investing & Lending 1

         60  
 

Investment Management

 574  561  587       586  

Total

 $3,802  $3,495  $3,645       $3,705  
 

Identifiable Intangible Assets
As of December

 

Identifiable Intangible Assets

as of December

 
in millions         2011  2010

Investment Banking:

   

Financial Advisory

 $       4  $     —

Underwriting

 1  
$ in millions  2014       2013  

Institutional Client Services:

        

Fixed Income, Currency and Commodities Client Execution

 488  608

Equities Client Execution

 677  718

Investing & Lending

 369  579

Fixed Income, Currency and
Commodities Client Execution 2

  $   138       $     35  
 

Equities Client Execution 3

  246       348  
 

Investing & Lending 1

  18       180  
 

Investment Management

 127  122  113       108  

Total

 $1,666  $2,027  $   515       $   671  

 

1.

The increasedecrease from December 20102013 to December 2011 is related to2014 for goodwill and identifiable intangible assets reflects the acquisitionsale of GS Australia.two consolidated investments. The decrease in goodwill also reflects an impairment of $22 million in connection with the sale of Metro International Trade Services LLC (Metro). See “— Impairments” below for further information about the impairment.

 

2.

The increase from December 20102013 to December 20112014 is primarily related to the acquisition of GS Australia, partially offset bycommodities-related intangible assets.

3.

The decrease from December 2013 to December 2014 reflects an impairment related to the sale of Litton. See Note 12 for further information about the sale of Litton.firm’s exchange-traded fund lead market maker (LMM) rights.

176Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

GoodwillNotes to Consolidated Financial Statements

Goodwill.Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date.

Goodwill is assessed annually in the fourth quarter for impairment or more frequently if events occur or circumstances change that indicate an impairment may exist. QualitativeWhen assessing goodwill for impairment, first, qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If results of the qualitative assessment are not conclusive, a quantitative goodwill impairment test iswould be performed. See Note 3 for information about amended accounting principles for goodwill impairment testing.

The quantitative goodwill impairment test consists of two steps.steps:

 

Ÿ 

The first step compares the estimated fair value of each reporting unit with its estimated net book value (including goodwill and identifiedidentifiable intangible assets). If the reporting unit’s fair value exceeds its estimated net book value, goodwill is not impaired.

 

Ÿ 

If the estimated fair value of a reporting unit is less than its estimated net book value, the second step of the goodwill impairment test is performed to measure the amount of impairment, loss, if any. An impairment loss is equal to the excess of the carrying amount of goodwill over its fair value.

Goodwill was tested for impairment, usingThe firm performed a quantitative goodwill impairment test during the fourth quarter of 2011 and2012 (2012 quantitative goodwill was not impaired.

To estimatetest). When performing this test, the firm estimated the fair value of each reporting unit bothand compared it to the respective reporting unit’s net book value (estimated carrying value). The reporting units were valued using relative value and residual income valuation techniques are used because the firm believes market participants would use these techniques to value the firm’s reporting units.

Relative value techniques apply average observable price-to-earnings multiples of comparable competitors to certain reporting units’ net earnings. For other reporting units, fair value is estimated using price-to-book multiples based on residual income techniques, which consider a reporting unit’s return on equity in excess of the firm’s cost of equity capital. The net book value of each reporting unit reflectsreflected an allocation of total shareholders’ equity and represented the estimated amount of shareholders’ equity required to support the activities of the reporting unit.unit under guidelines issued by the Basel Committee on Banking Supervision (Basel Committee) in December 2010. In performing its 2012 quantitative goodwill test, the firm determined that goodwill was not impaired, and the estimated fair value of the firm’s reporting units, in which substantially all of the firm’s goodwill is held, significantly exceeded their estimated carrying values.

During the fourth quarter of 2014, the firm assessed goodwill for impairment. Multiple factors were assessed with respect to each of the firm’s reporting units to determine whether it was more likely than not that the fair value of any of the reporting units was less than its carrying amount. The qualitative assessment also considered changes since the 2012 quantitative goodwill test.

In accordance with ASC 350, the firm considered the following factors in the 2014 qualitative assessment performed in the fourth quarter when evaluating whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount:

Ÿ

Macroeconomic conditions. Since the 2012 quantitative goodwill test was performed, the firm’s general operating environment improved as credit spreads tightened, global equity prices increased significantly, and industry-wide mergers and acquisitions activity, and industry-wide debt and equity underwriting activity, improved.

Ÿ

Industry and market considerations. Since the 2012 quantitative goodwill test was performed, industry-wide metrics have trended positively and most publicly-traded industry participants, including the firm, experienced increases in stock price, price-to-book multiples and price-to-earnings multiples. In addition, clarity was obtained on a number of regulations and other reforms have been adopted or proposed by regulators. Many of these rules are highly complex and their full impact will not be known until the rules are implemented and market practices develop under the final regulations. However, the firm does not expect compliance to have a significant negative impact on reporting unit results.

Ÿ

Cost factors. Although certain expenses increased, there were no significant negative changes to the firm’s overall cost structure since the 2012 quantitative goodwill test was performed.

Ÿ

Overall financial performance. During 2014, the firm’s net earnings, pre-tax margin, diluted earnings per common share, return on average common shareholders’ equity and book value per common share increased as compared with 2012.

 

 

 Goldman Sachs 20112014 Form 10-K 163177


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Ÿ

Entity-specific events. There were no entity-specific events since the 2012 quantitative goodwill test was performed that would have had a significant negative impact on the valuation of the firm’s reporting units.

Ÿ

Events affecting reporting units. There were no events since the 2012 quantitative goodwill test was performed that would have had a significant negative impact on the valuation of the firm’s reporting units.

Ÿ

Sustained changes in stock price. Since the 2012 quantitative goodwill test was performed, the firm’s stock price has increased significantly. In addition, the stock price exceeded book value per common share throughout most of 2013 and 2014.

The firm also considered other factors in its qualitative assessment, including changes in the book value of reporting units, the estimated excess of the fair values as compared with the carrying values for the reporting units in the 2012 quantitative goodwill test, projected earnings and the cost of equity. The firm considered all of the above factors in the aggregate as part of its qualitative assessment.

As a result of the 2014 qualitative assessment, the firm determined that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying amount. Therefore, the firm determined that goodwill was not impaired and that a quantitative goodwill impairment test was not required.

Identifiable Intangible AssetsAssets.

The table below presents the gross carrying amount, accumulated amortization and net carrying amount of

identifiable intangible assets and their weighted average remaining useful lives.

 

     As of December 
$ in millions     2011   Weighted Average
Remaining Lives
(years)
  2010 

Customer lists

  Gross carrying amount $1,119       $1,104  
   Accumulated amortization  (593      (529
   Net carrying amount $526    9  $575  

Commodities-related intangibles 1

  Gross carrying amount $595       $667  
   Accumulated amortization  (237      (52
   Net carrying amount $358    11  $615  

Broadcast royalties 2

  Gross carrying amount $560       $560  
   Accumulated amortization  (123      (61
   Net carrying amount $437    7  $499  

Insurance-related intangibles 3

  Gross carrying amount $292       $292  
   Accumulated amortization  (146      (146
   Net carrying amount $146    7  $146  

Other 4

  Gross carrying amount $950       $953  
   Accumulated amortization  (751      (761
   Net carrying amount $199    12  $192  

Total

  Gross carrying amount $3,516       $3,576  
   Accumulated amortization  (1,850      (1,549
   Net carrying amount $1,666    9  $2,027  
  As of December 
$ in millions  2014    Weighted Average
Remaining Useful
Lives(years)
   2013  

Customer lists

     

Gross carrying amount

  $1,036       $ 1,102  
  

Accumulated amortization

  (715      (706

Net carrying amount

  321    6   396  
  

 

Commodities-related 1

     

Gross carrying amount

  216       510  
  

Accumulated amortization

  (78      (341

Net carrying amount

  138    8   169  
  

 

Other

     

Gross carrying amount 2

  200       906  
  

Accumulated amortization 2

  (144      (800

Net carrying amount

  56    5   106  
  

 

Total

     

Gross carrying amount

  1,452       2,518  
  

Accumulated amortization

  (937      (1,847

Net carrying amount

  $   515    7   $    671  

 

1.

Primarily includes commodity-relatedIncludes commodities-related transportation rights, customer contracts and relationships, permits and access rights.permits.

 

2.

Represents television broadcast royalties held by a consolidated VIE.

3.

Represents value of business acquired relatedThe decrease from December 2013 to December 2014 is primarily due to the firm’s insurance businesses.

4.

Primarily includessale of the firm’s New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights and exchange-traded fund lead market maker rights.in August 2014.

Substantially all of the firm’s identifiable intangible assets are considered to have finite useful lives and are amortized (i) over their estimated useful lives (ii)using the straight-line method or based on economic usage for certain commodity-related intangibles or (iii) in proportioncommodities-related intangibles.

toThe tables below present amortization for 2014, 2013 and 2012, and the estimated gross profits or premium revenues. Amortization expensefuture amortization through 2019 for identifiable intangible assets.

  Year Ended December 
$ in millions  2014     2013     2012  

Amortization

  $217     $205     $338  

$ in millions

Estimated future amortization

  
 
As of
December 2014
  
  

2015

  $117  
  

2016

  106  
  

2017

  96  
  

2018

  81  
  

2019

  53  

178Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Impairments

The firm tests property, leasehold improvements and equipment, identifiable intangible assets and other assets for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. To the extent the carrying value of an asset exceeds the projected undiscounted cash flows expected to result from the use and eventual disposal of the asset or asset group, the firm determines the asset is impaired and records an impairment equal to the difference between the estimated fair value and the carrying value of the asset or asset group. In addition, the firm will recognize an impairment prior to the sale of an asset if the carrying value of the asset exceeds its estimated fair value.

During 2014 and 2013, primarily as a result of deterioration in market and operating conditions related to certain of the firm’s consolidated investments and the firm’s LMM rights, the firm determined that certain assets were impaired and recorded impairments of $360 million and $216 million, respectively.

Ÿ

In 2014, these impairments consisted of $268 million related to property, leasehold improvements and equipment, substantially all of which was attributable to a consolidated investment in Latin America, $70 million related to identifiable intangible assets, primarily attributable to the firm’s LMM rights, and $22 million related to goodwill as a result of the sale of Metro. The impairments related to property, leasehold improvements and equipment and goodwill were included in the firm’s Investing & Lending segment and the impairments related to identifiable intangible assets were principally included in the firm’s Institutional Client Services segment.

Ÿ

In 2013, these impairments consisted of $160 million related to property, leasehold improvements and equipment and $56 million related to identifiable intangible assets primarily attributable to a consolidated investment in Latin America. Substantially all of these impairments were included in the firm’s Investing & Lending segment.

The impairments in both 2014 and 2013 were included in “Depreciation and amortization.”amortization” and represented the excess of the carrying values of these assets over their estimated fair values, substantially all of which are calculated using level 3 measurements. These fair values were calculated using a combination of discounted cash flow analyses and relative value analyses, including the estimated cash flows expected to result from the use and eventual disposition of these assets.

 

 

164 Goldman Sachs 20112014 Form 10-K 179


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The tables below present amortization expense for identifiable intangible assets for the years ended December 2011, December 2010 and December 2009, and the estimated future amortization expense through 2016 for identifiable intangible assets as of December 2011.

   Year Ended December 
in millions  2011   2010   2009 

Amortization expense

   $389    $520    $96  

in millions 

As of

December 2011

 

Estimated future amortization expense:

 

2012

 $258  

2013

  234  

2014

  203  

2015

  170  

2016

  167  

Identifiable intangible assets are tested for recoverability whenever events or changes in circumstances indicate that an asset’s or asset group’s carrying value may not be recoverable.

If a recoverability test is necessary, the carrying value of an asset or asset group is compared to the total of the undiscounted cash flows expected to be received over the remaining useful life and from the disposition of the asset or asset group.

Ÿ

If the total of the undiscounted cash flows exceeds the carrying value, the asset or asset group is not impaired.

Ÿ

If the total of the undiscounted cash flows is less than the carrying value, the asset or asset group is not fully recoverable and an impairment loss is recognized as the difference between the carrying amount of the asset or asset group and its estimated fair value.

See Note 12 for information about impairments of our identifiable intangible assets.

Goldman Sachs 2011 Form 10-K165


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Deposits

Note 14.

Deposits

The tablestable below presentpresents deposits held in U.S. and non-U.S. offices, and the maturitiessubstantially all of time deposits.which were interest-bearing. Substantially all U.S. deposits were held at Goldman Sachs Bank USA (GS Bank USA) and were interest-bearing and substantially all non-U.S. deposits were held at Goldman Sachs International Bank (Europe) plc (GS Bank Europe) and were interest-bearing.(GSIB).

 

  As of December 
$ in millions  2014     2013  

U.S. offices

  $69,270     $61,016  
  

Non-U.S. offices

  13,738     9,791  

Total

  $83,008     $70,807  

The table below presents maturities of time deposits held in U.S. and non-U.S. offices.

 

  As of December 
in millions 2011   2010 

U.S. offices

 $38,477    $32,353  

Non-U.S. offices

  7,632     6,216  

Total

 $46,109    $38,569  

  As of December 2011 
in millions U.S.  Non-U.S.  Total 

2012

 $2,487   $2,347   $4,834  

2013

  3,252        3,252  

2014

  1,306        1,306  

2015

  1,031        1,031  

2016

  723        723  

2017 - thereafter

  2,120        2,120  

Total

 $10,919 1  $2,347 2  $13,266  
  As of December 2014 
$ in millions  U.S.     Non-U.S.     Total  

2015

  $  6,478     $8,395     $14,873  
  

2016

  3,755     8     3,763  
  

2017

  4,067          4,067  
  

2018

  2,410          2,410  
  

2019

  2,898          2,898  
  

2020 - thereafter

  5,661     43     5,704  

Total

  $25,269 1    $8,446 2    $33,715 3 

 

1.

Includes $71 million$1.57 billion greater than $100,000, of which $4$198 million matures within three months, $2$937 million matures within three to six months, $35$170 million matures within six to twelve months, and $30$266 million matures after twelve months.

 

2.

Substantially all wereIncludes $6.51 billion greater than $100,000.

Short-Term Borrowings

3.

Includes $13.52 billion of time deposits accounted for at fair value under the fair value option. See Note 8 for further information about deposits accounted for at fair value.

As of December 2014 and December 2013, deposits include $49.29 billion and $46.02 billion, respectively, of savings and demand deposits, which have no stated maturity, and were recorded based on the amount of cash received plus accrued interest, which approximates fair value. In addition, the firm designates certain derivatives as fair value hedges to convert substantially all of its time deposits not accounted for at fair value from fixed-rate obligations into floating-rate obligations. Accordingly, the carrying value of time deposits approximated fair value as of December 2014 and December 2013. While these savings and demand deposits and time deposits are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these deposits been included in the firm’s fair value hierarchy, they would have been classified in level 2 as of December 2014 and December 2013.

Note 15.

Short-Term Borrowings

Short-term borrowings were comprised ofThe table below presents details about the following:firm’s short-term borrowings.

 

 

As of December

 As of December 
in millions 2011  2010
$ in millions  2014     2013  

Other secured financings (short-term)

 $29,185  $24,529  $15,560     $17,290  
 

Unsecured short-term borrowings

 49,038  47,842  44,540     44,692  

Total

 $78,223  $72,371  $60,100     $61,982  

See Note 910 for further information about other secured financings.

Unsecured short-term borrowings include the portion of unsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder.

The firm accounts for promissory notes, commercial paper and certain hybrid financial instruments at fair value under the fair value option. See Note 8 for further information about unsecured short-term borrowings that are accounted for at fair value. Short-termThe carrying value of unsecured short-term borrowings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest, and such amounts approximategenerally approximates fair value due to the short-term nature of the obligations. While these unsecured short-term borrowings are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these borrowings been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of December 2014 and December 2013.

The table below presents details about the firm’s unsecured short-term borrowings.

 

  As of December  As of December 
in millions  2011 2010 

Current portion of unsecured long-term borrowings 1, 2

   $28,836    $25,396  
$ in millions  2014     2013  

Current portion of unsecured long-term borrowings 1

  $25,126     $25,312  
 

Hybrid financial instruments

   11,526    13,223    14,083     13,391  
 

Promissory notes

   1,328    3,265    338     292  
 

Commercial paper

   1,491    1,306    617     1,011  
 

Other short-term borrowings

   5,857    4,652    4,376     4,686  

Total

   $49,038    $47,842    $44,540     $44,692  

Weighted average interest rate 3

   1.89  1.77

Weighted average interest rate 2

  1.52%     1.65%  

 

1.

Includes $8.53$23.82 billion and $10.43$24.20 billion as of December 20112014 and December 2010, respectively, issued by Group Inc. and guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP).

2.

Includes $27.95 billion and $24.46 billion as of December 2011 and December 2010,2013, respectively, issued by Group Inc.

 

3.2.

The weighted average interest rates for these borrowings include the effect of hedging activities and exclude financial instruments accounted for at fair value under the fair value option. See Note 7 for further information about hedging activities.

 

 

166180 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Long-Term Borrowings

Note 16.

Long-Term Borrowings

Long-term borrowings were comprised of

The table below presents details about the following:firm’s long-term borrowings.

 

  As of December 
in millions 2011     2010 

Other secured financings (long-term)

 $8,179      $13,848  

Unsecured long-term borrowings

  173,545       174,399  

Total

 $181,724      $188,247  

  As of December 
$ in millions  2014     2013  

Other secured financings (long-term)

  $    7,249     $    7,524  
  

Unsecured long-term borrowings

  167,571     160,965  

Total

  $174,820     $168,489  

See Note 910 for further information about other secured financings. The tabletables below presentspresent unsecured long-term

borrowings extending through 2061 and consisting principally of senior borrowings.

 

  As of December 2011     As of December 2010 
in millions 

U.S.

Dollar

     

Non-U.S.

Dollar

     Total      

U.S.

Dollar

     

Non-U.S.

Dollar

     Total 

Fixed-rate obligations 1

Group Inc.

 $82,396      $38,012      $120,408      $81,192      $35,353      $116,545  

Subsidiaries

  1,662       557       2,219       1,622       532       2,154  

Floating-rate obligations 2

Group Inc.

  19,936       25,878       45,814       23,700       27,374       51,074  

Subsidiaries

  3,500       1,604       5,104       3,616       1,010       4,626  

Total 3

 $107,494      $66,051      $173,545      $110,130      $64,269      $174,399  
  As of December 2014 
$ in millions  
 
U.S.
Dollar
  
  
   
 
Non-U.S.
Dollar
  
  
   Total  

Fixed-rate obligations 1

     

Group Inc.

  $  86,403     $34,146     $120,549  
  

Subsidiaries

  3,074     711     3,785  
  

Floating-rate obligations 2

     

Group Inc.

  23,402     14,615     38,017  
  

Subsidiaries

  4,139     1,081     5,220  

Total

  $117,018     $50,553     $167,571  
  As of December 2013 
$ in millions  

 

U.S.

Dollar

  

  

   
 
Non-U.S.
Dollar
  
  
   Total  

Fixed-rate obligations 1

     

Group Inc.

  $  83,537     $34,362     $117,899  
  

Subsidiaries

  1,978     989     2,967  
  

Floating-rate obligations 2

     

Group Inc.

  19,446     16,168     35,614  
  

Subsidiaries

  3,144     1,341     4,485  

Total

  $108,105     $52,860     $160,965  

 

1.

Interest rates on U.S. dollar-denominated debt ranged from 0.10%1.55% to 10.04% (with a weighted average rate of 5.62%5.08%) and 0.20%1.35% to 10.04% (with a weighted average rate of 5.52%5.19%) as of December 20112014 and December 2010,2013, respectively. Interest rates on non-U.S. dollar-denominated debt ranged from 0.85%0.02% to 14.85%13.00% (with a weighted average rate of 4.75%4.06%) and 0.85%0.33% to 14.85%13.00% (with a weighted average rate of 4.65%4.29%) as of December 20112014 and December 2010,2013, respectively.

 

2.

Floating interest rates generally are based on LIBOR or the federal funds target rate.OIS. Equity-linked and indexed instruments are included in floating-rate obligations.

3.

Includes $0 and $8.58 billion as of December 2011 and December 2010, respectively, guaranteed by the FDIC under the TLGP.

Goldman Sachs 2011 Form 10-K167


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents unsecured long-term borrowings by maturity date.

  As of December 2014 
$ in millions  Group Inc.     Subsidiaries     Total  

2016

  $  22,368     $   789     $  23,157  
  

2017

  20,818     367     21,185  
  

2018

  22,564     1,272     23,836  
  

2019

  14,718     1,791     16,509  
  

2020 - thereafter

  78,098     4,786     82,884  

Total 1

  $158,566     $9,005     $167,571  

1.

Includes $9.54 billion of adjustments to the carrying value of certain unsecured long-term borrowings resulting from the application of hedge accounting by year of maturity as follows: $485 million in 2016, $738 million in 2017, $816 million in 2018, $459 million in 2019 and $7.04 billion in 2020 and thereafter.

In the table below:above:

 

Ÿ 

unsecuredUnsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holderholders are excluded from the table as they are included as unsecured short-term borrowings;borrowings.

 

Ÿ 

unsecuredUnsecured long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates; anddates.

 

Ÿ 

unsecuredUnsecured long-term borrowings that are redeemable prior to maturity at the option of the holders are reflected at the dates such options become exercisable.

  

As of December 2011

in millions Group Inc.  Subsidiaries  Total

2013

 $  25,024  $   185  $  25,209

2014

 19,981  358  20,339

2015

 16,578  272  16,850

2016

 25,507  163  25,670

2017 - thereafter

 79,132  6,345  85,477

Total 1

 $166,222  $7,323  $173,545

1.

Includes $10.84 billion related to interest rate hedges on certain unsecured long-term borrowings, by year of maturity as follows: $542 million in 2013, $882 million in 2014, $653 million in 2015, $1.19 billion in 2016 and $7.57 billion in 2017 and thereafter.

The aggregate contractual principal amount of unsecured long-term borrowings (principal and non-principal protected) for which the fair value option was elected exceeded the related fair value by $693 million and $349 million as of December 2011 and December 2010, respectively.

The firm designates certain derivatives as fair value hedges to effectively convert a substantial portion of its fixed-rate unsecured long-term borrowings which are not accounted for at fair value into floating-rate obligations. Accordingly, excluding the cumulative impact of changes in the firm’s credit spreads, the carrying value of unsecured long-term borrowings approximated fair value as of December 20112014 and December 2010.2013. See Note 7 for further information about hedging activities. For unsecured long-term borrowings for which the firm did not elect the fair value option, the cumulative impact due to changes in the firm’s own credit spreads would be a reductionan increase of 2% and 3% in the carrying value of total unsecured long-term borrowings of less than 4% as of both December 20112014 and December 2010. See Note 72013, respectively. As these borrowings are not accounted for further information about hedging activities.at fair value under the fair value option or at fair value in accordance with other U.S. GAAP, their fair value is not included in the firm’s fair value hierarchy in Notes 6 through 8. Had these borrowings been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of December 2014 and December 2013.

Goldman Sachs 2014 Form 10-K181


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The tabletables below presentspresent unsecured long-term borrowings, after giving effect to hedging activities that converted a substantial portion of fixed-rate obligations to floating-rate obligations.

 

     As of December 2011  As of December 2010
in millions    Group Inc.    Subsidiaries    Total  Group Inc.    Subsidiaries    Total

Fixed-rate obligations

                            

At fair value

     $ 10      $ 66      $76    $16      $6      $22 

At amortized cost 1, 2

      26,839       1,934       28,773     3,956       1,921       5,877 

Floating-rate obligations

At fair value

      12,903       4,183       17,086     13,428       4,720       18,148 

At amortized cost 1, 2

      126,470       1,140       127,610     150,219       133       150,352 

Total

     $166,222      $7,323      $173,545    $167,619      $6,780      $174,399 
  As of December 2014 
$ in millions  Group Inc.     Subsidiaries     Total  

Fixed-rate obligations

     

At fair value

  $         —     $   861     $       861  
  

At amortized cost 1

  31,296     2,452     33,748  
  

Floating-rate obligations

     

At fair value

  11,661     3,483     15,144  
  

At amortized cost 1

  115,609     2,209     117,818  

Total

  $158,566     $9,005     $167,571  
  As of December 2013 
$ in millions  Group Inc.     Subsidiaries     Total  

Fixed-rate obligations

     

At fair value

  $         —      $   471     $       471  
  

At amortized cost 1

  31,741     1,959     33,700  
  

Floating-rate obligations

     

At fair value

  8,671     2,549     11,220  
  

At amortized cost 1

  113,101     2,473     115,574  

Total

  $153,513     $7,452     $160,965  

 

1.

The weighted average interest rates on the aggregate amounts were 2.59% (5.18%2.68% (5.09% related to fixed-rate obligations and 2.03%2.01% related to floating-rate obligations) and 1.90% (5.69%2.73% (5.23% related to fixed-rate obligations and 1.74%2.04% related to floating-rate obligations) as of December 20112014 and December 2010,2013, respectively. These rates exclude financial instruments accounted for at fair value under the fair value option.

2.

During 2011, certain fair value hedges were de-designated resulting in a larger portion of fixed-rate debt carried at amortized cost.

168Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Subordinated Borrowings

Unsecured long-term borrowings include subordinated debt and junior subordinated debt. Junior subordinated debt is junior in right of payment to other subordinated borrowings, which are junior to senior borrowings. As of December 20112014 and

December 2010,2013, subordinated debt had maturities ranging from 2017 to 2038, and 20122015 to 2038, respectively. The tabletables below presentspresent subordinated borrowings.

 

 As of December 2011     As of December 2010  As of December 2014 
in millions 

Par

Amount

     

Carrying

Amount

     Rate 1    

Par

Amount

     

Carrying

Amount

     Rate 1 
$ in millions  
 
Par
Amount
  
  
   
 
Carrying
Amount
  
  
   Rate 1 

Subordinated debt 2

 $14,310       $17,362       4.39% 3    $14,345      $16,977       1.19  $14,254     $17,241     3.77%  
 

Junior subordinated debt

  5,085       6,533       2.43    5,082       5,716       2.50  1,582     2,122     6.21%  

Total subordinated borrowings

 $19,395       $23,895       3.87   $19,427      $22,693       1.54  $15,836     $19,363     4.02%  
 As of December 2013 
$ in millions  
 
Par
Amount
  
  
   
 
Carrying
Amount
  
  
   Rate 1 

Subordinated debt 2

  $14,508     $16,982     4.16%  
 

Junior subordinated debt

  2,835     3,760     4.79%  

Total subordinated borrowings

  $17,343     $20,742     4.26%  

 

1.

Weighted average interest raterates after giving effect to fair value hedges used to convert these fixed-rate obligations into floating-rate obligations. See Note 7 for further information about hedging activities. See below for information about interest rates on junior subordinated debt.

 

2.

Par amount and carrying amount of subordinated debt issued by Group Inc., was $13.75$13.68 billion and $16.80$16.67 billion, respectively, as of December 2011,2014, and $13.81$13.94 billion and $16.44$16.41 billion, respectively, as of December 2010.2013.

3.

The increase in the weighted average interest rate as of December 2011 compared with December 2010 is primarily due to the de-designation of certain fair value hedges resulting in a larger portion of subordinated debt carried as a fixed-rate obligation.

Junior Subordinated Debt

Junior Subordinated Debt Issued to APEXHeld by 2012 Trusts. In 2007, Group Inc.2012, the Vesey Street Investment Trust I and the Murray Street Investment Trust I (together, the 2012 Trusts) issued a totalan aggregate of $2.25 billion of remarketablesenior guaranteed trust securities to third parties. The proceeds of that offering were used to purchase $1.75 billion of junior subordinated debt toissued by Group Inc. that pays interest semi-annually at a fixed annual rate of 4.647% and matures on March 9, 2017, and $500 million of junior subordinated debt issued by Group Inc. that pays interest semi-annually at a fixed annual rate of 4.404% and matures on September 1, 2016. During 2014, the firm exchanged $175 million of the senior guaranteed trust securities held by the firm for $175 million of junior subordinated debt held by the Murray Street Investment Trust I. Following the exchange, these senior guaranteed trust securities and junior subordinated debt were extinguished.

The 2012 Trusts purchased the junior subordinated debt from Goldman Sachs Capital II and Goldman Sachs Capital III (APEX Trusts), Delaware statutory trusts.. The APEX Trusts issued $2.25 billion of guaranteed perpetual Normal Automatic Preferred Enhanced Capital Securities (APEX)used the proceeds from such sales to third parties and a de minimis amount of common securities to Group Inc. Group Inc. also entered into contracts with the APEX Trusts to sell $2.25 billionpurchase shares of Group Inc. perpetual non-cumulative preferred stock (the stock purchase contracts)’s Perpetual Non-Cumulative Preferred Stock, Series E (Series E Preferred Stock) and Perpetual Non-Cumulative Preferred Stock, Series F (Series F Preferred Stock). See Note 19 for more information about the preferred stock that Group Inc. will issue in connection with the stock purchase contracts.Series E and Series F Preferred Stock.

The APEX2012 Trusts are wholly-owned finance subsidiaries ofrequired to pay distributions on their senior guaranteed trust securities in the firm for regulatorysame amounts and legal purposes buton the same dates that they are not consolidated for accounting purposes.

The firm accounted forscheduled to receive interest on the stock purchase contracts as equity instruments and, accordingly, recorded the cost of the stock purchase contracts as a reduction to additional paid-in capital.

The firm pays interest semi-annually on $1.75 billion of junior subordinated debt issuedthey hold, and are required to Goldman Sachs Capital II at a fixed annual rateredeem their respective senior guaranteed trust securities upon the maturity or earlier redemption of 5.59% and the debt matures on June 1, 2043. The firm pays interest quarterly on $500 million of junior subordinated debt issued to Goldman Sachs Capital III at a rate per annum equal to

three-month LIBOR plus 0.57% and the debt matures on September 1, 2043. In addition, the firm makes contract payments at a rate of 0.20% per annum on the stock purchase contracts held by the APEX Trusts.they hold.

The firm has the right to defer payments on the junior subordinated debt, and the stock purchase contracts, subject to limitations, and therefore cause payment on the APEX to be deferred.limitations. During any such extensiondeferral period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common or preferred stock. However, as Group Inc. fully and unconditionally guarantees the payment of the distribution and redemption amounts when due on a senior basis on the senior guaranteed trust securities issued by the 2012 Trusts, if the 2012 Trusts are unable to make scheduled distributions to the holders of the senior guaranteed trust securities, under the guarantee, Group Inc. would be obligated to make those payments. As such, the $2.08 billion of junior subordinated debt held by the 2012 Trusts for the benefit of investors, included in “Unsecured long-term borrowings” in the consolidated statements of financial condition, is not classified as subordinated borrowings.

182Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

In connection withNotes to Consolidated Financial Statements

The APEX Trusts and the APEX issuance,2012 Trusts are Delaware statutory trusts sponsored by the firm and wholly-owned finance subsidiaries of the firm for regulatory and legal purposes but are not consolidated for accounting purposes.

The firm has covenanted in favor of certain of its debtholders, who were initially and are currently the holders of Group Inc.’s 6.345% Junior Subordinated Debenturesjunior subordinated debt due February 15, 2034, that, subject to certain exceptions, the firm wouldwill not redeem or purchase (i) Group Inc.’s junior subordinated debtthe capital securities issued toby the APEX Trusts prior to the applicable stock purchase date or (ii) APEX or shares of Group Inc.’s perpetual Non-CumulativeSeries E or Series F Preferred Stock Series E (Series E Preferred Stock) or perpetual Non-Cumulative Preferred Stock, Series F (Series F Preferred Stock) prior to the datespecified dates in 2022 for a price that is ten years after the applicable stock purchase date, unless the applicable redemption or purchase price does not exceedexceeds a maximum amount determined by reference to the aggregate amount of net cash proceeds that the firm has received from the sale of qualifying equity securities during the 180-day period preceding the redemption or purchase.securities.

Goldman Sachs 2011 Form 10-K169


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Junior Subordinated Debt Issued in Connection with Trust Preferred Securities.Group Inc. issued $2.84 billion of junior subordinated debenturesdebt in 2004 to Goldman Sachs Capital I (Trust), a Delaware statutory trust. The Trust issued $2.75 billion of guaranteed preferred beneficial interests (Trust Preferred Securities) to third parties and $85 million of common beneficial interests to Group Inc. and used the proceeds from the issuances to purchase the junior subordinated debenturesdebt from Group Inc. During the second quarter of 2014, the firm purchased $1.22 billion (par amount) of Trust Preferred Securities and delivered these securities, along with $37.6 million of common beneficial interests, to the Trust in the third quarter of 2014 in exchange for a corresponding par amount of the junior subordinated debt. Following the exchange, these Trust Preferred Securities, common beneficial interests and junior subordinated debt were extinguished and the firm recognized a gain of $289 million ($270 million of which was recorded at extinguishment in the third quarter of 2014), which is included in “Market making” in the consolidated statements of earnings. Subsequent to this exchange, during the second half of 2014, the firm purchased $214 million (par amount) of Trust Preferred Securities and delivered these securities, along with $6.6 million of common beneficial interests, to the Trust in February 2015 in exchange for a corresponding par amount of the junior subordinated debt. The Trust is a wholly-owned finance subsidiary of the firm for regulatory and legal purposes but is not consolidated for accounting purposes.

The firm pays interest semi-annually on the debenturesjunior subordinated debt at an annual rate of 6.345% and the debentures maturedebt matures on February 15, 2034. The coupon rate and the payment dates applicable to the beneficial interests are the same as the interest rate and payment dates for the debentures.junior subordinated debt. The firm has the right, from time to time, to defer payment of interest on the debentures,junior subordinated debt, and therefore cause payment on the Trust’s preferred beneficial interests to be deferred, in each case up to ten consecutive semi-annual periods. During any such extensiondeferral period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common stock. The Trust is not permitted to pay any distributions on the common beneficial interests held by Group Inc. unless all dividends payable on the preferred beneficial interests have been paid in full.

Other Liabilities and Accrued Expenses

Note 17.

Other Liabilities and Accrued Expenses

The table below presents other liabilities and accrued expenses by type.

 

 As of December  As of December 
in millions 2011   2010 
$ in millions  2014     2013  

Compensation and benefits

 $5,701    $9,089    $  8,368     $  7,874  

Insurance-related liabilities

  18,614     11,381  
 

Noncontrolling interests 1

  1,450     872    404     326  

Income tax-related liabilities 2

  533     2,042  
 

Income tax-related liabilities

  1,533     1,974  
 

Employee interests in consolidated funds

  305     451    176     210  
 

Subordinated liabilities issued
by consolidated VIEs

  1,090     1,526    843     477  
 

Accrued expenses and other

  4,108     4,650    4,751     5,183  

Total

 $31,801    $30,011    $16,075     $16,044  

 

1.

Includes $1.17 billion and $593 million relatedPrimarily relates to consolidated investment funds as of December 2011 and December 2010, respectively.funds.

2.

See Note 24 for further information about income taxes.

The table below presents insurance-related liabilities by type.

  As of December 
in millions 2011   2010 

Separate account liabilities

 $3,296    $4,024  

Liabilities for future benefits
and unpaid claims 1

  14,213     6,308  

Contract holder account balances

  835     801  

Reserves for guaranteed minimum death
and income benefits

  270     248  

Total

 $18,614    $11,381  

1.

Substantially all of the increase from December 2010 to December 2011 is related to acquisitions. In connection with these acquisitions, the firm acquired $7.50 billion of assets (primarily financial instruments owned, at fair value, principally consisting of corporate debt securities) and assumed $7.10 billion of liabilities.

Separate account liabilities are supported by separate account assets, representing segregated contract holder funds under variable annuity and life insurance contracts. Separate account assets are included in “Cash and securities segregated for regulatory and other purposes.”

Liabilities for future benefits and unpaid claims include liabilities arising from reinsurance provided by the firm to other insurers. The firm had a receivable of $1.30 billion and $1.26 billion as of December 2011 and December 2010, respectively, related to such reinsurance contracts, which is reported in “Receivables from customers and counterparties.” In addition, the firm has ceded risks to reinsurers related to certain of its liabilities for future benefits and unpaid claims and had a receivable of $648 million and $839 million as of December 2011 and December 2010, respectively, related to such reinsurance contracts, which is reported in “Receivables from customers and counterparties.” Contracts to cede risks to reinsurers do not relieve the firm of its obligations to contract holders. Liabilities for future benefits and unpaid claims include $8.75 billion and $2.05 billion carried at fair value under the fair value option as of December 2011 and December 2010, respectively.

Reserves for guaranteed minimum death and income benefits represent a liability for the expected value of guaranteed benefits in excess of projected annuity account balances. These reserves are based on total payments expected to be made less total fees expected to be assessed over the life of the contract.

 

 

170 Goldman Sachs 20112014 Form 10-K 183


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Commitments, Contingencies and Guarantees

Note 18.

Commitments, Contingencies and Guarantees

Commitments

The table below presents the firm’s commitments.

 

  

Commitment Amount by Period

of Expiration as of December 2011

     

Total Commitments

as of December

 
in millions 2012   

2013-

2014

   

2015-

2016

   

2017-

Thereafter

      2011   2010 

Commitments to extend credit 1

Commercial lending:

Investment-grade

 $5,014    $4,266    $10,344    $45      $19,669    $12,330  

Non-investment-grade

  1,585     3,939     7,608     761       13,893     11,919  

William Street credit extension program

  5,515     6,291     19,740     390       31,936     27,383  

Warehouse financing

  58     189                 247     265  

Total commitments to extend credit

  12,172     14,685     37,692     1,196       65,745     51,897  

Contingent and forward starting resale and securities borrowing agreements 2

  54,522                      54,522     46,886  

Forward starting repurchase and secured lending agreements 2

  17,964                      17,964     12,509  

Underwriting commitments

                             835  

Letters of credit 3

  1,145     58     145     5       1,353     2,210  

Investment commitments

  2,455     4,764     439     1,460       9,118     11,093  

Other

  5,200     101     34     7       5,342     4,396  

Total commitments

 $93,458    $19,608    $38,310    $2,668      $154,044    $129,826  

1.

Commitments to extend credit are presented net of amounts syndicated to third parties.

2.

These agreements generally settle within three business days.

3.

Consists of commitments under letters of credit issued by various banks which the firm provides to counterparties in lieu of securities or cash to satisfy various collateral and margin deposit requirements.

  

Commitment Amount by Period

of Expiration as of December 2014

    

Total Commitments

as of December

 
$ in millions  2015     
 
2016 -
2017
  
  
   
 
2018 -
2019
  
  
   
 
2020 -
Thereafter
  
  
    2014     2013  

Commitments to extend credit

           

Commercial lending:

           

Investment-grade

  $  9,712     $15,003     $36,200     $2,719     $  63,634     $  60,499  
  

Non-investment-grade

  4,136     7,080     14,111     4,278     29,605     25,412  
  

Warehouse financing

  1,306     1,152     112     140      2,710     1,716  

Total commitments to extend credit

  15,154     23,235     50,423     7,137     95,949     87,627  
  

Contingent and forward starting resale and securities borrowing agreements

  34,343     557     325          35,225     34,410  
  

Forward starting repurchase and secured lending agreements

  8,180                    8,180     8,256  
  

Letters of credit

  280     14     10     4     308     501  
  

Investment commitments

  1,684     2,818     25     637     5,164     7,116  
  

Other

  6,136     87     42     56      6,321     3,955  

Total commitments

  $65,777     $26,711     $50,825     $7,834      $151,147     $141,865  

Commitments to Extend Credit

The firm’s commitments to extend credit are agreements to lend with fixed termination dates and depend on the satisfaction of all contractual conditions to borrowing. These commitments are presented net of amounts syndicated to third parties. The total commitment amount does not necessarily reflect actual future cash flows because the firm may syndicate all or substantial additional portions of these commitments andcommitments. In addition, commitments can expire unused or be reduced or cancelled at the counterparty’s request.

As of December 2014 and December 2013, $66.22 billion and $35.66 billion, respectively, of the firm’s lending commitments were held for investment and were accounted for on an accrual basis. See Note 9 for further information about such commitments.

The firm generally accounts for the remaining commitments to extend credit at fair value. Losses, if any, are generally recorded, net of any fees in “Other principal transactions.”

Commercial Lending.The firm’s commercial lending commitments are generally extended to investment-grade and non-investment-grade corporate borrowers. Commitments to investment-grade corporate borrowers are principally used for operating liquidity and general corporate purposes. The firm also extends lending commitments in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. Commitments that are extended for contingent

acquisition financing are often intended to be short-term in nature, as borrowers often seek to replace them with other funding sources.

William Street Credit Extension Program.Substantially all of the commitments provided under the William Street credit extension program are to investment-grade corporate borrowers. Commitments under the program are principally extended by GS Bank USA and its subsidiaries, including William Street Commitment Corporation (Commitment Corp.). Historically, commitments extended by Commitment Corp. were supported, in part, by funding raised by Funding Corp., another consolidated wholly-owned subsidiary of GS Bank USA. As of April 26, 2011, the funding raised by Funding Corp. had been repaid in its entirety. The commitments extended by Commitment Corp. that had been supported by this funding are now supported by funding from GS Bank USA.

 

 

184 Goldman Sachs 20112014 Form 10-K 171


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The assets and liabilities of Commitment Corp. are legally separated from other assets and liabilities of the firm. The assets of Commitment Corp. will not be available to its shareholders until the claims of its creditors have been paid. In addition, no affiliate of Commitment Corp., except in limited cases as expressly agreed in writing, is responsible for any obligation of Commitment Corp.

Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection thaton certain approved loan commitments (primarily investment-grade commercial lending commitments). The notional amount of such loan commitments was $27.51 billion and $29.24 billion as of December 2014 and December 2013, respectively. The credit loss protection on loan commitments provided by SMFG is generally limited to 95% of the first loss the firm realizes on approved loansuch commitments, up to a maximum of approximately $950 million, with respect to most of the William Street commitments.million. In addition, subject to the satisfaction of certain conditions, upon the firm’s request, SMFG will provide protection for 70% of additional losses on such commitments, up to a maximum of $1.13 billion, of which $300$768 million and $375$870 million of protection had been provided as of December 20112014 and December 2010,2013, respectively. The firm also uses other financial instruments to mitigate credit risks related to certain William Street commitments not covered by SMFG. These instruments primarily include credit default swaps that reference the same or similar underlying instrument or entity, or credit default swaps that reference a market index.

Warehouse Financing.The firm provides financing to clients who warehouse financial assets. These arrangements are secured by the warehoused assets, primarily consisting of residentialcorporate loans and commercial mortgages.mortgage loans.

Contingent and Forward Starting Resale and Securities Borrowing Agreements/Forward Starting Repurchase and Secured Lending Agreements

The firm enters into resale and securities borrowing agreements and repurchase and secured lending agreements that settle at a future date.date, generally within three business days. The firm also enters into commitments to provide contingent financing to its clients and counterparties through resale agreements. The firm’s funding of these commitments depends on the satisfaction of all contractual conditions to the resale agreement and these commitments can expire unused.

Letters of Credit

The firm has commitments under letters of credit issued by various banks which the firm provides to counterparties in lieu of securities or cash to satisfy various collateral and margin deposit requirements.

Investment Commitments

The firm’s investment commitments consist of $5.16 billion and $7.12 billion as of December 2014 and December 2013, respectively, include commitments to invest in private equity, real estate and other assets directly and through funds that the firm raises and manages. These commitments include $1.62Of these amounts, $2.87 billion and $1.97$5.48 billion as of December 20112014 and December 2010, respectively, related to real estate private investments and $7.50 billion and $9.12 billion as of December 2011 and December 2010, respectively, related to corporate and other private investments. Of these amounts, $8.38 billion and $10.10 billion as of December 2011 and December 2010,2013, respectively, relate to commitments to invest in funds managed by the firm, which willfirm. If these commitments are called, they would be funded at market value on the date of investment.

Leases

The firm has contractual obligations under long-term noncancelable lease agreements, principally for office space, expiring on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. The table below presents future minimum rental payments, net of minimum sublease rentals.

 

in millions As of
December 2011
 

2012

 $440  

2013

  420  

2014

  385  

2015

  337  

2016

  301  

2017 - thereafter

  1,380  

Total

 $3,263  
$ in millions  
 
As of
December 2014
  
  

2015

  $   321  
  

2016

  292  
  

2017

  274  
  

2018

  226  
  

2019

  190  
  

2020 - thereafter

  870  

Total

  $2,173  

Rent charged to operating expense was $309 million for the years ended December 2011, December 20102014, $324 million for 2013 and December 2009 was $475$374 million $508 million and $434 million, respectively.for 2012.

Operating leases include office space held in excess of current requirements. Rent expense relating to space held for growth is included in “Occupancy.” The firm records a liability, based on the fair value of the remaining lease rentals reduced by any potential or existing sublease rentals, for leases where the firm has ceased using the space and management has concluded that the firm will not derive any future economic benefits. Costs to terminate a lease before the end of its term are recognized and measured at fair value on termination.

 

 

172 Goldman Sachs 20112014 Form 10-K 185


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Contingencies

Legal Proceedings. See Note 27 for information about legal proceedings, including certain mortgage-related matters.matters, and agreements the firm has entered into to toll the statute of limitations.

Certain Mortgage-Related Contingencies. There are multiple areas of focus by regulators, governmental agencies and others within the mortgage market that may impact originators, issuers, servicers and investors. There remains significant uncertainty surrounding the nature and extent of any potential exposure for participants in this market.

 

Ÿ 

Representations and Warranties.The firm has not been a significant originator of residential mortgage loans. The firm did purchase loans originated by others and generally received loan-level representations of the type described below from the originators. During the period 2005 through 2008, the firm sold approximately $10 billion of loans to government-sponsored enterprises and approximately $11 billion of loans to other third parties. In addition, the firm transferred loans to trusts and other mortgage securitization vehicles. As of December 20112014 and December 2010,2013, the outstanding balance of the loans transferred to trusts and other mortgage securitization vehicles during the period 2005 through 2008 was approximately $42$25 billion and $49$29 billion, respectively. This amount reflectsThese amounts reflect paydowns and cumulative losses of approximately $83$100 billion ($1723 billion of which are cumulative losses) as of December 20112014 and approximately $76$96 billion ($1422 billion of which are cumulative losses) as of December 2010.2013. A small number of these Goldman Sachs-issued securitizations with an outstanding principal balance of $635$401 million and total paydowns and cumulative losses of $1.42$1.66 billion ($465550 million of which are cumulative losses) as of December 2011,2014, and an outstanding principal balance of $739$463 million and total paydowns and cumulative losses of $1.32$1.60 billion ($410534 million of which are cumulative losses) as of December 2010,2013, were structured with credit protection obtained from monoline insurers. In connection with both sales of loans and securitizations, the firm provided loan level representations of the type described below and/or assigned the loan level representations from the party from whom the firm purchased the loans.

The loan level representations made in connection with the sale or securitization of mortgage loans varied among transactions but were generally detailed representations applicable to each loan in the portfolio and addressed matters relating to the property, the borrower and the note. These representations generally included, but were not limited to, the following: (i) certain attributes of the borrower’s financial status; (ii) loan-to-value ratios, owner occupancy status and certain other characteristics of the property; (iii) the lien position; (iv) the fact that the loan was originated in compliance with law; and (v) completeness of the loan documentation.

The loan level representations made in connection with the sale or securitization of mortgage loans varied among transactions but were generally detailed representations applicable to each loan in the portfolio and addressed matters relating to the property, the borrower and the note. These representations generally included, but were not limited to, the following: (i) certain attributes of the borrower’s financial status; (ii) loan-to-value ratios, owner occupancy status and certain other characteristics of the property; (iii) the lien position; (iv) the fact that the loan was originated in compliance with law; and (v) completeness of the loan documentation.

The firm has received repurchase claims for residential mortgage loans based on alleged breaches of representations from government-sponsored enterprises, other third parties, trusts and other mortgage securitization vehicles, which have not been significant. During both the years ended December 2014 and December 2013, the firm repurchased loans with an unpaid principal balance of less than $10 million and related losses were not material. The firm has received a communication from counsel purporting to represent certain institutional investors in portions of Goldman Sachs-issued securitizations between 2003 and 2007, such securitizations having a total original notional face amount of approximately $150 billion, offering to enter into a “settlement dialogue” with respect to alleged breaches of representations made by Goldman Sachs in connection with such offerings.

To date, repurchase claims and actual repurchases of residential mortgage loans based upon alleged breaches of representations have not been significant and have mainly involved government-sponsored enterprises. During the year ended December 2011, the firm repurchased loans with an unpaid principal balance of less than $10 million. During the year ended December 2010, the firm repurchased loans with an unpaid principal balance of less than $50 million. The loss related to the repurchase of these loans was not material for the years ended December 2011 and December 2010.

Ultimately, the firm’s exposure to claims for repurchase of residential mortgage loans based on alleged breaches of representations will depend on a number of factors including the following: (i) the extent to which these claims are actually made; (ii) the extent to which there are underlying breaches of representations that give rise to valid claims for repurchase; (iii) in the case of loans originated by others, the extent to which the firm could be held liable and, if it is, the firm’s ability to pursue and collect on any claims against the parties who made representations to the firm; (iv) macro-economic factors, including developments in the residential real estate market; and (v) legal and regulatory developments.

Ultimately, the firm’s exposure to claims for repurchase of residential mortgage loans based on alleged breaches of representations will depend on a number of factors including the following: (i) the extent to which these claims are actually made within the statute of limitations taking into consideration the agreements to toll the statute of limitations the firm has entered into with trustees representing trusts; (ii) the extent to which there are underlying breaches of representations that give rise to valid claims for repurchase; (iii) in the case of loans originated by others, the extent to which the firm could be held liable and, if it is, the firm’s ability to pursue and collect on any claims against the parties who made representations to the firm; (iv) macroeconomic factors, including developments in the residential real estate market; and (v) legal and regulatory developments. Based upon the large number of defaults in residential mortgages, including those sold or securitized by the firm, there is a potential for increasing claims for repurchases. However, the firm is not in a position to make a meaningful estimate of that exposure at this time.

 

 

186 Goldman Sachs 20112014 Form 10-K 173


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Ÿ 

Foreclosure and Other Mortgage Loan Servicing Practices and Procedures.The firm had received a number of requests for information from regulators and other agencies, including state attorneys general and banking regulators, as part of an industry-wide focus on the practices of lenders and servicers in connection with foreclosure proceedings and other aspects of mortgage loan servicing practices and procedures. The requests sought information about the foreclosure and servicing protocols and activities of Litton Loan Servicing LP (Litton), a residential mortgage servicing subsidiary sold by the firm to a third-party purchaserOcwen Financial Corporation (Ocwen) in the third quarter of 2011. The firm is cooperating with the requests and these inquiries may result in the imposition of fines or other regulatory action. In the third quarter of 2010, prior to the firm’s sale of Litton, Litton had temporarily suspended evictions and foreclosure and real estate owned sales in a number of states, including those with judicial foreclosure procedures. Litton resumed these activities beginning in the fourth quarter of 2010.

In connection with the sale of Litton, the firm agreed to provide certainprovided customary representations and warranties, and indemnities for breaches of these representations and warranties, to Ocwen. These indemnities are subject to various limitations, and are capped at approximately $50 million. The firm has not yet received any claims under these indemnities. The firm also agreed to provide specific indemnities to Ocwen related to Litton’sclaims made by third parties with respect to servicing activities during the period that Litton was owned by the firm and foreclosure practices prior towhich are in excess of the closerelated reserves accrued for such matters by Litton at the time of the sale. These indemnities are capped at approximately $125 million. The liability associated with certainfirm has recorded a reserve for the portion of these potential losses that it believes is probable and can be reasonably estimated. As of December 2014, claims received and payments made in connection with these claims were not material to the firm.

The firm further agreed to provide indemnities has been capped. For indemnitiesto Ocwen not subject to a cap, management is unablewhich primarily relate to develop an estimatepotential liabilities constituting fines or civil monetary penalties which could be imposed in settlements with U.S. states’ attorneys general or in consent orders with the U.S. federal bank regulatory agencies or the New York State Department of Financial Services, in each case relating to Litton’s foreclosure and servicing practices while it was owned by the maximum potential amountfirm. The firm has entered into a settlement with the Federal Reserve Board relating to foreclosure and servicing matters.

Under the Litton sale agreement the firm also retained liabilities associated with claims related to Litton’s failure to maintain lender-placed mortgage insurance, obligations to repurchase certain loans from government-sponsored enterprises, subpoenas from one of future payments because no amounts have yet been specifiedLitton’s regulators, and fines or claimed. However, managementcivil penalties imposed by the Federal Reserve Board or the New York State Department of Financial Services in connection with certain compliance matters. Management does not believe, based on currently available information, that any payments under these indemnities will have a material adverse effect on the firm’s financial condition.

On September 1, 2011, Group Inc. and GS Bank USA entered into a Consent Order (the Order) with the Board of Governors of the Federal Reserve System (Federal Reserve Board) relating to the servicing of residential mortgage loans. The terms of the Order are substantially similar and, in many respects, identical to the orders entered into with the Federal Reserve Board by other large U.S. financial institutions. The Order sets forth various allegations of

improper conduct in servicing by Litton, requires that Group Inc. and GS Bank USA cease and desist such conduct, and requires that Group Inc. and GS Bank USA, and their boards of directors, take various affirmative steps. The Order requires (i) Group Inc. and GS Bank USA to engage a third-party consultant to conduct a review of certain foreclosure actions or proceedings that occurred or were pending between January 1, 2009 and December 31, 2010; (ii) the adoption of policies and procedures related to management of third parties used to outsource residential mortgage servicing, loss mitigation or foreclosure; (iii) a “validation report” from an independent third-party consultant regarding compliance with the Order for the first year; and (iv) submission of quarterly progress reports as to compliance with the Order by the boards of directors (or committees thereof) of Group Inc. and GS Bank USA.

In addition, on September 1, 2011, GS Bank USA entered into an Agreement on Mortgage Servicing Practices with the New York State Banking Department, Litton and the acquirer of Litton relating to the servicing of residential mortgage loans, and, in a related agreement with the New York State Banking Department, Group Inc. agreed to forgive 25% of the unpaid principal balance on certain delinquent first lien residential mortgage loans owned by Group Inc. or a subsidiary, totaling approximately $13 million in principal forgiveness.

Guaranteed Minimum Death and Income Benefits.Other Contingencies.In connection with its insurance business,the sale of Metro, the firm is contingently liableprovided customary representations and warranties, and indemnities for breaches of these representations and warranties, to the buyer. The firm further agreed to provide guaranteed minimum death and income benefitsindemnities to certain contract holders and has established a reserve relatedthe buyer, which primarily relate to $5.52 billion and $6.11 billionpotential liabilities for legal or regulatory proceedings arising out of contract holder account balances asthe conduct of December 2011 and December 2010, respectively, for such benefits. The weighted average attained age of these contract holdersMetro’s business while it was 69 years for both December 2011 and December 2010.owned by the firm.

The net amount at risk, representing guaranteed minimum death and income benefits in excess of contract holder account balances, was $1.51 billion and $1.60 billion as of December 2011 and December 2010, respectively. See Note 17 for further information about insurance liabilities.

 

 

174 Goldman Sachs 20112014 Form 10-K 187


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Guarantees

Derivative Guarantees.The firm enters into various derivatives that meet the definition of a guarantee under U.S. GAAP, including written equity and commodity put options, written currency contracts and interest rate caps, floors and swaptions. These derivatives are risk managed together with derivatives that do not meet the definition of a guarantee, and therefore the amounts in the tables below do not reflect the firm’s overall risk related to its derivative activities. Disclosures about derivatives are not required if they may be cash settled and the firm has no basis to conclude it is probable that the counterparties held the underlying instruments at inception of the contract. The firm has concluded that these conditions have been met for certain large, internationally active commercial and investment bank counterparties, central clearing counterparties and certain other counterparties. Accordingly, the firm has not included such contracts in the tabletables below.

Derivatives are accounted for at fair value and therefore the carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying values in the tables below exclude the effect of counterparty and cash collateral netting.

Securities Lending Indemnifications.The firm, in its capacity as an agency lender, indemnifies most of its securities lending customers against losses incurred in the event that borrowers do not return securities and the collateral held is insufficient to cover the market value of the securities borrowed. Collateral held by the lenders in connection with securities lending indemnifications was $28.49 billion and $27.14 billion as of December 2014 and December 2013, respectively. Because the contractual nature of these arrangements requires the firm to obtain collateral with a market value that exceeds the value of the securities lent to the borrower, there is minimal performance risk associated with these guarantees.

Other Financial Guarantees.In the ordinary course of business, the firm provides other financial guarantees of the obligations of third parties (e.g., standby letters of credit and other guarantees to enable

clients to complete transactions and fund-related guarantees). These guarantees represent obligations to make payments to beneficiaries if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary.

The tabletables below presents certainpresent information about certain derivatives that meet the definition of a guarantee, securities lending indemnifications and certain other guarantees. The maximum payout in the tabletables below is based on the notional amount of the contract and therefore does not represent anticipated losses. See Note 7 for further information about credit derivatives that meet the definition of a guarantee which are not included below. The tables below also exclude certain commitments to issue standby letters of credit that are included in “Commitments to extend credit.” See the table in “Commitments” above for a summary of the firm’s commitments.

Because derivatives are accounted for at fair value, the carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying values below exclude the effect of a legal right of setoff that may exist under an enforceable netting agreement and the effect of netting of cash collateral posted under credit support agreements.

  As of December 2014 
$ in millions  Derivatives     
 
 
Securities
lending
indemnifications
  
  
  
   
 
 
Other
financial
guarantees
  
  
  

Carrying Value of Net Liability

  $  11,201     $        —     $   119  

Maximum Payout/Notional Amount by Period of Expiration

  

2015

  $351,308     $27,567     $   471  
  

2016 - 2017

  150,989          935  
  

2018 - 2019

  51,927          1,390  
  

2020 - Thereafter

  58,511          1,690  

Total

  $612,735     $27,567     $4,486  
  As of December 2013 
$ in millions  Derivatives     

 
 

Securities

lending
indemnifications

  

  
  

   
 
 
Other
financial
guarantees
  
  
  

Carrying Value of Net Liability

  $    7,634     $        —     $   213  

Maximum Payout/Notional Amount by Period of Expiration

  

2014

  $517,634     $26,384     $1,361  
  

2015 - 2016

  180,543          620  
  

2017 - 2018

  39,367          1,140  
  

2019 - Thereafter

  57,736          1,046  

Total

  $795,280     $26,384     $4,167  
 

  As of December 2011 
     Maximum Payout/Notional Amount by Period of Expiration 
in millions 

Carrying
Value of

Net Liability

  2012   2013-
2014
   

2015-

2016

   2017-
Thereafter
   Total 

Derivatives 1

 $11,881   $486,244    $206,853    $53,743    $49,576    $796,416  

Securities lending indemnifications 2

      27,798                    27,798  

Other financial guarantees 3

  205    625     795     1,209     939     3,568  

1.

These derivatives are risk managed together with derivatives that do not meet the definition of a guarantee, and therefore these amounts do not reflect the firm’s overall risk related to its derivative activities. As of December 2010, the carrying value of the net liability related to derivative guarantees was $8.26 billion.

2.

Collateral held by the lenders in connection with securities lending indemnifications was $28.58 billion as of December 2011. Because the contractual nature of these arrangements requires the firm to obtain collateral with a market value that exceeds the value of the securities lent to the borrower, there is minimal performance risk associated with these guarantees.

3.

Other financial guarantees excludes certain commitments to issue standby letters of credit that are included in “Commitments to extend credit.” See table in “Commitments” above for a summary of the firm’s commitments. As of December 2010, the carrying value of the net liability related to other financial guarantees was $28 million.

 

188 Goldman Sachs 20112014 Form 10-K 175


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Guarantees of Securities Issued by Trusts.The firm has established trusts, including Goldman Sachs Capital I, II and III,the APEX Trusts, the 2012 Trusts, and other entities for the limited purpose of issuing securities to third parties, lending the proceeds to the firm and entering into contractual arrangements with the firm and third parties related to this purpose. The firm does not consolidate these entities. See Note 16 for further information about the transactions involving Goldman Sachs Capital I, IIthe APEX Trusts, and III.the 2012 Trusts.

The firm effectively provides for the full and unconditional guarantee of the securities issued by these entities. Timely payment by the firm of amounts due to these entities under the guarantee, borrowing, preferred stock and related contractual arrangements will be sufficient to cover payments due on the securities issued by these entities.

Management believes that it is unlikely that any circumstances will occur, such as nonperformance on the part of paying agents or other service providers, that would make it necessary for the firm to make payments related to these entities other than those required under the terms of the guarantee, borrowing, preferred stock and related contractual arrangements and in connection with certain expenses incurred by these entities.

Indemnities and Guarantees of Service Providers.In the ordinary course of business, the firm indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the firm or its affiliates.

The firm may also indemnifiesbe liable to some clients against potentialor other parties, for losses incurred in the event specifiedarising from its custodial role or caused by acts or omissions of third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions.brokers. In certain cases, the firm has the right to seek indemnification from these third-party service providers for certain relevant losses incurred by the firm. In addition, the firm is a member of payment, clearing and settlement networks as well as securities exchanges around the world that may require the firm to meet the obligations of such networks and exchanges in the event of member defaults.defaults and other loss scenarios.

In connection with its prime brokerage and clearing businesses, the firm agrees to clear and settle on behalf of its clients the transactions entered into by them with other

brokerage firms. The firm’s obligations in respect of such transactions are secured by the assets in the client’s account as well as any proceeds received from the transactions cleared and settled by the firm on behalf of the client. In connection with joint venture investments, the firm may issue loan guarantees under which it may be liable in the event of fraud, misappropriation, environmental liabilities and certain other matters involving the borrower.

The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no material liabilities related to these guarantees and indemnifications have been recognized in the consolidated statements of financial condition as of December 20112014 and December 2010.2013.

Other Representations, Warranties and Indemnifications.The firm provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The firm may also provide indemnifications protecting against changes in or adverse application of certain U.S. tax laws in connection with ordinary-course transactions such as securities issuances, borrowings or derivatives.

In addition, the firm may provide indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or an adverse application of certain non-U.S. tax laws.

These indemnifications generally are standard contractual terms and are entered into in the ordinary course of business. Generally, there are no stated or notional amounts included in these indemnifications, and the contingencies triggering the obligation to indemnify are not expected to occur. The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no material liabilities related to these arrangements have been recognized in the consolidated statements of financial condition as of December 20112014 and December 2010.2013.

 

 

176 Goldman Sachs 20112014 Form 10-K 189


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Guarantees of Subsidiaries.Group Inc. fully and unconditionally guarantees the securities issued by GS Finance Corp., a wholly-owned finance subsidiary of the firm.

Group Inc. has guaranteed the payment obligations of Goldman, Sachs & Co. (GS&Co.), GS Bank USA GS Bank Europe and Goldman Sachs Execution & Clearing, L.P. (GSEC), subject to certain exceptions.

In November 2008, the firm contributed subsidiaries into GS Bank USA, and Group Inc. agreed to guarantee the reimbursement of certain losses, including credit-related losses, relating to assets held by the contributed entities. In connection with this guarantee, Group Inc. also agreed to pledge to GS Bank USA certain collateral, including interests in subsidiaries and other illiquid assets.

In addition, Group Inc. guarantees many of the obligations of its other consolidated subsidiaries on a transaction-by-transaction basis, as negotiated with counterparties. Group Inc. is unable to develop an estimate of the maximum payout under its subsidiary guarantees; however, because these guaranteed obligations are also obligations of consolidated subsidiaries, included in the table above, Group Inc.’s liabilities as guarantor are not separately disclosed.

Group Inc. has established a program for the issuance of securities by Goldman Sachs Secured Finance Limited insured by GS Secured Guaranty Company Limited (SGCL), a wholly-owned subsidiary of Group Inc. that is a financial guaranty insurer organized under the laws of Bermuda. The funds raised by SGCL are used to enter into repurchase transactions with GS&Co. and Goldman Sachs International (GSI). Group Inc. has fully and unconditionally guaranteed the securities issued by Goldman Sachs Secured Finance Limited, as well as the obligations of GS&Co. and GSI under their respective repurchase transactions. Group Inc. has not guaranteed the obligations of SGCL. The assets and liabilities of SGCL are legally separated from other assets and liabilities of the firm. The assets of SGCL will not be available to any holder of its capital stock until the claims of creditors have been paid.

Shareholders' Equity

Note 19.

Shareholders’ Equity

Common Equity

Dividends declared per common share were $1.40$2.25 in 2011, $1.402014, $2.05 in 20102013 and $1.05$1.77 in 2009.2012. On January 17, 2012,15, 2015, Group Inc. declared a dividend of $0.35$0.60 per common share to be paid on March 29, 201230, 2015 to common shareholders of record on March 1, 2012.

On July 1, 2011, the firm issued $103 million of common stock (774,823 shares) in connection with the acquisition of GS Australia.2, 2015.

The firm’s share repurchase program is intended to help maintain the appropriate level of common equity and to substantially offset increases inequity. The share count over time resulting from employee share-based compensation. The repurchase program is effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), the amounts and timing of which are determined primarily by the firm’s current and projected capital positions (i.e., comparisons of the firm’s desired level and composition of capital to its actual level and composition of capital) and the issuance of shares resulting from employee share-based compensation,position, but which may also be influenced by general market conditions and the prevailing price and trading volumes of the firm’s common stock. Any repurchase of the firm’sPrior to repurchasing common stock, requires approval bythe firm must receive confirmation that the Federal Reserve Board.Board does not object to such capital actions.

During 2011, 2010 and 2009,The table below presents the amount of common stock repurchased by the firm repurchased 47.0 million, 25.3 million and 19,578 shares of its common stock at an average cost per share of $128.33, $164.48 and $80.83, for a total cost of $6.04 billion, $4.16 billion and $2 million, respectively, under the share repurchase program. In addition, pursuantprogram during 2014, 2013 and 2012.

  Year Ended December 
in millions, except per share amounts  2014     2013     2012  

Common share repurchases

  31.8     39.3     42.0  
  

Average cost per share

  $171.79     $157.11     $110.31  
  

Total cost of common share repurchases

  $  5,469     $  6,175     $  4,637  

Pursuant to the terms of certain share-based compensation plans, employees may remit shares to the firm or the firm may cancel restricted stock units (RSUs) or stock options to satisfy minimum statutory employee tax withholding requirements.requirements and the exercise price of stock options. Under these plans, during 2011, 20102014, 2013 and 2009,2012, employees remitted 75,517174,489 shares, 164,172161,211 shares and 4,50633,477 shares with a total value of $12$31 million, $25 million and $342,153$3 million, and the firm cancelled 12.05.8 million, 6.24.0 million and 11.212.7 million of RSUs with a total value of $1.91 billion, $972$974 million, $599 million and $863$1.44 billion. Under these plans, the firm also cancelled 15.6 million respectively.stock options with a total value of $2.65 billion during 2014.

 

 

190 Goldman Sachs 20112014 Form 10-K 177


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Preferred Equity

The tabletables below presentspresent details about the perpetual preferred stock issued and outstanding.outstanding as of December 2014.

 

Series  
 
Shares
Authorized
  
  
     
 
Shares
Issued
  
  
     
 
Shares
Outstanding
  
  
     
 
 
Depositary
Shares
Per Share
  
  
  

A

  50,000       30,000       29,999       1,000  
  

B

  50,000       32,000       32,000       1,000  
  

C

  25,000       8,000       8,000       1,000  
  

D

  60,000       54,000       53,999       1,000  
  

E

  17,500       17,500       17,500       N/A  
  

F

  5,000       5,000       5,000       N/A  
  

I

  34,500       34,000       34,000       1,000  
  

J

  46,000       40,000       40,000       1,000  
  

1

  32,200       28,000       28,000       1,000  
  

1

  52,000       52,000       52,000       25  

Total

  372,200       300,500       300,498         

 

Series Shares
Authorized
     Shares
Issued
     Shares
Outstanding
     Dividend Rate    

Earliest

Redemption Date

     

Redemption
Value

(in millions)

 

A

  50,000       30,000       29,999      

3 month LIBOR + 0.75%,

with floor of 3.75% per annum

     April 25, 2010      $750  

B

  50,000       32,000       32,000      6.20% per annum     October 31, 2010       800  

C

  25,000       8,000       8,000      

3 month LIBOR + 0.75%,

with floor of 4.00% per annum

     October 31, 2010       200  

D

  60,000       54,000       53,999      

3 month LIBOR + 0.67%,

with floor of 4.00% per annum

     May 24, 2011       1,350  
   185,000       124,000       123,998                  $3,100  
1.

In April 2014, Group Inc. issued 28,000 shares of Series K perpetual 6.375% Fixed-to-Floating Rate Non-Cumulative Preferred Stock (Series K Preferred Stock) and 52,000 shares of Series L perpetual 5.70% Fixed-to-Floating Rate Non-Cumulative Preferred Stock (Series L Preferred Stock).

 

Series  
 
Liquidation
Preference
  
  
  Redemption Price Per Share   
 

 

Redemption
Value

($ in millions)

  
  

  

A

  $  25,000    $25,000 plus declared and unpaid dividends   $   750  
  

B

  25,000    $25,000 plus declared and unpaid dividends   800  
  

C

  25,000    $25,000 plus declared and unpaid dividends   200  
  

D

  25,000    $25,000 plus declared and unpaid dividends   1,350  
  

E

  100,000    $100,000 plus declared and unpaid dividends   1,750  
  

F

  100,000    $100,000 plus declared and unpaid dividends   500  
  

I

  25,000    $25,000 plus accrued and unpaid dividends   850  
  

J

  25,000    $25,000 plus accrued and unpaid dividends   1,000  
  

K

  25,000    $25,000 plus accrued and unpaid dividends   700  
  

L

  25,000    $25,000 plus accrued and unpaid dividends   1,300  

Total

          $9,200  

Each share of non-cumulative Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issued and outstanding has a par value of $0.01, has a liquidation preference of $25,000, is represented by 1,000 depositary shares and is redeemable atIn the tables above:

Ÿ

Each share of non-cumulative Series A, Series B, Series C and Series D Preferred Stock issued and outstanding is redeemable at the firm’s option.

Ÿ

Each share of non-cumulative Series E and Series F Preferred Stock issued and outstanding is redeemable at the firm’s option, subject to certain covenant restrictions governing the firm’s ability to redeem or purchase the preferred stock without issuing common stock or other instruments with equity-like characteristics. See Note 16 for information about the replacement capital covenants applicable to the Series E and Series F Preferred Stock.

Ÿ

Each share of non-cumulative Series I Preferred Stock issued and outstanding is redeemable at the firm’s option beginning November 10, 2017.

Ÿ

Each share of non-cumulative Series J Preferred Stock issued and outstanding is redeemable at the firm’s option beginning May 10, 2023.

Ÿ

Each share of non-cumulative Series K Preferred Stock issued and outstanding is redeemable at the firm’s option beginning May 10, 2024.

Ÿ

Each share of non-cumulative Series L Preferred Stock issued and outstanding is redeemable at the firm’s option beginning May 10, 2019.

Ÿ

All shares of preferred stock have a par value of $0.01 per share and, where applicable, each share of preferred stock is represented by the specified number of depositary shares.

Prior to redeeming preferred stock, the approval offirm must receive confirmation that the Federal Reserve Board at a redemption price equaldoes not object to $25,000 plus declared and unpaid dividends.

such capital actions. All series of preferred stock are pari passu and have a preference over the firm’s common stock on liquidation. Dividends on each series of preferred stock, excluding Series L Preferred Stock, if declared, are payable quarterly in arrears. Dividends on Series L Preferred Stock, if declared, are payable semi-annually in arrears from the issuance date to, but excluding, May 10, 2019, and quarterly thereafter. The firm’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the firm fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period.

In 2007,The table below presents the Boarddividend rates of Directors of Group Inc. (Board) authorized 17,500.1 shares of Series E Preferred Stock, and 5,000.1 shares of Series F Preferred Stock, in connection with the APEX Trusts. See Note 16 for further information about the APEX Trusts.

Under the stock purchase contracts with the APEX Trusts, Group Inc. will issue $2.25 billion offirm’s perpetual preferred stock in the aggregate, on the relevant stock purchase dates (on or before June 1, 2013 and September 1, 2013 for Series E and Series F Preferred Stock, respectively), comprisedas of one share of Series E and Series F Preferred Stock to Goldman Sachs Capital II and III, respectively, for each $100,000 principal amount of subordinated debt held by these trusts. When issued, each share of Series E and Series F Preferred Stock will have a par value of $0.01 and a liquidation preference of $100,000 per share.

Dividends on Series E Preferred Stock, if declared, will be payable semi-annually at a fixed annual rate of 5.79% if the stock is issued prior to June 1, 2012 and quarterly thereafter, at a rate per annum equal to the greater of (i) three-month LIBOR plus 0.77% and (ii) 4.00%.December 2014.

Dividends on Series F Preferred Stock, if declared, will be payable quarterly at a rate per annum equal to three-month LIBOR plus 0.77% if the stock is issued prior to September 1, 2012 and quarterly thereafter, at a rate per annum equal to the greater of (i) three-month LIBOR plus 0.77% and (ii) 4.00%.

The preferred stock may be redeemed at the option of the firm on the stock purchase dates or any day thereafter, subject to approval from the Federal Reserve Board and certain covenant restrictions governing the firm’s ability to redeem or purchase the preferred stock without issuing common stock or other instruments with equity-like characteristics.
SeriesDividend Rate

A

3 month LIBOR + 0.75%, with floor of 3.75% per annum

B

6.20% per annum

C

3 month LIBOR + 0.75%, with floor of 4.00% per annum

D

3 month LIBOR + 0.67%, with floor of 4.00% per annum

E

3 month LIBOR + 0.77%, with floor of 4.00% per annum

F

3 month LIBOR + 0.77%, with floor of 4.00% per annum

I

5.95% per annum

J

5.50% per annum to, but excluding, May 10, 2023;

3 month LIBOR + 3.64% per annum thereafter

K

6.375% per annum to, but excluding, May 10, 2024;

3 month LIBOR + 3.55% per annum thereafter

L

5.70% per annum to, but excluding, May 10, 2019;

3 month LIBOR + 3.884% per annum thereafter

 

 

178 Goldman Sachs 20112014 Form 10-K 191


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

In June 2009, Group Inc. repurchased from the U.S. Treasury the 10.0 million shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series H (Series H Preferred Stock), that were issued to the U.S. Treasury pursuant to the U.S. Treasury’s TARP Capital Purchase Program. The repurchase resulted in atables below present preferred dividend of $426 million (calculated as the difference between the carrying value and redemption value of the preferred stock), which is included in the consolidated statement of earnings for 2009. The repurchase also resulted in the payment of $44 million of accrued dividends. In connection with the issuance of the Series H Preferred Stock in October 2008, the firm issued a 10-year warrant to the U.S. Treasury to purchase up to 12.2 million shares of common stock at an exercise price of $122.90 per share. The firm repurchased this warrant in full in July 2009 for $1.1 billion. This amount was recorded as a reduction to additional paid-in capital.

During 2011, the firm redeemed the 50,000 shares ofdividends declared on the firm’s 10% Cumulative Perpetual Preferred Stock, Series G (Series G Preferred Stock) held by Berkshire Hathaway Inc.preferred stock.

  Year Ended December 2014 
Series  per share     $ in millions  

A

  $   945.32     $  28  
  

B

  1,550.00     50  
  

C

  1,008.34     8  
  

D

  1,008.34     54  
  

E

  4,044.44     71  
  

F

  4,044.44     20  
  

I

  1,487.52     51  
  

J

  1,375.00     55  
  

K

  850.00     24  
  

L

  760.00     39  

Total

       $400  
  Year Ended December 2013 
Series  per share     $ in millions  

A

  $   947.92     $  28  
  

B

  1,550.00     50  
  

C

  1,011.11     8  
  

D

  1,011.11     54  
  

E

  4,044.44     71  
  

F

  4,044.44     20  
  

I

  1,553.63     53  
  

J

  744.79     30  

Total

       $314  

  Year Ended December 2012 
Series  per share     $ in millions  

A

  $   960.94     $  29  
  

B

  1,550.00     50  
  

C

  1,025.01     8  
  

D

  1,025.01     55  
  

E

  2,055.56     36  
  

F

  1,000.00     5  

Total

       $183  

and certain of its subsidiaries (collectively, Berkshire Hathaway) for the stated redemption price of $5.50 billion ($110,000 per share), plus accrued and unpaid dividends. In connection with this redemption, the firm recognized a preferred dividend of $1.64 billion (calculated as the difference between the carrying value and the redemption value of the preferred stock), which is included in the consolidated statement of earnings for 2011. Berkshire Hathaway continues to hold a five-year warrant, issued in October 2008, to purchase up to 43.5 million shares of common stock at an exercise price of $115.00 per share.

On January 12, 2012,7, 2015, Group Inc. declared dividends of $239.58, $387.50, $255.56, $255.56, $371.88, $343.75 and $255.56$398.44 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series I Preferred Stock, Series J Preferred Stock and Series DK Preferred Stock, respectively, to be paid on February 10, 20122015 to preferred shareholders of record on January 26, 2012.

The table below presents2015. In addition, the firm declared dividends of $1,011.11 per each share of Series E Preferred Stock and Series F Preferred Stock, to be paid on March 2, 2015 to preferred dividends declaredshareholders of record on preferred stock.February 15, 2015.

  Year Ended December 
  2011     

2010

     2009 
   per share     in millions      per share     in millions      per share     in millions 

Series A

 $950.51      $28      $950.51      $28      $710.94      $21  

Series B

  1,550.00       50       1,550.00       50       1,162.50       38  

Series C

  1,013.90       8       1,013.90       8       758.34       6  

Series D

  1,013.90       55       1,013.90       55       758.34       41  

Series G 1

  2,500.00       125       10,000.00       500       7,500.00       375  

Series H 2

                              12.50       125  

Total

        $266             $641             $606  

1.

Amount for the year ended December 2011 excludes preferred dividends related to the redemption of the firm’s Series G Preferred Stock.

2.

Amount for the year ended December 2009 excludes the preferred dividend related to the repurchase of the TARP Series H Preferred Stock, as well as accrued dividends paid on repurchase of the Series H Preferred Stock.

Accumulated Other Comprehensive Income/(Loss)Loss

The tabletables below presentspresent accumulated other comprehensive income/(loss)loss, net of tax by type.

 

  As of December 
in millions 2011     2010 

Currency translation adjustment, net of tax

 $(225    $(170

Pension and postretirement liability adjustments, net of tax

  (374     (229

Net unrealized gains on available-for-sale securities, net of tax 1

  83       113  

Total accumulated other comprehensive loss, net of tax

 $(516    $(286

1.

Substantially all consists of net unrealized gains on securities held by the firm’s insurance subsidiaries as of both December 2011 and December 2010.

  December 2014 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
   
 
 
 
 
Other
comprehensive
income/(loss)
adjustments,
net of tax
  
  
  
  
  
   
 
 
Balance,
end of
year
  
  
  

Currency translation

  $(364   $(109   $(473
  

Pension and postretirement liabilities

  (168   (102   (270
  

Cash flow hedges

  8     (8     

Accumulated other comprehensive loss, net of tax

  $(524   $(219   $(743
  December 2013 
$ in millions  
 
 
Balance,
beginning
of year
  
  
  
   
 
 
 
 
Other
comprehensive
income/(loss)
adjustments,
net of tax
  
  
  
  
  
   
 
 
Balance,
end of
year
  
  
  

Currency translation

  $(314   $  (50   $(364
  

Pension and postretirement liabilities

  (206   38     (168
  

Available-for-sale securities

  327     (327     
  

Cash flow hedges

       8     8  

Accumulated other comprehensive loss, net of tax

  $(193   $(331   $(524

 

192 Goldman Sachs 20112014 Form 10-K 179


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Regulation and Capital Adequacy

Note 20.

Regulation and Capital Adequacy

 

The Federal Reserve Board is the primary regulator of Group Inc., a bank holding company under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under amendments to the U.S. Bank Holding Company Act of 1956.BHC Act. As a bank holding company, the firm is subject to consolidated risk-based regulatory capital requirements thatwhich are computed in accordance with the applicable risk-based capital regulations of the Federal Reserve Board’s capital adequacy regulations currently applicable to bank holding companies (which are based on the ‘Basel 1’ Capital Accord of the Basel Committee on Banking Supervision (Basel Committee)). Board.

These capital requirements are expressed as capital ratios that compare measures of regulatory capital to risk-weighted assets (RWAs). The firm’s bank depository institution subsidiaries, including GS Bank USA,capital levels are subject to similar capital requirements.

Under the Federal Reserve Board’s capital adequacy requirements and the regulatory framework for prompt corrective action that is applicable to GS Bank USA, the firm and its bank depository institution subsidiaries must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory reporting practices. The firm and its bank depository institution subsidiaries’ capital amounts, as well as GS Bank USA’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings and other factors. In addition, the firm is subject to requirements with respect to leverage.

ManyFurthermore, certain of the firm’s subsidiaries, including GS&Co. and the firm’s other broker-dealer subsidiaries are subject to separate regulationregulations and capital requirements as described below.

Group Inc.Applicable Capital Framework

Federal Reserve BoardAs of December 2013, the firm was subject to the risk-based capital regulations require bank holding companies to maintain a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio of 8%. The required minimum Tier 1 capital ratio and total capital ratio in order to be considered a “well-capitalized” bank holding company under the Federal Reserve Board guidelines are 6%that were based on the Basel I Capital Accord of the Basel Committee on Banking Supervision (Basel Committee), and 10%, respectively. Bank holding companies may be expectedincorporated the revised market risk regulatory capital requirements (together, the Prior Capital Rules).

As of January 1, 2014, the firm became subject to maintain ratios well above the minimum levels, depending on their particular condition, risk profile

and growth plans. The minimum Tier 1 leverage ratio is 3% for bank holding companies that have received the highest supervisory rating under Federal Reserve Board guidelines or that have implemented the Federal Reserve Board’s revised risk-based capital measureand leverage regulations, subject to certain transitional provisions (Revised Capital Framework). These regulations are largely based on the Basel Committee’s final capital framework for market risk. Other bank holding companies must havestrengthening international capital standards (Basel III) and also implement certain provisions of the Dodd-Frank Act. Under the Revised Capital Framework, the firm is an “Advanced approach” banking organization.

The firm was notified in the first quarter of 2014 that it had completed a minimum Tier 1 leverage ratio“parallel run” to the satisfaction of 4%.

The table below presents information regarding Group Inc.’s regulatory capital ratios.

  As of December 
$ in millions 2011     2010 

Tier 1 capital

 $63,262      $71,233  

Tier 2 capital

 $13,881      $13,660  

Total capital

 $77,143      $84,893  

Risk-weighted assets

 $457,027      $444,290  

Tier 1 capital ratio

  13.8     16.0

Total capital ratio

  16.9     19.1

Tier 1 leverage ratio

  7.0     8.0

RWAs under the Federal Reserve Board’s risk-basedBoard, as required under the Revised Capital Framework. As such, additional changes in the firm’s capital guidelines arerequirements became effective on April 1, 2014.

Beginning on January 1, 2014, regulatory capital was calculated based on the amountRevised Capital Framework. Beginning April 1, 2014, there were no changes to the calculation of regulatory capital, but RWAs were calculated using (i) the Prior Capital Rules, adjusted for certain items related to capital deductions under the previous definition of regulatory capital and for the phase-in of new capital deductions (Hybrid Capital Rules), and (ii) the Advanced approach and market risk rules set out in the Revised Capital Framework (together, the Basel III Advanced Rules). The lower of the ratios calculated under the Hybrid Capital Rules and credit risk. RWAsthose calculated under the Basel III Advanced Rules are the binding regulatory capital requirements for market risk are determined by reference tothe firm. The ratios calculated under the Basel III Advanced Rules were lower than those calculated under the Hybrid Capital Rules and therefore were the binding ratios for the firm as of December 2014.

As a result of the changes in the applicable capital framework in 2014, the firm’s Value-at-Risk (VaR) models, supplemented by other measures to capture riskscapital ratios as of December 2014 and those as of December 2013 were calculated on a different basis and, accordingly, are not reflected in VaR models. Credit risk for on-balance sheet assets is based on the balance sheet value. For off-balance sheet exposures, including OTC derivatives and commitments, a credit equivalent amount is calculated based on the notional amount of each trade. All such assets and amounts are then assigned a risk weight depending on, among other things, whether the counterparty is a sovereign, bank or qualifying securities firm or other entity (or if collateral is held, depending on the nature of the collateral).

Tier 1 leverage ratio is defined as Tier 1 capital under Basel 1 divided by average adjusted total assets (which includes adjustments for disallowed goodwill and intangible assets, and the carrying value of equity investments in non-financial companies that are subject to deductions from Tier 1 capital).comparable.

 

 

180 Goldman Sachs 20112014 Form 10-K 193


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Regulatory Reform

 

The firm is currently workingEffective on January 1, 2015, regulatory capital continues to implementbe calculated under the requirementsRevised Capital Framework, but RWAs are required to be calculated under the Basel III Advanced Rules, as well as the Standardized approach and market risk rules set out in the Federal Reserve Board’s Risk-BasedRevised Capital Standards:Framework (together, the Standardized Capital Rules). The lower of the ratios calculated under the Basel III Advanced Rules and those calculated under the Standardized Capital AdequacyRules are the binding regulatory capital requirements for the firm.

The Basel III Advanced Rules, Hybrid Capital Rules and Standardized Capital Rules are discussed in more detail below.

Regulatory Capital and Capital Ratios. The Revised Capital Framework — Basel 2, aschanged the definition of regulatory capital to include a new capital measure called Common Equity Tier 1 (CET1) and the related regulatory capital ratio of CET1 to RWAs (CET1 ratio), and changed the definition of Tier 1 capital. The Revised Capital Framework also increased the level of certain minimum risk-based capital and leverage ratios applicable to Group Inc.the firm.

The table below presents the minimum ratios applicable to the firm as a bank holding company (Basel 2), which are based onof December 2014 and January 2015. Failure to comply with these capital requirements could result in restrictions being imposed by the advanced approachesfirm’s regulators.

   
 
December 2014
Minimum Ratio
  
  
   
 
January 2015
Minimum Ratio
  
  

CET1 ratio

  4.0%     4.5%  
  

Tier 1 capital ratio

  5.5%     6.0%  
  

Total capital ratio 1

  8.0%     8.0%  
  

Tier 1 leverage ratio 2

  4.0%     4.0%  

1.

In order to meet the quantitative requirements for being “well-capitalized” under the Federal Reserve Board’s capital regulations, the firm must meet a higher required minimum Total capital ratio of 10.0%

2.

Tier 1 leverage ratio is defined as Tier 1 capital divided by average adjusted total assets (which includes adjustments for goodwill and identifiable intangible assets, and certain investments in nonconsolidated financial institutions).

Certain aspects of the Revised Framework forCapital Framework’s requirements phase in over time (transitional provisions). These include increases in the International Convergenceminimum capital ratio requirements and the introduction of Capital Measurementnew capital buffers and Capital Standardscertain deductions from regulatory capital (such as investments in nonconsolidated financial institutions). In addition, junior subordinated debt issued by the Basel Committee. U.S. banking regulators have incorporated the Basel 2 framework into the existing risk-based capital requirements by requiring that internationally active banking organizations, such as Group Inc., adopt Basel 2, once approved to do so by regulators. As required by the Dodd-Frank Act, U.S. banking regulators have adopted a rule that requires large banking organizations, upon adoptiontrusts is being phased out of Basel 2, to continue to calculate risk-based capital ratios under both Basel 1 and Basel 2. For each of theregulatory capital. The minimum CET1, Tier 1 and Total capital ratios the lower of the Basel 1 and Basel 2 ratios calculated will be used to determine whether the bank meets its minimum risk-based capital requirements.

In December 2011, the U.S. federal bank regulatory agencies issued revised proposals to modify their market risk regulatory capital requirements for banking organizations in the United States that have significant trading activities. These modifications are designed to address the adjustments to the market risk framework that were announced by the Basel Committee in June 2010 (Basel 2.5), as well as the prohibition in the use of credit ratings, as required by the Dodd-Frank Act. Once implemented, it is likely that these changes will result in increased capital requirements for market risk.

Additionally, the guidelines issued by the Basel Committee in December 2010 (Basel 3) revise the definition of Tier 1 capital, introduce Tier 1 common equity as a regulatory metric, set new minimum capital ratios (including a new “capital conservation buffer,” which must be composed exclusively of Tier 1 common equity and will be in addition to the minimum capital ratios), introduce a Tier 1 leverage ratio within international guidelines for the first time, and make substantial revisions to the computation of RWAs for credit exposures. Implementation of the new requirements is expected to take place over the next several years. The federal banking agencies have not yet proposed rules to implement the Basel 3 guidelines in the United States.

The Basel Committee has published its final provisions for assessing the global systemic importance of banking institutions and the range of additional Tier 1 common equity that should be maintained by banking institutions deemed to be globally systemically important. The additional capital for these institutions would initially range from 1% to 2.5% of Tier 1 common equity and could be as much as 3.5% for a bank that increases its systemic footprint (e.g., by increasing total assets). The firm was one of 29 institutions identified by the Financial Stability Board (established at the direction of the leaders of the Group of 20) as globally systemically important under the Basel Committee’s methodology. Therefore, depending upon the manner and timing of the U.S. banking regulators’ implementation of the Basel Committee’s methodology, the firm expects that the minimum Tier 1 common ratio requirement applicable to the firm will include this additionalincrease as the transitional provisions phase in and new capital assessment. The final determinationbuffers are introduced.

Definition of whether an institution is classified as globally systemically importantRisk-Weighted Assets. As of December 2014, RWAs were calculated under both the Basel III Advanced Rules and the calculation ofHybrid Capital Rules. Under both the Basel III Advanced Rules and the Hybrid Capital Rules, certain amounts not required additional capital amount is expected to be disclosed bydeducted from CET1 under the Basel Committee no later than November 2014 based on data through the end of 2013.

The Federal Reserve Board has proposed regulations designed to strengthen the regulation and supervision of large bank holding companies and systemically important nonbank financial firms. These proposals address risk-based capital and leverage requirements, liquidity requirements, stress tests, single counterparty limits and early remediation requirements thattransitional provisions are designed to address financial weakness at an early stage. Although many of the proposals mirror initiatives to which bank holding companies are already subject, their full impact on the firm will not be known with certainty until the rules are finalized.

The Dodd-Frank Act will subject the firm at a firmwide level to the same leverage and risk-based capital requirements that apply to depository institutions and directs banking regulators to impose additional capital requirements as disclosed above. The Federal Reserve Board is expected to adopt the new leverage and risk-based capital regulations in 2012. As a consequence of these changes,either deducted from Tier 1 capital treatment for the firm’s junior subordinated debt issued to trusts will be phased out over a three-year period beginning on January 1, 2013. or are risk weighted.

The interaction among the Dodd-Frank Act,primary difference between the Basel Committee’s proposed changesIII Advanced Rules and the Hybrid Capital Rules is that the latter utilizes prescribed risk-weightings for credit RWAs and does not contemplate the use of internal models to compute exposure for credit risk on derivatives and securities financing transactions, whereas the Basel III Advanced Rules permit the use of such models, subject to supervisory approval. In addition, RWAs under the Hybrid Capital Rules depend largely on the type of counterparty (e.g., whether the counterparty is a sovereign, bank, broker-dealer or other proposed or announced changes from other governmental entities and regulators adds further uncertainty toentity), rather than on internal assessments of each counterparty’s creditworthiness. Furthermore, the firm’s futureHybrid Capital Rules do not include a capital requirements and thoserequirement for operational risk.

As of our subsidiaries.December 2013, the firm calculated RWAs under the Prior Capital Rules.

 

 

194 Goldman Sachs 20112014 Form 10-K 181


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Credit Risk

Credit RWAs are calculated based upon measures of exposure, which are then risk weighted. The exposure amount is generally based on the following:

Ÿ

For on-balance-sheet assets, the carrying value; and

Ÿ

For off-balance-sheet exposures, including commitments and guarantees, a credit equivalent exposure amount is calculated based on the notional amount of each exposure multiplied by a credit conversion factor.

Counterparty credit risk is a component of total credit risk, and includes credit exposure arising from derivatives, securities financing transactions and eligible margin loans.

Ÿ

For the Basel III Advanced Rules, the firm uses the Internal Models Methodology for the measurement of exposure on derivatives, securities financing transactions and eligible margin loans. The Revised Capital Framework requires that a bank holding company obtain prior written agreement from its regulators before using the Internal Models Methodology; and

Ÿ

For the Hybrid and Prior Capital Rules, the exposure amount for derivatives is based on a combination of positive net exposure and a percentage of the notional amount for each trade, and includes the effect of counterparty netting and collateral, as applicable; for securities financing transactions and eligible margin loans, it is based on the carrying value.

All exposures are then assigned a risk weight computed as follows:

Ÿ

For the Basel III Advanced Rules, the firm has been given permission by its supervisors to compute risk weights for certain exposures in accordance with the Advanced Internal Ratings-Based approach, which utilizes internal assessments of each counterparty’s creditworthiness. Key inputs to the risk weight calculation are the probability of default, loss given default and the effective maturity. RWAs for securitization and equity exposures are calculated using specific required formula approaches; and

Ÿ

For the Hybrid and Prior Capital Rules, a standard risk weight is assigned depending on, among other things, whether the counterparty is a sovereign, bank or a qualifying securities firm or other entity (and if collateral is held, the risk weight may depend on the nature of the collateral).

The Standardized Capital Rules utilize prescribed risk-weightings for credit RWAs and do not contemplate the use of internal models to compute exposure for credit risk on derivatives and securities financing transactions. The exposure measure for securities financing transactions is calculated to reflect adjustments for potential price volatility, the size of which depends on factors such as the type of and maturity of the security, and whether it is denominated in the same currency as the other side of the financing transaction. In addition, RWAs under the Standardized Capital Rules depend largely on the type of counterparty (e.g., whether the counterparty is a sovereign, bank, broker-dealer or other entity), rather than on internal assessments of each counterparty’s creditworthiness.

Market Risk

RWAs for market risk are determined using measures for Value-at-Risk (VaR), stressed VaR, incremental risk and comprehensive risk based on internal models, and a standardized measurement method for specific risk. The market risk regulatory capital rules require that a bank holding company obtain prior written agreement from its regulators before using any internal model to calculate its risk-based capital requirement.

Ÿ

VaR is the potential loss in value of inventory positions, as well as certain other financial assets and financial liabilities, due to adverse market movements over a defined time horizon with a specified confidence level. For both risk management purposes and regulatory capital calculations the firm uses a single VaR model which captures risks including those related to interest rates, equity prices, currency rates and commodity prices. However, VaR used for regulatory capital requirements (regulatory VaR) differs from risk management VaR due to different time horizons and confidence levels (10-day and 99% for regulatory VaR vs. one-day and 95% for risk management VaR), as well as differences in the scope of positions on which VaR is calculated. In addition, the daily trading net revenues used to determine risk management VaR exceptions (i.e., comparing the daily trading net revenues to the VaR measure calculated as of the prior business day) include intraday activity, whereas the Federal Reserve Board’s regulatory capital regulations require that intraday activity be excluded from daily trading net revenues when calculating regulatory VaR exceptions. Intraday activity includes bid/offer net revenues, which are more likely than not to be positive. Under these regulations, the firm’s positional losses observed on a single day exceeded its 99% one-day regulatory VaR on three occasions during 2014. There was no change in the VaR multiplier used to calculate Market RWAs;

Goldman Sachs 2014 Form 10-K195


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ

Stressed VaR is the potential loss in value of inventory positions during a period of significant market stress;

Ÿ

Incremental risk is the potential loss in value of non-securitized inventory positions due to the default or credit migration of issuers of financial instruments over a one-year time horizon; and

Ÿ

Comprehensive risk is the potential loss in value, due to price risk and defaults, within the firm’s credit correlation positions.

The standardized measurement method is used to determine RWAs for specific risk on certain positions by applying supervisory defined risk-weighting factors to such positions after applicable netting is performed.

RWAs for market risk under the Standardized Capital Rules are calculated in a manner that is generally consistent with the RWAs calculated under the Basel III Advanced Rules.

Operational Risk

The Basel III Advanced Rules include a capital requirement for operational risk. The firm has been given permission by its supervisors to compute operational RWAs in accordance with the “Advanced Measurement Approach” of the Revised Capital Framework. Operational RWAs are therefore calculated based on an internal risk-based operational risk quantification model that meets the requirements for the “Advanced Measurement Approach.”

The Standardized Capital Rules do not include a capital requirement for operational risk.

Consolidated Regulatory Capital Ratios

December 2014 Capital Ratios and RWAs.The firm was required to calculate ratios under both the Basel III Advanced Rules and Hybrid Capital Rules as of December 2014, in both cases subject to transitional provisions. The ratios calculated under the Basel III Advanced Rules presented in the table below were lower than those calculated under the Hybrid Capital Rules and therefore were the binding ratios for the firm as of December 2014.

Effective on January 1, 2015, the firm was required to calculate ratios under both the Basel III Advanced Rules and Standardized Capital Rules. The firm’s ratios calculated under the Standardized Capital Rules as of December 2014 are also presented in the table below, although the ratios were not binding until January 2015.

$ in millions
As of
December 2014

Common shareholders’ equity

$  73,597

Deductions for goodwill and identifiable intangible assets, net of deferred tax liabilities

(2,787

Deductions for investments in nonconsolidated financial institutions

(953

Other adjustments

(27

Common Equity Tier 1

69,830

Perpetual non-cumulative preferred stock

9,200

Junior subordinated debt issued to trusts

660

Other adjustments

(1,257

Tier 1 capital

78,433

Qualifying subordinated debt

11,894

Junior subordinated debt issued to trusts

660

Other adjustments

(9

Tier 2 capital 1

12,545

Total capital

$  90,978

Basel III Advanced

RWAs

$570,313

CET1 ratio

12.2%

Tier 1 capital ratio

13.8%

Total capital ratio

16.0%

Tier 1 leverage ratio

9.0%

Standardized

RWAs

$619,216

CET1 ratio

11.3%

Tier 1 capital ratio

12.7%

Total capital ratio

14.7%

1.

Tier 2 capital under the Standardized Capital Rules is approximately $300 million higher due to the allowance for losses on loans and lending commitments.

In the table above:

Ÿ

The deduction for goodwill and identifiable intangible assets, net of deferred tax liabilities, represents goodwill of $3.65 billion and identifiable intangible assets of $103 million (20% of $515 million), net of associated deferred tax liabilities of $961 million. The remaining 80% of the deduction of identifiable intangible assets will be phased in ratably per year from 2015 to 2018. Identifiable intangible assets that are not deducted during the transitional period are risk weighted.

Ÿ

The deduction for investments in nonconsolidated financial institutions represents the amount by which the firm’s investments in the capital of nonconsolidated financial institutions exceed certain prescribed thresholds. As of December 2014, 20% of the deduction was reflected (calculated based on transitional thresholds). The remaining 80% will be phased in ratably per year from 2015 to 2018. The balance that is not deducted during the transitional period is risk weighted.

196Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ

Other adjustments within CET1 and Tier 1 capital primarily include accumulated other comprehensive loss, credit valuation adjustments on derivative liabilities, the overfunded portion of the firm’s defined benefit pension plan obligation, net of associated deferred tax liabilities, disallowed deferred tax assets and other required credit risk-based deductions. As of December 2014, 20% of the deductions related to credit valuation adjustments on derivative liabilities, the overfunded portion of the firm’s defined benefit pension plan obligation, net of associated deferred tax liabilities, disallowed deferred tax assets and other required credit risk-based deductions were included in other adjustments within CET1 and 80% of the deductions were included in other adjustments within Tier 1 capital. Most of the deductions that were included in other adjustments within Tier 1 capital will be phased into CET1 ratably per year from 2015 to 2018. Other adjustments within Tier 1 capital also include a deduction for investments in the preferred equity of nonconsolidated financial institutions.

Ÿ

Junior subordinated debt issued to trusts is reflected in both Tier 1 capital (50%) and Tier 2 capital (50%) and is reduced by the amount of trust preferred securities purchased by the firm. Junior subordinated debt issued to trusts will be fully phased out of Tier 1 capital by 2016, and then also from Tier 2 capital by 2022. See Note 16 for additional information about the firm’s junior subordinated debt issued to trusts and trust preferred securities purchased by the firm.

Ÿ

Qualifying subordinated debt represents subordinated debt issued by Group Inc. with an original term to maturity of five years or greater. The outstanding amount of subordinated debt qualifying for Tier 2 capital is reduced, or discounted, upon reaching a remaining maturity of five years. See Note 16 for additional information about the firm’s subordinated debt.

The table below presents the changes in CET1, Tier 1 capital and Tier 2 capital for the period December 31, 2013 to December 31, 2014.

$ in millions
Period Ended
December 2014

Common Equity Tier 1

Balance, December 31, 2013

$63,248

Change in CET1 related to the transition to the Revised Capital Framework 1

3,177

Increase in common shareholders’ equity

2,330

Change in deduction for goodwill and identifiable intangible assets, net of deferred tax liabilities

144

Change in deduction for investments in nonconsolidated financial institutions

839

Change in other adjustments

92

Balance, December 31, 2014

$69,830

Tier 1 capital

Balance, December 31, 2013

$72,471

Change in CET1 related to the transition to the Revised Capital Framework 1

3,177

Change in Tier 1 capital related to the transition to the Revised Capital Framework 2

(443

Other net increase in CET1

3,405

Increase in perpetual non-cumulative preferred stock

2,000

Redesignation of junior subordinated debt issued to trusts and decrease related to trust preferred securities purchased by the firm

(1,403

Change in other adjustments

(774

Balance, December 31, 2014

78,433

Tier 2 capital

Balance, December 31, 2013

13,632

Change in Tier 2 capital related to the transition to the Revised Capital Framework 3

(197

Decrease in qualifying subordinated debt

(879

Trust preferred securities purchased by the firm, net of redesignation of junior subordinated debt issued to trusts

(27

Change in other adjustments

16

Balance, December 31, 2014

12,545

Total capital

$90,978

1.

Includes $3.66 billion related to the transition to the Revised Capital Framework on January 1, 2014 as well as $(479) million related to the firm’s application of the Basel III Advanced Rules on April 1, 2014.

2.

Includes $(219) million related to the transition to the Revised Capital Framework on January 1, 2014 as well as $(224) million related to the firm’s application of the Basel III Advanced Rules on April 1, 2014.

3.

Includes $(2) million related to the transition to the Revised Capital Framework on January 1, 2014 as well as $(195) million related to the firm’s application of the Basel III Advanced Rules on April 1, 2014.

Goldman Sachs 2014 Form 10-K197


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

A numberThe change in CET1 related to the transition to the Revised Capital Framework is principally related to the change in treatment of other governmental entities and regulators, includingequity investments in certain nonconsolidated entities. Under the European Union (EU)Prior Capital Rules, such investments were treated as deductions. However, during the transition to the Revised Capital Framework, only a portion of such investments that exceed certain prescribed thresholds are treated as deductions from CET1 and the U.K.’sremainder are risk weighted.

The table below presents the components of RWAs under the Basel III Advanced Rules and Standardized Capital Rules as of December 2014.

  As of December 2014 
$ in millions  
 
Basel III
Advanced
  
  
   Standardized  

Credit RWAs

   

Derivatives

  $122,501     $180,771  
  

Commitments, guarantees and loans

  95,209     89,783  
  

Securities financing transactions 1

  15,618     92,116  
  

Equity investments

  40,146     38,526  
  

Other 2

  54,470     71,499  

Total Credit RWAs

  327,944     472,695  

Market RWAs

   

Regulatory VaR

  10,238     10,238  
  

Stressed VaR

  29,625     29,625  
  

Incremental risk

  16,950     16,950  
  

Comprehensive risk

  8,150     9,855  
  

Specific risk

  79,918     79,853  

Total Market RWAs

  144,881     146,521  

Total Operational RWAs

  97,488       

Total RWAs

  $570,313     $619,216  

1.

Represents resale and repurchase agreements and securities borrowed and loaned transactions.

2.

Includes receivables, other assets, and cash and cash equivalents.

The table below presents the changes in RWAs under the Basel III Advanced Rules for the period December 31, 2013 to December 31, 2014, and reflects the transition to the Revised Capital Framework from the Prior Capital Rules on January 1, 2014.

$ in millions
Period Ended
December 2014

Risk-weighted assets

Total RWAs, December 31, 2013

$433,226

Credit RWAs

Change related to the transition to the Revised Capital Framework 1

69,101

Other changes:

Decrease in derivatives

(24,109

Increase in commitments, guarantees and loans

18,208

Decrease in securities financing transactions

(2,782

Decrease in equity investments

(2,728

Increase in other

2,007

Change in Credit RWAs

59,697

Market RWAs

Change related to the transition to the Revised Capital Framework

1,626

Decrease in regulatory VaR

(5,175

Decrease in stressed VaR

(11,512

Increase in incremental risk

7,487

Decrease in comprehensive risk

(6,617

Decrease in specific risk

(5,907

Change in Market RWAs

(20,098

Operational RWAs

Change related to the transition to the Revised Capital Framework

88,938

Increase in operational risk

8,550

Change in Operational RWAs

97,488

Total RWAs, December 31, 2014

$570,313

1.

Includes $26.67 billion of RWA changes related to the transition to the Revised Capital Framework on January 1, 2014 and $42.43 billion of changes to the calculation of Credit RWAs under the Basel III Advanced Rules related to the firm’s application of the Basel III Advanced Rules on April 1, 2014.

Credit RWAs as of December 2014 increased by $59.70 billion compared with December 2013, primarily due to increased risk weightings related to counterparty credit risk for derivative exposures and the inclusion of RWAs for equity investments in certain nonconsolidated entities, both resulting from the transition to the Revised Capital Framework. Market RWAs as of December 2014 decreased by $20.10 billion compared with December 2013, primarily due to a decrease in stressed VaR, reflecting reduced fixed income and equities exposures. Operational RWAs as of December 2014 increased by $97.49 billion compared with December 2013, substantially all of which was due to the transition to the Revised Capital Framework.

198Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Services Authority (FSA), have also proposed or announcedStatements

December 2013 Capital Ratios and RWAs. The table below presents information about the firm’s regulatory ratios as of December 2013 under the Prior Capital Rules.

$ in millions
As of
December 2013

Common shareholders’ equity

$  71,267

Perpetual non-cumulative preferred stock

7,200

Junior subordinated debt issued to trusts

2,063

Deduction for goodwill and identifiable intangible assets

(4,376

Deduction for equity investments in certain entities

(3,314

Other adjustments

(369

Tier 1 capital

72,471

Qualifying subordinated debt

12,773

Junior subordinated debt issued to trusts

687

Other adjustments

172

Tier 2 capital

13,632

Total capital

$  86,103

Credit RWAs

$268,247

Market RWAs

164,979

Total RWAs

$433,226

Tier 1 capital ratio

16.7%

Total capital ratio

19.9%

Tier 1 leverage ratio

8.1%

In the table above:

Ÿ

Junior subordinated debt issued to trusts is reflected in both Tier 1 capital (75%) and Tier 2 capital (25%). See Note 16 for additional information about the firm’s junior subordinated debt issued to trusts.

Ÿ

The deduction for goodwill and identifiable intangible assets includes goodwill of $3.71 billion and identifiable intangible assets of $671 million.

Ÿ

Other adjustments within Tier 1 capital primarily include disallowed deferred tax assets and the overfunded portion of the firm’s defined benefit pension plan obligation, net of associated deferred tax liabilities.

Ÿ

Qualifying subordinated debt represents subordinated debt issued by Group Inc. with an original term to maturity of five years or greater. The outstanding amount of subordinated debt qualifying for Tier 2 capital is reduced, or discounted, upon reaching a remaining maturity of five years. See Note 16 for additional information about the firm’s subordinated debt.

The table below presents the changes that will result in Tier 1 capital and Tier 2 capital for the period ended December 2013 under the Prior Capital Rules.

$ in millions
Period Ended
December 2013

Tier 1 capital

Balance, December 31, 2012

$66,977

Increase in common shareholders’ equity

1,751

Increase in perpetual non-cumulative preferred stock

1,000

Redesignation of junior subordinated debt issued to trusts

(687

Change in goodwill and identifiable intangible assets

723

Change in equity investments in certain entities

1,491

Change in other adjustments

1,216

Balance, December 31, 2013

72,471

Tier 2 capital

Balance, December 31, 2012

13,429

Decrease in qualifying subordinated debt

(569

Redesignation of junior subordinated debt issued to trusts

687

Change in other adjustments

85

Balance, December 31, 2013

13,632

Total capital

$86,103

The table below presents the components of RWAs as of December 2013 under the Prior Capital Rules.

$ in millions
As of
December 2013

Credit RWAs

Derivatives

$  94,753

Commitments, guarantees and loans

78,997

Securities financing transactions 1

30,010

Equity investments

3,673

Other 2

60,814

Total Credit RWAs

268,247

Market RWAs

Regulatory VaR

13,425

Stressed VaR

38,250

Incremental risk

9,463

Comprehensive risk

18,150

Specific risk

85,691

Total Market RWAs

164,979

Total RWAs

$433,226

1.

Represents resale and repurchase agreements and securities borrowed and loaned transactions.

2.

Includes receivables, other assets, and cash and cash equivalents.

Goldman Sachs 2014 Form 10-K199


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the changes in RWAs for the period ended December 31, 2013 under the Prior Capital Rules.

$ in millions
Period Ended
December 2013

Risk-weighted assets

Balance, December 31, 2012

$399,928

Credit RWAs

Decrease in derivatives

(12,516

Increase in commitments, guarantees and loans

18,151

Decrease in securities financing transactions

(17,059

Increase in equity investments

1,077

Change in other

(8,932

Change in Credit RWAs

(19,279

Market RWAs

Increase related to the revised market risk rules

127,608

Decrease in regulatory VaR

(2,038

Decrease in stressed VaR

(13,700

Decrease in incremental risk

(17,350

Decrease in comprehensive risk

(9,568

Decrease in specific risk

(32,375

Change in Market RWAs

52,577

Total RWAs, December 31, 2013

$433,226

Credit RWAs as of December 2013 decreased $19.28 billion compared with December 2012, primarily due to a decrease in securities financing exposure. Market RWAs as of December 2013 increased by $52.58 billion compared with December 2012, reflecting the impact of the revised market risk regulatory capital requirements, for financial institutions.

Aswhich became effective on January 1, 2013, partially offset by, among other things, a consequence of these developments, the firm expects minimum capital ratios requireddecrease in specific risk due to be maintained under Federal Reserve Board regulations will be increased and changesa decrease in the prescribed calculation methodology are expected to result in higher RWAs and lower capital ratios than those currently computed.inventory.

The capital and liquidity requirements of several of the firm’s subsidiaries will also be impacted in the future by the various developments arising from the Basel Committee, the Dodd-Frank Act, and other governmental entities and regulators.

Bank Subsidiaries

Regulatory Capital Ratios.GS Bank USA, an FDIC-insured, New York State-chartered bank and a member of the Federal Reserve System, is supervised and regulated by the Federal Reserve Board, the FDIC, and the New York State Department of Financial Services (formerlyand the New York State Banking Department)Consumer Financial Protection Bureau, and is subject to minimum capital requirements (described below) that are calculated in a manner similar to those applicable to bank holding companies. For purposes of assessing the adequacy of its capital, GS Bank USA computes its capital ratios in accordance with the regulatory capital guidelines currentlyrequirements applicable to state member banks, whichbanks. Those requirements are based on Baselthe Revised Capital Framework described above, with changes to the definition of regulatory capital and capital ratios effective from January 1, as implemented by2014. GS Bank USA was notified in the first quarter of 2014 that it had completed a “parallel run” to the satisfaction of the Federal Reserve Board, as required under the Revised Capital Framework. As such, additional changes in GS Bank USA’s capital requirements, including changes to RWAs, became effective on April 1, 2014. GS Bank USA is an Advanced approach banking organization under the Revised Capital Framework. Under the Revised Capital Framework, as of January 1, 2014, GS Bank USA became subject to a new minimum CET1 ratio requirement of 4.0%. As of January 2015, the minimum CET1 ratio for purposes of assessing the adequacy of its capital. GS Bank USA increased from 4.0% to 4.5%.

Under the regulatory framework for prompt corrective action that is applicable to GS Bank USA as of December 2014, in order to be consideredmeet the quantitative requirements for being a “well-capitalized” depository institution, GS Bank USA must maintain a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a Tier 1 leverage ratio of at least 5%. GS Bank USA has agreed with the Federal Reserve Board to minimum capital ratios in excess of these “well-capitalized” levels. Accordingly, for a period of time, GS Bank USA is expectedwas required to maintain a Tier 1 capital ratio of at least 8%6.0%, a totalTotal capital ratio of at least 11%10.0% and a Tier 1 leverage ratio of at least 6%5.0%. As of January 1, 2015, the Revised Capital Framework changed the standards for “well-capitalized” status under prompt corrective action regulations by, among other things, introducing a CET1 ratio requirement of 6.5% and increasing the Tier 1 capital ratio requirement from 6.0% to 8.0%. The Total capital ratio and Tier 1 leverage ratio requirements remain at 10.0% and 5.0%, respectively.

200Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As noted in the tabletables below, GS Bank USA was in compliance with these minimum capital requirements as of December 20112014 and December 2010.

The table below presents information regarding2013. GS Bank USA’s regulatory capital ratios under Basel 1 as implementedlevels and prompt corrective action classification are also subject to qualitative judgments by the Federal Reserve Board.

  As of December 
$ in millions 2011   2010 

Tier 1 capital

 $19,251    $18,604  

Tier 2 capital

  6 1    5,004  

Total capital

  19,257     23,608  

Risk-weighted assets

  112,824     98,719  

Tier 1 capital ratio

  17.1   18.8

Total capital ratio

  17.1% 1    23.9

Tier 1 leverage ratio

  18.5   19.5

1.

The decrease from December 2010 to December 2011 is primarily related to GS Bank USA’s repayment of $5.00 billion of subordinated debt to Group Inc. and $1.00 billion dividend to Group Inc. during 2011.

regulators about components of capital, risk weightings and other factors. Failure to comply with these capital requirements could result in restrictions being imposed by GS Bank USA is currently working to implement the Basel 2 framework, as implemented by the Federal Reserve Board. USA’s regulators.

Similar to the firm’s requirement as a bank holding company,firm, GS Bank USA is required to adoptcalculate ratios under both the Basel 2, once approvedIII Advanced Rules and Hybrid Capital Rules as of December 2014, in both cases subject to do so by regulators. In addition,transitional provisions. The ratios calculated under the capital requirementsHybrid Capital Rules presented in the table below were lower than those calculated under the Basel III Advanced Rules, and therefore were the binding ratios for GS Bank USA as of December 2014.

As a result of the changes in the applicable capital framework in 2014, GS Bank USA’s capital ratios as of December 2014 and December 2013 were calculated on a different basis and, accordingly, are expected to be impacted by changes to the Basel Committee’s capital guidelines, as outlined above. Furthermore, the firm expects thatnot comparable.

Effective on January 1, 2015, GS Bank USA will be impactedwas required to calculate ratios under both the Basel III Advanced Rules and Standardized Capital Rules. GS Bank USA’s ratios calculated under the Standardized Capital Rules as of December 2014 are also presented in the table below, although the ratios were not binding until January 2015.

$ in millions
As of
December 2014

Common Equity Tier 1

$  21,293

Tier 1 capital

$  21,293

Tier 2 capital

$    2,182

Total capital

$  23,475

Hybrid RWAs

$149,963

CET1 ratio

14.2%

Tier 1 capital ratio

14.2%

Total capital ratio

15.7%

Tier 1 leverage ratio

17.3%

Standardized RWAs

$200,605

CET1 ratio

10.6%

Tier 1 capital ratio

10.6%

Total capital ratio

11.7%

The table below presents information as of December 2013 regarding GS Bank USA’s regulatory ratios under the Prior Capital Rules.

$ in millions
As of
December 2013

Tier 1 capital

$  20,086

Tier 2 capital

$       116

Total capital

$  20,202

Risk-weighted assets

$134,935

Tier 1 capital ratio

14.9%

Total capital ratio

15.0%

Tier 1 leverage ratio

16.9%

The firm’s principal non-U.S. bank subsidiary, GSIB, is a wholly-owned credit institution, regulated by aspectsthe Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) and is subject to minimum capital requirements. As of the Dodd-Frank Act, including stress testDecember 2014 and resolution planDecember 2013, GSIB was in compliance with all regulatory capital requirements.

Goldman Sachs 2014 Form 10-K201


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Other.The deposits of GS Bank USA are insured by the FDIC to the extent provided by law. The Federal Reserve Board requires depository institutions tothat GS Bank USA maintain cash reserves with athe Federal Reserve Bank.Bank of New York. The amount deposited by the firm’s depository institutionGS Bank USA held at the Federal Reserve Bank of New York was approximately $40.06$38.68 billion and $28.12$50.39 billion as of December 20112014 and December 2010,2013, respectively, which exceeded required reserve amounts by $39.51$38.57 billion and $27.45$50.29 billion as of December 20112014 and December 2010,2013, respectively.

182Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Transactions between GS Bank USA and its subsidiaries and Group Inc. and its subsidiaries and affiliates (other than, generally, subsidiaries of GS Bank USA) are regulated by the Federal Reserve Board. These regulations generally limit the types and amounts of transactions (including loans to and borrowings from GS Bank USA) that may take place and generally require those transactions to be on an arm’s-length basis.

Goldman Sachs International Bank, a wholly-owned credit institution, regulated by the FSA, and GS Bank Europe, a wholly-owned credit institution, regulated by the Central Bank of Ireland, are both subject to minimum capital requirements. As of December 2011 and December 2010, Goldman Sachs International Bank and GS Bank Europe were in compliance with all regulatory capital requirements.

Broker-Dealer Subsidiaries

U.S. Regulated Broker-Dealer Subsidiaries.The firm’s U.S. regulated broker-dealer subsidiaries include GS&Co. and GSEC. GS&Co. and GSEC are registered U.S. broker-dealers and futures commission merchants, and are subject to regulatory capital requirements, including those imposed by the SEC, the U.S. Commodity Futures Trading Commission (CFTC), the Chicago Mercantile Exchange, the Financial Industry Regulatory Authority, Inc. (FINRA) and the National Futures Association. Rule 15c3-1 of the SEC and Rule 1.17 of the CFTC specify uniform minimum net capital requirements, as defined, for their registrants, and also effectively require that a significant part of the registrants’ assets be kept in relatively liquid form. GS&Co. and GSEC have elected to compute their minimum capital requirements in accordance with the “Alternative Net Capital Requirement” as permitted by Rule 15c3-1.

As of December 2011,2014 and December 2013, GS&Co. had regulatory net capital, as defined by Rule 15c3-1, of $11.24$14.83 billion and $15.81 billion, respectively, which exceeded the amount required by $9.34 billion.$12.46 billion and $13.76 billion, respectively. As of December 2011,2014 and December 2013, GSEC had regulatory net capital, as defined by Rule 15c3-1, of $2.10$1.67 billion and $1.38 billion, respectively, which exceeded the amount required by $2.00 billion.$1.53 billion and $1.21 billion, respectively.

In addition to its alternative minimum net capital requirements, GS&Co. is also required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1. GS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As of December 20112014 and December 2010,2013, GS&Co. had tentative net capital and net capital in excess of both the minimum and the notification requirements.

Insurance Subsidiaries

The firm has U.S. insurance subsidiaries that are subject to state insurance regulation and oversight in the states in which they are domiciled and in the other states in which they are licensed. In addition, certain of the firm’s insurance subsidiaries outside of the U.S. are regulated by the FSA and certain are regulated by the Bermuda Monetary Authority. The firm’s insurance subsidiaries were in compliance with all regulatory capital requirements as of December 2011 and December 2010.

Other Non-U.S. Regulated SubsidiariesBroker-Dealer Subsidiaries.

The firm’s principal non-U.S. regulated broker-dealer subsidiaries include GSIGoldman Sachs International (GSI) and Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firm’s regulated U.K. broker-dealer, is subject to the capital requirements imposedregulated by the FSA.PRA and the FCA. GSJCL, the firm’s regulated Japanese broker-dealer, is subject to the capital requirements imposedregulated by Japan’s Financial Services Agency. As of December 2011These and December 2010, GSI and GSJCL were in compliance with their local capital adequacy requirements. Certaincertain other non-U.S. subsidiaries of the firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of December 20112014 and December 2010,2013, these subsidiaries were in compliance with their local capital adequacy requirements.

Restrictions on Payments

The regulatory requirements referred to above restrict Group Inc.’s ability to withdraw capital from its regulated subsidiaries.subsidiaries is limited by minimum equity capital requirements applicable to those subsidiaries, as well as by provisions of applicable law and regulations that limit the ability of those subsidiaries to declare and pay dividends without prior regulatory approval even if the relevant subsidiary would satisfy the equity capital requirements applicable to it after giving effect to the dividend. As of December 20112014 and December 2010, approximately $25.532013, Group Inc. was required to maintain $33.62 billion and $24.70$31.20 billion, respectively, of net assets ofminimum equity capital in its regulated subsidiaries were restricted asin order to satisfy the paymentregulatory requirements of dividends to Group Inc.such subsidiaries. In addition to statutory limitations on the payment of dividends, imposed by federal and state laws, the Federal Reserve Board, the FDIC and the New York State Department of Financial Services have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise (including GS Bank USA) if, in the relevant regulator’s opinion, payment of a dividend would constitute an unsafe or unsound practice in the light of the financial condition of the banking organization. Similar restrictions are imposed by regulators in jurisdictions outside of the U.S.

 

 

202 Goldman Sachs 20112014 Form 10-K 183


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Earnings Per Common Share

Note 21.

Earnings Per Common Share

Basic earnings per common share (EPS) is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and RSUs for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of

basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable for stock warrants and options and for RSUs for which future service is required as a condition to the delivery of the underlying common stock.

The table below presents the computations of basic and diluted EPS.

 

  Year Ended December 
in millions, except per share amounts 2011     2010     2009 

Numerator for basic and diluted EPS — net earnings applicable to common shareholders

 $2,510      $7,713      $12,192  

Denominator for basic EPS — weighted average number of common shares

  524.6       542.0       512.3  

Effect of dilutive securities:

RSUs

  14.6       15.0       15.7  

Stock options and warrants

  17.7       28.3       22.9  

Dilutive potential common shares

  32.3       43.3       38.6  

Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares

  556.9       585.3       550.9  

Basic EPS

 $4.71      $14.15      $23.74  

Diluted EPS

  4.51       13.18       22.13  

  Year Ended December 
in millions, except per share amounts  2014     2013     2012  

Numerator for basic and diluted EPS — net earnings applicable to common shareholders

  $8,077     $7,726     $7,292  

 

Denominator for basic EPS — weighted average number of common shares

  458.9     471.3     496.2  
  

 

Effect of dilutive securities:

     

RSUs

  6.1     7.2     11.3  
  

Stock options and warrants

  8.2     21.1     8.6  

Dilutive potential common shares

  14.3     28.3     19.9  

Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares

  473.2     499.6     516.1  

Basic EPS

  $17.55     $16.34     $14.63  
  

Diluted EPS

  17.07     15.46     14.13  

In the table above, unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents are treated as a separate class of securities in calculating EPS. The impact of applying this methodology was a reduction in basic EPS of $0.05 for both 2014 and 2013, and $0.07 $0.08 and $0.06 for the years ended December 2011, December 2010 and December 2009, respectively.2012.

The diluted EPS computations in the table above do not include the following:antidilutive RSUs and common shares underlying antidilutive stock options and warrants of 6.0 million for both 2014 and 2013, and 52.4 million for 2012.

  Year Ended December 
in millions 2011     2010     2009 

Number of antidilutive RSUs and common shares underlying antidilutive stock options and warrants

  9.2       6.2       24.7  

184Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Transactions with Affiliated Funds

Note 22.

Transactions with Affiliated Funds

The firm has formed numerous nonconsolidated investment funds with third-party investors. TheAs the firm generally acts as the investment manager for these funds, and, as such,it is entitled to receive management fees and, in certain cases, advisory fees or incentive fees from these funds. Additionally, the firm invests alongside the third-party investors in certain funds.

The tables below present fees earned from affiliated funds, fees receivable from affiliated funds and the aggregate carrying value of the firm’s interests in affiliated funds.

 

  Year Ended December 
$ in millions  2014     2013     2012  

Fees earned from affiliated funds

  $3,232     $2,897     $2,935  

 

  Year Ended December 
in millions 2011   2010   2009 

Fees earned from affiliated funds

 $2,789    $2,882    $2,484  
     As of December 
$ in millions    2014     2013  

Fees receivable from funds

   $   724     $     817  
  

Aggregate carrying value of interests in funds 1

    9,099     13,124  

 

  As of December 
in millions 2011   2010 

Fees receivable from funds

 $721    $886  

Aggregate carrying value of interests in funds

  14,960     14,773  
1.

The decrease from December 2013 to December 2014 primarily reflects both cash and in-kind distributions received by the firm.

As of December 2014 and December 2013, the firm has provided voluntary financial support to certainhad outstanding guarantees on behalf of its funds of $304 million and $147 million, respectively. The amounts as of December 2014 and December 2013 primarily relate to a guarantee that have experienced significant reductionsthe firm has voluntarily provided in capital and liquidity or had limited access toconnection with a financing agreement with a third-party lender executed by one of the debt markets duringfirm’s real estate funds that is not covered by the financial crisis.Volcker Rule. As of December 20112014 and December 2010,2013, the firm had exposure to these funds in the form ofno outstanding loans and guarantees of $289 million and $253 million, respectively, primarily related to certain real estate funds. In addition, as of December 2011 and 2010, the firm had outstandingor commitments to extend credit to these funds of $0 and $160 million, respectively.affiliated funds.

The Volcker Rule will restrict the firm mayfrom providing financial support to covered funds (as defined in the rule) after the expiration of the transition period. As a general matter, in the ordinary course of business, the firm does not expect to provide additional voluntary financial support to theseany covered funds if they werebut may choose to experience significant financial distress;do so with respect to funds that are not subject to the Volcker Rule; however, in the event that such amounts aresupport is provided, the amount is not expected to be material to the firm. material.

In addition, in the ordinary course of business, the firm may also engage in other activities with theseits affiliated funds including, among others, securities lending, trade execution, market making, custody, and acquisition and bridge financing. See Note 18 for the firm’s investment commitments related to these funds.

 

 

 Goldman Sachs 20112014 Form 10-K 185203


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Interest Income and Interest Expense

Note 23.

Interest Income and Interest Expense

Interest income is recorded over the life of the instrument on an accrual basis based on contractual interest rates. The table below presents the

firm’s sources of interest income and interest expense.

 

 Year Ended December  Year Ended December 
in millions 2011   2010   2009 
$ in millions  2014     2013     2012  

Interest income

        

Deposits with banks

 $125    $86    $65    $   164     $     186     $     156  

Securities borrowed, securities purchased under agreements to resell and federal funds sold

  666     540     951  
 

Securities borrowed, securities purchased under agreements to resell and federal funds sold 1

  (81   43     (77
 

Financial instruments owned, at fair value

  10,718     10,346     11,106    7,452     8,159     9,817  

Other interest 1

  1,665     1,337     1,785  
 

Loans receivable

  708     296     150  
 

Other interest 2

  1,361     1,376     1,335  

Total interest income

  13,174     12,309     13,907    9,604     10,060     11,381  

Interest expense

          

Deposits

  280     304     415    333     387     399  
 

Securities loaned and securities sold under agreements to repurchase

  905     708     1,317    431     576     822  
 

Financial instruments sold, but not yet purchased, at fair value

  2,464     1,859     1,854    1,741     2,054     2,438  

Short-term borrowings 2

  526     453     623  

Long-term borrowings 2

  3,439     3,155     2,585  

Other interest 3

  368     327     (294
 

Short-term borrowings 3

  447     394     581  
 

Long-term borrowings 3

  3,460     3,752     3,736  
 

Other interest 4

  (855   (495   (475

Total interest expense

  7,982     6,806     6,500    5,557     6,668     7,501  

Net interest income

 $5,192    $5,503    $7,407    $4,047     $  3,392     $  3,880  

 

1.

Primarily includesIncludes rebates paid and interest income on securities borrowed.

2.

Includes interest income on customer debit balances and other interest-earning assets.

 

2.3.

Includes interest on unsecured borrowings and other secured financings.

 

3.4.

Primarily includesIncludes rebates received on other interest-bearing liabilities and interest expense on customer credit balances and other interest-bearing liabilities.balances.

186Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Income Taxes

Note 24.

Income Taxes

Provision for Income Taxes

Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities. The firm reports interest expense related to income tax matters in “Provision for taxes” and income tax penalties in “Other expenses.”

The tables below present the components of the provision/(benefit) for taxes and a reconciliation of the U.S. federal statutory income tax rate to the firm’s effective income tax rate.

 

 Year Ended December  Year Ended December 
in millions 2011     2010     2009 
$ in millions  2014     2013     2012  

Current taxes

              

U.S. federal

 $405      $1,791      $4,039    $1,908     $2,589     $3,013  
 

State and local

  392       325       594    576     466     628  
 

Non-U.S.

  204       1,083       2,242    901     613     447  

Total current tax expense

  1,001       3,199       6,875    3,385     3,668     4,088  

Deferred taxes

              

U.S. federal

  683       1,516       (763  190     (188   (643
 

State and local

  24       162       (130  38     67     38  
 

Non-U.S.

  19       (339     462    267     150     249  

Total deferred tax (benefit)/expense

  726       1,339       (431  495     29     (356

Provision for taxes

 $1,727      $4,538      $6,444    $3,880     $3,697     $3,732  
 Year Ended December  Year Ended December 
 2011     2010     2009   2014     2013     2012  

U.S. federal statutory income tax rate

  35.0     35.0     35.0  35.0%     35.0%     35.0%  
 

State and local taxes, net of U.S. federal income tax effects

  4.4       2.5       1.5    3.2%     4.1%     3.8%  
 

Tax credits

  (1.6     (0.7     (0.3  (1.1)%     (1.0)%     (1.0)%  

Non-U.S. operations

  (6.7     (2.3     (3.5
 

Non-U.S. operations 1

  (5.8)%     (5.6)%     (4.8)%  
 

Tax-exempt income, including dividends

  (2.4     (1.0     (0.4  (0.3)%     (0.5)%     (0.5)%  
 

Other

  (0.7     1.7 1      0.2    0.4%     (0.5)%     0.8%  

Effective income tax rate

  28.0     35.2     32.5  31.4%     31.5%     33.3%  

 

1.

Primarily includesIncludes the effectimpact of the SEC settlement of $550 million, substantially all of which is non-deductible.permanently reinvested earnings.

 

204 Goldman Sachs 20112014 Form 10-K 187


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are established to reduce

deferred tax assets to the amount that more likely than not will be realized.realized and primarily relate to the ability to utilize losses in various tax jurisdictions. Tax assets and liabilities are presented as a component of “Other assets” and “Other liabilities and accrued expenses,” respectively.

The table below presents the significant components of deferred tax assets and liabilities.

liabilities, excluding the impact of netting within tax jurisdictions.

 

  As of December 
in millions 2011     2010 

Deferred tax assets

     

Compensation and benefits

 $3,126      $3,397  

Unrealized losses

  849       731  

ASC 740 asset related to unrecognized tax benefits

  569       972  

Non-U.S. operations

  662       652  

Foreign tax credits

  12       11  

Net operating losses

  213       250  

Occupancy-related

  110       129  

Other comprehensive income-related

  168       68  

Other, net

  581       473  
   6,290       6,683  

Valuation allowance 1

  (65     (50

Total deferred tax assets 2

 $6,225      $6,633  

Depreciation and amortization

  1,959       1,647  

Other comprehensive income-related

  36       130  

Total deferred tax liabilities 2

 $1,995      $1,777  

1.

Relates primarily to the ability to utilize losses in various tax jurisdictions.

2.

Before netting within tax jurisdictions.

188Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

  As of December 
$ in millions  2014     2013  

Deferred tax assets

   

Compensation and benefits

  $3,032     $2,740  
  

Unrealized losses

       309  
  

ASC 740 asset related to unrecognized tax benefits

  172     475  
  

Non-U.S. operations

  1,418     1,318  
  

Net operating losses

  336     232  
  

Occupancy-related

  78     108  
  

Other comprehensive income-related

  277     69  
  

Other, net

  545     729  

Subtotal

  5,858     5,980  
  

Valuation allowance

  (64   (183

Total deferred tax assets

  $5,794     $5,797  

 

Depreciation and amortization

  1,176     1,269  
  

Unrealized gains

  406       
  

Other comprehensive income-related

       68  

Total deferred tax liabilities

  $1,582     $1,337  

The firm has recorded deferred tax assets of $213$336 million and $250$232 million as of December 20112014 and December 2010,2013, respectively, in connection with U.S. federal, state and local and foreign net operating loss carryforwards. The firm also recorded a valuation allowance of $59$26 million and $42$45 million as of December 20112014 and December 2010,2013, respectively, related to these net operating loss carryforwards.

As of December 2011,2014, the U.S. federal state and local, and foreign net operating loss carryforwards were $96$108 million $1.65and $1.2 billion, and $378 million, respectively. If not utilized, the U.S. federal net operating loss carryforward will begin to expire in 2017 and the state and local net operating loss carryforwards will begin to expire in 2012.2015. The foreign net operating loss carryforwards can be carried forward indefinitely. State and local net operating loss carryforwards of $790 million will begin to expire in 2015. If these carryforwards expire, they will not have a material impact on the firm’s results of operations. The firm had no foreign tax credit carryforwards of $12 million and $11 million as of December 2011 and December 2010, respectively. The firm recorded ano related net deferred income tax asset of $6 million and $5 millionassets as of December 20112014 and December 2010, respectively. These carryforwards will begin to expire in 2013.

The firm had no capital loss carryforwards of $6 million and $12 million as of December 2011 and December 2010, respectively. The firm recorded ano related net deferred income tax asset of $2 millionassets as of both December 20112014 and December 2010. These carryforwards expire in 2013.

The valuation allowance decreased by $119 million during 2014 and increased by $15 million and decreased by $24 million during 2011 and 2010, respectively. The increase was due to losses considered more likely than not to expire unused.2013. The decrease in 2014 was primarily due to a decrease in deferred tax assets from which the utilization of losses previously considered more likely thanfirm does not expect to expire unused.realize any benefit. The increase in 2013 was primarily due to an increase in deferred tax assets from which the firm does not expect to realize any benefit.

The firm permanently reinvests eligible earnings of certain foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if such earnings were repatriated. As of December 20112014 and December 2010,2013, this policy resulted in an unrecognized net deferred tax liability of $3.32$4.66 billion and $2.67$4.06 billion, respectively, attributable to reinvested earnings of $20.63$24.88 billion and $17.70$22.54 billion, respectively.

Goldman Sachs 2014 Form 10-K205


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Unrecognized Tax Benefits

The firm recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained on examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.

As of December 20112014 and December 2010,2013, the accrued liability for interest expense related to income tax matters and income tax penalties was $233$101 million and $213$410 million, respectively. The firm recognized $21 million, $28 million and $62 million of interest expense and income tax penalties of $45 million, $53 million and $95 million for the years ended December 2011, December 20102014, 2013 and December 2009,2012, respectively. It is reasonably possible that unrecognized tax benefits could change significantly during the twelve months subsequent to December 20112014 due to potential audit settlements. AtHowever, at this time it is not possible to estimate the change or its impact on the firm’s effective tax rate over the next twelve months.any potential change.

The table below presents the changes in the liability for unrecognized tax benefits, whichbenefits. This liability is recordedincluded in “Other liabilities and accrued expenses.” See Note 17 for further information.

 

 As of December  As of December 
in millions 2011     2010     2009 
$ in millions  2014     2013     2012  

Balance, beginning of year

 $2,081      $1,925      $1,548    $ 1,765     $2,237     $1,887  
 

Increases based on tax positions related to the current year

  171       171       143    204     144     190  
 

Increases based on tax positions related to prior years

  278       162       379    263     149     336  

Decreases related to tax positions of prior years

  (41     (104     (19
 

Decreases based on tax positions related to prior years

  (241   (471   (109
 

Decreases related to settlements

  (638     (128     (91  (1,112   (299   (35
 

Acquisitions/(dispositions)

  47       56                     (47
 

Exchange rate fluctuations

  (11     (1     (35  (8   5     15  

Balance, end of year

 $1,887      $2,081      $1,925    $    871     $1,765     $2,237  

Related deferred income tax asset 1

 $569      $972      $1,004    172     475     685  
 

Net unrecognized tax benefit 2

  1,318       1,109       921    $    699     $1,290     $1,552  

 

1.

Included in “Other assets.” See Note 12.13.

 

2.

If recognized, the net tax benefit would reduce the firm’s effective income tax rate.

Goldman Sachs 2011 Form 10-K189


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Regulatory Tax Examinations

The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong, Korea and various states, such as New York. The tax years under examination vary by jurisdiction. The firm believes that during 2012, certain audits have a reasonable possibility of being completed. The firm does not expect completion of these audits to have a material impact on the firm’s financial condition but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.

The table below presents the earliest tax years that remain subject to examination by major jurisdiction.

 

Jurisdiction 


As of


December 20112014


U.S. Federal 1

  20052008  

New York State and City 2

  20042007
 

United Kingdom

  20072012  

Japan 3

  20082010
 

Hong Kong

  20052006
 

Korea

  20082010  

The U.S. Federal examinations of fiscal 2008 through calendar 2010 were finalized, but the settlement is subject to review by the Joint Committee of Taxation. The examinations of 2011 and 2012 began in 2013.

1.

IRS examination of fiscal 2008 through calendar 2010 began during 2011. IRS examination of fiscal 2005, 2006 and 2007 began during 2008. IRS examination of fiscal 2003 and 2004 has been completed, but the liabilities for those years are not yet final.

New York State and City examinations of fiscal 2004 through 2006 were finalized during 2014. The examinations of fiscal 2007 through 2010 began in 2013.

The United Kingdom examinations of fiscal 2008 through 2011 were finalized during 2014.

2.

New York State and City examination of fiscal 2004, 2005 and 2006 began in 2008.

3.

Japan National Tax Agency examination of fiscal 2005 through 2009 began during the first quarter of 2010. The examinations have been completed, but the liabilities for 2008 and 2009 are not yet final.

All years including and subsequent to the years in the table above remain open to examination by the taxing authorities. The firm believes that the liability for unrecognized tax benefits it has established is adequate in relation to the potential for additional assessments.

In January 2013, the firm was accepted into the Compliance Assurance Process program by the IRS. This program allows the firm to work with the IRS to identify and resolve potential U.S. federal tax issues before the filing of tax returns. The 2013 tax year is the first year that was examined under the program, and remains subject to post-filing review. The firm was also accepted into the program for the 2014 and 2015 tax years.

206Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Business SegmentsNotes to Consolidated Financial Statements

Note 25.

Business Segments

In

The firm reports its activities in the fourth quarter of 2010, the firm reorganized its three previous reportable business segments intofollowing four new reportable business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. Prior periods are presented on a comparable basis.

Basis of Presentation

In reporting segments, certain of the firm’s business lines have been aggregated where they have similar economic characteristics and are similar in each of the following areas: (i) the nature of the services they provide, (ii) their methods of distribution, (iii) the types of clients they serve and (iv) the regulatory environments in which they operate.

The cost drivers of the firm taken as a whole — compensation, headcount and levels of business activity — are broadly similar in each of the firm’s business segments. Compensation and benefits expenses in the firm’s segments reflect, among other factors, the overall performance of the firm as well as the performance of individual businesses. Consequently, pre-tax margins in one segment of the firm’s business may be significantly affected by the performance of the firm’s other business segments.

The firm allocates assets (including allocations of global core liquid assets and cash, secured client financing and other assets), revenues and expenses among the four reportable business segments. Due to the integrated nature of these segments, estimates and judgments are made in allocating certain revenueassets, revenues and expense items.expenses. The allocation process is based on the manner in which management currently views the performance of the segments. Transactions between segments are based on specific criteria or approximate third-party rates. Total operating expenses include corporate itemscharitable contributions that have not been allocated to individual business segments. The allocation process is based on

Management believes that the mannerinformation in which management views the businesstable below provides a reasonable representation of the firm.each segment’s contribution to consolidatedpre-tax earnings and total assets.

  Year Ended or as of December 
$ in millions  2014     2013     2012  

Investment Banking

     

Financial Advisory

  $    2,474     $    1,978     $    1,975  

 

Equity underwriting

  1,750     1,659     987  
  

Debt underwriting

  2,240     2,367     1,964  

Total Underwriting

  3,990     4,026     2,951  

Total net revenues

  6,464     6,004     4,926  
  

Operating expenses

  3,688     3,479     3,333  

Pre-tax earnings

  $    2,776     $    2,525     $    1,593  

Segment assets

  $    1,845     $    1,901     $    1,712  

Institutional Client Services

     

Fixed Income, Currency and Commodities Client Execution

  $    8,461     $    8,651     $    9,914  

 

Equities client execution

  2,079     2,594     3,171  
  

Commissions and fees

  3,153     3,103     3,053  
  

Securities services

  1,504     1,373     1,986  

Total Equities

  6,736     7,070     8,210  

Total net revenues 1

  15,197     15,721     18,124  
  

Operating expenses

  10,880     11,792     12,490  

Pre-tax earnings

  $    4,317     $    3,929     $    5,634  

Segment assets

  $696,013     $788,238     $825,496  

Investing & Lending

     

Equity securities

  $    3,813     $    3,930     $    2,800  
  

Debt securities and loans

  2,165     1,947     1,850  
  

Other

  847     1,141     1,241  

Total net revenues

  6,825     7,018     5,891  
  

Operating expenses

  2,819     2,686     2,668  

Pre-tax earnings

  $    4,006     $    4,332     $    3,223  

Segment assets

  $143,842     $109,285     $  98,600  

Investment Management

     

Management and other fees

  $    4,800     $    4,386     $    4,105  
  

Incentive fees

  776     662     701  
  

Transaction revenues

  466     415     416  

Total net revenues

  6,042     5,463     5,222  
  

Operating expenses

  4,647     4,357     4,296  

Pre-tax earnings

  $    1,395     $    1,106     $       926  

Segment assets

  $  14,540     $  12,083     $  12,747  

Total net revenues

  $  34,528     $  34,206     $  34,163  
  

Total operating expenses 2

  22,171     22,469     22,956  

Total pre-tax earnings

  $  12,357     $  11,737     $  11,207  

Total assets

  $856,240     $911,507     $938,555  

1.

Includes $37 million for 2013 and $121 million for 2012 of realized gains on available-for-sale securities.

2.

Includes charitable contributions that have not been allocated to the firm’s segments of $137 million for 2014, $155 million for 2013 and $169 million for 2012. Operating expenses related to real estate-related exit costs, previously not allocated to the firm’s segments, have now been allocated. This allocation reflects the change in the manner in which management views the performance of the firm’s segments. Reclassifications have been made to previously reported segment amounts to conform to the current presentation.

 

 

190 Goldman Sachs 20112014 Form 10-K 207


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The segment information presented in the table belowabove is prepared according to the following methodologies:

 

Ÿ 

Revenues and expenses directly associated with each segment are included in determining pre-tax earnings.

 

Ÿ 

Net revenues in the firm’s segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. Net interest is included in segment net revenues as it is consistent with the way in which management assesses segment performance.

Ÿ 

Overhead expenses not directly allocable to specific segments are allocated ratably based on direct segment expenses.

Management believes that the following information provides a reasonable representation of each segment’s contribution to consolidated pre-tax earnings and total assets.

     For the Years Ended or as of December 
in millions     2011     2010     2009 

Investment Banking

  Net revenues $4,355      $4,810      $4,984  
   

Operating expenses

  2,962       3,511       3,482  
   

Pre-tax earnings

 $1,393      $1,299      $1,502  
   

Segment assets

 $1,690      $1,870      $1,759  

Institutional Client Services

  Net revenues 1 $17,280      $21,796      $32,719  
   

Operating expenses

  12,697       14,291       13,691  
   

Pre-tax earnings

 $4,583      $7,505      $19,028  
   

Segment assets

 $834,780      $819,765      $751,851  

Investing & Lending

  Net revenues $2,142      $7,541      $2,863  
   

Operating expenses

  2,673       3,361       3,523  
   

Pre-tax earnings/(loss)

 $(531    $4,180      $(660
   

Segment assets

 $76,753      $78,771      $83,851  

Investment Management

  Net revenues $5,034      $5,014      $4,607  
   

Operating expenses

  4,018       4,051       3,673  
   

Pre-tax earnings

 $1,016      $963      $934  
   

Segment assets

 $10,002      $10,926      $11,481  

Total

  Net revenues $28,811      $39,161      $45,173  
   

Operating expenses

  22,642       26,269       25,344  
   

Pre-tax earnings

 $6,169      $12,892      $19,829  
   

Total assets

 $923,225      $911,332      $848,942  

1.

Includes $115 million, $111 million and $36 million for the years ended December 2011, December 2010 and December 2009, respectively, of realized gains on available-for-sale securities held in the firm’s insurance subsidiaries.

Goldman Sachs 2011 Form 10-K191


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Operating expenses in the table above include the following expenses that have not been allocated to the firm’s segments:

Ÿ

net provisions for a number of litigation and regulatory proceedings of $175 million, $682 million and $104 million for the years ended December 2011, December 2010 and December 2009, respectively;

Ÿ

charitable contributions of $103 million, $345 million and $810 million for the years ended December 2011, December 2010 and December 2009, respectively; and

Ÿ

real estate-related exit costs of $14 million, $28 million and $61 million for the years ended December 2011, December 2010 and December 2009, respectively.

The tables below present the amounts of net interest income or interest expense included in net revenues, and the amounts of depreciation and amortization expense included in pre-tax earnings.

 

  Year Ended December 
in millions 2011   2010     2009 

Investment Banking

 $(6  $      $  

Institutional Client Services

  4,360     4,692       6,951  

Investing & Lending

  635     609       242  

Investment Management

  203     202       214  

Total net interest

 $5,192    $5,503      $7,407  

 Year Ended December  Year Ended December 
in millions 2011     2010     2009 
$ in millions  2014     2013     2012  

Investment Banking

 $174      $172      $156    $      —     $      —     $    (15
 

Institutional Client Services

  944       1,109       775    3,679     3,250     3,723  
 

Investing & Lending

  563       422       793    237     25     26  
 

Investment Management

  131     117     146  

Total net interest income

  $4,047     $3,392     $3,880  
 Year Ended December 
$ in millions  2014     2013     2012  

Investment Banking

  $   135     $   144     $   166  
 

Institutional Client Services

  525     571     802  
 

Investing & Lending

  530     441     565  
 

Investment Management

  188       200       214    147     166     205  

Total depreciation and amortization 1

 $1,869      $1,904      $1,943    $1,337     $1,322     $1,738  

 

1.

IncludesDepreciation and amortization related to real estate-related exit costs, of $1 million and $5 million for the years ended December 2010 and December 2009, respectively, that havepreviously not been allocated to the firm’s segments, have now been allocated. This allocation reflects the change in the manner in which management views the performance of the firm’s segments. Reclassifications have been made to previously reported segment amounts to conform to the current presentation.

Geographic Information

Due to the highly integrated nature of international financial markets, the firm manages its businesses based on the profitability of the enterprise as a whole. The methodology for allocating profitability to geographic regions is dependent on estimates and management judgment because a significant portion of the firm’s activities require cross-border coordination in order to facilitate the needs of the firm’s clients.

Geographic results are generally allocated as follows:

 

Ÿ 

Investment Banking: location of the client and investment banking team.

 

Ÿ 

Institutional Client Services: Fixed Income, Currency and Commodities Client Execution, and Equities (excluding Securities Services): location of the market-making desk; Securities Services: location of the primary market for the underlying security.

 

Ÿ 

Investing & Lending: Investing: location of the investment; Lending: location of the client.

 

Ÿ 

Investment Management: location of the sales team.

192Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the total net revenues, pre-tax earnings and net earnings of the firm by geographic region allocated based on the methodology referred to above, as

well as the percentage of total net revenues, pre-tax earnings and net earnings (excluding Corporate) for each geographic region.

In the table below, Asia includes Australia and New Zealand.

 

   Year Ended December 
$ in millions  2011  2010  2009 

Net revenues

Americas 1

  $17,873     62 $21,564     55 $25,313     56

EMEA 2

   7,074     25    10,449     27    11,595     26  

Asia 3, 4

   3,864     13    7,148     18    8,265     18  

Total net revenues

  $28,811     100 $39,161     100 $45,173     100

Pre-tax earnings

Americas 1

  $5,466     85 $7,934     57 $11,461     56

EMEA 2

   1,226     19    3,080     22    5,508     26  

Asia 3

   (231   (4  2,933     21    3,835     18  

Subtotal

   6,461     100  13,947     100  20,804     100

Corporate 5

   (292       (1,055       (975     

Total pre-tax earnings

  $6,169        $12,892        $19,829       

Net earnings

Americas 1

  $3,624     78 $4,917     53 $7,120     51

EMEA 2

   1,117     24    2,236     24    4,201     30  

Asia 3

   (103   (2  2,083     23    2,689     19  

Subtotal

   4,638     100  9,236     100  14,010     100

Corporate

   (196       (882       (625     

Total net earnings

  $4,442        $8,354        $13,385       
  Year Ended December 
$ in millions  2014    2013    2012  

Net revenues

      

Americas

  $20,062    58%    $19,858    58%    $20,159    59%  
  

Europe, Middle East and Africa

  9,057    26%    8,828    26%    8,612    25%  
  

Asia

  5,409    16%    5,520    16%    5,392    16%  

Total net revenues

  $34,528    100%    $34,206    100%    $34,163    100%  

Pre-tax earnings

      

Americas

  $  7,144    57%    $  6,794    57%    $  6,956    61%  
  

Europe, Middle East and Africa

  3,338    27%    3,230    27%    2,931    26%  
  

Asia

  2,012    16%    1,868    16%    1,489    13%  

Subtotal

  12,494    100%    11,892    100%    11,376    100%  
  

Corporate 1

  (137      (155      (169    

Total pre-tax earnings

  $12,357        $11,737        $11,207      

Net earnings

      

Americas

  $  4,558    53%    $  4,425    54%    $  4,255    56%  
  

Europe, Middle East and Africa

  2,576    30%    2,377    29%    2,361    31%  
  

Asia

  1,434    17%    1,345    17%    971    13%  

Subtotal

  8,568    100%    8,147    100%    7,587    100%  
  

Corporate

  (91      (107      (112    

Total net earnings

  $  8,477        $  8,040        $  7,475      

 

1.

Substantially all relatesIncludes charitable contributions that have not been allocated to the U.S.

2.

EMEA (Europe, Middle East and Africa). Pre-tax earnings and net earnings include the impact of the U.K. bank payroll tax for the year ended December 2010.

3.

Asia also includes Australia and New Zealand.

4.

The decline in net revenues in Asia compared with 2010 primarily reflects lower results in Investing & Lending, principally duefirm’s geographic regions. Operating expenses related to losses from public equities, reflecting a significant decline in equity markets in Asia during 2011.

5.

Consists of net provisions for a number of litigation and regulatory proceedings of $175 million, $682 million and $104 million for the years ended December 2011, December 2010 and December 2009, respectively; charitable contributions of $103 million, $345 million and $810 million for the years ended December 2011, December 2010 and December 2009, respectively; and real estate-related exit costs, previously not allocated to the firm’s geographic regions, have now been allocated. This allocation reflects the change in the manner in which management views the performance of $14 million, $28 million and $61 million for the years ended December 2011, December 2010 and December 2009, respectively.geographic regions. Reclassifications have been made to previously reported geographic region amounts to conform to the current presentation.

 

208 Goldman Sachs 20112014 Form 10-K 193


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Credit Concentrations

Note 26.

Credit Concentrations

 

Credit concentrations may arise from market making, client facilitation, investing, underwriting, lending and collateralized transactions and may be impacted by changes in economic, industry or political factors. The firm seeks to mitigate credit risk by actively monitoring exposures and obtaining collateral from counterparties as deemed appropriate.

While the firm’s activities expose it to many different industries and counterparties, the firm routinely executes a high volume of transactions with asset managers, investment funds, commercial banks, brokers and dealers, clearing houses and exchanges, which results in significant credit concentrations.

In the ordinary course of business, the firm 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.

The table below presents the credit concentrations in assetscash instruments held by the firm. As of December 2011 and December 2010, the firm did not have credit exposure to any other counterparty that exceeded 2% of total assets.

 

 As of December  As of December 
$ in millions 2011   2010   2014     2013  

U.S. government and federal agency obligations 1

 $103,468    $96,350    $69,170     $90,118  
 

% of total assets

  11.2   10.6  8.1%     9.9%  

Other sovereign obligations 1,2

 $49,025    $40,379  
 

Non-U.S. government and
agency obligations 1

  $37,059     $40,944  
 

% of total assets

  5.3   4.4  4.3%     4.5%  

 

1.

Included in “Financial instruments owned, at fair value” and “Cash and securities segregated for regulatory and other purposes.”

As of December 2014 and December 2013, the firm did not have credit exposure to any other counterparty that exceeded 2% of total assets.

2.

Principally consisting of securities issued by the governments of the United Kingdom, Japan, and Germany as of December 2011, and the United Kingdom, Japan and France as of December 2010.

To reduce credit exposures, the firm may enter into agreements with counterparties that permit the firm to offset receivables and payables with such counterparties and/or enable the firm to obtain collateral on an upfront or contingent basis. Collateral obtained by the firm related to derivative assets is principally cash and is held by the firm or a third-party custodian. Collateral obtained by the firm related to resale agreements and securities borrowed transactions is primarily U.S. government and federal agency obligations and other sovereignnon-U.S. government and agency obligations. See Note 910 for further information about collateralized agreements and financings.

The table below presents U.S. government and federal agency obligations, and other sovereignnon-U.S. government and agency obligations, that collateralize resale agreements and securities borrowed transactions (including those in “Cash and securities segregated for regulatory and other purposes”). Because the firm’s primary credit exposure on such transactions is to the counterparty to the transaction, the firm would be exposed to the collateral issuer only in the event of counterparty default.

 

  As of December 
in millions 2011     2010 

U.S. government and federal agency obligations

 $94,603      $121,366  

Other sovereign obligations 1

  110,178       73,357  
  As of December 
$ in millions  2014     2013  

U.S. government and federal
agency obligations

  $103,263     $100,672  
  

Non-U.S. government and
agency obligations 1

  71,302     79,021  

 

1.

Principally consistingconsists of securities issued by the governments of GermanyFrance, the United Kingdom, Japan and France.Germany.

 

 

194 Goldman Sachs 20112014 Form 10-K 209


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Legal Proceedings

Note 27.

Legal Proceedings

 

The firm is involved in a number of judicial, regulatory and arbitration proceedings (including those described below) concerning matters arising in connection with the conduct of the firm’s businesses. Many of these proceedings are in early stages, and many of these cases seek an indeterminate amount of damages.

Under ASC 450, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the firm is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the firm believes the risk of loss is more than slight. The amounts reserved against such matters are not significant as compared to the upper end of the range of reasonably possible loss.

With respect to proceedingsmatters described below for which management has been able to estimate a range of reasonably possible loss where (i) actual or potential plaintiffs have claimed an amount of money damages, (ii) the firm is being, or threatened to be, sued by purchasers in an underwriting and is not being indemnified by a party that the firm believes will pay any judgment, or (iii) the purchasers are demanding that the firm repurchase securities, management has estimated the upper end of the range of reasonably possible loss as being equal to (a) in the case of (i), the amount of money damages claimed, (b) in the case of (ii), the amountdifference between the initial sales price of the securities that the firm sold in such underwriting and the underwritingsestimated lowest subsequent price of such securities and (c) in the case of (iii), the price that purchasers paid for the securities less the estimated value, if any, as of December 20112014 of the relevant securities, in each of cases (i), (ii) and (iii), taking into account any factors believed to be relevant to the particular proceeding.matter or matters of that type. As of the date hereof, the firm has estimated the aggregate amountupper end of the range of reasonably possible lossesaggregate loss for such proceedingsmatters and for any other proceedingsmatters described below where management has been able to estimate a range of reasonably possible aggregate loss to be approximately $2.4 billion.$3.0 billion in excess of the aggregate reserves for such matters.

Management is generally unable to estimate a range of reasonably possible loss for proceedingsmatters other than those included in the estimate above, including where (i) actual or potential plaintiffs have not claimed an amount of money damages, unlessexcept in those instances where management can otherwise determine an appropriate amount, (ii) the proceedingsmatters are in early stages, (iii) matters relate to regulatory investigations or reviews, except in those instances where management can otherwise determine an appropriate amount, (iv) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv)(v) there is uncertainty as to the outcome of pending appeals or motions, (v)(vi) there are significant factual issues to be resolved, and/or (vi)(vii) there are novel legal issues presented. For example, the firm’s potential liabilities with respect to future mortgage-related “put-back” claims, any future claims arising from the ongoing investigations by members of the Residential Mortgage-Backed Securities Working Group of the U.S. Financial Fraud Enforcement Task Force (RMBS Working Group) and the action filed by the Libyan Investment Authority discussed below may ultimately result in a significant increase in the firm’s liabilities, but are not included in management’s estimate of reasonably possible loss. As another example, the firm’s potential liabilities with respect to the investigations and reviews discussed below under “Regulatory Investigations and Reviews and Related Litigation” also generally are not included in management’s estimate of reasonably possible loss. However, for these cases, management does not believe, based on currently available information, that the outcomes of such proceedingsother matters will have a material adverse effect on the firm’s financial condition, though the outcomes could be material to the firm’s operating results for any particular period, depending, in part, upon the operating results for such period.

IPO Process Matters.Group Inc. and GS&Co. are among the numerous financial services companies that have been named as defendants in a variety of lawsuits alleging improprieties in the process by which those companies participated in the underwriting of public offerings in recent years.

GS&Co. has, together with other underwriters in certain offerings as well as the issuers and certain of their officers and directors, been named as a defendant in a number of related lawsuits filed in the U.S. District Court See Note 18 for the Southern District of New York alleging, among other things, that the prospectuses for the offerings violated the federal securities laws by failing to disclose the existence of alleged arrangements tying allocations in certain offerings to higher customer brokerage commission rates as well as purchase orders in the aftermarket, and that the alleged arrangements resulted in market manipulation. On October 5, 2009, the district court approved a settlement agreement entered into by the parties. The firm has paid into a settlement fund the full amount that GS&Co. would contribute in the settlement. Certain objectors appealed certain aspects of the settlement’s approval, but all such appeals have been withdrawn or finally dismissed, thereby concluding the matter.further information about mortgage-related contingencies.

 

 

210 Goldman Sachs 20112014 Form 10-K 195


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

GS&Co. is among numerous underwriting firms named as defendants in a number of complaints filed commencing October 3, 2007, in the U.S. District Court for the Western District of Washington alleging violations of Section 16 of the Exchange Act in connection with offerings of securities for 15 issuers during 1999 and 2000. The complaints generally assert that the underwriters, together with each issuer’s directors, officers and principal shareholders, entered into purported agreements to tie allocations in the offerings to increased brokerage commissions and aftermarket purchase orders. The complaints further allege that, based upon these and other purported agreements, the underwriters violated the reporting provisions of, and are subject to short-swing profit recovery under, Section 16 of the Exchange Act. The district court granted defendants’ motions to dismiss on the grounds that the plaintiff’s demands were inadequate with respect to certain actions and that the remaining actions were time-barred. On December 2, 2010, the appellate court affirmed in part and reversed in part, upholding the dismissal of seven of the actions in which GS&Co. is a defendant that were dismissed based on the deficient demands but remanding the remaining eight actions in which GS&Co. is a defendant that were dismissed as time-barred for consideration of other bases for dismissal. On June 27, 2011, the U.S. Supreme Court granted the defendants’ petition for review of whether the actions that were remanded are time-barred and denied the plaintiff’s petition.

GS&Co. has been named as a defendant in an action commenced on May 15, 2002 in New York Supreme Court, New York County, by an official committee of unsecured creditors on behalf of eToys, Inc., alleging that the firm intentionally underpriced eToys, Inc.’s initial public offering. The action seeks, among other things, unspecified compensatory damages resulting from the alleged lower amount of offering proceeds. On appeal from rulings on GS&Co.’s motion to dismiss, the New York Court of Appeals dismissed claims for breach of contract, professional malpractice and unjust enrichment, but permitted claims for breach of fiduciary duty and fraud to continue. On remand, the lower court granted GS&Co.’s motion for summary judgment and, on December 8, 2011, the appellate court affirmed the lower court’s decision. On January 9, 2012, the creditors moved for permission either to reargue the appellate decision or to appeal further to the New York Court of Appeals.

Group Inc. and certain of its affiliates have, together with various underwriters in certain offerings, received subpoenas and requests for documents and information from various governmental agencies and self-regulatory organizations in connection with investigations relating to the public offering process. Goldman Sachs has cooperated with these investigations.

World Online Litigation.In March 2001, a Dutch shareholders’ association initiated legal proceedings for an unspecified amount of damages against GSI and others in Amsterdam District Court in connection with the initial public offering of World Online in March 2000, alleging misstatements and omissions in the offering materials and that the market was artificially inflated by improper public statements and stabilization activities. Goldman Sachs and ABN AMRO Rothschild served as joint global coordinators of the approximately €2.9 billion offering. GSI underwrote 20,268,846 shares and GS&Co. underwrote 6,756,282 shares for a total offering price of approximately €1.16 billion.

The district court rejected the claims against GSI and ABN AMRO, but found World Online liable in an amount to be determined. On appeal, the Netherlands Court of Appeals affirmed in part and reversed in part the decision of the district court, holding that certain of the alleged disclosure deficiencies were actionable as to GSI and ABN AMRO. On further appeal, the Netherlands Supreme Court affirmed the rulings of the Court of Appeals, except that it found certain additional aspects of the offering materials actionable and held that individual investors could potentially hold GSI and ABN AMRO responsible for certain public statements and press releases by World Online and its former CEO. The parties entered into a definitive settlement agreement, dated July 15, 2011, pursuant to which GSI will contribute up to €48 million to a settlement fund. The firm has paid the full amount of GSI’s proposed contribution to the settlement into an escrow account. Other shareholders’ associations have made demands or filed claims for compensation of alleged damages.

196Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Research Matters.Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to research practices, including, among other things, research analysts’ methods for obtaining receipt and distribution of information and communications among research analysts, sales and trading personnel and clients. On June 9, 2011, pursuant to a settlement, a consent order was entered by the Massachusetts Securities Division pursuant to which GS&Co. paid a $10 million civil penalty and agreed to various undertakings regarding certain of its research practices. Other regulators, including the SEC and FINRA, have been investigating matters similar to those involved in the Massachusetts settlement, and Goldman Sachshas been discussing potential resolution of their proposed charges.

Adelphia Communications Fraudulent Conveyance Litigation. GS&Co. is named a defendant in two adversary proceedings commenced in the U.S. Bankruptcy Court for the Southern District of New York, one on July 6, 2003 by a creditors committee, and the second on or about July 31, 2003 by an equity committee of Adelphia Communications, Inc. Those proceedings were consolidated in a single amended complaint filed by the Adelphia Recovery Trust on October 31, 2007. The complaint seeks, among other things, to recover, as fraudulent conveyances, approximately $62.9 million allegedly paid to GS&Co. by Adelphia Communications, Inc. and its affiliates in respect of margin calls made in the ordinary course of business on accounts owned by members of the family that formerly controlled Adelphia Communications, Inc. The district court assumed jurisdiction over the action and on April 8, 2011 granted GS&Co.’s motion for summary judgment. The plaintiff has appealed.

Specialist Matters. Spear, Leeds & Kellogg Specialists LLC (SLKS) and certain affiliates have received requests for information from various governmental agencies and self-regulatory organizations as part of an industry-wide investigation relating to activities of floor specialists in recent years. Goldman Sachs has cooperated with the requests.

On March 30, 2004, certain specialist firms on the NYSE, including SLKS, without admitting or denying the allegations, entered into a final global settlement with the SEC and the NYSE covering certain activities during the years 1999 through 2003. The SLKS settlement involves, among other things, (i) findings by the SEC and the NYSE that SLKS violated certain federal securities laws and NYSE rules, and in some cases failed to supervise certain individual specialists, in connection with trades that allegedly disadvantaged customer orders, (ii) a cease and desist order against SLKS, (iii) a censure of SLKS, (iv) SLKS’ agreement to pay an aggregate of $45.3 million in disgorgement and a penalty to be used to compensate customers, (v) certain undertakings with respect to SLKS’ systems and procedures, and (vi) SLKS’ retention of an independent consultant to review and evaluate certain of SLKS’ compliance systems, policies and procedures. Comparable findings were made and sanctions imposed in the settlements with other specialist firms. The settlement did not resolve the related private civil actions against SLKS and other firms or regulatory investigations involving individuals or conduct on other exchanges. On May 26, 2011, the SEC issued an order directing the undistributed settlement funds to be transferred to the U.S. Treasury; the funds will accordingly not be allocated to any settlement fund for the civil actions described below.

SLKS, Spear, Leeds & Kellogg, L.P. and Group Inc. are among numerous defendants named in purported class actions brought beginning in October 2003 on behalf of investors in the U.S. District Court for the Southern District of New York alleging violations of the federal securities laws and state common law in connection with NYSE floor specialist activities. The actions, which have been consolidated, seek unspecified compensatory damages, restitution and disgorgement on behalf of purchasers and sellers of unspecified securities between October 17, 1998 and October 15, 2003. By a decision dated March 14, 2009, the district court granted plaintiffs’ motion for class certification. The defendants’ petition with the U.S. Court of Appeals for the Second Circuit seeking review of the certification ruling was denied, and the specialist defendants’ petition for a rehearing and/or rehearing en banc was denied on February 24, 2010. On December 5, 2011, the parties reached a settlement in principle, subject to documentation and court approval. The firm has reserved the full amount of its proposed contribution to the settlement.

Goldman Sachs 2011 Form 10-K197


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Treasury Matters.GS&Co. was named as a defendant in a purported class action filed on March 10, 2004 in the U.S. District Court for the Northern District of Illinois on behalf of holders of short positions in 30-year U.S. Treasury futures and options on the morning of October 31, 2001. The complaint alleged that the firm purchased 30-year bonds and futures prior to a forthcoming U.S. Treasury refunding announcement that morning based on non-public information about that announcement, and that such purchases increased the costs of covering such short positions. The complaint also named as defendants the Washington, D.C.-based political consultant who allegedly was the source of the information, a former GS&Co. economist who allegedly received the information, and another company and one of its employees who also allegedly received and traded on the information prior to its public announcement. The complaint alleged violations of the federal commodities and antitrust laws, as well as Illinois statutory and common law, and seeks, among other things, unspecified damages including treble damages under the antitrust laws. The district court dismissed the antitrust and Illinois state law claims but permitted the federal commodities law claims to proceed. Plaintiff’s motion for class certification was denied. GS&Co. moved for summary judgment, and the district court granted the motion but only insofar as the claim relates to the trading of treasury bonds. On October 13, 2009, the parties filed an offer of judgment and notice of acceptance with respect to plaintiff’s individual claim. The plaintiff attempted to pursue an appeal of the denial of class certification, as did another individual trader who had previously litigated and lost an individual claim and unsuccessfully sought to intervene in the purported class action. On August 5, 2011, the U.S. Court of Appeals for the Seventh Circuit affirmed the lower court’s rulings that neither the plaintiff nor the proposed intervenor could pursue the class issues on appeal, but remanded for further consideration as to the amount of pre-judgment interest on the plaintiff’s individual claim. The appellants’ petition for reconsideration en banc was denied on October 19, 2011. On remand, the district court entered a final stipulation and order on December 7, 2011 regarding calculation of pre-judgment interest, which concluded the matter.

Fannie Mae Litigation.GS&Co. was added as a defendant in an amended complaint filed on August 14, 2006 in a purported class action pending in the U.S. District Court for the District of Columbia. The complaint asserts violations of the federal securities laws generally arising from allegations concerning Fannie Mae’s accounting practices in connection with certain Fannie Mae-sponsored REMIC transactions that were allegedly arranged by GS&Co. The complaint does not specify a dollar amount of damages. The other defendants include Fannie Mae, certain of its past and present officers and directors, and accountants. By a decision dated May 8, 2007, the district court granted GS&Co.’s motion to dismiss the claim against it. The time for an appeal will not begin to run until disposition of the claims against other defendants. A motion to stay the action filed by the Federal Housing Finance Agency (FHFA), which took control of the foregoing action following Fannie Mae’s conservatorship, was denied on November 14, 2011.

Beginning in September 2006, Group Inc. and/or GS&Co. were named as defendants in four Fannie Mae shareholder derivative actions in the U.S. District Court for the District of Columbia. The complaints generally allege that the Goldman Sachs defendants aided and abetted a breach of fiduciary duty by Fannie Mae’s directors and officers in connection with certain Fannie Mae-sponsored REMIC transactions, and one of the complaints also asserts a breach of contract claim. The complaints also name as defendants certain former officers and directors of Fannie Mae as well as an outside accounting firm. The complaints seek, inter alia, unspecified damages. The Goldman Sachs defendants were dismissed without prejudice from the first filed of these actions, and the remaining claims in that action were dismissed for failure to make a demand on Fannie Mae’s board of directors. That dismissal has been affirmed on appeal. The district court dismissed the remaining three actions on July 28, 2010. The plaintiffs filed motions for reconsideration, which were denied on October 22, 2010, and have revised their notices of appeal in these actions. On January 20, 2011, the appellate court consolidated all actions on appeal.

198Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Compensation-Related Litigation.On January 17, 2008, Group Inc., its Board, executive officers and members of its management committee were named as defendants in a purported shareholder derivative action in the U.S. District Court for the Eastern District of New York predicting that the firm’s 2008 Proxy Statement would violate the federal securities laws by undervaluing certain stock option awards and alleging that senior management received excessive compensation for 2007. The complaint seeks, among other things, an equitable accounting for the allegedly excessive compensation. Plaintiff’s motion for a preliminary injunction to prevent the 2008 Proxy Statement from using options valuations that the plaintiff alleges are incorrect and to require the amendment of SEC Form 4s filed by certain of the executive officers named in the complaint to reflect the stock option valuations alleged by the plaintiff was denied, and plaintiff’s appeal from this denial was dismissed. On February 13, 2009, the plaintiff filed an amended complaint, which added purported direct (i.e., non-derivative) claims based on substantially the same theory. The plaintiff filed a further amended complaint on March 24, 2010, and the defendants’ motion to dismiss this further amended complaint was granted on the ground that dismissal of the shareholder plaintiff’s prior action relating the firm’s 2007 Proxy Statement based on the failure to make a demand to the Board precluded relitigation of demand futility. On December 19, 2011, the appellate court vacated the order of dismissal, holding only that preclusion principles did not mandate dismissal and remanding for consideration of the alternative grounds for dismissal.

On March 24, 2009, the same plaintiff filed an action in New York Supreme Court, New York County against Group Inc., its directors and certain senior executives alleging violation of Delaware statutory and common law in connection with substantively similar allegations regarding stock option awards. On January 7, 2011, the plaintiff filed an amended complaint. Defendants moved to dismiss the amended complaint, and the parties subsequently agreed to stay the state court action pending the final resolution of the appeal from the dismissal of the federal court action in respect of the firm’s 2008 Proxy Statement described above, as well as any remanded proceedings further adjudicating defendants’ motion to dismiss.

Purported shareholder derivative actions were commenced in New York Supreme Court, New York County and the Delaware Court of Chancery beginning on December 14, 2009, alleging that the Board breached its fiduciary duties in connection with setting compensation levels for the year 2009 and that such levels were excessive. The complaints name as defendants Group Inc., the Board and certain senior executives. The complaints sought,inter alia, unspecified damages, restitution of certain compensation paid, and an order requiring the firm to adopt corporate reforms. In the actions in New York state court, on April 8, 2010, the plaintiffs filed a motion indicating that they no longer intend to pursue their claims but are seeking an award of attorneys’ fees in connection with bringing the suit, which the defendants opposed. By a decision dated September 21, 2011, the New York court dismissed plaintiffs’ claims as moot and denied plaintiffs’ application for attorneys’ fees. On October 25, 2011, plaintiffs appealed from the denial of a fee award. In the actions brought in the Delaware Court of Chancery, the defendants moved to dismiss, and the plaintiffs amended their complaint on April 28, 2010 to include, among other things, the allegations included in the SEC’s action described in the “Mortgage-Related Matters” section below. The plaintiffs amended the complaint a second time on January 20, 2011, the defendants moved to dismiss the second amended complaint and, by a decision dated October 12, 2011, the Delaware court dismissed plaintiffs’ second amended complaint. Plaintiffs appealed on November 9, 2011.

Group Inc. and certain of its affiliates are subject to a number of investigations and reviews from various governmental agencies and self-regulatory organizations regarding the firm’s compensation processes. The firm is cooperating with the investigations and reviews.

Goldman Sachs 2011 Form 10-K199


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Mortgage-Related Matters. OnBeginning in April 16, 2010, the SEC brought an action (SEC Action) under the U.S. federal securities laws in the U.S. District Court for the Southern District of New York against GS&Co. and Fabrice Tourre, one of its employees, in connection with a CDO offering made in early 2007 (ABACUS 2007-AC1 transaction), alleging that the defendants made materially false and misleading statements to investors and seeking, among other things, unspecified monetary penalties. Investigations of GS&Co. by FINRA and of GSI by the FSA were subsequently initiated, and Group Inc. and certain of its affiliates have received subpoenas and requests for information from other regulators, regarding CDO offerings, including the ABACUS 2007-AC1 transaction, and related matters.

On July 14, 2010, GS&Co. entered into a consent agreement with the SEC, settling all claims made against GS&Co. in the SEC Action (SEC Settlement), pursuant to which GS&Co. paid $550 million of disgorgement and civil penalties, and which was approved by the U.S. District Court for the Southern District of New York on July 20, 2010.

On January 6, 2011, ACA Financial Guaranty Corp. filed an action against GS&Co. in respect of the ABACUS 2007-AC1 transaction in New York Supreme Court, New York County. The complaint includes allegations of fraudulent inducement, fraudulent concealment and unjust enrichment and seeks at least $30 million in compensatory damages, at least $90 million in punitive damages and unspecified disgorgement. On March 8, 2011, GS&Co. filed a motion to compel arbitration and/or to dismiss the complaint. On April 25, 2011, the plaintiff filed an amended complaint and, on June 3, 2011, GS&Co. moved to dismiss the amended complaint.

Since April 22, 2010, a number of putative shareholder derivative actions have been filed in New York Supreme Court, New York County, and the U.S. District Court for the Southern District of New York against Group Inc., the Board and certain officers and employees of Group Inc. and its affiliates in connection with mortgage-related matters between 2004 and 2007, including the ABACUS 2007-AC1 transaction and other CDO offerings. These derivative complaints generally include allegations of breach of fiduciary duty, corporate waste, abuse of control, mismanagement, unjust enrichment, misappropriation of information, securities fraud and insider trading, and

challenge the accuracy and adequacy of Group Inc.’s disclosure. These derivative complaints seek, among other things, declaratory relief, unspecified compensatory damages, restitution and certain corporate governance reforms. In addition, as described in the “Compensation-Related Litigation” section above, the plaintiffs in the compensation-related Delaware Court of Chancery actions twice amended their complaint, including to assert allegations similar to those in the derivative claims referred to above, the Delaware court granted the defendants’ motion to dismiss the second amended complaint and plaintiffs appealed on November 9, 2011.

The federal court cases have been consolidated, plaintiffs filed a consolidated amended complaint on August 1, 2011, and, on October 6, 2011, the defendants moved to dismiss the action. On December 8, 2011, the parties to the federal court action stipulated that (i) if the dismissal of the Delaware action is affirmed, the parties will submit a proposed order dismissing the federal court action with prejudice and (ii) if the Delaware action is remanded, the federal court action will be reinstated. The New York Supreme Court has consolidated the two actions pending in that court and the defendants moved to dismiss on December 2, 2011.

Since July 1, 2011, two putative shareholder derivative actions have been filed in the U.S. District Court for the Southern District of New York against Group Inc., the Board and certain officers and employees of Group Inc. and Litton in connection with the servicing of residential mortgage loans and other mortgage-related activities beginning in January 2009. The complaints generally include allegations of breach of fiduciary duty, waste, abuse of control, and mismanagement and seek, among other things, declaratory relief, unspecified damages and certain governance reforms. The district court consolidated the actions, and, on December 20, 2011, the plaintiffs filed a consolidated amended complaint. On January 31, 2012, the defendants moved to dismiss.

In addition, in October 2011, the Board received a books and records demand from a shareholder for materials relating to, among other subjects, the firm’s mortgage servicing and foreclosure activities, participation in federal programs providing assistance to financial institutions and homeowners and loan sales to Fannie Mae and Freddie Mac.

200Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Since April 23, 2010, the Board has received letters from shareholders demanding that the Board take action to address alleged misconduct by GS&Co., the Board and certain officers and employees of Group Inc. and its affiliates. The demands generally allege misconduct in connection with the firm’s securitization practices, including the ABACUS 2007-AC1 transaction, the alleged failure by Group Inc. to adequately disclose the SEC investigation that led to the SEC Action, and Group Inc.’s 2009 compensation practices. The demands include a letter from a Group Inc. shareholder, which previously made a demand that the Board investigate and take action in connection with auction products matters, and expanded its demand to address the foregoing matters. The Board previously rejected the demand relating to auction products matters in September 2010, and, in August 2011, the shareholder made a books and records demand for materials related to the Board’s rejection of the shareholder’s demand letter.

In addition, beginning April 26, 2010, a number of purported securities law class actions have beenwere filed in the U.S. District Court for the Southern District of New York challenging the adequacy of Group Inc.’s public disclosure of, among other things, the firm’s activities in the CDO market, the firm’s conflict of interest management, and the SEC investigation that led to GS&Co. entering into a consent agreement with the SEC, Action.settling all claims made against GS&Co. by the SEC in connection with the ABACUS 2007-AC1 CDO offering (ABACUS 2007-AC1 transaction), pursuant to which GS&Co. paid $550 million of disgorgement and civil penalties. The purported class action complaints,consolidated amended complaint filed on July 25, 2011, which namenames as defendants Group Inc. and certain officers and employees of Group Inc. and its affiliates, have been consolidated, generally allegealleges violations of Sections 10(b) and 20(a) of the Exchange Act and seekseeks unspecified damages. PlaintiffsOn June 21, 2012, the district court dismissed the claims based on Group Inc.’s not disclosing that it had received a “Wells” notice from the staff of the SEC related to the ABACUS 2007-AC1 transaction, but permitted the plaintiffs’ other claims to proceed.

In June 2012, the Board of Directors of Group Inc. (Board) received a demand from a shareholder that the Board investigate and take action relating to the firm’s mortgage-related activities and to stock sales by certain directors and executives of the firm. On February 15, 2013, this shareholder filed a consolidated amendedputative shareholder derivative action in New York Supreme Court, New York County, against Group Inc. and certain current or former directors and employees, based on these activities and stock sales. The derivative complaint on July 25, 2011.includes allegations of breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and corporate waste, and seeks, among other things, unspecified monetary damages, disgorgement of profits and certain corporate governance and disclosure reforms. On October 6, 2011,May 28, 2013, Group Inc. informed the defendants movedshareholder that the Board completed its investigation and determined to dismiss.refuse the demand. On June 20, 2013, the shareholder made a books and records demand requesting materials relating to the Board’s determination. The parties have agreed to stay proceedings in the putative derivative action pending resolution of the books and records demand.

In addition, the Board has received books and records demands from several shareholders for materials relating to, among other subjects, the firm’s mortgage servicing and foreclosure activities, participation in federal programs providing assistance to financial institutions and homeowners, loan sales to Fannie Mae and Freddie Mac, mortgage-related activities and conflicts management.

GS&Co., Goldman Sachs Mortgage Company (GSMC) and GS Mortgage Securities Corp. (GSMSC) and three current or former Goldman Sachs employees are defendants in a putative class action commenced on December 11, 2008 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts established by the firm and underwritten by GS&Co. in 2007. The complaint generally alleges that the registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory damages and rescission or rescissionary damages. TheBy a decision dated September 6, 2012, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s dismissal of plaintiff’s claims with respect to 10 of the 17 offerings included in plaintiff’s original complaint but vacated the dismissal and remanded the case to the district court with instructions to reinstate the plaintiff’s claims with respect to the other seven offerings. On October 31, 2012, the plaintiff served an amended complaint relating to those seven offerings, plus seven additional offerings (additional offerings). On July 10, 2014, the court granted the defendants’ motion to dismiss the second amended complaint was granted with leave to replead certain claims. On March 31, 2010, the plaintiff filed a third amended complaint relating to two offerings, which the defendants moved to dismiss. This motion to dismiss was denied as to the plaintiff’s Section 12(a)(2) claims and granted as to the plaintiff’s Section 11 claims, and the plaintiff’s motion for reconsideration was denied. The plaintiff filed a motion for entry of final judgment or certification of an interlocutory appeal as to plaintiff’s Section 11 claims, which was denied. The plaintiff then filed a motion for leave to amend to reinstate the damages claims based on allegations that it had sold its securities, which was denied. On May 5, 2011, the court granted plaintiff’s motion for entry of a final judgment dismissing all its claims. The plaintiff has appealed the dismissal with respect to all of the offerings included in its original complaint.additional offerings. On June 3, 2010, another investor (who had unsuccessfully sought to intervene in the action) filed a separate putative class action asserting substantively similar allegations relating to anone of the additional offering pursuant to the 2007 registration statement. The defendantsofferings and thereafter moved to dismiss this separate action, andfurther amend its amended complaint to add claims with respect to two of the additional offerings. On March 27, 2014, the district court dismissedlargely denied defendants’ motion to dismiss as to the action, with leaveoriginal offering, but denied the separate plaintiff’s motion to replead. Plaintiff filedadd the two additional offerings through an amended complaint on October 20, 2011, and, on December 16, 2011, defendants moved to dismiss. Theseamendment. The securitization trusts issued, and GS&Co. underwrote, approximately $785 million principal amount of certificates to all purchasers in the offering at issue in this amended complaint.

Goldman Sachs 2011 Form 10-K201


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Group Inc., GS&Co., GSMC and GSMSC are among the defendants in a separate putative class action commenced on February 6, 2009 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts established by the firm and underwritten by GS&Co. in 2006. The other original defendants include three current or former Goldman Sachs employees and various rating agencies. The second amended complaint generally alleges that the registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory and rescissionary damages. Defendants moved to dismiss the second amended complaint. On January 12, 2011, the district court granted the motion to dismiss with respect to offerings in which plaintiff had not purchased securities as well as all claims against the rating agencies, but denied the motion to dismiss with respect to a single offering in which the plaintiff allegedly purchased securities. These trusts issued, and GS&Co. underwrote, approximately $698 million$11 billion principal amount of certificates to all purchasers in the offerings at issue in the complaint (excluding those offerings for which the claims have been dismissed). On February 2, 2012, the district court granted the plaintiff’s motion for class certification and on February 16, 2012, defendants filed a petitioncomplaints.

Goldman Sachs 2014 Form 10-K211


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to review that ruling with the U.S. Court of Appeals for the Second Circuit.Consolidated Financial Statements

On September 30, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York against GS&Co., Group Inc. and two former GS&Co. employees on behalf of investors in $823 million of notes issued in 2006 and 2007 by two synthetic CDOs (Hudson Mezzanine 2006-1 and 2006-2). The complaint, which was amended on February 4, 2011,complaint asserts federal securities law and common law claims, and seeks unspecified compensatory, punitive and other damages. The defendants’ motion to dismiss was granted as to plaintiff’s claim of market manipulation and denied as to the remainder of plaintiff’s claims by a decision dated March 21, 2012. On May 21, 2012, the defendants counterclaimed for breach of contract and fraud. On June 27, 2014, the appellate court denied defendants’ petition for leave to appeal from the district court’s January 22, 2014 order granting class certification. On January 30, 2015, defendants moved to dismiss on April 5, 2011.

GS&Co., GSMC and GSMSC are among the defendants in a lawsuit filed in August 2011 by CIFG Assurance of North America, Inc. (CIFG) in the New York Supreme Court. The complaint alleges that CIFG was fraudulently induced to provide credit enhancement for a 2007 securitization sponsored by GSMC, and seeks, among other things, the repurchase of $24.7 million in aggregate principal amount of mortgages that CIFG had previously stated to be non-conforming, an accounting for any proceeds associated with mortgages discharged from the securitization and unspecified compensatory damages. On October 17, 2011, the Goldman Sachs defendants moved to dismiss.summary judgment.

Various alleged purchasers of, and counterparties and providers of credit enhancement involved in transactions relating to, mortgage pass-through certificates, CDOs and other mortgage-related products (including certain Allstate affiliates,Aozora Bank, Ltd., Basis Yield Alpha Fund (Master), Cambridge Place Investment Management Inc., the Charles Schwab Corporation, CIFG Assurance of North America, Inc., CMFG Life Insurance Company and related parties, Deutsche Zentral-Genossenschaftbank, the FDIC (as receiver for Guaranty Bank), the Federal Home Loan Banks of Boston, Chicago Indianapolis and Seattle, the FHFA (as conservator for Fannie MaeIKB Deutsche Industriebank AG, John Hancock and Freddie Mac), Heungkuk Life Insurance Co. Limited (Heungkuk), Landesbank Baden-Württemberg,related parties, Massachusetts Mutual Life Insurance Company, MoneyGram Payment Systems, Inc.,National Australia Bank, the National Credit Union Administration Stichting Pensioenfonds ABP,(as conservator or liquidating agent for several failed credit unions), Phoenix Light SF Limited and related parties, Royal Park Investments SA/NV, The Union Central Life Insurance Company, Ameritas Life Insurance Corp., Acacia Life Insurance Company, Watertown Savings Bank, Commerzbank, Texas County & District Retirement System and The Western and Southern Life Insurance Co.the Commonwealth of Virginia (on behalf of the Virginia Retirement System)) have filed complaints or summonses with notice in state and federal court or initiated arbitration proceedings against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material factsfact and material omissions and generally seeking rescission andand/or damages. Certain of these complaints allege fraud and seek punitive damages. Certain of these complaints also name other firms as defendants.

A number of other entities (including American International Group, Inc. (AIG), Bayerische Landesbank, Deutsche Bank National Trust Company, Deutsche Zentral-Genossenschaftbank, Erste Abwicklungsanstalt and related parties, HSH Nordbank, IKB Deutsche Industriebank AG, John Hancock and related parties, M&T Bank, Norges Bank Investment Management, PrudentialSelective Insurance Company and the State of America and related parties, and Sealink Funding Ltd.Illinois (on behalf of Illinois state retirement systems)) have threatened to assert claims of various types against the firm in connection with variousthe sale of mortgage-related transactions, and thesecurities. The firm has entered into agreements with a number of these entities to toll the relevant statute of limitations.

As of the date hereof, the aggregate notional amount of mortgage-related securities sold to plaintiffs in active and threatened cases brought againstdescribed in the firmpreceding two paragraphs where those plaintiffs are seeking rescission of such securities was approximately $16.5$6.6 billion (which does not reflect adjustment for any subsequent paydowns or distributions or any residual value of such securities)securities, statutory interest or any other adjustments that may be claimed). This amount does not include the threatened claims noted above or potential claims by these or other purchasers in the same or other mortgage-related offerings that have not actually brought claims against the firm,been described above, or claims that have been dismissed (includingdismissed.

The firm has entered into agreements with Deutsche Bank National Trust Company and U.S. Bank National Association to toll the relevant statute of limitations with respect to claims for repurchase of residential mortgage loans based on alleged breaches of representations related to $11.4 billion original notional face amount of securitizations issued by trusts for which they act as trustees.

Group Inc., Litton, Ocwen and Arrow Corporate Member Holdings LLC, a claimformer subsidiary of Group Inc., are defendants in a putative class action pending since January 23, 2013 in the U.S. District Court for the Southern District of New York generally challenging the procurement manner and scope of “force-placed” hazard insurance arranged by Landesbank Baden-Württemberg, which was dismissedLitton when homeowners failed to arrange for insurance as required by their mortgages. The complaint asserts claims for breach of contract, breach of fiduciary duty, misappropriation, conversion, unjust enrichment and violation of Florida unfair practices law, and seeks unspecified compensatory and punitive damages as well as declaratory and injunctive relief. An amended complaint, filed on November 19, 2013, added an additional plaintiff and RICO claims. On September 29, 2014, the court denied without prejudice and with leave to renew at a decision dated September 26, 2011, from whichlater date Group Inc.’s motion to sever the plaintiff appealed on October 24, 2011).claims against it and certain other defendants.

 

 

202212 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

In June 2011, Heungkuk filed a criminal complaint against certain past and present employees of the firm in South Korea relating to its purchase of a CDO securitization from Goldman Sachs. The filing does not represent any judgment by a governmental entity, but starts a process whereby the prosecutor investigates the complaint and determines whether to take action.

On September 1, 2011, Group Inc. and GS Bank USA entered into a Consent Order with the Federal Reserve Board relating to the servicing of residential mortgage loans. In addition, on September 1, 2011, GS Bank USA entered into an Agreement on Mortgage Servicing Practices with the New York State Banking Department, Litton and the acquirer of Litton, in connection with which Group Inc. agreed to forgive 25% of the unpaid principal balance on certain delinquent first lien residential mortgage loans owned by Group Inc. or a subsidiary, totaling approximately $13 million in principal forgiveness. See Note 18 for further information about these settlements.

Group Inc., GS&Co. and GSMC are among the numerous financial services firms named as defendants in a qui tam action originally filed by a realtor on April 7, 2010 purportedly on behalf of the City of Chicago and State of Illinois in Cook County, Illinois Circuit Court asserting claims under the Illinois Whistleblower Reward and Protection Act and Chicago False Claims Act, based on allegations that defendants had falsely certified compliance with various Illinois laws, which were purportedly violated in connection with mortgage origination and servicing activities. The complaint, which was originally filed under seal, seeks treble damages and civil penalties. Plaintiff filed an amended complaint on December 28, 2011, naming GS&Co. and GSMC, among others, as additional defendants and a second amended complaint on February 8, 2012.

The firm has also received, and continues to receive, requests for information and/or subpoenas fromas part of inquiries or investigations by the U.S. Department of Justice, other members of the RMBS Working Group and other federal, state and local regulators and law enforcement authorities relating to the mortgage-related securitization process, subprime mortgages, CDOs, synthetic mortgage-related products, sales communications and particular transactions involving these products, and servicing and foreclosure activities, which may subject the firm to actions, including litigation, penalties and fines. In December 2014, as part of the RMBS Working Group investigation, the firm received a letter from the U.S. Attorney for the Eastern District of California stating in connection with potentially bringing a civil action that it had preliminarily concluded that the firm had violated federal law in connection with its underwriting, securitization and sale of residential mortgage-backed securities and offering the firm an opportunity to respond. The firm is cooperating with these regulators and other authorities.authorities, including in some cases agreeing to the tolling of the relevant statute of limitations. See also “Financial Crisis-Related Matters”“Regulatory Investigations and Reviews and Related Litigation” below.

On February 24, 2012, the firm received a “Wells” notice from the staff of the SEC with respect to the disclosures contained in the offering documents used in connection with a late 2006 offering of approximately $1.3 billion of subprime residential mortgage-backed securities

underwritten by GS&Co. The firm will be making a submission to, and intends to engage in a dialogue with, the SEC staff seeking to address their concerns.

The firm expects to be the subject of additional putative shareholder derivative actions, purported class actions, rescission and “put back” claims and other litigation, additional investor and shareholder demands, and additional regulatory and other investigations and actions with respect to mortgage-related offerings, loan sales, CDOs, and servicing and foreclosure activities. See Note 18 for further information regarding mortgage-related contingencies.

Auction Products Matters. On August 21, 2008, GS&Co. entered into a settlementcontingencies not described in principle with the Office of the Attorney General of the State of New York and the Illinois Securities Department (on behalf of the North American Securities Administrators Association) regarding auction rate securities. Under the agreement, Goldman Sachs agreed, among other things, (i) to offer to repurchase at par the outstanding auction rate securities that its private wealth management clients purchased through the firm prior to February 11, 2008, with the exception of those auction rate securities where auctions were clearing, (ii) to continue to work with issuers and other interested parties, including regulatory and governmental entities, to expeditiously provide liquidity solutions for institutional investors, and (iii) to pay a $22.5 million fine. The settlement is subject to definitive documentation and approval by the various states. On June 2, 2009, GS&Co. entered into an Assurance of Discontinuance with the New York State Attorney General. On March 19, 2010, GS&Co. entered into an Administrative Consent Order with the Illinois Secretary of State, Securities Department, which had conducted an investigation on behalf of states other than New York. GS&Co. has entered into similar consent orders with most states and is in the process of doing so with the remaining states.this Note 27.

On September 4, 2008, Group Inc. was named as a defendant, together with numerous other financial services firms, in two complaints filed in the U.S. District Court for the Southern District of New York alleging that the defendants engaged in a conspiracy to manipulate the auction securities market in violation of federal antitrust laws. The actions were filed, respectively, on behalf of putative classes of issuers of and investors in auction rate securities and seek, among other things, treble damages in an unspecified amount. Defendants’ motion to dismiss was granted on January 26, 2010. On March 1, 2010, the plaintiffs appealed from the dismissal of their complaints.

Goldman Sachs 2011 Form 10-K203


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Private Equity-Sponsored Acquisitions Litigation.Group Inc. and “GS Capital Partners” areis among numerous private equity firms and investment banks named as defendants in a federal antitrust action filed in the U.S. District Court for the District of Massachusetts in December 2007. As amended, the complaint generally alleges that the defendants have colluded to limit competition in bidding for private equity-sponsored acquisitions of public companies, thereby resulting in lower prevailing bids and, by extension, less consideration for shareholders of those companies in violation of Section 1 of the U.S. Sherman Antitrust Act and common law. The complaint seeks, among other things, treble damages in an unspecified amount. Defendants moved to dismiss on August 27, 2008. The district court dismissed claims relating to certain transactions that were the subject of releases as part of the settlement of shareholder actions challenging such transactions, and by an order dated December 15, 2008 otherwise denied the motion to dismiss. On April 26, 2010, the plaintiffs moved for leave to proceed with a second phase of discovery encompassing additional transactions. On August 18, 2010, the court permitted discovery on eight additional transactions,In June 2014, Group Inc. and the plaintiffs filed a fourth amended complaint on October 7, 2010. The defendants filed a motion to dismiss certain aspects of the fourth amended complaint on October 21, 2010, and the court granted that motion on January 13, 2011. On January 21, 2011, certain defendants, including Group Inc., filed a motion to dismiss another claim of the fourth amended complaint on the grounds that the transaction was the subject of a release as part of the settlement of a shareholder action challenging the transaction. The court granted that motion on March 1, 2011. On July 11, 2011, the plaintiffs moved for leave to file a fifth amended complaint encompassing additional transactions and to take discovery concerning those transactions. On September 7, 2011, the district court denied the plaintiffs’ motion, without prejudice, insofar as it sought leave to file a fifth amended complaint, but permitted an additional six-month phase of discovery with respect to the additional transactions.

Washington Mutual Securities Litigation. GS&Co. is among numerous underwriters named as defendants in a putative securities class action amended complaint filed on August 5, 2008 in the U.S. District Court for the Western District of Washington. As to the underwriters, plaintiffs allege that the offering documents in connection with various securities offerings by Washington Mutual, Inc.

failed to describe accurately the company’s exposure to mortgage-related activities in violation of the disclosure requirements of the federal securities laws. The defendants include past and present directors and officers of Washington Mutual, the company’s former outside auditors, and numerous underwriters. On June 30, 2011, the underwriter defendants and plaintiffs entered into a definitive settlement agreement, pursuant to which GS&Co. would contributeagreed to a settlement, fund. On November 4, 2011,which the court preliminarily approved the settlement, and the time to appeal has run, thereby concluding the matter. The firmon September 29, 2014. Group Inc., together with its affiliates, has paid the full amount of GS&Co.’sits proposed contribution to the settlement fund.settlement.

IndyMacRALI Pass-Through Certificates Litigation. GS&Co. is among numerous underwriters named as defendants in a putative securities class action initially filed on May 14, 2009 in September 2008 in New York Supreme Court, and subsequently removed to the U.S. District Court for the Southern District of New York. As to the underwriters, plaintiffs allege that the offering documents in connection with various securitizationsofferings of mortgage-related assetsmortgage-backed pass-through certificates violated the disclosure requirements of the federal securities laws. TheIn addition to the underwriters, the defendants include IndyMac-related entities formedResidential Capital, LLC (ResCap), Residential Accredit Loans, Inc. (RALI), Residential Funding Corporation (RFC), Residential Funding Securities Corporation (RFSC), and certain of their officers and directors. On January 3, 2013, the district court certified a class in connection with one offering underwritten by GS&Co. which includes only initial purchasers who bought the securitizations,securities directly from the underwriters ofor their agents no later than ten trading days after the offerings, certain ratings agencies which evaluatedoffering date. On April 30, 2013, the credit quality of the securities, and certain former officers and directors of IndyMac affiliates. On November 2, 2009, the underwriters moved to dismiss the complaint. The motion wasdistrict court granted in part on February 17, 2010plaintiffs’ request to the extent of dismissing claims based on offerings in which no plaintiff purchased, and the court reserved judgment as to the other aspectsreinstate a number of the motion. By a decision dated June 21, 2010, the district court formallypreviously dismissed all claims relating to offerings in which no named plaintiff purchased certificates (including allan additional nine offerings underwritten by GS&Co.), and both On May 10, 2013, the plaintiffs filed an amended complaint incorporating those nine additional offerings. On December 27, 2013, the court granted andthe plaintiffs’ motion for class certification as to the nine additional offerings but denied the defendants’ motionsplaintiffs’ motion to dismissexpand the time period and scope covered by the previous class definition. On October 17, 2014, the plaintiffs and defendants moved for summary judgment. On February 11, 2015, GS&Co. and the other underwriter defendants agreed to a settlement with the plaintiffs, subject to court approval. The firm has reserved the full amount of its proposed contribution to the settlement.

GS&Co. underwrote approximately $5.57 billion principal amount of securities to all purchasers in various other respects.the offerings included in the amended complaint. On May 17, 2010, four additional investors14, 2012, ResCap, RALI and RFC filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York. On June 28, 2013, the district court entered a motion seeking to intervenefinal order and judgment approving a settlement between plaintiffs and ResCap, RALI, RFC, RFSC and their officers and directors named as defendants in order to assert claims based on additional offerings (including two underwritten by GS&Co.). On July 6, 2010 and August 19, 2010, two additional investors filed motions to intervene in order to assert claims based on additional offerings (none of which were underwritten by GS&Co.). The defendants opposed the motions on the ground that the putative intervenors’ claims were time-barred and, on June 21, 2011, the court denied the motions to intervene with respect to, among others, the claims based on the offerings underwritten by GS&Co. Certain of the putative intervenors (including those seeking to assert claims based on two offerings underwritten by GS&Co.) have appealed.action.

 

 

204 Goldman Sachs 20112014 Form 10-K 213


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

GS&Co. underwrote approximately $751 million principal amount of securities to all purchasers in the offerings at issue in the May 2010 motion to intervene. On July 11, 2008, IndyMac Bank was placed under an FDIC receivership, and on July 31, 2008, IndyMac Bancorp, Inc. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court in Los Angeles, California.

MF Global Securities Litigation.GS&Co. is among numerous underwriters named as defendants in class action complaints and an individual action filed in the U.S. District Court for the Southern District of New York commencing November 18, 2011. These complaints generally allege that the offering materials for two offerings of MF Global Holdings Ltd. (MF Global) convertible notes (aggregating approximately $575 million in principal amount) in February 2011 and July 2011, failed to, among other things, failed to describe adequately the extentnature, scope and risks of MF Global’s exposure to European sovereign debt, in violation of the disclosure requirements of the federal securities laws. On December 12, 2014, the court preliminarily approved a settlement resolving the class action, and on January 5, 2015, the court entered an order effectuating the settlement of all claims against GS&Co. underwrote an aggregate principalin the individual action. GS&Co. has paid the full amount of approximately $214 million ofits contribution to the notes.On October 31, 2011, MF Global Holdings Ltd. filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Manhattan, New York.settlements.

GS&Co. has also received inquiries from various governmental and regulatory bodies and self-regulatory organizations concerning certain transactions with MF Global prior to its bankruptcy filing. Goldman Sachs is cooperating with all such inquiries.

GT Advanced Technologies Securities Litigation. GS&Co. is among the underwriters named as defendants in several putative securities class actions filed in October 2014 in the U.S. District Court for the District of New Hampshire. In addition to the underwriters, the defendants include certain directors and officers of GT Advanced Technologies Inc. (GT Advanced Technologies). As to the underwriters, the complaints generally allege misstatements and omissions in connection with the December 2013 offerings by GT Advanced Technologies of approximately $86 million of common stock and $214 million principal amount of convertible senior notes, assert claims under the federal securities laws, and seek compensatory damages in an unspecified amount and rescission. GS&Co. underwrote 3,479,769 shares of common stock and $75 million principal amount of notes for an aggregate offering price of approximately $105 million. On October 6, 2014, GT Advanced Technologies filed for Chapter 11 bankruptcy.

FireEye Securities Litigation. GS&Co. is among the underwriters named as defendants in several putative securities class actions, filed beginning in June 2014 in the California Superior Court, County of Santa Clara. In addition to the underwriters, the defendants include FireEye, Inc. (FireEye) and certain of its directors and officers. The complaints generally allege misstatements and omissions in connection with the offering materials for the March 2014 offering of approximately $1.15 billion of FireEye common stock, assert claims under the federal securities laws, and seek compensatory damages in an unspecified amount and rescission. GS&Co. underwrote 2,100,000 shares for a total offering price of approximately $172 million.

Millennial Media Securities Litigation. GS&Co. is among the underwriters named as defendants in a putative securities class action filed on September 30, 2014 in the U.S. District Court for the Southern District of New York. In addition to the underwriters, the defendants include Millennial Media, Inc. (Millennial Media) and certain of its directors, officers and shareholders. As to the underwriters, the complaint generally alleges misstatements and omissions in connection with Millennial Media’s $152 million March 2012 initial public offering and the October 2012 offering of approximately $163 million of Millennial Media’s common stock, asserts claims under the federal securities laws, and seeks compensatory damages in an unspecified amount and rescission. GS&Co. underwrote 3,519,000 and 3,450,000 shares of common stock in the March and October 2012 offerings, respectively, for an aggregate offering price of approximately $95 million.

Zynga Securities Litigation. GS&Co. was among the underwriters named as defendants in a putative securities class action filed on August 1, 2012 in the California Superior Court, County of San Francisco. In addition to the underwriters, the defendants included Zynga Inc. (Zynga) and certain of its directors and officers. The consolidated amended complaint, filed on April 29, 2013, generally alleged that the offering materials for the March 2012 $516 million secondary offering of Zynga common stock by certain of Zynga’s shareholders violated the disclosure requirements of the federal securities laws, and sought compensatory damages in an unspecified amount and rescission. On February 11, 2015, the court dismissed the action.

214Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Cobalt International Energy Securities Litigation.Cobalt International Energy, Inc. (Cobalt), certain of its officers and directors (including employees of affiliates of Group Inc. who served as directors of Cobalt), shareholders of Cobalt (including certain funds affiliated with Group Inc.), affiliates of these shareholders (including Group Inc.) and underwriters (including GS&Co.) for certain offerings of Cobalt’s securities are defendants in a putative securities class action filed on November 30, 2014 in the U.S. District Court for the Southern District of Texas. The complaint asserts claims under the federal securities laws, seeks compensatory and rescissory damages in unspecified amounts and alleges material misstatements and omissions concerning Cobalt in connection with a $1.67 billion February 2012 offering of Cobalt common stock, a $1.38 billion December 2012 offering of Cobalt’s convertible notes, a $1.00 billion January 2013 offering of Cobalt’s common stock, a $1.33 billion May 2013 offering of Cobalt’s common stock, and a $1.30 billion May 2014 offering of Cobalt’s convertible notes. The complaint alleges that Group Inc., GS&Co. and the affiliated funds are liable as controlling persons with respect to all five offerings. The complaint also seeks damages (i) from GS&Co. in connection with its acting as an underwriter of 14,430,000 shares of common stock representing an aggregate offering price of approximately $465 million, $690 million principal amount of convertible notes, and approximately $508 million principal amount of convertible notes in the February 2012, December 2012 and May 2014 offerings, respectively, for an aggregate offering price of approximately $1.66 billion, and (ii) from Group Inc. and the affiliated funds in connection with their sales of 40,042,868 shares of common stock for aggregate gross proceeds of approximately $1.06 billion in the February 2012, January 2013 and May 2013 common stock offerings.

Employment-Related Matters.On May 27,September 15, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York by several contingent technology workers who were employees of third-party vendors. The plaintiffs are seeking overtime pay for alleged hours worked in excess of 40 per work week. The complaint alleges that the plaintiffs were de facto employees of GS&Co. and that GS&Co. is responsible for the overtime pay under federal and state overtime laws. The complaint seeks class action status and unspecified damages. On March 21, 2011, the parties agreed to the terms of a settlement in principle and on February 10, 2012, the court approved the terms of the settlement. The firm has reserved the full amount of the proposed settlement.

On September 15, 2010, a putative class action was filed in the U.S. District for the Southern District of New York by three female former female employees alleging that Group Inc. and GS&Co. have systematically discriminated against female employees in respect of compensation, promotion, assignments, mentoring and performance evaluations. The complaint alleges a class consisting of all female employees employed at specified levels in specified areas by Group Inc. and GS&Co. since July 2002, and asserts claims under federal and New York City discrimination laws. The complaint seeks class action status, injunctive relief and unspecified amounts of compensatory, punitive and other damages. Group Inc. and GS&Co. filed a motion to stay the claims of one of the named plaintiffs and to compel individual arbitration with that individual, based on an arbitration provision contained in an employment agreement between Group Inc. and the individual. On April 28, 2011, the magistrate judge to whomJuly 17, 2012, the district judge assigned the motion denied the motion. On July 7, 2011, the magistrate judge deniedcourt issued a decision granting in part Group Inc.’s and GS&Co.’s motion for reconsiderationto strike certain of plaintiffs’ class allegations on the magistrate judge’s decision,ground that plaintiffs lacked standing to pursue certain equitable remedies and on July 21, 2011denying Group Inc.’s and GS&Co. appealed the magistrate judge’s decision to the district court. On June 13, 2011, Group Inc. and GS&Co. moved to strike the class allegations of one of the three named plaintiffs based on her failure to exhaust administrative remedies. On September 29, 2011, the magistrate judge recommended denial of the’s motion to strike and Group Inc. and GS&Co. filed their objections to that recommendation with the district judge presiding over the case on October 11, 2011. By a decision dated January 10, 2012, the district court denied the motion to strike. On July 22, 2011, Group Inc. and GS&Co. moved to strike all of the plaintiffs’ class allegations and for partial summary judgment as to plaintiffs’ disparate impact claims. By a decision dated January 19, 2012, the magistrate judge recommended that defendants’ motion be deniedin their entirety as premature. The defendants have filed their objections toOn March 21, 2013, the U.S. Court of Appeals for the Second Circuit held that recommendation with the district judge. On November 15, 2011, the district court denied the defendants’ motion to compel arbitration should be compelled with one of the three named plaintiffs; defendants have appealed.

Goldman Sachs 2011 Form 10-K205


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notesplaintiffs, who as a managing director was a party to Consolidated Financial Statements

Transactionsan arbitration agreement with the Hellenic Republic (Greece).Group Inc. and certain of its affiliates have been subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with the firm’s transactions with the Hellenic Republic (Greece), including financing and swap transactions. Goldman Sachs has cooperated with the investigations and reviews.firm. On May 19, 2014, plaintiffs moved for class certification.

Investment Management ServicesServices.. Group Inc. and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with clients relating to losses allegedly sustained as a result of the firm’s investment management services. These claims generally seek, among other things, restitution or other compensatory damages and, in some cases, punitive damages. In addition, Group Inc. and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with the firm’s investment management services. Goldman Sachs is cooperating with all such investigations and reviews.

Sales, Trading and Clearance Practices.Financial Advisory Services. Group Inc. and certain of its affiliates are subjectfrom time to a number of investigationstime parties to various civil litigation and reviews, certain of which are industry-wide, by various governmentalarbitration proceedings and regulatory bodiesother disputes with clients and self-regulatory organizationsthird parties relating to the sales, tradingfirm’s financial advisory activities. These claims generally seek, among other things, compensatory damages and, clearancein some cases, punitive damages, and in certain cases allege that the firm did not appropriately disclose or deal with conflicts of corporate and government securities and other financial products, including compliance with the SEC’s short sale rule, algorithmic and quantitative trading, futures trading, transaction reporting, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices and compliance with the U.S. Foreign Corrupt Practices Act.interest.

Goldman Sachs 2014 Form 10-K215


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Credit Derivatives Antitrust Matters.The European Commission announced in April 2011 that it iswas initiating proceedings to investigate further numerous financial services companies, including Group Inc., in

connection with the supply of data related to credit default swaps and in connection with profit sharing and fee arrangements for clearing of credit default swaps, including potential anti-competitive practices. TheseOn July 1, 2013, the European Commission issued to those financial services companies a Statement of Objections alleging that they colluded to limit competition in the trading of exchange-traded unfunded credit derivatives and exchange trading of credit default swaps more generally, and setting out its process for determining fines and other remedies. Group Inc.’s current understanding is that the proceedings are ongoing.related to profit sharing and fee arrangements for clearing of credit default swaps have been suspended indefinitely. The firm has received civil investigative demands from the U.S. Department of Justice (DOJ) for information on similar matters.

The CFTC has been investigating the role of GSEC as the clearing broker for an SEC-registered broker-dealer client. The CFTC staff has orally advised GSEC that it intends to recommend that the CFTC bring aiding and abetting, civil fraud and supervision-related charges against GSEC arising from its provision of clearing services to this broker-dealer client based on allegations that GSEC knew or should have known that the client’s subaccounts maintained at GSEC were actually accounts belonging to customers of the broker-dealer client and not the client’s proprietary accounts.GSEC has been discussing a potential resolution. Goldman Sachs is cooperating with the investigations and reviews.

Insider Trading Investigations. From time to time,GS&Co. and Group Inc. are among the firm and its employees are the subject of or otherwise involvednumerous defendants in regulatory investigationsputative antitrust class actions relating to insidercredit derivatives, filed beginning in May 2013 and consolidated in the U.S. District Court for the Southern District of New York. The complaints generally allege that defendants violated federal antitrust laws by conspiring to forestall the development of alternatives to OTC trading of credit derivatives and to maintain inflated bid-ask spreads for credit derivatives trading. The complaints seek declaratory and injunctive relief as well as treble damages in an unspecified amount. On September 4, 2014, the potential misusecourt granted in part and denied in part the defendants’ motion to dismiss, permitting the claim alleging an antitrust conspiracy to proceed but confining it to a period after the fall of material nonpublic information2008.

Libya-Related Litigation. GSI is the defendant in an action filed on January 21, 2014 with the High Court of Justice in London by the Libyan Investment Authority, relating to nine derivative transactions between the plaintiff and GSI and seeking, among other things, rescission of the transactions and unspecified equitable compensation and damages exceeding $1 billion. On August 4, 2014, GSI withdrew its April 10, 2014 motion for summary judgment, and on December 4, 2014, the Libyan Investment Authority filed an amended statement of claim.

Municipal Securities Matters.GS&Co. (along with, in some cases, other financial services firms) is named as respondent in a number of FINRA arbitrations filed by municipalities, municipal-owned entities, state-owned agencies or instrumentalities and non-profit entities, based on GS&Co.’s role as underwriter of the claimants’ issuances of an aggregate of approximately $2.0 billion of auction rate securities from 2003 through 2007 and as a broker-dealer with respect to auctions for these securities. The claimants generally allege that GS&Co. failed to disclose that it had a practice of placing cover bids in auctions, and/or failed to inform the claimant of the deterioration of the auction rate market beginning in the fall of 2007, and that, as a result, the claimant was forced to engage in a series of expensive refinancing and conversion transactions after the failure of the auction market in February 2008. Certain claimants also allege that GS&Co. advised them to enter into interest rate swaps in connection with their auction rate securities issuances, causing them to incur additional losses. The claims include breach of fiduciary duty, fraudulent concealment, negligent misrepresentation, breach of contract, violations of the Exchange Act and state securities laws, and breach of duties under the rules of the Municipal Securities Rulemaking Board and the effectivenessNASD. One claimant has also filed a complaint against GS&Co. in federal court asserting the same claims as in the FINRA arbitration.

GS&Co. filed complaints and motions in federal court seeking to enjoin certain of the firm’s insider trading controlsarbitrations to effectuate the exclusive forum selection clauses in the transaction documents. In one case, the district court denied the injunction but was reversed by the appellate court, and information barriers. It is the firm’s practiceU.S. Supreme Court denied the claimant’s petition for certiorari seeking review of the appellate court’s decision; in other cases, the district court granted the injunctions, which have been affirmed by the appellate court.

GS&Co. has also filed motions with the FINRA Panels to fully cooperate with any such investigations.

EU Price-Fixing Matter. On July 5, 2011,dismiss the European Commission issued a Statementarbitrations, one of Objections to Group Inc. raising allegations of an industry-wide conspiracy to fix prices for power cables including by an Italian cable company in which certain Goldman Sachs-affiliated investment funds held ownership interests from 2005 to 2009. The Statement of Objections proposes to hold Group Inc. jointly and severally liable for some or all of any fine levied against the cable company under the concept of parental liability under EU competition law.has been granted.

 

 

206216 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Municipal Securities Matters.Commodities-Related Litigation. Group Inc. and its subsidiary, GS Power Holdings LLC (GS Power), as well as Metro, a previously consolidated subsidiary of Group Inc. that was sold in the fourth quarter of 2014, are among the defendants in a number of putative class actions filed beginning on August 1, 2013 and consolidated in the U.S. District Court for the Southern District of New York. The complaints generally allege violation of federal antitrust laws and other federal and state laws in connection with the management of aluminum storage facilities. The complaints seek declaratory, injunctive and other equitable relief as well as unspecified monetary damages, including treble damages. On August 29, 2014, the court granted the Goldman Sachs defendants’ motion to dismiss. Certain plaintiffs appealed on September 24, 2014, and the remaining plaintiffs filed proposed amended complaints on October 9 and 10, 2014.

Group Inc., GS Power, Metro and GSI are among the defendants named in putative class actions, filed beginning on May 23, 2014 in the U.S. District Court for the Southern District of New York, based on similar alleged violations of the federal antitrust laws in connection with the management of zinc storage facilities.

GSI is among the defendants named in putative class actions relating to trading in platinum and palladium, filed beginning on November 25, 2014, in the U.S. District Court for the Southern District of New York. The complaints generally allege that the defendants violated federal antitrust laws and the Commodity Exchange Act in connection with an alleged conspiracy to manipulate a benchmark for physical platinum and palladium prices and seek declaratory and injunctive relief as well as treble damages in an unspecified amount.

ISDAFIX-Related Litigation. GS&Co. is among the defendants named in several putative class actions relating to trading in interest rate derivatives, filed beginning in September 2014 in the U.S. District Court for the Southern District of New York. The complaints generally allege that the defendants violated federal antitrust laws and the Commodity Exchange Act in connection with an alleged conspiracy to manipulate the ISDAFIX benchmark and seek declaratory and injunctive relief as well as treble damages in an unspecified amount. On December 12, 2014, defendants moved to dismiss the consolidated amended complaint, and on February 12, 2015, the plaintiffs filed a second amended consolidated complaint.

Currencies-Related Litigation.GS&Co. and Group Inc. are among the defendants named in several putative antitrust class actions relating to trading in the foreign exchange markets, filed beginning in December 2013 in the U.S. District Court for the Southern District of New York. The complaints generally allege that defendants violated federal antitrust laws in connection with an alleged conspiracy to manipulate the foreign currency exchange markets and seek declaratory and injunctive relief as well as treble damages in an unspecified amount. On February 13, 2014, the cases were consolidated into one action. On February 28, 2014, Group Inc. was named in a separate putative class action on behalf of non-U.S. plaintiffs containing substantially similar allegations, which was not consolidated but was coordinated with the other proceedings for pretrial purposes; that complaint was amended on April 30, 2014. On January 28, 2015, the court denied defendants’ motion to dismiss the consolidated action and granted defendants’ motion to dismiss the amended complaint on behalf of the non-U.S. plaintiffs.

Regulatory Investigations and Reviews and Related Litigation. Group Inc. and certain of its affiliates are subject to a number of other investigations and reviews by, various governmental and regulatory bodiesin some cases have received subpoenas and self-regulatory organizations relating to transactions involving municipal securities, including wall-cross proceduresrequests for documents and conflict of interest disclosure with respect to state and municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal offerings, political contribution rules, underwriting of Build America Bonds and the possible impact of credit default swap transactions on municipal issuers. Goldman Sachs is cooperating with the investigations and reviews.

Group Inc., Goldman Sachs Mitsui Marine Derivative Products, L.P. (GSMMDP) and GS Bank USA are among numerous financial services firms that have been named as defendants in numerous substantially identical individual antitrust actions filed beginning on November 12, 2009 that have been coordinated with related antitrust class action litigation and individual actions, in which no Goldman Sachs affiliate is named, for pre-trial proceedings in the U.S. District Court for the Southern District of New York. The plaintiffs include individual California municipal entities and three New York non-profit entities. All of these complaints against Group Inc., GSMMDP and GS Bank USA generally allege that the Goldman Sachs defendants participated in a conspiracy to arrange bids, fix prices and divide up the market for derivatives used by municipalities in refinancing and hedging transactionsinformation from, 1992 to 2008.

The complaints assert claims under the federal antitrust laws and either California’s Cartwright Act or New York’s Donnelly Act, and seek, among other things, treble damages under the antitrust laws in an unspecified amount and injunctive relief. On April 26, 2010, the Goldman Sachs defendants’ motion to dismiss complaints filed by several individual California municipal plaintiffs was denied. On August 19, 2011, Group Inc., GSMMDP and GS Bank USA were voluntarily dismissed without prejudice from all actions except one brought by a California municipal entity.

Financial Crisis-Related Matters. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations and litigation relating to the 2008 financial crisis, including the establishment and unwind of credit default swaps between Goldman Sachs and AIG and other transactions with, and in the securities of, AIG, The Bear Stearns Companies Inc., Lehman Brothers Holdings Inc. and other firms. Goldman Sachs is cooperating with the investigations and reviews.

In the second quarter of 2011, a Staff Report of the Senate Permanent Subcommittee on Investigations concerning the key causes of the financial crisis was issued. Goldman Sachs and another financial institution were used as case studies with respectvarious matters relating to the role of investment banks. The report was referred to the DOJfirm’s businesses and the SEC for review. The firm is cooperating with the investigations arising from this referral, which are ongoing.operations, including:

Ÿ

The 2008 financial crisis;

Ÿ

The public offering process;

Ÿ

The firm’s investment management and financial advisory services;

Ÿ

Conflicts of interest;

Ÿ

Research practices, including research independence and interactions between research analysts and other firm personnel, including investment banking personnel, as well as third parties;

 

 

 Goldman Sachs 20112014 Form 10-K 207217


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Employee Benefit Plans
Ÿ

Transactions involving municipal securities, including wall-cross procedures and conflict of interest disclosure with respect to state and municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal offerings, political contribution rules, underwriting of Build America Bonds, municipal advisory services and the possible impact of credit default swap transactions on municipal issuers;

Ÿ

The sales, trading and clearance of corporate and government securities, currencies, commodities and other financial products and related sales and other communications and activities, including compliance with the SEC’s short sale rule, algorithmic, high-frequency and quantitative trading, the firm’s U.S. alternative trading system, futures trading, options trading, transaction reporting, technology systems and controls, securities lending practices, trading and clearance of credit derivative instruments, commodities activities and metals storage, private placement practices, allocations of and trading in securities, and trading activities and communications in connection with the establishment of benchmark rates, such as currency rates and the ISDAFIX benchmark rates;

Ÿ

Compliance with the U.S. Foreign Corrupt Practices Act, including with respect to the firm’s hiring practices;

Ÿ

The firm’s system of risk management and controls; and

Ÿ

Insider trading, the potential misuse and dissemination of material nonpublic information regarding corporate and governmental developments and the effectiveness of the firm’s insider trading controls and information barriers.

Goldman Sachs is cooperating with all such regulatory investigations and reviews.

Note 28.

Employee Benefit Plans

The firm sponsors various pension plans and certain other postretirement benefit plans, primarily healthcare and life insurance. The firm also provides certain benefits to former or inactive employees prior to retirement.

Defined Benefit Pension Plans and Postretirement Plans

Employees of certain non-U.S. subsidiaries participate in various defined benefit pension plans. These plans generally provide benefits based on years of credited service and a percentage of the employee’s eligible compensation. The firm maintains a defined benefit pension plan for certain U.K. employees. As of April 2008, the U.K. defined benefit plan was closed to new participants, but willallows existing participants to continue to accrue benefits for existing participants. Thesebenefits. In 2014, the firm notified plan participants that it intends to close the U.K. defined benefit plan to future benefit accruals after March 31, 2016. The non-U.S. plans do not have a material impact on the firm’s consolidated results of operations.

The firm also maintains a defined benefit pension plan for substantially all U.S. employees hired prior to November 1, 2003. As of November 2004, this plan was closed to new participants and frozen such that existing participants would not accrue any additional benefits. In addition, the firm maintains unfunded postretirement benefit plans that provide medical and life insurance for eligible retirees and their dependents covered under these programs. These plans do not have a material impact on the firm’s consolidated results of operations.

The firm recognizes the funded status of its defined benefit pension and postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation, in the consolidated statements of financial condition. As of December 2011,2014, “Other assets” and “Other liabilities and accrued expenses” included $135$273 million (related to an overfunded pension plan)plans) and $858$739 million, respectively, related to these plans. As of December 2010,2013, “Other assets” and “Other liabilities and accrued expenses” included $164$179 million (related to an overfunded pension plan)plans) and $641$482 million, respectively, related to these plans.

Defined Contribution Plans

The firm contributes to employer-sponsored U.S. and non-U.S. defined contribution plans. The firm’s contribution to these plans was $225 million, $193 million and $178$223 million for the years ended December 2011, December 20102014, $219 million for 2013 and December 2009, respectively.$221 million for 2012.

 

 

208218 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Employee Incentive Plans

Note 29.

Employee Incentive Plans

 

The cost of employee services received in exchange for a share-based award is generally measured based on the grant-date fair value of the award. Share-based awards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Share-based awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense.

The firm pays cash dividend equivalents on outstanding RSUs. Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense. The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.

The firm generally issues new shares of common stock upon delivery of share-based awards. In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards. For awards accounted for as equity instruments,instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the current value of the award at the time of cash settlement and the grant-date value of the award.

Stock Incentive Plan

The firm sponsors a stock incentive plan, The Goldman Sachs Amended and Restated Stock Incentive Plan (SIP)(2013) (2013 SIP), which provides for grants of RSUs, restricted stock, dividend equivalent rights, incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, RSUs, awards with performance conditions and other share-based awards. Inawards, each of which may be subject to performance conditions. On May 23, 2013, shareholders approved the second quarter2013 SIP. The 2013 SIP replaces The Goldman Sachs Amended and Restated Stock Incentive Plan (SIP) previously in effect, and applies to awards granted on or after the date of 2003, the SIP was approved by the firm’s shareholders, effective for grants after April 1, 2003. The SIP was further amended and restated, effective December 31, 2008.approval.

The total number of shares of common stock that may be delivered pursuant to awards granted under the 2013 SIP throughcannot exceed 60 million shares, subject to adjustment for certain changes in corporate structure as permitted under the end2013 SIP. The 2013 SIP is scheduled to terminate on the date of the 2008 fiscal year could not exceed 250 million shares. The total numberannual meeting of shares of common stockshareholders that may be delivered for awards granted under the SIPoccurs in the 2009 fiscal year and each fiscal year thereafter cannot exceed 5% of the issued and outstanding shares of common stock, determined as of the last day of the immediately preceding fiscal year, increased by the number of shares available for awards in previous years but not covered by awards granted in such years.2016. As of December 2011 and December 2010, 161.02014, 45.7 million and 139.2 million shares respectively, were available for grant under the 2013 SIP.

Restricted Stock Units

The firm issuesgrants RSUs to employees under the 2013 SIP, primarily in connection with year-end compensation and acquisitions. RSUswhich are valued based on the closing price of the underlying shares on the date of grant after taking into account a liquidity discount for any applicable post-vesting transfer restrictions. Year-end RSUs generally vest and underlying shares of common stock deliver as outlined in the applicable RSU agreements. Employee RSU agreements generally provide that vesting is accelerated in certain circumstances, such as on retirement, death, disability and extended absence.conflicted employment. Delivery of the underlying shares of common stock is conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements.

The table below presents the activity related to RSUs.

 

Goldman Sachs 2011 Form 10-K209


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Restricted Stock

Units Outstanding

      

Weighted Average Grant-Date Fair

Value of Restricted Stock Units

Outstanding

  

Restricted Stock

Units Outstanding

   

Weighted Average

Grant-Date Fair Value
of Restricted Stock

Units Outstanding

 
 

Future

Service
Required

   No Future
Service
Required
   

Future

Service
Required

     No Future
Service
Required
   
 
 
Future
Service
Required
  
  
  
   
 
 
No Future
Service
Required
  
  
  
  
 
 
Future
Service
Required
  
  
  
  
 
 
No Future
Service
Required
  
  
  

Outstanding, December 2010

  21,455,793     39,537,417       $124.17      $145.13  

Outstanding, December 2013

  8,226,869 4    21,002,821     $118.91    $117.53  
 

Granted 1, 2

  10,250,856     7,156,834        139.47       143.70    4,832,540     9,567,783     155.13    149.52  
 

Forfeited

  (1,258,410   (183,858      128.29       133.15    (800,429   (158,958   130.57    139.02  
 

Delivered 3

       (31,815,863             152.28         (14,723,912       121.60  
 

Vested 2

  (16,146,050   16,146,050        119.99       119.99    (5,602,111   5,602,111    119.78    119.78  

Outstanding, December 2011

  14,302,189 4    30,840,580        139.46       124.33  

Outstanding, December 2014

  6,656,869 4    21,289,845    143.07    129.52  

 

1.

The weighted average grant-date fair value of RSUs granted during the years ended December 2011, December 20102014, 2013 and December 20092012 was $141.21, $132.64$151.40, $122.59 and $151.31,$84.72, respectively. The fair value of the RSUs granted during the year ended December 20112014, 2013 and December 20102012 includes a liquidity discount of 12.7%13.8%, 13.7% and 13.2%21.7%, respectively, to reflect post-vesting transfer restrictions of up to 4 years.

 

2.

The aggregate fair value of awards that vested during the years ended December 2011, December 20102014, 2013 and December 20092012 was $2.40$2.39 billion, $4.07$2.26 billion and $2.18$1.57 billion, respectively.

 

3.

Includes RSUs that were cash settled.

 

4.

Includes 754,482 shares of restricted stock subject to future service requirements.requirements as of December 2014 and December 2013 of 20,651 and 4,768 shares, respectively.

In the first quarter of 2012,2015, the firm granted to its employees 10.414.0 million year-end RSUs, of which 6.23.6 million RSUs require future service as a condition of delivery. These awards are subject to additional conditions as outlined in the award agreements. Generally, shares underlying these awards, net of required withholding tax, deliver over a three-year period but are subject to post-vesting transfer restrictions through January 2017.2020. These grants are not included in the above table.table above.

Goldman Sachs 2014 Form 10-K219


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Stock Options

Stock options generally vest as outlined in the applicable stock option agreement. OptionsNo options have been granted in February 2010 will generally become exercisable in one-third installments in January 2011, January 2012 and January 2013 and will expire in February 2014.since 2010. In general, options granted prior to February 2010 expire on the tenth anniversary of the grant date, although they may be subject to earlier termination or cancellation under certain circumstances in accordance with the terms of the SIP and the applicable stock option agreement.agreement and the SIP in effect at the time of grant.

The table below presents the activity related to stock options.

 

   Options
Outstanding
  Weighted Average
Exercise Price
  Aggregate
Intrinsic Value
(in millions)
  

Weighted

Average
Remaining Life

(years)

 

Outstanding, December 2010

  55,247,865   $96.71   $4,152    6.25  

Exercised

  (4,289,438  89.49          

Forfeited

  (10,743  79.73          

Expired

  (3,690,746  91.61          

Outstanding, December 2011

  47,256,938    97.76    444    6.08  

Exercisable, December 2011

  35,699,815    103.83    310    5.79  

210Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   
 
Options
Outstanding
  
  
  
 
 
 
Weighted
Average
Exercise
Price
  
  
  
  
  
 
 

 

Aggregate
Intrinsic
Value

(in millions)

  
  
  

  

  
 
 
 

 

Weighted
Average
Remaining
Life

(years)

  
  
  
  

  

Outstanding,
December 2013

  42,565,241    $  99.37    $3,465    4.60  
  

Exercised

  (22,609,903  80.81          

Outstanding,
December 2014

  19,955,338    120.40    1,516    3.28  

Exercisable,
December 2014

  19,955,338    120.40    1,516    3.28  

The total intrinsic value of options exercised during the years ended December 2011, December 20102014, 2013 and December 20092012 was $143$2.03 billion, $26 million $510and $151 million, andrespectively.

$484 million, respectively. The table below presents options outstanding.

 

Exercise Price  
 
Options
Outstanding
  
  
   
 
 
 
Weighted
Average
Exercise
Price
  
  
  
  
   
 
 
 

 

Weighted
Average
Remaining
Life

(years)

  
  
  
  

  

$  75.00 - $  89.99

  12,236,264     $  78.78     4.00  
  

    90.00 -   119.99

              
  

  120.00 -   134.99

  1,737,950     131.64     0.92  
  

  135.00 -   194.99

              
  

  195.00 -   209.99

  5,981,124     202.27     2.48  

Outstanding, December 2014

  19,955,338     120.40     3.28  

Exercise Price     Options
Outstanding
  

Weighted

Average

Exercise Price

 

Weighted Average
Remaining Life

(years)

 $  75.00 - $89.99      38,119,258   $  78.79 6.37
 90.00 - 104.99      290,056   96.08 1.92
 105.00 - 119.99          
 120.00 - 134.99     2,791,500   131.64 3.92
 135.00 - 149.99          
 150.00 - 164.99      75,000   154.16 2.17
 165.00 - 194.99          
 195.00 - 209.99      5,981,124   202.27 5.48

 

Outstanding, December 2011

  47,256,938      

TheAs of December 2014, there was $468 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average fair valueperiod of options granted in the year ended December 2010 was $37.58 per option.1.53 years.

The tablestable below presentpresents the primary weighted average assumptions used to estimate fair value as of the grant date based on a Black-Scholes option-pricing model, and share-based compensation and the related excess tax benefit.

benefit/(provision).

 

  Year Ended December
   2011     2010   2009

Risk-free interest rate

  N/A       1.6  N/A

Expected volatility

  N/A       32.5    N/A

Annual dividend per share

  N/A       $1.40    N/A

Expected life

  N/A       3.75 years    N/A

  Year Ended December
in millions 2011     2010     2009 

Share-based compensation

 $2,843      $4,070      $2,030 

Excess tax benefit related to options exercised

  55       183      166 

Excess tax benefit/(provision) related to share-based awards 1

  138       239      (793)
  Year Ended December 
$ in millions  2014     2013     2012  

Share-based compensation

  $2,101     $2,039     $1,338  
  

Excess net tax benefit related to options exercised

  549     3     53  
  

Excess net tax benefit/(provision) related to share-based awards 1

  788     94     (11

 

1.

Represents the net tax benefit/(provision) recognized in additional paid-in capital on stock options exercised and the delivery of common stock underlying share-based awards.

As of December 2011, there was $926 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is

expected to be recognized over a weighted average period of 1.62 years.

 

 

220 Goldman Sachs 20112014 Form 10-K 211


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Parent Company

Note 30.

Parent Company

 

Group Inc. — Condensed Statements of EarningsGroup Inc. — Condensed Statements of Earnings

Group Inc. — Condensed Statements of Earnings

  

 Year Ended December Year Ended December 
in millions 2011 2010 2009
$ in millions  2014    2013    2012  

Revenues

      

Dividends from bank subsidiary

 $1,000  $  $ 

Dividends from nonbank subsidiaries

  4,967   6,032   8,793 

Dividends from subsidiaries

   

Bank subsidiaries

  $     16    $2,000    $      —  
 

Nonbank subsidiaries

  2,739    4,176    3,622  
 

Undistributed earnings of subsidiaries

  481   2,884   5,884   5,330    1,086    3,682  
 

Other revenues

  (3,381)  964   (1,018)  826    2,209    1,567  

Total non-interest revenues

  3,067   9,880   13,659   8,911    9,471    8,871  
 

Interest income

  4,547   4,153   4,565   3,769    4,048    4,751  
 

Interest expense

  3,917   3,429   3,112   3,802    4,161    4,287  

Net interest income

  630   724   1,453 

Net interest income/(loss)

  (33  (113  464  

Net revenues, including net interest income

  3,697   10,604   15,112   8,878    9,358    9,335  

Operating expenses

      

Compensation and benefits

  300   423   637   411    403    452  
 

Other expenses

  252   238   1,034   282    424    448  

Total operating expenses

  552   661   1,671   693    827    900  

Pre-tax earnings

  3,145   9,943   13,441   8,185    8,531    8,435  
 

Provision/(benefit) for taxes

  (1,297)  1,589   56   (292  491    960  

Net earnings

  4,442   8,354   13,385   8,477    8,040    7,475  
 

Preferred stock dividends

  1,932   641   1,193   400    314    183  

Net earnings applicable to common shareholders

 $2,510  $7,713  $12,192   $8,077    $7,726    $7,292  

 

Group Inc. — Condensed Statements of Financial ConditionGroup Inc. — Condensed Statements of Financial Condition

Group Inc. — Condensed Statements of Financial Condition

  

 As of December As of December 
in millions 2011 2010
$ in millions  2014    2013  

Assets

    

Cash and cash equivalents

 $14  $7   $         42    $         17  
 

Loans to and receivables from subsidiaries

    

Bank subsidiary

  7,196   5,050 

Nonbank subsidiaries

  180,397   182,316 

Bank subsidiaries

  8,222    5,366  
 

Nonbank subsidiaries 1

  171,121    169,653  
 

Investments in subsidiaries and other affiliates

    

Bank subsidiary

  19,226   18,807 

Bank subsidiaries

  22,393    20,972  
 

Nonbank subsidiaries and other affiliates

  48,473   52,498   57,311    52,422  
 

Financial instruments owned, at fair value

  20,698   24,153   11,812    16,065  
 

Other assets

  7,912   8,612   7,629    7,575  

Total assets

 $283,916  $291,443   $278,530    $272,070  

Liabilities and shareholders’ equity

    

Payables to subsidiaries

 $693  $358   $       129    $       489  
 

Financial instruments sold, but not yet purchased, at fair value

  241   935   169    421  

Unsecured short-term borrowings 1

  

With third parties

  35,368   32,299 
 

Unsecured short-term borrowings

  

With third parties 2

  31,022    30,611  
 

With subsidiaries

  4,701   5,483   1,955    4,289  

Unsecured long-term borrowings 2

  

With third parties

  166,342   167,782 

With subsidiaries 3

  1,536   1,000 
 

Unsecured long-term borrowings

  

With third parties 3

  158,613    153,576  
 

With subsidiaries 4

  1,616    1,587  
 

Other liabilities and accrued expenses

  4,656   6,230   2,229    2,630  

Total liabilities

  213,537   214,087   195,733    193,603  
 

Commitments, contingencies and guarantees

    

Shareholders’ equity

    

Preferred stock

  3,100   6,957   9,200    7,200  
 

Common stock

  8   8   9    8  

Restricted stock units and employee stock options

  5,681   7,706 
 

Share-based awards

  3,766    3,839  
 

Additional paid-in capital

  45,553   42,103   50,049    48,998  
 

Retained earnings

  58,834   57,163   78,984    71,961  
 

Accumulated other comprehensive loss

  (516)  (286)  (743  (524
 

Stock held in treasury, at cost

  (42,281)  (36,295)  (58,468  (53,015

Total shareholders’ equity

  70,379   77,356   82,797    78,467  

Total liabilities and shareholders’ equity

 $283,916  $291,443   $278,530    $272,070  
Group Inc.—Condensed Statements of Cash Flows

Group Inc. — Condensed Statements of Cash Flows

Group Inc. — Condensed Statements of Cash Flows

 Year Ended December Year Ended December
in millions 2011 2010 2009
$ in millions 2014  2013  2012 

Cash flows from operating activities

      

Net earnings

 $4,442  $8,354  $13,385  $   8,477  $   8,040  $   7,475 

Non-cash items included in net earnings

   

Adjustments to reconcile net earnings to net cash provided by operating activities

   

Undistributed earnings of subsidiaries

  (481)  (2,884)  (5,884) (5,330) (1,086) (3,682)

Depreciation and amortization

  14   18   39  42  15  15 

Deferred income taxes

  809   214   (3,347) (4) 1,398  (1,258)

Share-based compensation

  244   393   100  188  194  81 

Gain on extinguishment of junior subordinated debt

 (289)  

Changes in operating assets and liabilities

      

Financial instruments owned, at fair value

  3,557   (176)  24,382  6,766  (3,235) 2,197 

Financial instruments sold, but not yet purchased, at fair value

  (536)  (1,091)  (1,032) (252) 183  (3)

Other, net

  1,422   10,852  �� 10,081  (5,793) 586  1,888 

Net cash provided by operating activities

  9,471   15,680   37,724  3,805  6,095  6,713 

Cash flows from investing activities

      

Purchase of property, leasehold improvements and equipment

  (42)  (15)  (5) (15) (3) (12)

Issuance of short-term loans to subsidiaries, net of repayments

  20,319   (9,923)  (6,335)

Repayments/(issuances) of short-term loans by/(to) subsidiaries, net

 (4,099) (5,153) 6,584 

Issuance of term loans to subsidiaries

  (42,902)  (5,532)  (13,823) (8,803) (2,174) (17,414)

Repayments of term loans by subsidiaries

  21,850   1,992   9,601  3,979  7,063  18,715 

Capital distributions from/(contributions to) subsidiaries, net

  4,642   (1,038)  (2,781) 865  655  (298)

Net cash provided by/(used for) investing activities

  3,867   (14,516)  (13,343) (8,073) 388  7,575 

Cash flows from financing activities

      

Unsecured short-term borrowings, net

  (727)  3,137   (13,266) 963  1,296  (2,647)

Proceeds from issuance of long-term borrowings

  27,251   21,098   22,814  37,101  28,458  26,160 

Repayment of long-term borrowings, including the current portion

  (27,865)  (21,838)  (27,374) (27,931) (29,910) (35,608)

Preferred stock repurchased

  (3,857)     (9,574)

Purchase of trust preferred securities and senior guaranteed trust securities

 (1,801) —  — 

Common stock repurchased

  (6,048)  (4,183)  (2) (5,469) (6,175) (4,640)

Repurchase of common stock warrants

        (1,100)

Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units

  (2,771)  (1,443)  (2,205)

Proceeds from issuance of common stock, including stock option exercises

  368   581   6,260 

Excess tax benefit related to share-based compensation

  358   352   135 

Cash settlement of share-based compensation

  (40)  (1)  (2)

Net cash used for financing activities

  (13,331)  (2,297)  (24,314)

Net increase/(decrease) in cash and cash equivalents

  7   (1,133)  67 

Dividends and dividend equivalents paid on common stock, preferred stock andshare-based awards

 (1,454) (1,302) (1,086)

Proceeds from issuance of preferred stock, net of issuance costs

 1,980  991  3,087 

Proceeds from issuance of common stock, including exercise of share-based awards

 123  65  317 

Excess tax benefit related to share-based awards

 782  98  130 

Cash settlement of share-based awards

 (1) (1) (1)

Net cash provided by/(used for) financing activities

 4,293  (6,480) (14,288)

Net increase in cash and cash equivalents

 25   — 

Cash and cash equivalents, beginning of year

  7   1,140   1,073  17  14  14 

Cash and cash equivalents, end of year

 $14  $7  $1,140  $        42  $        17  $        14 

SUPPLEMENTAL DISCLOSURES:

Cash payments for third-party interest, net of capitalized interest, were $3.83$4.31 billion, $3.07$2.78 billion and $2.77$5.11 billion for the years ended December 2011, December 20102014, 2013 and December 2009,2012, respectively.

Cash payments for income taxes, net of refunds, were $1.39$2.35 billion, $2.05$3.21 billion and $2.77$1.59 billion for 2014, 2013 and 2012, respectively.

Non-cash activity:

During 2014, the years ended December 2011, December 2010firm exchanged $1.58 billion of Trust Preferred Securities, common beneficial interests and December 2009, respectively.senior guaranteed trust securities held by the firm for $1.87 billion of the firm’s junior subordinated debt held by the issuing trusts. Following the exchange, this junior subordinated debt was extinguished.

 

1.

Primarily includes overnight loans, the proceeds of which can be used to satisfy the short-term obligations of Group Inc.

2.

Includes $6.25$5.88 billion and $7.82$5.83 billion at fair value as of December 2011for 2014 and December 2010,2013, respectively.

2.3.

Includes $12.91$11.66 billion and $13.44$8.67 billion at fair value as of December 2011for 2014 and December 2010,2013, respectively.

3.4.

Unsecured long-term borrowings with subsidiaries by maturity date are $263 million in 2013, $656 million in 2014, $243 million in 2015, $97$186 million in 2016, and $277$338 million in 2017-thereafter.2017, $159 million in 2018, $44 million in 2019, and $889 million in 2020-thereafter.

Non-cash activity:

During the year ended December 2011, $103 million of common stock was issued in connection with the acquisition of Goldman Sachs Australia Pty Ltd (GS Australia), formerly Goldman Sachs & Partners Australia Group Holdings Pty Ltd.

 

 

212 Goldman Sachs 20112014 Form 10-K 221


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

 

Quarterly Results (unaudited)

The following represents the firm’s unaudited quarterly results for the years ended December 20112014 and December 2010.2013. These quarterly results were prepared in accordance with generally accepted accounting principlesU.S. GAAP and reflect all

adjustments that are, in the opinion of management, necessary for a fair statement of the results. These adjustments are of a normal, recurring nature.

 

 

 Three Months Ended  Three Months Ended 
in millions, except per share data December
2011
     September
2011
     June
2011
     March
2011
   
 
December
2014
  
  
     
 
September
2014
  
  
     
 
June
2014
  
  
     
 
March
2014
  
  

Total non-interest revenues

  $4,984       $2,231       $5,868       $10,536  

Non-interest revenues

  $6,727       $7,338       $8,125       $8,291  
 

Interest income

  3,032       3,354       3,681       3,107    2,134       2,297       2,579       2,594  
 

Interest expense

  1,967       1,998       2,268       1,749    1,173       1,248       1,579       1,557  

Net interest income

  1,065       1,356       1,413       1,358    961       1,049       1,000       1,037  

Net revenues, including net interest income

  6,049       3,587       7,281       11,894    7,688       8,387       9,125       9,328  
 

Operating expenses 1

  4,802       4,317       5,669       7,854    4,478       5,082       6,304       6,307  

Pre-tax earnings/(loss)

  1,247       (730     1,612       4,040  

Provision/(benefit) for taxes

  234       (337     525       1,305  

Net earnings/(loss)

  1,013       (393     1,087       2,735  

Pre-tax earnings

  3,210       3,305       2,821       3,021  
 

Provision for taxes

  1,044       1,064       784       988  

Net earnings

  2,166       2,241       2,037       2,033  
 

Preferred stock dividends

  35       35       35       1,827    134       98       84       84  

Net earnings/(loss) applicable to common shareholders

  $   978       $   (428     $1,052       $   908  

Earnings/(loss) per common share

             

Net earnings applicable to common shareholders

  $2,032       $2,143       $1,953       $1,949  

Earnings per common share

             

Basic

  $  1.91       $  (0.84     $  1.96       $   1.66    $  4.50       $  4.69       $  4.21       $  4.15  
 

Diluted

  1.84       (0.84     1.85       1.56    4.38       4.57       4.10       4.02  
 

Dividends declared per common share

  0.35       0.35       0.35       0.35    0.60       0.55       0.55       0.55  
 Three Months Ended  Three Months Ended 
in millions, except per share data December
2010
     September
2010
     June
2010
     March
2010
   
 
December
2013
  
  
     
 
September
2013
  
  
     
 
June
2013
  
  
     
 
March
2013
  
  

Total non-interest revenues

  $7,304       $7,775       $7,222       $11,357  

Non-interest revenues

  $7,981       $5,882       $7,786       $9,165  
 

Interest income

  3,069       2,937       3,302       3,001    2,391       2,398       2,663       2,608  
 

Interest expense

  1,731       1,809       1,683       1,583    1,590       1,558       1,837       1,683  

Net interest income

  1,338       1,128       1,619       1,418    801       840       826       925  

Net revenues, including net interest income

  8,642       8,903       8,841       12,775    8,782       6,722       8,612       10,090  
 

Operating expenses 1

  5,168       6,092       7,393       7,616    5,230       4,555       5,967       6,717  

Pre-tax earnings

  3,474       2,811       1,448       5,159    3,552       2,167       2,645       3,373  
 

Provision for taxes

  1,087       913       835       1,703    1,220       650       714       1,113  

Net earnings

  2,387       1,898       613       3,456    2,332       1,517       1,931       2,260  
 

Preferred stock dividends

  160       161       160       160    84       88       70       72  

Net earnings applicable to common shareholders

  $2,227       $1,737       $   453       $  3,296    $2,248       $1,429       $1,861       $2,188  

Earnings per common share

                          

Basic

  $  4.10       $  3.19       $  0.82       $    6.02    $  4.80       $  3.07       $  3.92       $  4.53  
 

Diluted

  3.79       2.98       0.78       5.59    4.60       2.88       3.70       4.29  
 

Dividends declared per common share

  0.35       0.35       0.35       0.35    0.55       0.50       0.50       0.50  

 

1.

The timing and magnitude of changes in the firm’s discretionary compensation accruals can have a significant effect on results in a given quarter.

 

222 Goldman Sachs 20112014 Form 10-K 213


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

 

Common Stock Price Range

The table below presents the high and low sales prices per share of the firm’s common stock.

 

 Year Ended December  Year Ended December 
 2011     2010     2009  2014   2013   2012 
 High     Low    High     Low    High     Low   High       Low    High       Low    High       Low  

First quarter

 $175.34      $153.26     $178.75      $147.81     $115.65      $59.13    $181.13       $159.77     $159.00       $129.62     $128.72       $  92.42  
 

Second quarter

  164.40       128.30      186.41       131.02      151.17       100.46    171.08       151.65     168.20       137.29     125.54       90.43  
 

Third quarter

  139.25       91.40      157.25       129.50      188.00       135.23    188.58       161.53     170.00       149.28     122.60       91.15  
 

Fourth quarter

  118.07       84.27      171.61       144.70      193.60       160.20    198.06       171.26    177.44       152.83    129.72       113.84  

 

As of February 17, 2012,6, 2015, there were 13,34010,230 holders of record of the firm’s common stock.

On February 17, 2012,6, 2015, the last reported sales price for the firm’s common stock on the New York Stock Exchange was $115.91$183.43 per share.

 

 

Common Stock Price Performance

The following graph comparesand table compare the performance of an investment in the firm’s common stock from November 24, 2006December 31, 2009 (the last trading day before the firm’s 2010 fiscal year) through December 31, 2011,2014, with the S&P 500 Index and the S&P 500 Financials Index. The graph assumesand table assume $100 was invested on November 24, 2006

December 31, 2009 in each of the firm’s common stock, the S&P 500

Index and the S&P 500 Financials Index, and the dividends were reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance.

The table below shows the cumulative total returns in dollars of the firm’s common stock, the S&P 500 Index and the S&P 500 Financials Index for Goldman Sachs’ last five fiscal year ends 1, assuming $100 was invested on November 24, 2006 in each of the firm’s common stock,

the S&P 500 Index and the S&P 500 Financials Index, and the dividends were reinvested on the date of payment without payment of any commissions. The performance shown in the table represents past performance and should not be considered an indication of future performance.

 

 

   11/24/06     11/30/07     11/28/08     12/31/09     12/31/10     12/31/11 

The Goldman Sachs Group, Inc.

 $100.00      $113.17      $39.79      $86.10      $86.56      $47.09  

S&P 500 Index

  100.00       107.77       66.72       85.28       98.12       100.19  

S&P 500 Financials Index

  100.00       88.54       37.56       43.92       49.27       40.88  
1.

As a result of the firm’s change in fiscal year-end during 2009, this table includes 61 months beginning November 24, 2006 and ending December 31, 2011.

  As of December 
   2009       2010       2011       2012       2013       2014  

The Goldman Sachs Group, Inc.

  $100.00       $100.54       $  54.69       $  78.41       $110.39       $122.29  
  

S&P 500 Index

  100.00       115.06       117.49       136.27       180.40       205.08  
  

S&P 500 Financials Index

  100.00       112.13       93.00       119.73       162.34       186.98  

 

214 Goldman Sachs 20112014 Form 10-K 223


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

 

Selected Financial Data

 

 As of or for the Year Ended or as of December 
 Year Ended  One Month Ended  2014     2013     2012     2011     2010  

Income statement data($ in millions)

         

Non-interest revenues

  $  30,481     $  30,814     $  30,283     $  23,619     $  33,658  
 

December

2011

  

December

2010

  

December

2009

  

November

2008

  

November

2007

  

December

2008  1

 

Income statement data(in millions)

                

Total non-interest revenues

 $23,619    $33,658    $37,766    $17,946    $42,000    $(502)

Interest income

  13,174     12,309     13,907     35,633     45,968     1,687   9,604     10,060     11,381     13,174     12,309  
 

Interest expense

  7,982     6,806     6,500     31,357     41,981     1,002   5,557     6,668     7,501     7,982     6,806  

Net interest income

  5,192     5,503     7,407     4,276     3,987     685   4,047     3,392     3,880     5,192     5,503  

Net revenues, including net interest income

  28,811     39,161     45,173     22,222     45,987     183   34,528     34,206     34,163     28,811     39,161  
 

Compensation and benefits

  12,223     15,376     16,193     10,934     20,190     744   12,691     12,613     12,944     12,223     15,376  
 

U.K. bank payroll tax

       465                                           465  

Other operating expenses

  10,419     10,428     9,151     8,952     8,193     697 

Pre-tax earnings/(loss)

 $6,169    $12,892    $19,829    $2,336    $17,604    $(1,258)

Balance sheet data(in millions)

                
 

Non-compensation expenses

  9,480     9,856     10,012     10,419     10,428  

Pre-tax earnings

  $  12,357     $  11,737     $  11,207     $    6,169     $  12,892  

Balance sheet data($ in millions)

         

Total assets

 $923,225    $911,332    $848,942    $884,547    $1,119,796    $1,112,225   $856,240     $911,507     $938,555     $923,225     $911,332  
 

Other secured financings (long-term)

  8,179     13,848     11,203     17,458     33,300     18,413   7,249     7,524     8,965     8,179     13,848  
 

Unsecured long-term borrowings

  173,545     174,399     185,085     168,220     164,174     185,564   167,571     160,965     167,305     173,545     174,399  
 

Total liabilities

  852,846     833,976     778,228     820,178     1,076,996     1,049,171   773,443     833,040     862,839     852,846     833,976  
 

Total shareholders’ equity

  70,379     77,356     70,714     64,369     42,800     63,054   82,797     78,467     75,716     70,379     77,356  

Common share data(in millions, except per share amounts)

                         

Earnings/(loss) per common share

                

Earnings per common share

         

Basic

 $4.71    $14.15    $23.74    $4.67    $26.34    $(2.15)  $    17.55     $    16.34     $    14.63     $      4.71     $    14.15  
 

Diluted

  4.51     13.18     22.13     4.47     24.73     (2.15)  17.07     15.46     14.13     4.51     13.18  
 

Dividends declared per common share

  1.40     1.40     1.05     1.40     1.40     0.47 3  2.25     2.05     1.77     1.40     1.40  

Book value per common share 2

  130.31     128.72     117.48     98.68     90.43     95.84 
 

Book value per common share 1

  163.01     152.48     144.67     130.31     128.72  

Average common shares outstanding

                         

Basic

  524.6     542.0     512.3     437.0     433.0     485.5   458.9     471.3     496.2     524.6     542.0  
 

Diluted

  556.9     585.3     550.9     456.2     461.2     485.5   473.2     499.6     516.1     556.9     585.3  

Selected data(unaudited)

                         

Total staff

                         

Americas

  17,200     19,900     18,900     19,700     20,100     19,200   17,400     16,600     16,400     17,200     19,900  
 

Non-Americas

  16,100     15,800     13,600     14,800     15,400     14,100   16,600     16,300     16,000     16,100     15,800  

Total staff

  33,300     35,700     32,500     34,500     35,500     33,300   34,000     32,900     32,400     33,300     35,700  

Total staff, including consolidated entities held for investment purposes

  34,700     38,700     36,200     39,200     40,000     38,000 

Assets under management(in billions)

                

Assets under supervision ($ in billions)

         

Asset class

                         

Alternative investments

 $142    $148    $146    $146    $151    $145   $       143     $       142     $       151     $       148     $       150  
 

Equity

  126     144     146     112     255     114   236     208     153     147     162  
 

Fixed income

  340     340     315     248     256     253   516     446     411     353     346  

Total non-money market assets

  608     632     607     506     662     512 

Money markets

  220     208     264     273     206     286 

Total assets under management

 $828    $840    $871    $779    $868    $798 

Long-term assets under supervision

  895     796     715     648     658  
 

Liquidity products

  283     246     250     247     259  

Total assets under supervision

  $    1,178     $    1,042     $       965     $       895     $       917  

 

1.

In connection with becoming a bank holding company, the firm was required to change its fiscal year-end from November to December. December 2008 represents the period from November 29, 2008 to December 26, 2008.

2.

Book value per common share is based on common shares outstanding, including RSUs granted to employees with no future service requirements, of 451.5 million, 467.4 million, 480.5 million, 516.3 million 546.9 million, 542.7 million, 485.4 million, 439.0 million and 485.9546.9 million as of December 2014, December 2013, December 2012, December 2011 and December 2010, December 2009, November 2008, November 2007 and December 2008, respectively.

3.

Rounded to the nearest penny. Exact dividend amount was $0.4666666 per common share and was reflective of a four-month period (December 2008 through March 2009), due to the change in the firm’s fiscal year-end.

 

224 Goldman Sachs 20112014 Form 10-K 215


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

 

Statistical Disclosures

Distribution of Assets, Liabilities and Shareholders’ Equity

The table below presents a summary of consolidated average balances and interest rates. Assets, liabilities and interest are

classified as U.S. and non-U.S.-based on the location of the legal entity in which the assets and liabilities are held.

 

  For the Year Ended December 
  2011    2010    2009 
in millions, except rates 

Average

balance

   Interest   Average
rate
     

Average

balance

   Interest   Average
rate
     

Average

balance

   Interest   Average
rate
 

Assets

                 

Deposits with banks

 $38,039    $125     0.33   $29,371    $86     0.29   $22,108    $65     0.29

U.S.

  32,770     95     0.29      24,988     67     0.27      18,134     45     0.25  

Non-U.S.

  5,269     30     0.57      4,383     19     0.43      3,974     20     0.50  

Securities borrowed, securities purchased under agreements to resell, at fair value, and federal funds sold

  351,896     666     0.19      353,719     540     0.15      355,636     951     0.27  

U.S.

  219,240     (249   (0.11    243,907     75     0.03      255,785     14     0.01  

Non-U.S.

  132,656     915     0.69      109,812     465     0.42      99,851     937     0.94  

Financial instruments owned, at fair value 1, 2

  287,322     10,718     3.73      273,801     10,346     3.78      277,706     11,106     4.00  

U.S.

  183,920     7,477     4.07      189,136     7,865     4.16      198,849     8,429     4.24  

Non-U.S.

  103,402     3,241     3.13      84,665     2,481     2.93      78,857     2,677     3.39  

Other interest-earning assets 3

  143,270     1,665     1.16      118,364     1,337     1.13      127,067     1,785     1.40  

U.S.

  99,042     915     0.92      82,965     689     0.83      83,000     1,052     1.27  

Non-U.S.

  44,228     750     1.70      35,399     648     1.83      44,067     733     1.66  

Total interest-earning assets

  820,527     13,174     1.61      775,255     12,309     1.59      782,517     13,907     1.78  

Cash and due from banks

  4,987                3,709                5,066            

Other non-interest-earning assets 2

  118,901                113,310                124,554            

Total Assets

 $944,415               $892,274               $912,137            

Liabilities

                 

Interest-bearing deposits

 $40,266    $280     0.70     $38,011    $304     0.80     $41,076    $415     1.01  

U.S.

  33,234     243     0.73      31,418     279     0.89      35,043     371     1.06  

Non-U.S.

  7,032     37     0.53      6,593     25     0.38      6,033     44     0.73  

Securities loaned and securities sold under agreements to repurchase, at fair value

  171,753     905     0.53      160,280     708     0.44      156,794     1,317     0.84  

U.S.

  110,235     280     0.25      112,839     355     0.31      111,718     392     0.35  

Non-U.S.

  61,518     625     1.02      47,441     353     0.74      45,076     925     2.05  

Financial instruments sold, but not yet purchased 1, 2

  102,282     2,464     2.41      89,040     1,859     2.09      72,866     1,854     2.54  

U.S.

  52,065     984     1.89      44,713     818     1.83      39,647     586     1.48  

Non-U.S.

  50,217     1,480     2.95      44,327     1,041     2.35      33,219     1,268     3.82  

Commercial paper

  1,881     5     0.24      1,624     5     0.31      1,002     5     0.50�� 

U.S.

  630     2     0.31      289     1     0.35      284     3     1.06  

Non-U.S.

  1,251     3     0.20      1,335     4     0.30      718     2     0.28  

Other borrowings 4, 5

  76,616     521     0.68      53,888     448     0.83      58,129     618     1.06  

U.S.

  50,029     429     0.86      33,017     393     1.19      36,164     525     1.45  

Non-U.S.

  26,587     92     0.35      20,871     55     0.26      21,965     93     0.42  

Long-term borrowings 5,6

  186,148     3,439     1.85      193,031     3,155     1.63      203,280     2,585     1.27  

U.S.

  179,004     3,235     1.81      183,338     2,910     1.59      192,054     2,313     1.20  

Non-U.S.

  7,144     204     2.86      9,693     245     2.53      11,226     272     2.42  

Other interest-bearing liabilities 7

  203,940     368     0.18      189,008     327     0.17      207,148     (294   (0.14

U.S.

  149,958     (535   (0.36    142,752     (221   (0.15    147,206     (723   (0.49

Non-U.S.

  53,982     903     1.67      46,256     548     1.18      59,942     429     0.72  

Total interest-bearing liabilities

  782,886     7,982     1.02      724,882     6,806     0.94      740,295     6,500     0.88  

Non-interest-bearing deposits

  140                169                115            

Other non-interest-bearing liabilities 2

  88,681                92,966                106,200            

Total liabilities

  871,707                818,017                846,610            

Shareholders’ equity

                 

Preferred stock

  3,990                6,957                11,363            

Common stock

  68,718                67,300                54,164            

Total shareholders’ equity

  72,708                74,257                65,527            

Total liabilities, preferred stock and shareholders’ equity

 $944,415               $892,274               $912,137            

Interest rate spread

            0.59              0.65              0.90

Net interest income and net yield on interest-earning assets

      $5,192     0.63          $5,503     0.71          $7,407     0.95  

U.S.

       3,600     0.67           4,161     0.77           6,073     1.09  

Non-U.S.

       1,592     0.56           1,342     0.57           1,334     0.59  

Percentage of interest-earning assets and interest-bearing liabilities attributable to non-U.S. operations 8

                 

Assets

            34.80              30.22              28.98

Liabilities

            26.53                24.35                24.07  

216Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

  Year Ended December 
  2014    2013    2012 
$ in millions  
 
Average
balance
  
  
   Interest    
 
Average
rate
  
  
    
 
Average
balance
  
  
   Interest    
 
Average
rate
  
  
    
 
Average
balance
  
  
   Interest    
 
Average
rate
  
  

Assets

              

Deposits with banks

  $  59,135     $    164    0.28%     $  61,921     $     186    0.30%     $  52,500     $     156    0.30%  
  

U.S.

  53,606     144    0.27%     56,848     167    0.29%     49,123     132    0.27%  
  

Non-U.S.

  5,529     20    0.36%     5,073     19    0.37%     3,377     24    0.71%  
  

Securities borrowed, securities purchased under agreements to resell and federal funds sold

  302,321     (81  (0.03)%     327,748     43    0.01%     331,828     (77  (0.02)%  
  

U.S.

  193,555     (514  (0.27)%     198,677     (289  (0.15)%     191,166     (431  (0.23)%  
  

Non-U.S.

  108,766     433    0.40%     129,071     332    0.26%     140,662     354    0.25%  
  

Financial instruments owned, at fair value 1

  271,810     7,452    2.74%     292,965     8,159    2.78%     310,982     9,817    3.16%  
  

U.S.

  170,647     5,045    2.96%     182,158     5,353    2.94%     190,490     6,548    3.44%  
  

Non-U.S.

  101,163     2,407    2.38%     110,807     2,806    2.53%     120,492     3,269    2.71%  
  

Loans receivable

  22,425     708    3.16%     10,296     296    2.87%     5,617     150    2.67%  
  

U.S.

  21,459     650    3.03%     9,736     268    2.75%     5,526     148    2.68%  
  

Non-U.S.

  966     58    6.00%     560     28    5.00%     91     2    2.20%  
  

Other interest-earning assets 2

  140,733     1,361    0.97%     138,775     1,376    0.99%     130,810     1,335    1.02%  
  

U.S.

  85,811     813    0.95%     81,759     796    0.97%     84,545     826    0.98%  
  

Non-U.S.

  54,922     548    1.00%      57,016     580    1.02%      46,265     509    1.10%  

Total interest-earning assets

  796,424     9,604    1.21%     831,705     10,060    1.21%     831,737     11,381    1.37%  
  

Cash and due from banks

  5,237        6,212        7,357     
  

Other non-interest-earning assets 1

  93,002               106,095               107,702           

Total assets

  $894,663               $944,012               $946,796           

Liabilities

              

Interest-bearing deposits

  $  73,286     $    333    0.45%     $  69,707     $     387    0.56%     $  56,399     $     399    0.71%  
  

U.S.

  62,717     286    0.46%     60,824     352    0.58%     48,668     362    0.74%  
  

Non-U.S.

  10,569     47    0.44%     8,883     35    0.39%     7,731     37    0.48%  
  

Securities loaned and securities sold under agreements to repurchase

  131,911     431    0.33%     178,686     576    0.32%     177,550     822    0.46%  
  

U.S.

  79,517     206    0.26%     114,884     242    0.21%     121,145     380    0.31%  
  

Non-U.S.

  52,394     225    0.43%     63,802     334    0.52%     56,405     442    0.78%  
  

Financial instruments sold, but not yet purchased, at fair value 1

  82,219     1,741    2.12%     92,913     2,054    2.21%     94,740     2,438    2.57%  
  

U.S.

  39,708     828    2.09%     37,923     671    1.77%     41,436     852    2.06%  
  

Non-U.S.

  42,511     913    2.15%     54,990     1,383    2.52%     53,304     1,586    2.98%  
  

Short-term borrowings 3

  64,594     447    0.69%     60,926     394    0.65%     70,359     581    0.83%  
  

U.S.

  45,843     413    0.90%     40,511     365    0.90%     47,614     479    1.01%  
  

Non-U.S.

  18,751     34    0.18%     20,415     29    0.14%     22,745     102    0.45%  
  

Long-term borrowings 3

  172,047     3,460    2.01%     174,195     3,752    2.15%     176,698     3,736    2.11%  
  

U.S.

  164,844     3,327    2.02%     168,106     3,635    2.16%     170,163     3,582    2.11%  
  

Non-U.S.

  7,203     133    1.85%     6,089     117    1.92%     6,535     154    2.36%  
  

Other interest-bearing liabilities 4

  215,911     (855  (0.40)%     203,482     (495  (0.24)%     206,790     (475  (0.23)%  
  

U.S.

  153,600     (1,222  (0.80)%     144,888     (904  (0.62)%     150,986     (988  (0.65)%  
  

Non-U.S.

  62,311     367    0.59%      58,594     409    0.70%      55,804     513    0.92%  

Total interest-bearing liabilities

  739,968     5,557    0.75%     779,909     6,668    0.85%     782,536     7,501    0.96%  
  

Non-interest-bearing deposits

  799        655        324     
  

Other non-interest-bearing liabilities 1

  73,057               86,095               91,406           

Total liabilities

  813,824        866,659        874,266     
  

Shareholders’ equity

              

Preferred stock

  8,585        6,892        4,392     
  

Common stock

  72,254               70,461               68,138           

Total shareholders’ equity

  80,839               77,353               72,530           

Total liabilities and shareholders’ equity

  $894,663               $944,012               $946,796           

Interest rate spread

     0.46%        0.36%        0.41%  
  

Net interest income and net yield on interest-earning assets

    $ 4,047    0.51%       $  3,392    0.41%       $  3,880    0.47%  
  

U.S.

    2,300    0.44%       1,934    0.37%       2,556    0.49%  
  

Non-U.S.

    1,747    0.64%       1,458    0.48%       1,324    0.43%  
  

Percentage of interest-earning assets and interest-bearing liabilities attributable tonon-U.S. operations

  

Assets

     34.07%        36.37%        37.38%  
  

Liabilities

           26.18%               27.28%               25.88%  

 

1.

Consists of cash financial instruments, including equity securities and convertible debentures.

2.

Derivative instruments and commodities are included in other non-interest-earning assets and other non-interest-bearing liabilities.

 

3.2.

Primarily consists of certain receivables from customers and counterparties and cash and securities segregated for regulatory and other purposes and certain receivables from customers and counterparties.purposes.

 

4.

Consists of short-term other secured financings and unsecured short-term borrowings, excluding commercial paper.

5.3.

Interest rates include the effects of interest rate swaps accounted for as hedges.

 

6.4.

Consists of long-term secured financings and unsecured long-term borrowings.

7.

PrimarilySubstantially all consists of certain payables to customers and counterparties.

 

8.

Assets, liabilities and interest are attributed to U.S. and non-U.S. based on the location of the legal entity in which the assets and liabilities are held.

 Goldman Sachs 20112014 Form 10-K 217225


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

Changes in Net Interest Income, Volume and Rate Analysis

 

Changes in Net Interest Income, Volume and Rate Analysis

The table below presents an analysis of the effect on net interest income of volume and rate changes. In this analysis,

changes due to volume/rate variance have been allocated to volume.

 

 

 For the Year Ended  Year Ended 
 December 2011 versus December 2010     December 2010 versus December 2009  December 2014 versus December 2013   December 2013 versus December 2012 
 Increase (decrease) due
to change in:
         Increase (decrease) due
to change in:
      Increase (decrease)
due to change in:
        Increase (decrease) due
to change in:
       
in millions Volume   Rate   

Net

change

        Volume   Rate   

Net

change

 
$ in millions  Volume       Rate       
 
Net
Change
  
  
  Volume       Rate       
 
Net
Change
  
  

Interest-earning assets

                               

Deposits with banks

  $  28     $   11     $   39      $   20     $       1     $      21    $    (7     $  (15     $     (22   $   29       $        1       $      30  
 

U.S.

  23     5     28      18     4     22    (9     (14     (23   23       12       35  
 

Non-U.S.

  5     6     11      2     (3   (1  2       (1     1     6       (11     (5

Securities borrowed, securities purchased under agreements to resell, at fair value and federal funds sold

  186     (60   126      38     (449   (411
 

Securities borrowed, securities purchased under agreements to resell and federal funds sold

  (67     (57     (124   (41     161       120  
 

U.S.

  28     (352   (324    (4   65     61    14       (239     (225   (11     153       142  
 

Non-U.S.

  158     292     450      42     (514   (472  (81     182       101     (30     8       (22
 

Financial instruments owned, at fair value

  375     (3   372      (234   (526   (760  (569     (138     (707   (490     (1,168     (1,658
 

U.S.

  (212   (176   (388    (404   (160   (564  (340     32       (308   (245     (950     (1,195
 

Non-U.S.

  587     173     760      170     (366   (196  (229     (170     (399   (245     (218     (463
 

Loans receivable

  379       33       412     139       7       146  
 

U.S.

  355       27       382     116       4       120  
 

Non-U.S.

  24       6       30     23       3       26  
 

Other interest-earning assets

  299     29     328      (159   (289   (448  17       (32     (15   82       (41     41  
 

U.S.

  149     77     226           (363   (363  38       (21     17     (27     (3     (30
 

Non-U.S.

  150     (48   102      (159   74     (85  (21     (11     (32  109       (38     71  

Change in interest income

  888     (23   865      (335   (1,263   (1,598  (247     (209     (456  (281     (1,040     (1,321

Interest-bearing liabilities

                               

Interest-bearing deposits

  15     (39   (24    (30   (81   (111     16         (70          (54      75            (87          (12
 

U.S.

  13     (49   (36    (32   (60   (92  9       (75     (66   70       (80     (10
 

Non-U.S.

  2     10     12      2     (21   (19  7       5       12     5       (7     (2

Securities loaned and securities sold under agreements to repurchase, at fair value

  136     61     197      22     (631   (609
 

Securities loaned and securities sold under agreements to repurchase

  (141     (4     (145   26       (272     (246
 

U.S.

  (7   (68   (75    4     (41   (37  (92     56       (36   (13     (125     (138
 

Non-U.S.

  143     129     272      18     (590   (572  (49     (60     (109   39       (147     (108
 

Financial instruments sold, but not yet purchased, at fair value

  313     292     605      354     (349   5    (231     (82     (313   (20     (364     (384
 

U.S.

  139     27     166      93     139     232    37       120       157     (62     (119     (181
 

Non-U.S.

  174     265     439      261     (488   (227  (268     (202     (470   42       (245     (203

Commercial paper

  1     (1         2     (2     
 

Short-term borrowings

  45       8       53     (67     (120     (187
 

U.S.

  1          1           (2   (2  48              48     (64     (50     (114
 

Non-U.S.

       (1   (1    2          2    (3     8       5     (3     (70     (73

Other borrowings

  166     (93   73      (40   (130   (170
 

Long-term borrowings

  (45     (247     (292   (53     69       16  
 

U.S.

  146     (110   36      (37   (95   (132  (66     (242     (308   (44     97       53  
 

Non-U.S.

  20     17     37      (3   (35   (38  21       (5     16     (9     (28     (37

Long-term debt

  (151   435     284      (177   747     570  
 

Other interest-bearing liabilities

  (47     (313     (360   57       (77     (20
 

U.S.

  (78   403     325      (138   735     597    (69     (249     (318   38       46       84  

Non-U.S.

  (73   32     (41    (39   12     (27

Other interest-bearing liabilities

  103     (62   41      (155   776     621  

U.S.

  (26   (288   (314    7     495     502  
 

Non-U.S.

  129     226     355      (162   281     119    22       (64     (42  19       (123     (104

Change in interest expense

  583     593     1,176      (24   330     306    (403     (708     (1,111  18       (851     (833

Change in net interest income

  $305     $(616   $(311    $(311   $(1,593   $(1,904  $ 156       $ 499       $    655    $(299     $   (189     $   (488

 

218226 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

Available-for-sale Securities Portfolio

The table below presents the fair value of available-for-sale securities.

in millions Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 

Available-for-sale securities, December 2011

       

Commercial paper, certificates of deposit, time deposits and other money market instruments

 $406    $    $    $406  

U.S. government and federal agency obligations

  582     80          662  

Non-U.S. government obligations

  19               19  

Mortgage and other asset-backed loans and securities

  1,505     30     (119   1,416  

Corporate debt securities

  1,696     128     (11   1,813  

State and municipal obligations

  418     63          481  

Other debt obligations

  67          (3   64  

Total available-for-sale securities

 $4,693    $301    $(133  $4,861  

Available-for-sale securities, December 2010

       

Commercial paper, certificates of deposit, time deposits and other money market instruments

 $176    $    $    $176  

U.S. government and federal agency obligations

  638     18     (19   637  

Non-U.S. government obligations

  2               2  

Mortgage and other asset-backed loans and securities

  593     82     (5   670  

Corporate debt securities

  1,533     162     (7   1,688  

State and municipal obligations

  356     8     (5   359  

Other debt obligations

  136     7     (2   141  

Total available-for-sale securities

 $3,434    $277    $(38  $3,673  

Goldman Sachs 2011 Form 10-K219


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

 

The table below presents the fair value, amortized cost and weighted average yields of available-for-sale securities by

contractual maturity. Yields are calculated on a weighted average basis.

  As of December 2011 
  

Due in

One Year or Less

    Due After
One Year Through
Five Years
  Due After
Five Years Through
Ten Years
  Due After
Ten Years
    Total 
$ in millions Amount   Yield     Amount   Yield  Amount   Yield  Amount   Yield     Amount   Yield 

Fair value of available-for-sale securities

                 

Commercial paper, certificates of deposit, time deposits and other money market instruments

  $406         $  —       $  —      $        $406     

U.S. government and federal agency obligations

  72           132     3    69     2    389     4      662     3  

Non-U.S. government obligations

             9     3    9     6    1     4      19     4  

Mortgage and other asset-backed loans and securities

             120     7    19     5    1,277     10      1,416     10  

Corporate debt securities

  33     5      425     4    848     5    507     6      1,813     5  

State and municipal obligations

  1     5      12     5             468     6      481     6  

Other debt obligations

             10     4             54     3      64     3  

Total available-for-sale securities

  $512           $708         $945        $2,696          $4,861       

Amortized cost of available-for-sale securities

  $512           $696         $899        $2,586          $4,693       
  As of December 2010 
  

Due in

One Year or Less

    Due After
One Year Through
Five Years
  Due After
Five Years Through
Ten Years
  Due After
Ten Years
    Total 
$ in millions Amount   Yield     Amount   Yield  Amount   Yield  Amount   Yield     Amount   Yield 

Fair value of available-for-sale securities

                 

Commercial paper, certificates of deposit, time deposits and other money market instruments

  $176         $  —       $  —      $        $176     

U.S. government and federal agency obligations

  37     4      99     3    17     4    484     4      637     4  

Non-U.S. government obligations

             2     2                        2     2  

Mortgage and other asset-backed loans and securities

                               670     11      670     11  

Corporate debt securities

  34     6      126     6    717     6    811     7      1,688     6  

State and municipal obligations

             10     5    11     5    338     6      359     6  

Other debt obligations

                      24     1    117     5      141     4  

Total available-for-sale securities

  $247           $237         $769        $2,420          $3,673       

Amortized cost of available-for-sale
securities

  $246           $220         $708        $2,260          $3,434       

220Goldman Sachs 2011 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

Deposits

The tabletables below presentspresent a summary of the firm’s interest-bearing deposits.

 

 Average Balances       Average Interest Rates 
 Year Ended December       Year Ended December  

Average Balances for the

Year Ended December

 
$ in millions 2011     2010     2009        2011   2010   2009   2014     2013     2012  

U.S.:

                       

Savings 1

 $25,916      $23,260      $23,024        0.42   0.44   0.62  $41,785     $39,411     $32,235  
 

Time

  7,318       8,158       12,019        1.84     2.16     1.89    20,932     21,413     16,433  

Total U.S. deposits

  33,234       31,418       35,043        0.73     0.89     1.06    62,717     60,824     48,668  

Non-U.S.:

                       

Demand

  5,378       5,559       5,402        0.46     0.34     0.61    4,571     4,613     5,318  
 

Time

  1,654       1,034       631        0.73     0.58     1.65    5,998     4,270     2,413  

Total Non-U.S. deposits

  7,032       6,593       6,033        0.53     0.38     0.73    10,569     8,883     7,731  

Total deposits

 $40,266      $38,011      $41,076        0.70     0.80     1.01    $73,286     $69,707     $56,399  

 

1.

Amounts are available for withdrawal upon short notice, generally within seven days.

Ratios

The table below presents selected financial ratios.

  Year Ended December 
   2011     2010   2009 

Net earnings to average assets

  0.5     0.9   1.5

Return on average common shareholders’ equity 1

  3.7       11.5     22.5  

Return on average total shareholders’ equity 2

  6.1       11.3     20.4  

Total average equity to average assets

  7.7       8.3     7.2  

Dividend payout ratio 3

  31.0       10.6     4.7  

1.

Based on net earnings applicable to common shareholders divided by average monthly common shareholders’ equity.

2.

Based on net earnings divided by average monthly total shareholders’ equity.

3.

Dividends declared per common share as a percentage of diluted earnings per common share.

  

Average Interest Rates for the

Year Ended December

 
   2014     2013     2012  

U.S.:

     

Savings

  0.23%     0.30%     0.42%  
  

Time

  0.91%     1.09%     1.38%  
  

Total U.S. deposits

  0.46%     0.58%     0.74%  
  

Non-U.S.:

     

Demand

  0.18%     0.22%     0.30%  
  

Time

  0.65%     0.59%     0.87%  
  

Total Non-U.S. deposits

  0.44%     0.39%     0.48%  
  

Total deposits

  0.45%     0.56%     0.71%  

Short-term and Other Borrowed Funds

The tabletables below presentspresent a summary of the firm’s securities loaned and securities sold under agreements to repurchase, and short-term borrowings. These borrowings generally

mature within one year of the financial statement date and include borrowings that are redeemable at the option of the holder within one year of the financial statement date.

 

 Securities Loaned and Securities Sold
Under Agreements to Repurchase
   Commercial Paper   Other Funds Borrowed 1, 2 
 As of December   As of December   As of December  

Securities Loaned and Securities Sold

Under Agreements to Repurchase

as of December

 
$ in millions 2011 2010 2009    2011 2010 2009    2011 2010 2009   2014     2013     2012  

Amounts outstanding at year-end

 $171,684   $173,557   $143,567   $1,491   $1,306   $1,660   $76,732   $71,065   $48,787    $  93,785     $183,527     $185,572  
 

Average outstanding during the year

  171,753    160,280    156,794    1,881    1,624    1,002    76,616    53,888    58,129    131,911     178,686     177,550  
 

Maximum month-end outstanding

  190,453    173,557    169,083    2,853    1,712    3,060    84,546    71,065    77,712    178,049     196,393     198,456  
 

Weighted average interest rate

                

During the year

  0.53  0.44  0.84  0.24  0.31  0.50  0.68  0.83  1.06  0.33%     0.32%     0.46%  
 

At year-end

  0.39    0.44    0.26    0.34    0.20    0.37    0.93    0.63    0.76    0.31%     0.28%     0.44%  
 

Short-Term Borrowings

as of December

 
$ in millions  2014     2013     2012  

Amounts outstanding at year-end 1

  $  60,100     $  61,982     $  67,349  
 

Average outstanding during the year

  64,594     60,926     70,359  
 

Maximum month-end outstanding

  68,572     66,978     75,280  
 

Weighted average interest rate 2

     

During the year

  0.69%     0.65%     0.83%  
 

At year-end

  0.68%     0.89%     0.79%  

 

1.

Includes short-term secured financings of $29.19$15.56 billion, $24.53$17.29 billion and $12.93$23.05 billion as of December 2011,2014, December 20102013 and December 2009,2012, respectively.

 

2.

As of December 2011, December 2010 and December 2009,The weighted average interest rates for these borrowings include the effectseffect of hedging.hedging activities.

 

  Goldman Sachs 20112014 Form 10-K  221227


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

 

Cross-border Outstandings

Cross-border outstandings are based on the Federal Financial Institutions Examination Council’s (FFIEC) regulatory guidelines for reporting cross-border information and represent the amounts that the firm may not be able to obtain from a foreign country due to country-specific events, including unfavorable economic and political conditions, economic and social instability, and changes in government policies.

Credit exposure represents the potential for loss due to the default or deterioration in credit quality of a counterparty or an issuer of securities or other instruments the firm holds and is measured based on the potential loss in an event of non-payment by a counterparty. Credit exposure is reduced through the effect of risk mitigants, such as netting agreements with counterparties that permit the firm to offset receivables and payables with such counterparties or obtaining collateral from counterparties. The tables below do not include all the effects of such risk mitigants and do not represent the firm’s credit exposure.

ClaimsThe tables below present cross-border outstandings and commitments for each country in which cross-border outstandings exceed 0.75% of consolidated assets in accordance with the tables belowFFIEC guidelines and include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash financial instruments, but exclude derivative instruments and commitments.instruments. Securities purchased under agreements to resell and securities borrowed are presented gross, without reduction for related securities collateral held, based on the domicile of the counterparty.held. Margin loans (included in receivables) are presented based on the amount of collateral advanced by the counterparty.

The tables Substantially all commitments in the table below present cross-border outstandings for each country in which cross-border outstandings exceed 0.75%consist of consolidated assets in accordance with the FFIEC guidelines.commitments to extend credit and forward starting resale and securities borrowing agreements.

 

 

$ in millions

Country

 As of December 2014 
 Banks       Governments       Other       Total       Commitments  

Cayman Islands

  $         2       $       —       $35,829       $35,831       $  2,658  
 As of December 2011   
in millions Banks     Governments     Other     Total 

Country

             

France

 $33,916 1     $2,859      $3,776      $40,551    4,730       4,932       18,261 1      27,923       12,214  
 

Japan

  13,862       373       10,763       24,998       11,413  
 

Germany

  5,362       4,479       10,629       20,470       4,631  
 

United Kingdom

  1,870       282       8,821       10,973       11,755  
 

Italy

  3,331       4,173       2,215       9,719       783  
 

China

  2,474       1,952       4,984       9,410       6  

$ in millions

Country

 As of December 2013 
 Banks       Governments       Other       Total       Commitments  

Cayman Islands

                33,742       33,742 3   $       12       $         1       $35,969       $35,982       $  1,671  
 

Japan

  18,745       31       6,457       25,233 3   23,026       123       11,981       35,130       5,086  
 

France

  12,427       2,871       16,567 1      31,865       12,060  
 

Germany

  5,458       16,089       3,162       24,709    5,148       4,336       7,793       17,277       4,716  
 

Spain

  7,002       2,281       2,491       11,774       1,069  
 

United Kingdom

  2,111       3,349       5,243       10,703 3   2,688       217       7,321       10,226       19,014  

Italy

  6,143       3,054       841       10,038 4 

Ireland

  1,148       63       8,801 2      10,012  

China

  6,722       38       2,908       9,668  

Switzerland

  3,836       40       5,112       8,988  

Canada

  676       1,019       6,841       8,536  

Australia

  1,597       470       5,209       7,276  
 

Netherlands

  1,785       540       5,786       8,111       1,962  

 

$ in millions

Country

 As of December 2012 
 Banks       Governments       Other       Total        Commitments  

Cayman Islands

  $       —       $       —       $39,283       $39,283       $  1,088  
 As of December 2010   
in millions Banks     Governments     Other     Total 

Country

             

France

 $29,250 1     $7,373      $4,860      $41,483    6,991       2,370       23,161 1      32,522       18,846  

Cayman Islands

  7              35,850       35,857 3 
 

Japan

  21,881       49       8,002       29,932 3   16,679       19       8,908       25,606       9,635  
 

Germany

  3,767       16,572       2,782       23,121    4,012       10,976       7,912       22,900       4,887  
 

Spain

  3,790       4,237       1,816       9,843       473  
 

Ireland

  438       68       7,057       7,563 2      176  
 

United Kingdom

  1,422       237       5,874       7,533       20,327  
 

China

  10,849       701       2,931       14,481    2,564       1,265       3,564       7,393         

United Kingdom

  2,829       2,401       6,800       12,030 3 
 

Brazil

  1,383       3,704       2,280       7,367       865  
 

Switzerland

  2,473       151       7,616       10,240    3,706       230       3,133       7,069       1,305  

Canada

  260       366       6,741       7,367  

 

1.

Primarily comprised of secured lending transactions with a clearing house which are secured by collateral.house.

2.

Primarily comprised of interests in and receivables from funds domiciled in Ireland, but whose underlying investments are primarily located outside of Ireland, and secured lending transactions which are secured by U.S. government obligations.

3.

Excludes claims of $2.27 billion, $6.99 billion and $53.01 billion as of December 2011, and $1.21 billion, $7.06 billion and $26.84 billion as of December 2010 for the Cayman Islands, Japan and the United Kingdom, respectively, where the firm’s subsidiary and the counterparty are domiciled within the same foreign country, but the claim is not denominated in that country’s local currency.

4.

Primarily comprised of secured lending transactions which are primarily secured by German government obligations.transactions.

 

222228 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants on accounting and financial disclosure during the last two years.

Item 9A.    Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by Goldman Sachs’ management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fourth quarter of our year ended December 31, 20112014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 of thisthe 2014 Form 10-K.

Item 9B.    Other Information

Not applicable.Effective February 20, 2015, the Board approved an amendment to our Amended and Restated By-Laws solely to change three references to the “Corporate Governance, Nominating and Public Responsibilities Committee” to the “Corporate Governance and Nominating Committee,” reflecting a change in the name of that Board committee.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Information relating to our executive officers is included on pages 35 to 36page 44 of thisthe 2014 Form 10-K. Information relating to our directors, including our audit committee and audit committee financial experts and the procedures by which shareholders can recommend director nominees, and our executive officers will be in our definitive Proxy Statement for our 20122015 Annual Meeting of Shareholders, which will be filed within 120 days of the end of 2011 (20122014 (2015 Proxy Statement) and is incorporated herein by reference. Information relating to our Code of Business Conduct and Ethics, which applies to our senior financial officers, is included under “Available Information” in Part I, Item 1 of thisthe 2014 Form 10-K.

Item 11.    Executive Compensation

Information relating to our executive officer and director compensation and the compensation committee of our board of directorsthe Board will be in the 20122015 Proxy Statement and is incorporated herein by reference.

 

 

 Goldman Sachs 20112014 Form 10-K 223229


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

 

Item 12.    Security Ownership of Certain
Beneficial Owners and Management and
Related Stockholder Matters

Information relating to security ownership of certain beneficial owners of our common stock and information relating to the security ownership of our management will be in the 20122015 Proxy Statement and is incorporated herein by reference.

The following table provides information as of December 31, 2011,2014, the last day of 2011,2014, regarding securities to be issued on exercise of outstanding stock options or pursuant to outstanding restricted stock units and performance-based awards, and securities remaining available for issuance under our equity compensation plans that were in effect during 2011.2014.

 

  

Plan

Category

 








Number of
Securities
to be

Issued
Upon
Exercise of
Outstanding
Options,
Warrants
and Rights










 






Weighted-AverageWeighted
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights







 












Number of
Securities
Remaining
Available For
for Future
Issuance
Under Equity
Equity Compensation
Plans (Excluding
(Excluding
Securities
Reflected in
the Second
Column)













Equity

compensation

plans

approved by

security holders

 

The

Goldman Sachs Amended

and

Restated Stock Incentive

Plan

(2013) 1

47,970,8862  91, 671,368$120.40 2$97.763   161,010,33645,678,241 4 4  

Equity

compensation

plans not

approved by

security holders

 None         

Total

    91, 671,36847,970,8862       161,010,33645,678,241 4 4  

 

1.

The Goldman Sachs Amended and Restated Stock Incentive Plan (SIP)(2013) (2013 SIP) was approved by the shareholders of Group Inc. at our 20032013 Annual Meeting of Shareholders and is a successor plan to The Goldman Sachs Amended and Restated Stock Incentive Plan (2003 SIP). The 2003 SIP was approved by our shareholders at our 2003 Annual Meeting of shareholders and was a successor plan to The Goldman Sachs 1999 Stock Incentive Plan (1999 Plan)SIP), which was approved by our shareholders immediately prior to our initial public offering in May 1999 and under which no additional awards have been granted since approval of the SIP.1999.

 

2.

Includes: (i) 47,256,93819,955,338 shares of common stock that may be issued upon exercise of outstanding options;options and (ii) 44,388,28728,015,548 shares that may be issued pursuant to outstanding restricted stock units; and (iii) 26,143 shares that may be issued pursuant to outstanding performance-based units granted under the SIP.units. These awards are subject to vesting and other conditions to the extent set forth in the respective award agreements, and the underlying shares will be delivered net of any required tax withholding.

 

3.

This weighted-averageweighted average exercise price relates only to the options described in footnote 2. Shares underlying restricted stock units and performance-based units are deliverable without the payment of any consideration, and therefore these awards have not been taken into account in calculating the weighted-averageweighted average exercise price.

 

4.

Represents shares remaining to be issued under the 2013 SIP, excluding shares reflected in the second column. The total number of shares of common stock that may be delivered pursuant to awards granted under the 2013 SIP through the end of our 2008 fiscal year could notcannot exceed 25060 million shares. The total number of shares, of common stock that may be delivered pursuantsubject to awards grantedadjustment for certain changes in corporate structure as permitted under the 2013 SIP. Shares that remain authorized but unissued under the 2003 SIP in our 2009 fiscal year and each fiscal year thereafter cannot exceed 5% ofare not carried over to the issued and outstanding shares of common stock, determined as of the last day of the immediately preceding fiscal year, increased by the number of shares available for awards in previous years but not covered by awards granted in such years.2013 SIP. There are no shares remaining to be issued under the 1999 PlanSIP or 2003 SIP other than those reflected in the second column.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

Information regarding certain relationships and related transactions and director independence will be in the 20122015 Proxy Statement and is incorporated herein by reference.

Item 14.    Principal AccountantAccounting Fees and Services

Information regarding principal accountantaccounting fees and services will be in the 20122015 Proxy Statement and is incorporated herein by reference.

 

 

224230 Goldman Sachs 20112014 Form 10-K 


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

PART IV

Item 15.    Exhibits, and Financial Statement Schedules

(a) Documents filed as part of this Report:

1. Consolidated Financial Statements

The consolidated financial statements required to be filed in thisthe 2014 Form 10-K are included in Part II, Item 8 hereof.

2. Exhibits

 

    2.1

  

Plan of Incorporation (incorporated by reference to the corresponding exhibit to the Registrant’s registration statementRegistration Statement on Form S-1 (No. 333-74449)).

    3.1

  

Restated Certificate of Incorporation of The Goldman Sachs Group, Inc., amended as of May 6, 20112, 2014 (incorporated by reference to Exhibit 3.23.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2011,2014, filed on May 10, 2011)9, 2014).

    3.2

  

Amended and Restated By-Laws of The Goldman Sachs Group, Inc., amended as of May 7, 2010 (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K, filed May 11, 2010).February 20, 2015.

    4.1

  

Indenture, dated as of May 19, 1999, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 6 to the Registrant’s registration statementRegistration Statement on Form 8-A, filed June 29, 1999).

    4.2

  

Subordinated Debt Indenture, dated as of February 20, 2004, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2003).

    4.3

  

Warrant Indenture, dated as of February 14, 2006, between The Goldman Sachs Group, Inc. and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.34 to the Registrant’s Post-Effective Amendment No. 3 to Form S-3, filed on March 1, 2006).

    4.4

  

Senior Debt Indenture, dated as of December 4, 2007, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York, as trustee (incorporated by reference to Exhibit 4.69 to the Registrant’s Post-Effective Amendment No. 10 to Form S-3, filed on December 4, 2007).

  

Certain instruments defining the rights of holders of long-term debt securities of the Registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of RegulationS-K. The Registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.

    4.5

  

Senior Debt Indenture, dated as of July 16, 2008, between The Goldman Sachs Group, Inc. and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.82 to the Registrant’s Post-Effective Amendment No. 11 to Form S-3 (No. 333-130074), filed July 17, 2008).

    4.6

  

Senior Debt Indenture, dated as of October 10, 2008, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York Mellon, as trustee (incorporated by reference to
Exhibit 4.70 to the Registrant’s registration statementRegistration Statement on Form S-3 (No. 333-154173), filed October 10, 2008).

    4.7

First Supplemental Indenture, dated as of February 20, 2015, among GS Finance Corp., as issuer, The Goldman Sachs Group, Inc., as guarantor, and The Bank of New York Mellon, as trustee, with respect to the Senior Debt Indenture, dated as of October 10, 2008.

10.1

  

The Goldman Sachs Amended and Restated Stock Incentive Plan (2013) (incorporated by reference to Exhibit 10.1Annex C to the Registrant’s Annual ReportDefinitive Proxy Statement on Form 10-K for the fiscal year ended November 28, 2008)Schedule 14A, filed on April 12, 2013)

10.2

  

The Goldman Sachs Amended and Restated Restricted Partner Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended February 24, 2006). 

Goldman Sachs 2014 Form 10-K231


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

10.3

  

Form of Employment Agreement for Participating Managing Directors (applicable to executive officers) (incorporated by reference to Exhibit 10.19 to the Registrant’s registration statementRegistration Statement on
Form S-1 (No.(No. 333-75213)). 

Goldman Sachs 2011 Form 10-K225


10.4

  

Form of Agreement Relating to Noncompetition and Other Covenants (incorporated by reference to
Exhibit 10.20 to the Registrant’s registration statementRegistration Statement on Form S-1 (No. 333-75213)). 

10.5

  

Tax Indemnification Agreement, dated as of May 7, 1999, by and among The Goldman Sachs Group, Inc. and various parties (incorporated by reference to Exhibit 10.25 to the Registrant’s registration statementRegistration Statement on
Form S-1 (No. 333-75213)).

10.6

  

Amended and Restated Shareholders’ Agreement, effective as of January 22, 2010,15, 2015, among The Goldman Sachs Group, Inc. and various parties (incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).parties.

10.7

  

Instrument of Indemnification (incorporated by reference to Exhibit 10.27 to the Registrant’s registration statementRegistration Statement on Form S-1 (No. 333-75213)).

10.8

  

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 26, 1999).

10.9

  

Form of Indemnification Agreement (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 26, 1999).

10.10

  

Form of Indemnification Agreement, dated as of July 5, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2000).

10.11

  

Amendment No. 1, dated as of September 5, 2000, to the Tax Indemnification Agreement, dated as of
May 7, 1999 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2000).

10.12

Letter, dated February 6, 2001, from The Goldman Sachs Group, Inc. to Mr. John H. Bryan (incorporated by reference to Exhibit 10.64 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2000). 

10.13

  

Letter, dated February 6, 2001, from The Goldman Sachs Group, Inc. to Mr. James A. Johnson (incorporated by reference to Exhibit 10.65 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2000). 

10.14

  10.13
  

Letter, dated December 18, 2002, from The Goldman Sachs Group, Inc. to Mr. William W. George (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 29, 2002). 

10.15

  10.14
  

Letter, dated June 20, 2003, from The Goldman Sachs Group, Inc. to Mr. Claes Dahlbäck (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended
May 30, 2003). 

10.16

Letter, dated March 31, 2004, from The Goldman Sachs Group, Inc. to Ms. Lois D. Juliber (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended
February 27, 2004). 

10.17

Letter, dated April 6, 2005, from The Goldman Sachs Group, Inc. to Mr. Stephen Friedman (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed April 8, 2005). 

10.18

Letter, dated May 12, 2009, from The Goldman Sachs Group, Inc. to Mr. James J. Schiro (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended
June 26, 2009). 

10.19

  10.15
  

Form of Amendment, dated November 27, 2004, to Agreement Relating to Noncompetition and Other Covenants, dated May 7, 1999 (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 26, 2004). 

10.20

Form of Year-End Restricted Stock Award (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007). 

10.21

Form of Year-End Restricted Stock Award in Connection with Outstanding RSU Awards (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007). 

10.22

  10.16
  

The Goldman Sachs Group, Inc. Non-Qualified Deferred Compensation Plan for U.S. Participating Managing Directors (terminated as of December 15, 2008) (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007). 

226Goldman Sachs 2011 Form 10-K


10.23

  10.17
  

Form of Year-End Option Award Agreement (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). 

10.24

  10.18
  

Form of Year-End RSU Award Agreement (French alternative award) (incorporated by reference to
Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). 

10.25

  10.19
  

Amendments to 2005 and 2006 Year-End RSU and Option Award Agreements (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 30, 2007). 

10.26

  10.20
  

Form of Non-Employee Director Option Award Agreement (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). 

10.27

  10.21
  

Form of Non-Employee Director RSU Award Agreement. 

10.28

232
 

Description of Non-Employee Director Compensation. Goldman Sachs 2014 Form 10-K


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

10.29

  10.22
  

Ground Lease, dated August 23, 2005, between Battery Park City Authority d/b/a/ Hugh L. Carey Battery Park City Authority, as Landlord, and Goldman Sachs Headquarters LLC, as Tenant (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed August 26, 2005).

10.30

  10.23
  

General Guarantee Agreement, dated January 30, 2006, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman, Sachs & Co. (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005).

10.31

  10.24
  

Goldman, Sachs & Co. Executive Life Insurance Policy and Certificate with Metropolitan Life Insurance Company for Participating Managing Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2006). 

10.32

  10.25
  

Form of Goldman, Sachs & Co. Executive Life Insurance Policy with Pacific Life & Annuity Company for Participating Managing Directors, including policy specifications and form of restriction on Policy Owner’s Rights (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 25, 2006). 

10.33

  10.26
  

Form of Second Amendment, dated November 25, 2006, to Agreement Relating to Noncompetition and Other Covenants, dated May 7, 1999, as amended effective November 27, 2004 (incorporated by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
November 24, 2006). 

10.34

  10.27
  

Description of PMD Retiree Medical Program (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the period ended February 29, 2008). 

10.35

  10.28
  

Letter, dated June 28, 2008, from The Goldman Sachs Group, Inc. to Mr. Lakshmi N. Mittal (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed June 30, 2008). 

10.36

  10.29
  

Securities Purchase Agreement, dated September 29, 2008, between The Goldman Sachs Group, Inc. and Berkshire Hathaway Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended August 29, 2008).

10.37

General Guarantee Agreement, dated December 1, 2008, made by The Goldman Sachs Group, Inc. relating to certain obligations of Goldman Sachs Bank USA (incorporated by reference to Exhibit 4.80 to the Registrant’s Post-Effective Amendment No. 2 toForm S-3, filed March 19, 2009).

10.38

General Guarantee Agreement, dated November 24, 2008, made by The Goldman Sachs Group, Inc. relating to the obligations of Goldman Sachs Bank (Europe) plc (incorporated by reference to Exhibit 10.59 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008).

10.39

  10.30
  

Guarantee Agreement, dated November 28, 2008 and amended effective as of January 1, 2010, between The Goldman Sachs Group, Inc. and Goldman Sachs Bank USA (incorporated by reference to Exhibit 10.51 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009).

Goldman Sachs 2011 Form 10-K227


10.40

  10.31
  

Collateral Agreement, dated November 28, 2008, between The Goldman Sachs Group, Inc., Goldman Sachs Bank USA and each other party that becomes a pledgor pursuant thereto (incorporated by reference to Exhibit 10.61 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008).

10.41

  10.32
  

Form of One-Time RSU Award Agreement. 

10.42

  10.33
  

Amendments to Certain Equity Award Agreements (incorporated by reference to Exhibit 10.68 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). 

10.43

  10.34
  

Amendments to Certain Non-Employee Director Equity Award Agreements (incorporated by reference to Exhibit 10.69 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008). 

10.44

  10.35
  

Form of Signature Card for Equity Awards. 

10.45

Form of Signature Card for Equity Awards (employees in Asia outside China). 

10.46

Form of Signature Card for Equity Awards (employees in China). 

10.47

  10.36
  

Form of Year-End RSU Award Agreement (not fully vested). 

10.48

  10.37
  

Form of Year-End RSU Award Agreement (fully vested). 

10.49

  10.38
  

Form of Year-End RSU Award Agreement (Base and/or Supplemental). 

10.50

  10.39
  

Form of Year-End Short-Term RSU Award Agreement. 

  10.40

10.51Form of Year-End Restricted Stock Award Agreement (fully vested) (incorporated by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013).  †

  10.41  

Form of Year-End Restricted Stock Award Agreement (Base and/or Supplemental). 

10.52

Form of Year-End Restricted Stock Award Agreement (fully vested). 

10.53

  10.42
  

Form of Year-End Short-Term Restricted Stock Award Agreement. 

  10.43

10.54Form of Fixed Allowance RSU Award Agreement. 

Goldman Sachs 2014 Form 10-K233


THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

  10.44  

General Guarantee Agreement, dated March 2, 2010, made by The Goldman Sachs Group, Inc. relating to the obligations of Goldman Sachs Execution & Clearing, L.P. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2010).

10.55

  10.45
  

Form of Deed of Gift (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2010). 

10.56

  10.46
  

The Goldman Sachs Long-Term Performance Incentive Plan, dated December 17, 2010 (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). 

10.57

  10.47
  

Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). 

10.58

  10.48
  

Form of Performance-Based Option Award Agreement (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). 

10.59

  10.49
  

Form of Performance-Based Cash Compensation Award Agreement (incorporated by reference to the Registrant’s Current Report on Form 8-K, filed December 23, 2010). 

10.60

  10.50
  

Amended and Restated General Guarantee Agreement, dated November 21, 2011, made by theThe Goldman Sachs Group, Inc. relating to certain obligations of Goldman Sachs Bank USA (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K, filed November 21, 2011).

10.61

  10.51
  

Form of Aircraft Time Sharing Agreement.Agreement (incorporated by reference to Exhibit 10.61 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). 

  10.52

Description of Compensation Arrangements with Executive Officer (incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the period ended June 30, 2012). 

  10.53

The Goldman Sachs Group, Inc. Clawback Policy, effective as of January 1, 2015.

12.1

  

Statement re: Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends.

21.1

  

List of significant subsidiaries of The Goldman Sachs Group, Inc.

23.1

  

Consent of Independent Registered Public Accounting Firm.

31.1

  

Rule 13a-14(a) Certifications.

32.1

  

Section 1350 Certifications. *

99.1

  

Report of Independent Registered Public Accounting Firm on Selected Financial Data.

228  99.2  Goldman Sachs 2011 Form 10-K


Debt and trust securities registered under Section 12(b) of the Exchange Act.

101

  

Interactive data files pursuant to Rule 405 of RegulationS-T: (i) the Consolidated Statements of Earnings for the years ended December 31, 2011,2014, December 31, 20102013 and December 31, 2009;2012, (ii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, (iii) the Consolidated Statements of Financial Condition as of December 31, 20112014 and December 31, 2010; (iii)2013, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011,2014, December 31, 20102013 and December 31, 2009; (iv)2012, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2011,2014, December 31, 20102013 and December 31, 2009; (v) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2011, December 31, 2010 and December 31, 2009;2012, and (vi) the notes to the Consolidated Financial Statements.

  ���

This exhibit is a management contract or a compensatory plan or arrangement.

  

*

This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

234 Goldman Sachs 20112014 Form 10-K 229


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

THE GOLDMAN SACHS GROUP, INC.

By:          /s/Harvey M. Schwartz

By:  Name:

 

/s/    David A. Viniar           Harvey M. Schwartz

 

Name:

  Title:
 

David A. Viniar

Title:

Chief Financial Officer

Date: February 28, 201220, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

 

Capacity

 

Date

/s/    Lloyd C. Blankfein        

Lloyd C. Blankfein

 

Director, Chairman and Chief Executive

Officer (Principal Executive Officer)

 February 28, 2012

/s/    John H. Bryan        

John H. Bryan

DirectorFebruary 28, 201220, 2015

/s/    M. Michele Burns        

M. Michele Burns

 Director February 28, 201220, 2015

/s/    Gary D. Cohn        

Gary D. Cohn

 Director February 28, 201220, 2015

/s/    Claes Dahlbäck        

Claes Dahlbäck

 Director February 28, 201220, 2015

/s/    Stephen FriedmanMark A. Flaherty        

Stephen FriedmanMark A. Flaherty

 Director February 28, 201220, 2015

/s/    William W. George        

William W. George

 Director February 28, 201220, 2015

/s/    James A. Johnson        

James A. Johnson

 Director February 28, 2012

/s/    Lois D. Juliber        

Lois D. Juliber

DirectorFebruary 28, 201220, 2015

/s/    Lakshmi N. Mittal        

Lakshmi N. Mittal

 Director February 28, 2012

/s/    James J. Schiro        

James J. Schiro

DirectorFebruary 28, 201220, 2015

 

II-1 Goldman Sachs 20112014 Form 10-K II-1


/s/    Adebayo O. Ogunlesi        

Adebayo O. Ogunlesi

DirectorFebruary 20, 2015

/s/    Peter Oppenheimer        

Peter Oppenheimer

DirectorFebruary 20, 2015

/s/    Debora L. Spar        

Debora L. Spar

 Director February 28, 201220, 2015

/s/    Mark E. Tucker        

Mark E. Tucker

DirectorFebruary 20, 2015

/s/    David A. Viniar        

David A. Viniar

 

Chief Financial Officer

(Principal Financial Officer)

Director
 February 28, 201220, 2015

/s/    Mark O. Winkelman        

Mark O. Winkelman

DirectorFebruary 20, 2015

/s/    Harvey M. Schwartz        

Harvey M. Schwartz

Chief Financial Officer
(Principal Financial Officer)
February 20, 2015

/s/    Sarah E. Smith        

Sarah E. Smith

 Principal Accounting Officer February 28, 201220, 2015

 

II-2 Goldman Sachs 20112014 Form 10-K II-2