Company Quick10K Filing
Quick10K
Goldman Sachs
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$201.63 366 $73,760
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-14 Shareholder Rights, Amend Bylaw, Exhibits
8-K 2019-06-12 Other Events
8-K 2019-05-02 Shareholder Vote
8-K 2019-04-15 Earnings, Regulation FD, Exhibits
8-K 2019-02-20 Exhibits
8-K 2019-02-01 Other Events
8-K 2019-01-16 Earnings, Regulation FD, Other Events, Exhibits
8-K 2018-12-19 Officers, Exhibits
8-K 2018-10-16 Earnings, Earnings, Exhibits
8-K 2018-09-28 Other Events, Exhibits
8-K 2018-09-18 Other Events, Exhibits
8-K 2018-09-13 Officers, Exhibits
8-K 2018-07-17 Earnings, Earnings, Exhibits
8-K 2018-07-16 Officers, Exhibits
8-K 2018-06-28 Officers, Exhibits
8-K 2018-06-28 Other Events, Exhibits
8-K 2018-06-21 Other Events
8-K 2018-05-17 Exhibits
8-K 2018-05-14 Officers
8-K 2018-04-23 Exhibits
8-K 2018-04-17 Earnings, Earnings, Exhibits
8-K 2018-03-12 Officers, Exhibits
8-K 2018-03-06 Exhibits
8-K 2018-02-15 Other Events
8-K 2018-01-29 Exhibits
8-K 2018-01-23 Amend Bylaw, Exhibits
8-K 2018-01-17 Earnings, Earnings, Exhibits
MO Altria Group 97,270
BXP Boston Properties 20,220
PLOW Douglas Dynamics 843
AXSM Axsome Therapeutics 660
WRLS Pensare Acquisition 372
AMOT Allied Motion Technologies 359
ALCO Alico 201
FNJN Finjan Holdings 84
COTV Cotiviti Holdings 0
TSSI TSS 0
GS 2019-03-31
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Note 1.
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10.
Note 11.
Note 12.
Note 13.
Note 14.
Note 15.
Note 16.
Note 17.
Note 18.
Note 19.
Note 20.
Note 21.
Note 22.
Note 23.
Note 24.
Note 25.
Note 26.
Note 27.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-15.1 d729034dex151.htm
EX-31.1 d729034dex311.htm
EX-32.1 d729034dex321.htm

Goldman Sachs Earnings 2019-03-31

GS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d729034d10q.htm FORM 10-Q Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

      

For the quarterly period ended March 31, 2019

         
              or        
 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

       For the transition period from   to        

Commission File Number: 001-14965

The Goldman Sachs Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   13-4019460

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

200 West Street, New York, N.Y.   10282
(Address of principal executive offices)   (Zip Code)

(212) 902-1000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     Accelerated filer     Non-accelerated filer     Smaller reporting company     Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading
Symbol(s)
   Name of each exchange
on which registered

Common stock, par value $.01 per share

  GS   

NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of  Floating Rate

Non-Cumulative Preferred Stock, Series A

  GS PrA   

NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.20%

Non-Cumulative Preferred Stock, Series B

  GS PrB   

NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate

Non-Cumulative Preferred Stock, Series C

  GS PrC   

NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of Floating Rate

Non-Cumulative Preferred Stock, Series D

  GS PrD    NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 5.50%

Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series J

  GS PrJ   

NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.375%

Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series K

  GS PrK    NYSE

Depositary Shares, Each Representing 1/1,000th Interest in a Share of 6.30%

Non-Cumulative Preferred Stock, Series N

  GS PrN   

NYSE

5.793% Fixed-to-Floating Rate Normal Automatic Preferred Enhanced Capital Securities

of Goldman Sachs Capital II

  GS/43PE   

NYSE

Floating Rate Normal Automatic Preferred Enhanced Capital Securities of Goldman

Sachs Capital III

  GS/43PF   

NYSE

Medium-Term Notes, Series A, Index-Linked Notes due 2037 of GS Finance Corp.

  GCE    NYSE Arca

Medium-Term Notes, Series B, Index-Linked Notes due 2037

  GSC    NYSE Arca

Medium-Term Notes, Series E, Index-Linked Notes due 2028 of GS Finance Corp.

  FRLG    NYSE Arca

APPLICABLE ONLY TO CORPORATE ISSUERS

As of April 18, 2019, there were 365,838,779 shares of the registrant’s common stock outstanding.


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

 

INDEX

 

Form 10-Q Item Number   Page No.

PART I

   

 

FINANCIAL INFORMATION

      1  

 

Item 1

 

 

Financial Statements (Unaudited)

  1  

 

Consolidated Statements of Earnings

  1  

 

Consolidated Statements of Comprehensive Income

  1  

 

Consolidated Statements of Financial Condition

  2  

 

Consolidated Statements of Changes in Shareholders’ Equity

  3  

 

Consolidated Statements of Cash Flows

  4  

 

Notes to Consolidated Financial Statements

  5  

 

Note 1.  Description of Business

  5  

 

Note 2.  Basis of Presentation

  5  

 

Note 3.  Significant Accounting Policies

  6  

 

Note 4.  Financial Instruments Owned and Financial

         Instruments Sold, But Not Yet Purchased

  13  

 

Note 5.  Fair Value Measurements

  14  

 

Note 6.  Cash Instruments

  15  

 

Note 7.  Derivatives and Hedging Activities

  21  

 

Note 8.  Fair Value Option

  32  

 

Note 9.  Loans Receivable

  37  

 

Note 10. Collateralized Agreements and Financings

  41  

 

Note 11. Securitization Activities

  44  

 

Note 12. Variable Interest Entities

  46  

 

Note 13. Other Assets

  49  

 

Note 14. Deposits

  52  

 

Note 15. Short-Term Borrowings

  53  

 

Note 16. Long-Term Borrowings

  54  

 

Note 17. Other Liabilities

  56  

 

Note 18. Commitments, Contingencies and Guarantees

  57  

 

Note 19. Shareholders’ Equity

  62  

 

Note 20. Regulation and Capital Adequacy

  64  

 

Note 21. Earnings Per Common Share

  71  

 

Note 22. Transactions with Affiliated Funds

  71  

 

Note 23. Interest Income and Interest Expense

  72  

 

Note 24. Income Taxes

  72  

 

Note 25. Business Segments

  73  

 

Note 26. Credit Concentrations

  75  

 

Note 27. Legal Proceedings

  75  
     Page No.

 

Report of Independent Registered Public Accounting Firm

  84  

 

Statistical Disclosures

  85  

 

Item 2

 

 

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

  87  

 

Introduction

  87  

 

Executive Overview

  87  

 

Business Environment

  87  

 

Critical Accounting Policies

  88  

 

Recent Accounting Developments

  90  

 

Use of Estimates

  90  

 

Results of Operations

  90  

 

Balance Sheet and Funding Sources

  100  

 

Equity Capital Management and Regulatory Capital

  106  

 

Regulatory Matters and Other Developments

  110  

 

Off-Balance-Sheet Arrangements and Contractual Obligations

  112  

 

Risk Management

  114  

 

Overview and Structure of Risk Management

  114  

 

Liquidity Risk Management

  119  

 

Market Risk Management

  126  

 

Credit Risk Management

  131  

 

Operational Risk Management

  137  

 

Model Risk Management

  139  

 

Available Information

  140  

 

Cautionary Statement Pursuant to the U.S. Private Securities Litigation  Reform Act of 1995

  140  

 

Item 3

 

 

Quantitative and Qualitative Disclosures About Market Risk

  142  

 

Item 4

 

 

Controls and Procedures

  142  

 

PART II

 

 

OTHER INFORMATION

  142  

 

Item 1

 

 

Legal Proceedings

  142  

 

Item 2

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

  142  

 

Item 6

 

 

Exhibits

  143  

 

SIGNATURES

  143  
 

 

Goldman Sachs March 2019 Form 10-Q


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

 

   

Three Months

Ended March

 
in millions, except per share amounts     2019        2018  

Revenues

    

Investment banking

    $ 1,810        $  1,793  

Investment management

    1,433        1,639  

Commissions and fees

    743        862  

Market making

    2,539        3,204  

Other principal transactions

    1,064        1,664  

Total non-interest revenues

    7,589        9,162  

 

Interest income

    5,597        4,230  

Interest expense

    4,379        3,312  

Net interest income

    1,218        918  

Total net revenues

    8,807        10,080  

 

Provision for credit losses

    224        44  

 

Operating expenses

    

Compensation and benefits

    3,259        4,057  

Brokerage, clearing, exchange and distribution fees

    762        844  

Market development

    184        182  

Communications and technology

    286        251  

Depreciation and amortization

    368        299  

Occupancy

    225        194  

Professional fees

    298        293  

Other expenses

    482        497  

Total operating expenses

    5,864        6,617  

 

Pre-tax earnings

    2,719        3,419  

Provision for taxes

    468        587  

Net earnings

    2,251        2,832  

Preferred stock dividends

    69        95  

Net earnings applicable to common shareholders

    $ 2,182        $  2,737  

 

Earnings per common share

    

Basic

    $   5.73        $    7.02  

Diluted

    $   5.71        $    6.95  

 

Average common shares

    

Basic

    379.8        389.1  

Diluted

    382.4        393.8  

Consolidated Statements of Comprehensive Income

(Unaudited)

 

   

Three Months

Ended March

 
$ in millions     2019        2018  

Net earnings

    $ 2,251        $  2,832  

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

    

Currency translation

    4        2  

Debt valuation adjustment

    (1,417      270  

Pension and postretirement liabilities

    (7      (4

Available-for-sale securities

    114        (158

Other comprehensive income/(loss)

    (1,306      110  

Comprehensive income

    $    945        $  2,942  

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

 

1   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Unaudited)

 

    As of  
$ in millions    
March
2019
 
 
   
December
2018
 
 

Assets

   

Cash and cash equivalents

    $  87,884       $130,547  

Collateralized agreements:

   

Securities purchased under agreements to resell (includes $132,445 and $139,220 at fair value)

    132,445       139,258  

Securities borrowed (includes $27,520 and $23,142 at fair value)

    147,950       135,285  

Receivables:

   

Loans receivable

    82,674       80,590  

Customer and other receivables (includes $1,614 and $3,189 at fair value)

    73,438       79,315  

Financial instruments owned (at fair value and includes $58,221 and $55,081 pledged as collateral)

    363,275       336,161  

Other assets

    37,683       30,640  

Total assets

    $925,349       $931,796  

 

Liabilities and shareholders’ equity

   

Deposits (includes $17,043 and $21,060 at fair value)

    $164,136       $158,257  

Collateralized financings:

   

Securities sold under agreements to repurchase (at fair value)

    70,569       78,723  

Securities loaned (includes $3,067 and $3,241 at fair value)

    12,599       11,808  

Other secured financings (includes $18,975 and $20,904 at fair value)

    19,749       21,433  

Customer and other payables

    180,997       180,235  

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

    100,947       108,897  

Unsecured short-term borrowings (includes $21,251 and $16,963 at fair value)

    45,432       40,502  

Unsecured long-term borrowings (includes $47,473 and $46,584 at fair value)

    224,473       224,149  

Other liabilities (includes $132 and $132 at fair value)

    16,174       17,607  

Total liabilities

    835,076       841,611  

 

Commitments, contingencies and guarantees

   

 

Shareholders’ equity

   

Preferred stock; aggregate liquidation preference of $11,203 and $11,203

    11,203       11,203  

Common stock; 896,690,424 and 891,356,284 shares issued, and 366,771,581 and 367,741,973 shares outstanding

    9       9  

Share-based awards

    2,739       2,845  

Nonvoting common stock; no shares issued and outstanding

           

Additional paid-in capital

    54,862       54,005  

Retained earnings

    101,988       100,100  

Accumulated other comprehensive income/(loss)

    (613     693  

Stock held in treasury, at cost; 529,918,845 and 523,614,313 shares

    (79,915     (78,670

Total shareholders’ equity

    90,273       90,185  

Total liabilities and shareholders’ equity

    $925,349       $931,796  

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

 

Goldman Sachs March 2019 Form 10-Q   2


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

 

   

Three Months

Ended March

 
$ in millions     2019        2018  

Preferred stock

    

Beginning balance

    $  11,203        $ 11,853  

Issued

            

Redeemed

           (650

Ending balance

    11,203        11,203  

Common stock

    

Beginning balance

    9        9  

Issued

            

Ending balance

    9        9  

Share-based awards

    

Beginning balance

    2,845        2,777  

Issuance and amortization of share-based awards

    1,506        807  

Delivery of common stock underlying share-based awards

    (1,596      (1,145

Forfeiture of share-based awards

    (16      (18

Exercise of share-based awards

           (6

Ending balance

    2,739        2,415  

Additional paid-in capital

    

Beginning balance

    54,005        53,357  

Delivery of common stock underlying share-based awards

    1,587        1,660  

Cancellation of share-based awards in satisfaction of withholding tax requirements

    (730      (1,040

Preferred stock issuance costs, net of reversals upon redemption

           15  

Ending balance

    54,862        53,992  

Retained earnings

    

Beginning balance, as previously reported

    100,100        91,519  

Cumulative effect of change in accounting principle for:

    

Leases, net of tax

    12         

Revenue recognition from contracts with clients, net of tax

           (53

Beginning balance, adjusted

    100,112        91,466  

Net earnings

    2,251        2,832  

Dividends and dividend equivalents declared on common stock and share-based awards

    (306      (296

Dividends declared on preferred stock

    (69      (80

Preferred stock redemption premium

           (15

Ending balance

    101,988        93,907  

Accumulated other comprehensive income/(loss)

    

Beginning balance

    693        (1,880

Other comprehensive income/(loss)

    (1,306      110  

Ending balance

    (613      (1,770

Stock held in treasury, at cost

    

Beginning balance

    (78,670      (75,392

Repurchased

    (1,250      (800

Reissued

    11        16  

Other

    (6      (1

Ending balance

    (79,915      (76,177

Total shareholders’ equity

    $  90,273        $ 83,579  

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

 

3   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

   

Three Months

Ended March

 
$ in millions     2019        2018  

Cash flows from operating activities

    

Net earnings

    $    2,251        $    2,832  

Adjustments to reconcile net earnings to net cash used for operating activities:

    

Depreciation and amortization

    368        299  

Share-based compensation

    1,503        1,329  

Provision for credit losses

    224        44  

Changes in operating assets and liabilities:

    

Customer and other receivables and payables, net

    6,168        (10,479

Collateralized transactions (excluding other secured financings), net

    (13,215      14,304  

Financial instruments owned (excluding available-for-sale securities)

    (29,502      (19,708

Financial instruments sold, but not yet purchased

    (7,888      12,165  

Other, net

    (4,915      (1,750

Net cash used for operating activities

    (45,006      (964

Cash flows from investing activities

    

Purchase of property, leasehold improvements and equipment

    (2,128      (1,563

Proceeds from sales of property, leasehold improvements and equipment

    2,266        1,007  

Net cash used for business acquisitions

           (68

Purchase of investments

    (4,803      (3,188

Proceeds from sales and paydowns of investments

    5,015        183  

Loans receivable, net

    (1,851      (5,584

Net cash used for investing activities

    (1,501      (9,213

Cash flows from financing activities

    

Unsecured short-term borrowings, net

    381        2,875  

Other secured financings (short-term), net

    (2,690      2,728  

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

    1,442        1,262  

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

    (525      (2,282

Purchase of Trust Preferred Securities

           (35

Proceeds from issuance of unsecured long-term borrowings

    6,253        16,029  

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

    (7,251      (9,607

Derivative contracts with a financing element, net

    2,586        189  

Deposits, net

    5,594        12,336  

Preferred stock redemption

           (650

Common stock repurchased

    (1,250      (800

Settlement of share-based awards in satisfaction of withholding tax requirements

    (730      (1,040

Dividends and dividend equivalents paid on common stock, preferred stock and share-based awards

    (375      (376

Other financing, net

    409         

Net cash provided by financing activities

    3,844        20,629  

Net increase/(decrease) in cash and cash equivalents

    (42,663      10,452  

Cash and cash equivalents, beginning balance

    130,547        110,051  

Cash and cash equivalents, ending balance

    $  87,884        $120,503  

 

Supplemental disclosures:

    

Cash payments for interest, net of capitalized interest

    $    4,372        $    3,554  

Cash payments/(refunds) for income taxes, net

    $      (109      $       326  

See Notes 11 and 16 for information about non-cash activities.

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

 

Goldman Sachs March 2019 Form 10-Q   4


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 1.

Description of Business

The Goldman Sachs Group, Inc. (Group Inc. or parent company), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

The firm reports its activities in the following four business segments:

Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings, spin-offs and risk management, and debt and equity underwriting of public offerings and private placements, including local and cross-border transactions and acquisition financing, as well as derivative transactions directly related to these activities.

Institutional Client Services

The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other prime brokerage services to institutional clients.

Investing & Lending

The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, some of which are consolidated, including through its Merchant Banking business and its Special Situations Group, in debt securities and loans, public and private equity securities, infrastructure and real estate entities. Some of these investments are made indirectly through funds that the firm manages. The firm also makes unsecured loans through its digital platform, Marcus: by Goldman Sachs and secured loans through its digital platform, Goldman Sachs Private Bank Select.

Investment Management

The firm provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. The firm also offers wealth advisory services provided by the firm’s subsidiary, The Ayco Company, L.P., including portfolio management and financial planning and counseling, and brokerage and other transaction services to high-net-worth individuals and families.

Note 2.

Basis of Presentation

These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.

These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report on Form 10-K for the year ended December 31, 2018. References to “the 2018 Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2018. Certain disclosures included in the annual financial statements have been condensed or omitted from these financial statements as they are not required for interim financial statements under U.S. GAAP and the rules of the Securities and Exchange Commission.

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

All references to March 2019 and March 2018 refer to the firm’s periods ended, or the dates, as the context requires, March 31, 2019 and March 31, 2018, respectively. All references to December 2018 refer to the date December 31, 2018. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

 

 

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Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 3.

Significant Accounting Policies

 

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 12 for policies on consolidation accounting. All other significant accounting policies are either described below or included in the following footnotes:

 

Financial Instruments Owned and Financial

Instruments Sold, But Not Yet Purchased

    Note 4  

Fair Value Measurements

    Note 5  

Cash Instruments

    Note 6  

Derivatives and Hedging Activities

    Note 7  

Fair Value Option

    Note 8  

Loans Receivable

    Note 9  

Collateralized Agreements and Financings

    Note 10  

Securitization Activities

    Note 11  

Variable Interest Entities

    Note 12  

Other Assets

    Note 13  

Deposits

    Note 14  

Short-Term Borrowings

    Note 15  

Long-Term Borrowings

    Note 16  

Other Liabilities

    Note 17  

Commitments, Contingencies and Guarantees

    Note 18  

Shareholders’ Equity

    Note 19  

Regulation and Capital Adequacy

    Note 20  

Earnings Per Common Share

    Note 21  

Transactions with Affiliated Funds

    Note 22  

Interest Income and Interest Expense

    Note 23  

Income Taxes

    Note 24  

Business Segments

    Note 25  

Credit Concentrations

    Note 26  

Legal Proceedings

    Note 27  

Consolidation

The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).

Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a controlling majority voting interest in a voting interest entity, the entity is consolidated.

Variable Interest Entities. A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 12 for further information about VIEs.

Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity’s operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity’s common stock or in-substance common stock.

In general, the firm accounts for investments acquired after the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 13 for further information about equity-method investments.

 

 

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Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Investment Funds. The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are generally measured at net asset value (NAV) and are included in financial instruments owned. See Notes 6, 18 and 22 for further information about investments in funds.

Use of Estimates

Preparation of these consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, discretionary compensation accruals, the allowance for credit losses on loans receivable and lending commitments held for investment, provisions for losses that may arise from litigation and regulatory proceedings (including governmental investigations), and provisions for losses that may arise from tax audits. These estimates and assumptions are based on the best available information but actual results could be materially different.

Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned and financial instruments sold, but not yet purchased are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in market making for positions in Institutional Client Services and other principal transactions for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

Revenue from Contracts with Clients. The firm accounts for revenue earned from contracts with clients for services such as investment banking, investment management, and execution and clearing (contracts with clients) under ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” As such, revenues for these services are recognized when the performance obligations related to the underlying transaction are completed.

Net revenues from contracts with clients subject to this ASU represent approximately 50% of total non-interest net revenues (including approximately 80% of investment banking revenues, approximately 95% of investment management revenues and all commissions and fees) for the three months ended March 2019, and approximately 40% of total non-interest net revenues (including approximately 75% of investment banking revenues, approximately 95% of investment management revenues and all commissions and fees) for the three months ended March 2018. Net interest income is not subject to this ASU. See Note 25 for information about net revenues by business segment.

Investment Banking

Advisory. Fees from financial advisory assignments are recognized in revenues when the services related to the underlying transaction are completed under the terms of the assignment. Non-refundable deposits and milestone payments in connection with financial advisory assignments are recognized in revenues upon completion of the underlying transaction or when the assignment is otherwise concluded.

Expenses associated with financial advisory assignments are recognized when incurred and are included in other expenses. Client reimbursements for such expenses are included in investment banking revenues.

Underwriting. Fees from underwriting assignments are recognized in revenues upon completion of the underlying transaction based on the terms of the assignment.

Expenses associated with underwriting assignments are generally deferred until the related revenue is recognized or the assignment is otherwise concluded. Such expenses are included in other expenses.

Investment Management

The firm earns management fees and incentive fees for investment management services, which are included in investment management revenues. The firm makes payments to brokers and advisors related to the placement of the firm’s investment funds (distribution fees), which are included in brokerage, clearing, exchange and distribution fees.

 

 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Management Fees. Management fees for mutual funds are calculated as a percentage of daily net asset value and are received monthly. Management fees for hedge funds and separately managed accounts are calculated as a percentage of month-end net asset value and are generally received quarterly. Management fees for private equity funds are calculated as a percentage of monthly invested capital or committed capital and are received quarterly, semi-annually or annually, depending on the fund. Management fees are recognized over time in the period the investment management services are provided.

Distribution fees paid by the firm are calculated based on either a percentage of the management fee, the investment fund’s net asset value or the committed capital. Such fees are included in brokerage, clearing, exchange and distribution fees.

Incentive Fees. Incentive fees are calculated as a percentage of a fund’s or separately managed account’s return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a twelve-month period or over the life of a fund. Fees that are based on performance over a twelve-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund.

Incentive fees earned from a fund or separately managed account are recognized when it is probable that a significant reversal of such fees will not occur, which is generally when such fees are no longer subject to fluctuations in the market value of investments held by the fund or separately managed account. Therefore, incentive fees recognized during the period may relate to performance obligations satisfied in previous periods.

Commissions and Fees

The firm earns commissions and fees from executing and clearing client transactions on stock, options and futures markets, as well as over-the-counter (OTC) transactions. Commissions and fees are recognized on the day the trade is executed. The firm also provides third-party research services to clients in connection with certain soft-dollar arrangements. Third-party research costs incurred by the firm in connection with such arrangements are presented net within commissions and fees.

Remaining Performance Obligations

Remaining performance obligations are services that the firm has committed to perform in the future in connection with its contracts with clients. The firm’s remaining performance obligations are generally related to its financial advisory assignments and certain investment management activities. Revenues associated with remaining performance obligations relating to financial advisory assignments cannot be determined until the outcome of the transaction. For the firm’s investment management activities, where fees are calculated based on the net asset value of the fund or separately managed account, future revenues associated with such remaining performance obligations cannot be determined as such fees are subject to fluctuations in the market value of investments held by the fund or separately managed account.

The firm is able to determine the future revenues associated with management fees calculated based on committed capital. As of March 2019, substantially all future net revenues associated with such remaining performance obligations will be recognized through 2024. Annual revenues associated with such performance obligations average less than $250 million through 2024.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of financial assets accounted for as sales, any gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred financial assets are initially recognized at fair value. For transfers of financial assets that are not accounted for as sales, the assets are generally included in financial instruments owned and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 10 for further information about transfers of financial assets accounted for as collateralized financings and Note 11 for further information about transfers of financial assets accounted for as sales.

 

 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. Cash and cash equivalents included cash and due from banks of $11.74 billion as of March 2019 and $10.66 billion as of December 2018. Cash and cash equivalents also included interest-bearing deposits with banks of $76.14 billion as of March 2019 and $119.89 billion as of December 2018.

The firm segregates cash for regulatory and other purposes related to client activity. Cash and cash equivalents segregated for regulatory and other purposes were $21.16 billion as of March 2019 and $23.14 billion as of December 2018. In addition, the firm segregates securities for regulatory and other purposes related to client activity. See Note 10 for further information about segregated securities.

Customer and Other Receivables

Customer and other receivables included receivables from customers and counterparties of $49.36 billion as of March 2019 and $53.81 billion as of December 2018, and receivables from brokers, dealers and clearing organizations of $24.08 billion as of March 2019 and $25.50 billion as of December 2018. Such receivables primarily consist of customer margin loans, receivables resulting from unsettled transactions, collateral posted in connection with certain derivative transactions and certain transfers of assets accounted for as secured loans rather than purchases at fair value.

Substantially all of these receivables are accounted for at amortized cost net of estimated uncollectible amounts. Certain of the firm’s customer and other receivables are accounted for at fair value under the fair value option, with changes in fair value generally included in market making revenues. See Note 8 for further information about customer and other receivables accounted for at fair value under the fair value option. In addition, the firm’s customer and other receivables included $3.12 billion as of March 2019 and $3.83 billion as of December 2018 of loans held for sale accounted for at the lower of cost or fair value. See Note 5 for an overview of the firm’s fair value measurement policies. As of both March 2019 and December 2018, the carrying value of receivables not accounted for at fair value generally approximated fair value. As these receivables are not accounted for at fair value, they are not included in the firm’s fair value hierarchy in Notes 5 through 8. Had these receivables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of both March 2019 and December 2018. Interest on customer and other receivables is recognized over the life of the transaction and included in interest income.

Customer and other receivables includes receivables from contracts with clients and contract assets. Contract assets represent the firm’s right to receive consideration for services provided in connection with its contracts with clients for which collection is conditional and not merely subject to the passage of time. The firm’s receivables from contracts with clients were $2.06 billion as of March 2019 and $1.94 billion as of December 2018. As of both March 2019 and December 2018 contract assets were not material.

Customer and Other Payables

Customer and other payables included payables to customers and counterparties of $174.62 billion as of March 2019 and $173.99 billion as of December 2018, and payables to brokers, dealers and clearing organizations of $6.38 billion as of March 2019 and $6.24 billion as of December 2018. Such payables primarily consist of customer credit balances related to the firm’s prime brokerage activities. Customer and other payables are accounted for at cost plus accrued interest, which generally approximates fair value. As these payables are not accounted for at fair value, they are not included in the firm’s fair value hierarchy in Notes 5 through 8. Had these payables been included in the firm’s fair value hierarchy, substantially all would have been classified in level 2 as of both March 2019 and December 2018. Interest on customer and other payables is recognized over the life of the transaction and included in interest expense.

Offsetting Assets and Liabilities

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

 

 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) in the consolidated statements of financial condition when a legal right of setoff exists under an enforceable netting agreement. Securities purchased under agreements to resell (resale agreements) and securities sold under agreements to repurchase (repurchase agreements) and securities borrowed and loaned transactions with the same term and currency are presented on a net-by-counterparty basis in the consolidated statements of financial condition when such transactions meet certain settlement criteria and are subject to netting agreements.

In the consolidated statements of financial condition, derivatives are reported net of cash collateral received and posted under enforceable credit support agreements, when transacted under an enforceable netting agreement. In the consolidated statements of financial condition, resale and repurchase agreements, and securities borrowed and loaned, are not reported net of the related cash and securities received or posted as collateral. See Note 10 for further information about collateral received and pledged, including rights to deliver or repledge collateral. See Notes 7 and 10 for further information about offsetting assets and liabilities.

Share-based Compensation

The cost of employee services received in exchange for a share-based award is generally measured based on the grant-date fair value of the award. Share-based awards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Share-based awards that require future service are amortized over the relevant service period. Forfeitures are recorded when they occur.

Cash dividend equivalents paid on outstanding restricted stock units (RSUs) are charged to retained earnings. If RSUs that require future service are forfeited, the related dividend equivalents originally charged to retained earnings are reclassified to compensation expense in the period in which forfeiture occurs.

The firm generally issues new shares of common stock upon delivery of share-based awards. In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement and the grant-date value of the award. The tax effect related to the settlement of share-based awards is recorded in income tax benefit or expense.

Foreign Currency Translation

Assets and liabilities denominated in non-U.S. currencies are translated at rates of exchange prevailing on the date of the consolidated statements of financial condition and revenues and expenses are translated at average rates of exchange for the period. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are recognized in earnings. Gains or losses on translation of the financial statements of a non-U.S. operation, when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the consolidated statements of comprehensive income.

Recent Accounting Developments

Revenue from Contracts with Customers (ASC 606). In May 2014, the FASB issued ASU No. 2014-09. This ASU, as amended, provides comprehensive guidance on the recognition of revenue earned from contracts with customers arising from the transfer of goods and services, guidance on accounting for certain contract costs and new disclosures.

The firm adopted this ASU in January 2018 under a modified retrospective approach. As a result of adopting this ASU, the firm, among other things, delays recognition of non-refundable and milestone payments on financial advisory assignments until the assignments are completed, and recognizes certain investment management fees earlier than under the firm’s previous revenue recognition policies.

The firm also prospectively changed the presentation of certain costs from a net presentation within revenues to a gross basis, and vice versa. Beginning in 2018, certain underwriting expenses, which were netted against investment banking revenues, and certain distribution fees, which were netted against investment management revenues, are presented gross as operating expenses. Costs incurred in connection with certain soft-dollar arrangements, which were presented gross as operating expenses, are presented net within commissions and fees.

The cumulative effect of adopting this ASU as of January 1, 2018 was a decrease to retained earnings of $53 million (net of tax).

Recognition and Measurement of Financial Assets and Financial Liabilities (ASC 825). In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments (Topic 825) — Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. It includes a requirement to present separately in other comprehensive income changes in fair value attributable to a firm’s own credit spreads (debt valuation adjustment or DVA), net of tax, on financial liabilities for which the fair value option was elected.

 

 

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Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In January 2016, the firm early adopted this ASU for the requirements related to DVA and reclassified the cumulative DVA from retained earnings to accumulated other comprehensive income/(loss). The adoption of the remaining provisions of the ASU in January 2018 did not have a material impact on the firm’s financial condition, results of operations or cash flows.

Leases (ASC 842). In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires that, for leases longer than one year, a lessee recognize in the statements of financial condition a right-of-use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the liability to make lease payments. It also requires that for finance leases, a lessee recognize interest expense on the lease liability, separately from the amortization of the right-of-use asset in the statements of earnings, while for operating leases, such amounts should be recognized as a combined expense. It also requires that for qualifying sale-leaseback transactions the seller recognize any gain or loss (based on the estimated fair value of the asset at the time of sale) when control of the asset is transferred instead of amortizing it over the lease period. In addition, this ASU requires expanded disclosures about the nature and terms of lease agreements.

The firm adopted this ASU in January 2019 under a modified retrospective approach. Upon adoption, in accordance with the ASU, the firm elected to not reassess the lease classification or initial direct costs of existing leases, and to not reassess whether existing contracts contain a lease. In addition, the firm has elected to account for each contract’s lease and non-lease components as a single lease component. The impact of adoption was a gross up of $1.77 billion on the firm’s consolidated statements of financial condition and an increase to retained earnings of $12 million (net of tax) as of January 1, 2019.

Measurement of Credit Losses on Financial Instruments (ASC 326). In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments.” This ASU amends several aspects of the measurement of credit losses on financial instruments, including replacing the existing incurred credit loss model and other models with the Current Expected Credit Losses (CECL) model and amending certain aspects of accounting for purchased financial assets with deterioration in credit quality since origination.

Under CECL, the allowance for losses for financial assets that are measured at amortized cost reflects management’s estimate of credit losses over the remaining expected life of such assets. Expected credit losses for newly recognized financial assets, as well as changes to expected credit losses during the period, would be recognized in earnings. For certain purchased financial assets with deterioration in credit quality since origination, an initial allowance would be recorded for expected credit losses and recognized as an increase to the purchase price rather than as an expense. The ASU eliminates the existing accounting guidance for Purchased Credit Impaired (PCI) loans. The ASU is effective for the firm in January 2020 under a modified retrospective approach with early adoption permitted. The firm plans to adopt this ASU on January 1, 2020.

Expected credit losses, including losses on off-balance-sheet exposures such as lending commitments, will be measured based on historical experience, current conditions and forecasts that affect the collectability of the reported amount.

The firm has substantially completed development of credit loss models for significant loan portfolios and is in the process of testing these models and validating data inputs, while continuing to develop the policies, systems and controls that will be required to implement CECL. Based on the work completed to date, the current loan portfolio and the weighted average of a range of current forecasts of future economic conditions, the firm estimates that the allowance for credit losses will increase by approximately $600 million to $800 million when CECL is adopted. The estimated increase is driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios and will also take into account forecasts of expected future economic conditions. This increased allowance will not impact the firm’s realized losses in these loan portfolios. In addition, an allowance will be recorded for certain purchased loans with deterioration in credit quality since origination with a corresponding increase to their gross carrying value. Ultimately, the extent of the impact of adoption of this ASU on the firm’s consolidated financial statements may vary and will depend on, among other things, the economic environment, the completion of the firm’s models, policies and other management judgments, and the size and type of loan portfolios held by the firm on the date of adoption.

 

 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Classification of Certain Cash Receipts and Cash Payments (ASC 230). In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments.” This ASU provides guidance on the disclosure and classification of certain items within the statements of cash flows. The firm adopted this ASU in January 2018 and upon adoption reclassified these items within the consolidated statements of cash flows on a retrospective basis.

Clarifying the Definition of a Business (ASC 805). In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) — Clarifying the Definition of a Business.” The ASU amends the definition of a business and provides a threshold which must be considered to determine whether a transaction is an acquisition (or disposal) of an asset or a business.

The firm adopted this ASU in January 2018 under a prospective approach. Adoption of the ASU did not have a material impact on the firm’s financial condition, results of operations or cash flows. The firm expects that fewer transactions will be treated as acquisitions (or disposals) of businesses as a result of adopting this ASU.

Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASC 610-20). In February 2017, the FASB issued ASU No. 2017-05, “Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20) — Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” The ASU clarifies the scope of guidance applicable to sales of nonfinancial assets and also provides guidance on accounting for partial sales of such assets.

The firm adopted this ASU in January 2018 under a modified retrospective approach. Adoption of the ASU did not have an impact on the firm’s financial condition, results of operations or cash flows.

Targeted Improvements to Accounting for Hedging Activities (ASC 815). In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815) — Targeted Improvements to Accounting for Hedging Activities.” The ASU amends certain rules for hedging relationships, expands the types of strategies that are eligible for hedge accounting treatment to more closely align the results of hedge accounting with risk management activities and amends disclosure requirements related to fair value and net investment hedges.

The firm early adopted this ASU in January 2018 under a modified retrospective approach for hedge accounting treatment, and under a prospective approach for the amended disclosure requirements. Adoption of this ASU did not have a material impact on the firm’s financial condition, results of operations or cash flows. See Note 7 for further information.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASC 220). In February 2018, the FASB issued ASU No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220) — Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU permits a reporting entity to reclassify the income tax effects of the Tax Cuts and Jobs Act (Tax Legislation) on items within accumulated other comprehensive income to retained earnings.

The firm adopted this ASU in January 2019 and did not elect to reclassify the income tax effects of Tax Legislation from accumulated other comprehensive income to retained earnings. Therefore, the adoption of the ASU did not have an impact on the firm’s financial condition, results of operations or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement (ASC 820). In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820) — Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU, among other amendments, eliminates the requirement to disclose the amounts and reasons for transfers between level 1 and level 2 of the fair value hierarchy and modifies the disclosure requirement relating to investments in funds at NAV. The firm early adopted this ASU in the third quarter of 2018 and disclosures were modified in accordance with the ASU. See Notes 5 through 8 for further information.

 

 

Goldman Sachs March 2019 Form 10-Q   12


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 4.

 

Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased

         

 

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

The table below presents financial instruments owned and financial instruments sold, but not yet purchased.

 

$ in millions    

Financial
Instruments
Owned
 
 
 
    



Financial
Instruments
Sold, But
Not Yet
Purchased
 
 
 
 
 

As of March 2019

    

Money market instruments

    $    2,759        $            –  

Government and agency obligations:

    

U.S.

    107,220        9,169  

Non-U.S.

    51,763        19,262  

Loans and securities backed by:

    

Commercial real estate

    3,673        1  

Residential real estate

    13,030        1  

Corporate debt instruments

    31,848        7,767  

State and municipal obligations

    812         

Other debt obligations

    1,639        2  

Equity securities

    101,166        24,413  

Commodities

    3,462         

Investments in funds at NAV

    4,036         

Subtotal

    321,408        60,615  

Derivatives

    41,867        40,332  

Total

    $363,275        $100,947  

 

As of December 2018

    

Money market instruments

    $    2,635        $            –  

Government and agency obligations:

    

U.S.

    110,616        5,080  

Non-U.S.

    43,607        25,347  

Loans and securities backed by:

    

Commercial real estate

    3,369         

Residential real estate

    12,949        1  

Corporate debt instruments

    31,207        10,411  

State and municipal obligations

    1,233         

Other debt obligations

    1,864        1  

Equity securities

    76,170        25,463  

Commodities

    3,729         

Investments in funds at NAV

    3,936         

Subtotal

    291,315        66,303  

Derivatives

    44,846        42,594  

Total

    $336,161        $108,897  

In the table above:

 

 

Money market instruments includes commercial paper, certificates of deposit and time deposits, substantially all of which have a maturity of less than one year.

 

 

Corporate debt instruments includes corporate loans and debt securities.

 

 

Equity securities includes public and private equities, exchange-traded funds and convertible debentures. Such amounts include investments accounted for at fair value under the fair value option where the firm would otherwise apply the equity method of accounting of $8.01 billion as of March 2019 and $7.91 billion as of December 2018.

Gains and Losses from Market Making and Other Principal Transactions

The table below presents market making revenues by major product type and other principal transactions revenues.

 

   

Three Months

Ended March

 
$ in millions     2019        2018  

Interest rates

    $1,234        $   905  

Credit

    238        318  

Currencies

    572        402  

Equities

    382        1,136  

Commodities

    113        443  

Market making

    2,539        3,204  

Other principal transactions

    1,064        1,664  

Total

    $3,603        $4,868  

In the table above:

 

 

Gains/(losses) include both realized and unrealized gains and losses, and are primarily related to the firm’s financial instruments owned and financial instruments sold, but not yet purchased, including both derivative and non-derivative financial instruments.

 

 

Gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.

 

 

Gains/(losses) on other principal transactions are included in the firm’s Investing & Lending segment. See Note 25 for net revenues, including net interest income, by product type for Investing & Lending, as well as the amount of net interest income included in Investing & Lending.

 

 

Gains/(losses) are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making and client facilitation strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm’s longer-term derivatives across product types are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives across product types has exposure to foreign currencies and may be economically hedged with foreign currency contracts.

 

 

13   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 5.

Fair Value Measurements

 

The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).

The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced inputs, including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread or difference between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).

U.S. GAAP has a three-level hierarchy for disclosure of fair value measurements. This hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in this hierarchy is based on the lowest level of input that is significant to its fair value measurement. In evaluating the significance of a valuation input, the firm considers, among other factors, a portfolio’s net risk exposure to that input. The fair value hierarchy is as follows:

Level 1. Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs to valuation techniques are observable, either directly or indirectly.

Level 3. One or more inputs to valuation techniques are significant and unobservable.

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

See Notes 6 through 8 for further information about fair value measurements of cash instruments, derivatives and other financial assets and financial liabilities at fair value.

The table below presents financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP.

 

    As of  

$ in millions

   

March

2019

 

 

    

December

2018

 

 

Total level 1 financial assets

    $195,787        $170,463  

Total level 2 financial assets

    354,812        354,515  

Total level 3 financial assets

    22,596        22,181  

Investments in funds at NAV

    4,036        3,936  

Counterparty and cash collateral netting

    (52,377      (49,383

Total financial assets at fair value

    $524,854        $501,712  

 

Total assets

    $925,349        $931,796  

 

Total level 3 financial assets divided by:

    

Total assets

    2.4%        2.4%  

Total financial assets at fair value

    4.3%        4.4%  

Total level 1 financial liabilities

    $  50,605        $  54,151  

Total level 2 financial liabilities

    242,196        258,335  

Total level 3 financial liabilities

    26,424        23,804  

Counterparty and cash collateral netting

    (39,768      (39,786

Total financial liabilities at fair value

    $279,457        $296,504  

 

Total level 3 financial liabilities divided by total financial liabilities at fair value

    9.5%        8.0%  

In the table above:

 

 

Counterparty netting among positions classified in the same level is included in that level.

 

 

Counterparty and cash collateral netting represents the impact on derivatives of netting across levels of the fair value hierarchy.

The table below presents a summary of level 3 financial assets.

 

    As of  
$ in millions    
March
2019
 
 
    
December
2018
 
 

Cash instruments

    $  17,935        $  17,227  

Derivatives

    4,658        4,948  

Other financial assets

    3        6  

Total

    $  22,596        $  22,181  

Level 3 financial assets as of March 2019 increased compared with December 2018, primarily reflecting an increase in level 3 cash instruments. See Notes 6 through 8 for further information about level 3 financial assets (including information about unrealized gains and losses related to level 3 financial assets and financial liabilities, and transfers in and out of level 3).

 

 

Goldman Sachs March 2019 Form 10-Q   14


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 6.

Cash Instruments

 

Cash instruments include U.S. government and agency obligations, non-U.S. government and agency obligations, mortgage-backed loans and securities, corporate debt instruments, equity securities, investments in funds at NAV, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Cash Instruments

Level 1 cash instruments include certain money market instruments, U.S. government obligations, most non-U.S. government obligations, certain government agency obligations, certain corporate debt instruments and actively traded listed equities. These instruments are valued using quoted prices for identical unrestricted instruments in active markets.

The firm defines active markets for equity instruments based on the average daily trading volume both in absolute terms and relative to the market capitalization for the instrument. The firm defines active markets for debt instruments based on both the average daily trading volume and the number of days with trading activity.

Level 2 Cash Instruments

Level 2 cash instruments include most money market instruments, most government agency obligations, certain non-U.S. government obligations, most mortgage-backed loans and securities, most corporate debt instruments, most state and municipal obligations, most other debt obligations, restricted or less liquid listed equities, commodities and certain lending commitments.

Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Valuation adjustments are typically made to level 2 cash instruments (i) if the cash instrument is subject to transfer restrictions and/or (ii) for other premiums and liquidity discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

Level 3 Cash Instruments

Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales.

Valuation Techniques and Significant Inputs of Level 3 Cash Instruments

Valuation techniques of level 3 cash instruments vary by instrument, but are generally based on discounted cash flow techniques. The valuation techniques and the nature of significant inputs used to determine the fair values of each type of level 3 cash instrument are described below:

Loans and Securities Backed by Commercial Real Estate. Loans and securities backed by commercial real estate are directly or indirectly collateralized by a single commercial real estate property or a portfolio of properties, and may include tranches of varying levels of subordination. Significant inputs are generally determined based on relative value analyses and include:

 

 

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

 

 

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

 

 

A measure of expected future cash flows in a default scenario (recovery rates) implied by the value of the underlying collateral, which is mainly driven by current performance of the underlying collateral, capitalization rates and multiples. Recovery rates are expressed as a percentage of notional or face value of the instrument and reflect the benefit of credit enhancements on certain instruments; and

 

 

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

 

 

15   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Loans and Securities Backed by Residential Real Estate. Loans and securities backed by residential real estate are directly or indirectly collateralized by portfolios of residential real estate and may include tranches of varying levels of subordination. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Significant inputs include:

 

 

Market yields implied by transactions of similar or related assets;

 

 

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

 

 

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

 

 

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

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

 

 

Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices, such as the CDX (an index that tracks the performance of corporate credit);

 

 

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

 

 

Duration.

Equity Securities. Equity securities includes private equity securities and convertible debentures. Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate:

 

 

Industry multiples (primarily EBITDA multiples) and public comparables;

 

 

Transactions in similar instruments;

 

 

Discounted cash flow techniques; and

 

 

Third-party appraisals.

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

 

 

Market and transaction multiples;

 

 

Discount rates and capitalization rates; and

 

 

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

Other Cash Instruments. Other cash instruments includes U.S. government and agency obligations, non-U.S. government and agency obligations, state and municipal obligations, and other debt obligations. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include:

 

 

Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices;

 

 

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

 

 

Duration.

 

 

Goldman Sachs March 2019 Form 10-Q   16


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Fair Value of Cash Instruments by Level

The table below presents cash instrument assets and liabilities at fair value by level within the fair value hierarchy.

 

$ in millions     Level 1       Level 2       Level 3       Total  

As of March 2019

       

Assets

       

Money market instruments

    $    1,111       $    1,648       $          –       $    2,759  

Government and agency obligations:

       

U.S.

    77,043       30,152       25       107,220  

Non-U.S.

    37,421       14,326       16       51,763  

Loans and securities backed by:

       

Commercial real estate

          2,662       1,011       3,673  

Residential real estate

          12,476       554       13,030  

Corporate debt instruments

    1,044       26,552       4,252       31,848  

State and municipal obligations

          775       37       812  

Other debt obligations

          1,025       614       1,639  

Equity securities

    79,076       10,664       11,426       101,166  

Commodities

          3,462             3,462  

Subtotal

    $195,695       $103,742       $17,935       $317,372  

Investments in funds at NAV

                            4,036  

Total cash instrument assets

                            $321,408  

Liabilities

       

Government and agency obligations:

       

U.S.

    $   (9,160     $          (9     $         –       $   (9,169

Non-U.S.

    (17,315     (1,947           (19,262

Loans and securities backed by:

       

Commercial real estate

          (1           (1

Residential real estate

          (1           (1

Corporate debt instruments

    (1     (7,630     (136     (7,767

Other debt obligations

          (2           (2

Equity securities

    (24,040     (350     (23     (24,413

Total cash instrument liabilities

    $ (50,516     $   (9,940     $    (159     $ (60,615

 

As of December 2018

       

Assets

       

Money market instruments

    $    1,489       $    1,146       $          –       $    2,635  

Government and agency obligations:

       

U.S.

    82,264       28,327       25       110,616  

Non-U.S.

    33,231       10,366       10       43,607  

Loans and securities backed by:

       

Commercial real estate

          2,350       1,019       3,369  

Residential real estate

          12,286       663       12,949  

Corporate debt instruments

    468       26,515       4,224       31,207  

State and municipal obligations

          1,210       23       1,233  

Other debt obligations

          1,326       538       1,864  

Equity securities

    52,989       12,456       10,725       76,170  

Commodities

          3,729             3,729  

Subtotal

    $170,441       $  99,711       $17,227       $287,379  

Investments in funds at NAV

                            3,936  

Total cash instrument assets

                            $291,315  

Liabilities

       

Government and agency obligations:

       

U.S.

    $   (5,067     $        (13     $          –       $   (5,080

Non-U.S.

    (23,872     (1,475           (25,347

Loans and securities backed by residential real estate

          (1           (1

Corporate debt instruments

    (4     (10,376     (31     (10,411

Other debt obligations

          (1           (1

Equity securities

    (25,147     (298     (18     (25,463

Total cash instrument liabilities

    $ (54,090     $ (12,164     $      (49     $ (66,303

In the table above:

 

 

Cash instrument assets are included in financial instruments owned and cash instrument liabilities are included in financial instruments sold, but not yet purchased.

 

 

Cash instrument assets are shown as positive amounts and cash instrument liabilities are shown as negative amounts.

 

 

Money market instruments includes commercial paper, certificates of deposit and time deposits, substantially all of which have a maturity of less than one year.

 

 

Corporate debt instruments includes corporate loans and debt securities.

 

 

Equity securities includes public and private equities, exchange-traded funds and convertible debentures.

 

 

As of both March 2019 and December 2018, substantially all level 3 equity securities consisted of private equity securities.

Significant Unobservable Inputs

The table below presents the amount of level 3 assets, and ranges and weighted averages of significant unobservable inputs used to value level 3 cash instruments.

 

    Level 3 Assets and Range of Significant
Unobservable Inputs (Weighted Average) as of
 
$ in millions    

March

2019

 

 

   

December

2018

 

 

Loans and securities backed by commercial real estate

 

Level 3 assets

    $1,011       $1,019  

Yield

    4.0% to 22.0% (11.6%     6.9% to 22.5% (12.4%

Recovery rate

    7.4% to 77.2% (44.3%     9.7% to 78.4% (42.9%

Duration (years)

    0.7 to 5.5 (3.5     0.4 to 7.1 (3.7

Loans and securities backed by residential real estate

 

Level 3 assets

    $554       $663  

Yield

    0.8% to 20.0% (8.8%     2.6% to 19.3% (9.2%

Cumulative loss rate

    2.1% to 34.2% (17.6%     8.3% to 37.7% (19.2%

Duration (years)

    1.2 to 16.4 (6.8     1.4 to 14.0 (6.7

Corporate debt instruments

 

Level 3 assets

    $4,252       $4,224  

Yield

    1.5% to 24.1% (12.2%     0.7% to 32.3% (11.9%

Recovery rate

    0.0% to 73.0% (55.5%     0.0% to 78.0% (57.8%

Duration (years)

    0.3 to 6.3 (3.0     0.4 to 13.5 (3.4

Equity securities

 

Level 3 assets

    $11,426       $10,725  

Multiples

    0.8x to 26.0x (6.6x     1.0x to 23.6x (8.1x

Discount rate/yield

    6.0% to 22.1% (14.5%     6.5% to 22.1% (14.3%

Capitalization rate

    3.7% to 12.6% (5.9%     3.5% to 12.3% (6.1%

Other cash instruments

 

Level 3 assets

    $692       $596  

Yield

    2.5% to 12.7% (9.2%     4.1% to 11.5% (9.2%

Duration (years)

    2.0 to 5.7 (3.2     2.2 to 4.8 (2.8
 

 

17   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

In the table above:

 

 

Ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument.

 

 

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

 

 

The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one cash instrument. For example, the highest multiple for private equity securities is appropriate for valuing a specific private equity security but may not be appropriate for valuing any other private equity security. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 cash instruments.

 

 

Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of level 3 cash instruments would have resulted in a lower fair value measurement, while increases in recovery rate or multiples would have resulted in a higher fair value measurement as of both March 2019 and December 2018. Due to the distinctive nature of each level 3 cash instrument, the interrelationship of inputs is not necessarily uniform within each product type.

 

 

Loans and securities backed by commercial and residential real estate, corporate debt instruments and other cash instruments are valued using discounted cash flows, and equity securities are valued using market comparables and discounted cash flows.

 

 

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

Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 cash instrument assets and liabilities.

 

   

Three Months

Ended March

 
$ in millions     2019        2018  

Total cash instrument assets

    

Beginning balance

    $17,227        $15,395  

Net realized gains/(losses)

    86        122  

Net unrealized gains/(losses)

    229        564  

Purchases

    372        549  

Sales

    (329      (213

Settlements

    (439      (722

Transfers into level 3

    1,478        1,942  

Transfers out of level 3

    (689      (695

Ending balance

    $17,935        $16,942  

Total cash instrument liabilities

    

Beginning balance

    $      (49      $      (68

Net realized gains/(losses)

           2  

Net unrealized gains/(losses)

    (63      7  

Purchases

    18        15  

Sales

    (52      (13

Settlements

    8        23  

Transfers into level 3

    (24      (9

Transfers out of level 3

    3        4  

Ending balance

    $    (159      $      (39

In the table above:

 

 

Changes in fair value are presented for all cash instrument assets and liabilities that are classified in level 3 as of the end of the period.

 

 

Net unrealized gains/(losses) relates to instruments that were still held at period-end.

 

 

Purchases includes originations and secondary purchases.

 

 

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

 

 

For level 3 cash instrument assets, increases are shown as positive amounts, while decreases are shown as negative amounts. For level 3 cash instrument liabilities, increases are shown as negative amounts, while decreases are shown as positive amounts.

 

 

Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are classified in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

 

 

Goldman Sachs March 2019 Form 10-Q   18


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The table below disaggregates, by product type, the information for cash instrument assets included in the summary table above.

 

   

Three Months

Ended March

 
$ in millions     2019       2018  

Loans and securities backed by commercial real estate

 

Beginning balance

    $  1,019       $  1,126  

Net realized gains/(losses)

    14       11  

Net unrealized gains/(losses)

    1       23  

Purchases

    13       41  

Sales

    (31     (4

Settlements

    (68     (78

Transfers into level 3

    89       231  

Transfers out of level 3

    (26     (84

Ending balance

    $  1,011       $  1,266  

Loans and securities backed by residential real estate

 

Beginning balance

    $     663       $     668  

Net realized gains/(losses)

    13       15  

Net unrealized gains/(losses)

    4       14  

Purchases

    27       35  

Sales

    (111     (60

Settlements

    (43     (29

Transfers into level 3

    22       34  

Transfers out of level 3

    (21     (4

Ending balance

    $     554       $     673  

Corporate debt instruments

   

Beginning balance

    $  4,224       $  3,270  

Net realized gains/(losses)

    26       48  

Net unrealized gains/(losses)

    42       74  

Purchases

    170       141  

Sales

    (135     (92

Settlements

    (116     (346

Transfers into level 3

    447       460  

Transfers out of level 3

    (406     (197

Ending balance

    $  4,252       $  3,358  

Equity securities

   

Beginning balance

    $10,725       $  9,904  

Net realized gains/(losses)

    22       44  

Net unrealized gains/(losses)

    171       453  

Purchases

    124       314  

Sales

    (39     (36

Settlements

    (164     (239

Transfers into level 3

    816       1,205  

Transfers out of level 3

    (229     (399

Ending balance

    $11,426       $11,246  

Other cash instruments

   

Beginning balance

    $     596       $     427  

Net realized gains/(losses)

    11       4  

Net unrealized gains/(losses)

    11        

Purchases

    38       18  

Sales

    (13     (21

Settlements

    (48     (30

Transfers into level 3

    104       12  

Transfers out of level 3

    (7     (11

Ending balance

    $     692       $     399  

Level 3 Rollforward Commentary

Three Months Ended March 2019. The net realized and unrealized gains on level 3 cash instrument assets of $315 million (reflecting $86 million of net realized gains and $229 million of net unrealized gains) for the three months ended March 2019 included gains/(losses) of $(28) million reported in market making, $240 million reported in other principal transactions and $103 million reported in interest income.

The net unrealized gains on level 3 cash instrument assets for the three months ended March 2019 primarily reflected gains on private equity securities, principally driven by company-specific events and corporate performance.

Transfers into level 3 during the three months ended March 2019 primarily reflected transfers of certain private equity securities and corporate debt instruments from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the three months ended March 2019 primarily reflected transfers of certain corporate debt instruments and private equity securities to level 2, principally due to increased price transparency as a result of market evidence, including market transactions in these instruments.

Three Months Ended March 2018. The net realized and unrealized gains on level 3 cash instrument assets of $686 million (reflecting $122 million of net realized gains and $564 million of net unrealized gains) for the three months ended March 2018 included gains/(losses) of $(2) million reported in market making, $597 million reported in other principal transactions and $91 million reported in interest income.

The net unrealized gains on level 3 cash instrument assets for the three months ended March 2018 primarily reflected gains on private equity securities, principally driven by strong corporate performance and company-specific events.

Transfers into level 3 during the three months ended March 2018 primarily reflected transfers of certain private equity securities and corporate debt instruments from level 2, principally due to reduced price transparency as a result of a lack of market evidence, including fewer market transactions in these instruments.

Transfers out of level 3 during the three months ended March 2018 primarily reflected transfers of certain private equity securities and corporate debt instruments to level 2, principally due to increased price transparency as a result of market evidence, including market transactions in these instruments, and transfers of certain other corporate debt instruments to level 2, principally due to certain unobservable yield and duration inputs no longer being significant to the valuation of these instruments.

 

 

19   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Available-for-Sale Securities

The table below presents information about cash instruments that are accounted for as available-for-sale.

 

$ in millions    
Amortized
Cost
 
 
    
Fair
Value
 
 
    

Weighted
Average
Yield
 
 
 

As of March 2019

       

Less than 5 years

    $  3,827        $  3,800        1.95%  

Greater than 5 years

    3,691        3,719        2.50%  

Total

    $  7,518        $  7,519        2.22%  

 

As of December 2018

       

Less than 5 years

    $  5,954        $  5,879        2.10%  

Greater than 5 years

    6,231        6,153        2.44%  

Total

    $12,185        $12,032        2.28%  

In the table above:

 

 

Available-for-sale securities consists of U.S. government obligations that were classified in level 1 of the fair value hierarchy as of both March 2019 and December 2018.

 

 

During the three months ended March 2019, the firm sold $4.96 billion of available-for-sale securities. The realized gains on sales of such securities were not material.

 

 

The gross unrealized gains/(losses) included in accumulated other comprehensive income/(loss) were not material as of March 2019. The gross unrealized losses included in accumulated other comprehensive income/(loss) were $153 million as of December 2018 and were related to securities in a continuous unrealized loss position for greater than a year.

 

 

Available-for-sale securities in an unrealized loss position are periodically reviewed for other-than-temporary impairment. The firm considers various factors, including market conditions, changes in issuer credit ratings, severity and duration of the unrealized losses, and the intent and ability to hold the security until recovery to determine if the securities are other-than-temporarily impaired. There were no such impairments during either the three months ended March 2019 or the year ended December 2018.

Investments in Funds at Net Asset Value Per Share

Cash instruments at fair value include investments in funds that are measured at NAV of the investment fund. The firm uses NAV to measure the fair value of its fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the investments at fair value.

Substantially all of the firm’s investments in funds at NAV consist of investments in firm-sponsored private equity, credit, real estate and hedge funds where the firm co-invests with third-party investors.

Private equity funds primarily invest in a broad range of industries worldwide, including leveraged buyouts, recapitalizations, growth investments and distressed investments. Credit funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers. Real estate funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and property. Private equity, credit and real estate funds are closed-end funds in which the firm’s investments are generally not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated or distributed, the timing of which is uncertain.

The firm also invests in hedge funds, primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies. The firm’s investments in hedge funds primarily include interests where the underlying assets are illiquid in nature, and proceeds from redemptions will not be received until the underlying assets are liquidated or distributed, the timing of which is uncertain.

 

 

Goldman Sachs March 2019 Form 10-Q   20


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Many of the funds described above are “covered funds” as defined in the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The Board of Governors of the Federal Reserve System (FRB) extended the conformance period to July 2022 for the firm’s investments in, and relationships with, certain legacy “illiquid funds” (as defined in the Volcker Rule) that were in place prior to December 2013. This extension is applicable to substantially all of the firm’s remaining investments in, and relationships with, such covered funds.

The table below presents the fair value of investments in funds at NAV and the related unfunded commitments.

 

$ in millions    
Fair Value of
Investments
 
 
    
Unfunded
Commitments
 
 

As of March 2019

    

Private equity funds

    $2,627        $   794  

Credit funds

    696        957  

Hedge funds

    162         

Real estate funds

    551        215  

Total

    $4,036        $1,966  

 

As of December 2018

    

Private equity funds

    $2,683        $   809  

Credit funds

    548        1,099  

Hedge funds

    161         

Real estate funds

    544        203  

Total

    $3,936        $2,111  

Note 7.

Derivatives and Hedging Activities

Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be traded on an exchange (exchange-traded) or they may be privately negotiated contracts, which are usually referred to as OTC derivatives. Certain of the firm’s OTC derivatives are cleared and settled through central clearing counterparties (OTC-cleared), while others are bilateral contracts between two counterparties (bilateral OTC).

Market Making. As a market maker, the firm enters into derivative transactions to provide liquidity to clients and to facilitate the transfer and hedging of their risks. In this role, the firm typically acts as principal and is required to commit capital to provide execution, and maintains inventory in response to, or in anticipation of, client demand.

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from its market-making and investing and lending activities in derivative and cash instruments. The firm’s holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits, and to manage foreign currency exposure on the net investment in certain non-U.S. operations.

The firm enters into various types of derivatives, including:

 

 

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

 

 

Swaps. Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.

 

 

Options. Contracts in which the option purchaser has the right, but not the obligation, to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.

Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement (counterparty netting). Derivatives are accounted for at fair value, net of cash collateral received or posted under enforceable credit support agreements (cash collateral netting). Derivative assets are included in financial instruments owned and derivative liabilities are included in financial instruments sold, but not yet purchased. Realized and unrealized gains and losses on derivatives not designated as hedges are included in market making and other principal transactions in Note 4.

 

 

21   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The tables below present the gross fair value and the notional amounts of derivative contracts by major product type, the amounts of counterparty and cash collateral netting in the consolidated statements of financial condition, as well as cash and securities collateral posted and received under enforceable credit support agreements that do not meet the criteria for netting under U.S. GAAP.

 

    As of March 2019         As of December 2018  
$ in millions    
Derivative
Assets
 
 
   
Derivative
Liabilities
 
 
          
Derivative
Assets
 
 
   
Derivative
Liabilities
 
 

Not accounted for as hedges

 

     

Exchange-traded

    $        601       $     1,255         $        760       $     1,553  

OTC-cleared

    7,219       5,973         5,040       3,552  

Bilateral OTC

    247,629       229,113           227,274       211,091  

Total interest rates

    255,449       236,341           233,074       216,196  

OTC-cleared

    5,703       5,215         4,778       4,517  

Bilateral OTC

    14,338       14,324           14,658       13,784  

Total credit

    20,041       19,539           19,436       18,301  

Exchange-traded

    11       14         11       16  

OTC-cleared

    698       602         656       800  

Bilateral OTC

    79,011       77,888           85,772       87,953  

Total currencies

    79,720       78,504           86,439       88,769  

Exchange-traded

    2,729       2,546         4,445       4,093  

OTC-cleared

    305       317         433       439  

Bilateral OTC

    7,951       10,548           12,746       15,595  

Total commodities

    10,985       13,411           17,624       20,127  

Exchange-traded

    11,061       11,029         13,431       11,765  

Bilateral OTC

    33,821       41,397           34,687       40,668  

Total equities

    44,882       52,426           48,118       52,433  

Subtotal

    411,077       400,221           404,691       395,826  

Accounted for as hedges

 

     

OTC-cleared

                  2        

Bilateral OTC

    3,208       4           3,024       7  

Total interest rates

    3,208       4           3,026       7  

OTC-cleared

    53       36         25       53  

Bilateral OTC

    84       17           54       61  

Total currencies

    137       53           79       114  

Subtotal

    3,345       57           3,105       121  

Total gross fair value

    $ 414,422       $ 400,278           $ 407,796       $ 395,947  

Offset in consolidated statements of financial condition

 

Exchange-traded

    $  (11,820     $  (11,820       $  (14,377     $  (14,377

OTC-cleared

    (11,928     (11,928       (8,888     (8,888

Bilateral OTC

    (297,392     (297,392         (290,961     (290,961

Counterparty netting

    (321,140     (321,140         (314,226     (314,226

OTC-cleared

    (1,605     (7       (1,389     (164

Bilateral OTC

    (49,810     (38,799         (47,335     (38,963

Cash collateral netting

    (51,415     (38,806         (48,724     (39,127

Total amounts offset

    $(372,555     $(359,946         $(362,950     $(353,353

Included in consolidated statements of financial condition

 

Exchange-traded

    $     2,582       $     3,024         $     4,270       $     3,050  

OTC-cleared

    445       208         657       309  

Bilateral OTC

    38,840       37,100           39,919       39,235  

Total

    $   41,867       $   40,332           $   44,846       $   42,594  

Not offset in consolidated statements of financial condition

 

Cash collateral

    $       (599     $    (1,391       $       (614     $    (1,328

Securities collateral

    (12,777     (8,995         (12,740     (8,414

Total

    $   28,491       $   29,946           $   31,492       $   32,852  
    Notional Amounts as of  
$ in millions    

March

2019

 

 

    

December

2018

 

 

Not accounted for as hedges

    

Exchange-traded

    $  5,814,243        $  5,139,159  

OTC-cleared

    19,542,492        14,290,327  

Bilateral OTC

    14,860,761        12,858,248  

Total interest rates

    40,217,496        32,287,734  

OTC-cleared

    386,010        394,494  

Bilateral OTC

    741,127        762,653  

Total credit

    1,127,137        1,157,147  

Exchange-traded

    7,396        5,599  

OTC-cleared

    112,778        113,360  

Bilateral OTC

    7,208,580        6,596,741  

Total currencies

    7,328,754        6,715,700  

Exchange-traded

    261,210        259,287  

OTC-cleared

    1,425        1,516  

Bilateral OTC

    237,984        244,958  

Total commodities

    500,619        505,761  

Exchange-traded

    712,848        635,988  

Bilateral OTC

    1,104,537        1,070,211  

Total equities

    1,817,385        1,706,199  

Subtotal

    50,991,391        42,372,541  

Accounted for as hedges

    

OTC-cleared

    90,907        85,681  

Bilateral OTC

    11,946        12,022  

Total interest rates

    102,853        97,703  

OTC-cleared

    3,397        2,911  

Bilateral OTC

    7,231        8,089  

Total currencies

    10,628        11,000  

Subtotal

    113,481        108,703  

Total notional amounts

    $51,104,872        $42,481,244  

In the tables above:

 

 

Gross fair values exclude the effects of both counterparty netting and collateral, and therefore are not representative of the firm’s exposure.

 

 

Where the firm has received or posted collateral under credit support agreements, but has not yet determined such agreements are enforceable, the related collateral has not been netted.

 

 

Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm’s derivative activity and do not represent anticipated losses.

 

 

Total gross fair value of derivatives included derivative assets of $9.27 billion as of March 2019 and $10.68 billion as of December 2018, and derivative liabilities of $15.77 billion as of March 2019 and $14.58 billion as of December 2018, which are not subject to an enforceable netting agreement or are subject to a netting agreement that the firm has not yet determined to be enforceable.

 

 

Goldman Sachs March 2019 Form 10-Q   22


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Valuation Techniques for Derivatives

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

 

 

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

 

 

Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to have less price transparency than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.

 

 

Currency. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the price transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.

 

Commodity. Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.

 

 

Equity. Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.

Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs. See Note 5 for an overview of the firm’s fair value measurement policies.

Level 1 Derivatives

Level 1 derivatives include short-term contracts for future delivery of securities when the underlying security is a level 1 instrument, and exchange-traded derivatives if they are actively traded and are valued at their quoted market price.

Level 2 Derivatives

Level 2 derivatives include OTC derivatives for which all significant valuation inputs are corroborated by market evidence and exchange-traded derivatives that are not actively traded and/or that are valued using models that calibrate to market-clearing levels of OTC derivatives.

The selection of a particular model to value a derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. For derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.

 

 

23   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Valuation models require a variety of inputs, such as contractual terms, market prices, yield curves, discount rates (including those derived from interest rates on collateral received and posted as specified in credit support agreements for collateralized derivatives), credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. Significant inputs to the valuations of level 2 derivatives can be verified to market transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Level 3 Derivatives

Level 3 derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs. The significant unobservable inputs used to value the firm’s level 3 derivatives are described below.

 

 

For level 3 interest rate and currency derivatives, significant unobservable inputs include correlations of certain currencies and interest rates (e.g., the correlation between Euro inflation and Euro interest rates). In addition, for level 3 interest rate derivatives, significant unobservable inputs include specific interest rate volatilities.

 

 

For level 3 credit derivatives, significant unobservable inputs include illiquid credit spreads and upfront credit points, which are unique to specific reference obligations and reference entities, recovery rates and certain correlations required to value credit derivatives (e.g., the likelihood of default of the underlying reference obligation relative to one another).

 

 

For level 3 commodity derivatives, significant unobservable inputs include volatilities for options with strike prices that differ significantly from current market prices and prices or spreads for certain products for which the product quality or physical location of the commodity is not aligned with benchmark indices.

 

For level 3 equity derivatives, significant unobservable inputs generally include equity volatility inputs for options that are long-dated and/or have strike prices that differ significantly from current market prices. In addition, the valuation of certain structured trades requires the use of level 3 correlation inputs, such as the correlation of the price performance of two or more individual stocks or the correlation of the price performance for a basket of stocks to another asset class such as commodities.

Subsequent to the initial valuation of a level 3 derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are classified in level 3. Level 3 inputs are changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See below for further information about significant unobservable inputs used in the valuation of level 3 derivatives.

Valuation Adjustments

Valuation adjustments are integral to determining the fair value of derivative portfolios and are used to adjust the mid-market valuations produced by derivative pricing models to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity, credit valuation adjustments and funding valuation adjustments, which account for the credit and funding risk inherent in the uncollateralized portion of derivative portfolios. The firm also makes funding valuation adjustments to collateralized derivatives where the terms of the agreement do not permit the firm to deliver or repledge collateral received. Market-based inputs are generally used when calibrating valuation adjustments to market-clearing levels.

In addition, for derivatives that include significant unobservable inputs, the firm makes model or exit price adjustments to account for the valuation uncertainty present in the transaction.

 

 

Goldman Sachs March 2019 Form 10-Q   24


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Fair Value of Derivatives by Level

The table below presents the fair value of derivatives on a gross basis by level and major product type, as well as the impact of netting.

 

$ in millions     Level 1       Level 2       Level 3       Total  

As of March 2019

       

Assets

       

Interest rates

    $ 84       $ 258,105       $    468       $ 258,657  

Credit

          16,526       3,515       20,041  

Currencies

          79,597       260       79,857  

Commodities

          10,678       307       10,985  

Equities

    8       43,954       920       44,882  

Gross fair value

    92       408,860       5,470       414,422  

Counterparty netting in levels

          (319,366     (812     (320,178

Subtotal

    $ 92       $   89,494       $ 4,658       $   94,244  

Cross-level counterparty netting

 

    (962

Cash collateral netting

                            (51,415

Net fair value

 

    $   41,867  

Liabilities

       

Interest rates

    $(83     $(235,775     $   (487     $(236,345

Credit

          (17,898     (1,641     (19,539

Currencies

          (78,326     (231     (78,557

Commodities

          (13,249     (162     (13,411

Equities

    (6     (48,783     (3,637     (52,426

Gross fair value

    (89     (394,031     (6,158     (400,278

Counterparty netting in levels

          319,366       812       320,178  

Subtotal

    $(89     $  (74,665     $(5,346     $  (80,100

Cross-level counterparty netting

 

    962  

Cash collateral netting

                            38,806  

Net fair value

 

    $  (40,332

 

As of December 2018

       

Assets

       

Interest rates

    $ 12       $ 235,680       $    408       $ 236,100  

Credit

          15,992       3,444       19,436  

Currencies

          85,837       681       86,518  

Commodities

          17,193       431       17,624  

Equities

    10       47,168       940       48,118  

Gross fair value

    22       401,870       5,904       407,796  

Counterparty netting in levels

          (312,611     (956     (313,567

Subtotal

    $ 22       $   89,259       $ 4,948       $   94,229  

Cross-level counterparty netting

 

    (659

Cash collateral netting

                            (48,724

Net fair value

 

    $   44,846  

Liabilities

       

Interest rates

    $ (24     $ (215,662     $   (517     $ (216,203

Credit

          (16,529     (1,772     (18,301

Currencies

          (88,663     (220     (88,883

Commodities

          (19,808     (319     (20,127

Equities

    (37     (49,910     (2,486     (52,433

Gross fair value

    (61     (390,572     (5,314     (395,947

Counterparty netting in levels

          312,611       956       313,567  

Subtotal

    $ (61     $   (77,961     $ (4,358     $   (82,380

Cross-level counterparty netting

 

    659  

Cash collateral netting

                            39,127  

Net fair value

 

    $   (42,594

In the table above:

 

 

The gross fair values exclude the effects of both counterparty netting and collateral netting, and therefore are not representative of the firm’s exposure.

 

 

Counterparty netting is reflected in each level to the extent that receivable and payable balances are netted within the same level and is included in counterparty netting in levels. Where the counterparty netting is across levels, the netting is included in cross-level counterparty netting.

 

 

Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.

Significant Unobservable Inputs

The table below presents the amount of level 3 assets (liabilities), and ranges, averages and medians of significant unobservable inputs used to value level 3 derivatives.

 

    Level 3 Assets (Liabilities) and Range of Significant
Unobservable Inputs (Average/Median) as of
 
$ in millions    

March

2019

 

 

   

December

2018

 

 

Interest rates, net

    $(19)       $(109)  

 

Correlation

    (55)% to 81% (50%/60%)       (10)% to 86% (66%/64%)  

 

Volatility (bps)

    31 to 150 (79/76)       31 to 150 (74/65)  

Credit, net

    $1,874        $1,672   

 

Credit spreads (bps)

    1 to 697 (96/55)       1 to 810 (109/63)  

 

Upfront credit points

    2 to 99 (45/41)       2 to 99 (44/40)  

 

Recovery rates

    25% to 60% (38%/33%)       25% to 70% (40%/40%)  

Currencies, net

    $29        $461   

 

Correlation

    10% to 70% (43%/36%)       10% to 70% (40%/36%)  

Commodities, net

    $145        $112   

 

Volatility

    8% to 48% (22%/22%)       10% to 75% (28%/27%)  

 

Natural gas spread

 

 

 

 

$(2.61) to $3.19 

($(0.26)/$(0.27))

 

 

 

   

$(2.32) to $4.68 

($(0.26)/$(0.30))

 

 

Oil spread

 

 

 

 

$(6.53) to $7.47 

($1.65/$4.77)

 

 

 

   

$(3.44) to $16.62 

($4.53/$3.94)

 

 

Equities, net

    $(2,717)       $(1,546)  

 

Correlation

    (68)% to 97% (45%/44%)       (68)% to 97% (48%/51%)  

 

Volatility

    3% to 87% (18%/16%)       3% to 102% (20%/18%)  

In the table above:

 

 

Derivative assets are shown as positive amounts and derivative liabilities are shown as negative amounts.

 

 

Ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative.

 

 

Averages represent the arithmetic average of the inputs and are not weighted by the relative fair value or notional of the respective financial instruments. An average greater than the median indicates that the majority of inputs are below the average. For example, the difference between the average and the median for credit spreads indicates that the majority of the inputs fall in the lower end of the range.

 

 

25   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

 

The ranges, averages and medians of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one derivative. For example, the highest correlation for interest rate derivatives is appropriate for valuing a specific interest rate derivative but may not be appropriate for valuing any other interest rate derivative. Accordingly, the ranges of inputs do not represent uncertainty in, or possible ranges of, fair value measurements of level 3 derivatives.

 

 

Interest rates, currencies and equities derivatives are valued using option pricing models, credit derivatives are valued using option pricing, correlation and discounted cash flow models, and commodities derivatives are valued using option pricing and discounted cash flow models.

 

 

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

 

 

Correlation within currencies and equities includes cross-product type correlation.

 

 

Natural gas spread represents the spread per million British thermal units of natural gas.

 

 

Oil spread represents the spread per barrel of oil and refined products.

Range of Significant Unobservable Inputs

The following is information about the ranges of significant unobservable inputs used to value the firm’s level 3 derivative instruments:

 

 

Correlation. Ranges for correlation cover a variety of underliers both within one product type (e.g., equity index and equity single stock names) and across product types (e.g., correlation of an interest rate and a currency), as well as across regions. Generally, cross-product type correlation inputs are used to value more complex instruments and are lower than correlation inputs on assets within the same derivative product type.

 

 

Volatility. Ranges for volatility cover numerous underliers across a variety of markets, maturities and strike prices. For example, volatility of equity indices is generally lower than volatility of single stocks.

 

Credit spreads, upfront credit points and recovery rates. The ranges for credit spreads, upfront credit points and recovery rates cover a variety of underliers (index and single names), regions, sectors, maturities and credit qualities (high-yield and investment-grade). The broad range of this population gives rise to the width of the ranges of significant unobservable inputs.

 

 

Commodity prices and spreads. The ranges for commodity prices and spreads cover variability in products, maturities and delivery locations.

Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs

The following is a description of the directional sensitivity of the firm’s level 3 fair value measurements, as of both March 2019 and December 2018, to changes in significant unobservable inputs, in isolation:

 

 

Correlation. In general, for contracts where the holder benefits from the convergence of the underlying asset or index prices (e.g., interest rates, credit spreads, foreign exchange rates, inflation rates and equity prices), an increase in correlation results in a higher fair value measurement.

 

 

Volatility. In general, for purchased options, an increase in volatility results in a higher fair value measurement.

 

 

Credit spreads, upfront credit points and recovery rates. In general, the fair value of purchased credit protection increases as credit spreads or upfront credit points increase or recovery rates decrease. Credit spreads, upfront credit points and recovery rates are strongly related to distinctive risk factors of the underlying reference obligations, which include reference entity-specific factors such as leverage, volatility and industry, market-based risk factors, such as borrowing costs or liquidity of the underlying reference obligation, and macroeconomic conditions.

 

 

Commodity prices and spreads. In general, for contracts where the holder is receiving a commodity, an increase in the spread (price difference from a benchmark index due to differences in quality or delivery location) or price results in a higher fair value measurement.

Due to the distinctive nature of each of the firm’s level 3 derivatives, the interrelationship of inputs is not necessarily uniform within each product type.

 

 

Goldman Sachs March 2019 Form 10-Q   26


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 Rollforward

The table below presents a summary of the changes in fair value for level 3 derivatives.

 

    Three Months
Ended March
 
$ in millions     2019        2018  

Total level 3 derivatives

    

Beginning balance

    $    590        $(288

Net realized gains/(losses)

    49        52  

Net unrealized gains/(losses)

    (91      219  

Purchases

    110        134  

Sales

    (1,574      (124

Settlements

    384        329  

Transfers into level 3

    (34      41  

Transfers out of level 3

    (122      45  

Ending balance

    $   (688      $ 408  

In the table above:

 

 

Changes in fair value are presented for all derivative assets and liabilities that are classified in level 3 as of the end of the period.

 

 

Net unrealized gains/(losses) relates to instruments that were still held at period-end.

 

 

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

 

 

Positive amounts for transfers into level 3 and negative amounts for transfers out of level 3 represent net transfers of derivative assets. Negative amounts for transfers into level 3 and positive amounts for transfers out of level 3 represent net transfers of derivative liabilities.

 

 

A derivative with level 1 and/or level 2 inputs is classified in level 3 in its entirety if it has at least one significant level 3 input.

 

 

If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2 inputs) is classified in level 3.

 

 

Gains or losses that have been classified in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to level 1 or level 2 derivatives and/or level 1, level 2 and level 3 cash instruments. As a result, gains/(losses) included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

The table below disaggregates, by major product type, the information for level 3 derivatives included in the summary table above.

 

    Three Months
Ended March
 
$ in millions     2019        2018  

Interest rates, net

    

Beginning balance

    $   (109      $   (410

Net realized gains/(losses)

           (5

Net unrealized gains/(losses)

    111        105  

Purchases

    2        6  

Sales

    (4      (7

Settlements

    (17      29  

Transfers into level 3

    (11      38  

Transfers out of level 3

    9        (5

Ending balance

    $     (19      $   (249

Credit, net

    

Beginning balance

    $ 1,672        $ 1,505  

Net realized gains/(losses)

    8        15  

Net unrealized gains/(losses)

    80        (297

Purchases

    42        19  

Sales

    (28      (23

Settlements

    (32      55  

Transfers into level 3

    55        (15

Transfers out of level 3

    77        23  

Ending balance

    $ 1,874        $ 1,282  

Currencies, net

    

Beginning balance

    $    461        $   (181

Net realized gains/(losses)

    (12      (17

Net unrealized gains/(losses)

    (131      125  

Purchases

    2        7  

Sales

    (16      (2

Settlements

    29        210  

Transfers into level 3

    (1      27  

Transfers out of level 3

    (303       

Ending balance

    $      29        $    169  

Commodities, net

    

Beginning balance

    $    112        $      47  

Net realized gains/(losses)

    18        (6

Net unrealized gains/(losses)

    15        31  

Purchases

    3        12  

Sales

    (6      (1

Settlements

    (12      (8

Transfers into level 3

    (8      (8

Transfers out of level 3

    23        6  

Ending balance

    $    145        $      73  

Equities, net

    

Beginning balance

    $(1,546      $(1,249

Net realized gains/(losses)

    35        65  

Net unrealized gains/(losses)

    (166      255  

Purchases

    61        90  

Sales

    (1,520      (91

Settlements

    416        43  

Transfers into level 3

    (69      (1

Transfers out of level 3

    72        21  

Ending balance

    $(2,717      $   (867
 

 

27   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Level 3 Rollforward Commentary

Three Months Ended March 2019. The net realized and unrealized losses on level 3 derivatives of $42 million (reflecting $49 million of net realized gains and $91 million of net unrealized losses) for the three months ended March 2019 included losses of $28 million reported in market making and $14 million reported in other principal transactions.

The net unrealized losses on level 3 derivatives for the three months ended March 2019 were primarily attributable to losses on certain equity derivatives, primarily reflecting the impact of an increase in equity prices, losses on certain currency derivatives, primarily reflecting the impact of a decrease in interest rates, partially offset by gains on certain interest rate derivatives, primarily reflecting the impact of a decrease in interest rates and changes in foreign exchange rates.

Transfers into level 3 derivatives during the three months ended March 2019 were not material.

Transfers out of level 3 derivatives during the three months ended March 2019 primarily reflected transfers of certain currency derivative assets to level 2, principally due to certain unobservable inputs no longer being significant to the valuation of these derivatives, partially offset by transfers of certain credit derivative liabilities to level 2, principally due to certain unobservable credit spread inputs no longer being significant to the valuation of these derivatives, and transfers of certain equity derivative liabilities to level 2, principally due to increased transparency and reduced significance of volatility and correlation inputs used to value these derivatives.

Three Months Ended March 2018. The net realized and unrealized gains on level 3 derivatives of $271 million (reflecting $52 million of net realized gains and $219 million of net unrealized gains) for the three months ended March 2018 included gains of $184 million reported in market making and $87 million reported in other principal transactions.

The net unrealized gains on level 3 derivatives for the three months ended March 2018 were primarily attributable to gains on certain equity derivatives, reflecting the impact of a decrease in equity prices, gains on certain currency derivatives, primarily reflecting the impact of changes in foreign exchange rates, and gains on certain interest rate derivatives, primarily reflecting the impact of an increase in interest rates, partially offset by losses on certain credit derivatives reflecting the impact of changes in foreign exchange rates.

Both transfers into level 3 derivatives and transfers out of level 3 derivatives during the three months ended March 2018 were not material.

OTC Derivatives

The table below presents the fair values of OTC derivative assets and liabilities by tenor and major product type.

 

$ in millions    
Less than
1 Year
 
 
   
1 - 5
Years
 
 
   
Greater than
5 Years
 
 
    Total  

As of March 2019

 

     

Assets

       

Interest rates

    $  4,523       $13,257       $48,013       $  65,793  

Credit

    901       3,276       3,696       7,873  

Currencies

    10,817       5,296       6,084       22,197  

Commodities

    2,900       1,284       173       4,357  

Equities

    3,222       5,325       1,190       9,737  

Counterparty netting in tenors

    (2,381     (4,005     (2,650     (9,036

Subtotal

    $19,982       $24,433       $56,506       $100,921  

Cross-tenor counterparty netting

          (10,221

Cash collateral netting

                            (51,415

Total OTC derivative assets

                            $  39,285  

Liabilities

       

Interest rates

    $  5,653       $  8,986       $28,090       $  42,729  

Credit

    1,028       4,511       1,832       7,371  

Currencies

    9,845       7,114       4,034       20,993  

Commodities

    2,530       1,454       2,982       6,966  

Equities

    8,703       5,683       2,926       17,312  

Counterparty netting in tenors

    (2,381     (4,005     (2,650     (9,036

Subtotal

    $25,378       $23,743       $37,214       $  86,335  

Cross-tenor counterparty netting

          (10,221

Cash collateral netting

                            (38,806

Total OTC derivative liabilities

 

            $  37,308  

 

As of December 2018

 

     

Assets

       

Interest rates

    $  2,810       $13,177       $47,426       $  63,413  

Credit

    807       3,676       3,364       7,847  

Currencies

    10,976       5,076       6,486       22,538  

Commodities

    4,978       2,101       145       7,224  

Equities

    4,962       5,244       1,329       11,535  

Counterparty netting in tenors

    (3,409     (3,883     (2,822     (10,114

Subtotal

    $21,124       $25,391       $55,928       $102,443  

Cross-tenor counterparty netting

          (13,143

Cash collateral netting

                            (48,724

Total OTC derivative assets

                            $  40,576  

Liabilities

       

Interest rates

    $  4,193       $  9,153       $29,377       $  42,723  

Credit

    1,127       4,173       1,412       6,712  

Currencies

    13,553       6,871       4,474       24,898  

Commodities

    4,271       2,663       3,145       10,079  

Equities

    9,278       5,178       3,060       17,516  

Counterparty netting in tenors

    (3,409     (3,883     (2,822     (10,114

Subtotal

    $29,013       $24,155       $38,646       $  91,814  

Cross-tenor counterparty netting

          (13,143

Cash collateral netting

                            (39,127

Total OTC derivative liabilities

                            $  39,544  

In the table above:

 

 

Tenor is based on remaining contractual maturity.

 

 

Counterparty netting within the same product type and tenor category is included within such product type and tenor category.

 

 

Counterparty netting across product types within the same tenor category is included in counterparty netting in tenors. Where the counterparty netting is across tenor categories, the netting is included in cross-tenor counterparty netting.

 

 

Goldman Sachs March 2019 Form 10-Q   28


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Credit Derivatives

The firm enters into a broad array of credit derivatives in locations around the world to facilitate client transactions and to manage the credit risk associated with market-making and investing and lending activities. Credit derivatives are actively managed based on the firm’s net risk position. Credit derivatives are generally individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference entity.

The firm enters into the following types of credit derivatives:

 

 

Credit Default Swaps. Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event the issuer of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer. If a credit event occurs, the seller of protection is required to make a payment to the buyer, calculated according to the terms of the contract.

 

 

Credit Options. In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right, but does not assume the obligation, to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.

 

 

Credit Indices, Baskets and Tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a pro-rata portion of the transaction’s total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss is covered by the next most senior tranche.

 

Total Return Swaps. A total return swap transfers the risks relating to economic performance of a reference obligation from the protection buyer to the protection seller. Typically, the protection buyer receives a floating rate of interest and protection against any reduction in fair value of the reference obligation, and the protection seller receives the cash flows associated with the reference obligation, plus any increase in the fair value of the reference obligation.

The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underliers. Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default.

As of March 2019, written credit derivatives had a total gross notional amount of $530.40 billion and purchased credit derivatives had a total gross notional amount of $596.76 billion, for total net notional purchased protection of $66.36 billion. As of December 2018, written credit derivatives had a total gross notional amount of $554.17 billion and purchased credit derivatives had a total gross notional amount of $603.00 billion, for total net notional purchased protection of $48.83 billion. Substantially all of the firm’s written and purchased credit derivatives are credit default swaps.

 

 

29   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

The table below presents information about credit derivatives.

 

    Credit Spread on Underlier (basis points)  
$ in millions     0 - 250      

251 -

500

 

 

   

501 -

1,000

 

 

   

Greater
than
1,000
 
 
 
    Total  

As of March 2019

 

       

Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor

 

Less than 1 year

    $123,030       $  7,548       $  1,053       $  2,782       $134,413  

1 – 5 years

    281,554       15,327       8,980       6,194       312,055  

Greater than 5 years

    73,217       8,001       2,210       505       83,933  

Total

    $477,801       $30,876       $12,243       $  9,481       $530,401  

Maximum Payout/Notional Amount of Purchased Credit Derivatives

 

Offsetting

    $420,734       $22,348       $10,634       $  8,634       $462,350  

Other

    120,611       8,997       3,042       1,757       134,407  

Fair Value of Written Credit Derivatives

 

Asset

    $    9,600       $     623       $     147       $     125       $  10,495  

Liability

    1,540       1,344       831       2,762       6,477  

Net asset/(liability)

    $    8,060       $    (721     $    (684     $ (2,637     $    4,018  

 

As of December 2018

 

       

Maximum Payout/Notional Amount of Written Credit Derivatives by Tenor

 

Less than 1 year

    $145,828       $  9,763       $  1,151       $  3,848       $160,590  

1 – 5 years

    298,228       21,100       13,835       7,520       340,683  

Greater than 5 years

    45,690       5,966       1,121       122       52,899  

Total

    $489,746       $36,829       $16,107       $11,490       $554,172  

Maximum Payout/Notional Amount of Purchased Credit Derivatives

 

Offsetting

    $413,445       $25,373       $14,243       $  8,841       $461,902  

Other

    115,754       14,273       7,555       3,513       141,095  

Fair Value of Written Credit Derivatives

 

Asset

    $    8,656       $     543       $       95       $       80       $    9,374  

Liability

    1,990       1,415       1,199       3,368       7,972  

Net asset/(liability)

    $    6,666       $    (872     $ (1,104     $ (3,288     $    1,402  

In the table above:

 

 

Fair values exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash received or posted under enforceable credit support agreements, and therefore are not representative of the firm’s credit exposure.

 

 

Tenor is based on remaining contractual maturity.

 

 

The credit spread on the underlier, together with the tenor of the contract, are indicators of payment/performance risk. The firm is less likely to pay or otherwise be required to perform where the credit spread and the tenor are lower.

 

 

Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives that economically hedge written credit derivatives with identical underliers.

 

 

Other purchased credit derivatives represent the notional amount of all other purchased credit derivatives not included in offsetting.

Impact of Credit Spreads on Derivatives

On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk through the unwind of derivative contracts and changes in credit mitigants.

The net gains/(losses), including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $(163) million for the three months ended March 2019 and $152 million for the three months ended March 2018.

Bifurcated Embedded Derivatives

The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings.

 

    As of  
$ in millions    
March
2019
 
 
    
December
2018
 
 

Fair value of assets

    $     978        $     980  

Fair value of liabilities

    1,381        1,297  

Net liability

    $     403        $     317  

 

Notional amount

    $10,627        $10,229  

In the table above, these derivatives, which are recorded at fair value, primarily consist of interest rate, equity and commodity products and are included in unsecured short-term borrowings and unsecured long-term borrowings with the related borrowings. See Note 8 for further information.

Derivatives with Credit-Related Contingent Features

Certain of the firm’s derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm’s credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency’s relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies.

The table below presents information about net derivative liabilities under such bilateral agreements (excluding application of collateral posted), the related fair value of collateral posted and the additional collateral or termination payments that could have been called by counterparties in the event of a one-notch and two-notch downgrade in the firm’s credit ratings.

 

    As of  
$ in millions    
March
2019
 
 
    
December
2018
 
 

Net derivative liabilities under bilateral agreements

    $30,598        $29,583  

Collateral posted

    $27,425        $24,393  

Additional collateral or termination payments:

    

One-notch downgrade

    $     312        $     262  

Two-notch downgrade

    $     959        $     959  
 

 

Goldman Sachs March 2019 Form 10-Q   30


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Hedge Accounting

The firm applies hedge accounting for (i) certain interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long-term and short-term borrowings and certain fixed-rate certificates of deposit and (ii) certain foreign currency forward contracts and foreign currency-denominated debt used to manage foreign currency exposures on the firm’s net investment in certain non-U.S. operations.

To qualify for hedge accounting, the hedging instrument must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and assess the hedging relationship at least on a quarterly basis to ensure the hedging instrument continues to be highly effective over the life of the hedging relationship.

Fair Value Hedges

The firm designates certain interest rate swaps as fair value hedges of certain fixed-rate unsecured long-term and short-term debt and fixed-rate certificates of deposit. These interest rate swaps hedge changes in fair value attributable to the designated benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR) or Overnight Index Swap Rate), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations.

The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%.

For qualifying fair value hedges, gains or losses on derivatives are included in interest expense. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value (hedging adjustment) and is also included in interest expense. When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense.

The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges and the related hedged borrowings and deposits, and total interest expense.

 

   

Three Months

Ended March

 
$ in millions     2019        2018  

Interest rate hedges

    $ 1,256        $(1,369

Hedged borrowings and deposits

    $(1,351      $ 1,230  

Interest expense

    $ 4,379        $ 3,312  

In the table above, the difference between gains/(losses) from interest rate hedges and hedged borrowings and deposits was primarily due to the amortization of prepaid credit spreads resulting from the passage of time.

The table below presents the carrying value of the hedged items that are currently designated in a hedging relationship and the related cumulative hedging adjustment (increase/(decrease)) from current and prior hedging relationships included in such carrying values.

 

$ in millions    
Carrying
Value
 
 
    

Cumulative
Hedging
Adjustment
 
 
 

As of March 2019

    

Deposits

    $12,963        $    (33

Unsecured short-term borrowings

    $  5,155        $      (1

Unsecured long-term borrowings

    $73,623        $4,657  

 

As of December 2018

    

Deposits

    $11,924        $  (156

Unsecured short-term borrowings

    $  4,450        $    (12

Unsecured long-term borrowings

    $68,839        $2,759  

In the table above, cumulative hedging adjustment included $2.16 billion as of March 2019 and $1.74 billion as of December 2018 of hedging adjustments from prior hedging relationships that were de-designated and were related to unsecured long-term borrowings.

In addition, cumulative hedging adjustments for items no longer designated in a hedging relationship were $1.03 billion as of March 2019 and $1.51 billion as of December 2018 and substantially all were related to unsecured long-term borrowings.

 

 

31   Goldman Sachs March 2019 Form 10-Q


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Net Investment Hedges

The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investments in certain non-U.S. operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (i.e., based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, all gains or losses on the hedging instruments are included in currency translation.

The table below presents the gains/(losses) from net investment hedging.

 

    Three Months
Ended March
 
$ in millions     2019        2018  

Hedges:

    

Foreign currency forward contract

    $14        $(210

Foreign currency-denominated debt

    $31        $(107

Gains or losses on individual net investments in non-U.S. operations are reclassified to earnings from accumulated other comprehensive income/(loss) when such net investments are sold or substantially liquidated. The gross and net gains and losses on hedges and the related net investments in non-U.S. operations reclassified to earnings from accumulated other comprehensive income/(loss) were not material for both the three months ended March 2019 and March 2018.

The firm had designated $2.90 billion as of March 2019 and $1.99 billion as of December 2018 of foreign currency-denominated debt, included in unsecured long-term borrowings and unsecured short-term borrowings, as hedges of net investments in non-U.S. subsidiaries.

Note 8.

Fair Value Option

Other Financial Assets and Financial Liabilities at Fair Value

In addition to cash and derivative instruments included in financial instruments owned and financial instruments sold, but not yet purchased, the firm accounts for certain of its other financial assets and financial liabilities at fair value, substantially all under the fair value option. The primary reasons for electing the fair value option are to:

 

 

Reflect economic events in earnings on a timely basis;

 

 

Mitigate volatility in earnings from using different measurement attributes (e.g., transfers of financial instruments owned accounted for as financings are recorded at fair value, whereas the related secured financing would be recorded on an accrual basis absent electing the fair value option); and

 

 

Address simplification and cost-benefit considerations (e.g., accounting for hybrid financial instruments at fair value in their entirety versus bifurcation of embedded derivatives and hedge accounting for debt hosts).

Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives and do not require settlement by physical delivery of nonfinancial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative from the associated debt, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedges. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option.

Other financial assets and financial liabilities accounted for at fair value under the fair value option include:

 

 

Repurchase agreements and substantially all resale agreements;

 

 

Securities borrowed and loaned in Fixed Income, Currency and Commodities (FICC) Client Execution;

 

 

Substantially all other secured financings, including transfers of assets accounted for as financings;

 

 

Certain unsecured short-term and long-term borrowings, substantially all of which are hybrid financial instruments;

 

 

Certain customer and other receivables, including transfers of assets accounted for as secured loans and certain margin loans; and

 

 

Certain time deposits (deposits with no stated maturity are not eligible for a fair value option election), including structured certificates of deposit, which are hybrid financial instruments.

 

 

Goldman Sachs March 2019 Form 10-Q   32


Table of Contents

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

Fair Value of Other Financial Assets and Financial Liabilities by Level

The table below presents, by level within the fair value hierarchy, other financial assets and financial liabilities at fair value, substantially all of which are accounted for at fair value under the fair value option.

 

$ in millions     Level 1       Level 2       Level 3       Total  

As of March 2019

       

Assets

       

Resale agreements

    $  –       $ 132,445       $          –       $ 132,445  

Securities borrowed

          27,520             27,520  

Customer and other receivables

          1,611       3       1,614  

Total

    $  –       $ 161,576       $           3       $ 161,579  

Liabilities

       

Deposits

    $  –       $  (13,692     $  (3,351     $  (17,043

Repurchase agreements

          (70,540     (29     (70,569

Securities loaned

          (3,067           (3,067

Other secured financings

          (18,783     (192     (18,975

Unsecured borrowings:

       

Short-term

          (15,738     (5,513     (21,251

Long-term

          (35,771     (11,702     (47,473

Other liabilities

                (132     (132

Total

    $  –       $(157,591     $(20,919     $(178,510

 

As of December 2018

       

Assets

       

Resale agreements

    $  –       $ 139,220       $           –       $ 139,220  

Securities borrowed

          23,142             23,142  

Customer and other receivables

          3,183       6       3,189  

Total

    $  –       $  165,545       $           6       $  165,551  

Liabilities

       

Deposits

    $  –       $   (17,892    </