10-Q 1 y92435e10vq.htm FORM 10-Q e10vq
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-Q
 
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
     
    For the quarterly period ended September 30, 2011
 
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 October 28, 2011, there were 492,313,122 shares of the registrant’s common stock outstanding.
 


 

 
THE GOLDMAN SACHS GROUP, INC.
 
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011
 
INDEX
 
                 
 
Form 10-Q Item Number   Page No.    
 
      2      
             
        2      
        3      
        4      
        5      
        6      
        7      
        7      
        7      
        8      
        12      
        13      
        23      
        32      
        45      
        49      
        52      
        55      
        60      
        61      
        63      
        63      
        64      
        67      
        68      
        74      
        77      
        81      
        82      
        83      
        83      
        84      
        88      
        89      
        102      
        103      
      107      
      171      
      171      
      171      
      171      
      172      
      173      
    174      
 
 
 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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Table of Contents

 
PART I. FINANCIAL INFORMATION
 
Item 1.  Financial Statements (Unaudited)
 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                                         
 
    Three Months
  Nine Months 
    Ended September   Ended September 
in millions, except per share amounts   2011     2010         2011     2010      
 
Revenues
                                       
Investment banking
  $ 781     $ 1,159         $ 3,498     $ 3,303      
Investment management
    1,133       1,200           3,495       3,254      
Commissions and fees
    1,056       807           2,969       2,665      
Market making
    1,800       2,849           7,998       12,084      
Other principal transactions
    (2,539 )     1,760           675       5,048      
 
 
Total non-interest revenues
    2,231       7,775           18,635       26,354      
                                         
Interest income
    3,354       2,937           10,142       9,240      
Interest expense
    1,998       1,809           6,015       5,075      
 
 
Net interest income
    1,356       1,128           4,127       4,165      
 
 
Net revenues, including net interest income
    3,587       8,903           22,762       30,519      
 
 
                                         
Operating expenses
                                       
Compensation and benefits
    1,578       3,828           10,015       13,123      
                                         
U.K. bank payroll tax
                          600      
                                         
Brokerage, clearing, exchange and distribution fees
    668       519           1,903       1,703      
Market development
    140       129           502       355      
Communications and technology
    209       192           617       554      
Depreciation and amortization
    389       355           1,351       1,164      
Occupancy
    262       297           781       827      
Professional fees
    253       256           749       665      
Other expenses
    818       516           1,922       2,110      
 
 
Total non-compensation expenses
    2,739       2,264           7,825       7,378      
 
 
Total operating expenses
    4,317       6,092           17,840       21,101      
 
 
Pre-tax earnings/(loss)
    (730 )     2,811           4,922       9,418      
Provision/(benefit) for taxes
    (337 )     913           1,493       3,451      
 
 
Net earnings/(loss)
    (393 )     1,898           3,429       5,967      
Preferred stock dividends
    35       161           1,897       481      
 
 
Net earnings/(loss) applicable to common shareholders
  $ (428 )   $ 1,737         $ 1,532     $ 5,486      
Earnings/(loss) per common share
                                       
Basic
  $ (0.84 )   $ 3.19         $ 2.84     $ 10.06      
Diluted
    (0.84 )     2.98           2.70       9.39      
                                         
Dividends declared per common share
  $ 0.35     $ 0.35         $ 1.05     $ 1.05      
                                         
Average common shares outstanding
                                       
Basic
    518.2       541.2           530.1       542.3      
Diluted
    518.2       582.7           566.6       584.4      
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                     
 
    As of 
    September
    December
     
in millions, except share and per share amounts   2011     2010      
 
Assets
                   
                     
Cash and cash equivalents
  $ 44,203     $ 39,788      
                     
Cash and securities segregated for regulatory and other purposes (includes $56,820 and $36,182 at fair value as of September 2011 and December 2010, respectively)
    77,423       53,731      
                     
Collateralized agreements:
                   
                     
Securities purchased under agreements to resell and federal funds sold (includes $185,854 and $188,355 at fair value as of September 2011 and December 2010, respectively)
    185,854       188,355      
                     
Securities borrowed (includes $48,609 and $48,822 at fair value as of September 2011 and December 2010, respectively)
    156,929       166,306      
                     
Receivables from brokers, dealers and clearing organizations
    22,070       10,437      
                     
Receivables from customers and counterparties (includes $10,495 and $7,202 at fair value as of September 2011 and December 2010, respectively)
    66,281       67,703      
                     
Financial instruments owned, at fair value (includes $57,941 and $51,010 pledged as collateral as of September 2011 and December 2010, respectively)
    371,459       356,953      
                     
Other assets
    24,690       28,059      
 
 
Total assets
  $ 948,909     $ 911,332      
                     
Liabilities and shareholders’ equity
                   
                     
Deposits (includes $3,723 and $1,975 at fair value as of September 2011 and December 2010, respectively)
  $ 41,799     $ 38,569      
                     
Collateralized financings:
                   
                     
Securities sold under agreements to repurchase, at fair value
    143,498       162,345      
                     
Securities loaned (includes $1,201 and $1,514 at fair value as of September 2011 and December 2010, respectively)
    8,689       11,212      
                     
Other secured financings (includes $33,136 and $31,794 at fair value as of September 2011 and December 2010, respectively)
    42,022       38,377      
                     
Payables to brokers, dealers and clearing organizations
    5,474       3,234      
                     
Payables to customers and counterparties
    213,845       187,270      
                     
Financial instruments sold, but not yet purchased, at fair value
    162,127       140,717      
                     
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $19,725 and $22,116 at fair value as of September 2011 and December 2010, respectively)
    54,629       47,842      
                     
Unsecured long-term borrowings (includes $17,772 and $18,171 at fair value as of September 2011 and December 2010, respectively)
    175,650       174,399      
                     
Other liabilities and accrued expenses (includes $7,793 and $2,972 at fair value as of September 2011 and December 2010, respectively)
    31,088       30,011      
 
 
                     
Total liabilities
    878,821       833,976      
                     
Commitments, contingencies and guarantees
                   
                     
Shareholders’ equity
                   
                     
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $3,100 and $8,100 as of September 2011 and December 2010, respectively
    3,100       6,957      
                     
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 793,476,722 and 770,949,268 shares issued as of September 2011 and December 2010, respectively, and 492,622,657 and 507,530,772 shares outstanding as of September 2011 and December 2010, respectively
    8       8      
                     
Restricted stock units and employee stock options
    5,286       7,706      
                     
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding
               
                     
Additional paid-in capital
    45,337       42,103      
                     
Retained earnings
    58,043       57,163      
                     
Accumulated other comprehensive loss
    (314 )     (286 )    
                     
Stock held in treasury, at cost, par value $0.01 per share; 300,854,067 and 263,418,498 shares as of September 2011 and December 2010, respectively
    (41,372 )     (36,295 )    
 
 
Total shareholders’ equity
    70,088       77,356      
 
 
                     
Total liabilities and shareholders’ equity
  $ 948,909     $ 911,332      
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)
 
                     
 
    Nine Months Ended     Year Ended      
    September
    December
     
in millions   2011     2010      
 
Preferred stock
                   
Balance, beginning of year
  $ 6,957     $ 6,957      
Repurchased
    (3,857 )          
 
 
Balance, end of period
    3,100       6,957      
Common stock
                   
Balance, beginning of year
    8       8      
Issued
               
 
 
Balance, end of period
    8       8      
Restricted stock units and employee stock options
                   
Balance, beginning of year
    7,706       6,245      
Issuance and amortization of restricted stock units and employee stock options
    2,486       4,137      
Delivery of common stock underlying restricted stock units
    (4,804 )     (2,521 )    
Forfeiture of restricted stock units and employee stock options
    (98 )     (149 )    
Exercise of employee stock options
    (4 )     (6 )    
 
 
Balance, end of period
    5,286       7,706      
Additional paid-in capital
                   
Balance, beginning of year
    42,103       39,770      
Issuance of common stock
    103            
Delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options
    4,958       3,067      
Cancellation of restricted stock units in satisfaction of withholding tax requirements
    (1,910 )     (972 )    
Excess net tax benefit related to share-based compensation
    123       239      
Cash settlement of share-based compensation
    (40 )     (1 )    
 
 
Balance, end of period
    45,337       42,103      
Retained earnings
                   
Balance, beginning of year
    57,163       50,252      
Net earnings
    3,429       8,354      
Dividends and dividend equivalents declared on common stock and restricted stock units
    (582 )     (802 )    
Dividends on preferred stock
    (1,967 )     (641 )    
 
 
Balance, end of period
    58,043       57,163      
Accumulated other comprehensive income/(loss)
                   
Balance, beginning of year
    (286 )     (362 )    
Currency translation adjustment, net of tax
    (40 )     (38 )    
Pension and postretirement liability adjustments, net of tax
    4       88      
Net unrealized gains on available-for-sale securities, net of tax
    8       26      
 
 
Balance, end of period
    (314 )     (286 )    
Stock held in treasury, at cost
                   
Balance, beginning of year
    (36,295 )     (32,156 )    
Repurchased
    (5,141 )     (4,185 )    
Reissued
    64       46      
 
 
Balance, end of period
    (41,372 )     (36,295 )    
 
 
Total shareholders’ equity
  $ 70,088     $ 77,356      
 
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)
 
                     
 
    Nine Months 
    Ended September
in millions   2011     2010      
 
Cash flows from operating activities
                   
Net earnings
  $ 3,429     $ 5,967      
Non-cash items included in net earnings
                   
Depreciation and amortization
    1,355       1,173      
Share-based compensation
    2,431       3,539      
Changes in operating assets and liabilities
                   
Cash and securities segregated for regulatory and other purposes
    (23,691 )     (15,553 )    
Net receivables from brokers, dealers and clearing organizations
    (9,839 )     (5,061 )    
Net payables to customers and counterparties
    26,241       (2 )    
Securities borrowed, net of securities loaned
    6,859       2,704      
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold
    (18,948 )     (11,760 )    
Financial instruments owned, at fair value
    (2,961 )     3,516      
Financial instruments sold, but not yet purchased, at fair value
    21,367       26,102      
Other, net
    (3,813 )     (7,500 )    
 
 
Net cash provided by operating activities
    2,430       3,125      
Cash flows from investing activities
                   
Purchase of property, leasehold improvements and equipment
    (979 )     (899 )    
Proceeds from sales of property, leasehold improvements and equipment
    53       63      
Business acquisitions, net of cash acquired
    (265 )     (779 )    
Proceeds from sales of investments
    1,985       717      
Purchase of available-for-sale securities
    (2,352 )     (1,748 )    
Proceeds from sales of available-for-sale securities
    2,546       1,869      
 
 
Net cash provided by/(used for) investing activities
    988       (777 )    
Cash flows from financing activities
                   
Unsecured short-term borrowings, net
    (190 )     213      
Other secured financings (short-term), net
    2,657       2,744      
Proceeds from issuance of other secured financings (long-term)
    9,505       2,505      
Repayment of other secured financings (long-term), including the current portion
    (8,285 )     (3,503 )    
Proceeds from issuance of unsecured long-term borrowings
    23,908       15,652      
Repayment of unsecured long-term borrowings, including the current portion
    (19,438 )     (18,494 )    
Derivative contracts with a financing element, net
    661       865      
Deposits, net
    3,230       (974 )    
Preferred stock repurchased
    (3,857 )          
Common stock repurchased
    (5,140 )     (3,088 )    
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units
    (2,549 )     (1,083 )    
Proceeds from issuance of common stock, including stock option exercises
    182       357      
Excess tax benefit related to share-based compensation
    353       297      
Cash settlement of share-based compensation
    (40 )     (1 )    
 
 
Net cash provided by/(used for) financing activities
    997       (4,510 )    
 
 
Net increase/(decrease) in cash and cash equivalents
    4,415       (2,162 )    
Cash and cash equivalents, beginning of year
    39,788       38,291      
 
 
Cash and cash equivalents, end of period
  $ 44,203     $ 36,129      
SUPPLEMENTAL DISCLOSURES:
 
Cash payments for interest, net of capitalized interest, were $6.11 billion and $5.35 billion during the nine months ended September 2011 and September 2010, respectively.
 
Cash payments for income taxes, net of refunds, were $1.64 billion and $3.09 billion during the nine months ended September 2011 and September 2010, respectively.
 
Non-cash activities:
During the nine months ended September 2011, the firm assumed $2.09 billion of debt and issued $103 million of common stock in connection with the acquisition of Goldman Sachs & Partners Australia Group Holdings Pty Ltd (GS&PA). During the nine months ended September 2010, the firm assumed $90 million of debt in connection with business acquisitions. In addition, in the first quarter of 2010, the firm recorded an increase of approximately $3 billion in both assets (primarily financial instruments owned, at fair value) and liabilities (primarily unsecured short-term borrowings and other liabilities) upon adoption of Accounting Standards Update (ASU) No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
(UNAUDITED)
 
                                         
 
    Three Months
  Nine Months 
    Ended September   Ended September 
in millions   2011     2010         2011     2010      
 
Net earnings/(loss)
  $ (393 )   $ 1,898         $ 3,429     $ 5,967      
Currency translation adjustment, net of tax
    (5 )     (23 )         (40 )     (37 )    
Pension and postretirement liability adjustments, net of tax
    1       6           4       17      
Net unrealized gains on available-for-sale securities, net of tax
    37       51           8       98      
 
 
Comprehensive income/(loss)
  $ (360 )   $ 1,932         $ 3,401     $ 6,045      
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

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

 
The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.
 
The firm reports its activities in the following four business segments:
 
Investment Banking
The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, risk management, restructurings and spin-offs, and debt and equity underwriting of public offerings and private placements, as well as derivative transactions directly related to these activities.
 
Institutional Client Services
The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporates, financial institutions, investment funds and governments. The firm also makes markets and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and prime brokerage services to institutional clients.
 
Investing & Lending
The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, directly and indirectly through funds that the firm manages, in debt securities, loans, public and private equity securities, real estate, consolidated investment entities and power generation facilities.

Investment Management
The firm provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. The firm also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.
 
 
These condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.
 
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 year ended December 31, 2010. References to “the firm’s Annual Report on Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2010. The condensed consolidated financial information as of December 31, 2010 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 September 2011 and September 2010, unless specifically stated otherwise, refer to the firm’s periods ended, or the dates, as the context requires, September 30, 2011 and September 30, 2010, respectively. All references to June 2011 and December 2010, unless specifically stated otherwise, refer to the dates June 30, 2011 and December 31, 2010, respectively. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.
 
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 3.  Significant Accounting Policies
 

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 11 for policies on consolidation accounting. All other significant accounting policies are either discussed below or included in the following footnotes:
 
     
Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value   Note 4
Fair Value Measurements
  Note 5
Cash Instruments
  Note 6
Derivatives and Hedging Activities
  Note 7
Fair Value Option
  Note 8
Collateralized Agreements and Financings
  Note 9
Securitization Activities
  Note 10
Variable Interest Entities
  Note 11
Other Assets
  Note 12
Goodwill and Identifiable Intangible Assets
  Note 13
Deposits
  Note 14
Short-Term Borrowings
  Note 15
Long-Term Borrowings
  Note 16
Other Liabilities and Accrued Expenses
  Note 17
Commitments, Contingencies and Guarantees
  Note 18
Shareholders’ Equity
  Note 19
Regulation and Capital Adequacy
  Note 20
Earnings Per Common Share
  Note 21
Transactions with Affiliated Funds
  Note 22
Interest Income and Interest Expense
  Note 23
Income Taxes
  Note 24
Business Segments
  Note 25
Credit Concentrations
  Note 26
Legal Proceedings
  Note 27
 
Consolidation
The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

Voting Interest Entities.  Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a majority voting interest in a voting interest entity, the entity is consolidated.
 
Variable Interest Entities.  A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 11 for further information about VIEs.
 
Equity-Method Investments.  When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.
 
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, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 12 for further information about equity-method investments.


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

Investment Funds.  The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are included in “Financial instruments owned, at fair value.” See Notes 6, 18 and 22 for further information about investments in funds.
 
Use of Estimates
Preparation of these condensed consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, discretionary compensation accruals and the provision for losses that may arise from litigation, regulatory proceedings and tax audits. These estimates and assumptions are based on the best available information but actual results could be materially different.
 
Revenue Recognition
Financial Assets and Financial Liabilities at Fair Value.  Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

Investment Banking.  Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.
 
Investment Management.  The firm earns management fees and incentive fees for investment management services. Management fees are calculated as a percentage of net asset value, invested capital or commitments, and are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund’s or separately managed account’s return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in “Investment management” revenues.
 
Commissions and Fees.  The firm earns “Commissions and fees” from executing and clearing client transactions on stock, options and futures markets. Commissions and fees are recognized on the day the trade is executed.


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

Transfers of Assets
Transfers of assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of assets accounted for as sales, any related gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred assets are measured at fair value. For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 9 for further information about transfers of assets accounted for as collateralized financings and Note 10 for further information about transfers of assets accounted for as sales.
 
Receivables from Customers and Counterparties
Receivables from customers and counterparties generally consist of collateralized receivables, primarily customer margin loans, related to client transactions. Certain of the firm’s receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in “Market making” revenues. See Note 8 for further information about the fair values of these receivables. Receivables from customers and counterparties not accounted for at fair value are accounted for at amortized cost net of estimated uncollectible amounts, which generally approximates fair value. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.”
 
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 “Market making” revenues. See Note 8 for further information about the fair values of these insurance and reinsurance contracts.
 
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. These revenues are recognized in earnings over the period that services are provided and are included in “Market making” revenues. Interest credited to variable annuity and life insurance and reinsurance contract account balances and changes in reserves are recognized in “Other expenses.”

Premiums earned for underwriting property catastrophe reinsurance are recognized in earnings over the coverage period, net of premiums ceded for the cost of reinsurance, and are included in “Market making” revenues. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported, are included in “Other expenses.”
 
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. 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.
 
The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.
 
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.
 
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. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the condensed consolidated statements of comprehensive income.


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

Cash and Cash Equivalents
The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of September 2011 and December 2010, “Cash and cash equivalents” included $6.66 billion and $5.75 billion, respectively, of cash and due from banks, and $37.54 billion and $34.04 billion, respectively, of interest-bearing deposits with banks.
 
Recent Accounting Developments
Improving Disclosures about Fair Value Measurements.  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 of these disclosure requirements became effective for the firm beginning in the first quarter of 2010, while others became effective for the firm beginning in the first quarter of 2011. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not affect the firm’s financial condition, results of operations or cash flows.
 
Reconsideration of Effective Control for Repurchase Agreements. In April 2011, the FASB issued ASU No. 2011-03, “Transfers and Servicing (Topic 860) — Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 changes the assessment of effective control by removing (i) the criterion that requires the transferor to have the ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for periods beginning after December 15, 2011. The adoption of ASU No. 2011-03 will not affect the firm’s financial condition, results of operations or cash flows.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (FASB Accounting Standards Codification (ASC) 820).  In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. The firm is currently evaluating the impact of adoption.
 
Testing Goodwill for Impairment.  In September 2011, the FASB issued ASU No. 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment.” ASU No. 2011-08 simplifies how entities test goodwill for impairment by permitting an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative, two-step goodwill impairment test. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The firm plans to adopt these amended principles in conjunction with its annual goodwill impairment test to be performed in the fourth quarter of 2011. The adoption of ASU No. 2011-08 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 4.  Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value
 

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about the fair value option. The table below presents the firm’s financial instruments owned, at fair value, including those

pledged as collateral, and financial instruments sold, but not yet purchased, at fair value. Financial instruments owned, at fair value included $4.89 billion and $3.67 billion as of September 2011 and December 2010, respectively, of securities accounted for as available-for-sale, substantially all of which are held in the firm’s insurance subsidiaries.
 


                                     
 
    As of September 2011     As of December 2010 
          Financial
          Financial
     
          Instruments
          Instruments
     
    Financial
    Sold, But
    Financial
    Sold, But
     
    Instruments
    Not Yet
    Instruments
    Not Yet
     
in millions   Owned     Purchased     Owned     Purchased      
 
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 9,267     $     $ 11,262  4   $      
U.S. government and federal agency obligations
    79,898       23,243       84,928       23,264      
Non-U.S. government obligations
    50,677       33,395       40,675       29,009      
Mortgage and other asset-backed loans and securities:
                                   
Loans and securities backed by commercial real estate
    6,463             6,200       5      
Loans and securities backed by residential real estate
    7,958       7       9,404       6      
Loan portfolios 1
    1,105             1,438            
Bank loans and bridge loans
    21,296       2,834  3     18,039       1,487  3    
Corporate debt securities
    24,604       8,461       24,719       7,219      
State and municipal obligations
    3,801             2,792            
Other debt obligations
    4,400             3,232            
Equities and convertible debentures
    61,427       28,183       67,833       24,988      
Commodities
    8,537             13,138       9      
Derivatives 2
    92,026       66,004       73,293       54,730      
 
 
Total
  $ 371,459     $ 162,127     $ 356,953     $ 140,717      
 
1.   Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate.
 
2.   Net of cash collateral received or posted under credit support agreements and reported on a net-by-counterparty basis when a legal right of setoff exists under an enforceable netting agreement.
 
3.   Includes the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is primarily included in “Financial instruments owned, at fair value.”
 
4.   Includes $4.06 billion as of December 2010 of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 18 for further information about the William Street credit extension program.
 

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

Gains and Losses from Market Making and Other Principal Transactions
The table below presents, by major product type, the firm’s “Market making” and “Other principal transactions” revenues. These gains/(losses) are primarily related to the firm’s financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments. These gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.
 
The gains/(losses) in the table are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making, client facilitation, and investing and lending strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm’s longer-term derivatives are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives has exposure to foreign currencies and may be economically hedged with foreign currency contracts.
 
                                     
 
    Three Months
    Nine Months
    Ended September     Ended September
in millions   2011     2010     2011     2010      
 
Interest rates
  $ (1,674 )   $ 3,597     $ 1,766     $ (1,171 )    
Credit
    213       1,801       3,193       8,250      
Currencies
    2,271       (4,587 )     (319 )     2,453      
Equities
    (1,998 )     2,949       1,876       4,910      
Commodities
    218       259       1,104       945      
Other
    231       590       1,053       1,745      
 
 
Total
  $ (739 )   $ 4,609     $ 8,673     $ 17,132      
 
Note 5.  Fair Value Measurements
 
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs.

The best evidence of fair value is a quoted price in an active market. If listed prices or quotations are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use as inputs market-based or independently sourced parameters, including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodities prices, credit curves and funding rates.
 
U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in the fair value hierarchy is based on the lowest level of any input that is significant to its fair value measurement.
 
The fair value hierarchy is as follows:
 
Level 1.  Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.
 
Level 2.  Inputs to valuation techniques are observable, either directly or indirectly.
 
Level 3.  One or more inputs to valuation techniques are significant and unobservable.
 
See Notes 6 and 7 for further information about fair value measurements of cash instruments and derivatives, respectively.
 
The fair value of certain level 2 and level 3 financial assets and financial liabilities may include valuation adjustments for counterparty and the firm’s credit quality, transfer restrictions, large and/or concentrated positions, illiquidity and bid/offer inputs. See Notes 6 and 7 for further information about valuation adjustments.
 
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Level 3 financial assets are summarized below.
 
                             
 
    As of
    September
    June
    December
     
in millions   2011     2011     2010      
 
Total level 3 financial assets
  $ 46,910     $ 47,007     $ 45,377      
Total assets
  $ 948,909     $ 936,910     $ 911,332      
Total financial assets at fair value
  $ 673,237     $ 644,772     $ 637,514      
Total level 3 financial assets as a percentage of Total assets
    4.9%       5.0%       5.0%      
Total level 3 financial assets as a percentage of Total financial assets at fair value
    7.0%       7.3%       7.1%      
 
 
 

Level 3 financial assets were essentially unchanged compared with June 2011, primarily reflecting a decrease in loans and securities backed by residential real estate, principally due to transfers to level 2, partially offset by an increase in bank loans and bridge loans. The increase in bank loans primarily reflected purchases, partially offset by unrealized losses and settlements.
 
The increase in level 3 financial assets during the nine months ended September 2011 primarily reflected: (i) an increase in private equity investments, principally due to purchases and transfers from level 2, partially offset by sales, and (ii) an increase in bank loans and bridge loans, principally due to purchases, partially offset by settlements, transfers to

level 2 and sales. These increases were partially offset by a decrease in commodity derivatives, primarily reflecting unrealized losses and transfers to level 2, as well as a decrease in credit derivatives, primarily reflecting transfers to level 2 and settlements, partially offset by unrealized gains.
 
See Notes 6 and 7 for further information about significant transfers in or out of level 3 cash instruments and derivatives, respectively. See below for a further discussion of any significant transfers in or out of other level 3 financial assets and financial liabilities accounted for at fair value under the fair value option, as well as information about significant unrealized gains/(losses) on level 3 financial assets and financial liabilities.
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Financial Assets and Financial Liabilities by Level

The tables below present, by level within the fair value hierarchy, financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, and other financial assets and financial liabilities accounted for at fair value under the fair value option. See Notes 6 and 7 for further information about the

assets and liabilities included in cash instruments and derivatives, respectively, and their valuation methodologies and inputs. See Note 8 for the valuation methodologies and inputs for other financial assets and financial liabilities accounted for at fair value under the fair value option.
 


 
                                             
 
    Financial Assets at Fair Value as of September 2011 
                Netting and            
in millions   Level 1     Level 2     Level 3     Collateral     Total      
 
Total cash instruments
  $ 105,764     $ 138,966     $ 34,703     $     $ 279,433      
Total derivatives
    47       205,393       10,939       (124,353 3     92,026      
 
 
Financial instruments owned, at fair value
    105,811       344,359       45,642       (124,353 )     371,459      
Securities segregated for regulatory and other purposes
    24,393  1     32,427  2                 56,820      
Securities purchased under agreements to resell
          185,369       485             185,854      
Securities borrowed
          48,609                   48,609      
Receivables from customers and counterparties
          9,712       783             10,495      
 
 
Total
  $ 130,204     $ 620,476     $ 46,910     $ (124,353 )   $ 673,237      
                                             
                                             
 
    Financial Liabilities at Fair Value as of September 2011 
                Netting and            
in millions   Level 1     Level 2     Level 3     Collateral     Total      
 
Total cash instruments
  $ 83,248     $ 11,941     $ 934     $     $ 96,123      
Total derivatives
    49       88,491       6,063       (28,599 3     66,004      
 
 
Financial instruments sold, but not yet purchased, at fair value
    83,297       100,432       6,997       (28,599 )     162,127      
Deposits
          3,723                   3,723      
Securities sold under agreements to repurchase
          141,370       2,128             143,498      
Securities loaned
          1,201                   1,201      
Other secured financings
          31,482       1,654             33,136      
Unsecured short-term borrowings
          16,291       3,434             19,725      
Unsecured long-term borrowings
          15,131       2,641             17,772      
Other liabilities and accrued expenses
          442       7,351             7,793      
 
 
Total
  $ 83,297     $ 310,072     $ 24,205  4   $ (28,599 )   $ 388,975      
 
1.   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.
 
2.   Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.
 
3.   Represents cash collateral and the impact of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.
 
4.   Level 3 financial liabilities were 6.2% of total financial liabilities at fair value.

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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 2010 
                Netting and            
in millions   Level 1     Level 2     Level 3     Collateral     Total      
 
Total cash instruments
  $ 117,800     $ 133,653     $ 32,207     $     $ 283,660      
Total derivatives
    93       172,513       12,772       (112,085 3     73,293      
 
 
Financial instruments owned, at fair value
    117,893       306,166       44,979       (112,085 )     356,953      
Securities segregated for regulatory and other purposes
    19,794  1     16,388  2                 36,182      
Securities purchased under agreements to resell
          188,255       100             188,355      
Securities borrowed
          48,822                   48,822      
Receivables from customers and counterparties
          6,904       298             7,202      
 
 
Total
  $ 137,687     $ 566,535     $ 45,377     $ (112,085 )   $ 637,514      
                                             
                                             
 
    Financial Liabilities at Fair Value as of December 2010 
                Netting and            
in millions   Level 1     Level 2     Level 3     Collateral     Total      
 
Total cash instruments
  $ 75,668     $ 9,873     $ 446     $     $ 85,987      
Total derivatives
    45       66,963       5,210       (17,488 3     54,730      
 
 
Financial instruments sold, but not yet purchased, at fair value
    75,713       76,836       5,656       (17,488 )     140,717      
Deposits
          1,975                   1,975      
Securities sold under agreements to repurchase
          160,285       2,060             162,345      
Securities loaned
          1,514                   1,514      
Other secured financings
          23,445       8,349             31,794      
Unsecured short-term borrowings
          18,640       3,476             22,116      
Unsecured long-term borrowings
          16,067       2,104             18,171      
Other liabilities and accrued expenses
          563       2,409             2,972      
 
 
Total
  $ 75,713     $ 299,325     $ 24,054  4   $ (17,488 )   $ 381,604      
 
1.   Principally consists of U.S. Treasury securities and money market instruments, as well as insurance separate account assets measured at fair value.
 
2.   Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.
 
3.   Represents cash collateral and the impact of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.
 
4.   Level 3 financial liabilities were 6.3% of total financial liabilities at fair value.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Level 3 Unrealized Gains/(Losses)

Cash Instruments.  Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 and level 3 derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 cash instruments and/or level 1, level 2 and level 3 derivatives. As a result, gains/(losses) included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.
 
Derivatives.  Gains and losses on level 3 derivatives should be considered in the context of the following:
 
•   A derivative with level 1 and/or level 2 inputs is classified in level 3 in its entirety if it has at least one significant level 3 input.
 
•   If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2 inputs) is classified as level 3.

•  Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to level 1 or level 2 derivatives and/or level 1, level 2 and level 3 cash instruments. As a result, gains/(losses) included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.
 
The table below presents the unrealized gains/(losses) on level 3 financial assets and financial liabilities at fair value still held at period-end. See Notes 6 and 7 for further information about level 3 cash instruments and derivatives, respectively. See Note 8 for further information about other financial assets and financial liabilities at fair value under the fair value option.
 


 
                                     
 
    Level 3 Unrealized Gains/(Losses) 
    Three Months
    Nine Months
    Ended September     Ended September 
in millions   2011     2010     2011     2010      
 
Cash instruments — assets
  $ (1,214 )   $ 522     $ 417     $ 1,497      
Cash instruments — liabilities
    (328 )     (6 )     (329 )     (56 )    
 
 
Net unrealized gains/(losses) on level 3 cash instruments
    (1,542 )     516       88       1,441      
Derivatives — net
    1,186       (272 )     1,193       4,100      
Securities purchased under agreements to resell
          21             21      
Receivables from customers and counterparties
    (19 )     (17 )     2       (66 )    
Other secured financings
    1       (61 )     (3 )     (25 )    
Unsecured short-term borrowings
    367       (207 )     652       37      
Unsecured long-term borrowings
    182       (202 )     20       (66 )    
Other liabilities and accrued expenses
    (359 )     (147 )     (662 )     (121 )    
 
 
Total
  $ (184 )   $ (369 )   $ 1,290     $ 5,321      

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

Unrealized gains and losses in the table above include:
 
Three Months Ended September 2011
 
•   A net unrealized loss on cash instruments of $1.54 billion, primarily consisting of losses on bank loans and bridge loans, corporate debt securities and private equity investments. Losses during the third quarter of 2011 reflected unfavorable credit markets and a significant decline in global equity markets.
 
•   A net unrealized gain on derivatives of $1.19 billion, primarily attributable to the impact of changes in interest rates and exchange rates and wider credit spreads underlying certain credit derivatives, as well as the impact of a decline in global equity prices underlying certain equity derivatives. These gains were partially offset by the impact of a decline in certain commodity prices. Unrealized gains on level 3 derivatives were substantially offset by unrealized losses on derivatives classified within level 2 which economically hedge derivatives classified within level 3.
 
Three Months Ended September 2010
 
•   A net unrealized gain on cash instruments of $516 million, primarily consisting of gains on private equity investments and real estate fund investments and bank loans and bridge loans. These gains were primarily attributable to changes in certain foreign exchange rates which increased the value of non-U.S. dollar-denominated assets, higher prices in the equity markets and tighter credit spreads which increased the prices of fixed income assets.
 
•   A net unrealized loss on derivatives of $272 million, primarily driven by tighter credit spreads (which are level 2 inputs) on the underlying instruments.

Nine Months Ended September 2011
 
•   A net unrealized gain on cash instruments of $88 million, primarily consisting of a net gain on private equity investments, where prices were generally corroborated through market transactions for similar assets during the period, partially offset by losses on bank loans and bridge loans, primarily reflecting the impact of unfavorable credit markets principally in the third quarter of 2011.
 
•   A net unrealized gain on derivatives of $1.19 billion, primarily attributable to the impact of changes in interest rates and exchange rates and wider credit spreads underlying certain credit derivatives, and the impact of a decline in global equity prices underlying certain equity derivatives. These gains were partially offset by the impact of a decline in certain commodity prices. Unrealized gains on level 3 derivatives were substantially offset by unrealized losses on derivatives classified within level 2 which economically hedge derivatives classified within level 3.
 
•   A net unrealized loss on other liabilities and accrued expenses of $662 million, primarily attributable to the impact of a change in interest rates on certain insurance liabilities.
 
•   A net unrealized gain on unsecured short-term borrowings of $652 million, primarily reflecting gains on certain equity-linked notes, principally due to a decline in global equity markets.
 
Nine Months Ended September 2010
 
•   A net unrealized gain on cash instruments of $1.44 billion, primarily consisting of gains on private equity investments and real estate fund investments and bank loans and bridge loans, where prices were corroborated through sales and partial sales of similar assets during the period.
 
•   A net unrealized gain on derivatives of $4.10 billion, primarily attributable to lower interest rates, which are level 2 inputs, underlying certain credit derivatives. These gains were substantially offset by losses on currency, interest rate and credit derivatives which are classified within level 2 and are used to economically hedge derivatives classified within level 3.
 
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Level 3 Rollforward

If a financial asset or financial liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are recognized at the beginning of the reporting period in which they occur.
 
The tables below present a summary of changes in fair value for all financial assets and financial liabilities categorized as level 3 as of the end of the period.

See Notes 6 and 7 for further information about cash instruments and derivatives, respectively, included in level 3, including information about significant transfers in or out of level 3 financial assets. See Note 8 for other financial assets and financial liabilities at fair value under the fair value option.
 


 
                                                                     
 
    Level 3 Financial Assets at Fair Value for the Three Months Ended September 2011
                Net unrealized
                                   
                gains/(losses)
                      Net
           
          Net
    relating to
                      transfers
           
    Balance,
    realized
    instruments
                      in and/or
    Balance,
     
    beginning
    gains/
    still held at
                      (out) of
    end of
     
in millions   of period     (losses)     period-end     Purchases     Sales     Settlements     level 3     period      
 
Total cash instruments — assets
  $ 34,865     $ 352  1   $ (1,214 1   $ 3,895     $ (1,660 )   $ (1,432 )   $ (103 )   $ 34,703      
Total derivatives — net
    6,231       141  2     1,186  2, 3     352       (1,739 )     (350 )     (945 )     4,876      
Securities purchased under agreements to resell
    299                   232             (46 )           485      
Receivables from customers and counterparties
    321             (19 )     312             (7 )     176       783      
 
 
 
1.   The aggregate amounts include approximately $(551) million, $(701) million and $390 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.
 
2.   The aggregate amounts include approximately $1.32 billion and $8 million reported in “Market making” and “Other principal transactions,” respectively.
 
3.   Principally resulted from changes in level 2 inputs.
 
                                                                             
 
    Level 3 Financial Liabilities at Fair Value for the Three Months Ended September 2011
                Net unrealized
                                         
                (gains)/losses
                            Net
           
          Net
    relating to
                            transfers
           
    Balance,
    realized
    instruments
                            in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
                            (out) of
    end of
     
in millions   of period     losses     period-end     Purchases     Sales     Issuances     Settlements     level 3     period      
 
Total cash instruments — liabilities
  $ 612     $ (12 )   $ 328     $ (265 )   $ 144     $     $ 122     $ 5     $ 934      
Securities sold under agreements to repurchase, at fair value
    2,076                               52                   2,128      
Other secured financings
    5,297             (1 )                       (588 )     (3,054 )     1,654      
Unsecured short-term borrowings
    3,101       (86 )     (367 )           19       110       (356 )     1,013       3,434      
Unsecured long-term borrowings
    2,554       4       (182 )     (22 )           163       (25 )     149       2,641      
Other liabilities and accrued expenses
    6,944             359       227       (32 )           (147 )           7,351      
 
 

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

Significant transfers in or out of level 3 during the three months ended September 2011 included:
 
•   Other secured financings: net transfer out of level 3 of $3.05 billion, principally due to transfers to level 2 of certain borrowings due to increased price transparency as these borrowings neared maturity.

•   Unsecured short-term borrowings: net transfer into level 3 of $1.01 billion, principally due to transfers to level 3 of certain borrowings due to less transparency of market prices as a result of less activity in these financial instruments.
 
See Notes 6 and 7 for information about significant transfers in or out of level 3 cash instruments and derivatives, respectively, during the three months ended September 2011.
 


 
                                                                     
 
    Level 3 Financial Assets at Fair Value for the Nine Months Ended September 2011 
                Net unrealized
                                   
                gains/(losses)
                      Net
           
          Net
    relating to
                      transfers
           
    Balance,
    realized
    instruments
                      in and/or
    Balance,
     
    beginning
    gains/
    still held at
                      (out) of
    end of
     
in millions   of year     (losses)     period-end     Purchases     Sales     Settlements     level 3     period      
 
Total cash instruments — assets
    $32,207     $ 1,196  1   $ 417  1   $ 11,219     $ (5,199 )   $ (3,823 )   $ (1,314 )   $ 34,703      
Total derivatives — net
    7,562       (96 2     1,193  2, 3     795       (2,216 )     (766 )     (1,596 )     4,876      
Securities purchased under agreements to resell
    100       2             477             (94 )           485      
Receivables from customers and counterparties
    298             2       325             (18 )     176       783      
 
 
 
1.   The aggregate amounts include approximately $(87) million, $629 million and $1.07 billion reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.
 
2.   The aggregate amounts include approximately $1.10 billion and $(7) million reported in “Market making” and “Other principal transactions,” respectively.
 
3.   Principally resulted from changes in level 2 inputs.
 
                                                                             
 
    Level 3 Financial Liabilities at Fair Value for the Nine Months Ended September 2011
                Net unrealized
                                         
                (gains)/losses
                            Net
           
          Net
    relating to
                            transfers
           
    Balance,
    realized
    instruments
                            in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
                            (out) of
    end of
     
in millions   of year     losses     period-end     Purchases     Sales     Issuances     Settlements     level 3     period      
 
Total cash instruments — liabilities
  $ 446     $ (32 )   $ 329     $ (363 )   $ 429     $     $ 132     $ (7 )   $ 934      
Securities sold under agreements to repurchase, at fair value
    2,060                               246       (178 )           2,128      
Other secured financings
    8,349       8       3                   272       (3,943 )     (3,035 )     1,654      
Unsecured short-term borrowings
    3,476       69       (652 )     (3 )     7       933       (781 )     385       3,434      
Unsecured long-term borrowings
    2,104       14       (20 )     (72 )           453       (97 )     259       2,641      
Other liabilities and accrued expenses
    2,409             662       4,564       (32 )           (252 )           7,351      
 
 
 

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

Significant transfers in or out of level 3 during the nine months ended September 2011 included:
 
•   Other secured financings: net transfer out of level 3 of $3.04 billion, principally due to transfers to level 2 of certain borrowings due to increased price transparency as these borrowings neared maturity.
 
•   Unsecured short-term borrowings: net transfer into level 3 of $385 million, principally due to transfers to level 3 of certain borrowings due to less transparency of market prices as a result of less

  activity in these financial instruments, partially offset by transfers from level 3 unsecured short-term borrowings to level 3 unsecured long-term borrowings related to an extension in the tenor of certain borrowings.
 
See Notes 6 and 7 for information about significant transfers in or out of level 3 cash instruments and derivatives, respectively, during the nine months ended September 2011.
 


 
                                                     
 
    Level 3 Financial Assets at Fair Value for the Three Months Ended September 2010 
                Net unrealized
                       
                gains/(losses)
                       
          Net
    relating to
    Net
    Net
           
    Balance,
    realized
    instruments
    purchases,
    transfers in
    Balance,
     
    beginning
    gains/
    still held at
    sales and
    and/or (out)
    end of
     
in millions   of period     (losses)     period-end     settlements     of level 3     period      
 
Total cash instruments — assets
  $ 31,951     $ 395  1   $ 522  1   $ (849 )   $ 1,250     $ 33,269      
Total derivatives — net
    7,872       41  2     (272 2, 3     (1,417 )     89       6,313      
Securities purchased under agreements to resell
          (13 )     21       (56 )     234       186      
Receivables from customers and counterparties
    218       6       (17 )           77       284      
 
 
 
1.   The aggregate amounts include approximately $201 million, $305 million and $411 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.
 
2.   The aggregate amounts include approximately $(39) million and $(192) million reported in “Market making” and “Other principal transactions,” respectively.
 
3.   Principally resulted from changes in level 2 inputs.
 
                                                     
 
    Level 3 Financial Liabilities at Fair Value for the Three Months Ended September 2010 
                Net unrealized
    Net
                 
                (gains)/losses
    purchases,
                 
          Net
    relating to
    sales,
    Net
           
    Balance,
    realized
    instruments
    issuances
    transfers in
    Balance,
     
    beginning
    (gains)/
    still held at
    and
    and/or (out)
    end of
     
in millions   of period     losses     period-end     settlements     of level 3     period      
 
Total cash instruments — liabilities
  $ 595     $ (10 )   $ 6     $ (47 )   $ (49 )   $ 495      
Securities sold under agreements to repurchase, at fair value
    1,419                   652             2,071      
Other secured financings
    8,086             61       7       (173 )     7,981      
Unsecured short-term borrowings
    2,768       (10 )     207       27       (101 )     2,891      
Unsecured long-term borrowings
    1,899       (1 )     202       108       (305 )     1,903      
Other liabilities and accrued expenses
    2,386       3       147       (154 )     94       2,476      
 
 
 
 

The only significant transfers in or out of level 3 financial assets and financial liabilities during the three months ended September 2010 were in cash instruments and

derivatives. See Notes 6 and 7 for information about significant transfers in or out of level 3 cash instruments and derivatives, respectively.
 


 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                                     
 
    Level 3 Financial Assets at Fair Value for the Nine Months Ended September 2010
                Net unrealized
                       
                gains/(losses)
          Net
           
          Net
    relating to
    Net
    transfers
           
    Balance,
    realized
    instruments
    purchases,
    in and/or
    Balance,
     
    beginning
    gains/
    still held at
    sales and
    (out) of
    end of
     
in millions   of year     (losses)     period-end     settlements     level 3     period      
 
Total cash instruments — assets
    $34,879     $ 1,154  1   $ 1,497  1   $ (3,436 )   $ (825 )   $ 33,269      
Total derivatives — net
    5,196       345  2     4,100  2, 3     (3,842 )     514       6,313      
Securities purchased under agreements to resell
          (13 )     21       (56 )     234       186      
Receivables from customers and counterparties
          16       (66 )           334       284      
 
 
 
1.   The aggregate amounts include approximately $797 million, $875 million and $979 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.
 
2.   The aggregate amounts include approximately $4.41 billion and $37 million reported in “Market making” and “Other principal transactions,” respectively.
 
3.   Principally resulted from changes in level 2 inputs.
                                                     
 
    Level 3 Financial Liabilities at Fair Value for the Nine Months Ended September 2010 
                Net unrealized
    Net
                 
                (gains)/losses
    purchases,
    Net
           
          Net
    relating to
    sales,
    transfers
           
    Balance,
    realized
    instruments
    issuances
    in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
    and
    (out) of
    end of
     
in millions   of year     losses     period-end     settlements     level 3     period      
 
Total cash instruments — liabilities
  $ 572     $ (24 )   $ 56     $ (80 )   $ (29 )   $ 495      
Securities sold under agreements to repurchase, at fair value
    394                   1,677             2,071      
Other secured financings
    6,756       21       25       1,181       (2 )     7,981      
Unsecured short-term borrowings
    2,310       52       (37 )     (378 )     944       2,891      
Unsecured long-term borrowings
    3,077       15       66       87       (1,342 )     1,903      
Other liabilities and accrued expenses
    1,913       8       121       (153 )     587       2,476      
 
 
 
 

Significant transfers in or out of level 3 financial liabilities during the nine months ended September 2010, which were principally due to the consolidation of certain VIEs upon adoption of ASU No. 2009-17 as of January 1, 2010, included:
 
•   Unsecured long-term borrowings: net transfer out of level 3 of $1.34 billion, principally due to the consolidation of certain VIEs, which caused the firm’s borrowings from these VIEs to become intercompany borrowings which were eliminated in consolidation. Substantially all of these borrowings were level 3.

•   Unsecured short-term borrowings: net transfer into level 3 of $944 million, principally due to the consolidation of certain VIEs.
 
•   Other liabilities and accrued expenses: net transfer into level 3 of $587 million, principally due to an increase in subordinated liabilities issued by certain consolidated VIEs.
 
See Notes 6 and 7 for information about significant transfers in or out of level 3 cash instruments and derivatives, respectively, during the nine months ended September 2010.


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



Note 6.  Cash Instruments
 
 

Cash instruments include U.S. government and federal agency obligations, non-U.S. government obligations, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies and the fair value hierarchy.
 
Level 1 Cash Instruments
Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities and certain money market instruments. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.
 
The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.
 
The fair value of a level 1 instrument is calculated as quantity held multiplied by quoted market price. U.S. GAAP prohibits valuation adjustments being applied to level 1 instruments even in situations where the firm holds a large position and a sale could impact the quoted price.

Level 2 Cash Instruments
Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, less liquid publicly listed equities, most state and municipal obligations and certain money market instruments and lending commitments.
 
Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.
 
Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.
 
Level 3 Cash Instruments
Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of level 3 financial assets.
 
The table below presents the valuation techniques and the nature of significant inputs generally used to determine the fair values of each class of level 3 cash instrument.


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



       
 Level 3 Cash Instrument     Valuation Techniques and Significant Inputs
 
Loans and securities backed by commercial real estate

•  Collateralized by a single commercial real estate property or a portfolio of properties

•  May include tranches of varying levels of subordination
    Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

Significant inputs for these valuations include:

 •  Transaction prices in both the underlying collateral and instruments with the same or
       similar underlying collateral

 •  Current levels and changes in market indices such as the CMBX (an index that tracks
       the performance of commercial mortgage bonds)

 •  Market yields implied by transactions of similar or related assets

 •  Current performance of the underlying collateral

 •  Capitalization rates and multiples
 
 
Loans and securities backed by residential real estate

•  Collateralized by portfolios of residential real estate

•  May include tranches of varying levels of subordination
   
Valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof.

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 (an index that tracks the performance of subprime residential mortgage bonds). Significant inputs include:

 •  Home price projections, residential property liquidation timelines and related costs

 •  Underlying loan prepayment, default and cumulative loss expectations

 •  Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral

 •  Market yields implied by transactions of similar or related assets
 
 
Loan portfolios

•  Acquired portfolios of distressed loans

•  Primarily backed by commercial and residential real estate collateral
   
Valuations are based on discounted cash flow techniques.

Significant inputs are determined based on relative value analyses, which incorporate comparisons to recent auction data for other similar loan portfolios. Significant inputs include:

 •  Amount and timing of expected future cash flows

 •  Market yields implied by transactions of similar or related assets
 
 
Bank loans and bridge loans

Corporate debt securities

State and municipal obligations

Other debt obligations
   
Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques.

Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

 •  Amount and timing of expected future cash flows

 •  Current levels and trends of market indices such as CDX, LCDX and MCDX (indices that track the performance of corporate credit, loans and municipal obligations, respectively)

 •  Market yields implied by transactions of similar or related assets

 •  Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation
 
 
Equities and convertible debentures

 •  Private equity investments
    Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available:

 •  Transactions in similar instruments

 •  Discounted cash flow techniques

 •  Third-party appraisals

 •  Industry multiples and public comparables

Evidence includes recent or pending reorganizations (e.g., merger proposals, tender offers, debt restructurings) and significant changes in financial metrics, such as:

 •  Current financial performance as compared to projected performance

 •  Capitalization rates and multiples

 •  Market yields implied by transactions of similar or related assets
 
 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Fair Value of Cash Instruments by Level

The tables below present, by level within the fair value hierarchy, cash instrument assets and liabilities, at fair value. Cash instrument assets and liabilities are

included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.
 


 
                                     
 
    Cash Instrument Assets at Fair Value as of September 2011 
in millions   Level 1     Level 2     Level 3     Total      
 
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 1,453     $ 7,814     $     $ 9,267      
U.S. government and federal agency obligations
    24,118       55,780             79,898      
Non-U.S. government obligations
    45,535       5,142             50,677      
Mortgage and other asset-backed loans and securities 1:
                                   
Loans and securities backed by commercial real estate
          3,951       2,512       6,463      
Loans and securities backed by residential real estate
          6,345       1,613       7,958      
Loan portfolios
                1,105       1,105      
Bank loans and bridge loans
          10,285       11,011       21,296      
Corporate debt securities 2
    193       21,831       2,580       24,604      
State and municipal obligations
          3,113       688       3,801      
Other debt obligations 2
          2,779       1,621       4,400      
Equities and convertible debentures
    34,465  3     13,389  4     13,573  5     61,427      
Commodities
          8,537             8,537      
 
 
Total
  $ 105,764     $ 138,966     $ 34,703     $ 279,433      
                                     
 
    Cash Instrument Liabilities at Fair Value as of September 2011
in millions   Level 1     Level 2     Level 3     Total      
 
U.S. government and federal agency obligations
  $ 23,083     $ 160     $     $ 23,243      
Non-U.S. government obligations
    32,551       844             33,395      
Mortgage and other asset-backed loans and securities:
                                   
Loans and securities backed by residential real estate
          4       3       7      
Bank loans and bridge loans
          1,987       847       2,834      
Corporate debt securities 6
    84       8,299       78       8,461      
Equities and convertible debentures 7
    27,530       647       6       28,183      
 
 
Total
  $ 83,248     $ 11,941     $ 934     $ 96,123      
 
1.   Includes $132 million and $555 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.
 
2.   Includes $478 million and $1.29 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.
 
3.   Consists of publicly listed equity securities.
 
4.   Principally consists of restricted and less liquid publicly listed securities.
 
5.   Includes $12.03 billion of private equity investments, $1.13 billion of real estate investments and $411 million of convertible debentures.
 
6.   Includes $2 million and $69 million of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.
 
7.   Substantially all consists of publicly listed equity securities.
 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                     
 
    Cash Instrument Assets at Fair Value as of December 2010 
in millions   Level 1     Level 2     Level 3     Total      
 
Commercial paper, certificates of deposit, time deposits and other money market instruments
  $ 4,344     $ 6,918     $     $ 11,262      
U.S. government and federal agency obligations
    36,184       48,744             84,928      
Non-U.S. government obligations
    35,504       5,171             40,675      
Mortgage and other asset-backed loans and securities 1:
                                   
Loans and securities backed by commercial real estate
          3,381       2,819       6,200      
Loans and securities backed by residential real estate
          7,031       2,373       9,404      
Loan portfolios
          153       1,285       1,438      
Bank loans and bridge loans
          8,134       9,905       18,039      
Corporate debt securities 2
    108       21,874       2,737       24,719      
State and municipal obligations
          2,038       754       2,792      
Other debt obligations
          1,958       1,274       3,232      
Equities and convertible debentures
    41,660  3     15,113  4     11,060  5     67,833      
Commodities
          13,138             13,138      
 
 
Total
  $ 117,800     $ 133,653     $ 32,207     $ 283,660      
                                     
 
    Cash Instrument Liabilities at Fair Value as of December 2010 
in millions   Level 1     Level 2     Level 3     Total      
 
U.S. government and federal agency obligations
  $ 23,191     $ 73     $     $ 23,264      
Non-U.S. government obligations
    28,168       841             29,009      
Mortgage and other asset-backed loans and securities:
                                   
Loans and securities backed by commercial real estate
          5             5      
Loans and securities backed by residential real estate
          6             6      
Bank loans and bridge loans
          1,107       380       1,487      
Corporate debt securities 6
    26       7,133       60       7,219      
Equities and convertible debentures 7
    24,283       699       6       24,988      
Commodities
          9             9      
 
 
Total
  $ 75,668     $ 9,873     $ 446     $ 85,987      
 
1.   Includes $212 million and $565 million of CDOs backed by real estate in level 2 and level 3, respectively.
 
2.   Includes $368 million and $1.07 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.
 
3.   Consists of publicly listed equity securities.
 
4.   Substantially all consists of restricted and less liquid publicly listed securities.
 
5.   Includes $10.03 billion of private equity investments, $874 million of real estate investments and $156 million of convertible debentures.
 
6.   Includes $35 million of CDOs and CLOs backed by corporate obligations in level 3.
 
7.   Substantially all consists of publicly listed equity securities.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Level 3 Rollforward

If a cash instrument asset or liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are reported at the beginning of the reporting period in which they occur.

The tables below present changes in fair value for all cash instrument assets and liabilities categorized as level 3 as of the end of the period.
 
See Note 5 for further information about unrealized gains and losses on level 3 cash instruments.
 


 
                                                                     
 
    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended September 2011 
                Net unrealized
                                   
                gains/(losses)
                      Net
           
          Net
    relating to
                      transfers
           
    Balance,
    realized
    instruments
                      in and/or
    Balance,
     
    beginning
    gains/
    still held at
                      (out) of
    end of
     
in millions   of period     (losses)     period-end     Purchases 1     Sales     Settlements     level 3     period      
 
Mortgage and other asset-backed loans and securities:
                                                                   
Loans and securities backed by commercial real estate
  $ 2,395     $ 47     $ (146 )   $ 225     $ (165 )   $ (284 )   $ 440     $ 2,512      
Loans and securities backed by residential real estate
    2,735       36       (25 )     234       (222 )     (156 )     (989 )     1,613      
Loan portfolios
    1,238       32       (3 )     1       (59 )     (105 )     1       1,105      
Bank loans and bridge loans
    10,183       162       (595 )     2,655       (413 )     (571 )     (410 )     11,011      
Corporate debt securities
    2,747       61       (221 )     316       (392 )     (80 )     149       2,580      
State and municipal obligations
    643       2       (6 )     17       (18 )     (2 )     52       688      
Other debt obligations
    1,472       (2 )     (27 )     153       (167 )     (68 )     260       1,621      
Equities and convertible debentures
    13,452       14       (191 )     294       (224 )     (166 )     394       13,573      
 
 
Total
  $ 34,865     $ 352     $ (1,214 )   $ 3,895     $ (1,660 )   $ (1,432 )   $ (103 )   $ 34,703      
                                                                     
                                                                     
 
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended September 2011 
                Net unrealized
                                   
                (gains)/losses
                      Net
           
          Net
    relating to
                      transfers
           
    Balance,
    realized
    instruments
                      in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
                      (out) of
    end of
     
in millions   of period     losses     period-end     Purchases     Sales     Settlements     level 3     period      
 
Total
  $ 612     $ (12 )   $ 328     $ (265 )   $ 144     $ 122     $ 5     $ 934      
 
1.   Includes both originations and secondary market purchases.
 
 

Significant transfers in or out of level 3 cash instrument assets during the three months ended September 2011 included:
 
•   Loans and securities backed by residential real estate: net transfer out of level 3 of $989 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices used to value these financial instruments, as well as unobservable inputs no longer being significant to the valuation of these instruments.
 
•   Bank loans and bridge loans:  net transfer out of level 3 of $410 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of market activity in these financial instruments, partially offset by transfers to level 3 of other loans due to reduced transparency of

  market prices as a result of less market activity in these financial instruments.
 
•   Equities and convertible debentures:  net transfer into level 3 of $394 million, principally due to transfers to level 3 of certain private equity investments due to reduced transparency of market prices as a result of less market activity in these financial instruments, partially offset by transfers to level 2 of other private equity investments due to improved transparency of market prices as a result of market activity and partial sales.
 
There were no significant transfers in or out of level 3 cash instrument liabilities during the three months ended September 2011.
 


 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                                                     
 
    Level 3 Cash Instrument Assets at Fair Value for the Nine Months Ended September 2011 
                Net unrealized
                                   
                gains/(losses)
                      Net
           
          Net
    relating to
                      transfers
           
    Balance,
    realized
    instruments
                      in and/or
    Balance,
     
    beginning
    gains/
    still held at
                      (out) of
    end of
     
in millions   of year     (losses)     period-end     Purchases 1     Sales     Settlements     level 3     period      
 
Mortgage and other asset-backed loans and securities:
                                                                   
Loans and securities backed by commercial real estate
  $ 2,819     $ 132     $ 12     $ 1,042     $ (809 )   $ (536 )   $ (148 )   $ 2,512      
Loans and securities backed by residential real estate
    2,373       136       48       687       (495 )     (443 )     (693 )     1,613      
Loan portfolios
    1,285       8       89       8       (118 )     (256 )     89       1,105      
Bank loans and bridge loans
    9,905       477       (96 )     4,732       (1,183 )     (1,521 )     (1,303 )     11,011      
Corporate debt securities
    2,737       164       (99 )     1,467       (1,002 )     (192 )     (495 )     2,580      
State and municipal obligations
    754       3       (3 )     72       (136 )     (2 )           688      
Other debt obligations
    1,274       116       (7 )     553       (552 )     (216 )     453       1,621      
Equities and convertible debentures
    11,060       160       473       2,658       (904 )     (657 )     783       13,573      
 
 
Total
  $ 32,207     $ 1,196     $ 417     $ 11,219     $ (5,199 )   $ (3,823 )   $ (1,314 )   $ 34,703      
                                                                     
 
    Level 3 Cash Instrument Liabilities at Fair Value for the Nine Months Ended September 2011 
                Net unrealized
                                   
                (gains)/losses
                      Net
           
          Net
    relating to
                      transfers
           
    Balance,
    realized
    instruments
                      in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
                      (out) of
    end of
     
in millions   of year     losses     period-end     Purchases     Sales     Settlements     level 3     period      
 
Total
  $ 446     $ (32 )   $ 329     $ (363 )   $ 429     $ 132     $ (7 )   $ 934      
 
1.   Includes both originations and secondary market purchases.
 

Significant transfers in or out of level 3 cash instrument assets during the nine months ended September 2011 included:
 
•   Bank loans and bridge loans: net transfer out of level 3 of $1.30 billion, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of market transactions in these financial instruments, partially offset by transfers to level 3 of other loans due to reduced transparency of market prices as a result of less market activity in these financial instruments.
 
•   Equities and convertible debentures: net transfer into level 3 of $783 million, principally due to transfers to level 3 of certain private equity investments due to reduced transparency of market prices as a result of less market activity in these financial instruments, partially offset by transfers to level 2 of other private equity

  investments due to improved transparency of market prices as a result of market transactions in these financial instruments.
 
•   Loans and securities backed by residential real estate: net transfer out of level 3 of $693 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices used to value these financial instruments, as well as unobservable inputs no longer being significant to the valuation of these instruments.
 
•   Corporate debt securities: net transfer out of level 3 of $495 million, principally due to transfers to level 2 of certain corporate debt securities due to increased transparency of market prices as a result of market transactions in these financial instruments.
 
There were no significant transfers in or out of level 3 cash instrument liabilities during the nine months ended September 2011.
 


 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                                     
 
    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended September 2010
                Net unrealized
                       
                gains/(losses)
          Net
           
          Net
    relating to
    Net
    transfers
           
    Balance,
    realized
    instruments
    purchases,
    in and/or
    Balance,
     
    beginning
    gains/
    still held at
    sales and
    (out) of
    end of
     
in millions   of period     (losses)     period-end     settlements     level 3     period      
 
Mortgage and other asset-backed loans and securities:
                                                   
Loans and securities backed by commercial real estate
  $ 3,868     $ 46     $ 25     $ 128     $ (77 )   $ 3,990      
Loans and securities backed by residential real estate
    2,124       45       25       (44 )     99       2,249      
Loan portfolios
    1,258       22             (16 )     2       1,266      
Bank loans and bridge loans
    9,573       165       157       (346 )     (16 )     9,533      
Corporate debt securities
    2,592       69       96       (428 )     22       2,351      
State and municipal obligations
    825       2       20       (55 )     66       858      
Other debt obligations
    1,376       26       17       (174 )     159       1,404      
Equities and convertible debentures
    10,335       20       182       86       995       11,618      
 
 
Total
  $ 31,951     $ 395     $ 522     $ (849 )   $ 1,250     $ 33,269      
                                                     
                                                     
 
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended September 2010
                Net unrealized
                       
                (gains)/losses
          Net
           
          Net
    relating to
    Net
    transfers
           
    Balance,
    realized
    instruments
    purchases,
    in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
    sales and
    (out) of
    end of
     
in millions   of period     losses     period-end     settlements     level 3     period      
 
Total
  $ 595     $ (10 )   $ 6     $ (47 )   $ (49 )   $ 495      
 

Significant transfers in or out of level 3 cash instrument assets during the three months ended September 2010 included:
 
•   Equities and convertible debentures:  net transfer into level 3 of $995 million, principally due to transfers from level 2 within the fair value hierarchy of certain private equity investments, reflecting reduced transparency of prices as a result of less market activity in these financial instruments.

There were no significant transfers in or out of level 3 cash instrument liabilities during the three months ended September 2010.
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
 
                                                     
 
    Level 3 Cash Instrument Assets at Fair Value for the Nine Months Ended September 2010
                Net unrealized
                       
                gains/(losses)
          Net
           
          Net
    relating to
    Net
    transfers
           
    Balance,
    realized
    instruments
    purchases,
    in and/or
    Balance,
     
    beginning
    gains/
    still held at
    sales and
    (out) of
    end of
     
in millions   of year     (losses)     period-end     settlements     level 3     period      
 
Mortgage and other asset-backed loans and securities:
                                                   
Loans and securities backed by commercial real estate
  $ 4,620     $ 178     $ 132     $ (1,227 )   $ 287     $ 3,990      
Loans and securities backed by residential real estate
    1,880       125       139       11       94       2,249      
Loan portfolios
    1,364       61       (10 )     (219 )     70       1,266      
Bank loans and bridge loans
    9,560       449       406       (1,095 )     213       9,533      
Corporate debt securities
    2,235       228       149       285       (546 )     2,351      
State and municipal obligations
    1,114             44       (379 )     79       858      
Other debt obligations
    2,235       (7 )     181       (249 )     (756 )     1,404      
Equities and convertible debentures
    11,871       120       456       (563 )     (266 )     11,618      
 
 
Total
  $ 34,879     $ 1,154     $ 1,497     $ (3,436 )   $ (825 )   $ 33,269      
                                                     
                                                     
 
    Level 3 Cash Instrument Liabilities at Fair Value for the Nine Months Ended September 2010
                Net unrealized
                       
                (gains)/losses
          Net
           
          Net
    relating to
    Net
    transfers
           
    Balance,
    realized
    instruments
    purchases,
    in and/or
    Balance,
     
    beginning
    (gains)/
    still held at
    sales and
    (out) of
    end of
     
in millions   of year     losses     period-end     settlements     level 3     period      
 
Total
  $ 572     $ (24 )   $ 56     $ (80 )   $ (29 )   $ 495      
 

Significant transfers in or out of level 3 cash instrument assets during the nine months ended September 2010 included:
 
•   Other debt obligations: net transfer out of level 3 of $756 million, principally due to 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.

•   Corporate debt securities: net transfer out of level 3 of $546 million, principally due to 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.
 
There were no significant transfers in or out of level 3 cash instrument liabilities during the nine months ended September 2010.
 
 


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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

Cash instruments at fair value include investments in funds that are valued based on the net asset value per share (NAV) of the investment fund. The firm uses NAV as its measure of fair value for fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.
 
The firm’s investments in funds that calculate NAV 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 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 table below presents the fair value of the firm’s investments in, and unfunded commitments to, funds that calculate NAV.
 


 
                                     
 
    As of September 2011     As of December 2010 
    Fair Value of
    Unfunded
    Fair Value of
    Unfunded
     
in millions   Investments     Commitments     Investments     Commitments      
 
Private equity funds 1
  $ 7,613     $ 4,122     $ 7,911     $ 4,816      
Private debt funds 2
    3,345       3,424       4,267       3,721      
Hedge funds 3
    3,186             3,169            
Real estate and other funds 4
    1,287       1,598       1,246       1,884      
 
 
Total
  $ 15,431     $ 9,144     $ 16,593     $ 10,421      
 
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 loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers.
 
3.   These funds are primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage.
 
4.   These funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and direct property.

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Note 7.  Derivatives and Hedging Activities
 
Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be privately negotiated contracts, which are usually referred to as over-the-counter (OTC) derivatives, or they may be listed and traded on an exchange (exchange-traded).
 
Market-Making.  As a market maker, the firm enters into derivative transactions with clients and other market participants to provide liquidity and to facilitate the transfer and hedging of risk. In this capacity, the firm typically acts as principal and is consequently required to commit capital to provide execution. As a market maker, it is essential to maintain an inventory of financial instruments sufficient to meet expected client and market demands.
 
Risk Management.  The firm also enters into derivatives to actively manage risk exposures that arise from market-making and investing and lending activities in derivative and cash instruments. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage foreign currency exposure on the net investment in certain non-U.S. operations and to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and certificates of deposit.

The firm enters into various types of derivatives, including:
 
•   Futures and Forwards.  Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.
 
•   Swaps.  Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.
 
•   Options.  Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.
 
Derivatives are accounted for at fair value, net of cash collateral received or posted under credit support agreements. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement. Derivative assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.
 
Substantially all gains and losses on derivatives not designated as hedges under ASC 815 are included in “Market making” and “Other principal transactions.”
 
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
The table below presents the fair value of exchange-traded and OTC derivatives on a net-by-counterparty basis.
 
                                     
 
    As of September 2011     As of December 2010 
    Derivative
    Derivative
    Derivative
    Derivative
     
in millions   Assets     Liabilities     Assets     Liabilities      
 
Exchange-traded
  $ 7,393     $ 4,113     $ 7,601     $ 2,794      
Over-the-counter
    84,633       61,891       65,692       51,936      
 
 
Total
  $ 92,026     $ 66,004     $ 73,293     $ 54,730      
 

The table below presents the fair value and the number of derivative contracts by major product type on a gross basis. Gross fair values in the table below exclude the effects of both netting under enforceable netting

agreements and netting of cash collateral received or posted under credit support agreements, and therefore are not representative of the firm’s exposure.


 
                                                     
 
    As of September 2011     As of December 2010 
    Derivative
    Derivative
    Number of
    Derivative
    Derivative
    Number of
     
in millions, except number of contracts   Assets     Liabilities     Contracts     Assets     Liabilities     Contracts      
 
Derivatives not accounted for as hedges
                                                   
Interest rates
  $ 631,820     $ 591,943       297,851     $ 463,145     $ 422,514       272,279      
Credit
    167,364       145,444       369,226       127,153       104,407       367,779      
Currencies
    109,250       90,308       270,870       87,959       70,273       222,706      
Commodities
    39,668       39,727       84,775       36,689       41,666       70,890      
Equities
    87,791       70,892       414,114       65,815       51,948       289,059      
 
 
Subtotal
    1,035,893       938,314       1,436,836       780,761       690,808       1,222,713      
 
 
Derivatives accounted for as hedges
                                                   
Interest rates
    23,984       11       1,038       23,396       33       997      
Currencies
    227       3       71       6       162       72      
 
 
Subtotal
    24,211       14       1,109       23,402       195       1,069      
 
 
Gross fair value of derivatives
  $ 1,060,104     $ 938,328       1,437,945     $ 804,163     $ 691,003       1,223,782      
Counterparty netting 1
    (845,833 )     (845,833 )             (620,553 )     (620,553 )            
Cash collateral netting 2
    (122,245 )     (26,491 )             (110,317 )     (15,720 )            
 
 
Fair value included in financial instruments owned
  $ 92,026                     $ 73,293                      
Fair value included in financial instruments sold, but not yet purchased
          $ 66,004                     $ 54,730              
 
1.   Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.
 
2.   Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

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

Valuation Techniques for Derivatives
See Note 5 for an overview of the firm’s fair value measurement policies and the fair value hierarchy.
 
Level 1 Derivatives
Exchange-traded derivatives fall within level 1 if they are actively traded and are valued at their quoted market price.
 
Level 2 Derivatives
Level 2 derivatives include exchange-traded derivatives that are not actively traded and OTC derivatives for which all significant valuation inputs are corroborated by market evidence.
 
Level 2 exchange-traded derivatives are valued using models that calibrate to market-clearing levels of OTC derivatives. Inputs to the valuations of level 2 OTC derivatives can be verified to market-clearing transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.
 
Where models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.
 
Price transparency of OTC derivatives can generally be characterized by product type.

Interest Rate.  In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate), are more complex and are therefore less transparent, but the prices and other inputs are generally observable.
 
Credit.  Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to be less transparent than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.
 
Currency.  Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.
 
Commodity.  Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.


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

Equity.  Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Exchange-traded and OTC equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.
 
Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs.
 
Level 3 Derivatives
Level 3 OTC derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs.
 
•   For the majority of the firm’s interest rate and currency derivatives classified within level 3, the significant unobservable inputs are correlations of certain currencies and interest rates (e.g., the correlation of Japanese yen foreign exchange rates to U.S. dollar interest rates).
 
•   For credit derivatives classified within level 3, significant level 3 inputs include long-dated credit and funding spreads, as well as certain correlation inputs required to value credit and mortgage derivatives (e.g., the likelihood of default of the underlying reference obligations relative to one another).

•   For level 3 equity derivatives, significant level 3 inputs generally include equity volatility inputs for options that are very long-dated and/or have strike prices that differ significantly from current market prices. In addition, the valuation of certain structured trades requires the use of level 3 inputs for the correlation of the price performance for two or more individual stocks.
 
•   For level 3 commodity derivatives, significant level 3 inputs include volatilities for options with strike prices that differ significantly from current market prices and prices for certain products for which the product quality is not aligned with benchmark indices.
 
Subsequent to the initial valuation of a level 3 OTC derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are recorded in level 3. Level 3 inputs are changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.
 
Valuation Adjustments
Valuation adjustments are integral to determining the fair value of derivatives and are used to adjust the mid-market valuations, produced by derivative pricing models, to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity on large or illiquid positions, credit valuation adjustments (CVA) and funding valuation adjustments, which account for the credit and funding risk inherent in derivative portfolios. Market-based inputs are generally used when calibrating valuation adjustments to market-clearing levels.
 
In addition, for derivatives that include significant unobservable inputs, the firm makes model or exit price adjustments to account for the valuation uncertainty present in the transaction.
 


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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Fair Value of Derivatives by Level

The tables below present the fair value of derivatives on a gross basis by level and major product type. Gross fair values in the tables below exclude the effects of both netting under enforceable netting agreements and

netting of cash received or posted under credit support agreements both in and across levels of the fair value hierarchy, and therefore are not representative of the firm’s exposure.
 


 
                                             
 
    Derivative Assets at Fair Value as of September 2011 
                      Cross-Level
           
in millions   Level 1     Level 2     Level 3     Netting     Total      
 
Interest rates
  $ 8     $ 655,652     $ 144     $     $ 655,804      
Credit
          156,553       10,811             167,364      
Currencies
          107,316       2,161             109,477      
Commodities
          38,740       928             39,668      
Equities
    39       86,176       1,576             87,791      
 
 
Gross fair value of derivative assets
    47       1,044,437       15,620             1,060,104      
Counterparty netting 1
          (839,044 )     (4,681 )     (2,108 3     (845,833 )    
 
 
Subtotal
  $ 47     $ 205,393     $ 10,939     $ (2,108 )   $ 214,271      
Cash collateral netting 2
                                    (122,245 )    
 
 
Fair value included in financial instruments owned
                                  $ 92,026      
                                             
                                             
 
    Derivative Liabilities at Fair Value as of September 2011 
                      Cross-Level
           
in millions   Level 1     Level 2     Level 3     Netting     Total      
 
Interest rates
  $ 18     $ 591,517     $ 419     $     $ 591,954      
Credit
          140,648       4,796             145,444      
Currencies
          89,280       1,031             90,311      
Commodities
          37,233       2,494             39,727      
Equities
    31       68,857       2,004             70,892      
 
 
Gross fair value of derivative liabilities
    49       927,535       10,744             938,328      
Counterparty netting 1
          (839,044 )     (4,681 )     (2,108 3     (845,833 )    
 
 
Subtotal
  $ 49     $ 88,491     $ 6,063     $ (2,108 )   $ 92,495      
Cash collateral netting 2
                                    (26,491 )    
 
 
Fair value included in financial instruments sold,
but not yet purchased
                                  $ 66,004      
 
1.   Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.
 
2.   Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.
 
3.   Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements.
 

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THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
                                             
 
    Derivative Assets at Fair Value as of December 2010 
                      Cross-Level
           
in millions   Level 1     Level 2     Level 3     Netting     Total      
 
Interest rates
  $ 49     $ 486,037     $ 455     $     $ 486,541      
Credit
          115,519       11,634             127,153      
Currencies
          86,158       1,807             87,965      
Commodities
          34,511       2,178             36,689      
Equities
    44       64,267       1,504             65,815      
 
 
Gross fair value of derivative assets
    93       786,492       17,578             804,163      
Counterparty netting 1
          (613,979 )     (4,806 )     (1,768 3     (620,553 )    
 
 
Subtotal
  $ 93     $ 172,513     $ 12,772     $ (1,768 )   $ 183,610      
Cash collateral netting 2
                                    (110,317 )    
 
 
Fair value included in financial instruments owned
                                  $ 73,293      
                                             
 
    Derivative Liabilities at Fair Value as of December 2010 
                      Cross-Level
           
in millions   Level 1     Level 2     Level 3     Netting     Total      
 
Interest rates
  $ 18     $ 422,267     $ 262     $     $ 422,547      
Credit
          99,813       4,594             104,407      
Currencies
          69,726       709             70,435      
Commodities
          39,709       1,957             41,666      
Equities
    27       49,427       2,494             51,948      
 
 
Gross fair value of derivative liabilities
    45       680,942       10,016             691,003      
Counterparty netting 1
          (613,979 )     (4,806 )     (1,768 3     (620,553 )    
 
 
Subtotal
  $ 45     $ 66,963     $ 5,210     $ (1,768 )   $ 70,450      
Cash collateral netting 2
                                    (15,720 )    
 
 
Fair value included in financial instruments sold,
but not yet purchased
                                  $ 54,730      
 
1.   Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.
 
2.   Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.
 
3.   Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements.

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Table of Contents

 
THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
 
 
Level 3 Rollforward

If a derivative was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3. Transfers between levels are reported at the beginning of the reporting period in which they occur.

The tables below present changes in fair value for all derivatives categorized as level 3 as of the end of the period.
 
See Note 5 for further information about unrealized gains and losses on level 3 derivatives.