10-Q 1 d590232d10q.htm 10-Q 10-Q
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, 2013

or

 

¨

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, N.Y.   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 ¨ 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 ¨ 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  ¨
Non-accelerated filer  ¨ (Do not  check if a smaller reporting company)        Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of October 25, 2013, there were 453,231,366 shares of the registrant’s common stock outstanding.

 


Table of Contents

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013

 

INDEX

 

Form 10-Q Item Number

   Page No.
 

PART I

 

FINANCIAL INFORMATION

   2
 

Item 1

 

Financial Statements (Unaudited)

   2
 
 

Condensed Consolidated Statements of Earnings for the three and nine months ended September  30, 2013 and September 30, 2012

   2
 
 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2013 and September 30, 2012

   3
 
 

Condensed Consolidated Statements of Financial Condition as of September 30,  2013 and December 31, 2012

   4
 
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2013 and year ended December 31, 2012

   5
 
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,  2013 and September 30, 2012

   6
 
 

Notes to Condensed Consolidated Financial Statements

   7
 
 

Note 1.        Description of Business

   7
 
 

Note 2.        Basis of Presentation

   7
 
 

Note 3.        Significant Accounting Policies

   8
 
 

Note 4.         Financial Instruments Owned, at Fair Value and Financial Instruments Sold,

                     But Not Yet Purchased, at Fair Value

   13
 
 

Note 5.        Fair Value Measurements

   15
 
 

Note 6.        Cash Instruments

   17
 
 

Note 7.        Derivatives and Hedging Activities

   28
 
 

Note 8.        Fair Value Option

   46
 
 

Note 9.        Collateralized Agreements and Financings

   58
 
 

Note 10.      Securitization Activities

   63
 
 

Note 11.      Variable Interest Entities

   66
 
 

Note 12.      Other Assets

   70
 
 

Note 13.      Goodwill and Identifiable Intangible Assets

   72
 
 

Note 14.      Deposits

   74
 
 

Note 15.      Short-Term Borrowings

   75
 
 

Note 16.      Long-Term Borrowings

   75
 
 

Note 17.      Other Liabilities and Accrued Expenses

   78
 
 

Note 18.      Commitments, Contingencies and Guarantees

   79
 
 

Note 19.      Shareholders’ Equity

   85
 
 

Note 20.      Regulation and Capital Adequacy

   88
 
 

Note 21.      Earnings Per Common Share

   93
 
 

Note 22.      Transactions with Affiliated Funds

   94
 
 

Note 23.      Interest Income and Interest Expense

   95
 
 

Note 24.      Income Taxes

   95
 
 

Note 25.      Business Segments

   96
 
 

Note 26.      Credit Concentrations

   100
 
 

Note 27.      Legal Proceedings

   101
 
 

Report of Independent Registered Public Accounting Firm

   109
 
 

Statistical Disclosures

   110
 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   113
 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

   192
 

Item 4

 

Controls and Procedures

   192
 

PART II

 

OTHER INFORMATION

   192
 

Item 1

 

Legal Proceedings

   192
 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

   193
 

Item 6

 

Exhibits

   194
 

SIGNATURES

   195

 

 

    Goldman Sachs September 2013 Form 10-Q   1


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Unaudited)

 

        Three Months
Ended September
        Nine Months
Ended September
 
in millions, except per share amounts         2013         2012            2013         2012   

Revenues

             

Investment banking

      $1,166         $1,168          $  4,286         $  3,534   
   

Investment management

      1,153         1,147          3,670         3,518   
   

Commissions and fees

      765         748          2,467         2,407   
   

Market making

      1,364         2,650          7,493         8,652   
   

Other principal transactions

        1,434         1,802            4,917         3,909   

Total non-interest revenues

      5,882         7,515          22,833         22,020   
   

 

Interest income

      2,398         2,629          7,669         8,517   
   

Interest expense

        1,558         1,793            5,078         5,610   

Net interest income

        840         836            2,591         2,907   

Net revenues, including net interest income

        6,722         8,351            25,424         24,927   

 

Operating expenses

             

Compensation and benefits

      2,382         3,675          10,424         10,968   
   

 

Brokerage, clearing, exchange and distribution fees

      573         547          1,747         1,658   
   

Market development

      117         123          398         369   
   

Communications and technology

      202         190          572         588   
   

Depreciation and amortization

      280         396          848         1,238   
   

Occupancy

      205         217          633         643   
   

Professional fees

      211         205          675         652   
   

Insurance reserves

              153          176         431   
   

Other expenses

        585         547            1,766         1,486   

Total non-compensation expenses

        2,173         2,378            6,815         7,065   

Total operating expenses

        4,555         6,053            17,239         18,033   

 

Pre-tax earnings

      2,167         2,298          8,185         6,894   
   

Provision for taxes

        650         786            2,477         2,311   

Net earnings

      1,517         1,512          5,708         4,583   
   

Preferred stock dividends

        88         54            230         124   

Net earnings applicable to common shareholders

        $1,429         $1,458            $  5,478         $  4,459   

 

Earnings per common share

             

Basic

      $  3.07         $  2.95          $  11.55         $    8.85   
   

Diluted

      2.88         2.85          10.89         8.57   
   

 

Dividends declared per common share

      $  0.50         $  0.46          $    1.50         $    1.27   
   

 

Average common shares outstanding

             

Basic

      463.4         491.2          472.7         501.1   
   

Diluted

        496.4         510.9            503.2         520.1   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

    Three Months
Ended September
        Nine Months
Ended September
 
in millions     2013         2012            2013         2012   

Net earnings

    $1,517         $1,512          $5,708         $4,583   
   

Other comprehensive income/(loss) adjustments, net of tax:

           

Currency translation

    (19      (11       (75      (63
   

Pension and postretirement liabilities

    (4      6          (11      13   
   

Available-for-sale securities

            129          (327      184   
   

Cash flow hedges

    6                    6           

Other comprehensive income/(loss)

    (17      124            (407      134   

Comprehensive income

    $1,500         $1,636            $5,301         $4,717   

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    Goldman Sachs September 2013 Form 10-Q   3


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)

 

    As of  
in millions, except share and per share amounts    
 
September
2013
  
  
    
 
December
2012
  
  

Assets

    

Cash and cash equivalents

    $  65,478         $  72,669   
   

Cash and securities segregated for regulatory and other purposes (includes $36,746 and $30,484 at fair value as of September 2013 and December 2012, respectively)

    53,875         49,671   
   

Collateralized agreements:

    

Securities purchased under agreements to resell and federal funds sold (includes $169,429 and $141,331 at fair value as of September 2013 and December 2012, respectively)

    169,868         141,334   
   

Securities borrowed (includes $59,753 and $38,395 at fair value as of September 2013 and December 2012, respectively)

    175,095         136,893   
   

Receivables from brokers, dealers and clearing organizations

    23,589         18,480   
   

Receivables from customers and counterparties (includes $7,085 and $7,866 at fair value as of September 2013 and December 2012, respectively)

    74,131         72,874   
   

Financial instruments owned, at fair value (includes $52,490 and $67,177 pledged as collateral as of September 2013 and December 2012, respectively)

    324,257         407,011   
   

Other assets (includes $13,408 and $13,426 at fair value as of September 2013 and December 2012, respectively)

    36,930         39,623   

Total assets

    $923,223         $938,555   

Liabilities and shareholders’ equity

    

Deposits (includes $7,430 and $5,100 at fair value as of September 2013 and December 2012, respectively)

    $  71,570         $  70,124   
   

Collateralized financings:

    

Securities sold under agreements to repurchase, at fair value

    157,781         171,807   
   

Securities loaned (includes $1,879 and $1,558 at fair value as of September 2013 and December 2012, respectively)

    19,034         13,765   
   

Other secured financings (includes $25,865 and $30,337 at fair value as of September 2013 and December 2012, respectively)

    27,054         32,010   
   

Payables to brokers, dealers and clearing organizations

    8,447         5,283   
   

Payables to customers and counterparties

    193,426         189,202   
   

Financial instruments sold, but not yet purchased, at fair value

    131,158         126,644   
   

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $18,682 and $17,595 at fair value as of September 2013 and December 2012, respectively)

    39,238         44,304   
   

Unsecured long-term borrowings (includes $11,741 and $12,593 at fair value as of September 2013 and December 2012, respectively)

    168,082         167,305   
   

Other liabilities and accrued expenses (includes $14,200 and $12,043 at fair value as of September 2013 and December 2012, respectively)

    29,817         42,395   

Total liabilities

    845,607         862,839   
   

Commitments, contingencies and guarantees

    

Shareholders’ equity

    

Preferred stock, par value $0.01 per share; aggregate liquidation preference of $7,200 and $6,200 as of September 2013 and December 2012, respectively

    7,200         6,200   
   

Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 823,766,476 and 816,807,400 shares issued as of September 2013 and December 2012, respectively, and 441,499,049 and 465,148,387 shares outstanding as of September 2013 and December 2012, respectively

    8         8   
   

Restricted stock units and employee stock options

    3,701         3,298   
   

Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding

              
   

Additional paid-in capital

    48,930         48,030   
   

Retained earnings

    69,975         65,223   
   

Accumulated other comprehensive loss

    (600      (193
   

Stock held in treasury, at cost, par value $0.01 per share; 382,267,429 and 351,659,015 shares as of September 2013 and December 2012, respectively

    (51,598      (46,850

Total shareholders’ equity

    77,616         75,716   

Total liabilities and shareholders’ equity

    $923,223         $938,555   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

        Nine Months Ended         Year Ended  
in millions        
 
September
2013
  
  
       
 
December
2012
  
  

Preferred stock

       

Balance, beginning of year

      $   6,200          $   3,100   
   

Issued

        1,000            3,100   

Balance, end of period

      7,200          6,200   
   

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

      3,298          5,681   
   

Issuance and amortization of restricted stock units and employee stock options

      1,845          1,368   
   

Delivery of common stock underlying restricted stock units

      (1,369       (3,659
   

Forfeiture of restricted stock units and employee stock options

      (60       (90
   

Exercise of employee stock options

        (13         (2

Balance, end of period

      3,701          3,298   
   

Additional paid-in capital

       

Balance, beginning of year

      48,030          45,553   
   

Delivery of common stock underlying share-based awards

      1,418          3,939   
   

Cancellation of restricted stock units in satisfaction of withholding tax requirements

      (594       (1,437
   

Preferred stock issuance costs

      (9       (13
   

Excess net tax benefit/(provision) related to share-based awards

      86          (11
   

Cash settlement of share-based compensation

        (1         (1

Balance, end of period

      48,930          48,030   
   

Retained earnings

       

Balance, beginning of year

      65,223          58,834   
   

Net earnings

      5,708          7,475   
   

Dividends and dividend equivalents declared on common stock and restricted stock units

      (726       (903
   

Dividends declared on preferred stock

        (230         (183

Balance, end of period

      69,975          65,223   
   

Accumulated other comprehensive loss

       

Balance, beginning of year

      (193       (516
   

Other comprehensive income/(loss)

        (407         323   

Balance, end of period

      (600       (193
   

Stock held in treasury, at cost

       

Balance, beginning of year

      (46,850       (42,281
   

Repurchased

      (4,775       (4,637
   

Reissued

      40          77   
   

Other

        (13         (9

Balance, end of period

        (51,598         (46,850

Total shareholders’ equity

        $ 77,616            $ 75,716   

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

    Goldman Sachs September 2013 Form 10-Q   5


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    Nine Months
Ended September
 
in millions     2013            2012   

Cash flows from operating activities

     

Net earnings

    $   5,708          $   4,583   
   

Adjustments to reconcile net earnings to net cash provided by/(used for) operating activities

     

Depreciation and amortization

    848          1,238   
   

Share-based compensation

    1,821          1,088   
   

Changes in operating assets and liabilities

     

Cash and securities segregated for regulatory and other purposes

    (4,346       10,616   
   

Net receivables from brokers, dealers and clearing organizations

    (2,011       1,617   
   

Net payables to customers and counterparties

    7,828          1,867   
   

Securities borrowed, net of securities loaned

    (32,938       (5,451
   

Securities sold under agreements to repurchase, net of securities purchased under agreements to resell
and federal funds sold

    (42,510       42,112   
   

Financial instruments owned, at fair value

    65,520          (47,787
   

Financial instruments sold, but not yet purchased, at fair value

    5,011          (831
   

Other, net

    (2,668         2,977   

Net cash provided by operating activities

    2,263          12,029   
   

Cash flows from investing activities

     

Purchase of property, leasehold improvements and equipment

    (498       (707
   

Proceeds from sales of property, leasehold improvements and equipment

    57          38   
   

Business acquisitions, net of cash acquired

    (1,266       (439
   

Proceeds from sales of investments

    1,840          424   
   

Purchase of available-for-sale securities

    (738       (3,671
   

Proceeds from sales of available-for-sale securities

    817          2,838   
   

Loans held for investment, net

    (6,027 )          (2,111

Net cash used for investing activities

    (5,815       (3,628
   

Cash flows from financing activities

     

Unsecured short-term borrowings, net

    135          (1,691
   

Other secured financings (short-term), net

    (6,415       (2,045
   

Proceeds from issuance of other secured financings (long-term)

    4,883          4,004   
   

Repayment of other secured financings (long-term), including the current portion

    (2,032       (10,333
   

Proceeds from issuance of unsecured long-term borrowings

    26,578          22,020   
   

Repayment of unsecured long-term borrowings, including the current portion

    (24,461       (27,873
   

Derivative contracts with a financing element, net

    829          1,145   
   

Deposits, net

    1,446          15,417   
   

Common stock repurchased

    (4,775       (3,116
   

Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units

    (956       (779
   

Proceeds from issuance of preferred stock, net of issuance costs

    991          2,250   
   

Proceeds from issuance of common stock, including stock option exercises

    49          148   
   

Excess tax benefit related to share-based compensation

    90          84   
   

Cash settlement of share-based compensation

    (1         (1

Net cash used for financing activities

    (3,639         (770

Net increase/(decrease) in cash and cash equivalents

    (7,191       7,631   
   

Cash and cash equivalents, beginning of year

    72,669            56,008   

Cash and cash equivalents, end of period

    $ 65,478            $ 63,639   

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $4.68 billion and $7.87 billion during the nine months ended September 2013 and September 2012, respectively.

Cash payments for income taxes, net of refunds, were $3.81 billion and $1.09 billion during the nine months ended September 2013 and September 2012, respectively.

Non-cash activities:

The firm assumed $77 million of debt in connection with business acquisitions during the nine months ended September 2012.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1. Description of Business

Note 1.

Description of Business

The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in 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 strategic 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, including domestic and cross-border transactions, 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 corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other 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 and 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.

 

 

Note 2. Basis of Presentation

Note 2.

Basis of Presentation

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, 2012. 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, 2012. The condensed consolidated financial information as of December 31, 2012 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 2013 and September 2012 refer to the firm’s periods ended, or the dates, as the context requires, September 30, 2013 and September 30, 2012, respectively. All references to June 2013 and December 2012 refer to the dates June 30, 2013 and December 31, 2012, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

 

 

    Goldman Sachs September 2013 Form 10-Q   7


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 3. Significant Accounting Policies

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 after 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.

 

 

8   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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 provisions 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 for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of month-end net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or commitments and are received quarterly, semi-annually or annually, depending on the fund. All management fees 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.

The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds. These payments are computed based on either a percentage of the management fee or the investment fund’s net asset value. Where the firm is principal to the arrangement, such costs are recorded on a gross basis and included in “Brokerage, clearing, exchange and distribution fees,” and where the firm is agent to the arrangement, such costs are recorded on a net basis in “Investment management” revenues.

 

 

    Goldman Sachs September 2013 Form 10-Q   9


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

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 relate to collateralized transactions. Such receivables are primarily comprised of customer margin loans, certain transfers of assets accounted for as secured loans rather than purchases at fair value, collateral posted in connection with certain derivative transactions, and loans held for investment. 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. Receivables from customers and counterparties not accounted for at fair value, including loans held for investment, are accounted for at amortized cost net of estimated uncollectible amounts. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.” See Note 8 for further information about receivables from customers and counterparties.

Payables to Customers and Counterparties

Payables to customers and counterparties primarily consist of customer credit balances related to the firm’s prime brokerage activities. Payables to customers and counterparties are accounted for at cost plus accrued interest, which generally approximates fair value. While these payables are carried at amounts that approximate fair

value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6, 7 and 8. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of September 2013 and December 2012.

Receivables from and Payables to Brokers, Dealers and Clearing Organizations

Receivables from and payables to brokers, dealers and clearing organizations are accounted for at cost plus accrued interest, which generally approximates fair value. While these receivables and payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm’s fair value hierarchy in Notes 6, 7 and 8. Had these receivables and payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of September 2013 and December 2012.

Offsetting Assets and Liabilities

To reduce credit exposures on derivatives and securities financing transactions, the firm may enter into master netting agreements or similar arrangements (collectively, netting agreements) with counterparties that permit it to offset receivables and payables with such counterparties. A netting agreement is a contract with a counterparty that permits net settlement of multiple transactions with that counterparty, including upon the exercise of termination rights by a non-defaulting party. Upon exercise of such termination rights, all transactions governed by the netting agreement are terminated and a net settlement amount is calculated. In addition, the firm receives and posts cash and securities collateral with respect to its derivatives and securities financing transactions, subject to the terms of the related credit support agreements. An enforceable credit support agreement grants the non-defaulting party exercising termination rights the right to liquidate the collateral and apply the proceeds to any amounts owed. In order to assess enforceability of the firm’s right of setoff under netting and credit support agreements, the firm evaluates various factors including applicable bankruptcy laws, local statutes and regulatory provisions in the jurisdiction of the parties to the agreement.

 

 

10   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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) in the condensed consolidated statements of financial condition when a legal right of setoff exists under an enforceable netting agreement. Resale and repurchase agreements and securities borrowed and loaned transactions with the same term and currency are presented on a net-by-counterparty basis in the condensed consolidated statements of financial condition when such transactions meet certain settlement criteria and are subject to netting agreements.

In the condensed consolidated statements of financial condition, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the condensed consolidated statements of financial condition, resale and repurchase agreements, and securities borrowed and loaned are not reported net of the related cash and securities received or posted as collateral. See Note 9 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 9 for further information about offsetting.

Insurance Activities

Certain of the firm’s insurance 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 contracts. The firm’s insurance activities consisted of the Americas reinsurance business and the European insurance business. See Note 12 for further information about the firm’s Americas reinsurance business, in which a majority stake was sold in April 2013, and the firm’s European insurance business, which was classified as held for sale as of September 2013 and June 2013.

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. Changes in reserves, including interest credited to policyholder account balances, are recognized in “Insurance reserves.”

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 “Insurance reserves.”

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 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 conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement 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.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of September 2013 and December 2012, “Cash and cash equivalents” included $7.30 billion and $6.75 billion, respectively, of cash and due from banks, and $58.18 billion and $65.92 billion, respectively, of interest-bearing deposits with banks.

 

 

    Goldman Sachs September 2013 Form 10-Q   11


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recent Accounting Developments

Derecognition of in Substance Real Estate (ASC 360). In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant, and Equipment (Topic 360) — Derecognition of in Substance Real Estate — a Scope Clarification.” ASU No. 2011-10 clarifies that in order to deconsolidate a subsidiary (that is in substance real estate due to a default on the subsidiary’s nonrecourse debt), the parent must no longer control the subsidiary and also must satisfy the sale criteria in ASC 360-20, “Property, Plant, and Equipment — Real Estate Sales.” The ASU was effective for fiscal years beginning on or after June 15, 2012. The firm applied the provisions of the ASU to such events occurring on or after January 1, 2013. Adoption of ASU No. 2011-10 did not materially affect the firm’s financial condition, results of operations or cash flows.

Disclosures about Offsetting Assets and Liabilities (ASC 210). In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11, as amended by ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,” requires disclosure of the effect or potential effect of offsetting arrangements on the firm’s financial position as well as enhanced disclosure of the rights of setoff associated with the firm’s recognized derivative instruments, resale and repurchase agreements, and securities borrowing and lending transactions. ASU No. 2011-11 was effective for periods beginning on or after January 1, 2013. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption did not affect the firm’s financial condition, results of operations or cash flows. See Notes 7 and 9 for further information about the firm’s offsetting and related arrangements.

Investment Companies (ASC 946). In June 2013, the FASB issued ASU No. 2013-08, “Financial Services — Investment Companies (Topic 946) — Amendments to the Scope, Measurement, and Disclosure Requirements.” ASU No. 2013-08 clarifies the approach to be used for determining whether an entity is an investment company and provides new measurement and disclosure requirements. ASU No. 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. Adoption of ASU No. 2013-08 is not expected to materially affect the firm’s financial condition, results of operations, or cash flows.

Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (ASC 815). In July 2013, the FASB issued ASU No. 2013-10, “Derivatives and Hedging (Topic 815) — Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) as a U.S. benchmark interest rate for hedge accounting purposes. The ASU also removes the restriction on using different benchmark rates for similar hedges. ASU No. 2013-10 was effective for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013 and adoption did not materially affect the firm’s financial condition, results of operations, or cash flows.

 

 

12   Goldman Sachs September 2013 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 4. Financial Instruments Owned, at Fair Valueand Financial Instruments Sold, But NotYet Purchased, at Fair Value

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.

 

 

 

    As of September 2013         As of December 2012  
in millions    
 
 
Financial
Instruments
Owned
  
  
  
    
 
 
 
 
Financial
Instruments
Sold, But
Not Yet
Purchased
  
  
  
  
  
       
 
 
Financial
Instruments
Owned
  
  
  
    
 
 
 
 
Financial
Instruments
Sold, But
Not Yet
Purchased
  
  
  
  
  

Commercial paper, certificates of deposit, time deposits and other money market instruments

    $    5,902         $          —          $    6,057         $          —   
   

U.S. government and federal agency obligations

    77,328         18,631          93,241         15,905   
   

Non-U.S. government and agency obligations

    46,257         32,591          62,250         32,361   
   

Mortgage and other asset-backed loans and securities:

           

Loans and securities backed by commercial real estate

    5,884         53          9,805           
   

Loans and securities backed by residential real estate

    8,285         1          8,216         4   
   

Bank loans and bridge loans

    17,573         1,091  4        22,407         1,779  4 
   

Corporate debt securities

    15,280         5,398          20,981         5,761   
   

State and municipal obligations

    1,356                  2,477         1   
   

Other debt obligations

    3,076         3          2,251           
   

Equities and convertible debentures

    77,485         24,903          96,454         20,406   
   

Commodities 1

    4,372                  11,696           
   

Derivatives 2

    61,459         48,487            71,176         50,427   

Total 3

    $324,257         $131,158            $407,011         $126,644   

 

1.

As of December 2012, includes $4.29 billion of commodities that have been transferred to third parties, which were accounted for as collateralized financings rather than sales. No such transactions related to commodities included in “Financial instruments owned, at fair value” were outstanding as of September 2013.

 

2.

Reported on a net-by-counterparty basis when a legal right of setoff exists under an enforceable netting agreement and reported net of cash collateral received or posted under enforceable credit support agreements.

 

3.

As of December 2012, includes approximately $8.84 billion of assets, primarily consisting of corporate debt securities, and non-U.S. government and agency obligations related to the firm’s European insurance business. As of September 2013, all assets, including financial instruments owned, related to the firm’s European insurance business were classified as held for sale and included in “Other assets.” See Note 12 for further information about assets held for sale.

 

4.

Primarily relates to the fair value of unfunded lending commitments for which the fair value option was elected.

 

    Goldman Sachs September 2013 Form 10-Q   13


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Gains and Losses from Market Making and Other Principal Transactions

    

The table below presents “Market making” revenues by major product type, as well as “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 and client facilitation 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.

 

 

 

Product Type  

Three Months

Ended September

          

Nine Months

Ended September

 
in millions     2013           2012               2013           2012   

Interest rates

    $ 1,546           $1,854             $     513           $  3,211   
   

Credit

    155           827             1,609           3,476   
   

Currencies

    (1,318        (689          2,042           (643
   

Equities

    857           809             2,126           2,020   
   

Commodities

    187           (16          836           511   
   

Other

    (63        (135            367           77   

Market making

    1,364           2,650               7,493           8,652   

Other principal transactions 1

    1,434           1,802               4,917           3,909   

Total

    $ 2,798           $4,452               $12,410           $12,561   

 

1.

Other principal transactions are included in the firm’s Investing & Lending segment. See Note 25 for net revenues, including net interest income, by product type for Investing & Lending, as well as the amount of net interest income included in Investing & Lending. The “Other” category in Note 25 relates to the firm’s consolidated investment entities, and primarily includes commodities-related net revenues.

 

14   Goldman Sachs September 2013 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 5. Fair Value Measurements

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 firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).

The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets 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 market-based or independently sourced parameters as inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread, or difference, between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).

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 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.

 

 

    Goldman Sachs September 2013 Form 10-Q   15


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The fair values for substantially all of the firm’s financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm’s credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.

See Notes 6 and 7 for further information about fair value measurements of cash instruments and derivatives, respectively, included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” and Note 8 for further information about fair value measurements of other financial assets and financial liabilities accounted for at fair value under the fair value option.

Financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP are summarized below.

 

 

 

    As of  
$ in millions    
 
September
2013
  
  
    

 

June

2013

  

  

    
 
December
2012
  
  

Total level 1 financial assets

    $158,223         $165,174         $ 190,737   
   

Total level 2 financial assets

    487,295         492,118         502,293   
   

Total level 3 financial assets

    41,971         42,824         47,095   
   

Cash collateral and counterparty netting 1

    (76,811      (81,312      (101,612

Total financial assets at fair value

    $610,678         $618,804         $ 638,513   
   

Total assets

    $923,223         $938,456         $ 938,555   
   

Total level 3 financial assets as a percentage of Total assets

    4.5      4.6      5.0
   

Total level 3 financial assets as a percentage of Total financial assets at fair value

    6.9      6.9      7.4
   

 

Total level 1 financial liabilities

    $  73,218         $  82,725         $   65,994   
   

Total level 2 financial liabilities

    294,599         300,929         318,764   
   

Total level 3 financial liabilities

    25,294         22,564         25,679   
   

Cash collateral and counterparty netting 1

    (24,375      (24,562      (32,760

Total financial liabilities at fair value

    $368,736         $381,656         $ 377,677   
   

Total level 3 financial liabilities as a percentage of Total financial liabilities at fair value

    6.9      5.9      6.8

 

1.

Represents the impact on derivatives of cash collateral, and counterparty netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

 

Level 3 financial assets as of September 2013 decreased compared with June 2013, primarily reflecting a decrease in derivative assets, bank loans and bridge loans, and loans and securities backed by commercial real estate, partially offset by an increase in private equity investments. The decrease in derivative assets primarily reflected a decline in credit derivative assets, principally due to unrealized losses and settlements, and the impact of counterparty netting. The decrease in bank loans and bridge loans, and loans and securities backed by commercial real estate primarily reflected settlements and sales, partially offset by purchases. The increase in private equity investments primarily reflected unrealized gains and net transfers from level 2, partially offset by settlements.

Level 3 financial assets as of September 2013 also decreased compared with December 2012, primarily reflecting a decrease in derivative assets and bank loans and bridge loans, partially offset by an increase in private equity investments. The decrease in derivative assets primarily reflected a decline in credit derivative assets, principally due to settlements, unrealized losses and transfers to level 2. The decrease in bank loans and bridge loans primarily reflected settlements and sales, partially offset by purchases. The increase in private equity investments primarily reflected unrealized gains and purchases, partially offset by settlements.

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

 

 

16   Goldman Sachs September 2013 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 6. Cash Instruments

Note 6.

Cash Instruments

 

Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency 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.

Level 1 Cash Instruments

Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities, certain government agency obligations and 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.

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, certain non-U.S. government obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, restricted or less liquid listed equities, most state and municipal obligations and certain 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 financial assets.

 

 

    Goldman Sachs September 2013 Form 10-Q   17


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Valuation Techniques and Significant Inputs

The table below presents the valuation techniques and the nature of significant inputs generally used to determine the

fair values of each type of level 3 cash instrument.

 

 

 

Level 3 Cash Instruments    Valuation Techniques and Significant Inputs

 

Loans and securities backed by commercial real estate

 

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

 

Ÿ   May include tranches of varying levels of subordination

  

 

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

  

 

Significant inputs are generally determined based on relative value analyses and include:

  

 

Ÿ   Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral and the basis, or price difference, to such prices

  

 

Ÿ   Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds)

  

 

Ÿ   Recovery rates implied by the value of the underlying collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and multiples

  

 

Ÿ   Timing of expected future cash flows (duration)

 

 

Loans and securities backed by
residential real estate

 

Ÿ   Collateralized by portfolios of residential real estate

 

Ÿ   May include tranches of varying levels of subordination

  

 

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 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:

  

 

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

  

 

Ÿ   Market yields implied by transactions of similar or related assets

  

 

Ÿ   Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines and related costs

  

 

Ÿ   Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines

 

 

Bank loans and bridge loans

  

 

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 instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

  

 

Ÿ   Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively)

  

 

Ÿ   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

  

 

Ÿ   Duration

 

 

Non-U.S. government and

agency obligations

 

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 instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

  

 

Ÿ   Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX, LCDX and MCDX (an index that tracks the performance of municipal obligations)

  

 

Ÿ   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

  

 

Ÿ   Duration

 

 

Equities and convertible debentures
(including private equity investments
and investments in real estate entities)

  

 

Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) 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:

  

 

Ÿ   Industry multiples (primarily EBITDA multiples) and public comparables

  

 

Ÿ   Transactions in similar instruments

  

 

Ÿ   Discounted cash flow techniques

  

 

Ÿ   Third-party appraisals

  

 

Ÿ   Net asset value per share (NAV)

  

 

The firm also considers changes in the outlook for the relevant industry and financial performance of the issuer as compared to projected performance. Significant inputs include:

  

 

Ÿ   Market and transaction multiples

  

 

Ÿ   Discount rates, long-term growth rates, earnings compound annual growth rates and capitalization rates

  

 

Ÿ   For equity instruments with debt-like features: market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration

 

 

18   Goldman Sachs September 2013 Form 10-Q    


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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Significant Unobservable Inputs

The tables below present the ranges of significant unobservable inputs used to value the firm’s level 3 cash instruments. These ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one cash instrument. For example, the highest multiple presented in

the tables below for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 cash instruments.

 

 

 

Level 3 Cash Instruments

 

  

Level 3 Assets as of   
September 2013   

(in millions)   

 

  

Valuation Techniques and
Significant Unobservable Inputs   

 

  

Range of Significant Unobservable
Inputs (Weighted Average 1)

as of September 2013

 

 

Loans and securities backed by commercial real estate

 

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

 

Ÿ   May include tranches of varying levels of subordination

  

 

$2,684

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

4.0% to 23.0% (9.5%)

     

 

Ÿ   Recovery rate 3

  

 

36.0% to 87.5% (63.1%)

     

 

Ÿ   Duration (years) 4

  

 

0.3 to 5.7 (2.0)

       

 

Ÿ   Basis

 

  

 

(15) points to 21 points (4 points)

 

Loans and securities backed by residential real estate

 

Ÿ   Collateralized by portfolios of residential real estate

 

Ÿ   May include tranches of varying levels of subordination

  

 

$1,770

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

3.0% to 18.9% (9.3%)

     

 

Ÿ   Cumulative loss rate

  

 

1.0% to 34.3% (20.9%)

       

 

Ÿ   Duration (years) 4

 

  

 

1.5 to 16.3 (3.5)

 

Bank loans and bridge loans

  

 

$9,475

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

1.6% to 37.0% (10.1%)

     

 

Ÿ   Recovery rate 3

  

 

40.0% to 85.0% (55.5%)

       

 

Ÿ   Duration (years) 4

 

  

 

0.4 to 4.4 (2.1)

 

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

  

 

$3,367

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

1.2% to 40.7% (9.9%)

     

 

Ÿ   Recovery rate 3

  

 

0.0% to 70.0% (62.3%)

       

 

Ÿ   Duration (years) 4

 

 

  

 

0.3 to 15.1 (4.2)

 

Equities and convertible debentures (including private equity investments and investments in real estate entities)

  

 

$16,180 2

  

 

Comparable multiples:

    
     

 

Ÿ   Multiples

  

 

0.6x to 19.9x (7.4x)

     

 

Discounted cash flows:

    
     

 

Ÿ   Discount rate/yield

  

 

10.0% to 45.0% (15.0%)

     

 

Ÿ   Long-term growth rate/compound annual growth rate

  

 

1.0% to 21.0% (10.3%)

       

 

Ÿ   Capitalization rate

 

 

  

 

4.7% to 11.0% (7.4%)

 

1.

Weighted averages are calculated by weighting each input by the relative fair value of the respective financial instruments.

 

2.

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

 

3.

Recovery rate is a measure of expected future cash flows in a default scenario, expressed as a percentage of notional or face value of the instrument, and reflects the benefit of credit enhancement on certain instruments.

 

4.

Duration is an estimate of the timing of future cash flows and, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds).

 

    Goldman Sachs September 2013 Form 10-Q   19


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Level 3 Cash Instruments

 

  

Level 3 Assets as of   
December 2012   

(in millions)   

 

  

Valuation Techniques and
Significant Unobservable Inputs   

 

  

Range of Significant Unobservable
Inputs (Weighted Average 1)

as of December 2012

 

 

Loans and securities backed by commercial real estate

 

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

 

Ÿ   May include tranches of varying levels of subordination

  

 

$3,389

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

4.0% to 43.3% (9.8%)

     

 

Ÿ   Recovery rate 3

  

 

37.0% to 96.2% (81.7%)

     

 

Ÿ   Duration (years) 4

  

 

0.1 to 7.0 (2.6)

       

 

Ÿ   Basis

 

  

 

(13) points to 18 points (2 points)

 

Loans and securities backed by residential real estate

 

Ÿ   Collateralized by portfolios of residential real estate

 

Ÿ   May include tranches of varying levels of subordination

  

 

$1,619

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

3.1% to 17.0% (9.7%)

     

 

Ÿ   Cumulative loss rate

  

 

0.0% to 61.6% (31.6%)

       

 

Ÿ   Duration (years) 4

 

  

 

1.3 to 5.9 (3.7)

 

Bank loans and bridge loans

  

 

$11,235

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

0.3% to 34.5% (8.3%)

     

 

Ÿ   Recovery rate 3

  

 

16.5% to 85.0% (56.0%)

       

 

Ÿ   Duration (years) 4

 

  

 

0.2 to 4.4 (1.9)

 

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

  

 

$4,651

  

 

Discounted cash flows:

    
     

 

Ÿ   Yield

  

 

0.6% to 33.7% (8.6%)

     

 

Ÿ   Recovery rate 3

  

 

0.0% to 70.0% (53.4%)

       

 

Ÿ   Duration (years) 4

 

  

 

0.5 to 15.5 (4.0)

 

Equities and convertible debentures (including private equity investments and investments in real estate entities)

  

 

$14,855 2

  

 

Comparable multiples:

    
     

 

Ÿ   Multiples

  

 

0.7x to 21.0x (7.2x)

     

 

Discounted cash flows:

    
     

 

Ÿ   Discount rate/yield

  

 

10.0% to 25.0% (14.3%)

     

 

Ÿ   Long-term growth rate/compound annual growth rate

  

 

0.7% to 25.0% (9.3%)

       

 

Ÿ   Capitalization rate

 

 

  

 

3.9% to 11.4% (7.3%)

 

1.

Weighted averages are calculated by weighting each input by the relative fair value of the respective financial instruments.

 

2.

The fair value of any one instrument may be determined using multiple valuation techniques. For example, market comparables and discounted cash flows may be used together to determine fair value. Therefore, the level 3 balance encompasses both of these techniques.

 

3.

Recovery rate is a measure of expected future cash flows in a default scenario, expressed as a percentage of notional or face value of the instrument, and reflects the benefit of credit enhancement on certain instruments.

 

4.

Duration is an estimate of the timing of future cash flows and, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds).

 

Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm’s level 3 cash instruments would result in a lower fair value measurement, while increases in recovery rate, basis, multiples, long-term growth rate or compound annual

growth rate would result in a higher fair value measurement. Due to the distinctive nature of each of the firm’s level 3 cash instruments, the interrelationship of inputs is not necessarily uniform within each product type.

 

 

20   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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 2013  
in millions     Level 1           Level 2           Level 3           Total   

Commercial paper, certificates of deposit, time deposits and other money
market instruments

    $       241           $  5,661           $        —           $    5,902   
   

U.S. government and federal agency obligations

    39,595           37,733                     77,328   
   

Non-U.S. government and agency obligations

    35,377           10,825           55           46,257   
   

Mortgage and other asset-backed loans and securities 1:

                

Loans and securities backed by commercial real estate

              3,200           2,684           5,884   
   

Loans and securities backed by residential real estate

              6,515           1,770           8,285   
   

Bank loans and bridge loans

              8,098           9,475           17,573   
   

Corporate debt securities 2

    465           12,502           2,313           15,280   
   

State and municipal obligations

              1,129           227           1,356   
   

Other debt obligations 2

              2,304           772           3,076   
   

Equities and convertible debentures

    53,757           7,548           16,180  3         77,485   
   

Commodities

              4,372                     4,372   

Total

    $129,435           $99,887           $33,476           $262,798   
    Cash Instrument Liabilities at Fair Value as of September 2013  
in millions     Level 1           Level 2           Level 3           Total   

U.S. government and federal agency obligations

    $  18,574           $       57           $        —             $  18,631   
   

Non-U.S. government and agency obligations

    30,185           2,406                     32,591   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

              52           1           53   
   

Loans and securities backed by residential real estate

              1                     1   
   

Bank loans and bridge loans

              744           347           1,091   
   

Corporate debt securities

    30           5,359           9           5,398   
   

Other debt obligations

                        3           3   
   

Equities and convertible debentures

    24,409           487           7           24,903   

Total

    $  73,198           $  9,106           $     367           $  82,671   

 

1.

Includes $340 million and $388 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

 

2.

Includes $504 million and $1.36 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

 

3.

Includes $14.13 billion of private equity investments, $1.60 billion of investments in real estate entities and $455 million of convertible debentures.

 

    Goldman Sachs September 2013 Form 10-Q   21


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

    Cash Instrument Assets at Fair Value as of December 2012  
in millions     Level 1           Level 2           Level 3           Total   

Commercial paper, certificates of deposit, time deposits and other money
market instruments

    $    2,155           $    3,902           $        —           $    6,057   
   

U.S. government and federal agency obligations

    42,856           50,385                     93,241   
   

Non-U.S. government and agency obligations

    46,715           15,509           26           62,250   
   

Mortgage and other asset-backed loans and securities 1:

                

Loans and securities backed by commercial real estate

              6,416           3,389           9,805   
   

Loans and securities backed by residential real estate

              6,597           1,619           8,216   
   

Bank loans and bridge loans

              11,172           11,235           22,407   
   

Corporate debt securities 2

    111           18,049           2,821           20,981   
   

State and municipal obligations

              1,858           619           2,477   
   

Other debt obligations 2

              1,066           1,185           2,251   
   

Equities and convertible debentures

    72,875           8,724           14,855  3         96,454   
   

Commodities

              11,696                     11,696   

Total

    $164,712           $135,374           $35,749           $335,835   
    Cash Instrument Liabilities at Fair Value as of December 2012  
in millions     Level 1           Level 2           Level 3           Total   

U.S. government and federal agency obligations

    $  15,475           $       430           $        —           $  15,905   
   

Non-U.S. government and agency obligations

    31,011           1,350                     32,361   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by residential real estate

              4                     4   
   

Bank loans and bridge loans

              1,143           636           1,779   
   

Corporate debt securities

    28           5,731           2           5,761   
   

State and municipal obligations

              1                     1   
   

Equities and convertible debentures

    19,416           986           4           20,406   

Total

    $  65,930           $    9,645           $     642           $  76,217   

 

1.

Includes $489 million and $446 million of CDOs backed by real estate in level 2 and level 3, respectively.

 

2.

Includes $284 million and $1.76 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

 

3.

Includes $12.67 billion of private equity investments, $1.58 billion of investments in real estate entities and $600 million of convertible debentures.

 

Transfers Between Levels of the Fair Value Hierarchy

    

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the three months ended September 2013, transfers into level 2 from level 1 of cash instruments were $31 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. During the three months ended September 2013, transfers into level 1 from level 2 of cash instruments were $22 million, reflecting transfers of public equity securities due to increased market activity in these instruments. During the three months ended September 2012, transfers into level 2 from level 1 of cash instruments were $205 million, including transfers of non-U.S. government obligations and equity securities of $118 million and $87 million, respectively, reflecting the level of market activity in these instruments. Transfers into level 1 from level 2 of cash instruments were $261 million, reflecting transfers of equity securities due to the level of market activity in these instruments.

During the nine months ended September 2013, transfers into level 2 from level 1 of cash instruments were $24 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. During the nine months ended September 2013, transfers into level 1 from level 2 of cash instruments were $71 million, reflecting transfers of public equity securities, primarily due to increased market activity in these instruments. During the nine months ended September 2012, transfers into level 2 from level 1 of cash instruments were $2.02 billion, including transfers of non-U.S. government obligations of $1.19 billion, reflecting the level of market activity in these instruments, and transfers of equity securities of $832 million, primarily reflecting the impact of transfer restrictions. Transfers into level 1 from level 2 of cash instruments were $427 million, including transfers of non-U.S. government obligations of $225 million, reflecting the level of market activity in these instruments, and transfers of equity securities of $182 million, where the firm was able to obtain quoted prices for certain instruments and due to the level of market activity for other instruments.

 

 

22   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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.

Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or 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 or level 3 derivatives. As a result, gains or 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 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.

 

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended September 2013  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

gains/

(losses)

  

  

  

  

   

 

 

 

 

 

Net unrealized

gains/(losses)

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Non-U.S. government and agency obligations

    $       90         $  —        $    3        $       2        $      (27     $       —        $     11         $     (24     $       55   
   

Mortgage and other asset-backed loans and securities:

                   

Loans and securities backed by commercial real estate

    2,969         40        66        320        (338     (363     77         (87     2,684   
   

Loans and securities backed by residential real estate

    1,738         17        37        207        (84     (114     61         (92     1,770   
   

Bank loans and bridge loans

    9,997         118        105        1,317        (580     (1,446     706         (742     9,475   
   

Corporate debt securities

    2,492         80        61        190        (357     (63     137         (227     2,313   
   

State and municipal obligations

    322         1        (2     28        (59     (1     4         (66     227   
   

Other debt obligations

    876         13        15        116        (26     (56     48         (214     772   
   

Equities and convertible debentures

    15,417         20        697        306        (115     (378     496         (263     16,180   

Total

    $33,901         $289  2      $982  2      $2,486        $(1,586     $(2,421     $1,540         $(1,715     $33,476   
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended September 2013  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

(gains)/

losses

  

  

  

  

   

 

 

 

 

 

Net unrealized

(gains)/losses

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Total

    $     385         $   (4     $  17        $  (101     $       49        $         3        $     32         $     (14     $     367   

 

1.

Includes both originations and secondary market purchases.

 

2.

The aggregate amounts include gains of approximately $149 million, $891 million and $231 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain/(loss) on level 3 cash instrument assets of $965 million (reflecting $982 million of gains on cash instrument assets and $17 million of losses on cash instrument liabilities) for the three months ended September 2013 primarily consisted of gains on private equity investments, primarily driven by strong corporate performance and company-specific events.

Transfers into level 3 during the three months ended September 2013 primarily reflected transfers of certain bank loans and bridge loans and private equity investments from level 2, due to a lack of market transactions in these instruments.

Transfers out of level 3 during the three months ended September 2013 primarily reflected transfers to level 2 of certain bank loans and bridge loans, private equity investments and other debt obligations, as a result of market transactions in these or similar instruments, and corporate debt obligations, principally due to increased transparency as a result of market transactions in these instruments and certain unobservable inputs not being significant to the valuation of these instruments.

 

 

    Goldman Sachs September 2013 Form 10-Q   23


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Nine Months Ended September 2013  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

gains/

(losses)

  

  

  

  

   

 

 

 

 

 

Net unrealized

gains/(losses)

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Non-U.S. government and agency obligations

    $       26         $    5        $       9        $     23        $     (14     $       (2     $     11         $       (3     $        55   
   

Mortgage and other asset-backed loans and securities:

                   

Loans and securities backed by commercial real estate

    3,389         86        197        549        (627     (965     197         (142     2,684   
   

Loans and securities backed by residential real estate

    1,619         37        99        633        (380     (236     78         (80     1,770   
   

Bank loans and bridge loans

    11,235         356        278        3,494        (2,042     (3,408     1,052         (1,490     9,475   
   

Corporate debt securities

    2,821         255        393        542        (1,392     (420     353         (239     2,313   
   

State and municipal obligations

    619         3        1        99        (461     (2     6         (38     227   
   

Other debt obligations

    1,185         35        16        563        (410     (60     17         (574     772   
   

Equities and convertible debentures

    14,855         154        1,635        1,640        (650     (1,396     1,015         (1,073     16,180   

Total

    $35,749         $931  2      $2,628  2      $7,543        $(5,976     $(6,489     $2,729         $(3,639     $33,476   
    Level 3 Cash Instrument Liabilities at Fair Value for the Nine Months Ended September 2013  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

(gains)/

losses

  

  

  

  

   

 

 

 

 

 

Net unrealized

(gains)/losses

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Total

    $     642         $    7        $      —        $  (368     $    187        $      13        $     46         $   (160     $     367   

 

1.

Includes both originations and secondary market purchases.

 

2.

The aggregate amounts include gains of approximately $664 million, $2.31 billion and $585 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instrument assets of $2.63 billion for the nine months ended September 2013 primarily consisted of gains on private equity investments, primarily driven by strong corporate performance and company-specific events, corporate debt securities, primarily due to tighter credit spreads, and bank loans and bridge loans, primarily due to company-specific events.

Transfers into level 3 during the nine months ended September 2013 primarily reflected transfers of certain bank loans and bridge loans and private equity investments from level 2, principally due to a lack of market transactions in these instruments.

Transfers out of level 3 during the nine months ended September 2013 primarily reflected transfers of certain bank loans and bridge loans, private equity investments and other debt obligations to level 2, principally due to increased transparency of market prices as a result of market transactions in these instruments and transfers related to the firm’s European insurance business of certain level 3 bank loans and bridge loans within cash instruments to level 3 other assets within other financial assets at fair value, as this business was classified as held for sale during the period.

 

 

24   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended September 2012  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

gains/

(losses)

  

  

  

  

   

 

 

 

 

 

Net unrealized

gains/(losses)

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Commercial paper, certificates of
deposit, time deposits and other
money market instruments

    $         7         $   —        $      —        $      —        $       —        $       (7     $      —         $       —        $        —   
   

Non-U.S. government and agency obligations

    8                3        2                                     13   
   

Mortgage and other asset-backed loans and securities:

                   

Loans and securities backed by commercial real estate

    3,166         57        78        355        (362     (44     214         (146     3,318   
   

Loans and securities backed by residential real estate

    1,632         65        44        81        (266     (351     98         (15     1,288   
   

Bank loans and bridge loans

    10,461         151        150        1,535        (906     (805     691         (444     10,833   
   

Corporate debt securities

    2,367         106        140        462        (274     (120     240         (200     2,721   
   

State and municipal obligations

    547         4        5        36        (27     (2     20                583   
   

Other debt obligations

    1,757         5        51        197        (88     (25     118         (7     2,008   
   

Equities and convertible debentures

    14,420         31        632        513        (320     (108     798         (840     15,126   

Total

    $34,365         $419  2      $1,103  2      $3,181        $(2,243     $(1,462     $2,179         $(1,652     $35,890   
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended September 2012  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

(gains)/

losses

  

  

  

  

   

 

 

 

 

 

Net unrealized

(gains)/losses

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Total

    $     739         $   (2     $       3        $  (105     $      65        $      16        $     46         $     (89     $     673   

 

1.

Includes both originations and secondary market purchases.

 

2.

The aggregate amounts include gains of approximately $340 million, $843 million and $339 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain/(loss) on level 3 cash instruments of $1.10 billion (reflecting $1.10 billion on cash instrument assets and $(3) million on cash instrument liabilities) for the three months ended September 2012 primarily consisted of gains on private equity investments, bank loans and bridge loans, and corporate debt securities. Unrealized gains during the quarter primarily reflected the impact of an increase in global equity prices and tighter credit spreads.

Transfers into level 3 during the three months ended September 2012 primarily reflected transfers from level 2 of certain private equity investments and bank loans and bridge loans, principally due to less market activity in these instruments.

Transfers out of level 3 during the three months ended September 2012 primarily reflected transfers to level 2 of certain private equity investments and bank loans and bridge loans, principally due to improved transparency of market prices as a result of market transactions in these financial instruments.

 

 

    Goldman Sachs September 2013 Form 10-Q   25


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Nine Months Ended September 2012  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

gains/

(losses)

  

  

  

  

   

 

 

 

 

 

Net unrealized

gains/(losses)

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Non-U.S. government and agency obligations

    $     148         $    (55     $       4        $       2        $       (8     $     (71     $       6         $     (13     $       13   
   

Mortgage and other asset-backed loans and securities:

                   

Loans and securities backed by commercial real estate

    3,346         143        227        1,337        (956     (859     218         (138     3,318   
   

Loans and securities backed by residential real estate

    1,709         128        239        345        (729     (471     77         (10     1,288   
   

Bank loans and bridge loans

    11,285         431        318        3,393        (2,754     (2,122     1,237         (955     10,833   
   

Corporate debt securities

    2,480         266        229        865        (851     (352     344         (260     2,721   
   

State and municipal obligations

    599         16        8        53        (80     (12             (1     583   
   

Other debt obligations

    1,451         52        50        645        (365     (41     222         (6     2,008   
   

Equities and convertible debentures

    13,667         60        1,158        2,166        (497     (640     866         (1,654     15,126   

Total

    $34,685         $1,041  2      $2,233  2      $8,806        $(6,240     $(4,568     $2,970         $(3,037     $35,890   
    Level 3 Cash Instrument Liabilities at Fair Value for the Nine Months Ended September 2012  
in millions    

 

 

Balance,

beginning

of period

  

  

  

    

 

 

 

Net

realized

(gains)/

losses

  

  

  

  

   

 

 

 

 

 

Net unrealized

(gains)/losses

relating to

instruments

still held at

period-end

  

  

  

  

  

  

    Purchases  1      Sales        Settlements       

 

 

Transfers

into

level 3

  

  

  

    

 

 

Transfers

out of

level 3

  

  

  

   

 

 

Balance,

end of

period

  

  

  

Total

    $     905         $    (35     $       9        $  (427     $    244        $      81        $     90         $   (194     $     673   

 

1.

Includes both originations and secondary market purchases.

 

2.

The aggregate amounts include gains of approximately $560 million, $1.77 billion and $945 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain/(loss) on level 3 cash instruments of $2.22 billion (reflecting $2.23 billion on cash instrument assets and $(9) million on cash instrument liabilities) for the nine months ended September 2012 primarily consisted of gains on private equity investments, mortgage and other asset-backed loans and securities, bank loans and bridge loans, and corporate debt securities. Unrealized gains during the nine months ended September 2012 primarily reflected the impact of an increase in global equity prices and generally tighter credit spreads.

Transfers into level 3 during the nine months ended September 2012 primarily reflected transfers from level 2 of certain bank loans and bridge loans and private equity investments, principally due to less market activity in these instruments.

Transfers out of level 3 during the nine months ended September 2012 primarily reflected transfers to level 2 of certain private equity investments and bank loans and bridge loans. Transfers of private equity investments to level 2 were principally due to improved transparency of market prices as a result of market transactions in these financial instruments. Transfers of bank loans and bridge loans to level 2 were principally due to market transactions in these instruments and unobservable inputs no longer being significant to the valuation of certain loans.

 

 

26   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(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, credit 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 six years. The firm continues to manage its existing funds taking into

account the transition periods under the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), although the rules have not yet been finalized.

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 firm currently plans to comply with the Volcker Rule by redeeming certain of its interests in hedge funds. Since March 2012, the firm has redeemed approximately $1.90 billion of these interests in hedge funds, including approximately $310 million and $840 million during the three and nine months ended September 2013, respectively.

The table below presents the fair value of the firm’s investments in, and unfunded commitments to, funds that calculate NAV.

 

 

 

    As of September 2013         As of December 2012  
in millions    

 

Fair Value of

Investments

  

  

    

 

Unfunded

Commitments

  

  

       

 

Fair Value of

Investments

  

  

    

 

Unfunded

Commitments

  

  

Private equity funds 1

    $  7,263         $2,555          $  7,680         $2,778   
   

Credit funds 2

    3,844         2,518          3,927         2,843   
   

Hedge funds 3

    1,931                  2,167           
   

Real estate funds 4

    1,892         468            2,006         870   

Total

    $14,930         $5,541            $15,780         $6,491   

 

1.

These funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed 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.

 

    Goldman Sachs September 2013 Form 10-Q   27


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 7. Derivatives and Hedging Activities

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 traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as over-the-counter (OTC) derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC).

Market-Making. As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. 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 its 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 interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits, to manage foreign currency exposure on the net investment in certain non-U.S. operations, and to manage the exposure to the variability in cash flows associated with the forecasted sales of certain energy commodities by one of the firm’s consolidated investments.

The firm enters into various types of derivatives, including:

 

Ÿ  

Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.

 

Ÿ  

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.

 

Ÿ  

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 enforceable 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.”

The table below presents the fair value of derivatives on a net-by-counterparty basis.

 

 

 

    As of September 2013         As of December 2012  
in millions    
 
Derivative
Assets
  
  
    
 
Derivative
Liabilities
  
  
       
 
Derivative
Assets
  
  
    
 
Derivative
Liabilities
  
  

Exchange-traded

    $  5,923         $  4,166          $  3,772         $  2,937   
   

OTC

    55,536         44,321            67,404         47,490   

Total

    $61,459         $48,487            $71,176         $50,427   

 

28   Goldman Sachs September 2013 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The table below presents the fair value and the notional amount of derivative contracts by major product type on a gross basis. Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure. The table below also presents the amounts of counterparty netting and cash collateral that have been offset in the condensed consolidated statements of financial condition, as well as cash and securities collateral posted and received under

enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP. Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted in the table below. Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.

 

 

 

    As of September 2013         As of December 2012  
in millions    
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  
   
 
Notional
Amount
  
  
       
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  
   
 
Notional
Amount
  
  

Derivatives not accounted for as hedges

             

Interest rates

    $ 414,150        $ 382,222        $40,686,745          $ 584,584        $ 545,605        $34,891,763   
   

Exchange-traded

    155        225        2,665,287          47        26        2,502,867   
   

OTC-cleared 1

    9,665        12,755        21,182,289          8,847        11,011        14,678,349   
   

Bilateral OTC

    404,330        369,242        16,839,169          575,690        534,568        17,710,547   
   

Credit

    67,792        61,144        3,248,369          85,816        74,927        3,615,757   
   

OTC-cleared

    3,607        3,427        363,148          3,359        2,638        304,100   
   

Bilateral OTC

    64,185        57,717        2,885,221          82,457        72,289        3,311,657   
   

Currencies

    69,229        62,972        4,164,998          72,128        60,808        3,833,114   
   

Exchange-traded

    37        56        14,283          31        82        12,341   
   

OTC-cleared

    87        116        10,075          14        14        5,487   
   

Bilateral OTC

    69,105        62,800        4,140,640          72,083        60,712        3,815,286   
   

Commodities

    19,782        18,857        802,809          23,320        24,350        774,115   
   

Exchange-traded

    5,955        4,486        410,100          5,360        5,040        344,823   
   

OTC-cleared

    55        36        739          26        23        327   
   

Bilateral OTC

    13,772        14,335        391,970          17,934        19,287        428,965   
   

Equities

    55,328        52,258        1,483,779          49,483        43,681        1,202,181   
   

Exchange-traded

    11,679        11,302        555,286          9,409        8,864        441,494   
   

OTC-cleared

                  2                          
   

Bilateral OTC

    43,649        40,956        928,491            40,074        34,817        760,687   

Subtotal

    626,281        577,453        50,386,700            815,331        749,371        44,316,930   

Derivatives accounted for as hedges

             

Interest rates

    17,029        389        136,717          23,772        66        128,302   
   

OTC-cleared

    1,528        7        9,578                          
   

Bilateral OTC

    15,501        382        127,139          23,772        66        128,302   
   

Currencies

    44        135        9,329          21        86        8,452   
   

OTC-cleared

           4        391                        3   
   

Bilateral OTC

    44        131        8,938          21        86        8,449   
   

Commodities

    31               335