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Goldman Sachs Group 10-K 2009 Documents found in this filing:
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
The Goldman Sachs Group,
Inc.
(212) 902-1000
Securities registered pursuant to Section 12(b) of the
Act:
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.
Yes o No x
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.
Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of the Annual Report on
Form 10-K
or any amendment to the Annual Report on
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer x Accelerated
filer o Non-accelerated
filer (Do not check if a smaller reporting
company) o Smaller
reporting
company o
Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange Act).
Yes o No x
As of
May 30, 2008, the aggregate market value of the common
stock of the registrant held by
non-affiliates
of the registrant was approximately $68.2 billion.
As of
January 16, 2009, there were 461,784,433 shares
of the registrant’s common stock outstanding.
Documents
incorporated by reference: Portions of The
Goldman Sachs Group, Inc.’s Proxy Statement for its 2009
Annual Meeting of Shareholders to be held on
May 8, 2009 are incorporated by reference in the
Annual Report on
Form 10-K
in response to Part III, Items 10, 11, 12, 13 and 14.
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED NOVEMBER 28, 2008
INDEX
Table of Contents
PART I
Goldman Sachs is a bank holding company and a leading global
investment banking, securities and investment management firm
that provides a wide range of services worldwide to a
substantial and diversified client base that includes
corporations, financial institutions, governments and
high-net-worth
individuals. Goldman Sachs is the successor to a commercial
paper business founded in 1869 by Marcus Goldman. On
May 7, 1999, we converted from a partnership to a
corporation and completed an initial public offering of our
common stock. On September 21, 2008, The Goldman Sachs
Group, Inc. (Group Inc.) became a bank holding company regulated
by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the U.S. Bank Holding Company Act of
1956 (BHC Act). Our depository institution subsidiary, Goldman
Sachs Bank USA (GS Bank USA), became a New York State-chartered
bank on November 28, 2008.
Our activities are divided into three segments:
(i) Investment Banking, (ii) Trading and Principal
Investments and (iii) Asset Management and Securities
Services.
All references to 2008, 2007 and 2006 refer to our fiscal years
ended, or the dates, as the context requires,
November 28, 2008, November 30, 2007 and
November 24, 2006, respectively. When we use the terms
“Goldman Sachs,” “the firm,” “we,”
“us” and “our,” we mean The Goldman Sachs
Group, Inc., a Delaware corporation, and its consolidated
subsidiaries. References herein to our Annual Report on
Form 10-K
are to our Annual Report on
Form 10-K
for the fiscal year ended November 28, 2008.
On December 15, 2008, our Board of Directors approved
a change in our fiscal year-end from the last Friday of November
to the last Friday of December. The change is effective for our
2009 fiscal year. Our 2009 fiscal year began
December 27, 2008 and will end
December 25, 2009, resulting in a
one-month
transition period that began November 29, 2008 and
ended December 26, 2008. Information on this
one-month
transition period will be included in our Quarterly Report on
Form 10-Q
for the three months ended March 27, 2009.
Financial information concerning our business segments and
geographic regions for each of 2008, 2007 and 2006 is set forth
in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” the consolidated
financial statements and the notes thereto, and the supplemental
financial information, which are in Part II, Items 7,
7A and 8 of our Annual Report on
Form 10-K.
Our internet address is www.gs.com and the investor
relations section of our web site is located at
www.gs.com/shareholders. We make available free of
charge, on or through the investor relations section of our web
site, annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the U.S. Securities Exchange
Act of 1934 (Exchange Act), as well as proxy statements, as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the U.S. Securities and
Exchange Commission. Also posted on our web site, and available
in print upon request of any shareholder to our Investor
Relations Department, are our certificate of incorporation and
by-laws, charters for our Audit Committee, Compensation
Committee, and Corporate Governance and Nominating Committee,
our Policy Regarding Director Independence Determinations, our
Policy on Reporting of Concerns Regarding Accounting and Other
Matters, our Corporate Governance Guidelines and our Code of
Business Conduct and Ethics governing our directors, officers
and employees. Within the time period required by the SEC and
the New York Stock Exchange, we will post on our web site any
amendment to the Code of Business Conduct and Ethics and any
waiver applicable to any executive officer, director or senior
financial officer (as defined in the Code). In addition, our web
site includes information concerning purchases and sales of our
equity securities by our executive officers and directors, as
well as disclosure relating to certain
non-GAAP
financial measures (as defined in the SEC’s
Regulation G) that we may make public orally,
telephonically, by webcast, by broadcast or by similar means
from time to time.
Our Investor Relations Department can be contacted at The
Goldman Sachs Group, Inc., 85 Broad Street, 17th Floor, New
York, New York 10004, Attn: Investor Relations, telephone:
212-902-0300,
e-mail:
gs-investor-relations@gs.com.
Table of Contents
We have included or incorporated by reference in our Annual
Report on
Form 10-K,
and from time to time our management may make, statements that
may constitute “forward-looking statements” within the
meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical facts but instead represent only
our beliefs regarding future events, many of which, by their
nature, are inherently uncertain and outside our control. These
statements include statements other than historical information
or statements of current condition and may relate to our future
plans and objectives and results, among other things, and may
also include our belief regarding the effect of various legal
proceedings, as set forth under “Legal Proceedings” in
Part I, Item 3 of our Annual Report on
Form 10-K,
as well as statements about the objectives and effectiveness of
our risk management and liquidity policies, statements about
trends in or growth opportunities for our businesses, statements
about our future status, activities or reporting under
U.S. banking regulation, and statements about our
investment banking transaction backlog, in Part II,
Item 7 of our Annual Report on
Form 10-K.
By identifying these statements for you in this manner, we are
alerting you to the possibility that our actual results and
financial condition may differ, possibly materially, from the
anticipated results and financial condition indicated in these
forward-looking statements. Important factors that could cause
our actual results and financial condition to differ from those
indicated in the forward-looking statements include, among
others, those discussed below and under “Risk Factors”
in Part I, Item 1A of our Annual Report on
Form 10-K.
In the case of statements about our investment banking
transaction backlog, such statements are subject to the risk
that the terms of these transactions may be modified or that
they may not be completed at all; therefore, the net revenues,
if any, that we actually earn from these transactions may
differ, possibly materially, from those currently expected.
Important factors that could result in a modification of the
terms of a transaction or a transaction not being completed
include, in the case of underwriting transactions, a decline or
continued weakness in general economic conditions, outbreak of
hostilities, volatility in the securities markets generally or
an adverse development with respect to the issuer of the
securities and, in the case of financial advisory transactions,
a decline in the securities markets, an inability to obtain
adequate financing, an adverse development with respect to a
party to the transaction or a failure to obtain a required
regulatory approval. For a discussion of other important factors
that could adversely affect our investment banking transactions,
see “Risk Factors” in Part I, Item 1A of our
Annual Report on
Form 10-K.
Table of Contents
Segment Operating
Results
(in millions)
Table of Contents
As of November 28, 2008, we operated offices in over
30 countries and 43% of our 30,067 employees were based outside
the Americas (which includes the countries in North and South
America). In 2008, we derived 30% of our net revenues outside of
the Americas. See geographic information in Note 18 to the
consolidated financial statements in Part II, Item 8
of our Annual Report on
Form 10-K.
Our clients are located worldwide, and we are an active
participant in financial markets around the world. We have
developed and continue to build strong investment banking
relationships in new and developing markets. We also continue to
expand our presence throughout these markets to invest
strategically when opportunities arise and to work more closely
with our private wealth and asset management clients in these
regions. Our global reach is illustrated by the following:
Our businesses are supported by our Global Investment Research
division, which, as of November 2008, provided research
coverage of over 3,250 companies worldwide and over 45 national
economies, and maintained a presence in locations around the
world.
We continue to expand our geographic reach. For example, in
recent years we have opened offices in Mumbai, Moscow, Sao
Paulo, Dubai, Qatar, Riyadh and Tel Aviv, become licensed as a
broker-dealer
in Russia, India and China, opened banks in Brazil, Ireland and
Russia and entered into the asset management business in South
Korea and India.
Table of Contents
The primary products and activities of our business segments are
set forth in the following chart:
Table of Contents
Investment Banking represented 23% of 2008 net revenues. We
provide a broad range of investment banking services to a
diverse group of corporations, financial institutions,
investment funds, governments and individuals and seek to
develop and maintain
long-term
relationships with these clients as their lead investment bank.
Our current structure, which is organized by regional, industry
and product groups, seeks to combine client-focused investment
bankers with execution and industry expertise. We continually
assess and adapt our organization to meet the demands of our
clients in each geographic region. Through our commitment to
teamwork, we believe that we provide services in an integrated
fashion for the benefit of our clients.
Our goal is to make available to our clients the entire
resources of the firm in a seamless fashion, with investment
banking serving as “front of the house.” To accomplish
this objective, we focus on coordination among our equity and
debt underwriting activities and our corporate risk and
liability management activities. This coordination is intended
to assist our investment banking clients in managing their asset
and liability exposures and their capital.
Our Investment Banking segment is divided into two components:
Financial Advisory and Underwriting.
Financial Advisory includes advisory assignments with respect to
mergers and acquisitions, divestitures, corporate defense
activities, restructurings and
spin-offs.
Our mergers and acquisitions capabilities are evidenced by our
significant share of assignments in large, complex transactions
for which we provide multiple services, including
“one-stop”
acquisition financing and cross-border structuring expertise, as
well as services in other areas of the firm, such as interest
rate and currency hedging. In particular, a significant number
of the loan commitments and bank and bridge loan facilities that
we enter into arise in connection with our advisory assignments.
Underwriting includes public offerings and private placements of
a wide range of securities and other financial instruments,
including common and preferred stock, convertible and
exchangeable securities,
investment-grade
debt,
high-yield
debt, sovereign and emerging market debt, municipal debt, bank
loans,
asset-backed
securities and real estate-related securities, such as
mortgage-related
securities and the securities of real estate investment trusts.
Equity Underwriting. Equity underwriting has
been a
long-term
core strength of Goldman Sachs. As with mergers and
acquisitions, we have been particularly successful in winning
mandates for large, complex transactions. We believe our
leadership in worldwide initial public offerings and worldwide
public common stock offerings reflects our expertise in complex
transactions, prior experience and distribution capabilities.
Debt Underwriting. We engage in the
underwriting and origination of various types of debt
instruments, including
investment-grade
debt securities,
high-yield
debt securities, bank and bridge loans and emerging market debt
securities, which may be issued by, among others, corporate,
sovereign and agency issuers. In addition, we underwrite and
originate structured securities, which include
mortgage-related
securities and other
asset-backed
securities and collateralized debt obligations.
Table of Contents
Trading and Principal Investments represented 41% of 2008 net
revenues. Trading and Principal Investments facilitates client
transactions with a diverse group of corporations, financial
institutions, investment funds, governments and individuals and
takes proprietary positions through market making in, trading of
and investing in fixed income and equity products, currencies,
commodities and derivatives on these products. In addition, we
engage in
market-making
and specialist activities on equities and options exchanges, and
we clear client transactions on major stock, options and futures
exchanges worldwide. In connection with our merchant banking and
other investing activities, we make principal investments
directly and through funds that we raise and manage.
To meet the needs of our clients, Trading and Principal
Investments is diversified across a wide range of products. We
believe our willingness and ability to take risk to facilitate
client transactions distinguishes us from many of our
competitors and substantially enhances our client relationships.
Our Trading and Principal Investments segment is divided into
three components: Fixed Income, Currency and Commodities;
Equities; and Principal Investments.
Fixed Income, Currency and Commodities (FICC) and Equities are
large and diversified operations through which we engage in a
variety of client-driven and proprietary trading and investing
activities.
In our client-driven businesses, FICC and Equities strive to
deliver
high-quality
service by offering broad
market-making
and market knowledge to our clients on a global basis. In
addition, we use our expertise to take positions in markets, by
committing capital and taking risk, to facilitate client
transactions and to provide liquidity. Our willingness to make
markets, commit capital and take risk in a broad range of fixed
income, currency, commodity and equity products and their
derivatives is crucial to our client relationships and to
support our underwriting business by providing secondary market
liquidity.
We generate trading net revenues from our client-driven
businesses in three ways:
Our FICC and Equities businesses operate in close coordination
to provide clients with services and cross-market knowledge and
expertise.
In our proprietary activities in both FICC and Equities, we
assume a variety of risks and devote resources to identify,
analyze and benefit from these exposures. We capitalize on our
analytical models to analyze information and make informed
trading judgments, and we seek to benefit from perceived
disparities in the value of assets in the trading markets and
from macroeconomic and issuer-specific trends.
Table of Contents
We make markets in and trade interest rate and credit products,
mortgage-related
securities and loan products and other
asset-backed
instruments, currencies and commodities, structure and enter
into a wide variety of derivative transactions, and engage in
proprietary trading and investing. FICC has five principal
businesses: commodities; credit products; currencies; interest
rate products, including money market instruments; and
mortgage-related
securities and loan products and other
asset-backed
instruments.
Commodities. We enter into trades with our
clients in, make markets in, and trade for our own account a
wide variety of commodities, commodity derivatives and interests
in commodity-related assets, including oil and oil products,
metals, natural gas and electricity, and forest products. As
part of our commodities business, we acquire and dispose of
interests in, and engage in the development and operation of,
electric power generation facilities and related activities.
Credit Products. We offer to and trade for our
clients a broad array of credit and
credit-linked
products all over the world, including credit derivatives,
investment-grade
corporate securities,
high-yield
securities, bank and secured loans (origination and trading),
municipal securities, and emerging market and distressed debt.
For example, we enter, as principal, into complex structured
transactions designed to meet client needs.
In addition, we provide credit through bridge and other loan
facilities to a broad range of clients. Commitments that are
extended for contingent acquisition financing are often intended
to be
short-term
in nature, as borrowers often seek to replace them with other
funding sources. As part of our ongoing credit origination
activities, we may seek to reduce our credit risk on commitments
by syndicating all or substantial portions of commitments to
other investors or, upon funding, by securitizing the positions
through investment vehicles sold to other investors.
Underwriting fees from syndications of these commitments are
recorded in debt underwriting in our Investment Banking segment.
However, to the extent that we recognize losses on these
commitments, such losses are recorded within our Trading and
Principal Investments segment, net of any related underwriting
fees. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Contractual Obligations and Commitments” in Part II,
Item 7 of our Annual Report on
Form 10-K
for additional information on our commitments.
Our credit products business includes making significant
long-term
and
short-term
investments for our own account (sometimes investing together
with our merchant banking funds) in a broad array of asset
classes (including distressed debt) globally. We
opportunistically invest in debt and equity securities and
secured loans, and in private equity, real estate and other
assets.
Currencies. We act as a dealer in foreign
exchange and trade for our clients and ourselves in most
currencies on exchanges and in cash and derivative markets
globally.
Interest Rate Products. We trade and make
markets in a variety of interest rate products, including
interest rate swaps, options and other derivatives, and
government bonds, as well as money market instruments, such as
commercial paper, treasury bills, repurchase agreements and
other highly liquid securities and instruments. This business
includes our matched book, which consists of
short-term
collateralized financing transactions.
Mortgage Business. We make markets in and
trade for our clients and ourselves commercial and residential
mortgage-related
securities and loan products (including agency prime and
non-agency prime,
Alt-A and
subprime mortgages) and other
asset-backed
and derivative instruments. We acquire positions in these
products for proprietary trading purposes as well as for
securitization or syndication. We also originate and service
commercial and residential mortgages.
Table of Contents
We make markets in and trade equities and
equity-related
products, structure and enter into equity derivative
transactions, and engage in proprietary trading. We generate
commissions from executing and clearing client transactions on
major stock, options and futures exchanges worldwide through our
Equities client franchise and clearing activities.
Equities includes two principal businesses: our client franchise
business and principal strategies. We also engage in specialist
and insurance activities.
Client Franchise Business. Our client
franchise business includes primarily client-driven activities
in the shares, equity derivatives and convertible securities
markets. These activities also include clearing client
transactions on major stock, options and futures exchanges
worldwide, as well as our options specialist and
market-making
businesses. Our client franchise business increasingly involves
providing our clients with access to electronic
“low-touch”
equity trading platforms, and electronic trades account for the
majority of our client trading activity in this business.
However, a majority of our net revenues in this business
continues to be derived from our traditional
“high-touch”
handling of more complex trades. We expect both types of trading
activities to remain important components of our client
franchise business.
We trade equity securities and
equity-related
products, including convertible securities, options, futures and
over-the-counter
(OTC) derivative instruments, on a global basis as an agent, as
a market maker or otherwise as a principal. As a principal, we
facilitate client transactions, often by committing capital and
taking risk, to provide liquidity to clients with large blocks
of stocks or options. For example, we are active in the
execution of large block trades. We also execute transactions as
agent and offer clients direct electronic access to trading
markets.
In the options and futures markets, we structure, distribute and
execute derivatives on market indices, industry groups,
financial measures and individual company stocks to facilitate
client transactions and our proprietary activities. We develop
strategies and render advice with respect to portfolio hedging
and restructuring and asset allocation transactions. We also
create specially tailored instruments to enable sophisticated
investors to undertake hedging strategies and to establish or
liquidate investment positions. We are one of the leading
participants in the trading and development of equity derivative
instruments. In options, we are a specialist
and/or
market maker on the International Securities Exchange, the
Chicago Board Options Exchange, NYSE Arca, the Boston Options
Exchange, the Philadelphia Stock Exchange, NYSE Alternext US and
the Chicago Mercantile Exchange.
Principal Strategies. Our principal strategies
business is a multi-strategy investment business that invests
and trades our capital across global markets. Investment
strategies include fundamental equities and relative value
trading (which involves trading strategies designed to take
advantage of perceived discrepancies in the relative value of
financial instruments, including equity,
equity-related
and debt instruments), event-driven investments (which focus on
event-oriented special situations such as corporate
restructurings, bankruptcies, recapitalizations, mergers and
acquisitions, and legal and regulatory events), convertible bond
trading, various types of volatility trading and principal
finance.
At the start of our first fiscal quarter of 2008, we reassigned
approximately
one-half of
the traders and other personnel and transferred approximately
one-half of
the firm’s assets comprising our principal strategies
business to our asset management business in an effort to
strengthen and diversify our asset management offerings. These
assets are invested in an alternative investment fund managed by
our asset management business.
Table of Contents
Specialist Activities. Our specialist
activities business consists of our stock and
exchange-traded
funds (ETF) specialist and
market-making
businesses. We engage in specialist and
market-making
activities on equities exchanges. In the United States, we are
one of the leading designated market makers for stocks traded on
the NYSE. For ETFs, we are registered market makers on NYSE Arca.
Insurance Activities. Through our insurance
subsidiaries, we engage in a range of insurance and reinsurance
businesses, including buying, originating
and/or
reinsuring variable annuity and life insurance contracts,
reinsuring property catastrophe and residential homeowner risks
and providing power interruption coverage to power generating
facilities.
Principal Investments primarily represents net revenues from
three primary sources: returns on corporate and real estate
investments; overrides on corporate and real estate investments
made by merchant banking funds that we manage; and our
investment in the ordinary shares of Industrial and Commercial
Bank of China Limited (ICBC).
Returns on Corporate and Real Estate
Investments. As of November 2008, the
aggregate carrying value of our principal investments held
directly or through our merchant banking funds, excluding our
investment in the ordinary shares of ICBC, was
$15.13 billion, comprised of corporate principal
investments with an aggregate carrying value of
$12.16 billion and real estate investments with an
aggregate carrying value of $2.97 billion. In addition, as
of November 2008, we had outstanding unfunded equity
capital commitments of up to $13.47 billion, comprised of
corporate principal investment commitments of
$10.39 billion and real estate investment commitments of
$3.08 billion.
Overrides. Consists of the increased share of
the income and gains derived from our merchant banking funds
when the return on a fund’s investments over the life of
the fund exceeds certain threshold returns (typically referred
to as an override). Overrides are recognized in net revenues
when all material contingencies have been resolved.
ICBC. Our investment in the ordinary shares of
ICBC was acquired on April 28, 2006. The ordinary
shares acquired from ICBC are subject to transfer restrictions
that, among other things, prohibit any sale, disposition or
other transfer until April 28, 2009. From
April 28, 2009 to October 20, 2009, we may
transfer up to 50% of the aggregate ordinary shares of ICBC that
we owned as of October 20, 2006. We may transfer the
remaining shares after October 20, 2009. As of
November 2008, the fair value of our investment in the
ordinary shares of ICBC was $5.50 billion. A portion of our
interest is held by investment funds managed by Goldman Sachs.
For further information regarding our investment in the ordinary
shares of ICBC, see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies —
Fair Value — Cash Instruments” in Part II,
Item 7 of our Annual Report on
Form 10-K.
Table of Contents
Asset Management and Securities Services represented 36% of 2008
net revenues. Our asset management business provides investment
advisory and financial planning services and offers investment
products (primarily through separately managed accounts and
commingled vehicles) across all major asset classes to a diverse
group of institutions and individuals worldwide and primarily
generates revenues in the form of management and incentive fees.
Securities Services provides prime brokerage services, financing
services and securities lending services to institutional
clients, including hedge funds, mutual funds, pension funds and
foundations, and to
high-net-worth
individuals worldwide, and generates revenues primarily in the
form of interest rate spreads or fees.
Our Asset Management and Securities Services segment is divided
into two components: Asset Management and Securities Services.
We offer a broad array of investment strategies, advice and
planning. We provide asset management services and offer
investment products (primarily through separately managed
accounts and commingled vehicles, such as mutual funds and
private investment funds) across all major asset classes: money
markets, fixed income, equities and alternative investments
(including hedge funds, private equity, real estate, currencies,
commodities and asset allocation strategies). Through our
subsidiary, The Ayco Company, L.P., we also provide fee-based
financial counseling and financial education in the United
States.
Assets under management (AUM) typically generate fees as a
percentage of asset value, which is affected by investment
performance and by inflows and redemptions. The fees that we
charge vary by asset class, as do our related expenses. In
certain circumstances, we are also entitled to receive incentive
fees based on a percentage of a fund’s return or when the
return on assets under management exceeds specified benchmark
returns or other performance targets. Incentive fees are
recognized when the performance period ends and they are no
longer subject to adjustment. We have numerous incentive fee
arrangements, many of which have annual performance periods that
end on December 31. For that reason, incentive fees have
been seasonally weighted to our first quarter.
AUM includes our mutual funds, alternative investment funds and
separately managed accounts for institutional and individual
investors. Alternative investments include our merchant banking
funds, which generate revenues as described below under
“— Management
of Merchant Banking Funds.” AUM includes assets in
clients’ brokerage accounts to the extent that they
generate fees based on the assets in the accounts rather than
commissions on transactional activity in the accounts.
AUM does not include assets in brokerage accounts that generate
commissions,
mark-ups and
spreads based on transactional activity, or our own investments
in funds that we manage. Net revenues from these assets are
included in our Trading and Principal Investments segment. AUM
also does not include
non-fee-paying
assets, including interest-bearing deposits held through our
bank depository institution subsidiaries.
Table of Contents
The amount of AUM is set forth in the graph below. In the
following graph, as well as in the following tables,
substantially all assets under management are valued as of
November 30:
Assets Under
Management
(in billions) 
The following table sets forth AUM by asset class:
Assets Under
Management by Asset Class
(in billions)
Table of Contents
Clients. Our clients are institutions and
individuals, including both
high-net-worth
and retail investors. We access institutional and
high-net-worth
clients through both direct and
third-party
channels and retail clients primarily through
third-party
channels. Our institutional clients include pension funds,
governmental organizations, corporations, insurance companies,
banks, foundations and endowments. In
third-party
distribution channels, we distribute our mutual funds,
alternative investment funds and separately managed accounts
through brokerage firms, banks, insurance companies and other
financial intermediaries. Our clients are located worldwide.
The table below sets forth the amount of AUM by distribution
channel and client category:
Assets Under
Management by Distribution Channel
(in billions)
Management of Merchant Banking Funds. Goldman
Sachs sponsors numerous corporate and real estate private
investment funds. As of November 2008, the amount of AUM in
these funds (including both funded amounts and unfunded
commitments on which we earn fees) was $93 billion.
Our strategy with respect to these funds generally is to invest
opportunistically to build a portfolio of investments that is
diversified by industry, product type, geographic region, and
transaction structure and type. Our corporate investment funds
pursue, on a global basis,
long-term
investments in equity and debt securities in privately
negotiated transactions, leveraged buyouts, acquisitions and
investments in funds managed by external parties. Our real
estate investment funds invest in real estate operating
companies, debt and equity interests in real estate assets, and
other real estate-related investments. In addition, our merchant
banking funds include funds that invest in infrastructure and
infrastructure-related assets and companies on a global basis.
Merchant banking activities generate three primary revenue
streams. First, we receive a management fee that is generally a
percentage of a fund’s committed capital, invested capital,
total gross acquisition cost or asset value. These annual
management fees are included in our Asset Management net
revenues. Second, Goldman Sachs, as a substantial investor in
some of these funds, is allocated its proportionate share of the
funds’ unrealized appreciation or depreciation arising from
changes in fair value as well as gains and losses upon
realization. Third, after a fund has achieved a minimum return
for fund investors, we receive an increased share of the
fund’s income and gains that is a percentage of the income
and gains from the fund’s investments. The second and third
of these revenue streams are included in Principal Investments
within our Trading and Principal Investments segment.
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Securities Services provides prime brokerage services, financing
services and securities lending services to institutional
clients, including hedge funds, mutual funds, pension funds and
foundations, and to
high-net-worth
individuals worldwide.
Prime brokerage services. We offer prime
brokerage services to our clients, allowing them the flexibility
to trade with most brokers while maintaining a single source for
financing and consolidated portfolio reports. Our prime
brokerage business provides clearing and custody in 53 markets
globally and provides consolidated multi-currency accounting and
reporting, fund administration and other ancillary services.
Financing services. A central element of our
prime brokerage business involves providing financing to our
clients for their securities trading activities through margin
and securities loans that are collateralized by securities, cash
or other acceptable collateral.
Securities lending services. Securities
lending services principally involve the borrowing and lending
of securities to cover clients’ and Goldman Sachs’
short sales and otherwise to make deliveries into the market. In
addition, we are an active participant in the
broker-to-broker
securities lending business and the
third-party
agency lending business. Net revenues in securities lending
services are, as a general matter, weighted toward our second
and third quarters each year due to seasonally higher activity
levels in Europe.
Global Investment Research provides fundamental research on
companies, industries, economies, currencies and commodities and
macro strategy research on a worldwide basis.
Global Investment Research employs a team approach that as of
November 2008 provided research coverage of over 3,250
companies worldwide and over 45 national economies. This is
accomplished by the following departments:
Further information regarding research at Goldman Sachs is
provided below under “— Regulation —
Regulations Applicable in and Outside the United States”
and “Legal Proceedings — Research Independence
Matters” in Part I, Item 3 of our Annual Report
on
Form 10-K.
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Business continuity and information security are high priorities
for Goldman Sachs. Our Business Continuity Program has been
developed to provide reasonable assurance of business continuity
in the event of disruptions at the firm’s critical
facilities and to comply with the regulatory requirements of the
Financial Industry Regulatory Authority (FINRA). Because we are
a bank holding company, our Business Continuity Program will be
subject to review by the Federal Reserve Board. The key elements
of the program are crisis management, people recovery
facilities, business recovery, systems and data recovery, and
process improvement. In the area of information security, we
have developed and implemented a framework of principles,
policies and technology to protect the information assets of the
firm and our clients. Safeguards are applied to maintain the
confidentiality, integrity and availability of information
resources.
Management believes that a major strength and principal reason
for the success of Goldman Sachs is the quality and dedication
of our people and the shared sense of being part of a team. We
strive to maintain a work environment that fosters
professionalism, excellence, diversity, cooperation among our
employees worldwide and high standards of business ethics.
Instilling the Goldman Sachs culture in all employees is a
continuous process, in which training plays an important part.
All employees are offered the opportunity to participate in
education and periodic seminars that we sponsor at various
locations throughout the world. Another important part of
instilling the Goldman Sachs culture is our employee review
process. Employees are reviewed by supervisors, co-workers and
employees they supervise in a
360-degree
review process that is integral to our team approach.
As of November 2008, we had 30,067 employees, excluding
4,671 employees of certain consolidated entities that are held
for investment purposes only. Consolidated entities held for
investment purposes are entities that are held strictly for
capital appreciation, have a defined exit strategy and are
engaged in activities that are not closely related to our
principal businesses.
The financial services industry — and all of our
businesses — are intensely competitive, and we expect
them to remain so. Our competitors are other entities that
provide investment banking, securities and investment management
services, as well as those entities that make investments in
securities, commodities, derivatives, real estate, loans and
other financial assets. These entities include brokers and
dealers, investment banking firms, commercial banks, insurance
companies, investment advisers, mutual funds, hedge funds,
private equity funds and merchant banks. We compete with some of
our competitors globally and with others on a regional, product
or niche basis. Our competition is based on a number of factors,
including transaction execution, our products and services,
innovation, reputation and price.
We also face intense competition in attracting and retaining
qualified employees. Our ability to continue to compete
effectively in our businesses will depend upon our ability to
attract new employees and retain and motivate our existing
employees.
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Over time, there has been substantial consolidation and
convergence among companies in the financial services industry.
This trend accelerated over the course of the past year as the
credit crisis caused numerous mergers and asset acquisitions
among industry participants. Many commercial banks and other
broad-based
financial services firms have had the ability for some time to
offer a wide range of products, from loans, deposit-taking and
insurance to brokerage, asset management and investment banking
services, which may enhance their competitive position. They
also have had the ability to support investment banking and
securities products with commercial banking, insurance and other
financial services revenues in an effort to gain market share,
which has resulted in pricing pressure in our investment banking
and trading businesses and could result in pricing pressure in
other of our businesses.
Moreover, we have faced, and expect to continue to face,
pressure to retain market share by committing capital to
businesses or transactions on terms that offer returns that may
not be commensurate with their risks. In particular, corporate
clients seek such commitments (such as agreements to participate
in their commercial paper backstop or other loan facilities)
from financial services firms in connection with investment
banking and other assignments.
We provide these commitments primarily through GS Bank USA and
its subsidiaries, including our William Street entities and
Goldman Sachs Credit Partners L.P. With respect to most of the
William Street commitments, Sumitomo Mitsui Financial Group,
Inc. (SMFG) provides us with credit loss protection that is
generally limited to 95% of the first loss we realize on
approved loan commitments, up to a maximum of
$1.00 billion. In addition, subject to the satisfaction of
certain conditions, upon our request, SMFG will provide
protection for 70% of additional losses on such commitments, up
to a maximum of $1.13 billion, of which $375 million
of protection has been provided as of November 2008. We
also use other financial instruments to mitigate credit risks
related to certain William Street commitments not covered by
SMFG. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations —
Contractual Obligations and Commitments” in Part II,
Item 7 of our Annual Report on
Form 10-K
and Note 8 to the consolidated financial statements in
Part II, Item 8 of our Annual Report on
Form 10-K
for more information regarding the William Street entities and
for a description of the credit loss protection provided by
SMFG. An increasing number of our commitments in connection with
investment banking and other assignments do not meet the
criteria established for the William Street entities and do not
benefit from the SMFG loss protection. These commitments are
issued through GS Bank USA and its subsidiaries or our other
subsidiaries.
The trend toward consolidation and convergence has significantly
increased the capital base and geographic reach of some of our
competitors. This trend has also hastened the globalization of
the securities and other financial services markets. As a
result, we have had to commit capital to support our
international operations and to execute large global
transactions. To take advantage of some of our most significant
challenges and opportunities, we will have to compete
successfully with financial institutions that are larger and
better capitalized and that may have a stronger local presence
and longer operating history outside the United States.
We have experienced intense price competition in some of our
businesses in recent years. There has been considerable pressure
in the pricing of block trades. Also, equity and debt
underwriting discounts, as well as trading spreads, have been
under pressure for a number of years and the ability to execute
trades electronically, through the internet and through
alternative trading systems, has increased the pressure on
trading commissions. It appears that this trend toward
electronic and other
“low-touch,”
low-commission
trading will continue. We believe that we will continue to
experience competitive pressures in these and other areas in the
future as some of our competitors seek to obtain market share by
reducing prices.
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Goldman Sachs, as a participant in the banking, securities,
commodity futures and options and insurance industries, is
subject to extensive regulation in the United States and the
other countries in which we operate. See “Risk
Factors — Our businesses and those of our clients are
subject to extensive and pervasive regulation around the
world” in Part I, Item 1A of our Annual Report on
Form 10-K
for a further discussion of the effect that regulation may have
on our businesses. As a matter of public policy, regulatory
bodies around the world are charged with safeguarding the
integrity of the securities and other financial markets and with
protecting the interests of clients participating in those
markets, including depositors in U.S. depository
institutions such as GS Bank USA. They are not, however,
generally charged with protecting the interests of Goldman
Sachs’ shareholders or creditors.
On September 21, 2008, Group Inc. became a bank
holding company under the BHC Act. As of that date, the Federal
Reserve Board became the primary U.S. regulator of Group
Inc., as a consolidated entity. Prior to
September 21, 2008, Group Inc. was subject to
regulation by the SEC as a Consolidated Supervised Entity (CSE)
and was subject to
group-wide
supervision and examination by the SEC and to minimum capital
standards on a consolidated basis. On
September 26, 2008, the SEC announced that it was
ending the CSE program. Our principal
U.S. broker-dealer,
Goldman, Sachs & Co. (GS&Co.) remains subject to
regulation by the SEC.
Banking
Regulation
As a bank holding company under the BHC Act, Group Inc. is now
subject to supervision and examination by the Federal Reserve
Board. Under the system of “functional regulation”
established under the BHC Act, the Federal Reserve Board
supervises Group Inc., including all of its nonbank
subsidiaries, as an “umbrella regulator” of the
consolidated organization and generally defers to the primary
U.S. regulators of Group Inc.’s U.S. depository
institution subsidiary, as applicable, and to the other
U.S. regulators of Group Inc.’s
U.S. non-depository
institution subsidiaries that regulate certain activities of
those subsidiaries. Such “functionally regulated”
non-depository
institution subsidiaries include
broker-dealers
registered with the SEC, insurance companies regulated by state
insurance authorities, investment advisors registered with the
SEC with respect to their investment advisory activities and
entities regulated by the U.S. Commodity Futures Trading
Commission (CFTC) with respect to certain futures-related
activities.
The BHC Act generally restricts us from engaging in business
activities other than the business of banking and certain
closely related activities. However, the BHC Act also grants a
new bank holding company, such as Group Inc., two years from the
date the entity becomes a bank holding company to comply with
the restrictions on its activities imposed by the BHC Act with
respect to any activities that it was engaged in when it became
a bank holding company. We expect that this
“grandfather” right will allow us to continue to
conduct our business substantially as we have in the past until
at least September 22, 2010. In addition, under the
BHC Act, we can apply to the Federal Reserve Board for up to
three
one-year
extensions.
Under the
U.S. Gramm-Leach-Bliley
Act of 1999 (GLB Act), an eligible bank holding company may
elect to become a “financial holding company.”
Financial holding companies may engage in a broader range of
financial and related activities than are permissible for bank
holding companies as long as they continue to meet the
eligibility requirements for financial holding companies. These
activities include underwriting, dealing and making markets in
securities, insurance underwriting and making merchant banking
investments in nonfinancial companies. In addition, the GLB Act
also allows a company that was not a bank holding company and
becomes a financial holding company after
November 12, 1999 to continue to engage in certain
commodities activities that are otherwise
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impermissible for bank holding companies if the company was
engaged in any of these activities in the United States as of
September 30, 1997 and if the assets held pursuant to
these activities do not equal 5% or more of the consolidated
assets of the bank holding company.
We intend to apply to elect to become a financial holding
company under the GLB Act as soon as practicable. Our ability to
achieve and maintain financial holding company status is
dependent on a number of factors, including our
U.S. depository institution subsidiaries continuing to
qualify as “well capitalized” as described under
“— Prompt
Corrective Action” below. We do not believe that any
activities that are material to our current or currently
proposed business would be impermissible activities for us as a
financial holding company.
As a bank holding company, Group Inc. is required to obtain
prior Federal Reserve Board approval before directly or
indirectly acquiring more than 5% of any class of voting shares
of any unaffiliated depository institution. In addition, as a
bank holding company, we may generally engage in banking and
other financial activities abroad, including investing in and
owning
non-U.S. banks,
if those activities and investments do not exceed certain limits
and, in some cases, if we have obtained the prior approval of
the Federal Reserve Board.
We are subject to regulatory capital requirements administered
by the U.S. federal banking agencies. Our bank depository
institution subsidiaries, including GS Bank USA, are subject to
similar capital guidelines. Under the Federal Reserve
Board’s capital adequacy guidelines and the regulatory
framework for prompt corrective action (PCA) that is applicable
to GS Bank USA, Goldman Sachs and its bank depository
institution subsidiaries must meet specific capital guidelines
that involve quantitative measures of assets, liabilities and
certain
off-balance-sheet
items as calculated under regulatory reporting practices.
Goldman Sachs and its bank depository institution
subsidiaries’ capital amounts, as well as GS Bank
USA’s PCA classification, are also subject to qualitative
judgments by the regulators about components, risk weightings
and other factors. We anticipate reporting capital ratios as
follows:
Under the Basel II framework as it applied to us when we were
regulated as a CSE, we evaluate our Tier 1 Capital and
Total Allowable Capital as a percentage of
Risk-Weighted
Assets (RWAs). RWAs are calculated based on the level of market
risk, credit risk and operational risk associated with our
business activities, using methodologies generally consistent
with those set out in Basel II. Our
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Tier 1 Capital consists of common shareholders’
equity, qualifying preferred stock (including the cumulative
preferred stock issued by Group Inc. to the U.S. Department
of the Treasury’s (U.S. Treasury) TARP Capital
Purchase Program and our junior subordinated debt issued to
trusts, less deductions for goodwill, disallowed intangible
assets and other items. Our Total Allowable Capital consists of
our Tier 1 Capital and our qualifying subordinated debt,
less certain deductions. Additional information on the
calculation of our Tier 1 Capital, Total Allowable Capital
and RWAs under the Basel II framework as it applied to us
as a CSE is set forth in “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Equity Capital — Consolidated
Capital Requirements,” and in Note 17 to the
consolidated financial statements, which are in Part II,
Items 7 and 8 of our Annual Report on
Form 10-K.
As of November 2008, our Total Capital Ratio (Total
Allowable Capital as a percentage of RWAs) was 18.9% and our
Tier 1 Ratio (Tier 1 Capital as a percentage of RWAs)
was 15.6%, in each case calculated under the Basel II framework
as it applied to us when we were regulated as a CSE.
As noted above, we are currently working to implement the Basel
II framework as applicable to us as a bank holding company (as
opposed to as a CSE). During a parallel period, we anticipate
that Group Inc.’s capital calculations computed under both
the Basel I rules and the Basel II rules will be reported to the
Federal Reserve Board for examination and compliance for at
least four consecutive quarterly periods. Once the parallel
period and subsequent three-year transition period are
successfully completed, Group Inc. will utilize the Basel II
framework as its means of capital adequacy assessment,
measurement and reporting and will discontinue use of Basel I.
Internationally, the Basel II framework was implemented in
several countries during the second half of 2007 and in 2008,
while others will begin implementation in 2009. The Basel II
rules therefore also apply to certain of our operations in
non-U.S. jurisdictions.
The Federal Reserve Board also has established minimum leverage
ratio guidelines. We were not subject to these guidelines before
becoming a bank holding company and, accordingly, we are
currently working with the Federal Reserve Board to finalize our
methodology for calculating this ratio. The Tier 1 leverage
ratio is defined as Tier 1 capital (as applicable to us as
a bank holding company) divided by adjusted average total assets
(which includes adjustments for disallowed goodwill and certain
intangible assets). The minimum Tier 1 leverage ratio is 3%
for bank holding companies that have received the highest
supervisory rating under Federal Reserve Board guidelines or
that have implemented the Federal Reserve Board’s
risk-based
capital measure for market risk. Other bank holding companies
must have a minimum Tier 1 leverage ratio of 4%. Bank
holding companies may be expected to maintain ratios well above
the minimum levels, depending upon their particular condition,
risk profile and growth plans. As of November 2008, our
estimated Tier 1 leverage ratio was 6.1%. This ratio
represents a preliminary estimate and may be revised in
subsequent filings as we continue to work with the Federal
Reserve Board to finalize the methodology for the calculation.
GS&Co. will continue to calculate its regulatory capital
requirements in accordance with the market and credit risk
standards of Appendix E of
Rule 15c3-1
under the Exchange Act, which are consistent with Basel II.
Federal and state law imposes limitations on the payment of
dividends by our bank depository institution subsidiaries. The
amount of dividends that may be paid by a state-chartered bank
that is a member of the Federal Reserve System, such as GS Bank
USA or our national bank trust company subsidiary, is limited to
the lesser of the amounts calculated under a “recent
earnings” test and an “undivided profits” test.
Under the recent earnings test, a dividend may not be paid if
the total of all dividends declared by a bank in any calendar
year is in excess of the current year’s net income combined
with the retained net income of the two preceding years, unless
the bank obtains the approval of its chartering authority. Under
the undivided profits test, a dividend may not be paid in excess
of a bank’s “undivided profits.” New York law
imposes similar limitations on New York State-
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chartered banks. As a result of these restrictions, GS Bank USA
was not able to declare dividends to Group Inc. without
regulatory approval as of November 2008.
In addition to the dividend restrictions described above, the
banking regulators have authority to prohibit or to limit the
payment of dividends by the banking organizations they supervise
if, in the banking regulator’s opinion, payment of a
dividend would constitute an unsafe or unsound practice in light
of the financial condition of the banking organization.
It is also the policy of the Federal Reserve Board that a bank
holding company generally only pay dividends on common stock out
of net income available to common shareholders over the past
year and only if the prospective rate of earnings retention
appears consistent with the bank holding company’s capital
needs, asset quality, and overall financial condition. In the
current financial and economic environment, the Federal Reserve
Board has indicated that bank holding companies should carefully
review their dividend policy and has discouraged dividend
pay-out ratios that are at the 100% level unless both asset
quality and capital are very strong. A bank holding company also
should not maintain a dividend level that places undue pressure
on the capital of bank depository institution subsidiaries, or
that may undermine the bank holding company’s ability to
serve as a source of strength for such bank depository
institution subsidiaries. See
“— U.S. Treasury’s
TARP Capital Purchase Program” below for a discussion of
additional restrictions on Group Inc.’s ability to pay
dividends. In addition, certain of Group Inc.’s nonbank
subsidiaries are subject to separate regulatory limitations on
dividends and distributions, including our
broker-dealer
and our insurance subsidiaries as described below.
Under Federal Reserve Board policy, Group Inc. is expected to
act as a source of strength to GS Bank USA and to commit capital
and financial resources to support this subsidiary. The required
support may be needed at times when, absent that Federal Reserve
Board policy, we may not find ourselves able to provide it.
Capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to
certain other indebtedness of such subsidiary banks. In the
event of a bank holding company’s bankruptcy, any
commitment by the bank holding company to a federal bank
regulator to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of
payment.
However, because the BHC Act provides for functional regulation
of bank holding company activities by various regulators, the
BHC Act prohibits the Federal Reserve Board from requiring
payment by a holding company or subsidiary to a depository
institution if the functional regulator of the payor objects to
such payment. In such a case, the Federal Reserve Board could
instead require the divestiture of the depository institution
and impose operating restrictions pending the divestiture.
Each insured depository institution “controlled” (as
defined in the BHC Act) by the same bank holding company can be
held liable to the U.S. Federal Deposit Insurance
Corporation (FDIC) for any loss incurred, or reasonably expected
to be incurred, by the FDIC due to the default of any other
insured depository institution controlled by that holding
company and for any assistance provided by the FDIC to any of
those banks that is in danger of default. Such a
“cross-guarantee” claim against a depository
institution is generally superior in right of payment to claims
of the holding company and its affiliates against that
depository institution. At this time, we control only one
insured depository institution for this purpose, namely GS Bank
USA. However, if, in the future, we were to control other
insured depository institutions, such cross-guarantee would
apply to all such insured depository institutions.
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On October 28, 2008, Group Inc. issued preferred stock
and a warrant to purchase its common stock to the
U.S. Treasury as a participant in the TARP Capital Purchase
Program. Prior to October 28, 2011, unless we have
redeemed all of this preferred stock or the U.S. Treasury
has transferred all of this preferred stock to a third party,
the consent of the U.S. Treasury will be required for us
to, among other things, increase our common stock dividend above
the current quarterly cash dividend of $0.35 per share or
repurchase our common stock or outstanding preferred stock
except in limited circumstances. In addition, until the
U.S. Treasury ceases to own any Group Inc. securities sold
under the TARP Capital Purchase Program, the compensation
arrangements for our senior executive officers must comply in
all respects with the U.S. Emergency Economic Stabilization
Act of 2008 and the rules and regulations thereunder. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Equity
Capital — Equity Capital Management” in
Part II, Item 7 of our Annual Report on
Form 10-K
for a further discussion of our participation in the
U.S. Treasury’s TARP Capital Purchase Program.
Group Inc. and GS Bank USA have chosen to participate in the
FDIC’s Temporary Liquidity Guarantee Program (TLGP), which
applies to, among others, all U.S. depository institutions
insured by the FDIC and all U.S. bank holding companies,
unless they have opted out of the TLGP or the FDIC has
terminated their participation. Under the TLGP, the FDIC
guarantees certain senior unsecured debt of Group Inc. and GS
Bank USA, as well as noninterest-bearing transaction account
deposits at GS Bank USA, and in return for these guarantees the
FDIC is paid a fee based on the amount of the deposit or the
amount and maturity of the debt. Under the debt guarantee
component of the TLGP, the FDIC will pay the unpaid principal
and interest on an FDIC-guaranteed debt instrument upon the
uncured failure of the participating entity to make a timely
payment of principal or interest in accordance with the terms of
the instrument. Under the transaction account guarantee
component of the TLGP, all noninterest-bearing transaction
accounts maintained at GS Bank USA are insured in full by the
FDIC until December 31, 2009, regardless of the
standard maximum deposit insurance amount. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Funding Risk — Conservative Liability Structure”
in Part II, Item 7 of our Annual Report on
Form 10-K
for a further discussion of our participation in the TLGP.
Our U.S. depository institution subsidiary, GS Bank USA, a New
York State-chartered bank and a member of the Federal Reserve
System and the FDIC, is regulated by the Federal Reserve Board
and the New York State Banking Department and is subject to
minimum capital requirements that (subject to certain
exceptions) are similar to those applicable to bank holding
companies. GS Bank USA was formed in November 2008 through
the merger of our existing Utah industrial bank (named GS Bank
USA) into our New York limited purpose trust company, with the
surviving company taking the name GS Bank USA. Concurrently with
this merger, we contributed subsidiaries with an aggregate of
$117.16 billion of assets into GS Bank USA (which brought
total assets in GS Bank USA to $145.06 billion as of
November 2008). As a result, a number of our businesses are now
conducted partially or entirely through GS Bank USA, including:
bank loan trading and origination; interest rate, credit,
currency and other derivatives; leveraged finance; commercial
and residential mortgage origination, trading and servicing;
structured finance; and agency lending, custody and hedge fund
administration services. The businesses conducted through GS
Bank USA are now subject to regulation by the Federal Reserve
Board, the New York State Banking Department and the FDIC.
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GS Bank USA accepts deposits, and those deposits have the
benefit of FDIC insurance up to the applicable limits. The
FDIC’s Deposit Insurance Fund is funded by assessments on
insured depository institutions, which depend on the risk
category of an institution and the amount of insured deposits
that it holds. The FDIC may increase or decrease the assessment
rate schedule on a
semi-annual
basis. We are also participants in the TLGP as discussed above
under
“— FDIC
Temporary Liquidity Guarantee Program.”
The U.S. Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), among other things, requires the federal
banking agencies to take “prompt corrective action” in
respect of depository institutions that do not meet specified
capital requirements. FDICIA establishes five capital categories
for FDIC-insured banks: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized. A depository institution is
deemed to be “well capitalized,” the highest category,
if it has a total capital ratio of 10% or greater, a Tier 1
capital ratio of 6% or greater and a Tier 1 leverage ratio
of 5% or greater and is not subject to any order or written
directive by any such regulatory authority to meet and maintain
a specific capital level for any capital measure. In connection
with the November 2008 asset transfer described below, GS Bank
USA agreed with the Federal Reserve Board to minimum capital
ratios in excess of these “well capitalized” levels.
Accordingly, for a period of time, GS Bank USA is expected to
maintain a Tier 1 capital ratio of at least 8%, a total
capital ratio of at least 11% and a Tier 1 leverage ratio
of at least 6%. We contributed subsidiaries with an aggregate of
$117.16 billion in assets into GS Bank USA in November 2008
(which brought total assets in GS Bank USA to
$145.06 billion as of November 2008). As a result, we are
currently working with the Federal Reserve Board to finalize our
methodology for the Basel I calculations. As of November
2008, under Basel I, GS Bank USA’s estimated
Tier 1 capital ratio was 8.9% and estimated total capital
ratio was 11.6%. In addition, GS Bank USA’s estimated
Tier 1 leverage ratio was 9.1%. An institution may be
downgraded to, or deemed to be in, a capital category that is
lower than is indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it
receives an unsatisfactory examination rating with respect to
certain matters.
FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, as the capital
category of an institution declines. Failure to meet the capital
guidelines could also subject a depository institution to
capital raising requirements. Ultimately, critically
undercapitalized institutions are subject to the appointment of
a receiver or conservator.
The prompt corrective action regulations apply only to
depository institutions and not to bank holding companies such
as Group Inc. However, the Federal Reserve Board is authorized
to take appropriate action at the holding company level, based
upon the undercapitalized status of the holding company’s
depository institution subsidiaries. In certain instances
relating to an undercapitalized depository institution
subsidiary, the bank holding company would be required to
guarantee the performance of the undercapitalized
subsidiary’s capital restoration plan and might be liable
for civil money damages for failure to fulfill its commitments
on that guarantee. Furthermore, in the event of the bankruptcy
of the parent holding company, the guarantee would take priority
over the parent’s general unsecured creditors.
If the FDIC is appointed the conservator or receiver of an
insured depository institution such as GS Bank USA, upon its
insolvency or in certain other events, the FDIC has the power:
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In addition, under federal law, the claims of holders of deposit
liabilities and certain claims for administrative expenses
against an insured depository institution would be afforded a
priority over other general unsecured claims against such an
institution, including claims of debt holders of the
institution, in the “liquidation or other resolution”
of such an institution by any receiver. As a result, whether or
not the FDIC ever sought to repudiate any debt obligations of GS
Bank USA, the debt holders would be treated differently from,
and could receive, if anything, substantially less than, the
depositors of the depository institution.
Transactions between GS Bank USA and Group Inc. and its
subsidiaries and affiliates are regulated by the Federal Reserve
Board. These regulations limit the types and amounts of
transactions (including loans to and credit extensions from GS
Bank USA) that may take place and generally require those
transactions to be on an arms-length basis. These regulations
generally do not apply to transactions between GS Bank USA and
its subsidiaries. In November 2008, Group Inc. transferred
assets and operations to GS Bank USA as described above under
“— GS
Bank USA.” In connection with this transfer, Group Inc.
entered into a guarantee agreement with GS Bank USA whereby
Group Inc. agreed to (i) purchase from GS Bank USA certain
transferred assets (other than derivatives and mortgage
servicing rights) or reimburse GS Bank USA for certain losses
relating to those assets; (ii) reimburse GS Bank USA for
credit-related
losses from assets transferred to GS Bank USA; and
(iii) protect GS Bank USA or reimburse it for certain
losses arising from derivatives and mortgage servicing rights
transferred to GS Bank USA. Group Inc. also agreed to pledge to
GS Bank USA collateral with an aggregate value at any time not
less than 5% of the face amount of committed but unfunded credit
lines plus the original transfer value of the assets transferred
to GS Bank USA, which amounted to a required collateral value of
approximately $7.1 billion as of November 2008.
Group Inc.’s two limited purpose trust company subsidiaries
operate under state or federal law. They are not permitted to
and do not accept deposits (other than as incidental to their
trust activities) or make loans and, as a result, are not
insured by the FDIC. The Goldman Sachs Trust Company, N.A.,
a national banking association that is limited to fiduciary
activities, is regulated by the Office of the Comptroller of the
Currency and is a member bank of the Federal Reserve System. The
Goldman Sachs Trust Company of Delaware, a Delaware limited
purpose trust company, is regulated by the Office of the
Delaware State Bank Commissioner.
Goldman Sachs’
broker-dealer
subsidiaries are subject to regulations that cover all aspects
of the securities business, including sales methods, trade
practices, use and safekeeping of clients’ funds and
securities, capital structure, recordkeeping, the financing of
clients’ purchases, and the conduct of directors, officers
and employees.
In the United States, the SEC is the federal agency responsible
for the administration of the federal securities laws.
GS&Co. is registered as a
broker-dealer
and as an investment adviser with the SEC and as a
broker-dealer
in all 50 states and the District of Columbia. Self-regulatory
organizations, such as FINRA and the NYSE, adopt rules that
apply to, and examine,
broker-dealers
such as GS&Co. In addition, state securities and other
regulators also have regulatory or oversight
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authority over GS&Co. Similarly, our businesses are also
subject to regulation by various
non-U.S. governmental
and regulatory bodies and self-regulatory authorities in
virtually all countries where we have offices. Goldman Sachs
Execution & Clearing, L.P. (GSEC) and two of its
subsidiaries are registered
U.S. broker-dealers
and are regulated by the SEC, the NYSE and FINRA. Goldman Sachs
Financial Markets, L.P. is registered with the SEC as an OTC
derivatives dealer and conducts certain OTC derivatives
businesses.
The commodity futures and commodity options industry in the
United States is subject to regulation under the
U.S. Commodity Exchange Act (CEA). The CFTC is the federal
agency charged with the administration of the CEA. Several of
Goldman Sachs’ subsidiaries, including GS&Co. and
GSEC, are registered with the CFTC and act as futures commission
merchants, commodity pool operators or commodity trading
advisors and are subject to the CEA. The rules and regulations
of various self-regulatory organizations, such as the Chicago
Board of Trade and the Chicago Mercantile Exchange, other
futures exchanges and the National Futures Association, also
govern the commodity futures and commodity options businesses of
these entities.
GS&Co. and GSEC are subject to
Rule 15c3-1
of the SEC and Rule 1.17 of the CFTC, which specify uniform
minimum net capital requirements and also effectively require
that a significant part of the registrants’ assets be kept
in relatively liquid form. GS&Co. and GSEC have elected to
compute their minimum capital requirements in accordance with
the “Alternative Net Capital Requirement” as permitted
by
Rule 15c3-1.
As of November 2008, GS&Co. had regulatory net
capital, as defined by
Rule 15c3-1,
of $10.92 billion, which exceeded the amounts required by
$8.87 billion. As of November 2008, GSEC had
regulatory net capital, as defined by
Rule 15c3-1,
of $1.38 billion, which exceeded the amounts required by
$1.29 billion. In addition to its alternative minimum net
capital requirements, GS&Co. is also required to hold
tentative net capital in excess of $1 billion and net
capital in excess of $500 million in accordance with the
market and credit risk standards of Appendix E of
Rule 15c3-1.
GS&Co. is also required to notify the SEC in the event that
its tentative net capital is less than $5 billion. As of
November 2008, GS&Co. had tentative net capital and
net capital in excess of both the minimum and the notification
requirements. These net capital requirements may have the effect
of prohibiting these entities from distributing or withdrawing
capital and may require prior notice to the SEC for certain
withdrawals of capital. See Note 17 to the consolidated
financial statements in Part II, Item 8 of our Annual
Report on
Form 10-K.
Our specialist businesses are subject to extensive regulation by
a number of securities exchanges. As a Designated Market Maker
on the NYSE and as a specialist on other exchanges, we are
required to maintain orderly markets in the securities to which
we are assigned. Under the NYSE’s new Designated Market
Maker rules, this may require us to supply liquidity to these
markets in certain circumstances.
J. Aron & Company is authorized by the
U.S. Federal Energy Regulatory Commission (FERC) to sell
wholesale physical power at
market-based
rates. As a FERC-authorized power marketer, J. Aron &
Company is subject to regulation under the U.S. Federal
Power Act and FERC regulations and to the oversight of FERC. As
a result of our investing activities, GS&Co. is also an
“exempt holding company” under the U.S. Public
Utility Holding Company Act of 2005 and applicable FERC rules.
In addition, as a result of our power-related activities, we are
subject to extensive and evolving energy, environmental and
other governmental laws and regulations, as discussed under
“Risk Factors — Our power generation interests
and related activities subject us to extensive regulation, as
well as environmental and other risks associated with power
generation activities” in Part I, Item 1A of our
Annual Report on
Form 10-K.
Our U.S. insurance subsidiaries are subject to state
insurance regulation and oversight in the states in which they
are domiciled and in the other states in which they are
licensed, and we are subject to oversight as an insurance
holding company in states where our insurance subsidiaries are
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domiciled. State insurance regulations limit the ability of our
insurance subsidiaries to pay dividends to Group Inc. in certain
circumstances, and could require regulatory approval for any
change in “control” of Group Inc., which may include
control of 10% or more of our voting stock. In addition, a
number of our other businesses, including our lending and
mortgage businesses, require us to obtain licenses, adhere to
applicable regulations and be subject to the oversight of
various regulators in the states in which we conduct these
businesses.
The U.S. Bank Secrecy Act (BSA), as amended by the USA
PATRIOT Act of 2001 (PATRIOT Act), contains anti-money
laundering and financial transparency laws and mandated the
implementation of various regulations applicable to all
financial institutions, including standards for verifying client
identification at account opening, and obligations to monitor
client transactions and report suspicious activities. Through
these and other provisions, the BSA and the PATRIOT Act seek to
promote the identification of parties that may be involved in
terrorism, money laundering or other suspicious activities.
Anti-money laundering laws outside the United States contain
some similar provisions. The obligation of financial
institutions, including Goldman Sachs, to identify their
clients, to monitor for and report suspicious transactions, to
respond to requests for information by regulatory authorities
and law enforcement agencies, and to share information with
other financial institutions, has required the implementation
and maintenance of internal practices, procedures and controls
that have increased, and may continue to increase, our costs,
and any failure with respect to our programs in this area could
subject us to substantial liability and regulatory fines.
Goldman Sachs provides investment services in and from the
United Kingdom under the regulation of the Financial Services
Authority (FSA). Goldman Sachs International (GSI), our
regulated U.K.
broker-dealer,
is subject to the capital requirements imposed by the FSA. As of
November 2008, GSI was in compliance with the FSA capital
requirements. Other subsidiaries, including Goldman Sachs
International Bank, are also regulated by the FSA.
Goldman Sachs Bank (Europe) PLC (GS Bank Europe), our regulated
Irish bank, is subject to minimum capital requirements imposed
by the Irish Financial Services Regulatory Authority. As of
November 2008, this bank was in compliance with all
regulatory capital requirements. Group Inc. has issued a general
guarantee of the obligations of this bank.
Various other Goldman Sachs entities are regulated by the
banking, insurance and securities regulatory authorities of the
European countries in which they operate, including, among
others, the Federal Financial Supervisory Authority (BaFin) and
the Bundesbank in Germany, Banque de France and the
Autorité des Marchés Financiers in France, Banca
d’Italia and the Commissione Nazionale per le Società
e la Borsa (CONSOB) in Italy, the Federal Financial Markets
Service in Russia and the Swiss Federal Banking Commission.
Certain Goldman Sachs entities are also regulated by the
European securities, derivatives and commodities exchanges of
which they are members.
The investment services that are subject to oversight by the FSA
and other regulators within the European Union (EU) are
regulated in accordance with national laws, many of which
implement EU directives requiring, among other things,
compliance with certain capital adequacy standards, customer
protection requirements and market conduct and trade reporting
rules. These standards, requirements and rules are similarly
implemented, under the same directives, throughout the EU.
Goldman Sachs Japan Co., Ltd. (GSJCL), our regulated Japanese
broker-dealer,
is subject to the capital requirements imposed by Japan’s
Financial Services Agency. As of November 2008, GSJCL was
in compliance with its capital adequacy requirements. GSJCL is
also regulated by the Tokyo Stock Exchange, the Osaka Securities
Exchange, the Tokyo Financial Exchange, the Japan Securities
Dealers Association, the Tokyo Commodity Exchange and the
Ministry of Economy, Trade and Industry in Japan.
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Also in Asia, the Securities and Futures Commission in Hong
Kong, the Monetary Authority of Singapore, the China Securities
Regulatory Commission, the Korean Financial Supervisory Service,
the Reserve Bank of India and the Securities and Exchange Board
of India, among others, regulate various of our subsidiaries and
also have capital standards and other requirements comparable to
the rules of the SEC.
Various Goldman Sachs entities are regulated by the banking and
regulatory authorities in other
non-U.S. countries
in which Goldman Sachs operates, including, among others, Brazil
and Dubai. In addition, certain of our insurance subsidiaries
are regulated by Lloyd’s (which is, in turn, regulated by
the FSA) and by the Bermuda Monetary Authority.
The U.S. and
non-U.S. government
agencies, regulatory bodies and self-regulatory organizations,
as well as state securities commissions and other state
regulators in the United States, are empowered to conduct
administrative proceedings that can result in censure, fine, the
issuance of cease and desist orders, or the suspension or
expulsion of a
broker-dealer
or its directors, officers or employees. From time to time, our
subsidiaries have been subject to investigations and
proceedings, and sanctions have been imposed for infractions of
various regulations relating to our activities, none of which
has had a material adverse effect on us or our businesses.
The research areas of investment banks have been and remain the
subject of regulatory scrutiny. The SEC and FINRA have rules
governing research analysts, including rules imposing
restrictions on the interaction between equity research analysts
and investment banking personnel at member securities firms.
Various
non-U.S. jurisdictions
have imposed both substantive and disclosure-based requirements
with respect to research and may impose additional regulations.
In 2003, GS&Co. agreed to a global settlement with certain
federal and state securities regulators and self-regulatory
organizations to resolve investigations into equity research
analysts’ alleged conflicts of interest. The global
settlement includes certain restrictions and undertakings that
have imposed additional costs and limitations on the conduct of
our businesses, including restrictions on the interaction
between research and investment banking areas.
In connection with the research settlement, we have also
subscribed to a voluntary initiative imposing restrictions on
the allocation of shares in initial public offerings to
executives and directors of public companies. The FSA in the
United Kingdom has imposed requirements on the conduct of the
allocation process in equity and fixed income securities
offerings (including initial public offerings and secondary
distributions). The SEC, the FSA, FINRA and other U.S. or
non-U.S. regulators
may in the future adopt additional and more stringent rules with
respect to offering procedures and the management of conflicts
of interest, and we cannot fully predict the effect that any new
requirements will have on our business.
Our investment management businesses are subject to significant
regulation in numerous jurisdictions around the world relating
to, among other things, the safeguarding of client assets and
our management of client funds.
As discussed above, many of our subsidiaries are subject to
regulatory capital requirements in jurisdictions throughout the
world. Subsidiaries not subject to separate regulation may hold
capital to satisfy local tax guidelines, rating agency
requirements or internal policies, including policies concerning
the minimum amount of capital a subsidiary should hold based
upon its underlying risk.
Certain of our businesses are subject to compliance with
regulations enacted by U.S. federal and state governments,
the European Union or other jurisdictions
and/or
enacted by various regulatory organizations or exchanges
relating to the privacy of the information of clients, employees
or others, and any failure to comply with these regulations
could expose us to liability
and/or
reputational damage.
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Item 1A. Risk
Factors
We face a variety of risks that are substantial and inherent in
our businesses, including market, liquidity, credit,
operational, legal and regulatory risks. The following are some
of the more important factors that could affect our businesses.
Our businesses, by their nature, do not produce predictable
earnings, and all of our businesses are materially affected by
conditions in the global financial markets and economic
conditions generally. In the past twelve months, these
conditions have changed suddenly and negatively.
Since mid-2007, and particularly during the second half of 2008,
the financial services industry and the securities markets
generally were materially and adversely affected by significant
declines in the values of nearly all asset classes and by a
serious lack of liquidity. This was initially triggered by
declines in the values of subprime mortgages, but spread to all
mortgage and real estate asset classes, to leveraged bank loans
and to nearly all asset classes, including equities. The global
markets have been characterized by substantially increased
volatility and
short-selling
and an overall loss of investor confidence, initially in
financial institutions, but more recently in companies in a
number of other industries and in the broader markets. The
decline in asset values has caused increases in margin calls for
investors, requirements that derivatives counterparties post
additional collateral and redemptions by mutual and hedge fund
investors, all of which have increased the downward pressure on
asset values and outflows of client funds across the financial
services industry. In addition, the increased redemptions and
unavailability of credit have required hedge funds and others to
rapidly reduce leverage, which has increased volatility and
further contributed to the decline in asset values.
Market conditions have also led to the failure or merger of a
number of prominent financial institutions. Financial
institution failures or near-failures have resulted in further
losses as a consequence of defaults on securities issued by them
and defaults under bilateral derivatives and other contracts
entered into with such entities as counterparties. Furthermore,
declining asset values, defaults on mortgages and consumer
loans, and the lack of market and investor confidence, as well
as other factors, have all combined to increase credit default
swap spreads, to cause rating agencies to lower credit ratings,
and to otherwise increase the cost and decrease the availability
of liquidity, despite very significant declines in central bank
borrowing rates and other government actions. Banks and other
lenders have suffered significant losses and have become
reluctant to lend, even on a secured basis, due to the increased
risk of default and the impact of declining asset values on the
value of collateral. The markets for securitized debt offerings
backed by mortgages, loans, credit card receivables and other
assets have for the most part been closed.
In 2008, governments, regulators and central banks in the United
States and worldwide have taken numerous steps to increase
liquidity and to restore investor confidence, but asset values
have continued to decline and access to liquidity continues to
be very limited.
We have “long” proprietary positions in a number of
our businesses. These positions are accounted for at fair value,
and the declines in the values of assets have had a direct and
large negative impact on our earnings in fiscal 2008. Revenues
from our asset management and merchant banking businesses were
also negatively impacted by declines in the values of assets
managed for our clients.
The ongoing liquidity crisis and the loss of confidence in
financial institutions has increased our cost of funding and
limited our access to some of our traditional sources of
liquidity, including both secured and unsecured borrowings.
While the numerous steps taken by governments, regulators and
central banks have helped reduce these funding costs somewhat
and increase our access to traditional and new sources of
liquidity, increases in funding costs and limitations on our
access to liquidity have
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negatively impacted our earnings and our ability to engage in
certain activities. In particular, in the latter half of 2008,
we were unable to raise significant amounts of
long-term
unsecured debt in the public markets, other than as a result of
the issuance of securities guaranteed by the FDIC under the
TLGP. We are able to have outstanding approximately
$35 billion of debt under the TLGP that is issued prior to
June 30, 2009. It is unclear when we will regain
access to the public
long-term
unsecured debt markets on customary terms or whether any similar
program will be available after the TLGP’s scheduled
June 2009 expiration. However, we continue to have access
to
short-term
funding and to a number of sources of secured funding, both in
the private markets and through various government and central
bank sponsored initiatives. In December 2008, Moody’s
Investors Service downgraded our
long-term
debt credit rating and Standard & Poor’s
downgraded both our
long-term
and
short-term
debt credit ratings, in each case with an outlook of
“negative.”
We have been able to fund our operations during fiscal 2008. Our
global core excess (our cash and cash equivalent positions
maintained to ensure
short-term
liquidity) and our capital ratios are at levels significantly
higher than in the past. Nevertheless, our credit spreads have
widened and the average maturity of our new funding has
decreased. Recently, we have relied to a significant extent for
our
long-term
unsecured funding on emergency funding programs implemented by
governments and central banks. It is unclear whether or for how
long these facilities will be extended and what impact
termination of these facilities could have on our ability to
access funding. See “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Liquidity and Funding Risk” in
Part II, Item 7 of our Annual Report on
Form 10-K.
Furthermore, the increased riskiness of assets due to increases
in the volatility of asset prices, coupled with market concerns
about the levels of financial institution leverage ratios, as
well as fewer attractive business opportunities, have caused us
to significantly decrease the size of our balance sheet and to
increase the size of our global core excess. Both of these steps
may have a negative effect on our profitability, until reversed.
Concerns about financial institution profitability and solvency
as a result of general market conditions, particularly in the
credit markets, together with the forced merger or failure of a
number of major commercial and investment banks, have at times
caused a number of our clients to reduce the level of business
that they do with us, either because of concerns about the
safety of their assets held by us or simply arising from a
desire to diversify their risk or for other reasons. Some
clients have withdrawn some of the funds held at our firm or
transferred them from deposits with GS Bank USA to other types
of assets (in many cases leaving those assets in their brokerage
accounts held with us). Some counterparties have at times
refused to enter into certain derivatives and other
long-term
transactions with us or have requested additional collateral.
These instances were more prevalent during periods when the lack
of confidence in financial institutions was most widespread and
have become significantly less frequent in recent months in the
wake of government and central bank actions, greater
understanding of client account protections and higher limits of
FDIC insurance. In addition, we have acquired some new clients
as a result of the difficulties experienced by other financial
institutions.
During the fourth quarter of 2008, we raised $20.75 billion
in equity, comprised of a $5.75 billion public common stock
offering, a $5 billion preferred stock and warrant issuance
to Berkshire Hathaway Inc. and certain affiliates and a
$10 billion preferred stock and warrant issuance under the
U.S. Treasury’s TARP Capital Purchase Program. While this
additional capital provides further funding to our business and
we believe has improved investor perceptions with regard to our
financial position, it has increased our equity and the number
of actual and diluted outstanding shares of our common stock as
well as our preferred dividend requirements, which will reduce
our earnings per share and the return on our equity unless our
earnings increase sufficiently.
In addition, as of the end of 2008, the United States, Europe
and Japan are all in a recession. Business activity across a
wide range of industries and regions is greatly reduced and
local governments and many companies are in serious difficulty
due to the lack of consumer spending and
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the lack of liquidity in the credit markets. Unemployment has
increased significantly. While lower interest rates, increased
volatility and substantial increases in trading volumes have
positively impacted earnings in a number of our trading
businesses, declines in asset values, the lack of liquidity,
general uncertainty about economic and market activities and a
lack of consumer, investor and CEO confidence have negatively
impacted many of our other businesses, particularly our
investment banking, merchant banking, asset management, credit
products, mortgage, leveraged lending and equity principal
strategies businesses. In particular, our investment banking
business has been affected during the last twelve months by the
decrease in equity and debt underwritings and the decline in
both announced and completed mergers and acquisitions.
Our financial performance is highly dependent on the environment
in which our businesses operate. A favorable business
environment is generally characterized by, among other factors,
high global gross domestic product growth, transparent, liquid
and efficient capital markets, low inflation, high business and
investor confidence, stable geopolitical conditions, and strong
business earnings. Unfavorable or uncertain economic and market
conditions can be caused by: declines in economic growth,
business activity or investor or business confidence;
limitations on the availability or increases in the cost of
credit and capital; increases in inflation, interest rates,
exchange rate volatility, default rates or the price of basic
commodities; outbreaks of hostilities or other geopolitical
instability; corporate, political or other scandals that reduce
investor confidence in capital markets; natural disasters or
pandemics; or a combination of these or other factors.
Overall, during fiscal 2008, the business environment has been
extremely adverse for many of our businesses and there can be no
assurance that these conditions will improve in the near term.
Until they do, we expect our results of operations to be
adversely affected.
Many of our businesses, such as our merchant banking businesses,
our mortgages, leveraged loan and credit products businesses in
our FICC segment, and our equity principal strategies business,
have net “long” positions in debt securities, loans,
derivatives, mortgages, equities (including private equity) and
most other asset classes. In addition, many of our
market-making
and other businesses in which we act as a principal to
facilitate our clients’ activities, including our
specialist businesses, commit large amounts of capital to
maintain trading positions in interest rate and credit products,
as well as currencies, commodities and equities. Because nearly
all of these investing and trading positions are
marked-to-market
on a daily basis, declines in asset values directly and
immediately impact our earnings, unless we have effectively
“hedged” our exposures to such declines. In certain
circumstances (particularly in the case of leveraged loans and
private equities or other securities that are not freely
tradable or lack established and liquid trading markets), it may
not be possible or economic to hedge such exposures and to the
extent that we do so the hedge may be ineffective or may greatly
reduce our ability to profit from increases in the values of the
assets. Sudden declines and significant volatility in the prices
of assets may substantially curtail or eliminate the trading
markets for certain assets, which may make it very difficult to
sell, hedge or value such assets. The inability to sell or
effectively hedge assets reduces our ability to limit losses in
such positions and the difficulty in valuing assets may increase
our
risk-weighted
assets which requires us to maintain additional capital and
increases our funding costs.
In our specialist businesses, we are obligated by stock exchange
rules to maintain an orderly market, including by purchasing
shares in a declining market. In markets where asset values are
declining and in volatile markets, this results in trading
losses and an increased need for liquidity.
We receive
asset-based
management fees based on the value of our clients’
portfolios or investment in funds managed by us and, in some
cases, we also receive incentive fees based on increases in the
value of such investments. Declines in asset values reduce the
value of our clients’ portfolios or fund assets, which in
turn reduce the fees we earn for managing such assets.
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We post collateral to support our obligations and receive
collateral to support the obligations of our clients and
counterparties in connection with our trading businesses. When
the value of the assets posted as collateral declines, the party
posting the collateral may need to provide additional collateral
or, if possible, reduce its trading position. A classic example
of such a situation is a “margin call” in connection
with a brokerage account. Therefore, declines in the value of
asset classes used as collateral mean that either the cost of
funding trading positions is increased or the size of trading
positions is decreased. If we are the party providing collateral
this can increase our costs and reduce our profitability and if
we are the party receiving collateral this can also reduce our
profitability by reducing the level of business done with our
clients and counterparties. In addition, volatile or less liquid
markets increase the difficulty of valuing assets which can lead
to costly and time-consuming disputes over asset values and the
level of required collateral, as well as increased credit risk
to the recipient of the collateral due to delays in receiving
adequate collateral.
Widening credit spreads, as well as significant declines in the
availability of credit, have adversely affected our ability to
borrow on a secured and unsecured basis and may continue to do
so. We fund ourselves on an unsecured basis by issuing
commercial paper, promissory notes and
long-term
debt, or by obtaining bank loans or lines of credit. We seek to
finance many of our assets, including our less liquid assets, on
a secured basis, including by entering into repurchase
agreements. Disruptions in the credit markets make it harder and
more expensive to obtain funding for our businesses. If our
available funding is limited or we are forced to fund our
operations at a higher cost, these conditions may require us to
curtail our business activities and increase our cost of
funding, both of which could reduce our profitability,
particularly in our businesses that involve investing, lending
and taking principal positions, including market making.
Our clients engaging in mergers and acquisitions often rely on
access to the secured and unsecured credit markets to finance
their transactions. The lack of available credit and the
increased cost of credit can adversely affect the size, volume
and timing of our clients’ merger and acquisition
transactions — particularly large
transactions — and adversely affect our financial
advisory and underwriting businesses.
In addition, we may incur significant unrealized gains or losses
due solely to changes in our credit spreads or those of third
parties, as these changes may affect the fair value of our
derivative instruments and the debt securities that we hold or
issue.
Certain of our trading businesses depend on market volatility to
provide trading and arbitrage opportunities, and decreases in
volatility may reduce these opportunities and adversely affect
the results of these businesses. On the other hand, increased
volatility, while it can increase trading volumes and spreads,
also increases risk as measured by VaR and may expose us to
increased risks in connection with our
market-making
and proprietary businesses or cause us to reduce the size of
these businesses in order to avoid increasing our VaR. Limiting
the size of our
market-making
positions and investing businesses can adversely affect our
profitability, even though spreads are widening and we may earn
more on each trade. In periods when volatility is increasing,
but asset values are declining significantly (as has been the
case recently), it may not be possible to sell assets at all or
it may only be possible to do so at steep discounts. In such
circumstances we may be forced to either take on additional risk
or to incur losses in order to decrease our VaR. In addition,
increases in volatility increase the level of our risk weighted
assets and increase our capital requirements which increases our
funding costs.
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Our investment banking business has been and may continue to be
adversely affected by market conditions. Poor economic
conditions and other adverse geopolitical conditions can
adversely affect and have adversely affected investor and CEO
confidence, resulting in significant
industry-wide
declines in the size and number of underwritings and of
financial advisory transactions, which could continue to have an
adverse effect on our revenues and our profit margins. In
particular, because a significant portion of our investment
banking revenues are derived from our participation in large
transactions, a decline in the number of large transactions
would adversely affect our investment banking business.
In certain circumstances, market uncertainty or general declines
in market or economic activity may affect our trading businesses
by decreasing levels of overall activity or by decreasing
volatility, but at other times market uncertainty and even
declining economic activity may result in higher trading volumes
or higher spreads or both.
Market uncertainty, volatility and adverse economic conditions,
as well as declines in asset values, may cause our clients to
transfer their assets out of our funds or other products or
their brokerage accounts and result in reduced net revenues,
principally in our asset management business. To the extent that
clients do not withdraw their funds, they may invest them in
products that generate less fee income.
Poor investment returns in our asset management business, due to
either general market conditions or underperformance (against
the performance of benchmarks or of our competitors) by funds or
accounts that we manage or investment products that we design or
sell, affects our ability to retain existing assets and to
attract new clients or additional assets from existing clients.
This could affect the asset management and incentive fees that
we earn on assets under management or the commissions that we
earn for selling other investment products, such as structured
notes or derivatives.
We have in the past provided financial support to certain of our
investment products in difficult market circumstances and, at
our discretion, we may decide to do so in the future for
reputational or business reasons, including through equity
investments or cash infusions.
We seek to monitor and control our risk exposure through a risk
and control framework encompassing a variety of separate but
complementary financial, credit, operational, compliance and
legal reporting systems, internal controls, management review
processes and other mechanisms. Our trading risk management
process seeks to balance our ability to profit from trading
positions with our exposure to potential losses. While we employ
a broad and diversified set of risk monitoring and risk
mitigation techniques, those techniques and the judgments that
accompany their application cannot anticipate every economic and
financial outcome or the specifics and timing of such outcomes.
Thus, we may, in the course of our activities, incur losses.
Recent market conditions have involved unprecedented
dislocations and highlight the limitations inherent in using
historical data to manage risk.
The models that we use to assess and control our risk exposures
reflect assumptions about the degrees of correlation or lack
thereof among prices of various asset classes or other market
indicators. In times of market stress or other unforeseen
circumstances, such as occurred during 2008, previously
uncorrelated indicators may become correlated, or conversely
previously correlated indicators may move in different
directions. These types of market movements have at times
limited the effectiveness of our hedging strategies and have
caused us to incur significant losses, and they
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may do so in the future. These changes in correlation can be
exacerbated where other market participants are using risk or
trading models with assumptions or algorithms that are similar
to ours. In these and other cases, it may be difficult to reduce
our risk positions due to the activity of other market
participants or widespread market dislocations, including
circumstances where asset values are declining significantly or
no market exists for certain assets. To the extent that we make
investments directly through various of our businesses in
securities, including private equity, that do not have an
established liquid trading market or are otherwise subject to
restrictions on sale or hedging, we may not be able to reduce
our positions and therefore reduce our risk associated with such
positions. In addition, we invest our own capital in our
merchant banking, alternative investment and infrastructure
funds, and limitations on our ability to withdraw some or all of
our investments in these funds, whether for legal, reputational
or other reasons, may make it more difficult for us to control
the risk exposures relating to these investments.
For a further discussion of our risk management policies and
procedures, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Risk Management” in Part II, Item 7 of our Annual
Report on
Form 10-K.
Liquidity is essential to our businesses. Our liquidity may be
impaired by an inability to access secured
and/or
unsecured debt markets, an inability to access funds from our
subsidiaries, an inability to sell assets or redeem our
investments, or unforeseen outflows of cash or collateral. This
situation may arise due to circumstances that we may be unable
to control, such as a general market disruption or an
operational problem that affects third parties or us, or even by
the perception among market participants that we, or other
market participants, are experiencing greater liquidity risk.
The financial instruments that we hold and the contracts to
which we are a party are increasingly complex, as we employ
structured products to benefit our clients and ourselves, and
these complex structured products often do not have readily
available markets to access in times of liquidity stress. Our
investing activities may lead to situations where the holdings
from these activities represent a significant portion of
specific markets, which could restrict liquidity for our
positions. Further, our ability to sell assets may be impaired
if other market participants are seeking to sell similar assets
at the same time, as is likely to occur in a liquidity or other
market crisis. In addition, financial institutions with which we
interact may exercise set-off rights or the right to require
additional collateral, including in difficult market conditions,
which could further impair our access to liquidity.
Our credit ratings are important to our liquidity. A reduction
in our credit ratings could adversely affect our liquidity and
competitive position, increase our borrowing costs, limit our
access to the capital markets or trigger our obligations under
certain bilateral provisions in some of our trading and
collateralized financing contracts. Under these provisions,
counterparties could be permitted to terminate contracts with
Goldman Sachs or require us to post additional collateral.
Termination of our trading and collateralized financing
contracts could cause us to sustain losses and impair our
liquidity by requiring us to find other sources of financing or
to make significant cash payments or securities movements.
Our cost of obtaining
long-term
unsecured funding is directly related to our credit spreads (the
amount in excess of the interest rate of U.S. Treasury
securities (or other benchmark securities) of the same maturity
that we need to pay to our debt investors). Increases in our
credit spreads can significantly increase our cost of this
funding. Changes in credit spreads are continuous,
market-driven,
and subject at times to unpredictable and highly volatile
movements. Credit spreads are influenced by market perceptions
of our creditworthiness. In addition, our credit spreads may be
influenced by movements in the costs to purchasers of credit
default swaps referenced to our
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long-term
debt. The market for credit default swaps is relatively new,
although very large, and it has proven to be extremely volatile
and currently lacks a high degree of structure or transparency.
Group Inc. is a holding company and, therefore, depends on
dividends, distributions and other payments from its
subsidiaries to fund dividend payments and to fund all payments
on its obligations, including debt obligations. Many of our
subsidiaries, including our
broker-dealer,
bank and insurance subsidiaries, are subject to laws that
restrict dividend payments or authorize regulatory bodies to
block or reduce the flow of funds from those subsidiaries to
Group Inc. Restrictions or regulatory action of that kind could
impede access to funds that Group Inc. needs to make payments on
its obligations, including debt obligations, or dividend
payments. In addition, Group Inc.’s right to participate in
a distribution of assets upon a subsidiary’s liquidation or
reorganization is subject to the prior claims of the
subsidiary’s creditors.
Furthermore, Group Inc. has guaranteed the payment obligations
of GS&Co., GS Bank USA and GS Bank Europe, subject to
certain exceptions, and has pledged significant assets to GS
Bank USA to support obligations to GS Bank USA. These guarantees
may require Group Inc. to provide substantial funds or assets to
its subsidiaries or their creditors and counterparties at a time
when Group Inc. is in need of liquidity to fund its own
obligations. See “Business — Regulation” in
Part I, Item 1 of our Annual Report on
Form 10-K.
The amount and duration of our credit exposures have been
increasing over the past several years, as have the breadth and
size of the entities to which we have credit exposures. We are
exposed to the risk that third parties that owe us money,
securities or other assets will not perform their obligations.
These parties may default on their obligations to us due to
bankruptcy, lack of liquidity, operational failure or other
reasons. A failure of a significant market participant, or even
concerns about a default by such an institution, could lead to
significant liquidity problems, losses or defaults by other
institutions, which in turn could adversely affect us.
We are also subject to the risk that our rights against third
parties may not be enforceable in all circumstances. In
addition, deterioration in the credit quality of third parties
whose securities or obligations we hold could result in losses
and/or
adversely affect our ability to rehypothecate or otherwise use
those securities or obligations for liquidity purposes. A
significant downgrade in the credit ratings of our
counterparties could also have a negative impact on our results.
While in many cases we are permitted to require additional
collateral from counterparties that experience financial
difficulty, disputes may arise as to the amount of collateral we
are entitled to receive and the value of pledged assets. The
termination of contracts and the foreclosure on collateral may
subject us to claims for the improper exercise of our rights.
Default rates, downgrades and disputes with counterparties as to
the valuation of collateral increase significantly in times of
market stress and illiquidity.
As part of our clearing business, we finance our client
positions, and we could be held responsible for the defaults or
misconduct of our clients. Although we regularly review credit
exposures to specific clients and counterparties and to specific
industries, countries and regions that we believe may present
credit concerns, default risk may arise from events or
circumstances that are difficult to detect or foresee.
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Concentration of risk increases the potential for significant
losses in our
market-making,
proprietary trading, investing, block trading, merchant banking,
underwriting and lending businesses. This risk may increase to
the extent we expand our proprietary trading and investing
businesses or commit capital to facilitate client-driven
business. The number and size of such transactions may affect
our results of operations in a given period. Moreover, because
of concentration of risk, we may suffer losses even when
economic and market conditions are generally favorable for our
competitors. Disruptions in the credit markets can make it
difficult to hedge these credit exposures effectively or
economically. In addition, we extend large commitments as part
of our credit origination activities. Our inability to reduce
our credit risk by selling, syndicating or securitizing these
positions, including during periods of market stress, could
negatively affect our results of operations due to a decrease in
the fair value of the positions, including due to the insolvency
or bankruptcy of the borrower, as well as the loss of revenues
associated with selling such securities or loans.
In the ordinary course of business, we may be subject to a
concentration of credit risk to a particular counterparty,
borrower or issuer, and a failure or downgrade of, or default
by, such entity could negatively impact our businesses, perhaps
materially, and the systems by which we set limits and monitor
the level of our credit exposure to individual entities,
industries and countries may not function as we have
anticipated. While our activities expose us to many different
industries and counterparties, we routinely execute a high
volume of transactions with counterparties in the financial
services industry, including brokers and dealers, commercial
banks, and investment funds. This has resulted in significant
credit concentration with respect to this industry.
The financial services industry — and all of our
businesses — are intensely competitive, and we expect
them to remain so. We compete on the basis of a number of
factors, including transaction execution, our products and
services, innovation, reputation, creditworthiness and price.
Over time, there has been substantial consolidation and
convergence among companies in the financial services industry.
This trend accelerated over the course of the past year as a
result of numerous mergers and asset acquisitions among industry
participants. This trend has also hastened the globalization of
the securities and other financial services markets. As a
result, we have had to commit capital to support our
international operations and to execute large global
transactions. To the extent we expand into new business areas
and new geographic regions, we will face competitors with more
experience and more established relationships with clients,
regulators and industry participants in the relevant market,
which could adversely affect our ability to expand.
Pricing and other competitive pressures in our investment
banking business, as well as our other businesses, have
continued to increase, particularly in situations where some of
our competitors may seek to increase market share by reducing
prices. For example, in connection with investment banking and
other assignments, we have experienced pressure to extend and
price credit at levels that may not always fully compensate us
for the risks we take.
A number of our recent and planned business initiatives and
expansions of existing businesses may bring us into contact,
directly or indirectly, with individuals and entities that are
not within our traditional client and counterparty base and
expose us to new asset classes and new markets. These business
activities expose us to new and enhanced risks, including risks
associated with dealing with governmental entities, reputational
concerns arising from dealing with less sophisticated
counterparties and investors, greater regulatory scrutiny of
these activities, increased
credit-related,
sovereign and operational risks, risks arising from accidents or
acts of terrorism, and reputational concerns with the manner in
which these assets are being operated or held.
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We are party to a large number of derivative transactions,
including credit derivatives. Many of these derivative
instruments are individually negotiated and
non-standardized,
which can make exiting, transferring or settling the position
difficult. Many credit derivatives require that we deliver to
the counterparty the underlying security, loan or other
obligation in order to receive payment. In a number of cases, we
do not hold the underlying security, loan or other obligation
and may not be able to obtain, the underlying security, loan or
other obligation. This could cause us to forfeit the payments
due to us under these contracts or result in settlement delays
with the attendant credit and operational risk as well as
increased costs to the firm.
Derivative contracts and other transactions entered into with
third parties are not always confirmed by the counterparties on
a timely basis. While the transaction remains unconfirmed, we
are subject to heightened credit and operational risk and in the
event of a default may find it more difficult to enforce the
contract. In addition, as new and more complex derivative
products are created, covering a wider array of underlying
credit and other instruments, disputes about the terms of the
underlying contracts could arise, which could impair our ability
to effectively manage our risk exposures from these products and
subject us to increased costs. Any regulatory effort to create
an exchange or trading platform for credit derivatives and other
OTC derivative contracts, or a market shift toward standardized
derivatives, could reduce the risk associated with such
transactions, but under certain circumstances could also limit
our ability to develop derivatives that best suit the needs of
our clients and ourselves and adversely affect our profitability.
Our businesses are highly dependent on our ability to process
and monitor, on a daily basis, a very large number of
transactions, many of which are highly complex, across numerous
and diverse markets in many currencies. These transactions, as
well as the information technology services we provide to
clients, often must adhere to client-specific guidelines, as
well as legal and regulatory standards. As our client base and
our geographical reach expands, developing and maintaining our
operational systems and infrastructure becomes increasingly
challenging. Our financial, accounting, data processing or other
operating systems and facilities may fail to operate properly or
become disabled as a result of events that are wholly or
partially beyond our control, such as a spike in transaction
volume, adversely affecting our ability to process these
transactions or provide these services. In addition, we also
face the risk of operational failure, termination or capacity
constraints of any of the clearing agents, exchanges, clearing
houses or other financial intermediaries we use to facilitate
our securities transactions, and as our interconnectivity with
our clients grows, we increasingly face the risk of operational
failure with respect to our clients’ systems. In recent
years, there has been significant consolidation among clearing
agents, exchanges and clearing houses, which has increased our
exposure to operational failure, termination or capacity
constraints of the particular financial intermediaries that we
use and could affect our ability to find adequate and
cost-effective
alternatives in the event of any such failure, termination or
constraint. Industry consolidation, whether among market
participants or financial intermediaries, increases the risk of
operational failure as disparate complex systems need to be
integrated, often on an accelerated basis. Furthermore, the
interconnectivity of multiple financial institutions with
central agents, exchanges and clearing houses increases the risk
that an operational failure at one institution may cause an
industry-wide
operational failure that could materially impact our ability to
conduct business. Any such failure, termination or constraint
could adversely affect our ability to effect transactions,
service our clients, manage our exposure to risk or expand our
businesses or result in financial loss or liability to our
clients, impairment of our liquidity, disruption of our
businesses, regulatory intervention or reputational damage.
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Despite the resiliency plans and facilities we have in place,
our ability to conduct business may be adversely impacted by a
disruption in the infrastructure that supports our businesses
and the communities in which we are located. This may include a
disruption involving electrical, communications, internet,
transportation or other services used by us or third parties
with which we conduct business. These disruptions may occur as a
result of events that affect only our buildings or the buildings
of such third parties, or as a result of events with a broader
impact globally, regionally or in the cities where those
buildings are located. Nearly all of our employees in our
primary locations, including the New York metropolitan area,
London, Frankfurt, Hong Kong, Tokyo and Bangalore, work in close
proximity to one another, in one or more buildings.
Notwithstanding our efforts to maintain business continuity,
given that our headquarters and the largest concentration of our
employees are in the New York metropolitan area, depending on
the intensity and longevity of the event, a catastrophic event
impacting our New York metropolitan area offices could very
negatively affect our business. If a disruption occurs in one
location and our employees in that location are unable to occupy
our offices or communicate with or travel to other locations,
our ability to service and interact with our clients may suffer,
and we may not be able to successfully implement contingency
plans that depend on communication or travel.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures and endeavor to modify them as circumstances warrant,
our computer systems, software and networks may be vulnerable to
unauthorized access, computer viruses or other malicious code
and other events that could have a security impact. If one or
more of such events occur, this potentially could jeopardize our
or our clients’ or counterparties’ confidential and
other information processed and stored in, and transmitted
through, our computer systems and networks, or otherwise cause
interruptions or malfunctions in our, our clients’, our
counterparties’ or third parties’ operations, which
could result in significant losses or reputational damage. We
may be required to expend significant additional resources to
modify our protective measures or to investigate and remediate
vulnerabilities or other exposures, and we may be subject to
litigation and financial losses that are either not insured
against or not fully covered through any insurance maintained by
us.
We routinely transmit and receive personal, confidential and
proprietary information by email and other electronic means. We
have discussed and worked with clients, vendors, service
providers, counterparties and other third parties to develop
secure transmission capabilities, but we do not have, and may be
unable to put in place, secure capabilities with all of our
clients, vendors, service providers, counterparties and other
third parties and we may not be able to ensure that these third
parties have appropriate controls in place to protect the
confidentiality of the information. An interception, misuse or
mishandling of personal, confidential or proprietary information
being sent to or received from a client, vendor, service
provider, counterparty or other third party could result in
legal liability, regulatory action and reputational harm.
As we have expanded the scope of our businesses and our client
base, we increasingly must address potential conflicts of
interest, including situations where our services to a
particular client or our own investments or other interests
conflict, or are perceived to conflict, with the interests of
another client, as well as situations where one or more of our
businesses have access to material
non-public
information that may not be shared with other businesses within
the firm and situations where we may be a creditor of an entity
with which we also have an advisory or other relationship.
Our regulators have the ability to scrutinize our activities for
potential conflicts of interest, including through detailed
examinations of specific transactions. Our status as a bank
holding company subjects us to heightened regulation and
increased regulatory scrutiny by the Federal Reserve Board with
respect to transactions between GS Bank USA and entities that
are or could be seen as affiliates of ours.
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We have extensive procedures and controls that are designed to
identify and address conflicts of interest, including those
designed to prevent the improper sharing of information among
our businesses. However, appropriately identifying and dealing
with conflicts of interest is complex and difficult, and our
reputation, which is one of our most important assets, could be
damaged and the willingness of clients to enter into
transactions in which such a conflict might arise may be
affected if we fail, or appear to fail, to identify and deal
appropriately with conflicts of interest. In addition, potential
or perceived conflicts could give rise to litigation or
enforcement actions.
As a participant in the financial services industry, we are
subject to extensive regulation in jurisdictions around the
world. We face the risk of significant intervention by
regulatory authorities in all jurisdictions in which we conduct
our businesses. Among other things, we could be fined,
prohibited from engaging in some of our business activities or
subject to limitations or conditions on our business activities.
In recent years, firms in the financial services industry have
been operating in a difficult regulatory environment. The
industry has experienced increased scrutiny from a variety of
regulators, both within and outside the United States. Penalties
and fines sought by regulatory authorities have increased
substantially over the last several years, and certain
regulators have been more likely in recent years to commence
enforcement actions.
In addition, new laws or regulations or changes in enforcement
of existing laws or regulations applicable to our businesses or
those of our clients may adversely affect our businesses. Recent
market disruptions have led to numerous proposals for changes in
the regulation of the financial services industry, including
significant additional regulation. Regulatory changes could lead
to business disruptions, could impact the value of assets that
we hold or the scope or profitability of our business
activities, could require us to change certain of our business
practices and could expose us to additional costs (including
compliance costs) and liabilities as well as reputational harm,
and, to the extent the regulations strictly control the
activities of financial services firms, make it more difficult
for us to distinguish ourselves from competitors. For a
discussion of the extensive regulation to which our businesses
are subject, see “Business — Regulation” in
Part I, Item 1 of our Annual Report on
Form 10-K.
Our status as a bank holding company and the operation of our
lending and other businesses through GS Bank USA subject us to
additional regulation and limitations on our activities, as
described in “Business — Regulation —
Banking Regulation” in Part I, Item 1 of our
Annual Report on
Form 10-K,
as well as some regulatory uncertainty as we apply banking
regulations and practices to many of our businesses. The
application of these regulations and practices may present us
and our regulators with new or novel issues.
Our firm is subject to regulatory capital requirements at a
number of levels, as described above under
“Business — Regulation” in Part I,
Item 1 of our Annual Report on
Form 10-K.
As a bank holding company, we will be subject to capital
requirements based on Basel I as opposed to the requirements
based on Basel II that applied to us as a CSE. Complying with
these requirements may require us to liquidate assets or raise
capital in a manner that adversely increases our funding costs
or otherwise adversely affects our shareholders and creditors.
In addition, failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct
material adverse effect on our financial condition.
In October 2008, we issued preferred stock and a warrant to
purchase our common stock to the U.S. Treasury as part of
its TARP Capital Purchase Program. Prior to
October 28, 2011, unless we have redeemed all of the
preferred stock or the U.S. Treasury has transferred all of
the preferred stock to a third party, the consent of the
U.S. Treasury will be required for us to, among other
things,
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increase our common stock dividend or repurchase our common
stock or other preferred stock (with certain exceptions,
including the repurchase of our common stock to offset share
dilution from
equity-based
employee compensation awards). We have also granted registration
rights and offering facilitation rights to the
U.S. Treasury and to Berkshire Hathaway Inc. pursuant to
which we have agreed to
lock-up
periods during which we would be unable to issue equity
securities.
We face significant legal risks in our businesses, and the
volume of claims and amount of damages and penalties claimed in
litigation and regulatory proceedings against financial
institutions remain high. See “Legal Proceedings” in
Part I, Item 3 of our Annual Report on
Form 10-K
for a discussion of certain legal proceedings in which we are
involved. Our experience has been that legal claims by customers
and clients increase in a market downturn. In addition,
employment-related claims typically increase in periods when we
have reduced the total number of employees.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees in the financial services
industry in recent years, and we run the risk that employee
misconduct could occur. It is not always possible to deter or
prevent employee misconduct and the precautions we take to
prevent and detect this activity may not be effective in all
cases.
Technology is fundamental to our business and our industry. The
growth of electronic trading and the introduction of new
technologies is changing our businesses and presenting us with
new challenges. Securities, futures and options transactions are
increasingly occurring electronically, both on our own systems
and through other alternative trading systems, and it appears
that the trend toward alternative trading systems will continue
and probably accelerate. Some of these alternative trading
systems compete with our trading businesses, including our
specialist businesses, and we may experience continued
competitive pressures in these and other areas. In addition, the
increased use by our clients of
low-cost
electronic trading systems and direct electronic access to
trading markets could cause a reduction in commissions and
spreads. As our clients increasingly use our systems to trade
directly in the markets, we may incur liabilities as a result of
their use of our order routing and execution infrastructure. The
NYSE’s adoption and continued refinement of its hybrid
market for trading securities may increase pressure on our
Equities business as clients execute more of their NYSE-related
trades electronically. We have invested significant resources
into the development of electronic trading systems and expect to
continue to do so, but there is no assurance that the revenues
generated by these systems will yield an adequate return on our
investment, particularly given the relatively lower commissions
arising from electronic trades.
Our performance is largely dependent on the talents and efforts
of highly skilled individuals; therefore, our continued ability
to compete effectively in our businesses, to manage our
businesses effectively and to expand into new businesses and
geographic areas depends on our ability to attract new employees
and to retain and motivate our existing employees. Competition
from within the financial services industry and from businesses
outside the financial services industry for qualified employees
has often been intense. This is particularly the case in
emerging markets, where we are often competing for qualified
employees with entities that have a significantly greater
presence or more extensive experience in the region.
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In fiscal 2008, we significantly reduced compensation levels. In
addition, the market price of our shares of our common stock
declined very significantly during the year. A substantial
portion of our annual bonus compensation paid to our senior
employees has in recent years been paid in the form of
equity-based
awards. In addition, we reduced the number of employees across
nearly all of our businesses during the latter portion of the
year. The combination of these events could adversely affect our
ability to hire and retain qualified employees.
The power generation facilities that we own and those that we
operate, as well as our other power-related activities, are
subject to extensive and evolving federal, state and local
energy, environmental and other governmental laws and
regulations, including environmental laws and regulations
relating to, among others, air quality, water quality, waste
management, natural resources, site remediation and health and
safety.
We may incur substantial costs (including being required to
cease or curtail operations of one or more of our power
generation facilities) in complying with current or future laws
and regulations relating to electric power generation and
wholesale sales and trading of electricity and natural gas,
including having to commit significant capital toward
environmental monitoring, installation of pollution control
equipment, payment of emission fees and carbon or other taxes,
and application for, and holding of, permits and licenses at our
power generation facilities. Our power generation facilities are
also subject to the risk of unforeseen or catastrophic events,
many of which are outside of our control, including breakdown or
failure of power generation equipment, transmission lines or
other equipment or processes or other mechanical malfunctions,
performance below expected levels of output or efficiency,
terrorist attacks, natural disasters or other hostile or
catastrophic events. In addition, these facilities could be
adversely affected by the failure of any of our third party
suppliers or service providers to perform their contractual
obligations, including the failure to obtain raw materials
necessary for operation at reasonable prices. Market conditions
or other factors could cause a failure to satisfy or obtain
waivers under agreements with third parties, including lenders
and utilities, which impose significant obligations on our
subsidiaries that own such facilities. In addition, we may not
have insurance against the risks that such facilities face or
the insurance that we have may be inadequate to cover our losses.
The occurrence of any of such events may prevent the affected
facilities from performing under applicable power sales
agreements, may impair their operations or financial results and
may result in litigation or other reputational harm.
In conducting our businesses and maintaining and supporting our
global operations, we are subject to risks of possible
nationalization, expropriation, price controls, capital
controls, exchange controls and other restrictive governmental
actions, as well the outbreak of hostilities or acts of
terrorism. In many countries, the laws and regulations
applicable to the securities and financial services industries
and many of the transactions in which we are involved are
uncertain and evolving, and it may be difficult for us to
determine the exact requirements of local laws in every market.
Any determination by local regulators that we have not acted in
compliance with the application of local laws in a particular
market or our failure to develop effective working relationships
with local regulators could have a significant and negative
effect not only on our businesses in that market but also on our
reputation generally. We are also subject to the enhanced risk
that transactions we structure might not be legally enforceable
in all cases.
Our businesses and operations are increasingly expanding into
new regions throughout the world, including emerging markets,
and we expect this trend to continue. Various emerging market
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countries have experienced severe economic and financial
disruptions, including significant devaluations of their
currencies, defaults or threatened defaults on sovereign debt,
capital and currency exchange controls, and low or negative
growth rates in their economies, as well as military activity or
acts of terrorism. The possible effects of any of these
conditions include an adverse impact on our businesses and
increased volatility in financial markets generally.
The occurrence of unforeseen or catastrophic events, including
the emergence of a pandemic or other widespread health emergency
(or concerns over the possibility of such an emergency),
terrorist attacks or natural disasters, could create economic
and financial disruptions, could lead to operational
difficulties (including travel limitations) that could impair
our ability to manage our businesses, and could expose our
insurance subsidiaries to significant losses.
There are no material unresolved written comments that were
received from the SEC staff 180 days or more before the end
of our fiscal year relating to our periodic or current reports
under the Exchange Act.
Our principal executive offices are located at 85 Broad
Street, New York, New York, and comprise approximately one
million rentable square feet of leased space, pursuant to a
lease agreement expiring in June 2011. We also occupy over
680,000 rentable square feet at One New York Plaza under lease
agreements expiring primarily in 2010 (with options to renew for
up to five additional years), and we lease space at various
other locations in the New York metropolitan area. In total, we
lease approximately 3.7 million rentable square feet in the
New York metropolitan area.
In August 2005, we leased from Battery Park City Authority
a parcel of land in lower Manhattan, pursuant to a ground lease.
We are currently constructing a 2.1 million gross square
foot office building on the site that will serve as our
headquarters. Under the lease, Battery Park City Authority holds
title to all improvements, including the office building,
subject to Goldman Sachs’ right of exclusive possession and
use until June 2069, the expiration date of the lease.
Under the terms of the ground lease, we made a lump-sum ground
rent payment in June 2007 of $161 million, which was
paid into escrow, to be released to the Battery Park City
Authority pending performance of specified state and city
obligations. We are required to make additional periodic
payments during the term of the lease. We are obligated under
the ground lease to construct the office building by 2011
(subject to extensions in the case of force majeure) in
accordance with certain
pre-approved
design standards. Construction began on the building in
November 2005, and we expect construction completion and
initial occupancy of the building during 2009. The building is
projected to cost between $2.1 billion and
$2.3 billion, including acquisition, development, fitout
and furnishings, financing and other related costs.
We are receiving significant benefits from the City and State of
New York based on our agreement to construct our headquarters in
lower Manhattan. These benefits are subject to recoupment or
recapture if we do not satisfy our obligations under these
agreements with the City and State of New York.
We have offices at 30 Hudson Street in Jersey City, New Jersey,
which we own and which include approximately 1.6 million
gross square feet of office space, and we own over 575,000
square feet of additional office space spread among four
locations in New York and New Jersey. We have additional offices
in the U.S. and elsewhere in the Americas, which together
comprise approximately 2.9 million rentable square feet of
leased space.
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In Europe, the Middle East and Africa, we have offices that
total approximately 2.2 million rentable square feet. Our
European headquarters is located in London at Peterborough
Court, pursuant to a lease expiring in 2026. In total, we lease
approximately 1.6 million rentable square feet in London
through various leases, relating to various properties.
In Asia, we have offices that total approximately
1.5 million rentable square feet. Our headquarters in this
region are in Tokyo, at the Roppongi Hills Mori Tower, and in
Hong Kong, at the Cheung Kong Center. In Tokyo, we currently
lease approximately 415,000 rentable square feet, the majority
of which will expire in 2018. In Hong Kong, we currently lease
approximately 295,000 rentable square feet under lease
agreements, the majority of which will expire in 2011.
Our occupancy expenses include costs associated with office
space held in excess of our current requirements. This excess
space, the cost of which is charged to earnings as incurred, is
being held for potential growth or to replace currently occupied
space that we may exit in the future. We regularly evaluate our
current and future space capacity in relation to current and
projected staffing levels. In 2008, we incurred exit costs of
$80 million related to our office space. We may incur exit
costs in the future to the extent we (i) reduce our space
capacity or (ii) commit to, or occupy, new properties in
the locations in which we operate and, consequently, dispose of
existing space that had been held for potential growth. These
exit costs may be material to our results of operations in a
given period.
We are involved in a number of judicial, regulatory and
arbitration proceedings (including those described below)
concerning matters arising in connection with the conduct of our
businesses. We believe, based on currently available
information, that the results of such proceedings, in the
aggregate, will not have a material adverse effect on our
financial condition, but might be material to our operating
results for any particular period, depending, in part, upon the
operating results for such period. Given the range of litigation
and investigations presently under way, our litigation expenses
can be expected to remain high.
Group Inc. and GS&Co. are among the numerous financial
services companies that have been named as defendants in a
variety of lawsuits alleging improprieties in the process by
which those companies participated in the underwriting of public
offerings in recent years.
GS&Co. has, together with other underwriters in certain
offerings as well as the issuers and certain of their officers
and directors, been named as a defendant in a number of related
lawsuits filed in the U.S. District Court for the Southern
District of New York alleging, among other things, that the
prospectuses for the offerings violated the federal securities
laws by failing to disclose the existence of alleged
arrangements tying allocations in certain offerings to higher
customer brokerage commission rates as well as purchase orders
in the aftermarket, and that the alleged arrangements resulted
in market manipulation. The federal district court denied a
motion to dismiss in all material respects relating to the
underwriter defendants and generally granted plaintiffs’
motion for class certification in six “focus cases.”
The U.S. Court of Appeals for the Second Circuit reversed
the district court’s order granting class certification,
denied plaintiffs’ applications for rehearing and rehearing
en banc, and remanded. On August 14, 2007, plaintiffs
amended their complaints in the six “focus cases” as
well as their master allegations for all such cases to reflect
new class related allegations. On September 27, 2007,
plaintiffs filed a new motion for class certification in the
district court, and on November 14, 2007, GS&Co.
and the other defendants moved to dismiss the amended
complaints. Following a mediation, a settlement in principle has
been reached, subject to negotiation of definitive documentation
and court approval.
GS&Co. is among numerous underwriting firms named as
defendants in a number of complaints filed commencing
October 3, 2007, in the U.S. District Court for
the Western District of Washington alleging violations of the
federal securities laws in connection with offerings of
securities for 16 issuers
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during 1999 and 2000. The complaints generally assert that the
underwriters, together with each issuer’s directors,
officers and principal shareholders, entered into purported
agreements to tie allocations in the offerings to increased
brokerage commissions and aftermarket purchase orders. The
complaints further allege that, based upon these and other
purported agreements, the underwriters violated the reporting
provisions of, and are subject to
short-swing
profit recovery under, Section 16 of the Exchange Act. On
October 29, 2007, the cases were reassigned to a
single district judge. On July 25, 2008, defendants
moved to dismiss the various complaints.
GS&Co. has been named as a defendant in an action commenced
on May 15, 2002 in New York Supreme Court, New York
County, by an official committee of unsecured creditors on
behalf of eToys, Inc., alleging that the firm intentionally
underpriced eToys, Inc.’s initial public offering. The
action seeks, among other things, unspecified compensatory
damages resulting from the alleged lower amount of offering
proceeds. The court granted GS&Co.’s motion to dismiss
as to five of the claims; plaintiff appealed from the dismissal
of the five claims, and GS&Co. appealed from the denial of
its motion as to the remaining claim. The New York Appellate
Division, First Department affirmed in part and reversed in part
the lower court’s ruling on the firm’s motion to
dismiss, permitting all claims to proceed except the claim for
fraud, as to which the appellate court granted leave to replead,
and the New York Court of Appeals affirmed in part and reversed
in part, dismissing claims for breach of contract, professional
malpractice and unjust enrichment, but permitting claims for
breach of fiduciary duty and fraud to continue. On remand to the
lower court, GS&Co. moved to dismiss the surviving claims
or, in the alternative, for summary judgment, but the motion was
denied by a decision dated March 21, 2006. Plaintiff
has moved for leave to amend the complaint again, and
GS&Co. has cross-moved to dismiss.
Group Inc. and certain of its affiliates have, together with
various underwriters in certain offerings, received subpoenas
and requests for documents and information from various
governmental agencies and self-regulatory organizations in
connection with investigations relating to the public offering
process. Goldman Sachs has cooperated with these investigations.
GS&Co. has been named as a defendant in two purported class
action lawsuits commenced, beginning on May 26, 1999,
in the U.S. District Court for the District of Columbia
brought on behalf of purchasers of Class A common stock of
Iridium World Communications, Ltd. in a January 1999
underwritten secondary offering of 7,500,000 shares of
Class A common stock. All parties entered into settlement
agreements, with the underwriter defendants contributing
$8.25 million to a settlement fund. The settlement was
approved by the Court by order dated October 23, 2008
and has become final.
Several lawsuits have been commenced in the Netherlands courts
based on alleged misstatements and omissions relating to the
initial public offering of World Online in March 2000.
Goldman Sachs and ABN AMRO Rothschild served as joint global
coordinators of the approximately €2.9 billion
offering. GSI underwrote 20,268,846 shares and GS&Co.
underwrote 6,756,282 shares for a total offering price of
approximately €1.16 billion.
On September 11, 2000, several Dutch World Online
shareholders as well as a Dutch entity purporting to represent
the interests of certain World Online shareholders commenced a
proceeding in Amsterdam District Court against “ABN AMRO
Bank N.V., also acting under the name of ABN AMRO
Rothschild,” alleging misrepresentations and omissions
relating to the initial public offering of World Online. The
lawsuit seeks, among other things, the return of the purchase
price of the shares purchased by the plaintiffs or unspecified
damages. The court held that the claims failed and dismissed the
complaint and the Amsterdam Court of Appeal affirmed dismissal
of the complaint.
In March 2001, a Dutch shareholders association initiated
legal proceedings for an unspecified amount of damages against
GSI in Amsterdam District Court in connection with the World
Online
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offering. The court rejected the claims against GSI, but found
World Online liable in an amount to be determined. The Dutch
shareholders association appealed from the dismissal of their
claims against GSI. By a decision dated May 3, 2007,
the Netherlands Court of Appeals affirmed in part and reversed
in part the decision of the district court dismissing the
complaint, holding that certain of the alleged disclosure
deficiencies were actionable. On July 24, 2007, the
shareholder association appealed from the Netherlands Court of
Appeals decision to the extent that it affirmed the decision of
the district court dismissing the complaint. On
November 2, 2007, GSI joined the other defendants in
appealing from the Court of Appeals decision to the extent that
it reversed the district court’s dismissal.
GS&Co. is one of several investment firms that have been
named as defendants in substantively identical purported class
actions filed in the U.S. District Court for the Southern
District of New York alleging violations of the federal
securities laws in connection with research coverage of certain
issuers and seeking compensatory damages. In one such action,
relating to coverage of RSL Communications, Inc. commenced on
July 15, 2003, GS&Co.’s motion to dismiss
the complaint was denied. The district court granted the
plaintiffs’ motion for class certification and the
U.S. Court of Appeals for the Second Circuit, by an order
dated January 26, 2007, vacated the district court’s
class certification and remanded for reconsideration.
GS&Co. is also a defendant in several actions relating to
research coverage of Exodus Communications, Inc. that commenced
beginning in May 2003. The actions were consolidated,
Goldman, Sachs & Co.’s motion to dismiss was
granted with leave to replead, and plaintiff filed a second
amended complaint. The defendants’ motion to dismiss the
second amended complaint was granted by order dated
December 4, 2007, and plaintiff’s motion for
reconsideration was denied by order dated
June 3, 2008. Plaintiff appealed the dismissal, and
while the appeal was pending, the parties entered into a
settlement agreement on a
non-class
basis, disposing of the case.
A purported shareholder derivative action was filed in New York
Supreme Court, New York County on June 13, 2003
against Group Inc. and its board of directors, which, as amended
on March 3, 2004 and June 14, 2005, alleges
that the directors breached their fiduciary duties in connection
with the firm’s research as well as the firm’s IPO
allocations practices.
Group Inc., GS&Co. and Henry M. Paulson, Jr., the former
Chairman and Chief Executive Officer of Group Inc., have been
named as defendants in a purported class action filed originally
on July 18, 2003 in the U.S. District Court for
the District of Nevada on behalf of purchasers of Group Inc.
stock from July 1, 1999 through May 7, 2002.
The complaint alleges that defendants breached their fiduciary
duties and violated the federal securities laws in connection
with the firm’s research activities. The complaint seeks,
among other things, unspecified compensatory damages
and/or
rescission. The action was transferred on consent to the
U.S. District Court for the Southern District of New York,
and the district court granted the defendants’ motion to
dismiss with leave to amend. Plaintiffs filed a second amended
complaint, and defendants filed a motion to dismiss. In a
decision dated September 29, 2006, the federal
district court granted Mr. Paulson’s motion to dismiss
with leave to replead but otherwise denied the motion.
Plaintiffs’ motion for class certification was granted by a
decision dated September 15, 2008, and on
September 26, 2008, the Goldman Sachs defendants filed
a petition in the U.S. Court of Appeals for the Second
Circuit seeking review of the certification ruling.
Group Inc. and its affiliates, together with other financial
services firms, have received requests for information from
various governmental agencies and self-regulatory organizations
in connection with their review of research independence issues.
Goldman Sachs has cooperated with these requests. See
“Business — Regulation — Regulations
Applicable in and Outside the United States” in
Part I, Item 1 of our Annual Report on
Form 10-K
for a discussion of our global research settlement.
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Goldman Sachs affiliates are defendants in certain actions
relating to Enron Corp., which filed for protection under the
U.S. bankruptcy laws on December 2, 2001.
GS&Co. and co-managing underwriters have been named as
defendants in certain purported securities class and individual
actions commenced beginning on December 14, 2001 in
the U.S. District Court for the Southern District of Texas
and California Superior Court brought by purchasers of
$255,875,000, (including
over-allotments)
of Exchangeable Notes of Enron Corp. in August 1999. The
notes were mandatorily exchangeable in 2002 into shares of Enron
Oil & Gas Company held by Enron Corp. or their cash
equivalent. The complaints also name as defendants Group Inc. as
well as certain past and present officers and directors of Enron
Corp. and the company’s outside accounting firm. The
complaints generally allege violations of the disclosure
requirements of the federal securities laws
and/or state
law, and seek compensatory damages. GS&Co. underwrote
$127,937,500 (including
over-allotments)
principal amount of the notes. Group Inc. and GS&Co. moved
to dismiss the class action complaint in the Texas federal court
and the motion was granted as to Group Inc. but denied as to
GS&Co. One of the plaintiffs has moved for class
certification. GS&Co. has moved for judgment on the
pleadings against all plaintiffs. On October 18, 2007,
the parties reached a settlement agreement in principle pursuant
to which GS&Co. has contributed $11.5 million to a
settlement fund, subject to definitive documentation and court
approval. Plaintiffs in various consolidated actions relating to
Enron entered into a settlement with Banc of America Securities
LLC on July 2, 2004 and with Citigroup, Inc. on
June 10, 2005, including with respect to claims
relating to the Exchangeable Notes offering, as to which
affiliates of those settling defendants were two of the three
underwriters (together with GS&Co.).
Several funds which allegedly sustained investment losses of
approximately $125 million in connection with secondary
market purchases of the Exchangeable Notes as well as Zero
Coupon Convertible Notes of Enron Corp. commenced an action in
the U.S. District Court for the Southern District of New
York on January 16, 2002. As amended, the lawsuit
names as defendants the underwriters of the August 1999
offering and the company’s outside accounting firm, and
alleges violations of the disclosure requirements of the federal
securities laws, fraud and misrepresentation. The Judicial Panel
on Multidistrict Litigation has transferred that action to the
Texas federal district court for purposes of coordinated or
consolidated pretrial proceedings with other matters relating to
Enron Corp. GS&Co. moved to dismiss the complaint and the
motion was granted in part and denied in part. The district
court granted the funds’ motion for leave to file a second
amended complaint on January 22, 2007.
GS&Co. is among numerous defendants in two substantively
identical actions filed by Enron Corp.’s bankruptcy trustee
in the U.S. Bankruptcy Court for the Southern District of
New York beginning in November 2003 seeking to recover as
fraudulent transfers
and/or
preferences payments made by Enron Corp. in repurchasing its
commercial paper shortly before its bankruptcy filing.
GS&Co., which had acted as a commercial paper dealer for
Enron Corp., resold to Enron Corp. approximately
$30 million of commercial paper as principal, and as an
agent facilitated Enron Corp.’s repurchase of approximately
$340 million additional commercial paper from various
customers who have also been named as defendants. The bankruptcy
court denied GS&Co.’s motion to dismiss as well as
similar motions by other defendants. On
August 1, 2005, various defendants including
GS&Co. petitioned to have the denial of their motion to
dismiss reviewed by the U.S. District Court for the
Southern District of New York. On March 10, 2008, the
district court denied GS&Co.’s motion to remove the
standing reference at the present time. On
April 29, 2008, GS&Co. moved for summary
judgment. On January 6, 2009, GS&Co. entered into
a settlement with the trustee pursuant to which it will pay
$6.95 million in exchange for a release and a bar order
against any third party claims. The settlement was approved by
the bankruptcy court on January 21, 2009.
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By an amended complaint dated July 11, 2002,
GS&Co. and the other lead underwriters for the
February 2001 offering of 13,000,000 shares of common
stock and $575,000,000 of
51/4%
convertible subordinated notes of Exodus Communications, Inc.
were added as defendants in a purported class action pending in
the U.S. District Court for the Northern District of
California. The complaint, which also names as defendants
certain officers and directors of Exodus Communications, Inc.,
alleged violations of the disclosure requirements of the federal
securities laws and seeks compensatory damages. The parties
entered into a settlement agreement, with the underwriter
defendants contributing $1 million toward a settlement
fund. The settlement was approved by the district court on
October 31, 2008 and has become final.
GS&Co. and Group Inc. have been named as defendants in a
purported class action commenced originally on
October 1, 2001 in Montana District Court, Second
Judicial District on behalf of former shareholders of Montana
Power Company. The complaint generally alleges that Montana
Power Company violated Montana law by failing to procure
shareholder approval of certain corporate strategies and
transactions, that the company’s board breached its
fiduciary duties in pursuing those strategies and transactions,
and that GS&Co. aided and abetted the board’s breaches
and rendered negligent advice in its role as financial advisor
to the company. The complaint seeks, among other things,
compensatory damages. In addition to GS&Co. and Group Inc.,
the defendants include Montana Power Company, certain of its
officers and directors, an outside law firm for the Montana
Power Company, and certain companies that purchased assets from
Montana Power Company and its affiliates. The Montana state
court denied the Goldman Sachs defendants’ motions to
dismiss. Following the bankruptcies of certain defendants in the
action, defendants removed the action to federal court, the
U.S. District Court for the District of Montana, Butte
Division.
On October 26, 2004, a creditors committee of Touch
America Holdings, Inc. brought an action against GS&Co.,
Group Inc., and a former outside law firm for Montana Power
Company in Montana District Court, Second Judicial District. The
complaint asserts that Touch America Holdings, Inc. is the
successor to Montana Power Corporation and alleges substantially
the same claims as in the purported class action. Defendants
removed the action to federal court. Defendants moved to dismiss
the complaint, but the motion was denied by a decision dated
June 10, 2005.
GS&Co. is among numerous entities named as defendants in
two adversary proceedings commenced in the U.S. Bankruptcy
Court for the Southern District of New York, one on
July 6, 2003 by a creditors committee, and the second
on or about July 31, 2003 by an equity committee of
Adelphia Communications, Inc. Those proceedings have now been
consolidated in a single amended complaint filed by the Adelphia
Recovery Trust on October 31, 2007. The complaint
seeks, among other things, to recover, as fraudulent
conveyances, payments made allegedly by Adelphia Communications,
Inc. and its affiliates to certain brokerage firms, including
approximately $62.9 million allegedly paid to GS&Co.,
in respect of margin calls made in the ordinary course of
business on accounts owned by members of the family that
formerly controlled Adelphia Communications, Inc. GS&Co.
moved to dismiss the claim related to such margin payments on
December 21, 2007.
Spear, Leeds & Kellogg Specialists LLC (SLKS) and
certain affiliates have received requests for information from
various governmental agencies and self-regulatory organizations
as part of an
industry-wide
investigation relating to activities of floor specialists in
recent years. Goldman Sachs has cooperated with the requests.
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On March 30, 2004, certain specialist firms on the
NYSE, including SLKS, without admitting or denying the
allegations, entered into a final global settlement with the SEC
and the NYSE covering certain activities during the years 1999
through 2003. The SLKS settlement involves, among other things,
(i) findings by the SEC and the NYSE that SLKS violated
certain federal securities laws and NYSE rules, and in some
cases failed to supervise certain individual specialists, in
connection with trades that allegedly disadvantaged customer
orders, (ii) a cease and desist order against SLKS,
(iii) a censure of SLKS, (iv) SLKS’ agreement to
pay an aggregate of $45.3 million in disgorgement and a
penalty to be used to compensate customers, (v) certain
undertakings with respect to SLKS’ systems and procedures,
and (v) SLKS’ retention of an independent consultant
to review and evaluate certain of SLKS’ compliance systems,
policies and procedures. Comparable findings were made and
sanctions imposed in the settlements with other specialist
firms. The settlement did not resolve the related private civil
actions against SLKS and other firms or regulatory
investigations involving individuals or conduct on other
exchanges.
SLKS, Spear, Leeds & Kellogg, L.P. and Group Inc. are
among numerous defendants named in purported class actions
brought beginning in October 2003 on behalf of investors in
the U.S. District Court for the Southern District of New
York alleging violations of the federal securities laws and
state common law in connection with NYSE floor specialist
activities. The actions seek unspecified compensatory damages,
restitution and disgorgement on behalf of purchasers and sellers
of unspecified securities between October 17, 1998 and
October 15, 2003. Plaintiffs filed a consolidated
amended complaint on September 16, 2004. The
defendants’ motion to dismiss the amended complaint was
granted in part and denied in part by a decision dated
December 13, 2005. On June 28, 2007,
plaintiffs filed a motion seeking to certify a class.
On September 4, 2003, the SEC announced that
GS&Co. had settled an administrative proceeding arising
from certain trading in U.S. Treasury bonds over an
approximately eight-minute period after GS&Co. received an
October 31, 2001 telephone call from a Washington,
D.C.-based political consultant concerning a forthcoming
Treasury refunding announcement. Without admitting or denying
the allegations, GS&Co. consented to the entry of an order
that, among other things, (i) censured GS&Co.;
(ii) directed GS&Co. to cease and desist from
committing or causing any violations of
Sections 15(c)(1)(A) and (C) and 15(f) of, and
Rule 15c1-2
under, the Exchange Act; (iii) ordered GS&Co. to pay
disgorgement and prejudgment interest in the amount of
$1,742,642, and a civil monetary penalty of $5 million; and
(iv) directed GS&Co. to conduct a review of its
policies and procedures and adopt, implement and maintain
policies and procedures consistent with the order and that
review. GS&Co. also undertook to pay $2,562,740 in
disgorgement and interest relating to certain trading in
U.S. Treasury bond futures during the same eight-minute
period.
GS&Co. has been named as a defendant in a purported class
action filed on March 10, 2004 in the
U.S. District Court for the Northern District of Illinois
on behalf of holders of short positions in
30-year
U.S. Treasury futures and options on the morning of
October 31, 2001. The complaint alleges that the firm
purchased
30-year
bonds and futures prior to the Treasury’s refunding
announcement that morning based on
non-public
information about that announcement, and that such purchases
increased the costs of covering such short positions. The
complaint also names as defendants the Washington, D.C.-based
political consultant who allegedly was the source of the
information, a former GS&Co. economist who allegedly
received the information, and another company and one of its
employees who also allegedly received and traded on the
information prior to its public announcement. The complaint
alleges violations of the federal commodities and antitrust
laws, as well as Illinois statutory and common law, and seeks,
among other things, unspecified damages including treble damages
under the antitrust laws. The district court dismissed the
antitrust and Illinois state law claims but permitted the
federal commodities law claims to proceed. Plaintiff’s
motion for class certification was denied by a decision dated
August 22, 2008. GS&Co. moved for summary
judgment, and by a decision dated July 30, 2008, the
district court granted the motion insofar as the remaining
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claim relates to the trading of treasury bonds, but denied the
motion without prejudice to the extent the claim relates to
trading of treasury futures.
GS&Co. and certain mutual fund affiliates have received
subpoenas and requests for information from various governmental
agencies and self-regulatory organizations including the SEC as
part of the
industry-wide
investigation relating to the practices of mutual funds and
their customers. GS&Co. and its affiliates have cooperated
with such requests.
GS&Co. and the other lead underwriters for the
August 2005 initial public offering of
26,500,000 shares of common stock of Refco Inc. are among
the defendants in various putative class actions filed in the
U.S. District Court for the Southern District of New York
beginning in October 2005 by investors in Refco Inc. in
response to certain publicly reported events that culminated in
the October 17, 2005 filing by Refco Inc. and certain
affiliates for protection under U.S. bankruptcy laws. The
actions, which have been consolidated, allege violations of the
disclosure requirements of the federal securities laws and seek
compensatory damages. In addition to the underwriters, the
consolidated complaint names as defendants Refco Inc. and
certain of its affiliates, certain officers and directors of
Refco Inc., Thomas H. Lee Partners, L.P. (which held a majority
of Refco Inc.’s equity through certain funds it manages),
Grant Thornton (Refco Inc.’s outside auditor), and BAWAG
P.S.K. Bank fur Arbeit und Wirtschaft und Osterreichische
Postsparkasse Aktiengesellschaft (BAWAG). Lead plaintiffs
entered into a settlement with BAWAG, which was approved
following certain amendments on June 29, 2007.
GS&Co. underwrote 5,639,200 shares of common stock at
a price of $22 per share for a total offering price of
approximately $124 million.
A purported shareholder derivative action was filed in the
U.S. District Court for the Southern District of New York
on November 2, 2005 on behalf of Group Inc. against
certain of its officers and directors. The complaint alleges
that the individual defendants breached their fiduciary duties
by failing to ensure that adequate due diligence was conducted
in connection with the Refco Inc. initial public offering. The
parties subsequently stipulated to the action’s dismissal,
and the action was dismissed by the district court by order
dated January 7, 2009.
GS&Co. has, together with other underwriters of the Refco
Inc. initial public offering, received requests for information
from various governmental agencies and self-regulatory
organizations. GS&Co. is cooperating with those requests.
Group Inc., GS&Co. and Goldman Sachs Execution &
Clearing, L.P. are among the numerous financial services firms
that have been named as defendants in a purported class action
filed on April 12, 2006 in the U.S. District
Court for the Southern District of New York by customers who
engaged in
short-selling
transactions in equity securities since
April 12, 2000. The amended complaint generally
alleges that the customers were charged fees in connection with
the short sales but that the applicable securities were not
necessarily borrowed to effect delivery, resulting in failed
deliveries, and that the defendants conspired to set a minimum
threshold borrowing rate for securities designated as hard to
borrow. The complaint asserts a claim under the federal
antitrust laws, as well as claims under the New York Business
Law and common law, and seeks treble damages as well as
injunctive relief. Defendants’ motion to dismiss the
complaint was granted by a decision dated
December 20, 2007. On January 18, 2008,
plaintiffs appealed from this decision.
GS&Co. was added as a defendant in an amended complaint
filed on August 14, 2006 in a purported class action
pending in the U.S. District Court for the District of
Columbia. The complaint
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asserts violations of the federal securities laws generally
arising from allegations concerning Fannie Mae’s accounting
practices in connection with certain Fannie Mae-sponsored REMIC
transactions that were allegedly arranged by GS&Co. The
other defendants include Fannie Mae, certain of its past and
present officers and directors, and accountants. By a decision
dated May 8, 2007, the district court granted
GS&Co.’s motion to dismiss the claim against it. The
time for an appeal will not begin to run until disposition of
the claims against other defendants.
Beginning in September 2006, Group Inc.
and/or
GS&Co. were added named as defendants in four Fannie Mae
shareholder derivative actions in the U.S. District Court
for the District of Columbia. The complaints generally allege
that the Goldman Sachs defendants aided and abetted a breach of
fiduciary duty by Fannie Mae’s directors and officers in
connection with certain Fannie Mae-sponsored REMIC transactions
and one of the complaints also asserts a breach of contract
claim. The complaints also name as defendants certain former
officers and directors of Fannie Mae as well as an outside
accounting firm. The complaints seek, inter alia,
unspecified damages. The Goldman Sachs defendants were dismissed
without prejudice from the first filed of these actions, and the
remaining claims in that action were dismissed for failure to
make a demand on Fannie Mae’s board of directors. That
dismissal has been affirmed on appeal. The remaining three
actions have been stayed by the district court.
On February 13, 2007, the liquidators of General
American Mutual Holding Corporation filed a complaint in
Missouri Circuit Court against one of the company’s former
officers to assert claims against Group Inc. and GS&Co. The
amended complaint asserted that the Goldman Sachs defendants
breached certain duties and violated Missouri law in the course
of acting as the company’s financial advisor during
1998-1999 in
connection with the exploration of a potential demutualization
and initial public offering, and the ensuing sale of certain
company assets. The complaint sought compensatory and punitive
damages. The parties settled the action, with the Goldman Sachs
defendants paying $99.975 million. The settlement was
approved by order dated November 6, 2008.
On March 16, 2007, Group Inc., its board of directors,
executive officers and members of its management committee were
named as defendants in a purported shareholder derivative action
in the U.S. District Court for the Eastern District of New
York challenging the sufficiency of the firm’s
February 21, 2007 Proxy Statement and the compensation
of certain employees. The complaint generally alleges that the
Proxy Statement undervalues stock option awards disclosed
therein, that the recipients received excessive awards because
the proper methodology was not followed, and that the
firm’s senior management received excessive compensation,
constituting corporate waste. The complaint seeks, among other
things, an injunction against the 2007 Annual Meeting of
Shareholders, the voiding of any election of directors in the
absence of an injunction and an equitable accounting for the
allegedly excessive compensation. On July 20, 2007,
defendants moved to dismiss the complaint, the motion was
granted by an order dated December 18, 2008 and
plaintiff appealed on January 13, 2009.
On January 17, 2008, Group Inc., its board of
directors, executive officers and members of its management
committee were named as defendants in a related purported
shareholder derivative action brought by the same plaintiff in
the same court predicting that the firm’s 2008 Proxy
Statement will violate the federal securities laws by
undervaluing certain stock option awards and alleging that
senior management received excessive compensation for 2007. The
complaint seeks, among other things, an injunction against the
distribution of the 2008 Proxy Statement, the voiding of any
election
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of directors in the absence of an injunction and an equitable
accounting for the allegedly excessive compensation. On
January 25, 2008, the plaintiff moved for a
preliminary injunction to prevent the 2008 Proxy Statement from
using options valuations that the plaintiff alleges are
incorrect and to require the amendment of SEC Form 4s filed
by certain of the executive officers named in the complaint to
reflect the stock option valuations alleged by the plaintiff.
Plaintiff’s motion for a preliminary injunction was denied
by order dated February 14, 2008, plaintiff appealed
and twice moved to expedite the appeal, with the motions being
denied by orders dated February 29, 2008 and
April 3, 2008.
GS&Co. and certain of its affiliates, together with other
financial services firms, have received requests for information
from various governmental agencies and self-regulatory
organizations relating to subprime mortgages, and
securitizations, collateralized debt obligations and synthetic
products related to subprime mortgages. GS&Co. and its
affiliates are cooperating with the requests.
GS&Co., along with numerous other financial institutions,
is a defendant in an action brought by the City of Cleveland
alleging that the defendants’ activities in connection with
securitizations of subprime mortgages created a “public
nuisance” in Cleveland. The action is pending in the
U.S. District Court for the Northern District of Ohio, and
the complaint seeks, among other things, unspecified
compensatory damages. Defendants moved to dismiss on
November 24, 2008.
GS&Co., Goldman Sachs Mortgage Company and GS Mortgage
Securities Corp. are among the defendants in a purported class
action commenced on December 11, 2008 in the U.S. District
Court for the Southern District of New York brought on behalf of
purchasers of various mortgage pass-through certificates and
asset-backed certificates issued by various securitization
trusts in 2007 and underwritten by GS&Co. The other
defendants include the various issuer trusts that issued the
securities as well as certain officers and directors of certain
of the entity defendants. The complaint generally alleges that
the registration statement and prospectus supplements for the
certificates violated the federal securities laws. The complaint
asserts claims against the issuer trusts and GS&Co. under
Section 11 of the U.S. Securities Act of 1933 (Securities
Act), and a related “controlling person” claim against
the other defendants under Section 15 of the Securities
Act, and seeks unspecified compensatory damages and rescission
or recessionary damages.
On August 21, 2008, GS&Co. entered into a
settlement in principle with the Office of Attorney General of
the State of New York and the Illinois Securities Department (on
behalf of the North American Securities Administrators
Association) regarding auction rate securities. Under the
agreement, Goldman Sachs agreed, among other things, (i) to
offer to repurchase at par the outstanding auction rate
securities that its private wealth management clients purchased
through the firm prior to February 11, 2008, with the
exception of those auction rate securities where auctions are
clearing, (ii) to continue to work with issuers and other
interested parties, including regulatory and governmental
entities, to expeditiously provide liquidity solutions for
institutional investors, and (iii) to pay a
$22.5 million fine. The settlement, which is subject to
definitive documentation and approval by the various states,
does not resolve any potential regulatory action by the SEC.
On August 28, 2008, a putative shareholder derivative
action was filed in the U.S. District Court for the
Southern District of New York naming as defendants Group Inc.,
its board of directors, and certain senior officers. The
complaint alleges generally that the board breached its
fiduciary duties and committed mismanagement in connection with
its oversight of auction rate securities marketing and trading
operations, that certain individual defendants engaged in
insider selling by selling shares of Group Inc., and that the
firm’s public filings were false and misleading in
violation of the federal securities laws by failing to
accurately disclose the alleged practices involving auction rate
securities. The complaint seeks damages, injunctive and
declaratory relief, restitution, and an order requiring the firm
to adopt corporate reforms. Defendants moved to dismiss on
January 23, 2009.
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On September 4, 2008, Group Inc. was named as a
defendant, together with numerous other financial services
firms, in two complaints filed in the U.S. District Court
for the Southern District of New York alleging that the
defendants engaged in a conspiracy to manipulate the auction
securities market in violation of federal antitrust laws. The
actions were filed, respectively, on behalf of putative classes
of issuers of and investors in auction rate securities and seek,
among other things, treble damages. Defendants moved to dismiss
on January 15, 2009.
Group Inc. and “GS Capital Partners” are among
numerous private equity firms and investment banks named as
defendants in a federal antitrust action filed in the
U.S. District Court for the District of Massachusetts in
December 2007. As amended, the complaint generally alleges
that the defendants have colluded to limit competition in
bidding for private
equity-sponsored
acquisitions of public companies, thereby resulting in lower
prevailing bids and, by extension, less consideration for
shareholders of those companies in violation of Section 1
of the U.S. Sherman Antitrust Act and common law.
Defendants moved to dismiss on August 27, 2008. By an
order dated November 19, 2008, the district court
dismissed claims relating to certain transactions that were the
subject of releases as part of the settlement of shareholder
actions challenging such transactions, and by an order dated
December 15, 2008 otherwise denied the motion to
dismiss.
GS&Co. is among numerous underwriters named as defendants
in a putative securities class action amended complaint filed on
August 5, 2008 in the U.S. District Court for the
Western District of Washington. As to the underwriters,
plaintiffs allege that the offering documents in connection with
various securities offerings by Washington Mutual, Inc. failed
to describe accurately the company’s exposure to
mortgage-related
activities in violation of the disclosure requirements of the
federal securities laws. The defendants include past and present
directors and officers of Washington Mutual, the company’s
former outside auditors, and numerous underwriters. The
underwriter defendants moved to dismiss on
December 8, 2008. GS&Co. underwrote $788,500,000
principal amount of securities in the offerings at issue.
On September 25, 2008, the FDIC took over the primary
banking operations of Washington Mutual, Inc. and then sold
them. On September 27, 2008, Washington Mutual, Inc.
filed for Chapter 11 bankruptcy in the U.S. bankruptcy
court in Delaware.
GS&Co. is among the underwriters named as defendants in
numerous putative securities class actions filed beginning on
November 6, 2008 in the U.S. District Court for
the Southern District of New York arising from the
June 17, 2008 $125 million initial public
offering of common stock of Britannia Bulk Holdings, Inc. The
complaints name as defendants the company, certain of its
directors and officers, and the underwriters for the offering.
Plaintiffs allege that the offering materials violated the
disclosure requirements of the federal securities laws and seek
compensatory damages. Defendants have yet to respond.
GS&Co. underwrote 3.75 million shares of common stock
for a total offering price of $56.25 million. The principal
operating subsidiary of Britannia Bulk Holdings, Inc. is subject
to an insolvency proceeding in the U.K. courts.
There were no matters submitted to a vote of security holders
during the fourth quarter of our fiscal year ended
November 28, 2008.
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Set forth below are the name, age, present title, principal
occupation and certain biographical information as of
January 26, 2009 for our executive officers. All of
our executive officers have been appointed by and serve at the
pleasure of our board of directors.
Mr. Blankfein has been our Chairman and Chief Executive
Officer since June 2006, and a director since
April 2003. Previously, he had been our President and Chief
Operating Officer since January 2004. Prior to that, from
April 2002 until January 2004, he was a Vice Chairman
of Goldman Sachs, with management responsibility for Goldman
Sachs’ Fixed Income, Currency and Commodities Division
(FICC) and Equities Division (Equities). Prior to becoming a
Vice Chairman, he had served as co-head of FICC since its
formation in 1997. From 1994 to 1997, he headed or co-headed the
Currency and Commodities Division. Mr. Blankfein is not on
the board of any public company other than Goldman Sachs. He is
affiliated with certain
non-profit
organizations, including as a member of the Harvard University
Committee on University Resources, the Advisory Board of the
Tsinghua University School of Economics and Management and the
Governing Board of the Indian School of Business, an overseer of
the Weill Medical College of Cornell University, and a director
of the Partnership for New York City and Catalyst.
Mr. Cohen has been an Executive Vice President of Goldman
Sachs and our Global Head of Compliance since
February 2004. From 1991 until January 2004, he was a
partner in the law firm of O’Melveny & Myers LLP.
He is affiliated with certain
non-profit
organizations, including as a board member of the New York Stem
Cell Foundation.
Mr. Cohn has been our President and Co-Chief Operating
Officer and a director since June 2006. Previously, he had
been the co-head of Goldman Sachs’ global securities
businesses since January 2004. He also had been the co-head
of Equities since 2003 and the co-head of FICC since
September 2002. From March 2002 to
September 2002, he served as co-chief operating officer of
FICC. Prior to that, beginning in 1999, Mr. Cohn managed
the FICC macro businesses. From 1996 to 1999, he was the global
head of Goldman Sachs’ commodities business. Mr. Cohn
is not on the board of any public company other than Goldman
Sachs. He is affiliated with certain
non-profit
organizations, including as a trustee of the Gilmour Academy,
the NYU Child Study Center, the NYU Hospital, the NYU Medical
School, the Harlem Children’s Zone and American University.
Mr. Evans has been a Vice Chairman of Goldman Sachs since
February 2008 and chairman of Goldman Sachs Asia since
2004. Prior to becoming a Vice Chairman, he had served as global
co-head of Goldman Sachs’ securities business since 2003.
Previously, he had been co-head of the Equities Division since
2001. Mr. Evans is a board member of CASPER (Center for
Advancement of Standards-based Physical Education Reform). He
also serves as a trustee of the Bendheim Center for Finance at
Princeton University.
Mr. Palm has been an Executive Vice President of Goldman
Sachs since May 1999, and our General Counsel and head or
co-head of the Legal Department since May 1992.
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Mr. Sherwood has been a Vice Chairman of Goldman Sachs
since February 2008 and co-chief executive officer of
Goldman Sachs International since 2005. Prior to becoming a Vice
Chairman, he had served as global co-head of Goldman Sachs’
securities business since 2003. Prior to that, he had been head
of the Fixed Income, Currency and Commodities Division in Europe
since 2001.
Ms. Stecher has been an Executive Vice President of Goldman
Sachs and our General Counsel and co-head of the Legal
Department since December 2000. From 1994 to 2000, she was
head of the firm’s Tax Department, over which she continues
to have senior oversight responsibility. She is also a trustee
of Columbia University.
Mr. Viniar has been an Executive Vice President of Goldman
Sachs and our Chief Financial Officer since May 1999. He
has been the head of Operations, Technology, Finance and
Services Division since December 2002. He was head of the
Finance Division and co-head of Credit Risk Management and
Advisory and Firmwide Risk from December 2001 to
December 2002. Mr. Viniar was co-head of Operations,
Finance and Resources from March 1999 to
December 2001. He was Chief Financial Officer of The
Goldman Sachs Group, L.P. from March 1999 to May 1999.
From July 1998 until March 1999, he was Deputy Chief
Financial Officer and from 1994 until July 1998, he was
head of Finance, with responsibility for Controllers and
Treasury. From 1992 to 1994, he was head of Treasury and prior
to that was in the Structured Finance Department of Investment
Banking. He also serves on the Board of Trustees of Union
College.
Mr. Weinberg has been a Vice Chairman of Goldman Sachs
since June 2006. He has been co-head of Goldman Sachs’
Investment Banking Division since December 2002. From
January 2002 to December 2002, he was co-head of the
Investment Banking Division in the Americas. Prior to that, he
served as co-head of the Investment Banking Services Department
since 1997. He is affiliated with certain
non-profit
organizations, including as a board member at
NewYork-Presbyterian Hospital, The Steppingstone Foundation, the
Greenwich Country Day School and Community Anti-Drug Coalitions
of America. Mr. Weinberg also serves on the Visiting
Committee for Harvard Business School.
Mr. Winkelried has been our President and Co-Chief
Operating Officer and a director since June 2006.
Previously, he had been the co-head of Goldman Sachs’
Investment Banking Division since January 2005. From 2000
to 2005, he was co-head of FICC. From 1999 to 2000, he was head
of FICC in Europe. From 1995 to 1999, he was responsible for
Goldman Sachs’ leveraged finance business.
Mr. Winkelried is not on the board of any public company
other than Goldman Sachs. He is also a trustee of the University
of Chicago.
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The principal market on which our common stock is traded is the
NYSE. Information relating to the high and low sales prices per
share of our common stock, as reported by the Consolidated Tape
Association, for each full quarterly period during fiscal 2007
and 2008 is set forth under the heading “Supplemental
Financial Information — Common Stock Price Range”
in Part II, Item 8 of our Annual Report on
Form 10-K.
As of January 16, 2009, there were 9,909 holders of
record of our common stock.
During fiscal 2008 and 2007, dividends of $0.35 per share of
common stock were declared on December 11, 2007,
March 12, 2008, June 13, 2007,
September 19, 2007, December 17, 2007,
March 17, 2008, June 16, 2008 and
September 15, 2008. The holders of our common stock
share proportionately on a per share basis in all dividends and
other distributions on common stock declared by our board of
directors.
The declaration of dividends by Goldman Sachs is subject to the
discretion of our board of directors. Our board of directors
will take into account such matters as general business
conditions, our financial results, capital requirements,
contractual, legal and regulatory restrictions on the payment of
dividends by us to our shareholders or by our subsidiaries to
us, the effect on our debt ratings and such other factors as our
board of directors may deem relevant. See
“Business — Regulation” in Part I,
Item 1 of our Annual Report on
Form 10-K
for a discussion of potential regulatory limitations on our
receipt of funds from our regulated subsidiaries and our payment
of dividends to shareholders of Group Inc.
Prior to October 28, 2011, unless we have redeemed all
the preferred stock issued to the U.S. Treasury on
October 28, 2008 or unless the U.S. Treasury has
transferred all the preferred stock to a third party, the
consent of the U.S. Treasury will be required for us to
declare or pay any dividend or make any distribution on common
stock other than (i) regular quarterly cash dividends of
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