Exhibit 99.1
Risk Factors that Could Affect Our Business
In the course of conducting our business operations, we could be exposed to a
variety of risks that are inherent to the financial services business. A
summary of some of the significant risks that could affect our financial
condition and results of operations is included below. Some of these risks are
managed in accordance with established risk management policies and procedures,
most of which are described in the Risk Management section of the Management's
Discussion and Analysis.
Market Risk
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Our business may be adversely impacted by global market and economic
conditions that may cause fluctuations in interest rates, exchange rates,
equity and commodity prices and credit spreads. We are exposed to potential
changes in the value of financial instruments caused by fluctuations in
interest rates, exchange rates, equity and commodity prices, credit
spreads, and/or other risks. These fluctuations may result from changes in
economic conditions, monetary and fiscal policies, the liquidity of global
markets, availability and cost of capital, international and regional
political events, acts of war or terrorism and investor sentiment. We have a
large and increasing amount of proprietary trading and investment positions,
which include proprietary trading positions in fixed income, currency,
commodities and equity securities, as well as in real estate, private equity
and other investments. We may incur losses as a result of increased market
volatility, as these fluctuations may adversely impact the valuation of our
trading and investment positions. Conversely, a decline in volatility may
adversely affect the results in our trading business, which depend on
market volatility to create client and proprietary trading opportunities.
Credit Risk
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Our business may be adversely impacted by an increase in our credit
exposure related to trading, lending, and other business activities. We are
exposed to the potential for credit-related losses that can occur as a result
of an individual, counterparty or issuer being unable or unwilling to honor
its contractual obligations. These credit exposures exist within lending
relationships, commitments, letters of credit, derivatives, foreign exchange
and other transactions. These exposures may arise, for example, from a decline
in the financial condition of a counterparty, from entering into swap or
other derivative contracts under which counterparties have obligations to
make payments to us, from a decrease in the value of securities of third
parties that we hold as collateral, or from extending credit to clients
through loans or other arrangements. As our credit exposure increases, it
could have an adverse effect on our business and profitability if material
unexpected credit losses occur.
Liquidity Risk
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Our business and financial condition may be adversely impacted by an
inability to borrow funds or sell assets to meet maturing obligations. We are
exposed to liquidity risk, which is the potential inability to repay
short-term borrowings with new borrowings or assets that can be quickly
converted into cash while meeting other obligations and continuing to
operate as a going concern. Our liquidity may be impaired due to circumstances
that we may be unable to control, such as general market disruptions or an
operational problem that affects our trading clients or ourselves. Our
ability to sell assets may also be impaired if other market participants
are seeking to sell similar assets at the same time. Our inability to borrow
funds or sell assets to meet maturing obligations, a negative change in our
credit ratings that would have an adverse effect on our ability to borrow funds,
or regulatory capital restrictions imposed on the free flows of funds
between us and our subsidiaries may have a negative effect on our
business and financial condition.
Operational Risk
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We may incur losses due to the failure of people, internal processes and
systems or from external events. Our business may be adversely impacted by
operational failures or from unfavorable external events. We are exposed to
the risk of loss resulting from the failure of people, internal processes and
systems or from external events. Such operational risks may include,
exposure to theft and fraud, improper business practices, client suitability
and servicing risks, product complexity and pricing risk or from improper
recording, evaluating or accounting for transactions. We could suffer
financial loss, disruption of our business, liability to clients, regulatory
intervention or reputational damage from such events, which would affect our
business and financial condition.
Litigation Risk
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Legal proceedings could adversely affect our operating results for a
particular period and impact our credit ratings. We have been named as a
defendant in various legal actions, including arbitrations, class actions,
and other litigation arising in connection with our activities as a global
diversified financial services institution. Some of the legal actions
against us include claims for substantial compensatory and/or punitive
damages or claims for indeterminate amounts of damages. In some cases, the
issuers who would otherwise be the primary defendants are bankrupt or
otherwise in financial distress. Given the number of these matters, some
are likely to result in adverse judgments, penalties, injunctions,
fines, or other relief. We are also involved in investigations and/or
proceedings by governmental and self-regulatory agencies. We may explore
potential settlements before a case is taken through trial because of
uncertainty, risks, and costs inherent in the litigation process. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 5,
Accounting for Contingencies, we will accrue a liability when it is probable
that a liability has been incurred and the amount of the loss can be
reasonably estimated. In many lawsuits and arbitrations, including almost
all of the class action lawsuits disclosed in "Other Information
(Unaudited) - Legal Proceedings", it is not possible to determine whether a
liability has been incurred or to estimate the ultimate or minimum amount of
that liability until the case is close to resolution, in which case no
accrual is made until that time. In view of the inherent difficulty of
predicting the outcome of such matters, particularly in cases in which
claimants seek substantial or indeterminate damages, we cannot predict what
the eventual loss or range of loss related to such matters will be. Potential
losses may be material to our operating results or cash flows for any
particular period and may impact our credit ratings.
Regulatory and Legislative Risks
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Many of our businesses are highly regulated and could be impacted, and in
some instances adversely impacted, by regulatory and legislative initiatives
around the world. Our business may be affected by various U.S. and non-U.S.
legislative bodies and regulatory and exchange authorities, such as federal
and state securities and bank regulators including the SEC, the FSA, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision
("OTS"), and the Utah Department of Finance Institutions, and
self-regulatory organizations including The New York Stock Exchange, Inc.
("NYSE"), the National Association of Securities Dealers, Inc. ("NASD"),
the Commodity Futures Trading Commission ("CFTC") and industry
participants that continue to review and, in many cases, adopt changes to
their established rules and policies. Such changes have occurred in areas
such as corporate governance, anti-money laundering, privacy, research
analyst conflicts of interest and qualifications, practices related to the
issuance of securities, mutual fund trading, disclosure practices and
auditor independence.
Competitive Environment
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Competitive pressures in the financial services industry could adversely
affect our business and results of operations. We compete globally for
clients on the basis of price, the range of products that we offer, the
quality of our services, our financial resources, and product and
service innovation. The financial services industry continues to be affected
by an intensifying competitive environment, as demonstrated by the
introduction of new technology platforms, consolidation through mergers,
increased competition from new and established industry participants and
diminishing margins in many mature products and services. We compete with U.S.
and non-U.S. commercial banks and other broker-dealers in brokerage,
underwriting, trading, financing and advisory businesses. For example, the
financial services industry in general, including us, has experienced
intense price competition in brokerage, as the ability to execute trades
electronically,through the internet and through other alternative trading
systems has pressured trading commissions and spreads. Many of our non-U.S.
competitors may have competitive advantages in their home markets.
In addition, our business is substantially dependent on our continuing ability
to compete effectively to attract and retain qualified employees, including
successful FAs, investment bankers, trading professionals and other
revenue-producing or support personnel.
For further information on Risks refer to Note 6 to the Consolidated Financial
Statements.