10-Q 1 y81145e10vq.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 June 30, 2010
 
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.)
     
200 West Street, New York, NY   10282
(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 July 23, 2010, there were 515,616,486 shares of the registrant’s common stock outstanding.
 


 

 
THE GOLDMAN SACHS GROUP, INC.
 
QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED JUNE 30, 2010
 
INDEX
 
             
        Page
Form 10-Q Item Number:   No.
 
           
         
           
         
        2  
        3  
        4  
        5  
        6  
        7  
        81  
        82  
           
      86  
           
      147  
           
      147  
           
         
           
      148  
           
      150  
           
      151  
       
    152  
 EX-10.1 FORM OF DEED OF GIFT
 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

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PART I: FINANCIAL INFORMATION
 
Item 1:   Financial Statements (Unaudited)
 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                                 
    Three Months
  Six Months
    Ended June   Ended June
    2010   2009   2010   2009
    (in millions, except per share amounts)
 
Revenues
                               
Investment banking
  $ 917     $ 1,440     $ 2,101     $ 2,263  
Trading and principal investments
    5,292       9,322       14,487       15,028  
Asset management and securities services
    1,013       957       1,991       1,946  
                                 
Total non-interest revenues
    7,222       11,719       18,579       19,237  
                                 
Interest income
    3,302       3,470       6,303       7,832  
Interest expense
    1,683       1,428       3,266       3,883  
                                 
Net interest income
    1,619       2,042       3,037       3,949  
                                 
Net revenues, including net interest income
    8,841       13,761       21,616       23,186  
                                 
                                 
Operating expenses
                               
Compensation and benefits
    3,802       6,649       9,295       11,361  
                                 
U.K. bank payroll tax
    600             600        
                                 
Brokerage, clearing, exchange and distribution fees
    622       574       1,184       1,110  
Market development
    116       82       226       150  
Communications and technology
    186       173       362       346  
Depreciation and amortization
    437       426       809       975  
Occupancy
    274       242       530       483  
Professional fees
    227       145       409       280  
Other expenses
    1,129       441       1,594       823  
                                 
Total non-compensation expenses
    2,991       2,083       5,114       4,167  
                                 
Total operating expenses
    7,393       8,732       15,009       15,528  
                                 
                                 
Pre-tax earnings
    1,448       5,029       6,607       7,658  
Provision for taxes
    835       1,594       2,538       2,409  
                                 
Net earnings
    613       3,435       4,069       5,249  
Preferred stock dividends
    160       717       320       872  
                                 
Net earnings applicable to common shareholders
  $ 453     $ 2,718     $ 3,749     $ 4,377  
                                 
Earnings per common share
                               
Basic
  $ 0.82     $ 5.27     $ 6.87     $ 8.81  
Diluted
    0.78       4.93       6.41       8.42  
                                 
Dividends declared per common share
  $ 0.35     $ 0.35     $ 0.70     $ 0.35  
                                 
Average common shares outstanding
                               
Basic
    539.8       514.1       542.9       495.7  
Diluted
    580.4       551.0       585.2       520.1  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                 
    As of
    June
  December
    2010   2009
    (in millions, except share
    and per share amounts)
 
Assets
               
Cash and cash equivalents
  $ 32,601     $ 38,291  
Cash and securities segregated for regulatory and other purposes (includes $42,532 and $18,853 at fair value as of June 2010 and December 2009, respectively)
    56,414       36,663  
Collateralized agreements:
               
Securities purchased under agreements to resell and federal funds sold (includes $169,280 and $144,279 at fair value as of June 2010 and December 2009, respectively)
    169,280       144,279  
Securities borrowed (includes $64,856 and $66,329 at fair value as of June 2010 and December 2009, respectively)
    190,079       189,939  
Receivables from brokers, dealers and clearing organizations
    13,485       12,597  
Receivables from customers and counterparties (includes $2,734 and $1,925 at fair value as of June 2010 and December 2009, respectively)
    57,261       55,303  
Trading assets, at fair value (includes $35,643 and $31,485 pledged as collateral as of June 2010 and December 2009, respectively)
    334,868       342,402  
Other assets
    29,200       29,468  
                 
Total assets
  $ 883,188     $ 848,942  
                 
                 
Liabilities and shareholders’ equity
               
Deposits (includes $2,127 and $1,947 at fair value as of June 2010 and December 2009, respectively)
  $ 37,024     $ 39,418  
Collateralized financings:
               
Securities sold under agreements to repurchase, at fair value
    149,908       128,360  
Securities loaned (includes $1,139 and $6,194 at fair value as of June 2010 and December 2009, respectively)
    11,052       15,207  
Other secured financings (includes $15,887 and $15,228 at fair value as of June 2010 and December 2009, respectively)
    25,834       24,134  
Payables to brokers, dealers and clearing organizations
    4,745       5,242  
Payables to customers and counterparties
    185,531       180,392  
Trading liabilities, at fair value
    147,170       129,019  
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $19,509 and $18,403 at fair value as of June 2010 and December 2009, respectively)
    39,123       37,516  
Unsecured long-term borrowings (includes $20,241 and $21,392 at fair value as of June 2010 and December 2009, respectively)
    178,582       185,085  
Other liabilities and accrued expenses (includes $2,992 and $2,054 at fair value as of June 2010 and December 2009, respectively)
    30,400       33,855  
                 
Total liabilities
    809,369       778,228  
                 
Commitments, contingencies and guarantees
               
                 
Shareholders’ equity
               
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $8,100 as of both June 2010 and December 2009
    6,957       6,957  
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 766,674,337 and 753,412,247 shares issued as of June 2010 and December 2009, respectively, and 515,486,866 and 515,113,890 shares outstanding as of June 2010 and December 2009, respectively
    8       8  
Restricted stock units and employee stock options
    6,362       6,245  
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding
           
Additional paid-in capital
    41,597       39,770  
Retained earnings
    53,599       50,252  
Accumulated other comprehensive loss
    (318 )     (362 )
Stock held in treasury, at cost, par value $0.01 per share; 251,187,473 and 238,298,357 shares as of June 2010 and December 2009, respectively
    (34,386 )     (32,156 )
                 
Total shareholders’ equity
    73,819       70,714  
                 
Total liabilities and shareholders’ equity
  $ 883,188     $ 848,942  
                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                 
    Six Months
   
    Ended   Year Ended
    June 2010   December 2009
    (in millions)
 
Preferred stock
               
Balance, beginning of year
  $ 6,957     $ 16,483  
Accretion
          48  
Repurchased
          (9,574 )
                 
Balance, end of period
    6,957       6,957  
Common stock
               
Balance, beginning of year
    8       7  
Issued
          1  
                 
Balance, end of period
    8       8  
Restricted stock units and employee stock options
               
Balance, beginning of year
    6,245       9,463  
Issuance and amortization of restricted stock units and employee stock options
    2,643       2,064  
Delivery of common stock underlying restricted stock units
    (2,457 )     (5,206 )
Forfeiture of restricted stock units and employee stock options
    (64 )     (73 )
Exercise of employee stock options
    (5 )     (3 )
                 
Balance, end of period
    6,362       6,245  
Additional paid-in capital
               
Balance, beginning of year
    39,770       31,070  
Issuance of common stock
          5,750  
Repurchase of common stock warrants
          (1,100 )
Delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options
    2,672       5,708  
Cancellation of restricted stock units in satisfaction of withholding tax requirements
    (962 )     (863 )
Excess net tax benefit/(provision) related to share-based compensation
    118       (793 )
Cash settlement of share-based compensation
    (1 )     (2 )
                 
Balance, end of period
    41,597       39,770  
Retained earnings
               
Balance, beginning of year
    50,252       38,579  
Net earnings
    4,069       13,385  
Dividends and dividend equivalents declared on common stock and restricted stock units
    (402 )     (588 )
Dividends declared on preferred stock
    (320 )     (1,076 )
Preferred stock accretion
          (48 )
                 
Balance, end of period
    53,599       50,252  
Accumulated other comprehensive income/(loss)
               
Balance, beginning of year
    (362 )     (372 )
Currency translation adjustment, net of tax
    (14 )     (70 )
Pension and postretirement liability adjustments, net of tax
    11       (17 )
Net unrealized gains on available-for-sale securities, net of tax
    47       97  
                 
Balance, end of period
    (318 )     (362 )
Stock held in treasury, at cost
               
Balance, beginning of year
    (32,156 )     (32,176 )
Repurchased
    (2,269 )     (2 (1)
Reissued
    39       22  
                 
Balance, end of period
    (34,386 )     (32,156 )
                 
Total shareholders’ equity
  $ 73,819     $ 70,714  
                 
 
 
(1)  Relates primarily to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business and shares withheld to satisfy withholding tax requirements.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                 
    Six Months
    Ended June
    2010   2009
    (in millions)
 
Cash flows from operating activities
               
Net earnings
  $ 4,069     $ 5,249  
Non-cash items included in net earnings
               
Depreciation and amortization
    815       1,176  
Share-based compensation
    2,594       907  
Changes in operating assets and liabilities
               
Cash and securities segregated for regulatory and other purposes
    (19,748 )     58,895  
Net receivables from brokers, dealers and clearing organizations
    (1,336 )     2,715  
Net payables to customers and counterparties
    3,263       (37,786 )
Securities borrowed, net of securities loaned
    (4,296 )     (16,490 )
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold
    (3,452 )     (136,246 )
Trading assets, at fair value
    16,823       172,389  
Trading liabilities, at fair value
    18,145       (38,731 )
Other, net
    (14,428 )     3,942  
                 
Net cash provided by operating activities
    2,449       16,020  
Cash flows from investing activities
               
Purchase of property, leasehold improvements and equipment
    (452 )     (653 )
Proceeds from sales of property, leasehold improvements and equipment
    49       50  
Business acquisitions, net of cash acquired
    (753 )     (208 )
Proceeds from sales of investments
    445       140  
Purchase of available-for-sale securities
    (1,248 )     (1,904 )
Proceeds from sales of available-for-sale securities
    1,269       1,803  
                 
Net cash used for investing activities
    (690 )     (772 )
Cash flows from financing activities
               
Unsecured short-term borrowings, net
    204       (10,965 )
Other secured financings (short-term), net
    1,392       (6,531 )
Proceeds from issuance of other secured financings (long-term)
    1,752       3,400  
Repayment of other secured financings (long-term), including the current portion
    (2,528 )     (2,850 )
Proceeds from issuance of unsecured long-term borrowings
    9,518       20,875  
Repayment of unsecured long-term borrowings, including the current portion
    (13,458 )     (16,805 )
Preferred stock repurchased
          (9,574 )
Derivative contracts with a financing element, net
    536       1,815  
Deposits, net
    (2,394 )     9,327  
Common stock repurchased
    (2,269 )     (2 )
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units
    (722 )     (1,495 )
Proceeds from issuance of common stock, including stock option exercises
    250       5,893  
Excess tax benefit related to share-based compensation
    271       38  
Cash settlement of share-based compensation
    (1 )     (2 )
                 
Net cash used for financing activities
    (7,449 )     (6,876 )
                 
Net increase/(decrease) in cash and cash equivalents
    (5,690 )     8,372  
Cash and cash equivalents, beginning of year
    38,291       13,805  
                 
Cash and cash equivalents, end of period
  $ 32,601     $ 22,177  
                 
 
SUPPLEMENTAL DISCLOSURES:
 
Cash payments for interest, net of capitalized interest, were $3.75 billion and $4.58 billion during the six months ended June 2010 and June 2009, respectively.
 
Cash payments for income taxes, net of refunds, were $2.77 billion and $1.81 billion during the six months ended June 2010 and June 2009, respectively.
 
Non-cash activities:
The firm assumed $90 million and $16 million of debt in connection with business acquisitions during the six months ended June 2010 and June 2009, respectively. In addition, in the first quarter of 2010, the firm recorded an increase of approximately $3 billion in both assets (primarily trading assets, at fair value) and liabilities (primarily unsecured short-term borrowings and other liabilities) upon adoption of Accounting Standards Update (ASU) No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                                 
    Three Months
  Six Months
    Ended June   Ended June
    2010   2009   2010   2009
    (in millions)
 
Net earnings
  $ 613     $ 3,435     $ 4,069     $ 5,249  
Currency translation adjustment, net of tax
    (10 )     (54 )     (14 )     (29 )
Pension and postretirement liability adjustments, net of tax
    5       8       11       17  
Net unrealized gains on available-for-sale securities, net of tax
    43       53       47       34  
                                 
Comprehensive income
  $ 651     $ 3,442     $ 4,113     $ 5,271  
                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in 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 through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. The firm also takes proprietary positions on certain of these products. In addition, the firm engages in market-making 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 and wealth advisory 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 or a variable interest entity (VIE) 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 power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  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.
 
  •  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 provides the enterprise with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. 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 performing an analysis that principally considers: (i) the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders, (ii) the VIE’s capital structure, (iii) the terms between the VIE and its variable interest holders and other parties involved with the VIE, (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, (v) which variable interest holders have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE and (vi) related party relationships. The firm reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events. The firm reassesses its determination of whether the firm is the primary beneficiary of a VIE upon changes in facts and circumstances that could potentially alter the firm’s assessment. See “— Recent Accounting Developments” below for further information regarding accounting for VIEs.
.
 
  •  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 applies 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.
 
  •  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. Investments in these funds are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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 December 31, 2009. The condensed consolidated financial information as of December 31, 2009 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.
 
All references to June 2010 and June 2009, unless specifically stated otherwise, refer to the firm’s fiscal periods ended, or the dates, as the context requires, June 30, 2010 and June 26, 2009, respectively. Beginning with the fourth quarter of fiscal 2009, the firm changed its fiscal year-end from the last Friday of December to December 31. All references to December 2009, unless specifically stated otherwise, refer to the firm’s fiscal year ended, or the date, as the context requires, December 31, 2009. All references to 2010, unless specifically stated otherwise, refer to the firm’s year ending, or the date, as the context requires, December 31, 2010. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.
 
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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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 of financial assets 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 the firm’s bank subsidiaries, as well as securities held by Goldman Sachs Bank USA (GS Bank USA);
 
  •  certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards;
 
  •  certain insurance and reinsurance contracts and certain guarantees;
 
  •  certain subordinated liabilities issued by consolidated VIEs; 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 as follows:
 
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;

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
 
  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. Transfers between levels and sales are recognized at the beginning of the reporting period in which they occur.
 
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.
 
Trading Assets, at Fair Value and Trading Liabilities, at Fair Value
 
Level 1 and level 2 trading assets, at fair value and trading liabilities, at fair value.  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.
 
The valuation techniques and significant inputs used in determining the fair values of cash instruments and derivative contracts classified within level 1 and level 2 of the fair value hierarchy are as follows:
 
  •  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 prices in active markets include U.S. and non-U.S. government obligations, actively traded listed equities and certain money market instruments. These 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 commercial paper, certificates of deposit, time deposits, most government agency obligations, most corporate debt securities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, less liquid publicly listed equities, certain state and municipal obligations and certain money market

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
instruments and loan commitments. These instruments are generally classified within level 2 of the fair value hierarchy. 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.
 
  •  Derivative contracts.  Derivative contracts are instruments such as futures, forwards, swaps or option contracts that derive their value from underlying asset prices, indices, reference rates and other inputs or a combination of these factors. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter (OTC) derivatives, or they may be listed and traded on an exchange. The assets and inputs underlying derivative instruments may include financial instruments (such as government and corporate bonds, mortgage and other asset-backed loans and securities and bank loans), currencies, commodities, interest rates and related indices.
 
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, calibration to market-clearing transactions, broker or dealer quotations, or other 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, voluntary and involuntary prepayment rates, loss severity rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, 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 are corroborated by market evidence. 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.
 
Level 3 trading assets, at fair value and trading liabilities, at fair value.  Absent evidence to the contrary, instruments classified within level 3 of the fair value hierarchy are initially valued at transaction price, which is considered to be the best initial estimate of fair value. 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. Subsequent to the transaction date, the firm uses other methodologies to determine fair value, which vary based on the type of instrument, as described below. Regardless of methodology, valuation inputs and assumptions are only changed when corroborated by substantive evidence. Valuations are further corroborated by values realized upon sales of the firm’s level 3 assets. The valuation techniques and significant inputs used in determining the fair values of each class of cash instrument and derivative contracts classified within level 3 of the fair value hierarchy are as follows:
 
  •  Equities and convertible debentures.  For private equity investments, recent third-party investments or pending transactions are considered to be the best evidence for any change in

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  fair value. In the absence of such evidence, valuations are based on one or more of the following methodologies, as appropriate and available: transactions in similar instruments, discounted cash flow techniques, third-party independent appraisals, valuation multiples and public comparables. Such evidence includes pending reorganizations (e.g., merger proposals, tender offers or debt restructurings), and significant changes in financial metrics (e.g., operating results as compared to previous projections, industry multiples, credit ratings and balance sheet ratios). Real estate fund investments are carried at net asset value per share. The underlying investments in the funds are generally valued using discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, capitalization rates and valuation multiples.
 
  •  Bank loans and bridge loans, Corporate debt securities, State and municipal obligations and Other debt obligations.  Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to credit default swaps that reference the same underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotes are available.
 
  •  Loans and securities backed by commercial real estate.  Loans and securities backed by commercial real estate are collateralized by specific assets and may be tranched into varying levels of subordination. Due to the nature of these instruments, valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof. Significant inputs for these valuations include transactions in both the underlying collateral and instruments with the same or substantially the same underlying collateral, credit default swap prices, current levels and trends of market indices (such as the CMBX), market yields and other factors (such as the operating income generated by the underlying collateral) which are used in determining the amount and timing of expected future cash flows.
 
  •  Loans and securities backed by residential real estate.  Valuations are based on both proprietary and industry recognized models (including Intex and Bloomberg), and discounted cash flow techniques. The most significant inputs to the valuation of these instruments are the rates and timing of delinquencies, the rates and timing of prepayments, and default and loss expectations, which are driven in part by housing prices. The significant inputs are determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices such as the ABX.
 
  •  Loan portfolios.  Loan portfolios are acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. Valuations are based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows and market yields. The significant inputs are determined based on relative value analyses which incorporate comparisons to recent auction data for other similar loan portfolios.
 
  •  Derivative contracts.  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. 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. Unobservable inputs typically include certain correlations as well as credit spreads, equity volatilities, commodity prices and commodity volatilities that are long-dated or derived from trading activity in inactive or less liquid markets. When unobservable inputs to a valuation

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  model are significant to the fair value measurement of an instrument, the instrument is classified within level 3 of the fair value hierarchy. 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.
 
Other Financial Assets and Financial Liabilities at Fair Value
 
Other financial assets and financial liabilities at fair value are generally valued based on discounted cash flow techniques which incorporate inputs with reasonable levels of price transparency and are generally classified within level 2 of the fair value hierarchy. Significant inputs for each category of other financial asset and financial liability at fair value are as follows:
 
  •  Resale and Repurchase Agreements and Securities Borrowed and Loaned.  The significant inputs to the valuation of resale and repurchase agreements and securities borrowed and loaned within Trading and Principal Investments (which are related to the firm’s matched book and certain firm financing activities) are the amount and timing of expected future cash flows, interest rates and collateral funding spreads.
 
  •  Other Secured Financings.  The significant inputs to the valuation of other secured financings at fair value, including transfers of financial assets accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings, are the amount and timing of expected future cash flows, interest rates, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market yields and recovery assumptions), the frequency of additional collateral calls and the credit spreads of the firm.
 
  •  Unsecured short-term and long-term borrowings.  The significant inputs to the valuation of certain short-term and long-term borrowings at fair value, including all promissory notes and commercial paper, certain hybrid financial instruments and prepaid physical commodity transactions, are the amount and timing of expected future cash flows, interest rates, the credit spreads of the firm, as well as commodity prices in the case of prepaid physical commodity transactions and, for certain hybrid financial instruments, equity prices, inflation rates and index levels.
 
  •  Receivables from customers and counterparties.  The significant inputs to the valuation of certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards, are interest rates and the amount and timing of expected future cash flows.
 
  •  Insurance and reinsurance contracts.  Insurance and reinsurance contracts at fair value are included in “Receivables from customers and counterparties” and “Other liabilities and accrued expenses” in the firm’s condensed consolidated statements of financial condition. These contracts are valued using market transactions and other market evidence where possible, including market-based inputs to models, calibration to market-clearing transactions or other alternative pricing sources with reasonable levels of price transparency. Significant level 2 inputs typically include interest rates and inflation risk. Significant level 3 inputs typically include mortality or funding

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
  benefit assumptions. When unobservable inputs to a valuation model are significant to the fair value measurement of an instrument, the instrument is classified within level 3 of the fair value hierarchy.
 
  •  Deposits.  The significant inputs to the valuation of deposits are interest rates.
 
Collateralized Agreements and Financings
 
Collateralized agreements consist of resale agreements and securities borrowed. For these agreements, the firm requires delivery of collateral with a fair value approximately equal to the carrying value of the relevant assets in the condensed consolidated statements of financial condition. 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. Collateralized agreements and financings are presented on a net-by-counterparty basis when a right of setoff exists.
 
  •  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. 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.
 
  •  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.
 
  •  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 of financial assets 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. 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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
 
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, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value 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 of financial assets accounted for as sales, any related gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred financial assets are measured at fair value. For transfers that are not accounted for as sales, the financial assets remain in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and the transfer is accounted for as a collateralized financing, with the related interest expense recognized in net revenues over the life of the transaction. When the firm transfers a security that has very little, if any, default risk under an agreement to repurchase the security where the maturity date of the repurchase agreement matches the maturity date of the underlying security (such that the firm effectively no longer has a repurchase obligation) and the firm has relinquished control over the underlying security, the firm records such transactions as sales. See “— Recent Accounting Developments” below for further information regarding accounting for transfers of financial assets.
 
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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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.
 
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.
 
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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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, television broadcast royalties, contractual rights related to commodity-related acquisitions, 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.
 
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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are included in the condensed consolidated statements of earnings.
 
Hedge Accounting
 
The firm applies hedge accounting for certain derivative contracts used to manage the interest rate exposure of certain fixed-rate obligations, and for certain derivative contracts and foreign currency-denominated debt used to manage foreign currency exposures resulting from the firm’s net investment in certain non-U.S. operations. The firm documents its risk management strategy at the inception of each hedging relationship and assesses the effectiveness of each hedging relationship at least quarterly.
 
Fair Value Hedges — Interest Rate.  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 fixed-rate borrowings, certain unsecured short-term fixed-rate borrowings and certificates of deposit into floating rate obligations.
 
The firm applies the “long-haul method” in assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and hedged item. During the three months ended March 2010, the firm changed its method of prospectively and retrospectively assessing the effectiveness of all of its fair value hedging relationships from a dollar-offset method, which is a non-statistical method, to regression analysis, which is a statistical method. An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%. The dollar-offset method compared the change in the fair value of the hedging instrument to the change in the fair value of the hedged item, excluding the effect of the passage of time. The firm’s prospective dollar-offset assessment utilized scenario analyses to test hedge effectiveness via simulations of numerous parallel and slope shifts of the relevant yield curve. Parallel shifts changed the interest rate of all maturities by identical amounts. Slope shifts changed the curvature of the yield curve. For both the prospective assessment, in response to each of the simulated yield curve shifts, and the retrospective assessment, a hedging relationship was deemed to be effective if the fair value of the hedging instrument and the hedged item changed inversely within a range of 80% to 125%.
 
For qualifying fair value hedges, gains or losses on 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 resulting from hedge ineffectiveness are included in “Interest expense” in the condensed consolidated statements of earnings.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Net Investment Hedges.  The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (that is, based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, the gains or losses on hedging instruments, to the extent effective, are included in the condensed consolidated statements of comprehensive income.
 
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 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.
 
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.
 
Cash and Cash Equivalents
 
The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of June 2010 and December 2009, “Cash and cash equivalents” on the condensed consolidated statements of financial condition included $5.84 billion and $4.45 billion, respectively, of cash and due from banks and $26.76 billion and $33.84 billion, respectively, of interest-bearing deposits with banks.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Recent Accounting Developments
 
Transfers of Financial Assets and Interests in Variable Interest Entities (ASC 860 and 810).  In June 2009, the FASB issued amended accounting principles that changed the accounting for securitizations and VIEs. These principles were codified as ASU No. 2009-16, “Transfers and Servicing (Topic 860) — Accounting for Transfers of Financial Assets” and ASU No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” in December 2009. ASU No. 2009-16 eliminates the concept of a qualifying special-purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. ASU No. 2009-17 changes the accounting and requires additional disclosures for VIEs. Under ASU No. 2009-17, 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. Additionally, entities previously classified as QSPEs are now required to be evaluated for consolidation and disclosure as VIEs. Previously, QSPEs were not consolidated and not considered for disclosure as VIEs and the determination of whether to consolidate a VIE was based on whether an enterprise had a variable interest, or combination of variable interests, that would absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. ASU Nos. 2009-16 and 2009-17 were effective for fiscal years beginning after November 15, 2009. In February 2010, the FASB issued ASU No. 2010-10, “Consolidations (Topic 810) — Amendments For Certain Investment Funds,” which defers the requirements of ASU No. 2009-17 for certain interests in investment funds and certain similar entities.
 
The firm adopted ASU Nos. 2009-16 and 2009-17 as of January 1, 2010 and reassessed whether it was the primary beneficiary of any VIEs in which it had variable interests (including VIEs that were formerly QSPEs) as of that date. Adoption resulted in an increase to the firm’s total assets of approximately $3 billion as of March 2010, principally within “Trading assets, at fair value” in the condensed consolidated statement of financial condition. In addition, “Other assets” in the condensed consolidated statement of financial condition increased by $545 million as of March 2010, with a corresponding decrease in “Trading assets, at fair value,” as a result of the consolidation of an entity which holds intangible assets. Upon adoption, the firm elected the fair value option for all eligible assets and liabilities of newly consolidated VIEs, except for (i) those VIEs where the financial assets and financial liabilities are accounted for either at fair value or in a manner that approximates fair value under other GAAP and (ii) those VIEs where the election would have caused volatility in earnings as a result of using different measurement attributes for financial instruments and nonfinancial assets. Adoption did not have a material impact on the firm’s results of operations or cash flows.
 
Improving Disclosures about Fair Value Measurements (ASC 820).  In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements. Certain disclosure requirements of ASU No. 2010-06 were effective for the firm beginning in the first quarter of 2010, while other disclosure requirements of the ASU are effective for financial statements issued for reporting periods beginning after December 15, 2010. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not and will not affect the firm’s financial condition, results of operations or cash flows.

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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
    June 2010   December 2009
    Assets   Liabilities   Assets   Liabilities
    (in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 10,449  (1)   $     $ 9,111  (1)   $  
U.S. government and federal agency obligations
    83,344       19,148       78,336       20,982  
Non-U.S. government obligations
    40,789       29,875       38,858       23,843  
Mortgage and other asset-backed
loans and securities:
                               
Loans and securities backed by commercial real estate
    5,859       24       6,203       29  
Loans and securities backed by residential real estate
    6,219       42       6,704       74  
Loan portfolios
    1,258  (2)           1,370  (2)      
Bank loans and bridge loans
    17,776       1,679  (5)     19,345       1,541  (5)
Corporate debt securities
    24,386       7,243       26,368       6,229  
State and municipal obligations
    2,393             2,759       36  
Other debt obligations
    3,851             2,914        
Equities and convertible debentures
    57,165       31,548       71,474       20,253  
Physical commodities
    1,578       37       3,707       23  
Derivative contracts
    79,801  (3)     57,574  (6)     75,253  (3)     56,009  (6)
                                 
Total
  $ 334,868  (4)   $ 147,170     $ 342,402  (4)   $ 129,019  
                                 
 
 
  (1)  Includes $4.08 billion and $4.31 billion as of June 2010 and December 2009, 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)  Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral.
 
  (3)  Net of cash received pursuant to credit support agreements of $113.76 billion and $124.60 billion as of June 2010 and December 2009, respectively.
 
  (4)  Includes $3.96 billion and $3.86 billion as of June 2010 and December 2009, respectively, of securities accounted for as available-for-sale, substantially all of which is held within the firm’s insurance subsidiaries.
 
  (5)  Includes the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets, at fair value.
 
  (6)  Net of cash posted pursuant to credit support agreements of $17.65 billion and $14.74 billion as of June 2010 and December 2009, respectively.

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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
    June
  March
  December
    2010   2010   2009
    ($ in millions)
Total level 3 assets
  $ 46,125     $ 45,153     $ 46,475  
Level 3 assets for which the firm bears economic exposure (1)
    43,516       42,513       43,348  
                         
Total assets
    883,188       880,528       848,942  
Total financial assets at fair value
    614,270       606,238       573,788  
                         
Total level 3 assets as a percentage of Total assets
    5.2 %     5.1 %     5.5 %
Level 3 assets for which the firm bears economic exposure as a percentage of Total assets
    4.9       4.8       5.1  
                         
Total level 3 assets as a percentage of Total financial assets at fair value
    7.5       7.4       8.1  
Level 3 assets for which the firm bears economic exposure as a percentage of Total financial assets at fair value
    7.1       7.0       7.6  
 
 
  (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 June 2010 and December 2009. 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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
 
                                         
    Financial Assets at Fair Value as of June 2010
                Netting and
   
    Level 1   Level 2   Level 3   Collateral   Total
    (in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 4,380     $ 6,069     $     $     $ 10,449  
U.S. government and federal agency obligations
    37,177       46,167                   83,344  
Non-U.S. government obligations
    37,077       3,712                   40,789  
Mortgage and other asset-backed loans and securities (1):
                                       
Loans and securities backed by commercial real estate
          1,991       3,868             5,859  
Loans and securities backed by residential real estate
          4,095       2,124             6,219  
Loan portfolios
                1,258             1,258  
Bank loans and bridge loans
          8,203       9,573             17,776  
Corporate debt securities (2)
    137       21,657       2,592             24,386  
State and municipal obligations
          1,568       825             2,393  
Other debt obligations
          2,475       1,376             3,851  
Equities and convertible debentures
    37,845  (4)     8,985  (6)     10,335   (8)           57,165  
Physical commodities
          1,578                   1,578  
                                         
Total cash instruments
    116,616       106,500       31,951             255,067  
Derivative contracts
    284       181,600       13,956       (116,039 (9)     79,801  
                                         
Trading assets, at fair value
    116,900       288,100       45,907       (116,039 )     334,868  
Securities segregated for regulatory and other purposes
    20,760  (5)     21,772  (7)                 42,532  
Securities purchased under agreements to resell
          169,280                   169,280  
Securities borrowed
          64,856                   64,856  
Receivables from customers and counterparties
          2,516       218             2,734  
                                         
Total financial assets at fair value
  $ 137,660     $ 546,524     $ 46,125     $ (116,039 )   $ 614,270  
                                         
Level 3 assets for which the firm does not bear economic exposure (3)
                    (2,609 )                
                                         
Level 3 assets for which the firm bears economic exposure
                  $ 43,516                  
                                         
 
 
(1)  Includes $7 million and $655 million of collateralized debt obligations (CDOs) backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy.
 
(2)  Includes $315 million and $775 million of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.
 
(3)  Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
 
(4)  Consists of publicly listed equity securities. Includes the firm’s $9.68 billion investment in the ordinary shares of Industrial and Commercial Bank of China Limited, which was transferred from level 2 within the fair value hierarchy upon expiration of transfer restrictions in April 2010.
 
(5)  Principally consists of U.S. Department of the Treasury (U.S. Treasury) securities and money market instruments as well as insurance separate account assets measured at fair value.
 
(6)  Principally consists of less liquid publicly listed securities.
 
(7)  Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.
 
(8)  Includes $9.24 billion of private equity investments, $918 million of real estate investments and $180 million of convertible debentures.
 
(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.
 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                         
    Financial Liabilities at Fair Value as of June 2010
                Netting and
   
    Level 1   Level 2   Level 3   Collateral   Total
    (in millions)
U.S. government and federal agency obligations
  $ 18,323     $ 825     $     $     $ 19,148  
Non-U.S. government obligations
    29,532       343                   29,875  
Mortgage and other asset-backed loans and securities:
                                       
Loans and securities backed by commercial real estate
          24                   24  
Loans and securities backed by residential real estate
          42                   42  
Bank loans and bridge loans
          1,182       497             1,679  
Corporate debt securities (1)
    62       7,090       91             7,243  
Equities and convertible debentures (2)
    30,005       1,536       7             31,548  
Physical commodities
          37                   37  
                                         
Total cash instruments
    77,922       11,079       595             89,596  
Derivative contracts
    82       71,333       6,084       (19,925 (4)     57,574  
                                         
Trading liabilities, at fair value
    78,004       82,412       6,679       (19,925 )     147,170  
Deposits
          2,127                   2,127  
Securities sold under agreements to repurchase, at fair value
          148,489       1,419             149,908  
Securities loaned
          1,139                   1,139  
Other secured financings
          7,801       8,086             15,887  
Unsecured short-term borrowings
          16,741       2,768             19,509  
Unsecured long-term borrowings
          18,342       1,899             20,241  
Other liabilities and accrued expenses
          606       2,386             2,992  
                                         
Total financial liabilities at fair value
  $ 78,004     $ 277,657     $ 23,237  (3)   $ (19,925 )   $ 358,973  
                                         
 
 
(1)  Includes $11 million and $82 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.
 
(2)  Substantially all consists of publicly listed equity securities.
 
(3)  Level 3 liabilities were 6.5% 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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
 
                                         
    Financial Assets at Fair Value as of December 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
  $ 5,026     $ 4,085     $     $     $ 9,111  
U.S. government and federal agency obligations
    36,391       41,945                   78,336  
Non-U.S. government obligations
    33,881       4,977                   38,858  
Mortgage and other asset-backed loans and securities (1):
                                       
Loans and securities backed by commercial real estate
          1,583       4,620             6,203  
Loans and securities backed by residential real estate
          4,824       1,880             6,704  
Loan portfolios
          6       1,364             1,370  
Bank loans and bridge loans
          9,785       9,560             19,345  
Corporate debt securities (2)
    164       23,969       2,235             26,368  
State and municipal obligations
          1,645       1,114             2,759  
Other debt obligations
          679       2,235             2,914  
Equities and convertible debentures
    37,103  (4)     22,500  (6)     11,871  (9)           71,474  
Physical commodities
          3,707                   3,707  
                                         
Total cash instruments
    112,565       119,705       34,879             267,149  
Derivative contracts
    161       190,816  (7)     11,596  (7)     (127,320 (10)     75,253  
                                         
Trading assets, at fair value
    112,726       310,521       46,475       (127,320 )     342,402  
Securities segregated for regulatory and other purposes
    14,381  (5)     4,472  (8)                 18,853  
Securities purchased under agreements to resell
          144,279                   144,279  
Securities borrowed
          66,329                   66,329  
Receivables from customers and counterparties
          1,925                   1,925  
                                         
Total financial assets at fair value
  $ 127,107     $ 527,526     $ 46,475     $ (127,320 )   $ 573,788  
                                         
Level 3 assets for which the firm does not bear economic exposure (3)
                    (3,127 )                
                                         
Level 3 assets for which the firm bears economic exposure
                  $ 43,348                  
                                         
 
 
  (1)  Includes $291 million and $311 million of CDOs and CLOs backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy.
 
  (2)  Includes $338 million and $741 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.
 
  (3)  Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.
 
  (4)  Consists of publicly listed equity securities.
 
  (5)  Principally consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value.
 
  (6)  Substantially all consists of less liquid publicly listed securities.
 
  (7)  Includes $31.44 billion and $9.58 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.
 
  (8)  Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.
 
  (9)  Includes $10.56 billion of private equity investments, $1.23 billion of real estate investments and $79 million of convertible debentures.
 
(10)  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.
 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                         
    Financial Liabilities at Fair Value as of December 2009
                Netting and
   
    Level 1   Level 2   Level 3   Collateral   Total
    (in millions)
U.S. government and federal agency obligations
  $ 20,940     $ 42     $     $     $ 20,982  
Non-U.S. government obligations
    23,306       537                   23,843  
Mortgage and other asset-backed loans and securities:
                                       
Loans and securities backed by commercial real estate
          29                   29  
Loans and securities backed by residential real estate
          74                   74  
Bank loans and bridge loans
          1,128       413             1,541  
Corporate debt securities (1)
    65       6,018       146             6,229  
State and municipal obligations
          36                   36  
Equities and convertible debentures (2)
    19,072       1,168       13             20,253  
Physical commodities
          23                   23  
                                         
Total cash instruments
    63,383       9,055       572             73,010  
Derivative contracts
    126       66,943  (3)     6,400  (3)     (17,460 (5)     56,009  
                                         
Trading liabilities, at fair value
    63,509       75,998       6,972       (17,460 )     129,019  
Deposits
          1,947                   1,947  
Securities sold under agreements to repurchase, at fair value
          127,966       394             128,360  
Securities loaned
          6,194                   6,194  
Other secured financings
    118       8,354       6,756             15,228  
Unsecured short-term borrowings
          16,093       2,310             18,403  
Unsecured long-term borrowings
          18,315       3,077             21,392  
Other liabilities and accrued expenses
          141       1,913             2,054  
                                         
Total financial liabilities at fair value
  $ 63,627     $ 255,008     $ 21,422  (4)   $ (17,460 )   $ 322,597  
                                         
 
 
(1)  Includes $45 million of CDOs and CLOs backed by corporate obligations within level 3 of the fair value hierarchy.
 
(2)  Substantially all consists of publicly listed equity securities.
 
(3)  Includes $7.96 billion and $3.20 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.
 
(4)  Level 3 liabilities were 6.6% of Total financial liabilities at fair value.
 
(5)  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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
The fair value of the firm’s derivative contracts is reflected net of cash posted or received pursuant to credit support agreements and is reported on a net-by-counterparty basis in the firm’s 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 of the firm’s derivative contracts on a gross basis by level within the fair value hierarchy and major product type as of June 2010. Gross fair values in the tables below exclude the effects of both netting under enforceable netting agreements and netting of cash received or posted pursuant to credit support agreements both within and across the levels of the fair value hierarchy, and therefore are not representative of the firm’s exposure.
 
                                         
    Derivative Assets at Fair Value as of June 2010
                Cross-Level
   
    Level 1   Level 2   Level 3   Netting   Total
    (in millions)
Interest rates
  $ 207     $ 569,264     $ 350             $ 569,821  
Credit
          138,829       14,120               152,949  
Currencies
          84,839       1,792               86,631  
Commodities
          34,907       1,893               36,800  
Equities
    77       69,979       1,182               71,238  
                                         
Gross fair value of derivative assets
  $ 284     $ 897,818     $ 19,337             $ 917,439  
Counterparty netting (1)
          (716,218 )     (5,381 )   $ (2,275 (3)     (723,874 )
                                         
Subtotal
  $ 284     $ 181,600     $ 13,956     $ (2,275 )   $ 193,565  
Cash collateral netting (2)
                                    (113,764 )
                                         
Fair value included in trading
assets, at fair value
                                  $ 79,801  
                                         
 
                                         
    Derivative Liabilities at Fair Value as of June 2010
                Cross-Level
   
    Level 1   Level 2   Level 3   Netting   Total
    (in millions)
Interest rates
  $ 9     $ 499,520     $ 370             $ 499,899  
Credit
          119,953       5,738               125,691  
Currencies
          75,663       658               76,321  
Commodities
          35,575       2,164               37,739  
Equities
    73       56,840       2,535               59,448  
                                         
Gross fair value of derivative liabilities
  $ 82     $ 787,551     $ 11,465             $ 799,098  
Counterparty netting (1)
          (716,218 )     (5,381 )   $ (2,275 (3)     (723,874 )
                                         
Subtotal
  $ 82     $ 71,333     $ 6,084     $ (2,275 )   $ 75,224  
Cash collateral netting (2)
                                    (17,650 )
                                         
Fair value included in trading
liabilities, at fair value
                                  $ 57,574  
                                         
 
 
  (1)  Represents the netting of receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements.
 
  (2)  Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.
 
  (3)  Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy pursuant to enforceable netting agreements.

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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 six months ended June 2010 and June 2009:
 
                                 
    Level 3 Unrealized Gains/(Losses)
    Three Months
  Six Months
    Ended June   Ended June
    2010   2009   2010   2009
    (in millions)
Cash instruments — assets
  $ 191     $ (1,932 )   $ 855     $ (5,597 )
Cash instruments — liabilities
    (109 )     289       (60 )     280  
                                 
Net unrealized gains/(losses) on level 3 cash instruments
    82       (1,643 )     795       (5,317 )
Derivative contracts — net
    1,386       (1,403 )     2,852       (171 )
Receivables from customers and counterparties
    (21 )           (48 )      
Other secured financings
    50       (442 )     39       (426 )
Unsecured short-term borrowings
    224       (189 )     307       (50 )
Unsecured long-term borrowings
    124       (133 )     137       (98 )
Other liabilities and accrued expenses
    (17 )     18       47       81  
                                 
Total level 3 unrealized gains/(losses)
  $ 1,828     $ (3,792 )   $ 4,129     $ (5,981 )
                                 
 
Cash Instruments
 
The net unrealized gain on level 3 cash instruments of $82 million for the three months ended June 2010 primarily consisted of unrealized gains across most asset classes, partially offset by unrealized losses on bank loans and bridge loans. The net unrealized loss on level 3 cash instruments of $1.64 billion for the three months ended June 2009 primarily consisted of unrealized losses on real estate fund investments, and loans and securities backed by commercial real estate, reflecting continued weakness in the commercial real estate market. The net unrealized gain on level 3 cash instruments of $795 million for the six months ended June 2010 primarily consisted of unrealized gains on loans and securities backed by commercial real estate, private equity investments and real estate fund investments, loans and securities backed by residential real estate, and other debt obligations evidenced by sales of similar assets in each of these asset classes during the period. The net unrealized loss on level 3 cash instruments of $5.32 billion for the six months ended June 2009 primarily consisted of unrealized losses on private equity investments and real estate fund investments, and loans and securities backed by commercial real estate, reflecting weakness in the global equity markets in the first quarter of 2009, as well as weakness in the commercial real estate market.
 
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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Derivative Contracts
 
The net unrealized gain on level 3 derivative contracts of $1.39 billion for the three months ended June 2010 was primarily driven by wider credit spreads (which are level 2 inputs) on the underlying instruments as well as decreases in certain equity prices (which are either level 1 or level 2 inputs). These unrealized gains were substantially offset by unrealized losses on currency, interest rate and credit derivative contracts which are classified within level 2 of the fair value hierarchy and are used to economically hedge derivative contracts classified within level 3 of the fair value hierarchy. The net unrealized loss on level 3 derivative contracts of $1.40 billion for the three months ended June 2009 was primarily driven by tighter credit spreads (which are level 2 observable inputs) on the underlying instruments. The net unrealized gain on level 3 derivative contracts of $2.85 billion for the six months ended June 2010 was primarily attributable to foreign exchange rates and interest rates (which are level 2 inputs) underlying certain credit derivative contracts. These unrealized gains were substantially offset by unrealized losses on currency, interest rate and credit derivative contracts which are classified within level 2 of the fair value hierarchy and are used to economically hedge derivative contracts classified within level 3 of the fair value hierarchy. The net unrealized loss on level 3 derivative contracts of $171 million for the six months ended June 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). 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 cash instruments reported within level 3 of the fair value hierarchy.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
The tables below set forth a summary of changes in the fair value of the firm’s level 3 financial assets and financial liabilities at fair value for the three and six months ended June 2010 and June 2009. The tables reflect gains and losses, including gains and losses for the entire period on financial assets and financial liabilities at fair value that were transferred to level 3 during the period, for all financial assets and financial liabilities at fair value categorized as level 3 as of June 2010 and June 2009, respectively. Transfers between levels and sales are recognized at the beginning of the reporting period in which they occur. Accordingly, the tables do not include gains or losses that were reported in level 3 in prior periods for financial instruments that were transferred out of level 3 or sold 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 June 2010
                                               
Mortgage and other asset-backed loans and securities:
                                               
Loans and securities backed by commercial real estate
  $ 4,070     $ 88     $ 60     $ (327 )   $ (23 (4)   $ 3,868  
Loans and securities backed by residential real estate
    2,131       57       61       37       (162 (4)     2,124  
Loan portfolios
    1,291       4       (16 )     (72 )     51   (4)     1,258  
Bank loans and bridge loans
    9,323       134       (205 )     (162 )     483   (5)     9,573  
Corporate debt securities
    2,703       36       49       (202 )     6   (4)     2,592  
State and municipal obligations
    870       (5 )     34       (73 )     (1 (4)     825  
Other debt obligations
    1,487       (1 )     78       (116 )     (72 (4)     1,376  
Equities and convertible debentures
    10,653       21       130       248       (717 (6)     10,335  
                                                 
Total cash instruments — assets
    32,528       334   (1)     191   (1)     (667 )     (435 )     31,951  
                                                 
Cash instruments — liabilities
    (483 )     112   (2)     (109 (2)     (113 )     (2 (4)     (595 )
Derivative contracts:
                                               
Interest rates — net
    94       (6 )     43       (51 )     (195 (4)     (115 )
Credit — net
    7,137       (1 )     949       83       358   (4)     8,526  
Currencies — net
    468             75       287       270   (4)     1,100  
Commodities — net
    (244 )     (92 )     (4 )     92       (23 (4)     (271 )
Equities — net
    (1,119 )     (5 )     323       (500 )     (67 (4)     (1,368 )
                                                 
Total derivative contracts — net
    6,336       (104 (2)     1,386   (2)(3)     (89 )     343       7,872  
                                                 
Securities purchased under agreements to resell
    268                         (268 (4)      
Receivables from customers and counterparties
    234       5   (2)     (21 (2)             (4)     218  
Securities sold under agreements to repurchase, at fair value
    (1,055 )                 (531 )     167   (4)     (1,419 )
Other secured financings
    (8,139 )     (12 (2)     50   (2)     (38 )     53   (4)     (8,086 )
Unsecured short-term borrowings
    (2,994 )     (47 (2)     224   (2)     224       (175 (4)     (2,768 )
Unsecured long-term borrowings
    (1,715 )     (2 (2)     124   (2)     53       (359 (4)     (1,899 )
Other liabilities and accrued expenses
    (2,327 )     (2 (2)     (17 (2)     (21 )     (19 (4)     (2,386 )

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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 year   gains/(losses)   reporting date   settlements   of level 3   period
    (in millions)
Six Months Ended June 2010
                                               
Mortgage and other asset-backed loans and securities:
                                               
Loans and securities backed by commercial real estate
  $ 4,620     $ 172     $ 202     $ (1,002 )   $ (124 (4)   $ 3,868  
Loans and securities backed by residential real estate
    1,880       66       143       52       (17 (4)     2,124  
Loan portfolios
    1,364       28       (6 )     (194 )     66   (4)     1,258  
Bank loans and bridge loans
    9,560       260       83       (404 )     74   (4)     9,573  
Corporate debt securities
    2,235       72       141       793       (649 (7)     2,592  
State and municipal obligations
    1,114       (3 )     26       (299 )     (13 (4)     825  
Other debt obligations
    2,235       (10 )     119       (105 )     (863 (8)     1,376  
Equities and convertible debentures
    11,871       150       147       (903 )     (930 (6)     10,335  
                                                 
Total cash instruments — assets
    34,879       735   (1)     855   (1)     (2,062 )     (2,456 )     31,951  
                                                 
Cash instruments — liabilities
    (572 )     132   (2)     (60 (2)     (169 )     74   (4)     (595 )
Derivative contracts:
                                               
Interest rates — net
    (71 )     (14 )     7       21       (58 (4)     (115 )
Credit — net
    6,366       (39 )     2,238       (19 )     (20 (4)     8,526  
Currencies — net
    215       (37 )     64       331       527   (9)     1,100  
Commodities — net
    (90 )     (259 )     105       259       (286 (4)     (271 )
Equities — net
    (1,224 )     (52 )     438       (439 )     (91 (4)     (1,368 )
                                                 
Total derivative contracts — net
    5,196       (401 (2)     2,852   (2)(3)     153       72       7,872  
                                                 
Receivables from customers and counterparties
          10   (2)     (48 (2)           256   (4)     218  
Securities sold under agreements to repurchase, at fair value
    (394 )                 (1,025 )       (4)     (1,419 )
Other secured financings
    (6,756 )     (21 (2)     39   (2)     (1,174 )     (174 (10)     (8,086 )
Unsecured short-term borrowings
    (2,310 )     (67 (2)     307   (2)     267       (965 (10)     (2,768 )
Unsecured long-term borrowings
    (3,077 )     (15 (2)     137   (2)     19       1,037   (11)     (1,899 )
Other liabilities and accrued expenses
    (1,913 )     (5 (2)     47   (2)     (22 )     (493 (12)     (2,386 )
 
 
  (1)  The aggregate amounts include approximately $173 million and $352 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the three months ended June 2010. The aggregate amounts include approximately $932 million and $658 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the six months ended June 2010.
  (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)  Includes no individually significant transfers into or out of level 3 during the three and six months ended June 2010.
  (5)  Principally reflects transfers from level 2 within the fair value hierarchy reflecting reduced transparency of prices for these financial instruments as a result of less trading activity.
  (6)  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 market transactions.
  (7)  Principally reflects a reduction in financial instruments as a result of the consolidation of a VIE, which holds identifiable intangible assets, as a result of the adoption of ASU No. 2009-17. Such assets are included in “Other assets” in the condensed consolidated statements of financial condition.
  (8)  Principally reflects a reduction in financial instruments as a result of the consolidation of a VIE, which holds real estate assets. Such assets are included in “Other assets” in the condensed consolidated statements of financial condition.
  (9)  Principally reflects transfers from level 2 within the fair value hierarchy of certain currency derivative assets reflecting reduced transparency of the correlation inputs used to value these financial instruments.
(10)  Principally reflects consolidation of certain VIEs as a result of the adoption of ASU No. 2009-17.
(11)  Upon the firm’s consolidation of certain VIEs as a result of the adoption of ASU No. 2009-17, the firm’s borrowings from such VIEs, substantially all of which were level 3, became intercompany borrowings and were eliminated in consolidation.
(12)  Principally reflects an increase related to subordinated liabilities issued by VIEs which were consolidated upon the adoption of ASU No. 2009-17.
 

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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 June 2009
                                               
Mortgage and other asset-backed loans and securities:
                                               
Loans and securities backed by commercial real estate
  $ 7,705     $ (207 )   $ (637 )   $ (92 )   $ 70     $ 6,839  
Loans and securities backed by residential real estate
    2,088       101       (14 )     (301 )     (12 )     1,862  
Loan portfolios
    1,851       41       (29 )     (89 )           1,774  
Bank loans and bridge loans
    9,866       169       (74 )     (679 )     387       9,669  
Corporate debt securities
    2,648       23       (70 )     (161 )     (68 )     2,372  
State and municipal obligations
    1,157       3       (5 )     (33 )     308       1,430  
Other debt obligations
    3,749       119       (166 )     (626 )     (273 )     2,803  
Equities and convertible debentures
    13,620       11       (937 )     118       (133 )     12,679  
                                                 
Total cash instruments — assets
    42,684       260   (1)     (1,932 (1)     (1,863 )     279       39,428  
                                                 
Cash instruments — liabilities
    (1,304 )     (9 (2)     289   (2)     (31 )     35       (1,020 )
Derivative contracts — net
    4,116       474   (2)     (1,403 (2)(3)     (141 )     30   (4)     3,076  
Other secured financings
    (7,277 )     (15 (2)     (442 (2)     90       (423 (5)     (8,067 )
Unsecured short-term borrowings
    (3,143 )     1   (2)     (189 (2)     (219 )     1,321   (6)     (2,229 )
Unsecured long-term borrowings
    (1,916 )     (25 (2)     (133 (2)     54       (1,407 (6)     (3,427 )
Other liabilities and accrued expenses
    (1,510 )     (11 (2)     18   (2)     (141 )           (1,644 )

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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)
Six Months Ended June 2009
                                               
Mortgage and other asset-backed loans and securities:
                                               
Loans and securities backed by commercial real estate
  $ 9,170     $ (148 )   $ (1,546 )   $ (530 )   $ (107 )   $ 6,839  
Loans and securities backed by residential real estate
    1,927       183       (123 )     (505 )     380       1,862  
Loan portfolios
    4,266       90       (269 )     (766 )     (1,547 (7)     1,774  
Bank loans and bridge loans
    11,169       344       (682 )     (1,227 )     65       9,669  
Corporate debt securities
    2,734       163       (349 )     13       (189 )     2,372  
State and municipal obligations
    1,356       7       (9 )     (219 )     295       1,430  
Other debt obligations
    3,903       68       (211 )     (920 )     (37 )     2,803  
Equities and convertible debentures
    15,127       7       (2,408 )     (56 )     9       12,679  
                                                 
Total cash instruments — assets
    49,652       714   (1)     (5,597 (1)     (4,210 )     (1,131 )     39,428  
                                                 
Cash instruments — liabilities
    (1,727 )     (2 (2)     280   (2)     274       155       (1,020 )
Derivative contracts — net
    3,315       577   (2)     (171 (2)(3)     (1,446 )     801   (8)     3,076  
Other secured financings
    (4,039 )     (21 (2)     (426 (2)     (1,053 )     (2,528 (9)     (8,067 )
Unsecured short-term borrowings
    (4,712 )     8   (2)     (50 (2)     (1,039 )     3,564   (9)     (2,229 )
Unsecured long-term borrowings
    (1,689 )     15   (2)     (98 (2)     225       (1,880 (9)     (3,427 )
Other liabilities and accrued expenses
          (21 (2)     81   (2)     (751 )     (953 (10)     (1,644 )
 
 
  (1)  The aggregate amounts include approximately $(2.18) billion and $510 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the three months ended June 2009. The aggregate amounts include approximately $(5.96) billion and $1.08 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the six months ended June 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 from level 2 within the fair value hierarchy of credit derivative assets, reflecting reduced transparency of the correlation inputs used to value these financial instruments, 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.
 
  (5)  Principally reflects transfers from level 2 within the fair value hierarchy due to reduced transparency of prices for municipal obligations that collateralize certain secured financings.
 
  (6)  Principally reflects transfers from level 3 unsecured short-term borrowings to level 3 unsecured long-term borrowings related to changes in the terms of certain notes.
 
  (7)  Principally reflects the deconsolidation of certain loan portfolios for which the firm did not bear economic exposure.
 
  (8)  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.
 
  (9)  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.
 
(10)  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 financial instruments as a result of less observable trading activity.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Derivative Activities
 
Derivative contracts are instruments such as futures, forwards, swaps or option contracts that derive their value from underlying asset prices, indices, reference rates and other inputs 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, financial instruments, 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.
 
The firm enters into derivative transactions to facilitate client transactions, as a means of risk management or to take proprietary positions. 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.
 
Gains and losses on derivatives used for trading purposes are included in “Trading and principal investments” in the condensed consolidated statements of earnings. See Note 2 for information regarding the firm’s accounting policy and use of derivatives for hedge accounting.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
The fair value of the firm’s derivative contracts is reflected net of cash posted 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 June 2010 and December 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:
 
                                                 
    As of June 2010   As of December 2009
            Number
          Number
    Derivative
  Derivative
  of
  Derivative
  Derivative
  of
    Assets   Liabilities   Contracts   Assets   Liabilities   Contracts
    (in millions, except number of contracts)
Derivative contracts for trading activities                                                
Interest rates
  $ 543,982     $ 499,894       281,630     $ 458,614     $ 407,125       270,707  
Credit
    152,949       125,691       401,265       164,669       134,810       443,450  
Currencies
    86,563       76,300       244,554       77,223       62,413       171,760  
Commodities
    36,800       37,739       69,553       47,234       48,163       73,010  
Equities
    71,238       59,448       289,887       67,559       53,207       237,625  
                                                 
Subtotal
  $ 891,532     $ 799,072       1,286,889     $ 815,299     $ 705,718       1,196,552  
                                                 
Derivative contracts accounted for as hedges                                                
Interest rates
  $ 25,839     $ 5       868     $ 19,563     $ 1       806  
Currencies
    68       21       71       8       47       58  
                                                 
Subtotal
  $ 25,907     $ 26       939     $ 19,571     $ 48       864  
                                                 
Gross fair value of derivative contracts
  $ 917,439     $ 799,098       1,287,828     $ 834,870     $ 705,766       1,197,416  
                                                 
Counterparty netting (1)
    (723,874 )     (723,874 )             (635,014 )     (635,014 )        
Cash collateral netting (2)
    (113,764 )     (17,650 )             (124,603 )     (14,743 )        
                                                 
Fair value included in trading assets,
at fair value
  $ 79,801                     $ 75,253                  
                                                 
Fair value included in trading liabilities,
at fair value
          $ 57,574                     $ 56,009          
                                                 
 
 
(1)  Represents the netting of receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements.
 
(2)  Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
For the three months ended June 2010 and June 2009, the gain/(loss) recognized on interest rate derivative contracts accounted for as hedges was $4.95 billion and $(5.54) billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $(5.37) billion and $5.54 billion, respectively. For the six months ended June 2010 and June 2009, the gain/(loss) recognized on interest rate derivative contracts accounted for as hedges was $5.64 billion and $(8.01) billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $(6.47) billion and $7.97 billion, respectively. These gains and losses are included in “Interest expense” in the condensed consolidated statements of earnings. The hedge ineffectiveness recognized on these derivative contracts for the three and six months ended June 2010 was a loss of $418 million and $831 million, respectively. This loss consisted primarily of the amortization of prepaid credit spreads, and was not material for the three and six months ended June 2009. The gain/(loss) excluded from the assessment of hedge effectiveness was not material for the three and six months ended June 2010 and was a loss of $350 million and $666 million for the three and six months ended June 2009, respectively.
 
For the three months ended June 2010 and June 2009, the gain/(loss) on currency derivative contracts accounted for as hedges was $196 million and $(450) million, respectively. For the six months ended June 2010 and June 2009, the gain/(loss) on currency derivative contracts accounted for as hedges was $317 million and $(297) 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 six months ended June 2010 and June 2009.
 
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 $86 million and $96 million as of June 2010 and December 2009, respectively. The net asset as of June 2010, which represented 322 contracts, included gross assets of $384 million (primarily comprised of equity and interest rate derivatives) and gross liabilities of $298 million (primarily comprised of interest rate and equity derivatives). The net asset as of December 2009, which represented 297 contracts, included gross assets of $478 million (primarily comprised of equity and interest rate derivatives) and gross liabilities of $382 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 June 2010 and December 2009, the firm has designated $3.56 billion and $3.38 billion, respectively, of foreign currency-denominated debt, included in unsecured long-term borrowings and unsecured short-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 months ended June 2010 and June 2009, the loss on these debt instruments was $190 million and $90 million, respectively. For the six months ended June 2010 and June 2009, the gain/(loss) on these debt instruments was $(178) million and $179 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 was not material for the three and six months ended June 2010 and June 2009.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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 six months ended June 2010 and June 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
  Six Months
    Ended June   Ended June
    2010   2009   2010   2009
    (in millions)
Interest rates
  $ (2,814 )   $ 4,215     $ (4,728 )   $ 4,875  
Credit
    2,376       1,558       6,479       3,114  
Currencies (1)
    3,470       (1,398 )     6,791       (421 )
Equities
    376       1,798       1,949       2,842  
Commodities and other
    343       1,574       1,161       3,343  
                                 
Total
  $ 3,751     $ 7,747     $ 11,652     $ 13,753  
                                 
 
 
  (1)  Includes gains/(losses) on currency contracts used to economically hedge positions included in other product types in this table.
 
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 June 2010, the aggregate fair value of such derivative contracts that were in a net liability position was $26.51 billion, and the aggregate fair value of assets posted by the firm as collateral for these derivative contracts was $19.79 billion. As of June 2010, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately $1.33 billion and $2.68 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. As of December 2009, the aggregate fair value of such derivative contracts that were in a net liability position was $20.85 billion, and the aggregate fair value of assets posted by the firm as collateral for these derivative contracts was $14.48 billion. As of December 2009, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately $1.12 billion and $2.36 billion could have been called by counterparties in the event of a one-notch and two-notch reduction, respectively, in the firm’s long-term credit ratings.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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.
 
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 June 2010, the firm’s written and purchased credit derivatives had total gross notional amounts of $2.15 trillion and $2.29 trillion, respectively, for total net purchased protection of $140.73 billion in notional value. As of December 2009, the firm’s written and purchased credit derivatives had total gross notional amounts of $2.54 trillion and $2.71 trillion, respectively, for total net purchased protection of $164.13 billion in notional value.

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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 credit derivatives. Fair values in the table below exclude the effects of both netting under enforceable netting agreements and netting of cash posted or received pursuant to credit support agreements, and therefore are not representative of the firm’s exposure.
 
                                                                         
        Maximum Payout/Notional
   
    Maximum Payout/Notional Amount
  Amount of Purchased
  Fair Value of
    of Written Credit Derivatives by Tenor (1)   Credit Derivatives   Written Credit Derivatives
                    Offsetting
  Other
           
            5 Years
      Purchased
  Purchased
          Net
    0 - 12
  1 - 5
  or
      Credit
  Credit
          Asset/
    Months   Years   Greater   Total   Derivatives (2)   Derivatives (3)   Asset   Liability   (Liability)
    ($ in millions)
As of June 2010
                                                                       
Credit spread on
underlying (basis points)
(4)
                                                                       
0-250
  $ 220,472     $ 1,011,103     $ 283,685     $ 1,515,260     $ 1,423,331     $ 216,075     $ 20,272     $ 19,324     $ 948  
251-500
    22,176       214,903       54,160       291,239       272,856       39,163       5,016       12,209       (7,193 )
501-1,000
    15,064       137,022       44,841       196,927       163,787       23,345       4,086       15,599       (11,513 )
Greater than 1,000
    9,887       112,152       23,356       145,395       115,449       35,542       2,164       52,420       (50,256 )
                                                                         
Total
  $ 267,599     $ 1,475,180     $ 406,042     $ 2,148,821     $ 1,975,423     $ 314,125     $ 31,538     $ 99,552     $ (68,014 (5)
                                                                         
As of December 2009                                                                        
Credit spread on
underlying (basis points)
(4)
                                                                       
0-250
  $ 283,353     $ 1,342,649     $ 414,809     $ 2,040,811     $ 1,884,864     $ 299,329     $ 39,740     $ 13,441     $ 26,299  
251-500
    15,151       142,732       39,337       197,220       182,583       27,194       5,008       6,816       (1,808 )
501-1,000
    10,364       101,621       34,194       146,179       141,317       5,673       2,841       12,448       (9,607 )
Greater than 1,000
    20,262       107,768       31,208       159,238       117,914       48,699       1,524       60,279       (58,755 )
                                                                         
Total
  $ 329,130     $ 1,694,770     $ 519,548     $ 2,543,448     $ 2,326,678     $ 380,895     $ 49,113     $ 92,984     $ (43,871 (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)  These net liabilities differ from the carrying values related to credit derivatives in the firm’s condensed consolidated statements of financial condition because they exclude the effects of both netting under enforceable netting agreements and netting of cash collateral posted or received pursuant to credit support agreements.

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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 $145 million and $38 million for the three months ended June 2010 and June 2009, respectively, and $189 million and $86 million for the six months ended June 2010 and June 2009, 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
  Six Months
    Ended June   Ended June
    2010   2009   2010   2009
    (in millions)
Net gains/(losses) including hedges
  $ 390     $ (348 )   $ 497     $ (545 )
Net gains/(losses) excluding hedges
    405       (353 )     514       (545 )
 
The net gain/(loss) attributable to changes in instrument-specific credit spreads on loans and loan commitments for which the fair value option was elected was a gain/(loss) of $(118) million and $917 million for the three months ended June 2010 and June 2009, respectively, and a gain/(loss) of $952 million and $(297) million for the six months ended June 2010 and June 2009, respectively. 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.

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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 six months ended June 2010 and June 2009 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, at fair value and trading liabilities, at fair value, (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, (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, and (iv) gains and losses on subordinated liabilities issued by consolidated VIEs, as such gains and losses are offset by gains and losses on the financial assets held by the consolidated VIEs.
 
                                 
    Three Months
  Six Months
    Ended June   Ended June
    2010   2009   2010   2009
        (in millions)    
Unsecured long-term borrowings (1)
  $ 286     $ (307 )   $ 370     $ (442 )
Other secured financings (2)
    58       (442 )     54       (417 )
Unsecured short-term borrowings (3)
    61       (27 )     74       (94 )
Receivables from customers and counterparties (4)
    (55 )     84       (93 )     82  
Other liabilities and accrued expenses (5)(6)
    (142 )     (162 )     (73 )     (80 )
Other (7)
    20       34       17       8  
                                 
Total (8)
  $ 228     $ (820 )   $ 349     $ (943 )
                                 
 
 
  (1)  Excludes losses of $2.17 billion and $2.96 billion for the three months ended June 2010 and June 2009, respectively, and $1.59 billion and $1.72 billion for the six months ended June 2010 and June 2009, respectively, related to the embedded derivative component of hybrid financial instruments. Such 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/(losses) of $(12) million for the three months ended June 2009 and $(5) million and $7 million for the six months ended June 2010 and June 2009, 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. Such gains/(losses) were not material for the three months ended June 2010.
 
  (3)  Excludes gains/(losses) of $964 million and $(1.18) billion for the three months ended June 2010 and June 2009, respectively, and $759 million and $(1.48) billion for the six months ended June 2010 and June 2009, 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)  Excludes gains of $44 million and $151 million for the three and six months ended June 2010, respectively, related to subordinated liabilities issued by consolidated VIEs. Changes in the fair value of these financial instruments are offset by changes in the fair value of the financial assets held by the consolidated VIEs.
 
  (6)  Primarily consists of losses on certain insurance and reinsurance contracts.
 
  (7)  Primarily consists of gains/(losses) on resale and repurchase agreements, securities borrowed and loaned within Trading and Principal Investments, and deposits.
 
  (8)  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.

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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 $977 million and $1.02 billion for the three months ended June 2010 and June 2009, respectively, and $1.86 billion and $2.00 billion for the six months ended June 2010 and June 2009, 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 June 2010, 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 $38.53 billion, including a difference of $33.75 billion related to loans with an aggregate fair value of $3.52 billion that were on nonaccrual status (including loans more than 90 days past due). As of December 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 $41.96 billion, including a difference of $36.30 billion related to loans with an aggregate fair value of $4.28 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 June 2010 and December 2009, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $1.51 billion and $879 million, respectively, and the related total contractual amount of these lending commitments was $46.89 billion and $44.05 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 $1.66 billion and $752 million as of June 2010 and December 2009, respectively.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Investments in Funds That Calculate Net Asset Value Per Share
 
The firm’s investments in funds that calculate net asset value per share primarily consist of investments in firm-sponsored funds where the firm co-invests with third-party investors. The private equity, private debt and real estate funds are primarily closed-end funds in which the firm’s investments are not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated and it is estimated that substantially all of the underlying assets of these existing funds will be liquidated over the next 10 years. The firm’s investments in hedge funds are generally redeemable on a quarterly basis with 91 days notice, subject to a maximum redemption level of 25% of the firm’s initial investments at any quarter-end. The following table sets forth the fair value of the firm’s investments in and unfunded commitments to funds that calculate net asset value per share:
 
                                 
    As of June 2010   As of December 2009
    Fair Value of
  Unfunded
  Fair Value of
  Unfunded
    Investments   Commitments   Investments   Commitments
    (in millions)
Private equity funds (1)
  $ 7,317     $ 6,057     $ 8,229     $ 5,722  
Private debt funds (2)
    4,180       3,580       3,628       4,048  
Hedge funds (3)
    3,015             3,133        
Real estate and other funds (4)
    910       2,369       939       2,398  
                                 
Total
  $ 15,422     $ 12,006     $ 15,929     $ 12,168  
                                 
 
 
  (1)  These funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, and growth investments.
 
  (2)  These funds generally invest in fixed income instruments and are focused on providing private high-yield capital for mid to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers.
 
  (3)  These funds are primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage/special situations and capital structure arbitrage.
 
  (4)  These funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and direct property.

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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 convertible debentures.
 
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 June 2010 and December 2009, the fair value of financial instruments received as collateral by the firm that it was permitted to deliver or repledge was $590.15 billion and $561.77 billion, respectively, of which the firm delivered or repledged $419.39 billion and $392.89 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 $35.64 billion and $31.49 billion as of June 2010 and December 2009, 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 $112.89 billion and $109.11 billion as of June 2010 and December 2009, 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 $6.49 billion and $7.93 billion as of June 2010 and December 2009, 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 accounted for as financings rather than sales (primarily pledged bank loans and mortgage whole loans); and other structured financing arrangements.

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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
    June
  December
    2010   2009
    (in millions)
Other secured financings (short-term) (1)(2)
  $ 13,432     $ 12,931  
Other secured financings (long-term):
               
2011
    1,609       3,832  
2012
    4,816       1,726  
2013
    1,266       1,518  
2014
    2,055       1,617  
2015
    246       255  
2016-thereafter
    2,410       2,255  
                 
Total other secured financings (long-term) (3)(4)(5)
    12,402       11,203  
                 
Total other secured financings (6)(7)
  $ 25,834     $ 24,134  
                 
 
 
  (1)  As of June 2010 and December 2009, consists of U.S. dollar-denominated financings of $4.40 billion and $6.47 billion (including $4.19 billion and $6.15 billion at fair value) and non-U.S. dollar-denominated financings of $9.03 billion and $6.46 billion (including $1.60 billion and $1.08 billion at fair value), respectively. As of June 2010 and December 2009, after giving effect to hedging activities, the U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 4.18% and 3.44%, respectively, and the non-U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 0.71% and 1.57%, respectively.
 
  (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 June 2010 and December 2009, consists of U.S. dollar-denominated financings of $8.77 billion and $7.28 billion (including $7.37 billion and $5.90 billion at fair value) and non-U.S. dollar-denominated financings of $3.63 billion and $3.92 billion (including $2.72 billion and $2.10 billion at fair value), respectively. As of June 2010 and December 2009, after giving effect to hedging activities, the U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 1.85% and 1.83%, respectively, and the non-U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 2.77% and 2.30%, respectively.
 
  (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)  The aggregate contractual principal amount of other secured financings (long-term) for which the fair value option was elected, primarily consisting of transfers of financial assets accounted for as financings rather than sales, debt raised through the William Street credit extension program and certain other nonrecourse financings, exceeded the related fair value by $725 million as of June 2010.
 
  (6)  As of June 2010 and December 2009, $21.81 billion and $18.25 billion, respectively, of these financings were collateralized by trading assets and $4.02 billion and $5.88 billion, respectively, by other assets (primarily real estate and cash). Other secured financings include $9.77 billion and $10.63 billion of nonrecourse obligations as of June 2010 and December 2009, respectively.
 
  (7)  As of June 2010 and December 2009, other secured financings include $10.61 billion and $9.51 billion, respectively, 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 statements of financial condition of $10.87 billion and $9.78 billion as of June 2010 and December 2009, respectively.

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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 residential and commercial mortgages, 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. The firm generally receives cash in exchange for the transferred assets. Net revenues related to 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; and retaining servicing rights. The firm may also purchase 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 and are generally classified within level 2 of the fair value hierarchy. See Note 2 for additional information regarding fair value measurement.
 
During the three months ended June 2010 and June 2009, the firm securitized $13.46 billion and $12.91 billion, respectively, of financial assets in which the firm had continuing involvement, including $13.46 billion and $12.41 billion, respectively, of residential mortgages, primarily in connection with government agency securitizations, and $0 and $496 million, respectively, of other financial assets. During the six months ended June 2010 and June 2009, the firm securitized $23.43 billion and $16.47 billion, respectively, of financial assets in which the firm had continuing involvement, including $23.42 billion and $15.88 billion, respectively, of residential mortgages, primarily in connection with government agency securitizations, and $14 million and $591 million, respectively, of other financial assets. Cash flows received on retained interests were $218 million and $106 million for the three months ended June 2010 and June 2009, respectively, and $417 million and $200 million for the six months ended June 2010 and June 2009, respectively.

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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 June 2010 and December 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 June 2010   As of December 2009
    Outstanding
  Fair Value of
  Fair Value of
  Outstanding
  Fair Value of
  Fair Value of
    Principal
  Retained
  Purchased
  Principal
  Retained
  Purchased
    Amount   Interests   Interests (1)   Amount   Interests   Interests (1)
    (in millions)
Residential mortgage-backed (2)
  $ 60,564     $ 3,755     $ 8     $ 59,410     $ 3,956     $ 17  
Commercial mortgage-backed
    6,685       56       86       11,643       56       96  
Other (3)
    16,503       110       140       17,768       93       54  
                                                 
Total (4)
  $ 83,752     $ 3,921     $ 234     $ 88,821     $ 4,105     $ 167  
                                                 
 
 
  (1)  Comprised of senior and subordinated interests in securitization-related entities purchased in connection with secondary market-making activities 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 nonconsolidated VIEs for which the carrying value was a net liability of $95 million and $87 million as of June 2010 and December 2009, respectively. The notional amounts of these transactions are included in maximum exposure to loss in the nonconsolidated VIE table below.
 
  (2)  Primarily consists of outstanding principal and retained interests related to government agency securitization entities.
 
  (3)  Primarily consists of CDOs backed by corporate and mortgage obligations and CLOs.
 
  (4)  Includes $8.08 billion of outstanding principal amount and $24 million of fair value of retained interests as of June 2010 related to securitization entities in which the firm’s only continuing involvement is retained servicing, which is market-based and therefore not a variable interest.

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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 June 2010   As of December 2009
    Type of Retained Interests   Type of Retained Interests
    Mortgage-
      Mortgage-
   
    Backed   Other (1)   Backed   Other (1)
    ($ in millions)
Fair value of retained interests
  $ 3,811     $ 110     $ 4,012     $ 93  
                                 
Weighted average life (years)
    5.0       2.3       4.4       4.4  
                                 
Constant prepayment rate (2)
    21.9 %     N.M.       23.5 %     N.M.  
Impact of 10% adverse change (2)
  $ (47 )     N.M.     $ (44 )     N.M.  
Impact of 20% adverse change (2)
    (96 )     N.M.       (92 )     N.M.  
                                 
Discount rate (3)
    7.8 %     N.M.       8.4 %     N.M.  
Impact of 10% adverse change
  $ (70 )     N.M.     $ (76 )     N.M.  
Impact of 20% adverse change
    (137 )     N.M.       (147 )     N.M.  
 
 
  (1)  Due to the nature and current fair value of certain of these retained interests, the weighted average assumptions for constant prepayment and discount rates and the related sensitivity to adverse changes are not meaningful as of June 2010 and December 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the firm’s carrying value of $110 million and $93 million as of June 2010 and December 2009, respectively.
 
  (2)  Constant prepayment rate is included only for positions for which constant prepayment rate is a key assumption in the determination of fair value.
 
  (3)  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.
 
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.
 
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 residential and commercial 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 finance the purchase of assets by issuing debt and equity instruments.
 
The firm’s 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.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
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 retained and purchased 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 firm has aggregated nonconsolidated VIEs based on principal business activity, as reflected in the tables below. The nature of the firm’s variable interests can take different forms, as described in the rows under maximum exposure to loss.
 
The following tables set forth total assets in nonconsolidated VIEs in which the firm holds variable interests, 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 and the total assets and total liabilities included in the condensed consolidated statements of financial condition related to the firm’s variable interests in these nonconsolidated VIEs. For June 2010, in accordance with ASU Nos. 2009-16 and 2009-17, the following table also includes nonconsolidated VIEs in which the firm holds variable interests (and to which the firm sold assets and has continuing involvement as of June 2010) that were formerly considered to be QSPEs prior to the adoption of these standards on January 1, 2010.
 
                                                         
    As of June 2010
            Real estate,
               
        Corporate
  credit-related
  Other
           
    Mortgage-
  CDOs and
  and other
  asset-
  Power-
  Investment
   
    backed (1)   CLOs (1)   investing (2)   backed (1)   related (3)   funds (4)   Total
    (in millions)
Assets in VIE
  $ 73,779  (6)   $ 21,807     $ 13,865     $ 2,188     $ 553     $ 1,965     $ 114,157  
                                                         
Carrying Value of the Firm’s Variable Interests                                                        
                                                         
Assets
  $ 4,481     $ 1,052     $ 1,210     $ 109     $ 235     $ 7     $ 7,094  
Liabilities
    4       147       163       4       1             319  
                                                         
Maximum Exposure to Loss in Nonconsolidated VIEs (5)                                                        
                                                         
Retained interests
  $ 3,786     $ 96     $     $ 14     $     $     $ 3,896  
Purchased interests
    511       191             87                   789  
Commitments and guarantees
          1       301             37             339  (9)
Derivatives
    3,829  (6)(7)     6,884  (8)           1,145                   11,858  (9)
Loans and investments
    127             1,210             235       7       1,579  
                                                         
Total
  $ 8,253     $ 7,172     $ 1,511     $ 1,246     $ 272     $ 7     $ 18,461  
                                                         

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                                         
    As of December 2009
            Real estate,
               
        Corporate
  credit-related
  Other
      Principal-
   
    Mortgage
  CDOs and
  and other
  asset-
  Power-
  protected
   
    CDOs (1)   CLOs (1)   investing (2)   backed (1)   related (3)   notes (10)   Total
    (in millions)
Assets in VIE
  $ 9,114     $ 32,490     $ 22,618     $ 497     $ 592     $ 2,209     $ 67,520  
                                                         
Carrying Value of the Firm’s Variable Interests                                                        
                                                         
Assets
  $ 182     $ 834     $ 2,386     $ 16     $ 224     $ 12     $ 3,654  
Liabilities
    10       400       204       12       3       1,357       1,986  
                                                         
Maximum Exposure to Loss in Nonconsolidated VIEs (5)                                                        
                                                         
Retained and purchased interests
    135       259                               394  
Commitments and guarantees
          3       397             37             437  (9)
Derivatives
    4,111  (7)     7,577  (8)           497             2,512       14,697  (9)
Loans and investments
                2,425             224             2,649  
                                                         
Total
  $ 4,246     $ 7,839     $ 2,822     $ 497     $ 261     $ 2,512     $ 18,177  
                                                         
 
 
  (1)  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 statements of financial condition.
 
  (2)  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 assets,” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition.
 
  (3)  These VIEs are financed through the issuance of debt instruments. Assets and liabilities held by the firm related to these VIEs are included in “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition.
 
  (4)  These VIEs are generally financed through the issuance of equity instruments. 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.
 
  (5)  Such amounts do not represent the anticipated losses in connection with these transactions because they exclude the effect of offsetting financial instruments that are held to mitigate these risks.
 
  (6)  Assets in VIE and maximum exposure to loss include $6.99 billion and $4.01 billion, respectively, related to CDOs backed by mortgage obligations as of June 2010.
 
  (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.
 
  (9)  The aggregate amounts include $4.77 billion and $4.66 billion as of June 2010 and December 2009, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets.
 
(10)  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, including the current portion of unsecured long-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 $3.97 billion as of December 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. These VIEs were consolidated by the firm upon adoption of ASU No. 2009-17.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
The following tables set forth the carrying amount and classification of the firm’s assets and liabilities in consolidated VIEs, excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with its variable interests. For June 2010, in accordance with ASU No. 2009-17, the following table excludes VIEs in which the firm holds a majority voting interest if (i) the VIE meets the definition of a business as defined in ASC 805 and (ii) the VIE’s assets can be used for purposes other than the settlement of its obligations. For December 2009, prior to the adoption of ASU No. 2009-17, 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. The increase in total assets of consolidated VIEs from December 2009 to June 2010 is primarily related to (i) VIEs that are required to be disclosed in accordance with ASU No. 2009-17 that were not required to be disclosed under previous GAAP, as described above, and (ii) VIEs that were consolidated by the firm upon adoption of ASU No. 2009-17.
 
The firm has aggregated consolidated VIEs based on principal business activity, as reflected in the table below. Consolidated VIE assets and liabilities are presented after intercompany eliminations and include assets financed on a nonrecourse basis.
 
                                         
    As of June 2010
            CDOs,
       
    Real estate,
      mortgage-
       
    credit-related
      backed and
  Principal-
   
    and other
  Municipal bond
  other asset-
  protected
   
    investing (1)   securitizations (2)   backed (3)   notes (4)   Total
    (in millions)
Assets (5)
                                       
Cash and cash equivalents
  $ 314     $     $ 37     $ 148     $ 499  
Cash and securities segregated for regulatory and other purposes
    173