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THE GOLDMAN SACHS GROUP, INC. | 85 BROAD STREET | NEW YORK, NEW YORK 10004
TEL: 212-902-1000
GOLDMAN
SACHS
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February 1, 2006
United States Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Attention: Mr. Donald Walker
Senior Assistant Chief Accountant
Mail Stop 4561
Re: The Goldman Sachs Group, Inc.
Form 10-K for Fiscal Year Ended November 26, 2004
Dear Mr. Walker:
We are in receipt of the letter, dated January 23, 2006, to David A. Viniar,
Chief Financial Officer of The Goldman Sachs Group, Inc., from the
staff (the Staff) of the Securities and Exchange Commission (the Commission)
regarding the above-referenced filing. This letter responds to that letter. To
facilitate the Staff's review of our response, we have first reproduced in
sequence the Staff's comment. Our response immediately follows.
Financial Statements
Note 2. Significant Accounting Policies
Revenue Recognition
Financial Instruments, page 102
1. We note your response to comment 1 from our letter dated December 15, 2005
that you have included legal entities like J. Aron & Co., which prior to
you becoming a Consolidated Supervised Entity (CSE) in April 2005 were not
subject to direct regulation by any regulatory regime, within the scope of
the AICPA Broker-Dealer Guide (the Guide). Please tell us why you believe
in fiscal 2004 it was appropriate for you to apply the accounting guidance
in the Guide to the activities of J. Aron & Co. and other non-regulated
legal entities.
Response:
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We have historically applied the principles of the Guide to legal entities
that conduct broker-dealer activities (as broadly defined in the Guide) and
are not regulated as broker-dealers in accordance with the Securities
Exchange Act of 1934 or the Commodity Exchange Act because our overall
business has been, and continues to be, predominantly that of a global
broker-dealer, and the fair value accounting model prescribed by the Guide
is fundamental to a meaningful presentation of the results of our
broker-dealer activities.
As we stated in our letter to the Staff dated January 9, 2006, we believe
that it would have been inappropriate to have applied different accounting
principles to legal entities that conduct similar (or even identical)
broker-dealer activities, based solely on whether, or where, such entities
were regulated. In other words, we have always viewed as inappropriate an
accounting model that would treat, for example, Goldman
Sachs International, our U.K. broker-dealer, differently than Goldman,
Sachs & Co., our principal U.S. broker-dealer; or any model, for that
matter, that would require registrants to determine the application of
accounting principles based on where individual legal entities fall on the
global regulatory continuum.
Instead, we have adopted the specialized industry accounting principles of
the Guide as the overriding accounting model for all of our global
broker-dealer activities and have applied that accounting model
consistently since the 1980s, and transparently in our consolidated
financial statements since becoming a public company in 1999. This model
not only has the advantage of requiring consistent accounting policies
across similar (if not identical) broker-dealer activities, but it also
fully aligns our accounting policies with our risk management policies and
practices across all such activities.
We believe applying the Guide in this manner is consistent with long
standing, widely accepted practice for U.S. investment banks, not just with
respect to fair value accounting for physical commodities, but also for
other asset classes such as mortgage whole loans, loan commitments and
non-marketable equity securities, in each case, examples of assets that
would not be accounted for at fair value, except by application of the
Guide.
We have discussed our application of the Guide to legal entities that
conduct broker-dealer activities and are not regulated as broker-dealers in
accordance with the Securities Exchange Act of 1934 or the Commodity
Exchange Act with our auditors, PricewaterhouseCoopers LLP, and they concur
with our treatment.
2. Please tell us whether you believe it is appropriate for legal entities
that are not regulated as broker-dealers in accordance with the Securities
Exchange Act of 1934 or the Commodity Exchange Act to apply the Guide. If
so, explain why.
Response:
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We believe it is appropriate to apply the Guide to legal entities that are
not regulated as broker-dealers in accordance with the Securities Exchange
Act of 1934 or the Commodity Exchange Act because the ability to
consistently apply fair value accounting under the Guide to all
consolidated broker-dealer activities is fundamental to a meaningful
presentation of the results of such business activities, and to the way
associated market, credit, operational and other risks are managed.
Furthermore, if a broker-dealer was to account for the same (or similar)
activity using different accounting models (depending on the underlying
legal entity), that inconsistent accounting framework would result in
financial information that lacked comparability and consistency - two
important characteristics of financial information in the FASB's conceptual
framework (FASB Concepts Statement No. 2).
We recognize, however, that a registrant engaging in a wide array of
financial services (including, for example, commercial banking, insurance
and investment banking) should not be able to selectively apply the Guide
to some, but not all, of its broker-dealer activities. For that reason, we
believe broader application of the Guide should be permitted only if the
Guide is applied consistently to all legal entities conducting
broker-dealer activities within the registrant's consolidated group.
3. Please tell us whether you believe that Goldman Sachs becoming a CSE in
April 2005 caused each of your subsidiaries to be regulated as a
broker-dealer.
Response:
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We do not believe that our becoming a CSE in April 2005 caused each of our
subsidiaries to be regulated by the Commission as a registered
broker-dealer.
However, as a CSE, all of our global business activities, including those
conducted in non-U.S. and non-regulated legal entities, are now subject to
the supervision of, and consolidated capital requirements promulgated by,
the SEC.
Appendix E to the Commission's rule 15c3-1 (the net capital standard for
broker-dealers) is particularly relevant in defining a CSE's
responsibilities. Paragraph (a)(1) requires the ultimate holding company to
file as part of its application to obtain CSE status a written undertaking
stating that the ultimate holding company will (among other
responsibilities):
o "Comply with the provisions of Rule 15c3-4 with respect to an internal
risk management control system for the affiliate group" (sub paragraph
(viii)(C));
o "Permit the Commission to examine the books and records of the ultimate
holding company and any of its affiliates, if the affiliate is not an
entity that has a principal regulator" (sub paragraph (viii)(E));
o "Make available to the Commission information about the ultimate
holding company or any of its material affiliates that the Commission
finds necessary to evaluate the financial and operational risk within
the ultimate holding company and its material affiliates (sub paragraph
(viii)(G));
o "Make available examination reports of principal regulators for those
affiliates of the ultimate holding company that are not subject to
Commission examination" (sub paragraph (viii)(H)).
Appendix G sets forth the basis upon which an ultimate holding company
shall compute its capital requirements. Paragraph (e)(1), sub paragraph
(i), requires the ultimate holding company to "send notice promptly" to the
Commission of "early warning indications of low capital" (since defined by
the Commission as either a ratio of capital to risk-weighted assets of less
than 10% or available liquidity falling below $10 billion).
The above cited requirements are directly comparable to the requirements
the Commission imposes upon an SEC-registered broker-dealer, and, in point
of fact, the Commission's examinations of the broker-dealer are similar in
scope and content to the Commission's examinations of ultimate holding
companies and their subsidiaries under CSE rules.
These requirements, which were the result of many years of work by the
Commission and other regulators around the world, served to confirm that
the scope
of the business activities of broker-dealers had fundamentally changed over
the past two decades, and that a revised regulatory framework was needed to
ensure the appropriate oversight of increasingly global and non-regulated
activities.
We fully support the resulting CSE framework and believe that it confirms
our past and present status as a global broker-dealer. We believe that our
fair-value-based accounting model, which has always been the foundation of
our regulatory oversight, appropriately does the same.
* * *
Finally, as we stated during our call with the Staff on January 25, 2006,
we plan to file our Annual Report on Form 10-K for the fiscal year ended
November 25, 2005 on February 6, 2006, and understand the Staff does not
object.
We would of course be happy to come to Washington to discuss this with you
further at your convenience. Please feel free to contact me at (212)
902-5675 at any time.
Sincerely,
/s/ Sarah Smith
Sarah Smith
Controller and Chief Accounting Officer
cc:
David A. Viniar, Chief Financial Officer
Thomas Pirolo, Engagement Partner, PricewaterhouseCoopers, LLP