10-Q 1 y79196e10vq.htm FORM 10-Q e10vq
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
     
    For the quarterly period ended September 25, 2009
 
or
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
     
    For the transition period from                        to
 
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.)
     
85 Broad Street, New York, NY   10004
(Address of principal executive offices)   (Zip Code)
 
(212) 902-1000
(Registrant’s telephone number, including area code)
 
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.     x  Yes  o  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     x  Yes  o  No
 
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 o
 
Non-accelerated filer o (Do not check if a smaller reporting company)  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     o  Yes  x  No
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
As of October 23, 2009, there were 514,082,153 shares of the registrant’s common stock outstanding.
 


 

 
THE GOLDMAN SACHS GROUP, INC.
 
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 25, 2009
 
INDEX
 
             
        Page
Form 10-Q Item Number:
 
No.
 
           
         
           
         
        2  
        3  
        4  
        5  
        6  
        7  
        76  
        77  
           
      81  
           
      138  
           
      138  
           
         
           
      139  
           
      141  
           
      142  
           
      143  
       
    144  
 EX-3.1: CERTIFICATE OF ELIMINATION OF FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES H, OF THE GOLDMAN SACHS GROUP, INC.
 EX-3.2: RESTATED CERTIFICATE OF INCORPORATION OF THE GOLDMAN SACHS GROUP, INC.
 EX-3.3: AMENDED AND RESTATED BY-LAWS OF THE GOLDMAN SACHS GROUP, INC.
 EX-12.1: STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
 EX-15.1: LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
 EX-31.1: RULE 13A-14(A) CERTIFICATIONS
 EX-32.1: SECTION 1350 CERTIFICATIONS
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


1


Table of Contents

 
PART I: FINANCIAL INFORMATION
 
Item 1:   Financial Statements (Unaudited)
 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                                 
    Three Months Ended   Nine Months Ended
    September
  August
  September
  August
    2009   2008   2009   2008
    (in millions, except per share amounts)
 
Revenues
                               
Investment banking
  $ 899     $ 1,294     $ 3,162     $ 4,145  
Trading and principal investments
    8,801       2,440       23,829       12,556  
Asset management and securities services
    982       1,174       2,928       3,736  
                                 
Total non-interest revenues
    10,682       4,908       29,919       20,437  
                                 
Interest income
    3,000       8,717       10,832       29,460  
Interest expense
    1,310       7,582       5,193       26,097  
                                 
Net interest income
    1,690       1,135       5,639       3,363  
                                 
Net revenues, including net interest income
    12,372       6,043       35,558       23,800  
                                 
                                 
Operating expenses
                               
Compensation and benefits
    5,351       2,901       16,712       11,424  
                                 
Brokerage, clearing, exchange and distribution fees
    580       734       1,690       2,265  
Market development
    84       119       234       389  
Communications and technology
    194       192       540       571  
Depreciation and amortization
    367       300       1,342       774  
Occupancy
    230       237       713       707  
Professional fees
    183       168       463       531  
Other expenses
    589       432       1,412       1,204  
                                 
Total non-compensation expenses
    2,227       2,182       6,394       6,441  
                                 
Total operating expenses
    7,578       5,083       23,106       17,865  
                                 
                                 
Pre-tax earnings
    4,794       960       12,452       5,935  
Provision for taxes
    1,606       115       4,015       1,492  
                                 
Net earnings
    3,188       845       8,437       4,443  
Preferred stock dividends
    160       35       1,032       115  
                                 
Net earnings applicable to common shareholders
  $ 3,028     $ 810     $ 7,405     $ 4,328  
                                 
Earnings per common share
                               
Basic
  $ 5.74     $ 1.89     $ 14.60     $ 10.08  
Diluted
    5.25       1.81       13.74       9.62  
                                 
Dividends declared per common share
  $ 0.35     $ 0.35     $ 0.70     $ 1.05  
                                 
Average common shares outstanding
                               
Basic
    525.9       427.6       505.8       429.3  
Diluted
    576.9       448.3       539.0       449.7  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


2


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                 
    As of
    September
  November
    2009   2008
    (in millions, except share
    and per share amounts)
 
Assets
               
Cash and cash equivalents
  $ 23,015     $ 15,740  
Cash and securities segregated for regulatory and other purposes (includes $20,016 and $78,830 at fair value as of September 2009 and November 2008, respectively)
    42,959       106,664  
Collateralized agreements:
               
Securities purchased under agreements to resell and federal funds sold (includes $142,589 and $116,671 at fair value as of September 2009 and November 2008, respectively)
    142,589       122,021  
Securities borrowed (includes $79,461 and $59,810 at fair value as of September 2009 and November 2008, respectively)
    221,817       180,795  
Receivables from brokers, dealers and clearing organizations
    15,054       25,899  
Receivables from customers and counterparties (includes $2,026 and $1,598 at fair value as of September 2009 and November 2008, respectively)
    54,882       64,665  
Trading assets, at fair value (includes $34,869 and $26,313 pledged as collateral as of September 2009 and November 2008, respectively)
    352,190       338,325  
Other assets
    29,679       30,438  
                 
Total assets
  $ 882,185     $ 884,547  
                 
                 
Liabilities and shareholders’ equity
               
Deposits (includes $3,825 and $4,224 at fair value as of September 2009 and November 2008, respectively)
  $ 42,431     $ 27,643  
Collateralized financings:
               
Securities sold under agreements to repurchase, at fair value
    127,035       62,883  
Securities loaned (includes $9,465 and $7,872 at fair value as of September 2009 and November 2008, respectively)
    17,567       17,060  
Other secured financings (includes $15,185 and $20,249 at fair value as of September 2009 and November 2008, respectively)
    27,984       38,683  
Payables to brokers, dealers and clearing organizations
    5,434       8,585  
Payables to customers and counterparties
    181,770       245,258  
Trading liabilities, at fair value
    150,383       175,972  
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $14,801 and $23,075 at fair value as of September 2009 and November 2008, respectively)
    38,555       52,658  
Unsecured long-term borrowings (includes $20,795 and $17,446 at fair value as of September 2009 and November 2008, respectively)
    189,724       168,220  
Other liabilities and accrued expenses (includes $2,479 and $978 at fair value as of September 2009 and November 2008, respectively)
    35,948       23,216  
                 
Total liabilities
    816,831       820,178  
                 
Commitments, contingencies and guarantees
               
                 
Shareholders’ equity
               
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $8,100 and $18,100 as of September 2009 and November 2008, respectively
    6,957       16,471  
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 751,358,890 and 680,953,836 shares issued as of September 2009 and November 2008, respectively, and 513,055,963 and 442,537,317 shares outstanding as of September 2009 and November 2008, respectively
    8       7  
Restricted stock units and employee stock options
    5,609       9,284  
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding
           
Additional paid-in capital
    39,517       31,071  
Retained earnings
    45,660       39,913  
Accumulated other comprehensive loss
    (240 )     (202 )
Common stock held in treasury, at cost, par value $0.01 per share; 238,302,927 and 238,416,519 shares as of September 2009 and November 2008, respectively
    (32,157 )     (32,175 )
                 
Total shareholders’ equity
    65,354       64,369  
                 
Total liabilities and shareholders’ equity
  $ 882,185     $ 884,547  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


3


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
 
                 
    Nine Months
   
    Ended   Year Ended
    September 2009 (1)   November 2008
    (in millions)
 
Preferred stock
               
Balance, beginning of period
  $ 16,483     $ 3,100  
Issued
          13,367  
Accretion
    48       4  
Repurchased
    (9,574 )      
                 
Balance, end of period
    6,957       16,471  
Common stock
               
Balance, beginning of period
    7       6  
Issued
    1       1  
                 
Balance, end of period
    8       7  
Restricted stock units and employee stock options
               
Balance, beginning of period
    9,463       9,302  
Issuance and amortization of restricted stock units and employee stock options
    1,409       2,254  
Delivery of common stock underlying restricted stock units
    (5,178 )     (1,995 )
Forfeiture of restricted stock units and employee stock options
    (83 )     (274 )
Exercise of employee stock options
    (2 )     (3 )
                 
Balance, end of period
    5,609       9,284  
Additional paid-in capital
               
Balance, beginning of period
    31,070       22,027  
Issuance of common stock
    5,750       5,750  
Issuance of common stock warrants
          1,633  
Repurchase of common stock warrants
    (1,100 )      
Delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options
    5,510       2,331  
Cancellation of restricted stock units in satisfaction of withholding tax requirements
    (850 )     (1,314 )
Preferred and common stock issuance costs
          (1 )
Excess net tax benefit/(provision) related to share-based compensation
    (861 )     645  
Cash settlement of share-based compensation
    (2 )      
                 
Balance, end of period
    39,517       31,071  
Retained earnings
               
Balance, beginning of period
    38,579       38,642  
Cumulative effect from adoption of amended principles related to accounting for uncertainty in income taxes
          (201 )
                 
Balance, beginning of period, after cumulative effect of adjustments
    38,579       38,441  
Net earnings
    8,437       2,322  
Dividends and dividend equivalents declared on common stock and restricted stock units
    (392 )     (642 )
Dividends declared on preferred stock
    (916 )     (204 )
Preferred stock accretion
    (48 )     (4 )
                 
Balance, end of period
    45,660       39,913  
Accumulated other comprehensive income/(loss)
               
Balance, beginning of period
    (372 )     (118 )
Currency translation adjustment, net of tax
    (30 )     (98 )
Pension and postretirement liability adjustments, net of tax
    25       69  
Net unrealized gains/(losses) on available-for-sale securities, net of tax
    137       (55 )
                 
Balance, end of period
    (240 )     (202 )
Common stock held in treasury, at cost
               
Balance, beginning of period
    (32,176 )     (30,159 )
Repurchased
    (2 (2)     (2,037 )
Reissued
    21       21  
                 
Balance, end of period
    (32,157 )     (32,175 )
                 
Total shareholders’ equity
  $ 65,354     $ 64,369  
                 
 
 
(1) In connection with becoming a bank holding company, the firm was required to change its fiscal year-end from November to December. The beginning of period for the nine months ended September 2009 is December 26, 2008.
 
(2) Relates 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.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


4


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
 
                 
    Nine Months Ended
    September
  August
    2009   2008
    (in millions)
 
Cash flows from operating activities
               
Net earnings
  $ 8,437     $ 4,443  
Non-cash items included in net earnings
               
Depreciation and amortization
    1,549       1,046  
Share-based compensation
    1,345       1,195  
Changes in operating assets and liabilities
               
Cash and securities segregated for regulatory and other purposes
    69,748       20,715  
Net receivables from brokers, dealers and clearing organizations
    4,001       1,820  
Net payables to customers and counterparties
    (45,872 )     82,244  
Securities borrowed, net of securities loaned
    (22,485 )     (24,463 )
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold
    (146,443 )     (97,072 )
Trading assets, at fair value
    177,292       37,946  
Trading liabilities, at fair value
    (35,646 )     (28,582 )
Other, net
    11,426       (8,296 )
                 
Net cash provided by/(used for) operating activities
    23,352       (9,004 )
Cash flows from investing activities
               
Purchase of property, leasehold improvements and equipment
    (1,077 )     (1,529 )
Proceeds from sales of property, leasehold improvements and equipment
    52       70  
Business acquisitions, net of cash acquired
    (210 )     (2,517 )
Proceeds from sales of investments
    201       384  
Purchase of available-for-sale securities
    (2,405 )     (3,240 )
Proceeds from sales of available-for-sale securities
    2,139       2,825  
                 
Net cash used for investing activities
    (1,300 )     (4,007 )
Cash flows from financing activities
               
Unsecured short-term borrowings, net
    (12,052 )     (10,061 )
Other secured financings (short-term), net
    (8,820 )     (5,545 )
Proceeds from issuance of other secured financings (long-term)
    3,703       9,870  
Repayment of other secured financings (long-term), including the current portion
    (3,652 )     (9,343 )
Proceeds from issuance of unsecured long-term borrowings
    23,989       37,143  
Repayment of unsecured long-term borrowings, including the current portion
    (22,087 )     (19,190 )
Preferred stock repurchased
    (9,574 )      
Repurchase of common stock warrants
    (1,100 )      
Derivative contracts with a financing element, net
    2,130       73  
Deposits, net
    10,301       13,681  
Common stock repurchased
    (2 )     (2,032 )
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units
    (1,850 )     (587 )
Proceeds from issuance of common stock, including stock option exercises
    6,089       261  
Excess tax benefit related to share-based compensation
    85       619  
Cash settlement of share-based compensation
    (2 )      
                 
Net cash provided by/(used for) financing activities
    (12,842 )     14,889  
                 
Net increase in cash and cash equivalents
    9,210       1,878  
Cash and cash equivalents, beginning of period
    13,805       10,282  
                 
Cash and cash equivalents, end of period
  $ 23,015     $ 12,160  
                 
 
SUPPLEMENTAL DISCLOSURES:
 
Cash payments for interest, net of capitalized interest, were $6.05 billion and $26.13 billion during the nine months ended September 2009 and August 2008, respectively.
 
Cash payments for income taxes, net of refunds, were $3.60 billion and $2.46 billion during the nine months ended September 2009 and August 2008, respectively.
 
Non-cash activities:
The firm assumed $16 million and $610 million of debt in connection with business acquisitions during the nine months ended September 2009 and August 2008, respectively.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5


Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                                 
    Three Months Ended   Nine Months Ended
    September
  August
  September
  August
    2009   2008   2009   2008
    (in millions)
 
Net earnings
  $ 3,188     $ 845     $ 8,437     $ 4,443  
Currency translation adjustment, net of tax
    (1 )     (25 )     (30 )     (37 )
Pension and postretirement liability adjustments, net of tax
    8       3       25       9  
Net unrealized gains/(losses) on available-for-sale securities, net of tax
    103       (7 )     137       (19 )
                                 
Comprehensive income
  $ 3,298     $ 816     $ 8,569     $ 4,396  
                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


6


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
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 financial services firm providing investment banking, securities and investment management 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 London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.
 
The firm’s activities are divided into three segments:
 
  •  Investment Banking.  The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals.
 
  •  Trading and Principal Investments.  The firm facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and takes proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. In addition, the firm engages in market-making and specialist activities on equities and options exchanges, and the firm clears client transactions on major stock, options and futures exchanges worldwide. In connection with the firm’s merchant banking and other investing activities, the firm makes principal investments directly and through funds that the firm raises and manages.
 
  •  Asset Management and Securities Services.  The firm provides investment advisory and financial planning 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 group of institutions and individuals worldwide and provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide.
 
Note 2.   Significant Accounting Policies
 
Basis of Presentation
 
These condensed consolidated financial statements include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. All material intercompany transactions and balances have been eliminated.
 
The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity, a variable interest entity (VIE) or a qualifying special-purpose entity (QSPE) under generally accepted accounting principles (GAAP).
 
  •  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 obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest.


7


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  •  Variable Interest Entities.  VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE’s expected losses and expected residual returns. This analysis includes a review of, among other factors, the VIE’s capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE. Where qualitative analysis is not conclusive, the firm performs a quantitative analysis. For purposes of allocating a VIE’s expected losses and expected residual returns to its variable interest holders, the firm utilizes the “top down” method. Under this method, the firm calculates its share of the VIE’s expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual arrangements and/or the firm’s position in the capital structure of the VIE, under various probability-weighted scenarios. The firm reassesses its initial evaluation of an entity as a VIE and its initial determination of whether the firm is the primary beneficiary of a VIE upon the occurrence of certain reconsideration events. See “— Recent Accounting Developments” below for information regarding amendments to accounting for VIEs.
 
  •  QSPEs.  QSPEs are passive entities that are commonly used in mortgage and other securitization transactions. To be considered a QSPE, an entity must satisfy certain criteria. These criteria include the types of assets a QSPE may hold, limits on asset sales, the use of derivatives and financial guarantees, and the level of discretion a servicer may exercise in attempting to collect receivables. These criteria may require management to make judgments about complex matters, such as whether a derivative is considered passive and the level of discretion a servicer may exercise, including, for example, determining when default is reasonably foreseeable. The firm does not consolidate QSPEs. See “— Recent Accounting Developments” below for information regarding amendments to accounting for QSPEs.
 
  •  Equity-Method Investments.  When the firm does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting interest of 20% to 50%) and has an investment in common stock or in-substance common stock, the firm accounts for its investment either under the equity method of accounting or at fair value pursuant to the fair value option available under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10. In general, the firm accounts for investments acquired subsequent to November 24, 2006, when the fair value option became available, at fair value. In certain cases, the firm may apply the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, where the firm has a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. See “— Revenue Recognition — Other Financial Assets and Financial Liabilities at Fair Value” below for a discussion of the firm’s application of the fair value option.


8


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  •  Other.  If the firm does not consolidate an entity or apply the equity method of accounting, the firm accounts for its investment at fair value. The firm also has formed numerous nonconsolidated investment funds with third-party investors that are typically organized as limited partnerships. The firm acts as general partner for these funds and generally does not hold a majority of the economic interests in these funds. The firm has generally provided the third-party investors with rights to terminate the funds or to remove the firm as the general partner. As a result, the firm does not consolidate these funds. These fund investments are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.
 
These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report on Form 10-K for the fiscal year ended November 28, 2008. The condensed consolidated financial information as of November 28, 2008 has been derived from audited consolidated financial statements not included herein.
 
These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.
 
In connection with becoming a bank holding company, the firm was required to change its fiscal year-end from November to December. This change in the firm’s fiscal year-end resulted in a one-month transition period that began on November 29, 2008 and ended on December 26, 2008. The firm’s financial information for this fiscal transition period is included in the firm’s Quarterly Report on Form 10-Q for the quarter ended March 27, 2009. On April 13, 2009, the Board of Directors of Group Inc. (the Board) approved a change in the firm’s fiscal year-end from the last Friday of December to December 31, beginning in the fourth quarter of 2009. Fiscal 2009 began on December 27, 2008 and will end on December 31, 2009.
 
In the condensed consolidated statements of earnings, cash flows and comprehensive income, the firm compares the three and nine month periods, as applicable, ended September 25, 2009 with the previously reported three and nine month periods ended August 29, 2008. Financial information for the three and nine months ended September 26, 2008 has not been included in this Form 10-Q for the following reasons: (i) the three and nine months ended August 29, 2008 provide a meaningful comparison for the three and nine months ended September 25, 2009; (ii) there are no significant factors, seasonal or other, that would impact the comparability of information if the results for the three and nine months ended September 26, 2008 were presented in lieu of results for the three and nine months ended August 29, 2008; and (iii) it was not practicable or cost justified to prepare this information.
 
All references to September 2009 and August 2008, unless specifically stated otherwise, refer to the firm’s fiscal periods ended, or the dates, as the context requires, September 25, 2009 and August 29, 2008, respectively. All references to November 2008, unless specifically stated otherwise, refer to the firm’s fiscal year ended, or the date, as the context requires, November 28, 2008. All references to 2009, unless specifically stated otherwise, refer to the firm’s fiscal year ending, or the date, as the context requires, December 31, 2009. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.


9


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Use of Estimates
 
These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make certain estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements, the accounting for goodwill and identifiable intangible assets, discretionary compensation accruals and the provision for potential losses that may arise from litigation and regulatory proceedings and tax audits. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
 
Revenue Recognition
 
Investment Banking.  Underwriting revenues and fees from mergers and acquisitions and other financial advisory assignments are recognized in the condensed consolidated statements of earnings when the services related to the underlying transaction are completed under the terms of the engagement. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. Underwriting revenues are presented net of related expenses. Expenses associated with financial advisory transactions are recorded as non-compensation expenses, net of client reimbursements.
 
Trading Assets and Trading Liabilities.  Substantially all trading assets and trading liabilities are reflected in the condensed consolidated statements of financial condition at fair value. Related gains or losses are generally recognized in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
Other Financial Assets and Financial Liabilities at Fair Value.  In addition to “Trading assets, at fair value” and “Trading liabilities, at fair value,” the firm has elected to account for certain of its other financial assets and financial liabilities at fair value under ASC 815-15 and 825-10 (i.e., the fair value option). The primary reasons for electing the fair value option are to reflect economic events in earnings on a timely basis, to mitigate volatility in earnings from using different measurement attributes and to address simplification and cost-benefit considerations.
 
Such financial assets and financial liabilities accounted for at fair value include:
 
  •  certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments;
 
  •  certain other secured financings, primarily transfers accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings;
 
  •  certain unsecured long-term borrowings, including prepaid physical commodity transactions and certain hybrid financial instruments;
 
  •  resale and repurchase agreements;
 
  •  securities borrowed and loaned within Trading and Principal Investments, consisting of the firm’s matched book and certain firm financing activities;
 
  •  certain deposits issued by Goldman Sachs Bank USA (GS Bank USA), as well as securities held by GS Bank USA;


10


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  •  certain receivables from customers and counterparties, including certain margin loans, transfers accounted for as secured loans rather than purchases and prepaid variable share forwards;
 
  •  certain insurance and reinsurance contracts and certain guarantees; and
 
  •  in general, investments acquired after November 24, 2006, when the fair value option became available, where the firm has significant influence over the investee and would otherwise apply the equity method of accounting.
 
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 (i.e., the exit price). Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs.
 
The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
 
Basis of Fair Value Measurement
 
  Level 1   Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
  Level 2   Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;
 
  Level 3   Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
 
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
 
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.
 
Credit risk is an essential component of fair value. Cash products (e.g., bonds and loans) and derivative instruments (particularly those with significant future projected cash flows) trade in the market at levels which reflect credit considerations. The firm calculates the fair value of derivative assets by discounting future cash flows at a rate which incorporates counterparty credit spreads and the fair value of derivative liabilities by discounting future cash flows at a rate which incorporates the firm’s own credit spreads. In doing so, credit exposures are adjusted to reflect mitigants, namely collateral agreements which reduce exposures based on triggers and contractual posting requirements. The firm manages its exposure to credit risk as it does other market risks and will price, economically hedge, facilitate and intermediate trades which involve credit risk. The firm records liquidity valuation adjustments to reflect the cost of exiting concentrated risk positions, including exposure to the firm’s own credit spreads.


11


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
In determining fair value, the firm separates “Trading assets, at fair value” and “Trading liabilities, at fair value” into two categories: cash instruments and derivative contracts.
 
  •  Cash Instruments.  The firm’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most government obligations, active listed equities and certain money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. Instruments classified within level 1 of the fair value hierarchy are required to be carried at quoted market prices, even in situations where the firm holds a large position and a sale could reasonably impact the quoted price.
 
The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most government agency securities, most corporate bonds, certain mortgage products, certain bank loans and bridge loans, less liquid listed equities, certain state, municipal and provincial obligations and certain money market securities and loan commitments. Such instruments are generally classified within level 2 of the fair value hierarchy.
 
Certain cash instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity and real estate fund investments, certain bank loans and bridge loans (including certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt), less liquid corporate debt securities and other debt obligations (including less liquid corporate bonds, distressed debt instruments and collateralized debt obligations (CDOs) backed by corporate obligations), less liquid mortgage whole loans and securities (backed by either commercial or residential real estate), and acquired portfolios of distressed loans. The transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.
 
For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on market evidence where available. In the absence of such evidence, management’s best estimate is used.
 
Management’s judgment is required to determine the appropriate risk-adjusted discount rate for cash trading instruments that are classified within level 3 of the fair value hierarchy and that have little or no price transparency as a result of decreased volumes and lower levels of trading activity. In such situations, the firm’s valuation is adjusted to approximate rates which market participants would likely consider appropriate for relevant credit and liquidity risks.


12


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
  •  Derivative Contracts.  Derivative contracts can be exchange-traded or over-the-counter (OTC). Exchange-traded derivatives typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The firm generally values exchange-traded derivatives using models which calibrate to market-clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy.
 
OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. OTC derivatives are classified within level 2 of the fair value hierarchy when all of the significant inputs can be corroborated to market evidence.
 
Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Where the firm does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, the transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes, with resulting gains and losses reflected within level 3. Level 3 inputs are only 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 to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.
 
When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on market evidence where available. In the absence of such evidence, management’s best estimate is used.
 
Collateralized Agreements and Financings.  Collateralized agreements consist of resale agreements and securities borrowed. Collateralized financings consist of repurchase agreements, securities loaned and other secured financings. Interest on collateralized agreements and collateralized financings is recognized in “Interest income” and “Interest expense,” respectively, in the condensed consolidated statements of earnings over the life of the transaction.
 
  •  Resale and Repurchase Agreements.  Securities purchased under agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade sovereign obligations, represent collateralized financing transactions.


13


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
  The firm receives securities purchased under agreements to resell, makes delivery of securities sold under agreements to repurchase, monitors the market value of these securities on a daily basis and delivers or obtains additional collateral as appropriate. As noted above, resale and repurchase agreements are carried in the condensed consolidated statements of financial condition at fair value under the fair value option. Resale and repurchase agreements are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy. Resale and repurchase agreements are presented on a net-by-counterparty basis when a right of setoff exists.
 
  •  Securities Borrowed and Loaned.  Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Securities borrowed and loaned within Securities Services, relating to both customer activities and, to a lesser extent, certain firm financing activities, 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 noted above, securities borrowed and loaned within Trading and Principal Investments, which are related to the firm’s matched book and certain firm financing activities, are recorded at fair value under the fair value option. These securities borrowed and loaned transactions are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy.
 
  •  Other Secured Financings.  In addition to repurchase agreements and securities loaned, the firm funds assets through the use of other secured financing arrangements and pledges financial instruments and other assets as collateral in these transactions. As noted above, the firm has elected to apply the fair value option to transfers accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings, for which the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. These other secured financing transactions are generally classified within level 2 of the fair value hierarchy. Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest. See Note 3 for further information regarding other secured financings.
 
Hybrid Financial Instruments.  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, it 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 hedge accounting relationships. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option. See Notes 3 and 6 for further information regarding hybrid financial instruments.
 
Transfers of Financial Assets.  In general, transfers of financial assets are accounted for as sales when the firm has relinquished control over the transferred assets. For transfers accounted for as sales, any related gains or losses are recognized in net revenues. Transfers that are not accounted for as sales are accounted for as collateralized financings, with the related interest expense recognized in net revenues over the life of the transaction.


14


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Commissions.  Commission revenues from executing and clearing client transactions on stock, options and futures markets are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings on a trade-date basis.
 
Insurance Activities.  Certain of the firm’s insurance and reinsurance contracts are accounted for at fair value under the fair value option, with changes in fair value included in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
Revenues from variable annuity and life insurance and reinsurance contracts not accounted for at fair value generally consist of fees assessed on contract holder account balances for mortality charges, policy administration fees and surrender charges, and are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings in the period that services are provided.
 
Interest credited to variable annuity and life insurance and reinsurance contract account balances and changes in reserves are recognized in “Other expenses” in the condensed consolidated statements of earnings.
 
Premiums earned for underwriting property catastrophe reinsurance are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings over the coverage period, net of premiums ceded for the cost of reinsurance. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported, are recognized in “Other expenses” in the condensed consolidated statements of earnings.
 
Merchant Banking Overrides.  The firm is entitled to receive merchant banking overrides (i.e., an increased share of a fund’s income and gains) when the return on the funds’ investments exceeds certain threshold returns. Overrides are based on investment performance over the life of each merchant banking fund, and future investment underperformance may require amounts of override previously distributed to the firm to be returned to the funds. Accordingly, overrides are recognized in the condensed consolidated statements of earnings only when all material contingencies have been resolved. Overrides are included in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
Asset Management.  Management fees are recognized over the period that the related service is provided based upon average net asset values. In certain circumstances, the firm is also entitled to receive incentive fees based on a percentage of a fund’s return or when the return on assets under management exceeds specified benchmark returns or other performance targets. Incentive fees are generally based on investment performance over a 12-month period and are subject to adjustment prior to the end of the measurement period. Accordingly, incentive fees are recognized in the condensed consolidated statements of earnings when the measurement period ends. Asset management fees and incentive fees are included in “Asset management and securities services” in the condensed consolidated statements of earnings.
 
Share-Based Compensation
 
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 in accordance with ASC 718. 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 employee awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense.


15


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The firm pays cash dividend equivalents on outstanding restricted stock units (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. In the first quarter of fiscal 2009, the firm adopted amended accounting principles related to income tax benefits of dividends on share-based payment awards (ASC 718). These amended principles require the tax benefit related to dividend equivalents paid on RSUs to be accounted for as an increase to additional paid-in capital. Previously, the firm accounted for this tax benefit as a reduction to income tax expense. See “— Recent Accounting Developments” below for further information on these amended principles.
 
In certain cases, primarily related to the death of an employee or 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, additional paid-in capital is adjusted to the extent of the difference between the current value of the award and the grant-date value of the award.
 
Goodwill
 
Goodwill is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. Goodwill is tested at least annually for impairment. An impairment loss is recognized if the estimated fair value of an operating segment, which is a component one level below the firm’s three business segments, is less than its estimated net book value. Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.
 
Identifiable Intangible Assets
 
Identifiable intangible assets, which consist primarily of customer lists, New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights and the value of business acquired (VOBA) in the firm’s insurance subsidiaries, are amortized over their estimated lives or, in the case of insurance contracts, in proportion to estimated gross profits or premium revenues. 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.
 
Property, Leasehold Improvements and Equipment
 
Property, leasehold improvements and equipment, net of accumulated depreciation and amortization, are recorded at cost and included in “Other assets” in the condensed consolidated statements of financial condition.
 
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. An impairment loss, 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 expected undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.


16


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The firm’s operating leases include office space held in excess of current requirements. Rent expense relating to space held for growth is included in “Occupancy” in the condensed consolidated statements of earnings. 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 upon termination.
 
Foreign Currency Translation
 
Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the condensed consolidated statements of financial condition, and revenues and expenses are translated at average rates of exchange for the period. 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 condensed consolidated statements of comprehensive income. The firm seeks to reduce its net investment exposure to fluctuations in foreign exchange rates through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts, hedge effectiveness is assessed based on changes in forward exchange rates; accordingly, forward points are reflected as a component of the currency translation adjustment in the condensed consolidated statements of comprehensive income. For foreign currency-denominated debt, hedge effectiveness is assessed based on changes in spot rates. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are included in the condensed consolidated statements of earnings.
 
Income Taxes
 
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of the firm’s assets and liabilities. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized. The firm’s tax assets and liabilities are presented as a component of “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. The firm adopted amended accounting principles related to the accounting for uncertainty in income taxes (ASC 740) as of December 1, 2007, and recorded a transition adjustment resulting in a reduction of $201 million to beginning retained earnings in the first fiscal quarter of 2008. The firm recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon 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 upon settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. The firm reports interest expense related to income tax matters in “Provision for taxes” in the condensed consolidated statements of earnings and income tax penalties in “Other expenses” in the condensed consolidated statements of earnings.


17


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Earnings Per Common Share (EPS)
 
Basic 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 pursuant to stock warrants and options and to RSUs for which future service is required as a condition to the delivery of the underlying common stock. In the first quarter of fiscal 2009, the firm adopted amended accounting principles related to determining whether instruments granted in share-based payment transactions are participating securities. Accordingly, the firm treats unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per common share. See “— Recent Accounting Developments” below for further information on these amended principles.
 
Cash and Cash Equivalents
 
The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of September 2009 and November 2008, “Cash and cash equivalents” on the condensed consolidated statements of financial condition included $4.07 billion and $5.60 billion, respectively, of cash and due from banks and $18.95 billion and $10.14 billion, respectively, of interest-bearing deposits with banks.
 
Recent Accounting Developments
 
FASB Accounting Standards Codification.  In July 2009, the FASB launched the FASB Accounting Standards Codification (the Codification) as the single source of GAAP. While the Codification did not change GAAP, it introduced a new structure to the accounting literature and changed references to accounting standards and other authoritative accounting guidance. The Codification was effective for the firm for the third quarter of 2009 and did not have an effect on the firm’s financial condition, results of operations or cash flows.
 
Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (ASC 718).  In June 2007, the FASB issued amended accounting principles related to income tax benefits of dividends on share-based payment awards, which require that the tax benefit related to dividend equivalents paid on RSUs, which are expected to vest, be recorded as an increase to additional paid-in capital. The firm previously accounted for this tax benefit as a reduction to income tax expense. These amended accounting principles were applied prospectively for tax benefits on dividend equivalents declared beginning in the first quarter of fiscal 2009. Adoption did not have a material effect on the firm’s financial condition, results of operations or cash flows.
 
Accounting for Transfers of Financial Assets and Repurchase Financing Transactions (ASC 860).  In February 2008, the FASB issued amended accounting principles related to transfers of financial assets and repurchase financing transactions. These amended principles require an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction (for purposes of determining whether a sale has occurred) unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. The firm adopted these amended accounting principles for new transactions entered into after November 2008. Adoption did not have a material effect on the firm’s financial condition, results of operations or cash flows.


18


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Disclosures About Derivative Instruments and Hedging Activities (ASC 815).  In March 2008, the FASB issued amended principles related to disclosures about derivative instruments and hedging activities, which were effective for the firm beginning in the one-month transition period ended December 2008. Since these amended principles require only additional disclosures concerning derivatives and hedging activities, adoption did not affect the firm’s financial condition, results of operations or cash flows.
 
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (ASC 260).  In June 2008, the FASB issued amended accounting principles related to determining whether instruments granted in share-based payment transactions are participating securities. These amended principles require companies to treat unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per common share under the two-class method. The firm adopted these amended accounting principles in the first quarter of fiscal 2009. The impact to basic earnings per common share for the three and nine months ended September 2009 was a reduction of $0.02 and $0.04 per common share, respectively. There was no impact on diluted earnings per common share. Prior periods have not been restated due to immateriality.
 
Business Combinations (ASC 805).  In December 2007, the FASB issued amended accounting principles related to business combinations, which changed the accounting for transaction costs, certain contingent assets and liabilities, and other balances in a business combination. In addition, in partial acquisitions, when control is obtained, the amended principles require that the acquiring company measure and record all of the target’s assets and liabilities, including goodwill, at fair value as if the entire target company had been acquired. These amended accounting principles applied to the firm’s business combinations beginning in the first quarter of fiscal 2009. Adoption did not affect the firm’s financial condition, results of operations or cash flows, but may have an effect on accounting for future business combinations.
 
Noncontrolling Interests in Consolidated Financial Statements (ASC 810).  In December 2007, the FASB issued amended accounting principles related to noncontrolling interests in consolidated financial statements, which require that ownership interests in consolidated subsidiaries held by parties other than the parent (i.e., noncontrolling interests) be accounted for and presented as equity, rather than as a liability or mezzanine equity. These amended accounting principles were effective for the firm beginning in the first quarter of fiscal 2009. Adoption did not have a material effect on the firm’s financial condition, results of operations or cash flows.
 
Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (ASC 860 and 810).  In December 2008, the FASB issued amended principles related to disclosures by public entities (enterprises) about transfers of financial assets and interests in variable interest entities, which were effective for the firm beginning in the one-month transition period ended December 2008. Since these amended principles require only additional disclosures concerning transfers of financial assets and interests in VIEs, adoption did not affect the firm’s financial condition, results of operations or cash flows.
 
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock (ASC 815).  In June 2008, the FASB issued amended accounting principles related to determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. These amended accounting principles provide guidance about whether an instrument (such as the firm’s outstanding common stock warrants) should be classified as equity and not subsequently recorded at fair value. The firm adopted these amended accounting principles in the first quarter of fiscal 2009. Adoption did not affect the firm’s financial condition, results of operations or cash flows.


19


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (ASC 820).  In April 2009, the FASB issued amended accounting principles related to determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. Specifically, these amended principles list factors which should be evaluated to determine whether a transaction is orderly, clarify that adjustments to transactions or quoted prices may be necessary when the volume and level of activity for an asset or liability have decreased significantly, and provide guidance for determining the concurrent weighting of the transaction price relative to fair value indications from other valuation techniques when estimating fair value. The firm adopted these amended accounting principles in the second quarter of 2009. Since the firm’s fair value methodologies were consistent with these amended accounting principles, adoption did not affect the firm’s financial condition, results of operations or cash flows.
 
Recognition and Presentation of Other-Than-Temporary Impairments (ASC 320).  In April 2009, the FASB issued amended accounting principles related to recognition and presentation of other-than-temporary impairments. These amended principles prescribe that only the portion of an other-than-temporary impairment on a debt security related to credit loss is recognized in current period earnings, with the remainder recognized in other comprehensive income, if the holder does not intend to sell the security and it is more likely than not that the holder will not be required to sell the security prior to recovery. Previously, the entire other-than-temporary impairment was recognized in current period earnings. The firm adopted these amended accounting principles in the second quarter of 2009. Adoption did not have a material effect on the firm’s financial condition, results of operations or cash flows.
 
Interim Disclosures about Fair Value of Financial Instruments (ASC 825).  In April 2009, the FASB issued amended principles related to interim disclosures about fair value of financial instruments. The firm adopted these amended principles in the second quarter of 2009. Adoption did not affect the firm’s financial condition, results of operations or cash flows.
 
Subsequent Events (ASC 855).  In May 2009, the FASB issued amended accounting principles related to subsequent events, which codify the guidance regarding the disclosure of events occurring subsequent to the balance sheet date. These amended principles do not change the definition of a subsequent event (i.e., an event or transaction that occurs after the balance sheet date but before the financial statements are issued) but require disclosure of the date through which subsequent events were evaluated when determining whether adjustment to or disclosure in the financial statements is required. These amended principles were effective for the firm for the second quarter of 2009. For the third quarter of 2009, the firm evaluated subsequent events through November 3, 2009. Since these amended principles require only additional disclosures concerning subsequent events, adoption of the standard did not affect the firm’s financial condition, results of operations or cash flows.


20


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Transfers of Financial Assets and Interests in Variable Interest Entities.  In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, “Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” which change the accounting for securitizations and VIEs. SFAS No. 166 will eliminate the concept of a QSPE, change the requirements for derecognizing financial assets, and require additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. SFAS No. 167 will change the determination of when a VIE should be consolidated. Under SFAS No. 167, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. SFAS No. 166 and 167, which have not yet been incorporated into the Codification, are effective for fiscal years beginning after November 15, 2009. The firm is currently evaluating the impact of adopting SFAS No. 166 and 167, which requires the firm to make complex judgments that are subject to change as interpretations and practices evolve. Based on the firm’s current analyses, the firm does not expect adoption to have a material effect on its financial condition, results of operations or cash flows.
 
Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value.  In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Fair Value Measurements and Disclosures — Measuring Liabilities at Fair Value.” ASU No. 2009-05 provides guidance in measuring liabilities when a quoted price in an active market for an identical liability is not available and clarifies that a reporting entity should not make an adjustment to fair value for a restriction that prevents the transfer of the liability. ASU No. 2009-05 is effective for financial statements issued for the first reporting period beginning after issuance of the ASU. Because the firm’s current fair value measurement policies are consistent with ASU No. 2009-5, adoption will not affect the firm’s financial condition, results of operations or cash flows.
 
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).  In September 2009, the FASB issued ASU No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU No. 2009-12 provides guidance about using net asset value to measure the fair value of interests in certain investment funds and requires additional disclosures about interests in investment funds. ASU No. 2009-12 is effective for financial statements issued for reporting periods ending after December 15, 2009, with earlier application permitted. Because the firm’s current fair value measurement policies are consistent with ASU No. 2009-12, adoption will not affect the firm’s financial condition, results of operations or cash flows. The firm will adopt the ASU in the fourth quarter of 2009 to comply with the ASU’s disclosure requirements.


21


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 3.   Financial Instruments
 
Fair Value of Financial Instruments
 
The following table sets forth the firm’s trading assets, at fair value, including those pledged as collateral, and trading liabilities, at fair value. At any point in time, the firm may use cash instruments as well as derivatives to manage a long or short risk position.
 
                                 
    As of
    September 2009   November 2008
   
Assets
 
Liabilities
 
Assets
 
Liabilities
    (in millions)
Commercial paper, certificates of
deposit, time deposits and other
money market instruments
  $ 16,427  (1)   $     $ 8,662  (1)   $  
Government and U.S. federal agency obligations
    122,185       54,842       69,653       37,000  
Mortgage and other asset-backed
loans and securities
    14,023       143       22,393       340  
Bank loans and bridge loans
    19,879       1,752  (4)     21,839       3,108  (4)
Corporate debt securities and
other debt obligations
    29,621       6,003       27,879       5,711  
Equities and convertible debentures
    58,698       23,603       57,049       12,116  
Physical commodities
    3,090             513       2  
Derivative contracts
    88,267  (2)     64,040  (5)     130,337  (2)     117,695  (5)
                                 
Total
  $ 352,190  (3)   $ 150,383     $ 338,325  (3)   $ 175,972  
                                 
 
 
(1) Includes $4.31 billion and $4.40 billion as of September 2009 and November 2008, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 8 for further information regarding the William Street credit extension program.
 
(2) Net of cash received pursuant to credit support agreements of $126.82 billion and $137.16 billion as of September 2009 and November 2008, respectively.
 
(3) Includes $3.87 billion and $1.68 billion as of September 2009 and November 2008, respectively, of securities held within the firm’s insurance subsidiaries which are accounted for as available-for-sale.
 
(4) Consists of the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets, at fair value.
 
(5) Net of cash paid pursuant to credit support agreements of $16.83 billion and $34.01 billion as of September 2009 and November 2008, respectively.


22


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Fair Value Hierarchy
 
The firm’s financial assets at fair value classified within level 3 of the fair value hierarchy are summarized below:
 
                         
    As of
    September
  June
  November
    2009   2009   2008
    ($ in millions)
Total level 3 assets
  $ 50,466     $ 54,444     $ 66,190  
Level 3 assets for which the firm bears economic exposure (1)
    46,442       50,383       59,574  
                         
Total assets
    882,185       889,544       884,547  
Total financial assets at fair value
    596,282       614,559       595,234  
                         
Total level 3 assets as a percentage of Total assets
    5.7 %     6.1 %     7.5 %
Level 3 assets for which the firm bears economic exposure as a percentage of Total assets
    5.3       5.7       6.7  
                         
Total level 3 assets as a percentage of Total financial assets at fair value
    8.5       8.9       11.1  
Level 3 assets for which the firm bears economic exposure as a percentage of Total financial assets at fair value
    7.8       8.2       10.0  
 
 
(1) Excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
 
The following tables set forth by level within the fair value hierarchy “Trading assets, at fair value,” “Trading liabilities, at fair value,” and other financial assets and financial liabilities accounted for at fair value under the fair value option as of September 2009 and November 2008. See Note 2 for further information on the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


23


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                         
    Financial Assets at Fair Value as of September 2009
                Netting and
   
   
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
    (in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 5,237     $ 11,190     $     $     $ 16,427  
U.S. government and federal agency obligations
    31,139       44,659                   75,798  
Non-U.S. government obligations
    42,444       3,943                   46,387  
Mortgage and other asset-backed loans and securities (1):
                                       
Loans and securities backed by commercial real estate
          1,512       6,112             7,624  
Loans and securities backed by residential real estate
          2,880       1,843             4,723  
Loan portfolios (2)
                1,676             1,676  
Bank loans and bridge loans
          10,098       9,781             19,879  
Corporate debt securities (3)
    155       21,054       1,858             23,067  
State and municipal obligations
          1,730       1,264             2,994  
Other debt obligations
    2       1,072       2,486             3,560  
Equities and convertible debentures
    25,165       21,052       12,481  (8)           58,698  
Physical commodities
          3,090                   3,090  
                                         
Cash instruments
    104,142       122,280       37,501             263,923  
Derivative contracts
    65       205,327  (6)     12,965  (6)     (130,090 (9)     88,267  
                                         
Trading assets, at fair value
    104,207       327,607       50,466       (130,090 )     352,190  
Securities segregated for regulatory
and other purposes
    12,197  (5)     7,819  (7)                 20,016  
Securities purchased under agreements to resell
          142,589                   142,589  
Securities borrowed
          79,461                   79,461  
Receivables from customers and counterparties
          2,026                   2,026  
                                         
Total financial assets at fair value
  $ 116,404     $ 559,502     $ 50,466     $ (130,090 )   $ 596,282  
                                         
Level 3 assets for which the firm does not bear economic exposure (4)
                    (4,024 )                
                                         
Level 3 assets for which the firm
bears economic exposure
                  $ 46,442                  
                                         
 
 
(1)  Includes $56 million and $364 million of CDOs and collateralized loan obligations (CLOs) backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy.
 
(2)  Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral.
 
(3)  Includes $396 million and $405 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.
 
(4)  Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
 
(5)  Principally consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value.
 
(6)  Includes $34.19 billion and $9.52 billion of credit derivative assets within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types.
 
(7)  Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.
 
(8)  Consists of private equity and real estate fund investments.
 
(9)  Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.


24


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                         
    Financial Liabilities at Fair Value as of September 2009
                Netting and
   
   
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
    (in millions)
U.S. government and federal
agency obligations
  $ 28,842     $ 924     $     $     $ 29,766  
Non-U.S. government obligations
    24,879       197                   25,076  
Mortgage and other asset-backed loans and securities:
                                       
Loans and securities backed by commercial real estate
          9       4             13  
Loans and securities backed by residential real estate
          130                   130  
Bank loans and bridge loans
          1,356       396             1,752  
Corporate debt securities (1)
    42       5,794       129             5,965  
State and municipal obligations
          36                   36  
Other debt obligations
                2             2  
Equities and convertible debentures
    19,769       3,823       11             23,603  
                                         
Cash instruments
    73,532       12,269       542             86,343  
Derivative contracts
    12       75,321  (2)     8,804  (2)     (20,097 (4)     64,040  
                                         
Trading liabilities, at fair value
    73,544       87,590       9,346       (20,097 )     150,383  
Deposits
          3,825                   3,825  
Securities sold under agreements to repurchase, at fair value
          127,035                   127,035  
Securities loaned
          9,465                   9,465  
Other secured financings
    88       7,195       7,902             15,185  
Unsecured short-term borrowings
          12,860       1,941             14,801  
Unsecured long-term borrowings
          17,366       3,429             20,795  
Other liabilities and accrued expenses
          657       1,822             2,479  
                                         
Total financial liabilities at fair value
  $ 73,632     $ 265,993     $ 24,440  (3)   $ (20,097 )   $ 343,968  
                                         
 
 
(1)  Includes $8 million and $101 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.
 
(2)  Includes $8.55 billion and $3.23 billion of credit derivative liabilities within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types.
 
(3)  Level 3 liabilities were 7.1% of Total financial liabilities at fair value.
 
(4)  Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.


25


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                         
    Financial Assets at Fair Value as of November 2008
                Netting and
   
   
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
    (in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 5,205     $ 3,457     $     $     $ 8,662  
Government and U.S. federal
agency obligations
    35,069       34,584                   69,653  
Mortgage and other asset-backed loans and securities
          6,886       15,507             22,393  
Bank loans and bridge loans
          9,882       11,957             21,839  
Corporate debt securities and other
debt obligations
    14       20,269       7,596             27,879  
Equities and convertible debentures
    25,068       15,975       16,006  (5)           57,049  
Physical commodities
          513                   513  
                                         
Cash instruments
    65,356       91,566       51,066             207,988  
Derivative contracts
    24       256,412  (3)     15,124  (3)     (141,223 (6)     130,337  
                                         
Trading assets, at fair value
    65,380       347,978       66,190       (141,223 )     338,325  
Securities segregated for regulatory
and other purposes
    20,030  (2)     58,800  (4)                 78,830  
Securities purchased under agreements to resell
          116,671                   116,671  
Securities borrowed
          59,810                   59,810  
Receivables from customers and counterparties
          1,598                   1,598  
                                         
Total financial assets at fair value
  $ 85,410     $ 584,857     $ 66,190     $ (141,223 )   $ 595,234  
                                         
Level 3 assets for which the firm does not bear economic exposure (1)
                    (6,616 )                
                                         
Level 3 assets for which the firm bears economic exposure
                  $ 59,574                  
                                         
 
 
(1)  Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
 
(2)  Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value.
 
(3)  Includes $66.00 billion and $8.32 billion of credit derivative assets within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types.
 
(4)  Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.
 
(5)  Consists of private equity and real estate fund investments.
 
(6)  Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
 


26


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                         
    Financial Liabilities at Fair Value as of November 2008
                Netting and
   
   
Level 1
 
Level 2
 
Level 3
 
Collateral
 
Total
    (in millions)
Government and U.S. federal
agency obligations
  $ 36,385     $ 615     $     $     $ 37,000  
Mortgage and other asset-backed loans and securities
          320       20             340  
Bank loans and bridge loans
          2,278       830             3,108  
Corporate debt securities and
other debt obligations
    11       5,185       515             5,711  
Equities and convertible debentures
    11,928       174       14             12,116  
Physical commodities
    2                         2  
                                         
Cash instruments
    48,326       8,572       1,379             58,277  
Derivative contracts
    21       145,777  (1)     9,968  (1)     (38,071 (3)     117,695  
                                         
Trading liabilities, at fair value
    48,347       154,349       11,347       (38,071 )     175,972  
Deposits
          4,224                   4,224  
Securities sold under agreements to repurchase, at fair value
          62,883                   62,883  
Securities loaned
          7,872                   7,872  
Other secured financings
          16,429       3,820             20,249  
Unsecured short-term borrowings
          17,916       5,159             23,075  
Unsecured long-term borrowings
          15,886       1,560             17,446  
Other liabilities and accrued expenses
          978                   978  
                                         
Total financial liabilities at fair value
  $ 48,347     $ 280,537     $ 21,886  (2)   $ (38,071 )   $ 312,699  
                                         
 
 
(1)  Includes $31.20 billion and $4.74 billion of credit derivative liabilities within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types.
 
(2)  Level 3 liabilities were 7.0% of Total financial liabilities at fair value.
 
(3)  Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

27


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Level 3 Unrealized Gains/(Losses)
 
The table below sets forth a summary of unrealized gains/(losses) on the firm’s level 3 financial assets and financial liabilities at fair value still held at the reporting date for the three and nine months ended September 2009 and August 2008:
 
                                 
    Level 3 Unrealized Gains/(Losses)
    Three Months Ended   Nine Months Ended
    September
  August
  September
  August
    2009   2008   2009   2008
    (in millions)
Cash instruments — assets
  $ 377     $ (2,207 )   $ (4,703 )   $ (4,249 )
Cash instruments — liabilities
    180       (104 )     433       (246 )
                                 
Net unrealized gains/(losses) on level 3
cash instruments
    557       (2,311 )     (4,270 )     (4,495 )
Derivative contracts — net
    (639 )     3,216       (1,216 )     5,623  
Other secured financings
    (295 )     99       (720 )     263  
Unsecured short-term borrowings
    (193 )     310       (137 )     306  
Unsecured long-term borrowings
    (217 )     217       (268 )     264  
Other liabilities and accrued expenses
    (22 )     (20 )     56       (20 )
                                 
Total level 3 unrealized gains/(losses)
  $ (809 )   $ 1,511     $ (6,555 )   $ 1,941  
                                 
 
Cash Instruments
 
The net unrealized gain on level 3 cash instruments of $557 million for the three months ended September 2009 primarily consisted of unrealized gains on certain bank loans, partially offset by unrealized losses on loans and securities backed by commercial real estate. The net unrealized loss on level 3 cash instruments of $2.31 billion for the three months ended August 2008 primarily consisted of unrealized losses on loans and securities backed by commercial real estate and bank loans and bridge loans. The net unrealized loss on level 3 cash instruments of $4.27 billion for the nine months ended September 2009 primarily consisted of unrealized losses on private equity and real estate fund investments, and loans and securities backed by commercial real estate, reflecting weakness in these less liquid asset classes. The net unrealized loss on level 3 cash instruments of $4.50 billion for the nine months ended August 2008 primarily consisted of unrealized losses on loans and securities backed by commercial and residential real estate and certain bank loans and bridge loans.
 
Level 3 cash instruments are frequently economically hedged with instruments classified within level 1 and level 2, and accordingly, gains or losses that have been reported in level 3 can be partially offset by gains or losses attributable to instruments classified within level 1 or level 2 or by gains or losses on derivative contracts classified within level 3 of the fair value hierarchy.


28


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Derivative Contracts
 
The net unrealized loss on level 3 derivative contracts of $639 million for the three months ended September 2009 was primarily attributable to changes in observable prices and observable credit spreads on the underlying instruments (which are level 2 inputs). The net unrealized loss of $1.22 billion for the nine months ended September 2009 was primarily attributable to tighter credit spreads on the underlying instruments partially offset by increases in commodities prices (which are level 2 observable inputs). The net unrealized gain on level 3 derivative contracts of $3.22 billion for the three months ended August 2008 and net unrealized gain of $5.62 billion for the nine months ended August 2008 was primarily attributable to changes in observable credit spreads (which are level 2 inputs) on the underlying instruments. Level 3 gains and losses on derivative contracts should be considered in the context of the following:
 
  •  A derivative contract with level 1 and/or level 2 inputs is classified as a level 3 financial instrument in its entirety if it has at least one significant level 3 input.
 
  •  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) is still classified as level 3.
 
  •  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 instruments classified within level 1 or level 2 or by cash instruments reported within level 3 of the fair value hierarchy.
 
The tables below set forth a summary of changes in the fair value of the firm’s level 3 financial assets and financial liabilities for the three and nine months ended September 2009 and August 2008. The tables reflect gains and losses, including gains and losses for the entire period on financial assets and financial liabilities that were transferred to level 3 during the period, for all financial assets and financial liabilities categorized as level 3 as of September 2009 and August 2008, respectively. The tables do not include gains or losses that were reported in level 3 in prior periods for instruments that were sold or transferred out of level 3 prior to the end of the period presented.
 
                                                 
    Level 3 Financial Assets and Financial Liabilities at Fair Value
            Net unrealized
           
            gains/(losses)
  Net
       
            relating to
  purchases,
       
    Balance,
      instruments still
  issuances
  Net transfers
  Balance,
    beginning
  Net realized
  held at the
  and
  in and/or out
  end of
   
of period
 
gains/(losses)
 
reporting date
 
settlements
 
of level 3
 
period
    (in millions)
Three Months Ended September 2009
                                               
Mortgage and other asset-backed loans and securities:
                                               
Loans and securities backed by commercial real estate
  $ 6,839     $ 95     $ (259 )   $ (370 )   $ (193 )   $ 6,112  
Loans and securities backed by residential real estate
    1,862       49       62       (40 )     (90 )     1,843  
Loan portfolios
    1,774       32       (4 )     (126 )           1,676  
Bank loans and bridge loans
    9,669       182       409       (493 )     14       9,781  
Corporate debt securities
    2,372       22       39       (327 )     (248 )     1,858  
State and municipal obligations
    1,430       (2 )     23       (39 )     (148 )     1,264  
Other debt obligations
    2,803       26       20       (236 )     (127 )     2,486  
Equities and convertible debentures
    12,679       5       87       190       (480 (4)     12,481  
                                                 
Total cash instruments — assets
    39,428       409   (1)     377   (1)     (1,441 )     (1,272 )     37,501  
                                                 
Cash instruments — liabilities
    (1,020 )     10   (2)     180   (2)     250       38       (542 )
Derivative contracts — net
    3,076       170   (2)     (639 (2)(3)     367       1,187   (5)     4,161  
Other secured financings
    (8,067 )     (4 (2)     (295 (2)     491       (27 )     (7,902 )
Unsecured short-term borrowings
    (2,229 )     (61 (2)     (193 (2)     172       370       (1,941 )
Unsecured long-term borrowings
    (3,427 )     (5 (2)     (217 (2)     85       135       (3,429 )
Other liabilities and accrued expenses
    (1,644 )       (2)     (22 (2)     (156 )           (1,822 )


29


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                                 
    Level 3 Financial Assets and Financial Liabilities at Fair Value
            Net unrealized
           
            gains/(losses)
  Net
       
            relating to
  purchases,
       
    Balance,
      instruments still
  issuances
  Net transfers
  Balance,
    beginning
  Net realized
  held at the
  and
  in and/or out
  end of
   
of period
 
gains/(losses)
 
reporting date
 
settlements
 
of level 3
 
period
    (in millions)
Nine Months Ended September 2009
                                               
                                                 
Mortgage and other asset-backed loans and securities:
                                               
Loans and securities backed by commercial real estate
  $ 9,170     $ 202     $ (1,464 )   $ (1,481 )   $ (315 )   $ 6,112  
Loans and securities backed by residential real estate
    1,927       79       66       (395 )     166       1,843  
Loan portfolios
    4,266       148       (300 )     (891 )     (1,547 (6)     1,676  
Bank loans and bridge loans
    11,169       559       (194 )     (1,963 )     210       9,781  
Corporate debt securities
    2,734       152       (192 )     (525 )     (311 )     1,858  
State and municipal obligations
    1,356       (23 )     33       (424 )     322       1,264  
Other debt obligations
    3,903       123       (200 )     (1,054 )     (286 )     2,486  
Equities and convertible debentures
    15,127       (14 )     (2,452 )     586       (766 (4)     12,481  
                                                 
Total cash instruments — assets
    49,652       1,226   (1)     (4,703 (1)     (6,147 )     (2,527 )     37,501  
                                                 
Cash instruments — liabilities
    (1,727 )     5   (2)     433   (2)     560       187       (542 )
Derivative contracts — net
    3,315       547   (2)     (1,216 (2)(3)     1,928       (413 )     4,161  
Other secured financings
    (4,039 )     (24 (2)     (720 (2)     (564 )     (2,555 (7)     (7,902 )
Unsecured short-term borrowings
    (4,712 )     (70 (2)     (137 (2)     (837 )     3,815   (7)     (1,941 )
Unsecured long-term borrowings
    (1,689 )     (45 (2)     (268 (2)     318       (1,745 (7)     (3,429 )
Other liabilities and accrued expenses
          (21 (2)     56   (2)     (904 )     (953 (8)     (1,822 )
 
 
(1)  The aggregate amounts include approximately $317 million and $469 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the three months ended September 2009. The aggregate amounts include approximately $(4.92) billion and $1.44 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the nine months ended September 2009.
 
(2)  Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
(3)  Primarily resulted from changes in level 2 inputs.
 
(4)  Principally reflects transfers to level 2 within the fair value hierarchy of certain private equity investments, reflecting improved transparency of prices for these financial instruments, primarily as a result of trading activity.
 
(5)  Principally reflects transfers from level 2 within the fair value hierarchy of credit derivative assets, reflecting reduced transparency of certain credit spread inputs used to value these financial instruments, partially offset by transfers to level 2 within the fair value hierarchy of equity derivative assets, reflecting improved transparency of the equity index volatility inputs used to value these financial instruments.
 
(6)  Principally reflects the deconsolidation of certain loan portfolios for which the firm did not bear economic exposure.
 
(7)  Principally reflects transfers from level 3 unsecured short-term borrowings to level 3 other secured financings and level 3 unsecured long-term borrowings related to changes in the terms of certain notes.
 
(8)  Principally reflects transfers from level 2 within the fair value hierarchy of certain insurance contracts, reflecting reduced transparency of mortality curve inputs used to value these instruments as a result of less observable trading activity.

30


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                                 
    Level 3 Financial Assets and Financial Liabilities at Fair Value
            Net unrealized
           
            gains/(losses)
  Net
       
            relating to
  purchases,
       
    Balance,
      instruments still
  issuances
  Net transfers
  Balance,
    beginning
  Net realized
  held at the
  and
  in and/or out
  end of
   
of period
 
gains/(losses)
 
reporting date
 
settlements
 
of level 3
 
period
    (in millions)
Three Months Ended August 2008
                                               
                                                 
Cash instruments — assets
  $ 59,671     $ 598   (1)   $ (2,207 (1)   $ (5,837 )   $ 1,898   (4)   $ 54,123  
Cash instruments — liabilities
    (581 )     (1 (2)     (104 (2)     100       (11 )     (597 )
Derivative contracts — net
    6,508       (381 (2)     3,216   (2)(3)     40       (4,344 (5)     5,039  
Other secured financings
    (880 )     25   (2)     99   (2)     352       (3,962 (6)     (4,366 )
Unsecured short-term borrowings
    (3,837 )     33   (2)     310   (2)     (787 )     (470 )     (4,751 )
Unsecured long-term borrowings
    (2,002 )     (5 (2)     217   (2)     (202 )     74       (1,918 )
Other liabilities and accrued expenses
          (8 (2)     (20 (2)     (1,315 )           (1,343 )
                                                 
Nine Months Ended August 2008
                                               
                                                 
Cash instruments — assets
  $ 53,451     $ 2,103   (1)   $ (4,249 (1)   $ 426     $ 2,392   (7)   $ 54,123  
Cash instruments — liabilities
    (554 )     2   (2)     (246 (2)     167       34       (597 )
Derivative contracts — net
    2,056       362   (2)     5,623   (2)(3)     (1,331 )     (1,671 (5)     5,039  
Other secured financings
          25   (2)     263   (2)     271       (4,925 (6)     (4,366 )
Unsecured short-term borrowings
    (4,271 )     (19 (2)     306   (2)     (283 )     (484 )     (4,751 )
Unsecured long-term borrowings
    (767 )     (10 (2)     264   (2)     (1,304 )     (101 )     (1,918 )
Other liabilities and accrued expenses
          (8 (2)     (20 (2)     (1,315 )           (1,343 )
 
 
(1)  The aggregate amounts include approximately $(2.23) billion and $623 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the three months ended August 2008. The aggregate amounts include approximately $(4.09) billion and $1.94 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the nine months ended August 2008.
 
(2)  Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
(3)  Principally resulted from changes in level 2 inputs.
 
(4)  Principally reflects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial real estate and private equity investments, reflecting reduced price transparency for these financial instruments, partially offset by transfers of corporate debt securities and other debt obligations to level 2 within the fair value hierarchy, reflecting improved price transparency for these financial instruments, largely as a result of sales and partial sales.
 
(5)  Principally reflects transfers to level 2 within the fair value hierarchy of mortgage-related derivative assets, as recent trading activity provided improved transparency of correlation inputs.
 
(6)  Consists of transfers from level 2 within the fair value hierarchy.
 
(7)  Principally reflects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial real estate, reflecting reduced price transparency for these financial instruments.


31


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Impact of Credit Spreads
 
On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk on derivative contracts through changes in credit mitigants or the sale or unwind of the contracts. The net gain attributable to the impact of changes in credit exposure and credit spreads on derivative contracts (including derivative assets and liabilities and related hedges) was $264 million and $257 million for the three months ended September 2009 and August 2008, respectively, and $350 million and $128 million for the nine months ended September 2009 and August 2008, respectively.
 
The following table sets forth 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 observable credit spreads.
 
                                 
    Three Months Ended   Nine Months Ended
    September
  August
  September
  August
    2009   2008   2009   2008
    (in millions)
Net gains/(losses) including hedges
  $ (278 )   $ 176     $ (823 )   $ 331  
Net gains/(losses) excluding hedges
    (285 )     248       (830 )     391  
 
The impact of changes in instrument-specific credit spreads on loans and loan commitments for which the fair value option was elected was a gain of $1.33 billion and $1.03 billion for the three and nine months ended September 2009, respectively, and not material for the three and nine months ended August 2008. The firm attributes changes in the fair value of floating rate loans and loan commitments to changes in instrument-specific credit spreads. For fixed rate loans and loan commitments, the firm allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. See below for additional details regarding the fair value option.


32


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The Fair Value Option
 
Gains/(Losses)
 
The following table sets forth the gains/(losses) included in earnings for the three and nine months ended September 2009 and August 2008 as a result of the firm electing to apply the fair value option to certain financial assets and financial liabilities, as described in Note 2. The table excludes gains and losses related to (i) trading assets and trading liabilities, (ii) gains and losses on assets and liabilities that would have been accounted for at fair value under other GAAP if the firm had not elected the fair value option, and (iii) gains and losses on secured financings related to transfers of financial assets accounted for as financings rather than sales, as such gains and losses are offset by gains and losses on the related financial assets.
 
                                 
    Three Months Ended   Nine Months Ended
    September
  August
  September
  August
    2009   2008   2009   2008
    (in millions)
Unsecured long-term borrowings (1)
  $ (209 )   $ 236     $ (651 )   $ 371  
Other secured financings (2)
    (349 )     142       (766 )     265  
Unsecured short-term borrowings (3)
    (44 )     8       (138 )     (17 )
Receivables from customers and counterparties (4)
    241       (33 )     323       (32 )
Other liabilities and accrued expenses (5)
    (180 )     (27 )     (260 )     (27 )
Other (6)
    53       (6 )     61       (28 )
                                 
Total (7)
  $ (488 )   $ 320     $ (1,431 )   $ 532  
                                 
 
 
(1) Excludes gains/(losses) of $(1.45) billion and $1.50 billion for the three months ended September 2009 and August 2008, respectively, and $(3.17) billion and $(758) million for the nine months ended September 2009 and August 2008, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option.
 
(2) Excludes gains of $34 million and $90 million for the three months ended September 2009 and August 2008, respectively, and $41 million and $1.13 billion for the nine months ended September 2009 and August 2008, respectively, related to financings recorded as a result of transactions that were accounted for as secured financings rather than sales. Changes in the fair value of these secured financings are offset by changes in the fair value of the related financial instruments included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.
 
(3) Excludes gains/(losses) of $(893) million and $1.91 billion for the three months ended September 2009 and August 2008, respectively, and $(2.37) billion and $2.17 billion for the nine months ended September 2009 and August 2008, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option.
 
(4) Primarily consists of gains/(losses) on certain reinsurance contracts.
 
(5) Primarily consists of losses on certain insurance and reinsurance contracts.
 
(6) Primarily consists of gains/(losses) on resale and repurchase agreements, and securities borrowed and loaned within Trading and Principal Investments.
 
(7) Reported in “Trading and principal investments” in the condensed consolidated statements of earnings. The amounts exclude contractual interest, which is included in “Interest income” and “Interest expense” in the condensed consolidated statements of earnings, for all instruments other than hybrid financial instruments.


33


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
All trading assets and trading liabilities are accounted for at fair value either under the fair value option or as required by other accounting standards (principally ASC 320, ASC 940 and ASC 815). Excluding equities commissions of $930 million and $1.21 billion for the three months ended September 2009 and August 2008, respectively, and $2.93 billion and $3.68 billion for the nine months ended September 2009 and August 2008, respectively, and the gains and losses on the instruments accounted for under the fair value option described above, “Trading and principal investments” in the condensed consolidated statements of earnings primarily represents gains and losses on “Trading assets, at fair value” and “Trading liabilities, at fair value” in the condensed consolidated statements of financial condition.
 
Loans and Loan Commitments
 
As of September 2009, the aggregate contractual principal amount of loans and long-term receivables for which the fair value option was elected exceeded the related fair value by $44.68 billion, including a difference of $38.65 billion related to loans with an aggregate fair value of $4.95 billion that were on nonaccrual status (including loans more than 90 days past due). As of November 2008, the aggregate contractual principal amount of loans and long-term receivables for which the fair value option was elected exceeded the related fair value by $50.21 billion, including a difference of $37.46 billion related to loans with an aggregate fair value of $3.77 billion that were on nonaccrual status (including loans more than 90 days past due). The aggregate contractual principal 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 September 2009 and November 2008, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $1.16 billion and $3.52 billion, respectively, and the related total contractual amount of these lending commitments was $40.57 billion and $39.49 billion, respectively.
 
Long-term Debt Instruments
 
The aggregate contractual principal amount of long-term debt instruments (principal and non-principal protected) for which the fair value option was elected exceeded the related fair value by $893 million and $2.42 billion as of September 2009 and November 2008, respectively.
 
Derivative Activities
 
Derivative contracts are instruments, such as futures, forwards, swaps or option contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. Derivative instruments may be privately negotiated contracts, which are often referred to as OTC derivatives, or they may be listed and traded on an exchange. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, securities, commodities, currencies or indices.
 
Certain cash instruments, such as mortgage-backed securities, interest-only and principal-only obligations, and indexed debt instruments, are not considered derivatives even though their values or contractually required cash flows are derived from the price of some other security or index. However, certain commodity-related contracts are included in the firm’s derivatives disclosure, as these contracts may be settled in cash or the assets to be delivered under the contract are readily convertible into cash.


34


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The firm enters into derivative transactions to facilitate client transactions, to take proprietary positions and as a means of risk management. Risk exposures are managed through diversification, by controlling position sizes and by entering into offsetting positions. For example, the firm may manage the risk related to a portfolio of common stock by entering into an offsetting position in a related equity-index futures contract.
 
The firm applies hedge accounting to certain derivative contracts. The firm uses these derivatives to manage certain interest rate and currency exposures, including the firm’s net investment in non-U.S. operations. The firm designates certain interest rate swap contracts as fair value hedges. These interest rate swap contracts hedge changes in the relevant benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR)), effectively converting a substantial portion of the firm’s unsecured long-term borrowings, certain unsecured short-term borrowings and certificates of deposit into floating rate obligations. See Note 2 for information regarding the firm’s accounting policy for foreign currency forward contracts used to hedge its net investment in non-U.S. operations.
 
The firm applies a long-haul method to all of its hedge accounting relationships to perform an ongoing assessment of the effectiveness of these relationships in achieving offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged. The firm utilizes a dollar-offset method, which compares 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, to prospectively and retrospectively assess hedge effectiveness under the long-haul method. The firm’s prospective dollar-offset assessment utilizes scenario analyses to test hedge effectiveness via simulations of numerous parallel and slope shifts of the relevant yield curve. Parallel shifts change the interest rate of all maturities by identical amounts. Slope shifts change 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 is deemed to be effective if the fair value of the hedging instrument and the hedged item change inversely within a range of 80% to 125%.
 
For fair value hedges, gains or losses on derivative transactions are recognized in “Interest expense” in the condensed consolidated statements of earnings. 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 related to hedge ineffectiveness for these hedges are generally included in “Interest expense” in the condensed consolidated statements of earnings. These gains or losses were not material for the three and nine months ended September 2009 and August 2008. Gains and losses on derivatives used for trading purposes are included in “Trading and principal investments” in the condensed consolidated statements of earnings.
 
The fair value of the firm’s derivative contracts is reflected net of cash paid or received pursuant to credit support agreements and is reported on a net-by-counterparty basis in the firm’s condensed consolidated statements of financial condition when management believes a legal right of setoff exists under an enforceable netting agreement. The following table sets forth the fair value and the number of contracts of the firm’s derivative contracts by major product type on a gross basis as of September 2009. Gross fair values in the table below exclude the effects of both netting under enforceable netting agreements and netting of cash received or posted pursuant to credit support agreements, and therefore are not representative of the firm’s exposure:
 


35


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                         
    As of September 2009
    Derivative
  Derivative
  Number of
   
Assets
 
Liabilities
 
Contracts
    (in millions, except number of contracts)
Derivative contracts for trading activities
                       
                         
Interest rates
  $ 533,136  (4)   $ 480,148  (4)     274,115  
Credit
    194,977       163,051       449,917  
Currencies
    88,021       75,537       227,152  
Commodities
    57,208       55,296       164,402  
Equities
    87,168       74,504       245,282  
                         
Subtotal
  $ 960,510     $ 848,536       1,360,868  
                         
Derivative contracts accounted for as hedges (1)
                       
                         
Interest rates
  $ 22,325  (5)   $ 4  (5)     817  
Currencies
    52  (6)     127  (6)     79  
                         
Subtotal
  $ 22,377     $ 131       896  
                         
Gross fair value of derivative contracts
  $ 982,887     $ 848,667       1,361,764  
                         
Counterparty netting (2)
    (767,797 )     (767,797 )        
Cash collateral netting (3)
    (126,823 )     (16,830 )        
                         
Fair value included in “Trading assets, at fair value”
  $ 88,267                  
                         
Fair value included in “Trading liabilities, at fair value”
          $ 64,040          
                         
 
 
(1) As of November 2008, the gross fair value of derivative contracts accounted for as hedges consisted of $20.40 billion in assets and $128 million in liabilities.
 
(2) Represents the netting of receivable balances with payable balances for the same counterparty pursuant to credit support agreements.
 
(3) Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.
 
(4) Presented after giving effect to $469.23 billion of derivative assets and $450.07 billion of derivative liabilities settled with clearing organizations.
 
(5) For the three and nine months ended September 2009, the gain/(loss) recognized on these derivative contracts was $844 million and $(7.17) billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $(832) million and $7.14 billion, respectively. These gains and losses are included in “Interest expense” in the condensed consolidated statements of earnings. For the three and nine months ended September 2009, the gain/(loss) recognized on these derivative contracts included losses of $223 million and $889 million, respectively, which were excluded from the assessment of hedge effectiveness.
 
(6) For the three and nine months ended September 2009, the loss on these derivative contracts was $145 million and $442 million, respectively. Such amounts are included in “Currency translation adjustment, net of tax” in the condensed consolidated statements of comprehensive income. The gain/(loss) related to ineffectiveness and the gain/(loss) reclassified to earnings from accumulated other comprehensive income were not material for the three and nine months ended September 2009.

36


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The firm also has embedded derivatives that have been bifurcated from related borrowings. Such derivatives, which are classified in unsecured short-term and unsecured long-term borrowings in the firm’s condensed consolidated statements of financial condition, had a net asset carrying value of $585 million and $774 million as of September 2009 and November 2008, respectively. The net asset as of September 2009, which represented 324 contracts, included gross assets of $990 million (primarily comprised of equity and interest rate derivatives) and gross liabilities of $405 million (primarily comprised of equity and interest rate derivatives). See Notes 6 and 7 for further information regarding the firm’s unsecured borrowings.
 
As of September 2009 and November 2008, the firm has designated $3.50 billion and $3.36 billion, respectively, of foreign currency-denominated debt, included in unsecured long-term borrowings in the firm’s condensed consolidated statements of financial condition, as hedges of net investments in non-U.S. subsidiaries. For the three and nine months ended September 2009, the loss on these debt instruments was $195 million and $16 million, respectively. Such amounts are included in “Currency translation adjustment, net of tax” in the condensed consolidated statements of comprehensive income. The gain/(loss) related to ineffectiveness and the gain/(loss) reclassified to earnings from accumulated other comprehensive income were not material for the three and nine months ended September 2009.
 
The following table sets forth by major product type the firm’s gains/(losses) related to trading activities, including both derivative and nonderivative financial instruments, for the three and nine months ended September 2009. These gains/(losses) are not representative of the firm’s individual business unit results because many of the firm’s trading 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 derivative contracts 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 and derivatives trading inventory has exposure to foreign currencies and may be economically hedged with foreign currency contracts. The gains/(losses) set forth below are included in “Trading and principal investments” in the condensed consolidated statements of earnings and exclude related interest income and interest expense.
 
                 
    Three Months Ended
  Nine Months Ended
    September 2009   September 2009
    (in millions)
Interest rates
  $ 3,928     $ 8,314  
Credit
    2,022       4,358  
Currencies (1)
    (3,617 )     (4,038 )
Equities
    3,406       7,515  
Commodities and other
    964       4,307  
                 
Total
  $ 6,703     $ 20,456  
                 
 
 
(1) Includes gains/(losses) on currency contracts used to economically hedge positions included in other product types in this table.


37


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Certain of the firm’s derivative instruments have been transacted pursuant to bilateral agreements with certain counterparties that may require the firm to post collateral or terminate the transactions based on the firm’s long-term credit ratings. As of September 2009, the aggregate fair value of such derivative contracts that were in a net liability position was $22.15 billion, and the aggregate fair value of assets posted by the firm as collateral for these derivative contracts was $16.32 billion. As of September 2009, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately $685 million and $1.70 billion could have been called by counterparties in the event of a one-notch and two-notch reduction, respectively, in the firm’s long-term credit ratings.
 
The firm enters into a broad array of credit derivatives to facilitate client transactions, to take proprietary positions and as a means of risk management. The firm uses each of the credit derivatives described below for these purposes. These credit derivatives are entered into by various trading desks around the world, and are actively managed based on the underlying risks. These activities are frequently part of a broader trading strategy and are dynamically managed based on the net risk position. As individually negotiated contracts, credit derivatives can have numerous settlement and payment conventions. The more common types of triggers include bankruptcy of the reference credit entity, acceleration of indebtedness, failure to pay, restructuring, repudiation and dissolution of the 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 of a default by the issuer (reference entity). The buyer of protection pays an initial or periodic premium to the seller and receives credit default protection for the period of the contract. If there is no credit default event, as defined by the specific derivative contract, then the seller of protection makes no payments to the buyer of protection. However, if a credit default event occurs, the seller of protection will be required to make a payment to the buyer of protection. Typical credit default events requiring payment include bankruptcy of the reference credit entity, failure to pay the principal or interest, and restructuring of the relevant obligations of the reference entity.
 
  •  Credit indices, baskets and tranches:  Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. Typically, in the event of a default of one of the underlying reference obligations, the protection seller will pay to the protection buyer a pro-rata portion of a transaction’s total notional amount relating to the underlying defaulted reference obligation. In tranched transactions, the credit risk of a basket or index is separated into various portions each having different levels of subordination. The most junior tranches cover initial defaults, and once losses exceed the notional amount of these tranches, the excess 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.
 
  •  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 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.


38


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underlyings. 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 September 2009, the firm’s written and purchased credit derivatives had total gross notional amounts of $2.81 trillion and $2.95 trillion, respectively, for total net purchased protection of $136.80 billion in notional value. As of November 2008, the firm’s written and purchased credit derivatives had total gross notional amounts of $3.78 trillion and $4.03 trillion, respectively, for total net purchased protection of $255.24 billion in notional value. The decrease in notional amounts from November 2008 to September 2009 primarily reflects compression efforts across the industry.
 
The following table sets forth certain information related to the firm’s credit derivatives. Fair values in the table below exclude the effects of both netting under enforceable netting agreements and netting of cash paid pursuant to credit support agreements, and therefore are not representative of the firm’s exposure.
 
                                                         
        Maximum Payout/Notional
  Carrying Value
    Maximum Payout/Notional Amount
  Amount of Purchased
  of Written Credit
    of Written Credit Derivatives by Tenor (1)   Credit Derivatives   Derivatives
                    Offsetting
  Other
   
            5 Years
      Purchased
  Purchased
   
    0 - 12
  1 - 5
  or
      Credit
  Credit
   
    Months   Years   Greater   Total   Derivatives (2)   Derivatives (3)   Asset/(Liability)
    ($ in millions)
As of September 2009
                                                       
Credit spread on
underlying (basis points)
 (4)
                                                       
0-250
  $ 223,600     $ 1,456,260     $ 492,390     $ 2,172,250     $ 1,997,498     $ 247,284     $ 11,766  
251-500
    26,827       154,932       42,262       224,021       207,479       30,291       (3,720 )
501-1,000
    15,773       146,937       51,786       214,496       201,185       35,108       (18,091 )
Greater than 1,000
    26,988       143,215       31,960       202,163       167,974       62,909       (71,726 )
                                                         
Total
  $ 293,188     $ 1,901,344     $ 618,398     $ 2,812,930     $ 2,574,136     $ 375,592     $ (81,771 (5)
                                                         
As of November 2008
                                                       
Credit spread on
underlying (basis points)
 (4)
                                                       
0-250
  $ 108,555     $ 1,093,651     $ 623,944     $ 1,826,150     $ 1,632,681     $ 347,573     $ (77,836 )
251-500
    51,015       551,971       186,084       789,070       784,149       26,316       (94,278 )
501-1,000
    34,756       404,661       148,052       587,469       538,251       67,958       (75,079 )
Greater than 1,000
    41,496       373,211       161,475       576,182       533,816       103,362       (222,346 )
                                                         
Total
  $ 235,822     $ 2,423,494     $ 1,119,555     $ 3,778,871     $ 3,488,897     $ 545,209     $ (469,539 (5)
                                                         
 
 
(1)  Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives.
 
(2)  Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent they economically hedge written credit derivatives with identical underlyings.
 
(3)  Comprised of purchased protection in excess of the amount of written protection on identical underlyings and purchased protection on other underlyings on which the firm has not written protection.
 
(4)  Credit spread on the underlying, together with the tenor of the contract, are indicators of payment/performance risk. For example, the firm is least likely to pay or otherwise be required to perform where the credit spread on the underlying is “0-250” basis points and the tenor is “0-12 Months.” The likelihood of payment or performance is generally greater as the credit spread on the underlying and tenor increase.
 
(5)  This net liability excludes the effects of both netting under enforceable netting agreements and netting of cash collateral paid pursuant to credit support agreements. Including the effects of netting receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements, the firm’s net liability related to credit derivatives in the firm’s condensed consolidated statements of financial condition as of September 2009 and November 2008 was $10.17 billion and $33.76 billion, respectively. This net amount excludes the netting of cash collateral paid pursuant to credit support agreements. The decrease in this net liability from November 2008 to September 2009 primarily reflected tightening credit spreads.


39


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Collateralized Transactions
 
The firm receives financial instruments as collateral, primarily in connection with resale agreements, securities borrowed, derivative transactions and customer margin loans. Such financial instruments may include obligations of the U.S. government, federal agencies, sovereigns and corporations, as well as equities and convertibles.
 
In many cases, the firm is permitted to deliver or repledge these financial instruments in connection with entering into repurchase agreements, securities lending agreements and other secured financings, collateralizing derivative transactions and meeting firm or customer settlement requirements. As of September 2009 and November 2008, the fair value of financial instruments received as collateral by the firm that it was permitted to deliver or repledge was $599.70 billion and $578.72 billion, respectively, of which the firm delivered or repledged $423.52 billion and $445.11 billion, respectively.
 
The firm also pledges assets that it owns to counterparties who may or may not have the right to deliver or repledge them. Trading assets pledged to counterparties that have the right to deliver or repledge are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and were $34.87 billion and $26.31 billion as of September 2009 and November 2008, respectively. Trading assets, pledged in connection with repurchase agreements, securities lending agreements and other secured financings to counterparties that did not have the right to sell or repledge are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and were $117.10 billion and $80.85 billion as of September 2009 and November 2008, respectively. Other assets (primarily real estate and cash) owned and pledged in connection with other secured financings to counterparties that did not have the right to sell or repledge were $7.38 billion and $9.24 billion as of September 2009 and November 2008, respectively.
 
In addition to repurchase agreements and securities lending agreements, the firm obtains secured funding through the use of other arrangements. Other secured financings include arrangements that are nonrecourse, that is, only the subsidiary that executed the arrangement or a subsidiary guaranteeing the arrangement is obligated to repay the financing. Other secured financings consist of liabilities related to the firm’s William Street credit extension program; consolidated VIEs; collateralized central bank financings and other transfers of financial assets that are accounted for as financings rather than sales (primarily pledged bank loans and mortgage whole loans); and other structured financing arrangements.


40


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Other secured financings by maturity are set forth in the table below:
 
                 
    As of
    September
  November
    2009   2008
    (in millions)
Other secured financings (short-term) (1)(2)
  $ 13,403     $ 21,225  
Other secured financings (long-term):
               
2010
    1,342       2,157  
2011
    3,973       4,578  
2012
    3,315       3,040  
2013
    1,610       1,377  
2014
    1,464       1,512  
2015-thereafter
    2,877       4,794  
                 
Total other secured financings (long-term) (3)(4)
    14,581       17,458  
                 
Total other secured financings (5)(6)
  $ 27,984     $ 38,683  
                 
 
 
(1) As of September 2009 and November 2008, consists of U.S. dollar-denominated financings of $4.72 billion and $12.53 billion, respectively, with a weighted average interest rate of 2.37% and 2.98%, respectively, and non-U.S. dollar-denominated financings of $8.68 billion and $8.70 billion, respectively, with a weighted average interest rate of 0.75% and 0.95%, respectively, after giving effect to hedging activities. The weighted average interest rates as of September 2009 and November 2008 excluded financial instruments accounted for at fair value under the fair value option.
 
(2) Includes other secured financings maturing within one year of the financial statement date and other secured financings that are redeemable within one year of the financial statement date at the option of the holder.
 
(3) As of September 2009 and November 2008, consists of U.S. dollar-denominated financings of $8.81 billion and $9.55 billion, respectively, with a weighted average interest rate of 1.64% and 4.62%, respectively, and non-U.S. dollar-denominated financings of $5.77 billion and $7.91 billion, respectively, with a weighted average interest rate of 2.16% and 4.39%, respectively, after giving effect to hedging activities. The weighted average interest rates as of September 2009 and November 2008 excluded financial instruments accounted for at fair value under the fair value option.
 
(4) Secured long-term financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Secured long-term financings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable.
 
(5) As of September 2009 and November 2008, $22.39 billion and $31.54 billion, respectively, of these financings were collateralized by trading assets and $5.59 billion and $7.14 billion, respectively, by other assets (primarily real estate and cash). Other secured financings include $11.71 billion and $13.74 billion of nonrecourse obligations as of September 2009 and November 2008, respectively.
 
(6) As of September 2009, other secured financings includes $12.96 billion related to transfers of financial assets accounted for as financings rather than sales. Such financings were collateralized by financial assets included in “Trading assets, at fair value” in the condensed consolidated statement of financial condition of $13.15 billion as of September 2009.


41


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 4.   Securitization Activities and Variable Interest Entities
 
Securitization Activities
 
The firm securitizes commercial and residential mortgages, government and corporate bonds and other types of financial assets. The firm acts as underwriter of the beneficial interests that are sold to investors. The firm derecognizes financial assets transferred in securitizations, provided it has relinquished control over such assets. Transferred assets are accounted for at fair value prior to securitization. Net revenues related to these underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.
 
The firm may have continuing involvement with transferred assets, including: retaining interests in securitized financial assets, primarily in the form of senior or subordinated securities; retaining servicing rights; and purchasing senior or subordinated securities in connection with secondary market-making activities. Retained interests and other interests related to the firm’s continuing involvement are accounted for at fair value and are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition. See Note 2 for additional information regarding fair value measurement.
 
During the three and nine months ended September 2009, the firm securitized $18.75 billion and $35.22 billion, respectively, of financial assets in which the firm had continuing involvement as of September 2009, including $18.75 billion and $34.63 billion, respectively, of residential mortgages, primarily in connection with government agency securitizations, and $0 and $591 million, respectively, of other financial assets. During the three and nine months ended August 2008, the firm securitized $5.85 billion and $12.39 billion, respectively, of financial assets, including $1.38 billion and $5.49 billion, respectively, of residential mortgages, $0 and $773 million, respectively, of commercial mortgages, and $4.48 billion and $6.13 billion, respectively, of other financial assets, primarily in connection with CLOs. Cash flows received on retained interests were $135 million and $335 million for the three and nine months ended September 2009, respectively, and $133 million and $404 million for the three and nine months ended August 2008, respectively.


42


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The following table sets forth certain information related to the firm’s continuing involvement in 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, as of September 2009. The outstanding principal amount set forth in the table below 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. For retained or purchased interests, the firm’s risk of loss is limited to the fair value of these interests.
 
                         
    As of September 2009 (1)
    Outstanding
  Fair value of
  Fair value of
    principal
  retained
  purchased
   
amount
 
interests
 
interests (2)
    (in millions)
Residential mortgage-backed (3)
  $ 50,315     $ 2,306     $ 15  
Commercial mortgage-backed
    14,291       179       80  
Other asset-backed (4)
    17,485       87       26  
                         
Total
  $ 82,091     $ 2,572     $ 121  
                         
 
 
(1) As of September 2009, fair value of other continuing involvement excludes $485 million of purchased interests in securitization entities where the firm’s involvement was related to secondary market-making activities. Continuing involvement also excludes derivative contracts that are used by securitization entities to manage credit, interest rate or foreign exchange risk. See Note 3 for information on the firm’s derivative contracts.
 
(2) Comprised of senior and subordinated interests purchased in connection with secondary market-making activities in VIEs and QSPEs in which the firm also holds retained interests. In addition to these interests, the firm had other continuing involvement in the form of derivative transactions and guarantees with certain VIEs for which the carrying value was a net liability of $115 million as of September 2009. The notional amounts of these transactions are included in maximum exposure to loss in the nonconsolidated VIE table below.
 
(3) Primarily consists of outstanding principal and retained interests related to government agency QSPEs.
 
(4) Primarily consists of CDOs backed by corporate and mortgage obligations and CLOs. Outstanding principal amount and fair value of retained interests include $16.13 billion and $53 million, respectively, as of September 2009 related to VIEs which are also included in the nonconsolidated VIE table below.


43


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The following table sets forth the weighted average key economic assumptions used in measuring the fair value of the firm’s retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions:
 
                                 
    As of September 2009   As of November 2008
    Type of Retained Interests (1)   Type of Retained Interests (1)
    Mortgage-
  Other Asset-
  Mortgage-
  Other Asset-
   
Backed
 
Backed (2)
 
Backed
 
Backed
    ($ in millions)
Fair value of retained interests
  $ 2,485     $ 87     $ 1,415     $ 367  (5)
                                 
Weighted average life (years)
    5.9       3.7       6.0       5.1  
                                 
Constant prepayment rate (3)
    18.9 %     N.M.       15.5 %     4.5 %
Impact of 10% adverse change (3)
  $ (26 )     N.M.     $ (14 )   $ (6 )
Impact of 20% adverse change (3)
    (55 )     N.M.       (27 )     (12 )
                                 
Discount rate (4)
    10.4 %     N.M.       21.1 %     29.2 %
Impact of 10% adverse change
  $ (69 )     N.M.     $ (46 )   $ (25 )
Impact of 20% adverse change
    (133 )     N.M.       (89 )     (45 )
 
 
(1) Includes $2.52 billion and $1.53 billion as of September 2009 and November 2008, respectively, held in QSPEs.
 
(2) 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 September 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the firm’s carrying value of $87 million.
 
(3) Constant prepayment rate is included only for positions for which constant prepayment rate is a key assumption in the determination of fair value.
 
(4) The majority of the firm’s mortgage-backed retained interests are U.S. government agency-issued collateralized mortgage obligations, for which there is no anticipated credit loss. For the remainder of the firm’s retained interests, the expected credit loss assumptions are reflected within the discount rate.
 
(5) Includes $192 million of retained interests related to transfers of securitized assets that were accounted for as secured financings rather than sales.


44


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
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 is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.
 
As of September 2009 and November 2008, the firm held mortgage servicing rights with a fair value of $131 million and $147 million, respectively. These servicing assets represent the firm’s right to receive a future stream of cash flows, such as servicing fees, in excess of the firm’s obligation to service residential mortgages. The fair value of mortgage servicing rights will fluctuate in response to changes in certain economic variables, such as discount rates and loan prepayment rates. The firm estimates the fair value of mortgage servicing rights by using valuation models that incorporate these variables in quantifying anticipated cash flows related to servicing activities. Mortgage servicing rights are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and are classified within level 3 of the fair value hierarchy. The following table sets forth changes in the firm’s mortgage servicing rights, as well as servicing fees earned:
 
                                 
    Three Months Ended   Nine Months Ended
    September
  August
  September
  August
    2009   2008   2009   2008
    (in millions)
Balance, beginning of period
  $ 130     $ 248     $ 153     $ 93  
Purchases
          27             239  (2)
Servicing assets that resulted from transfers of financial assets
                      3  
Changes in fair value due to changes in valuation inputs and assumptions
    1       (35 )     (22 )     (95 )
                                 
Balance, end of period (1)
  $ 131     $ 240     $ 131     $ 240  
                                 
Contractually specified servicing fees
  $ 71     $ 87     $ 248     $ 224  
                                 
 
 
(1) As of September 2009 and August 2008, the fair value was estimated using a weighted average discount rate of approximately 16% and 16%, respectively, and a weighted average prepayment rate of approximately 26% and 28%, respectively.
 
(2) Primarily related to the acquisition of Litton Loan Servicing LP.


45


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Variable Interest Entities
 
The firm, in the ordinary course of business, retains interests in VIEs in connection with its securitization activities. The firm also purchases and sells variable interests in VIEs, which primarily issue mortgage-backed and other asset-backed securities, CDOs and CLOs, in connection with its market-making activities and makes investments in and loans to VIEs that hold performing and nonperforming debt, equity, real estate, power-related and other assets. In addition, the firm utilizes VIEs to provide investors with principal-protected notes, credit-linked notes and asset-repackaged notes designed to meet their objectives. VIEs generally purchase assets by issuing debt and equity instruments.
 
The firm’s significant variable interests in VIEs include senior and subordinated debt interests in mortgage-backed and asset-backed securitization vehicles, CDOs and CLOs; loan commitments; limited and general partnership interests; preferred and common stock; interest rate, foreign currency, equity, commodity and credit derivatives; and guarantees.
 
The firm’s exposure to the obligations of VIEs is generally limited to its interests in these entities. In the tables set forth below, the maximum exposure to loss for purchased and retained interests and loans and investments is the carrying value of these interests. In certain instances, the firm provides guarantees, including derivative guarantees, to VIEs or holders of variable interests in VIEs. For these contracts, maximum exposure to loss set forth in the tables below is the notional amount of such guarantees, which does not represent anticipated losses and also has not been reduced by unrealized losses already recorded by the firm in connection with these guarantees. As a result, the maximum exposure to loss exceeds the firm’s liabilities related to VIEs.
 
The following tables set forth total assets in firm-sponsored nonconsolidated VIEs in which the firm holds variable interests and other nonconsolidated VIEs in which the firm holds significant variable interests, and the firm’s maximum exposure to loss excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with these variable interests. For 2009, in accordance with amended principles requiring enhanced disclosures, the following table also sets forth the total assets and total liabilities included in the condensed consolidated statements of financial condition related to the firm’s significant interests in nonconsolidated VIEs. The firm has aggregated nonconsolidated VIEs based on principal business activity, as reflected in the first column. The nature of the firm’s variable interests can take different forms, as described in the columns under maximum exposure to loss.
 
                                                                   
    As of September 2009
          Carrying Value of
   
          the Firm’s
                   
          Variable Interests   Maximum Exposure to Loss in Nonconsolidated VIEs (1)
                  Purchased
  Commitments
           
    Assets
             and Retained
  and
      Loans and
   
    in VIE     Assets   Liabilities   Interests   Guarantees   Derivatives   Investments   Total
                  (in millions)            
Mortgage CDOs (2)
  $ 8,796       $ 140     $ 4     $ 51     $     $ 4,016  (7)   $     $ 4,067  
Corporate CDOs and CLOs (2)
    28,193         752       468       216             7,302  (8)           7,518  
Real estate, credit-related
and other investing (3)
    27,975         3,221       189             364             3,270       3,634  
Other asset-backed (2)
    537         11       17                   537             537  
Power-related (4)
    603         219       3             37             219       256  
Principal-protected notes (5)
    2,355         13       1,369                   2,620             2,620  
                                                                   
Total
  $ 68,459       $ 4,356     $ 2,050     $ 267     $ 401  (6)   $ 14,475  (6)   $ 3,489     $ 18,632  
                                                                   
                                                                   
                                                                   


46


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
                                                   
    As of November 2008
          Maximum Exposure to Loss in Nonconsolidated VIEs (1)
          Purchased
  Commitments
           
    Assets
    and Retained
  and
      Loans and
   
    in VIE     Interests   Guarantees   Derivatives  
Investments
  Total
          (in millions)    
Mortgage CDOs
  $ 13,061       $ 242     $     $ 5,616  (7)   $     $ 5,858  
Corporate CDOs and CLOs
    8,584         161             918  (8)           1,079  
Real estate, credit-related and other investing (3)
    26,898               143             3,223       3,366  
Municipal bond securitizations
    111               111                   111  
Other asset-backed
    4,355                     1,084             1,084  
Power-related
    844               37             213       250  
Principal-protected notes (5)
    4,516                     4,353             4,353  
                                                   
Total
  $ 58,369       $ 403     $ 291     $ 11,971     $ 3,436     $ 16,101  
                                                   
 
 
(1)  Such amounts do not represent the anticipated losses in connection with these transactions as they exclude the effect of offsetting financial instruments that are held to mitigate these risks.
 
(2)  These VIEs are generally financed through the issuance of debt instruments collateralized by assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Trading liabilities, at fair value,” respectively, in the condensed consolidated statement of financial condition.
 
(3)  The firm obtains interests in these VIEs in connection with making investments in real estate, distressed loans and other types of debt, mezzanine instruments and equities. These VIEs are generally financed through the issuance of debt and equity instruments which are either collateralized by or indexed to assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statement of financial condition.
 
(4)  Assets and liabilities held by the firm related to these VIEs are included in “Other assets” and “Trading liabilities, at fair value” in the condensed consolidated statement of financial condition.
 
(5)  Consists of out-of-the-money written put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing. Assets related to these VIEs are included in “Trading assets, at fair value” and liabilities related to these VIEs are included in “Other secured financings,” “Unsecured short-term borrowings” or “Unsecured long-term borrowings” in the condensed consolidated statement of financial condition. Assets in VIE, carrying value of liabilities and maximum exposure to loss exclude $3.89 billion as of September 2009, associated with guarantees related to the firm’s performance under borrowings from the VIE, which are recorded as liabilities in the condensed consolidated statement of financial condition. Substantially all of the liabilities included in the table above relate to additional borrowings from the VIE associated with principal protected notes guaranteed by the firm.
 
(6)  The aggregate amounts include $4.70 billion as of September 2009, related to guarantees and derivative transactions with VIEs to which the firm transferred assets.
 
(7)  Primarily consists of written protection on investment-grade, short-term collateral held by VIEs that have issued CDOs.
 
(8)  Primarily consists of total return swaps on CDOs and CLOs. The firm has generally transferred the risks related to the underlying securities through derivatives with non-VIEs.


47


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The following table sets forth the firm’s total assets excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with its variable interests in consolidated VIEs. The following table excludes VIEs in which the firm holds a majority voting interest unless the activities of the VIE are primarily related to securitization, asset-backed financings or single-lessee leasing arrangements. For 2009, in accordance with amended principles requiring enhanced disclosures, the following table also sets forth the total liabilities included in the condensed consolidated statement of financial condition related to the firm’s consolidated VIEs. The firm has aggregated consolidated VIEs based on principal business activity, as reflected in the first column.
 
                         
    As of
    September 2009   November 2008
    VIE
  VIE
  VIE
    Assets (1)   Liabilities (1)   Assets (1)
    (in millions)
Real estate, credit-related and other investing
  $ 1,085     $ 816  (2)   $ 1,560  
Municipal bond securitizations
    756       893  (3)     985  
CDOs, mortgage-backed and other asset-backed
    630       569  (4)     32  
Foreign exchange and commodities
    245       272  (5)     652  
Principal-protected notes
    218       218  (6)     215  
                         
Total
  $ 2,934     $ 2,768     $ 3,444  
                         
 
 
(1) Consolidated VIE assets and liabilities are presented after intercompany eliminations and include assets financed on a nonrecourse basis. Substantially all VIE assets are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.
 
(2) These VIE liabilities are generally collateralized by the related VIE assets and included in “Other secured financings” in the condensed consolidated statement of financial condition. These VIE liabilities generally do not provide for recourse to the general credit of the firm.
 
(3) These VIE liabilities, which are partially collateralized by the related VIE assets, are included in “Other secured financings” in the condensed consolidated statement of financial condition.
 
(4) These VIE liabilities are primarily included in “Securities sold under agreements to repurchase, at fair value” and “Other secured financings” in the condensed consolidated statement of financial condition and generally do not provide for recourse to the general credit of the firm.
 
(5) These VIE liabilities are primarily included in “Trading liabilities, at fair value” in the condensed consolidated statement of financial condition.
 
(6) These VIE liabilities are included in “Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings” in the condensed consolidated statement of financial condition.
 
The firm did not have off-balance-sheet commitments to purchase or finance any CDOs held by structured investment vehicles as of September 2009 or November 2008.


48


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 5.   Deposits
 
The following table sets forth deposits as of September 2009 and November 2008:
 
                 
    As of
    September
  November
    2009   2008
    (in millions)
U.S. offices (1)
  $ 35,771     $ 23,018  
Non-U.S. offices (2)
    6,660       4,625  
                 
Total
  $ 42,431     $ 27,643  
                 
 
 
(1) Substantially all U.S. deposits were interest-bearing and were held at GS Bank USA.
 
(2) Substantially all non-U.S. deposits were interest-bearing and were held at Goldman Sachs Bank (Europe) PLC (GS Bank Europe).
 
Included in the above table are time deposits of $11.36 billion and $8.49 billion as of September 2009 and November 2008, respectively. The following table sets forth the maturities of time deposits as of September 2009:
 
                         
    As of September 2009
   
U.S.
 
Non-U.S.
 
Total
    (in millions)
2009
  $ 2,165     $ 603     $ 2,768  
2010
    1,617       106       1,723  
2011
    1,605             1,605  
2012
    873             873  
2013
    1,795       15       1,810  
2014-thereafter
    2,585             2,585  
                         
Total
  $ 10,640     $ 724     $ 11,364  
                         


49


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 6.   Short-Term Borrowings
 
As of September 2009 and November 2008, short-term borrowings were $51.96 billion and $73.89 billion, respectively, comprised of $13.40 billion and $21.23 billion, respectively, included in “Other secured financings” in the condensed consolidated statements of financial condition and $38.56 billion and $52.66 billion, respectively, of unsecured short-term borrowings. See Note 3 for information on 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. 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 approximate fair value due to the short-term nature of the obligations.
 
Unsecured short-term borrowings are set forth below:
 
                 
    As of
    September
  November
    2009   2008
    (in millions)
Current portion of unsecured long-term borrowings
  $ 19,977     $ 26,281  
Hybrid financial instruments
    10,351       12,086  
Promissory notes (1)
    846       6,944  
Commercial paper (2)
    1,424       1,125  
Other short-term borrowings (3)
    5,957       6,222  
                 
Total (4)
  $ 38,555     $ 52,658  
                 
 
 
(1) Includes $661 million and $3.42 billion as of September 2009 and November 2008, respectively, guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP).
 
(2) Includes $0 and $751 million as of September 2009 and November 2008, respectively, guaranteed by the FDIC under the TLGP.
 
(3) Includes $1.11 billion and $0 as of September 2009 and November 2008, respectively, guaranteed by the FDIC under the TLGP.
 
(4) The weighted average interest rates for these borrowings, after giving effect to hedging activities, were 1.58% and 3.37% as of September 2009 and November 2008, respectively, and excluded financial instruments accounted for at fair value under the fair value option.


50


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 7.   Long-Term Borrowings
 
As of September 2009 and November 2008, long-term borrowings were $204.30 billion and $185.68 billion, respectively, comprised of $14.58 billion and $17.46 billion, respectively, included in “Other secured financings” in the condensed consolidated statements of financial condition and $189.72 billion and $168.22 billion, respectively, of unsecured long-term borrowings. See Note 3 for information regarding other secured financings.
 
The firm’s unsecured long-term borrowings extend through 2043 and consist principally of senior borrowings.
 
Unsecured long-term borrowings are set forth below:
 
                 
    As of
    September
  November
    2009   2008
    (in millions)
Fixed rate obligations (1)
  $ 119,398     $ 103,825  
Floating rate obligations (2)
    70,326       64,395  
                 
Total (3)
  $ 189,724     $ 168,220  
                 
 
 
(1) As of September 2009 and November 2008, $81.28 billion and $70.08 billion, respectively, of the firm’s fixed rate debt obligations were denominated in U.S. dollars and interest rates ranged from 1.63% to 10.04% and from 3.87% to 10.04%, respectively. As of September 2009 and November 2008, $38.12 billion and $33.75 billion, respectively, of the firm’s fixed rate debt obligations were denominated in non-U.S. dollars and interest rates ranged from 0.67% to 7.45% and from 0.67% to 8.88%, respectively.
 
(2) As of September 2009 and November 2008, $35.08 billion and $32.41 billion, respectively, of the firm’s floating rate debt obligations were denominated in U.S. dollars. As of September 2009 and November 2008, $35.25 billion and $31.99 billion, respectively, of the firm’s floating rate debt obligations were denominated in non-U.S. dollars. Floating interest rates generally are based on LIBOR or the federal funds target rate. Equity-linked and indexed instruments are included in floating rate obligations.
 
(3) Includes $20.85 billion and $0 as of September 2009 and November 2008, respectively, guaranteed by the FDIC under the TLGP.
 
Unsecured long-term borrowings by maturity date are set forth below (in millions):
 
         
    As of
    September 2009
2010
  $ 3,047  
2011
    23,749  
2012
    27,500  
2013
    23,774  
2014
    18,539  
2015-thereafter
    93,115  
         
Total (1)(2)
  $ 189,724  
         
 
 
(1) 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 are included as unsecured short-term borrowings in the condensed consolidated statements of financial condition.
 
(2) Unsecured long-term borrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Unsecured long-term borrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable.


51


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
The firm enters into derivative contracts to effectively convert a substantial portion of its 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 September 2009 and November 2008. For unsecured long-term borrowings for which the firm did not elect the fair value option, the cumulative impact due to the widening of the firm’s own credit spreads would be a reduction in the carrying value of total unsecured long-term borrowings of approximately 1% and 9% as of September 2009 and November 2008, respectively.
 
The effective weighted average interest rates for unsecured long-term borrowings are set forth below:
 
                                 
    As of
    September 2009   November 2008
   
Amount
 
Rate
 
Amount
 
Rate
    ($ in millions)
Fixed rate obligations
  $ 4,273       5.48 %   $ 4,015       4.97 %
Floating rate obligations (1)
    185,451       0.72       164,205       2.66  
                                 
Total (2)
  $ 189,724       0.83     $ 168,220       2.73  
                                 
 
 
(1) Includes fixed rate obligations that have been converted into floating rate obligations through derivative contracts.
 
(2) The weighted average interest rates as of September 2009 and November 2008 excluded financial instruments accounted for at fair value under the fair value option.
 
Subordinated Borrowings
 
Unsecured long-term borrowings included subordinated borrowings with outstanding principal amounts of $19.16 billion and $19.26 billion as of September 2009 and November 2008, respectively, as set forth below.
 
Junior Subordinated Debt Issued to Trusts in Connection with Fixed-to-Floating and Floating Rate Normal Automatic Preferred Enhanced Capital Securities.  In 2007, Group Inc. issued a total of $2.25 billion of remarketable junior subordinated debt to Goldman Sachs Capital II and Goldman Sachs Capital III (APEX Trusts), Delaware statutory trusts that, in turn, issued $2.25 billion of guaranteed perpetual Normal Automatic Preferred Enhanced Capital Securities (APEX) 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 billion of perpetual non-cumulative preferred stock to be issued by Group Inc. (the stock purchase contracts). The APEX Trusts are wholly owned finance subsidiaries of the firm for regulatory and legal purposes but are not consolidated for accounting purposes.
 
The firm pays interest semi-annually on $1.75 billion of junior subordinated debt issued to Goldman Sachs Capital II at a fixed annual rate 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. 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. During any such extension period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common or preferred stock. The junior subordinated debt is junior in right of payment to all of Group Inc.’s senior indebtedness and all of Group Inc.’s other subordinated borrowings.


52


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
In connection with the APEX issuance, the firm covenanted in favor of certain of its debtholders, who are initially the holders of Group Inc.’s 6.345% Junior Subordinated Debentures due February 15, 2034, that, subject to certain exceptions, the firm would not redeem or purchase (i) Group Inc.’s junior subordinated debt issued to the APEX Trusts prior to the applicable stock purchase date or (ii) APEX or shares of Group Inc.’s Series E or Series F Preferred Stock prior to the date that is ten years after the applicable stock purchase date, unless the applicable redemption or purchase price does not exceed 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.
 
The firm accounted for 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. See Note 9 for information on the preferred stock that Group Inc. will issue in connection with the stock purchase contracts.
 
Junior Subordinated Debt Issued to a Trust in Connection with Trust Preferred Securities. Group Inc. issued $2.84 billion of junior subordinated debentures in 2004 to Goldman Sachs Capital I (Trust), a Delaware statutory trust that, in turn, issued $2.75 billion of guaranteed preferred beneficial interests to third parties and $85 million of common beneficial interests to Group Inc. and invested the proceeds from the sale in junior subordinated debentures issued by Group Inc. 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 these debentures at an annual rate of 6.345% and the debentures mature 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 applicable to the debentures. The firm has the right, from time to time, to defer payment of interest on the debentures, 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 extension 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. These debentures are junior in right of payment to all of Group Inc.’s senior indebtedness and all of Group Inc.’s subordinated borrowings, other than the junior subordinated debt issued in connection with the APEX.
 
Subordinated Debt.  As of September 2009, the firm had $14.07 billion of other subordinated debt outstanding with maturities ranging from fiscal 2010 to 2038. The effective weighted average interest rate on this debt was 0.46%, after giving effect to derivative contracts used to convert fixed rate obligations into floating rate obligations. As of November 2008, the firm had $14.17 billion of other subordinated debt outstanding with maturities ranging from fiscal 2009 to 2038. The effective weighted average interest rate on this debt was 1.99%, after giving effect to derivative contracts used to convert fixed rate obligations into floating rate obligations. This debt is junior in right of payment to all of the firm’s senior indebtedness.


53


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 8.   Commitments, Contingencies and Guarantees
 
Commitments
 
The following table summarizes the firm’s commitments as of September 2009 and November 2008:
 
                                                 
    Commitment Amount by Fiscal Period
   
    of Expiration as of September 2009   Total Commitments as of
    Remainder
  2010-
  2012-
  2014-
  September
  November
   
of 2009
  2011   2013  
Thereafter
  2009   2008
    (in millions)
Commitments to extend credit (1)
                                               
Commercial lending:
                                               
Investment-grade
  $ 990     $ 5,285     $ 2,553     $     $ 8,828     $ 8,007  
Non-investment-grade (2)
    614       2,833       4,466       398       8,311       9,318  
William Street credit extension program
    672       9,985       13,373       441       24,471       22,610  
Warehouse financing
          29                   29       1,101  
                                                 
Total commitments to extend credit
    2,276       18,132       20,392       839       41,639       41,036  
Forward starting resale and securities borrowing agreements
    60,578       361                   60,939       61,455  
Forward starting repurchase and securities lending agreements
    15,479       364                   15,843       6,948  
Underwriting commitments
          1,176                   1,176       241  
Letters of credit (3)
    1,513       806       175       5       2,499       7,251  
Investment commitments (4)
    1,824       10,004       149       869       12,846       14,266  
Construction-related commitments (5)
    205       68                   273       483  
Other
    58       111       36       34       239       260  
                                                 
Total commitments
  $ 81,933     $ 31,022     $ 20,752     $ 1,747     $ 135,454     $ 131,940  
                                                 
 
 
(1)  Commitments to extend credit are presented net of amounts syndicated to third parties.
 
(2)  Included within non-investment-grade commitments as of September 2009 and November 2008 were $2.14 billion and $2.07 billion, respectively, related to leveraged lending capital market transactions; $89 million and $164 million, respectively, related to commercial real estate transactions; and $6.08 billion and $7.09 billion, respectively, arising from other unfunded credit facilities. Including funded loans, the total notional amount of the firm’s leveraged lending capital market transactions was $5.77 billion and $7.97 billion as of September 2009 and November 2008, respectively.
 
(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.
 
(4)  Consists of the firm’s commitments to invest in private equity, real estate and other assets directly and through funds that the firm raises and manages in connection with its merchant banking and other investing activities, consisting of $2.43 billion and $3.15 billion as of September 2009 and November 2008, respectively, related to real estate private investments and $10.42 billion and $11.12 billion as of September 2009 and November 2008, respectively, related to corporate and other private investments. Such commitments include $11.36 billion and $12.25 billion as of September 2009 and November 2008, respectively, of commitments to invest in funds managed by the firm, which will be funded at market value on the date of investment.
 
(5)  Includes commitments of $239 million and $388 million as of September 2009 and November 2008, respectively, related to the firm’s new headquarters in New York City, which is expected to cost approximately $2.1 billion.


54


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Commitments to Extend Credit.  The firm’s commitments to extend credit are agreements to lend to counterparties that have fixed termination dates and are contingent on the satisfaction of all conditions to borrowing set forth in the contract. Since these commitments may expire unused or be reduced or cancelled at the counterparty’s request, the total commitment amount does not necessarily reflect the actual future cash flow requirements. The firm accounts for these commitments at fair value. To the extent that the firm recognizes losses on these commitments, such losses are recorded within the firm’s Trading and Principal Investments segment net of any related underwriting fees.
 
  •  Commercial lending commitments.  The firm’s commercial lending commitments are generally extended in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. The total commitment amount does not necessarily reflect the actual future cash flow requirements, as the firm may syndicate all or substantial portions of these commitments in the future, the commitments may expire unused, or the commitments may be cancelled or reduced at the request of the counterparty. In addition, 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 William Street Commitment Corporation (Commitment Corp.), a consolidated wholly owned subsidiary of GS Bank USA, GS Bank USA and other subsidiaries of GS Bank USA. The commitments extended by Commitment Corp. are supported, in part, by funding raised by William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of GS Bank USA. The assets and liabilities of Commitment Corp. and Funding Corp. are legally separated from other assets and liabilities of the firm. The assets of Commitment Corp. and of Funding Corp. will not be available to their respective shareholders until the claims of their respective creditors have been paid. In addition, no affiliate of either Commitment Corp. or Funding Corp., except in limited cases as expressly agreed in writing, is responsible for any obligation of either entity. With respect to most of the William Street commitments, Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection that is generally limited to 95% of the first loss the firm realizes on approved loan commitments, up to a maximum of approximately $1 billion. 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 $375 million of protection has been provided as of September 2009 and November 2008. The firm also uses other financial instruments to mitigate credit risks related to certain William Street commitments not covered by SMFG.
 
  •  Warehouse financing.  The firm provides financing for the warehousing of financial assets. These arrangements are secured by the warehoused assets, primarily consisting of commercial mortgages as of September 2009 and November 2008.


55


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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. Future minimum rental payments, net of minimum sublease rentals are set forth below (in millions):
 
         
    As of
    September 2009
Remainder of 2009
  $ 127  
2010
    467  
2011
    365  
2012
    301  
2013
    271  
2014-thereafter
    1,771  
         
Total
  $ 3,302  
         
 
Contingencies
 
The firm is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the firm’s financial condition, but may be material to the firm’s operating results for any particular period, depending, in part, upon the operating results for such period. Given the inherent difficulty of predicting the outcome of the firm’s litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, the firm cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.
 
In connection with its insurance business, the firm is contingently liable to provide guaranteed minimum death and income benefits to certain contract holders and has established a reserve related to $6.26 billion and $6.13 billion of contract holder account balances as of September 2009 and November 2008, respectively, for such benefits. The weighted average attained age of these contract holders was 68 years as of both September 2009 and November 2008. The net amount at risk, representing guaranteed minimum death and income benefits in excess of contract holder account balances, was $2.16 billion and $2.96 billion as of September 2009 and November 2008, respectively. See Note 12 for more information on the firm’s insurance liabilities.
 
Guarantees
 
The firm enters into various derivative contracts that meet the definition of a guarantee under ASC 460. Disclosures about derivative contracts are not required if such contracts may be cash settled and the firm has no basis to conclude it is probable that the counterparties held, at inception, the underlying instruments related to the derivative contracts. The firm has concluded that these conditions have been met for certain large, internationally active commercial and investment bank counterparties and certain other counterparties. Accordingly, the firm has not included such contracts in the tables below.
 
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.


56


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
In the ordinary course of business, the firm provides other financial guarantees of the obligations of third parties (e.g., performance bonds, standby letters of credit and other guarantees to enable clients to complete transactions and merchant banking 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 following table sets forth certain information about the firm’s derivative contracts that meet the definition of a guarantee and certain other guarantees as of September 2009 and November 2008. Derivative contracts set forth below include written equity and commodity put options, written currency contracts and interest rate caps, floors and swaptions. See Note 3 for information regarding credit derivative contracts that meet the definition of a guarantee, which are not included below.
 
                                                 
        Maximum Payout/
    Carrying
  Notional Amount by Period of Expiration (1)
    Value of
      2010-
  2012-
  2014-
   
    Net Liability   2009   2011   2013   Thereafter   Total
    (in millions)
As of September 2009
                                               
Derivatives (2)
  $ 7,705     $ 41,030     $ 165,450     $ 67,574     $ 97,387     $ 371,441  
Securities lending indemnifications (3)
          26,317                         26,317  
Other financial guarantees
    205       73       386       487       1,027       1,973  
                                                 
                                                 
As of November 2008
                                               
Derivatives (2)
  $ 17,462     $ 114,863     $ 73,224     $ 30,312     $ 90,643     $ 309,042  
Securities lending indemnifications (3)
          19,306                         19,306  
Other financial guarantees
    235       203       477       458       238       1,376  
 
 
(1) Such amounts do not represent the anticipated losses in connection with these contracts.
 
(2) Because derivative contracts are accounted for at fair value, carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying value excludes the effect of a legal right of setoff that may exist under an enforceable netting agreement and the effect of netting of cash paid pursuant to credit support agreements. These derivative contracts are risk managed together with derivative contracts that do not meet the definition of a guarantee under ASC 460 and, therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities.
 
(3) Collateral held by the lenders in connection with securities lending indemnifications was $27.06 billion and $19.95 billion as of September 2009 and November 2008, 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 on loan from the borrower, there is minimal performance risk associated with these guarantees.
 
The firm has established trusts, including Goldman Sachs Capital I, II and III, 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. See Note 7 for information regarding the transactions involving Goldman Sachs Capital I, II and III. The firm effectively provides for the full and unconditional guarantee of the securities issued by these entities, which are not consolidated for accounting purposes. Timely payment by the firm of amounts due to these entities under the 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 borrowing, preferred stock and related contractual arrangements and in connection with certain expenses incurred by these entities.


57


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
Group Inc. also fully and unconditionally guarantees the securities issued by GS Finance Corp., a wholly owned finance subsidiary of the firm, which is consolidated for accounting purposes.
 
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 also indemnifies some clients against potential losses incurred in the event specified third-party service providers, including sub-custodians and third-party brokers, improperly execute transactions. 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. 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 liabilities related to these guarantees and indemnifications have been recognized in the condensed consolidated statements of financial condition as of September 2009 and November 2008.
 
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 liabilities related to these arrangements have been recognized in the condensed consolidated statements of financial condition as of September 2009 and November 2008.
 
Group Inc. has guaranteed the payment obligations of Goldman, Sachs & Co. (GS&Co.), GS Bank USA and GS Bank Europe, subject to certain exceptions. In November 2008, the firm 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. 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.


58


Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 9.   Shareholders’ Equity
 
Common and Preferred Equity
 
During the second quarter of 2009, Group Inc. completed a public offering of 46.7 million common shares at $123.00 per share for total proceeds of $5.75 billion.
 
In June 2009, Group Inc. repurchased from the U.S. Department of the Treasury (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 aggregate purchase price paid by Group Inc. to the U.S. Treasury for the Series H Preferred Stock, including accrued dividends, was $10.04 billion. The repurchase resulted in a one-time preferred dividend of $426 million, which is included in the condensed consolidated statement of earnings for the nine months ended September 2009. This one-time preferred dividend represented the difference between the carrying value and the redemption value of the Series H Preferred Stock. 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.
 
On October 14, 2009, the Board declared a dividend of $0.35 per common share to be paid on December 30, 2009 to common shareholders of record on December 2, 2009.
 
To satisfy minimum statutory employee tax withholding requirements related to the delivery of common stock underlying RSUs, the firm cancelled 11.1 million of RSUs with a total value of $850 million during the nine months ended September 2009.
 
The firm’s share repurchase program is intended 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 the firm’s current and projected capital positions (i.e., comparisons of the firm’s desired level of capital to its actual level of capital) but which may also be influenced by general market conditions and the prevailing price and trading volumes of the firm’s common stock. Upon repurchase of the Series H Preferred Stock in June 2009, the Company was no longer subject to the limitations on common stock repurchases imposed under the U.S. Treasury’s TARP Capital Purchase Program.
 
As of September 2009, the firm had 174,000 shares of perpetual preferred stock issued and outstanding as set forth in the following table:
 
                                     
                        Redemption
    Dividend
  Shares
  Shares
      Earliest
  Value
Series
  Preference  
Issued
 
Authorized
  Dividend Rate  
Redemption Date
 
(in millions)
A
  Non-cumulative     30,000       50,000     3 month LIBOR + 0.75%,
with floor of 3.75% per annum
  April 25, 2010   $ 750  
                                     
B
  Non-cumulative     32,000       50,000     6.20% per annum   October 31, 2010     800  
                                     
C
  Non-cumulative     8,000       25,000     3 month LIBOR + 0.75%,
with floor of 4.00% per annum
  October 31, 2010     200  
                                     
D
  Non-cumulative     54,000       60,000     3 month LIBOR + 0.67%,
with floor of 4.00% per annum
  May 24, 2011     1,350  
                                     
G
  Cumulative     50,000       50,000     10.00% per annum   October 1, 2008     5,500