10-Q 1 d746051d10q.htm FORM 10-Q Form 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 June 30, 2014

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 July 25, 2014, there were 440,579,936 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 JUNE 30, 2014

 

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 six months ended June 30,  2014
and June 30, 2013

  2
 
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June  30, 2014 and June 30, 2013

  3
 
 

Condensed Consolidated Statements of Financial Condition as of June 30, 2014 and December  31, 2013

  4
 
 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2014 and year ended December 31, 2013

  5
 
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30,  2014 and June 30, 2013

  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

  14
 
 

Note 6.        Cash Instruments

  16
 
 

Note 7.        Derivatives and Hedging Activities

  27
 
 

Note 8.        Fair Value Option

  43
 
 

Note 9.        Collateralized Agreements and Financings

  52
 
 

Note 10.      Securitization Activities

  57
 
 

Note 11.      Variable Interest Entities

  59
 
 

Note 12.      Other Assets

  64
 
 

Note 13.      Goodwill and Identifiable Intangible Assets

  65
 
 

Note 14.      Deposits

  66
 
 

Note 15.      Short-Term Borrowings

  67
 
 

Note 16.      Long-Term Borrowings

  68
 
 

Note 17.      Other Liabilities and Accrued Expenses

  70
 
 

Note 18.      Commitments, Contingencies and Guarantees

  71
 
 

Note 19.      Shareholders’ Equity

  77
 
 

Note 20.      Regulation and Capital Adequacy

  79
 
 

Note 21.      Earnings Per Common Share

  88
 
 

Note 22.      Transactions with Affiliated Funds

  88
 
 

Note 23.      Interest Income and Interest Expense

  89
 
 

Note 24.      Income Taxes

  90
 
 

Note 25.      Business Segments

  91
 
 

Note 26.      Credit Concentrations

  93
 
 

Note 27.      Legal Proceedings

  94
 
 

Report of Independent Registered Public Accounting Firm

  101
 
 

Statistical Disclosures

  102
 

Item 2

 

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

  104
 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

  180
 

Item 4

 

Controls and Procedures

  180
 

PART II

 

OTHER INFORMATION

  180
 

Item 1

 

Legal Proceedings

  180
 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

  180
 

Item 6

 

Exhibits

  181
 

SIGNATURES

  182

 

    Goldman Sachs June 2014 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 June

       

Six Months

Ended June

 
in millions, except per share amounts     2014         2013            2014         2013   

Revenues

           

Investment banking

    $1,781         $1,552          $  3,560         $  3,120   
   

Investment management

    1,378         1,267          2,876         2,517   
   

Commissions and fees

    786         873          1,658         1,702   
   

Market making

    2,185         2,692          4,824         6,129   
   

Other principal transactions

    1,995         1,402            3,498         3,483   

Total non-interest revenues

    8,125         7,786          16,416         16,951   
   

 

Interest income

    2,579         2,663          5,173         5,271   
   

Interest expense

    1,579         1,837            3,136         3,520   

Net interest income

    1,000         826            2,037         1,751   

Net revenues, including net interest income

    9,125         8,612            18,453         18,702   

 

Operating expenses

           

Compensation and benefits

    3,924         3,703          7,935         8,042   
   

 

Brokerage, clearing, exchange and distribution fees

    613         613          1,208         1,174   
   

Market development

    141         140          279         281   
   

Communications and technology

    186         182          386         370   
   

Depreciation and amortization

    294         266          684         568   
   

Occupancy

    205         210          415         428   
   

Professional fees

    224         218          436         464   
   

Insurance reserves

            49                  176   
   

Other expenses

    717         586            1,268         1,181   

Total non-compensation expenses

    2,380         2,264            4,676         4,642   

Total operating expenses

    6,304         5,967            12,611         12,684   

 

Pre-tax earnings

    2,821         2,645          5,842         6,018   
   

Provision for taxes

    784         714            1,772         1,827   

Net earnings

    2,037         1,931          4,070         4,191   
   

Preferred stock dividends

    84         70            168         142   

Net earnings applicable to common shareholders

    $1,953         $1,861            $  3,902         $  4,049   

 

Earnings per common share

           

Basic

    $  4.21         $  3.92          $    8.36         $    8.45   
   

Diluted

    4.10         3.70          8.13         7.99   
   

 

Dividends declared per common share

    $  0.55         $  0.50          $    1.10         $    1.00   
   

 

Average common shares outstanding

           

Basic

    461.7         473.2          465.1         477.5   
   

Diluted

    475.9         503.5            480.1         506.6   

 

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

 

2   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months

Ended June

       

Six Months

Ended June

 
in millions     2014         2013            2014         2013   

Net earnings

    $2,037         $1,931          $4,070         $4,191   
   

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

           

Currency translation

    (30      (30       (59      (56
   

Pension and postretirement liabilities

    (6      (3       (14      (7
   

Available-for-sale securities

            (342               (327
   

Cash flow hedges

    1                    2           

Other comprehensive loss

    (35      (375         (71      (390

Comprehensive income

    $2,002         $1,556            $3,999         $3,801   

 

 

 

 

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

 

    Goldman Sachs June 2014 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    

 

June

2014

  

  

    
 
December
2013
  
  

Assets

    

Cash and cash equivalents

    $  56,983         $  61,133   
   

Cash and securities segregated for regulatory and other purposes (includes $23,947 and $31,937 at fair value as of June 2014 and December 2013, respectively)

    40,668         49,671   
   

Collateralized agreements:

    

Securities purchased under agreements to resell and federal funds sold (includes $108,504 and $161,297 at fair value as of June 2014 and December 2013, respectively)

    109,103         161,732   
   

Securities borrowed (includes $51,971 and $60,384 at fair value as of June 2014 and December 2013, respectively)

    164,719         164,566   
   

Receivables from:

    

Brokers, dealers and clearing organizations

    28,233         23,840   
   

Customers and counterparties (includes $7,010 and $7,416 at fair value as of June 2014 and December 2013, respectively)

    91,011         88,935   
   

Financial instruments owned, at fair value (includes $72,244 and $62,348 pledged as collateral as of June 2014 and December 2013, respectively)

    345,806         339,121   
   

Other assets (includes $18 at fair value as of December 2013)

    23,391         22,509   

Total assets

    $859,914         $911,507   

 

Liabilities and shareholders’ equity

    

Deposits (includes $10,134 and $7,255 at fair value as of June 2014 and December 2013, respectively)

    $  73,750         $  70,807   
   

Collateralized financings:

    

Securities sold under agreements to repurchase, at fair value

    106,966         164,782   
   

Securities loaned (includes $1,529 and $973 at fair value as of June 2014 and December 2013, respectively)

    9,440         18,745   
   

Other secured financings (includes $23,846 and $23,591 at fair value as of June 2014 and December 2013, respectively)

    25,178         24,814   
   

Payables to:

    

Brokers, dealers and clearing organizations

    12,263         5,349   
   

Customers and counterparties

    199,253         199,416   
   

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

    124,162         127,426   
   

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $17,617 and $19,067 at fair value as of June 2014 and December 2013, respectively)

    45,755         44,692   
   

Unsecured long-term borrowings (includes $14,703 and $11,691 at fair value as of June 2014 and December 2013, respectively)

    167,019         160,965   
   

Other liabilities and accrued expenses (includes $488 and $388 at fair value as of June 2014 and December 2013, respectively)

    14,499         16,044   

Total liabilities

    778,285         833,040   
   

 

Commitments, contingencies and guarantees

    

 

Shareholders’ equity

    

Preferred stock, par value $0.01 per share; aggregate liquidation preference of $9,200 and $7,200 as of June 2014 and December 2013, respectively

    9,200         7,200   
   

Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 849,565,423 and 837,219,068 shares issued as of June 2014 and December 2013, respectively, and 440,734,836 and 446,359,012 shares outstanding as of June 2014 and December 2013, respectively

    8         8   
   

Restricted stock units and employee stock options

    3,709         3,839   
   

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

              
   

Additional paid-in capital

    49,942         48,998   
   

Retained earnings

    75,340         71,961   
   

Accumulated other comprehensive loss

    (595      (524
   

Stock held in treasury, at cost, par value $0.01 per share; 408,830,589 and 390,860,058 shares as of June 2014 and December 2013, respectively

    (55,975      (53,015

Total shareholders’ equity

    81,629         78,467   

Total liabilities and shareholders’ equity

    $859,914         $911,507   

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

 

4   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

    Six Months Ended         Year Ended  
in millions    

 

June

2014

  

  

       
 
December
2013
  
  

Preferred stock

     

Balance, beginning of year

    $   7,200          $   6,200   
   

Issued

    2,000            1,000   

Balance, end of period

    9,200          7,200   
   

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

    3,839          3,298   
   

Issuance and amortization of restricted stock units and employee stock options

    1,734          2,017   
   

Delivery of common stock underlying restricted stock units

    (1,633       (1,378
   

Forfeiture of restricted stock units and employee stock options

    (32       (79
   

Exercise of employee stock options

    (199         (19

Balance, end of period

    3,709          3,839   
   

Additional paid-in capital

     

Balance, beginning of year

    48,998          48,030   
   

Delivery of common stock underlying share-based awards

    1,919          1,483   
   

Cancellation of restricted stock units and employee stock options in satisfaction of withholding tax requirements

    (1,503       (599
   

Preferred stock issuance costs

    (20       (9
   

Excess net tax benefit related to share-based awards

    549          94   
   

Cash settlement of share-based compensation

    (1         (1

Balance, end of period

    49,942          48,998   
   

Retained earnings

     

Balance, beginning of year

    71,961          65,223   
   

Net earnings

    4,070          8,040   
   

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

    (523       (988
   

Dividends declared on preferred stock

    (168         (314

Balance, end of period

    75,340          71,961   
   

Accumulated other comprehensive loss

     

Balance, beginning of year

    (524       (193
   

Other comprehensive loss

    (71         (331

Balance, end of period

    (595       (524
   

Stock held in treasury, at cost

     

Balance, beginning of year

    (53,015       (46,850
   

Repurchased

    (2,969       (6,175
   

Reissued

    40          40   
   

Other

    (31         (30

Balance, end of period

    (55,975         (53,015

Total shareholders’ equity

    $ 81,629            $ 78,467   

 

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

 

    Goldman Sachs June 2014 Form 10-Q   5


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   

Six Months

Ended June

 
in millions     2014         2013   

Cash flows from operating activities

    

Net earnings

    $   4,070         $   4,191   
   

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

    

Depreciation and amortization

    684         568   
   

Share-based compensation

    1,775         1,669   
   

Changes in operating assets and liabilities

    

Cash and securities segregated for regulatory and other purposes

    9,003         (2,399
   

Receivables and payables, net

    6,772         10,066   
   

Collateralized transactions (excluding other secured financings), net

    (14,645      (56,114
   

Financial instruments owned, at fair value

    (4,531      36,071   
   

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

    (3,279      18,792   
   

Other, net

    (3,541      (7,210

Net cash provided by/(used for) operating activities

    (3,692      5,634   
   

Cash flows from investing activities

    

Purchase of property, leasehold improvements and equipment

    (353      (329
   

Proceeds from sales of property, leasehold improvements and equipment

    10         33   
   

Business acquisitions, net of cash acquired

    (449      (446
   

Proceeds from sales of investments

    469         1,521   
   

Purchase of available-for-sale securities

            (738
   

Proceeds from sales of available-for-sale securities

            817   
   

Loans held for investment, net

    (6,490      (2,518

Net cash used for investing activities

    (6,813      (1,660
   

Cash flows from financing activities

    

Unsecured short-term borrowings, net

    1,077         622   
   

Other secured financings (short-term), net

    1,141         (3,764
   

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

    3,413         2,641   
   

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

    (4,840      (1,466
   

Proceeds from issuance of unsecured long-term borrowings

    19,804         18,502   
   

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

    (15,320      (18,152
   

Purchase of trust preferred securities

    (1,362        
   

Derivative contracts with a financing element, net

    574         761   
   

Deposits, net

    2,943         (729
   

Common stock repurchased

    (2,969      (3,125
   

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

    (691      (631
   

Proceeds from issuance of preferred stock, net of issuance costs

    1,980         991   
   

Proceeds from issuance of common stock, including stock option exercises

    56         34   
   

Excess tax benefit related to share-based compensation

    550         71   
   

Cash settlement of share-based compensation

    (1        

Net cash provided by/(used for) financing activities

    6,355         (4,245

Net decrease in cash and cash equivalents

    (4,150      (271
   

Cash and cash equivalents, beginning of year

    61,133         72,669   

Cash and cash equivalents, end of period

    $ 56,983         $ 72,398   

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $3.26 billion and $3.33 billion during the six months ended June 2014 and June 2013, respectively.

Cash payments for income taxes, net of refunds, were $2.06 billion and $2.61 billion during the six months ended June 2014 and June 2013, respectively.

Non-cash activities:

The firm exchanged $175 million of senior guaranteed trust securities held by the firm for $175 million of the firm’s junior subordinated debt securities held by the issuing trust during the six months ended June 2014. As a result of this exchange, these senior guaranteed trust securities and junior subordinated debt securities were extinguished.

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

 

6   Goldman Sachs June 2014 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

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, some of which are consolidated, directly and indirectly through funds that the firm manages, in debt securities and loans, public and private equity securities and real estate entities.

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

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, 2013. References to “the 2013 Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2013. The condensed consolidated financial information as of December 31, 2013 has been derived from audited consolidated financial statements not included herein.

These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.

All references to June 2014, March 2014, December 2013 and June 2013 refer to the firm’s periods ended, or the dates, as the context requires, June 30, 2014, March 31, 2014, December 31, 2013 and June 30, 2013, 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 June 2014 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

 

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 June 2014 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 June 2014 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.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of June 2014 and December 2013, “Cash and cash equivalents” included $6.26 billion and $4.14 billion, respectively, of cash and due from banks, and $50.72 billion and $56.99 billion, respectively, of interest-bearing deposits with banks.

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.

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 June 2014 and December 2013.

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 June 2014 and December 2013.

 

 

10   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 or similar arrangements (collectively, 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.

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.

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.

The firm generally issues new shares of common stock upon delivery of share-based awards. 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.

 

 

    Goldman Sachs June 2014 Form 10-Q   11


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Recent Accounting Developments

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. Adoption of ASU No. 2013-08 on January 1, 2014 did not 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.

Revenue from Contracts with Customers (ASC 606). In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract costs, and requires new disclosures. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The firm is still evaluating the effect of the ASU on its financial condition, results of operations, and cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASC 860). In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 changes the accounting for repurchase- and resale-to-maturity agreements by requiring that such agreements be recognized as financing arrangements, and requires that a transfer of a financial asset and a repurchase agreement entered into contemporaneously be accounted for separately. ASU No. 2014-11 also requires additional disclosures about certain transferred financial assets accounted for as sales and certain securities financing transactions. The accounting changes and additional disclosures about certain transferred financial assets accounted for as sales are effective for the first interim and annual reporting periods beginning after December 15, 2014. The additional disclosures for securities financing transactions are required for annual reporting periods beginning after December 15, 2014 and for interim reporting periods beginning after March 15, 2015. Early adoption is not permitted. Adoption of ASU No. 2014-11 is not expected to materially affect the firm’s financial condition, results of operations, or cash flows.

 

 

12   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 4.

 

Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value

    

 

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about other financial assets and

financial liabilities accounted for at fair value primarily under 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 June 2014         As of December 2013  
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

    $    6,537         $          —          $    8,608         $          —   
   

U.S. government and federal agency obligations

    75,648         15,734          71,072         20,920   
   

Non-U.S. government and agency obligations

    44,787         24,786          40,944         26,999   
   

Mortgage and other asset-backed loans and securities:

           

Loans and securities backed by commercial real estate

    6,374         21          6,596         1   
   

Loans and securities backed by residential real estate

    9,857         1          9,025         2   
   

Bank loans and bridge loans

    18,731         732  1        17,400         925  1 
   

Corporate debt securities

    23,459         5,505          17,412         5,253   
   

State and municipal obligations

    1,406                  1,476         51   
   

Other debt obligations

    3,645         31          3,129         4   
   

Equities and convertible debentures

    97,462         29,331          101,024         22,583   
   

Commodities

    4,057         1,826            4,556         966   

Subtotal

    291,963         77,967          281,242         77,704   
   

Derivatives

    53,843         46,195            57,879         49,722   

Total

    $345,806         $124,162            $339,121         $127,426   

 

1.

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

 

    Goldman Sachs June 2014 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 below 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 across product types 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 across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.

 

in millions

Product Type

  Three Months
Ended June
       

Six Months

Ended June

 
    2014         2013            2014         2013   

Interest rates

    $  (176      $   131          $  (456      $(1,033
   

Credit

    1,022         (5       2,202         1,454   
   

Currencies

    561         851          856         3,360   
   

Equities

    544         767          1,227         1,269   
   

Commodities

    234         261          995         649   
   

Other

            687  2                  430  2 

Market making

    2,185         2,692            4,824         6,129   

Other principal transactions 1

    1,995         1,402            3,498         3,483   

Total

    $4,180         $4,094            $8,322         $ 9,612   

 

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.

 

2.

Includes gains on insurance liabilities related to the firm’s European insurance business, which were offset by losses on the related hedges in other product types.

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.

 

 

14   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

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, 7 and 8 for further information about fair value measurements of cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value primarily under the fair value option (including information about significant unrealized gains and losses related to level 3 financial assets and financial liabilities, and transfers in and out of level 3), respectively.

The table below presents financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP. In the table below, counterparty and cash collateral netting represents the impact on derivatives of netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

 

    As of  
$ in millions    

 

June

2014

  

  

    

 

March

2014

  

  

    
 
December
2013
  
  

Total level 1 financial assets

    $153,025         $153,199         $156,030   
   

Total level 2 financial assets

    441,295         484,573         499,480   
   

Total level 3 financial assets

    39,760         40,923         40,013   
   

Counterparty and cash collateral netting

    (96,842      (92,834      (95,350

Total financial assets at fair value

    $537,238         $585,861         $600,173   
   

Total assets 1

    $859,914         $915,665         $911,507   
   

Total level 3 financial assets as a percentage of Total assets

    4.6%         4.5%         4.4%   
   

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

    7.4%         7.0%         6.7%   
   

Total level 1 financial liabilities

    $  67,579         $  71,973         $  68,412   
   

Total level 2 financial liabilities

    247,288         273,929         300,583   
   

Total level 3 financial liabilities

    12,389         13,208         12,046   
   

Counterparty and cash collateral netting

    (27,811      (25,415      (25,868

Total financial liabilities at fair value

    $299,445         $333,695         $355,173   
   

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

    4.1%         4.0%         3.4%   

 

1.

Includes approximately $837 billion, $892 billion and $890 billion as of June 2014, March 2014 and December 2013, respectively, that is carried at fair value or at amounts that generally approximate fair value.

Level 3 financial assets as of June 2014 decreased compared with March 2014, primarily reflecting a decrease in bank loans and bridge loans and derivative assets. The decrease in bank loans and bridge loans primarily reflected settlements and sales, partially offset by purchases, realized gains and net transfers from level 2. The decrease in derivative assets primarily reflected a decline in credit derivative assets, principally due to settlements and unrealized losses.

Level 3 financial assets as of June 2014 were essentially unchanged compared with December 2013.

 

 

    Goldman Sachs June 2014 Form 10-Q   15


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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.

 

 

16   Goldman Sachs June 2014 Form 10-Q    


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. These valuation techniques and

significant inputs are 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    A measure of expected future cash flows in a default scenario (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. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments

    

 

Ÿ    Timing of expected future cash flows (duration) which, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds)

 

 

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. 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

 

 

    Goldman Sachs June 2014 Form 10-Q   17


Table of Contents

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. Weighted averages in the tables below are calculated by weighting each input by the relative fair value of the respective financial instruments. 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 June 2014   

(in millions)   

 

  

Valuation Techniques and
Significant Unobservable Inputs   

 

  

Range of Significant Unobservable
Inputs (Weighted Average)

as of June 2014

 

 

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

 

    

 

$2,620

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

3.5% to 20.0% (10.0%)

       

 

Ÿ    Recovery rate

  

 

24.6% to 97.4% (70.8%)

       

 

Ÿ    Duration (years)

  

 

0.2 to 5.3 (2.2)

       

 

Ÿ    Basis

 

  

 

(2) points to 18 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

      

 

$2,039

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

2.9% to 17.5% (9.1%)

       

 

Ÿ    Cumulative loss rate

  

 

8.0% to 89.6% (25.4%)

       

 

Ÿ    Duration (years)

 

  

 

1.2 to 10.5 (3.1)

 

Bank loans and bridge loans

      

 

$8,947

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

1.6% to 23.4% (8.2%)

       

 

Ÿ    Recovery rate

  

 

34.7% to 87.1% (60.5%)

       

 

Ÿ    Duration (years)

 

  

 

0.4 to 4.5 (1.7)

 

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

 

      

 

$3,181

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

1.0% to 24.0% (8.5%)

       

 

Ÿ    Recovery rate

  

 

0.0% to 70.0% (63.2%)

       

 

Ÿ    Duration (years)

 

  

 

1.0 to 16.7 (4.5)

 

Equities and convertible debentures

(including private equity investments and investments in real estate entities)

      

 

$16,259 1

  

 

Comparable multiples:

    
       

 

Ÿ    Multiples

  

 

0.8x to 19.0x (6.6x)

       

 

Discounted cash flows:

    
       

 

Ÿ    Discount rate/yield

  

 

5.5% to 25.0% (14.6%)

       

 

Ÿ    Long-term growth rate/compound annual growth rate

  

 

(3.5)% to 20.0% (7.1%)

         

 

Ÿ   Capitalization rate

 

  

 

5.1% to 12.1% (7.2%)

 

1.

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.

 

18   Goldman Sachs June 2014 Form 10-Q    


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 2013   

(in millions)

 

  

Valuation Techniques and Significant Unobservable Inputs   

 

  

Range of Significant Unobservable Inputs (Weighted Average)

as of December 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

 

      

 

$2,692

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

2.7% to 29.1% (10.1%)

       

 

Ÿ    Recovery rate

  

 

26.2% to 88.1% (74.4%)

       

 

Ÿ    Duration (years)

  

 

0.6 to 5.7 (2.0)

       

 

Ÿ    Basis

 

  

 

(9) points to 20 points (5 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

      

 

$1,961

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

2.6% to 25.8% (10.1%)

       

 

Ÿ    Cumulative loss rate

  

 

9.8% to 56.6% (24.9%)

       

 

Ÿ    Duration (years)

 

  

 

1.4 to 16.7 (3.6)

 

Bank loans and bridge loans

      

 

$9,324

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

1.0% to 39.6% (9.3%)

       

 

Ÿ    Recovery rate

  

 

40.0% to 85.0% (54.9%)

       

 

Ÿ    Duration (years)

 

  

 

0.5 to 5.3 (2.1)

 

Non-U.S. government and agency obligations

 

Corporate debt securities

 

State and municipal obligations

 

Other debt obligations

      

 

$3,977

  

 

Discounted cash flows:

    
       

 

Ÿ    Yield

  

 

1.5% to 40.2% (8.9%)

       

 

Ÿ    Recovery rate

  

 

0.0% to 70.0% (61.9%)

       

 

Ÿ    Duration (years)

 

  

 

0.6 to 16.1 (4.2)

 

Equities and convertible debentures

(including private equity investments and investments in real estate entities)

      

 

$14,685 1

  

 

Comparable multiples:

    
       

 

Ÿ    Multiples

  

 

0.6x to 18.8x (6.9x)

       

 

Discounted cash flows:

    
       

 

Ÿ    Discount rate/yield

  

 

6.0% to 29.1% (14.6%)

       

 

Ÿ    Long-term growth rate/compound annual growth rate

  

 

1.0% to 19.0% (8.1%)

         

 

Ÿ   Capitalization rate

 

  

 

4.6% to 11.3% (7.1%)

 

1.

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.

 

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.

 

 

    Goldman Sachs June 2014 Form 10-Q   19


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 June 2014  
in millions     Level 1           Level 2           Level 3           Total   

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

    $       183           $    6,354           $       —           $    6,537   
   

U.S. government and federal agency obligations

    29,912           45,736                     75,648   
   

Non-U.S. government and agency obligations

    34,522           10,212           53           44,787   
   

Mortgage and other asset-backed loans and securities 1:

                

Loans and securities backed by commercial real estate

              3,754           2,620           6,374   
   

Loans and securities backed by residential real estate

              7,818           2,039           9,857   
   

Bank loans and bridge loans

              9,784           8,947           18,731   
   

Corporate debt securities 2

    272           20,857           2,330           23,459   
   

State and municipal obligations

              1,237           169           1,406   
   

Other debt obligations 2

              3,016           629           3,645   
   

Equities and convertible debentures

    70,611           10,592           16,259  3         97,462   
   

Commodities

              4,057                     4,057   

Total

    $135,500           $123,417           $33,046           $291,963   
    Cash Instrument Liabilities at Fair Value as of June 2014  
in millions     Level 1           Level 2           Level 3           Total   

U.S. government and federal agency obligations

    $  15,616           $       118           $       —           $  15,734   
   

Non-U.S. government and agency obligations

    22,997           1,789                     24,786   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

              14           7           21   
   

Loans and securities backed by residential real estate

              1                     1   
   

Bank loans and bridge loans

              554           178           732   
   

Corporate debt securities

    10           5,492           3           5,505   
   

Other debt obligations

              29           2           31   
   

Equities and convertible debentures

    28,901           423           7           29,331   
   

Commodities

              1,826                     1,826   

Total

    $  67,524           $  10,246           $     197           $  77,967   

 

1.

Includes $317 million and $570 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

 

2.

Includes $364 million and $1.05 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

 

3.

Includes $14.41 billion of private equity investments, $1.43 billion of investments in real estate entities and $416 million of convertible debentures.

 

20   Goldman Sachs June 2014 Form 10-Q    


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 2013  
in millions     Level 1           Level 2           Level 3           Total   

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

    $       216           $    8,392           $       —           $    8,608   
   

U.S. government and federal agency obligations

    29,582           41,490                     71,072   
   

Non-U.S. government and agency obligations

    29,451           11,453           40           40,944   
   

Mortgage and other asset-backed loans and securities 1:

                

Loans and securities backed by commercial real estate

              3,904           2,692           6,596   
   

Loans and securities backed by residential real estate

              7,064           1,961           9,025   
   

Bank loans and bridge loans

              8,076           9,324           17,400   
   

Corporate debt securities 2

    240           14,299           2,873           17,412   
   

State and municipal obligations

              1,219           257           1,476   
   

Other debt obligations 2

              2,322           807           3,129   
   

Equities and convertible debentures

    76,945           9,394           14,685  3         101,024   
   

Commodities

              4,556                     4,556   

Total

    $136,434           $112,169           $32,639           $281,242   
    Cash Instrument Liabilities at Fair Value as of December 2013  
in millions     Level 1           Level 2           Level 3           Total   

U.S. government and federal agency obligations

    $  20,871           $         49           $       —           $  20,920   
   

Non-U.S. government and agency obligations

    25,325           1,674                     26,999   
   

Mortgage and other asset-backed loans and securities:

                

Loans and securities backed by commercial real estate

                        1           1   
   

Loans and securities backed by residential real estate

              2                     2   
   

Bank loans and bridge loans

              641           284           925   
   

Corporate debt securities

    10           5,241           2           5,253   
   

State and municipal obligations

              50           1           51   
   

Other debt obligations

              3           1           4   
   

Equities and convertible debentures

    22,107           468           8           22,583   
   

Commodities

              966                     966   

Total

    $  68,313           $    9,094           $     297           $  77,704   

 

1.

Includes $295 million and $411 million of CDOs backed by real estate in level 2 and level 3, respectively.

 

2.

Includes $451 million and $1.62 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

 

3.

Includes $12.82 billion of private equity investments, $1.37 billion of investments in real estate entities and $491 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 June 2014, transfers into level 2 from level 1 of cash instruments were $552 million, including $346 million of public equity securities and $206 million of U.S. government and federal agency obligations primarily due to decreased market activity in these instruments. During the three months ended June 2014, transfers into level 1 from level 2 of cash instruments were $7 million, reflecting transfers of public equity securities due to increased market activity in these instruments. During the three months ended June 2013, transfers into level 2 from level 1 of cash instruments were $51 million, primarily including transfers of public equity securities of $48 million due to decreased market activity in these instruments. During the three months ended June 2013, transfers into level 1 from level 2 of cash instruments were $105 million, reflecting transfers of public equity securities, primarily due to increased market activity in these instruments.

During the six months ended June 2014, transfers into level 2 from level 1 of cash instruments were $67 million, including $49 million of public equity securities and $18 million of U.S. government and federal agency obligations primarily due to decreased market activity in these instruments. During the six months ended June 2014, transfers into level 1 from level 2 of cash instruments were $81 million, reflecting transfers of public equity securities, due to increased market activity in these instruments. During the six months ended June 2013, transfers into level 2 from level 1 of cash instruments were $5 million, reflecting transfers of public equity securities due to decreased market activity in these instruments. During the six months ended June 2013, transfers into level 1 from level 2 of cash instruments were $77 million, reflecting transfers of public equity securities, primarily reflecting increased market activity in these instruments.

See level 3 rollforward below for information about transfers between level 2 and level 3.

 

 

    Goldman Sachs June 2014 Form 10-Q   21


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. Purchases in the tables below include both originations and secondary market purchases.

 

 

    Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended June 2014  
in millions    
 

 

Balance,
beginning

of period

  
  

  

    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 

 
 

Net unrealized
gains/(losses)
relating to
instruments

still held at
period-end

  
  
  
  

  
  

    Purchases         Sales        Settlements       
 

 

Transfers
into

level 3

  
  

  

    
 

 

Transfers
out of

level 3

  
  

  

    
 
 
Balance,
end of
period
  
  
  

Non-U.S. government and agency obligations

    $       45         $    1        $       1        $       9         $       (1     $       (2     $      —         $       —         $       53   
   

Mortgage and other asset-backed loans and securities:

                     

Loans and securities backed by commercial real estate

    2,626         31        90        114         (155     (304     417         (199      2,620   
   

Loans and securities backed by residential real estate

    2,065         34        90        149         (194     (3     27         (129      2,039   
   

Bank loans and bridge loans

    9,687         130        116        798         (272     (1,641     990         (861      8,947   
   

Corporate debt securities

    2,632         86        34        211         (666     (177     401         (191      2,330   
   

State and municipal obligations

    242         1        2        28         (41            1         (64      169   
   

Other debt obligations

    640         5        32        53         (51     (25     41         (66      629   
   

Equities and convertible debentures

    15,807         76        939        590         (606     (328     796         (1,015      16,259   

Total

    $33,744         $364  1      $1,304  1      $1,952         $(1,986     $(2,480     $2,673         $(2,525      $33,046   
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended June 2014  
in millions    
 
 
Balance,
Beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Total

    $     204         $   (6     $      (9     $    (49      $      51        $      11        $     15         $     (20      $     197   

 

1.

The aggregate amounts include gains of approximately $232 million, $1.11 billion and $326 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $1.31 billion (reflecting $1.30 billion on cash instrument assets and $9 million on cash instrument liabilities) for the three months ended June 2014 primarily consisted of gains on private equity investments principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during the three months ended June 2014 primarily reflected transfers of certain bank loans and bridge loans and private equity investments from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the three months ended June 2014 primarily reflected transfers of certain private equity investments and bank loans and bridge loans to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

 

 

22   Goldman Sachs June 2014 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 Six Months Ended June 2014  
in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Non-U.S. government and agency obligations

    $       40         $    1        $      —        $     22         $     (18     $       (1     $       9         $       —         $       53   
   

Mortgage and other asset-backed loans and securities:

                     

Loans and securities backed by commercial real estate

    2,692         66        165        366         (259     (461     404         (353      2,620   
   

Loans and securities backed by residential real estate

    1,961         68        132        252         (177     (178     199         (218      2,039   
   

Bank loans and bridge loans

    9,324         244        236        2,250         (855     (2,213     651         (690      8,947   
   

Corporate debt securities

    2,873         155        66        629         (713     (405     100         (375      2,330   
   

State and municipal obligations

    257         2        4        34         (82     (2     1         (45      169   
   

Other debt obligations

    807         15        38        122         (160     (76     38         (155      629   
   

Equities and convertible debentures

    14,685         102        1,262        1,886         (1,025     (597     1,515         (1,569      16,259   

Total

    $32,639         $653  1      $1,903  1      $5,561         $(3,289     $(3,933     $2,917         $(3,405      $33,046   
    Level 3 Cash Instrument Liabilities at Fair Value for the Six Months Ended June 2014  
in millions    
 
 
Balance,
Beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Total

    $     297         $   (6     $    (70     $  (110      $      71        $      11        $       5         $       (1      $     197   

 

1.

The aggregate amounts include gains of approximately $400 million, $1.56 billion and $597 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instruments of $1.97 billion (reflecting $1.90 billion on cash instrument assets and $70 million on cash instrument liabilities) for the six months ended June 2014 primarily consisted of gains on private equity investments and bank loans and bridge loans, principally driven by company-specific events and strong corporate performance.

Transfers into level 3 during the six months ended June 2014 primarily reflected transfers of certain private equity investments and bank loans and bridge loans from level 2 principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the six months ended June 2014 primarily reflected transfers of certain private equity investments and bank loans and bridge loans to level 2 principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

 

 

    Goldman Sachs June 2014 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 Three Months Ended June 2013  
in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Non-U.S. government and
agency obligations

    $       47         $    2        $    3        $     42         $     (95     $       —        $     92         $       (1      $       90   
   

Mortgage and other asset-backed
loans and securities:

                     

Loans and securities backed by commercial real estate

    3,164         44        75        216         (431     (258     305         (146      2,969   
   

Loans and securities backed by
residential real estate

    1,683         30        61        223         (163     (156     106         (46      1,738   
   

Bank loans and bridge loans

    11,688         160        180        1,530         (1,217     (1,780     518         (1,082      9,997   
   

Corporate debt securities

    2,442         63        58        365         (364     (90     187         (169      2,492   
   

State and municipal obligations

    334         2        3        58         (162            93         (6      322   
   

Other debt obligations

    855         9        (3     183         (92     (132     260         (204      876   
   

Equities and convertible debentures

    15,224         42        346        740         (178     (330     349         (776      15,417   

Total

    $35,437         $352  1      $723  1      $3,357         $(2,702     $(2,746     $1,910         $(2,430      $33,901   
    Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended June 2013  
in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
(gains)/
losses
  
  
  
  
   
 
 
 
 
 
Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Total

    $     441         $  14        $   —        $  (210      $      89        $        3        $     75         $     (27      $     385   

 

1.

The aggregate amounts include gains of approximately $241 million, $612 million and $222 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instrument assets of $723 million for the three months ended June 2013 primarily consisted of gains on private equity investments, primarily driven by company-specific events and strong corporate performance, and bank loans and bridge loans, primarily driven by company-specific events.

Transfers into level 3 during the three months ended June 2013 primarily reflected transfers from level 2 of certain bank loans and bridge loans, private equity investments and investment in real estate entities, loans and securities backed by commercial real estate, and other debt obligations due to a lack of market transactions in these instruments.

Transfers out of level 3 during the three months ended June 2013 primarily reflected transfers of certain bank loans and bridge loans and private equity investments 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 June 2014 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 Six Months Ended June 2013  
in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Non-U.S. government and
agency obligations

    $       26         $    3        $       6        $     64         $       (9     $       (2     $       5         $       (3      $       90   
   

Mortgage and other asset-backed
loans and securities:

                     

Loans and securities backed by commercial real estate

    3,389         60        132        391         (569     (624     385         (195      2,969   
   

Loans and securities backed by
residential real estate

    1,619         65        79        475         (365     (182     124         (77      1,738   
   

Bank loans and bridge loans

    11,235         289        220        2,669         (1,163     (3,007     969         (1,215      9,997   
   

Corporate debt securities

    2,821         187        347        502         (1,183     (290     268         (160      2,492   
   

State and municipal obligations

    619         6        4        118         (421     (2     6         (8      322   
   

Other debt obligations

    1,185         22        18        423         (390     (104     160         (438      876   
   

Equities and convertible debentures

    14,855         86        920        968         (491     (916     1,097         (1,102      15,417   

Total

    $35,749         $718  1      $1,726  1      $5,610         $(4,591     $(5,127     $3,014         $(3,198      $33,901   
    Level 3 Cash Instrument Liabilities at Fair Value for the Six Months Ended June 2013  
in millions    
 
 
Balance,
beginning
of period
  
  
  
    
 
 
 
Net
realized
gains/
(losses)
  
  
  
  
   
 
 
 
 
 
Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end
  
  
  
  
  
  
    Purchases         Sales        Settlements       
 
 
Transfers
into
level 3
  
  
  
    
 
 
Transfers
out of
level 3
  
  
  
    
 
 
Balance,
end of
period
  
  
  

Total

    $     642         $  47        $     —        $  (423      $    172        $        7        $     64         $   (124      $     385   

 

1.

The aggregate amounts include gains of approximately $662 million, $1.38 billion and $400 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

 

The net unrealized gain on level 3 cash instrument assets of $1.73 billion for the six months ended June 2013 primarily consisted of gains on private equity investments, primarily driven by company-specific events and strong corporate performance, corporate debt securities, primarily due to tighter credit spreads, and bank loans and bridge loans, primarily driven by company-specific events.

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

Transfers out of level 3 during the six months ended June 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.

 

 

    Goldman Sachs June 2014 Form 10-Q   25


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Investments in Funds That Are Calculated Using Net Asset Value Per Share

    

Cash instruments at fair value include investments in funds that are calculated 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 are calculated using NAV primarily consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm co-invests with third-party investors.

Private equity funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit 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. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. The private equity, credit and real estate funds are primarily closed-end funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated.

The firm also invests in hedge funds, 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. These 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; however, these investments also include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be distributed until the underlying assets are liquidated.

Many of the funds described above are “covered funds” as defined by the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which has a conformance period that ends in July 2015 subject to possible extensions through 2017.

The firm continues to manage its existing funds, taking into account the transition periods under the Volcker Rule.

In order to be compliant with the Volcker Rule, the firm will be required to reduce most of its interests in the funds in the table below by the prescribed compliance date. To the extent that the underlying investments of particular funds are not sold, the firm may be required to sell its investments in such funds. If that occurs, the firm may receive a value for its investments that is less than the then carrying value, as there could be a limited secondary market for these investments and the firm may be unable to sell them in orderly transactions.

Since March 2012, the firm has redeemed approximately $2.25 billion of its interests in hedge funds, including approximately $20 million and $60 million during the three and six months ended June 2014, respectively.

The tables below present the fair value of the firm’s investments in, and unfunded commitments to, funds that are calculated using NAV.

 

    As of June 2014  
in millions    
 
Fair Value of
Investments
  
  
    
 
Unfunded
Commitments
  
  

Private equity funds

    $  7,510         $2,351   
   

Credit funds

    3,001         1,683   
   

Hedge funds

    1,461           
   

Real estate funds

    1,773         382   

Total

    $13,745         $4,416   
    As of December 2013  
in millions    
 
Fair Value of
Investments
  
  
    
 
Unfunded
Commitments
  
  

Private equity funds

    $  7,446         $2,575   
   

Credit funds

    3,624         2,515   
   

Hedge funds

    1,394           
   

Real estate funds

    1,908         471   

Total

    $14,372         $5,561   
 

 

26   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 7.

Derivatives and Hedging Activities

Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be 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 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 (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). 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 tables below present the fair value of derivatives on a net-by-counterparty basis.

 

    As of June 2014  
in millions    
 
Derivative
Assets
  
  
    
 
Derivative
Liabilities
  
  

Exchange-traded

    $  3,059         $  2,666   
   

OTC

    50,784         43,529   

Total

    $53,843         $46,195   
    As of December 2013  
in millions    
 
Derivative
Assets
  
  
    
 
Derivative
Liabilities
  
  

Exchange-traded

    $  4,277         $  6,366   
   

OTC

    53,602         43,356   

Total

    $57,879         $49,722   
 

 

    Goldman Sachs June 2014 Form 10-Q   27


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 and cash collateral netting 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 June 2014         As of December 2013  
in millions    
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  
   
 
Notional
Amount
  
  
       
 
Derivative
Assets
  
  
   
 
Derivative
Liabilities
  
  
   
 
Notional
Amount
  
  

Derivatives not accounted for as hedges

             

Interest rates

    $ 626,078        $ 573,843        $47,606,176          $ 641,186        $ 587,110        $44,110,483   
   

Exchange-traded

    163        231        3,429,506          157        271        2,366,448   
   

OTC-cleared

    232,572        216,279        28,501,398          266,230        252,596        24,888,301   
   

Bilateral OTC

    393,343        357,333        15,675,272          374,799        334,243        16,855,734   
   

Credit

    53,990        51,338        2,754,868          60,751        56,340        2,946,376   
   

OTC-cleared

    5,433        5,332        381,086          3,943        4,482        348,848   
   

Bilateral OTC

    48,557        46,006        2,373,782          56,808        51,858        2,597,528   
   

Currencies

    59,009        51,532        5,123,746          70,757        63,659        4,311,971   
   

Exchange-traded

    68        63        14,698          98        122        23,908   
   

OTC-cleared

    116        125        13,404          88        97        11,319   
   

Bilateral OTC

    58,825        51,344        5,095,644          70,571        63,440        4,276,744   
   

Commodities

    17,711        17,515        719,827          18,007        18,228        701,101   
   

Exchange-traded

    4,863        3,790        367,968          4,323        3,661        346,057   
   

OTC-cleared

    266        298        3,267          11        12        135   
   

Bilateral OTC

    12,582        13,427        348,592          13,673        14,555        354,909   
   

Equities

    54,644        52,771        1,523,954          56,719        55,472        1,406,499   
   

Exchange-traded

    9,963        10,580        551,650          10,544        13,157        534,840   
   

OTC-cleared

    10        1        299                          
   

Bilateral OTC

    44,671        42,190        972,005            46,175        42,315        871,659   

Subtotal

    811,432        746,999        57,728,571            847,420        780,809        53,476,430   

Derivatives accounted for as hedges

             

Interest rates

    12,609        303        124,034          11,403        429        132,879   
   

OTC-cleared

    4,056        26        38,365          1,327        27        10,637   
   

Bilateral OTC

    8,553        277        85,669          10,076        402        122,242   
   

Currencies

    16        116        9,684          74        56        9,296   
   

OTC-cleared

    3        14        1,442          1        10        869   
   

Bilateral OTC

    13        102        8,242          73        46        8,427   
   

Commodities

    40               147          36               335   
   

Exchange-traded

                                         23   
   

Bilateral OTC

    40               147            36               312   

Subtotal

    12,665        419        133,865            11,513        485        142,510   

Gross fair value/notional amount of derivatives

    $ 824,097  1      $ 747,418  1      $57,862,436            $ 858,933  1      $ 781,294  1      $53,618,940   

Amounts that have been offset in the condensed consolidated statements of financial condition

             

Counterparty netting

    (674,863     (674,863         (707,411     (707,411  
   

Exchange-traded

    (11,998     (11,998         (10,845     (10,845  
   

OTC-cleared

    (220,564     (220,564         (254,756     (254,756  
   

Bilateral OTC

    (442,301     (442,301         (441,810     (441,810  
   

Cash collateral netting

    (95,391     (26,360         (93,643     (24,161  
   

OTC-cleared

    (21,460     (1,428         (16,353     (2,515  
   

Bilateral OTC

    (73,931     (24,932                 (77,290     (21,646        

Fair value included in financial instruments owned/financial instruments sold, but not yet purchased

    $   53,843        $   46,195                    $   57,879        $   49,722           

Amounts that have not been offset in the condensed consolidated statements of financial condition

             

Cash collateral received/posted

    (692     (2,166         (636     (2,806  
   

Securities collateral received/posted

    (10,951     (10,331                 (13,225     (10,521        

Total

    $   42,200        $   33,698                    $   44,018        $   36,395           

 

1.

Includes derivative assets and derivative liabilities of $24.49 billion and $23.37 billion, respectively, as of June 2014, and derivative assets and derivative liabilities of $23.18 billion and $23.46 billion, respectively, as of December 2013, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.

 

28   Goldman Sachs June 2014 Form 10-Q    


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Valuation Techniques for Derivatives

The firm’s level 2 and level 3 derivatives are valued using derivative pricing models (e.g., discounted cash flow models, correlation models, and models that incorporate option pricing methodologies, such as Monte Carlo simulations). Price transparency of derivatives can generally be characterized by product type.

 

Ÿ  

Interest Rate. In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate) are more complex, but the prices and other inputs are generally observable.

 

Ÿ  

Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns gen