Goldman Sachs By: Amandeep - PowerPoint Presentation

1. Goldman SachsBy:Amandeep GillGeoff ThomassonKatherine LypkieTej Sandhu

2. Agenda Goldman Overview Risk Management EnvironmentMarket Risk Credit Risk Liquidity Risk Operational Risk Regulatory Risk Recommendations Hello 

3. GS - Overview Overview

4. History Founded in 1869 by Marcus Goldman in New York Son in law, Samuel Sachs, joined in 1882 and adopted their current name in 1885Early 20th century mainly IPO’sDecember 1928 launched Goldman Sachs Trading Corporation, which failed during the 1929 stock market crash 1930’s focus shifted towards investment banking First international office in London 1970Overview

5. History Major events – Sears IPO – 1906Stock Market Crash 1929 – moved out of trading to more investment bankingFord IPO – 1956Penn Central Transportation Company bankruptcy left GS with 80million in cp, this lead to credit ratings for cp issuers – 1970Microsoft IPO – 19861990 introduced paperless trading to NYSEIPO in 1999 only 12% held by public→ As of 2009, 67% of GS owned by shareholdersOverview

6. History- Subprime Crisis Made $4 billion in profit due to shorting the subprime mortgage backed securities September 21, 2008 following the collapse of Lehman Brothers, Goldman along with Morgan Stanley became a bank holding companyNow under the supervision of bank regulatorsEasier access to capitalOverview

7. Current Situation Offices in over 30 countries with 35,700 staff members44% of revenue generated outside of the AmericasCEO Lloyd BlankfeinFormer trader at GoldmanBA JD from Harvard2010 revenues of 39.2 billion with net earnings of $8.4 billionTotal Assets of 910B as of 3QMarket Cap of 84.3BOverview

8. Current SituationGlobal investment banking and securities firm operating in three main financial services areas:Investment BankingTrading and Principle InvestmentsAsset Management and Securities Services …mainly for institutional clients; however, some PCS.Overview

9. Financial Highlights Overview

10. Financial Highlights Overview

11. Firm – Goals & Strategy“In many respects, our job is to match the capital of our investing clients — who aim to grow the savings of millions of people — with the needs of our corporate and government clients — who rely on financing to generate growth, create jobs and deliver products and services.”Goals – industry leading returns while continuing to grow book value and earnings per share Overview

12. Firm – Business Principles 1. Our Clients’ interests always come first2. Our Assets are our people, capital and reputation3. Our goal is to provide superior returns to our shareholders4. We take great pride in the professional quality of our work5. We stress creativity and imagination in everything we do 6. We make an unusual effort to identify and recruit the very best person for every jobOverview

13. Firm – Business Principles 7. We offer our people the opportunity to move ahead more rapidly than is possible at most other places 8. We stress teamwork in everything we do 9. The dedication of our people to the firm and intense effort they give their jobs are greater than one finds in most other organizations10. We consider our size and asset that we try hard to preserve 11. We constantly strive to anticipate the rapidly changing needs of our clients and to develop new services to meet those needs Overview

14. Firm – Business Principles 12. We regularly receive confidential information as part of our normal client relationship 13. Our business is highly competitive and we aggressively seek to expand our client relationship 14. Integrity and honesty are at the heart our our business Overview

15. What They DoInvestment BankingFinancial AdvisoryMergers and AcquisitionsDivestitures, corporate defense Financial RestructuringUnderwriting Debt and Equity Underwriting ServicesPublic offerings, private placementsUnderwrite a wide range of securities & financial instrumentsOverview

16. M&A League TableOverview

17. What They DoAsset ManagementInvestment advisory services, financial planning and investment products across all major asset classes and exchangesManagement of merchant banking fundsSecurities ServicesPrime BrokerageFinancing ServicesSecurities LendingOverview

18. What They DoFixed Income, Currency & CommoditiesCommodities & commodity derivativesCredit products, derivatives, investment-grade, high-yield, and distressed debt among many othersCurrencies & currency derivativesInterest rate derivativesMortgage-related securities and loan products and other asset backed instrumentsOverview

19. What They DoEquitiesEquity securities and derivativesEquities and options exchange-based market-making activitiesSecurities, futures and options clearing servicesInsurance ActivitiesPrincipal InvestmentsIn connection with merchant banking activitiesICBC (come back to this)Overview

20. Current Results Net RevenuesInvestment Banking – $4.81BInvesting & lending – $7.45BInstitutional Client Services – $21.78BInvestment Management – $5.01BPre Taxing Earnings – $12.89BOverview

21. Revenue – Investment BankingOverview

22. Revenue – Investing & LendingOverview

23. Revenue – Client ServicesOverview

24. Revenue – Investment Management Overview

25. Operations by Segment Overview

26. Major Risks – Overview “We believe that effective risk management is of primary importance to the success of the firm. Accordingly, we have comprehensive risk management processes through which we monitor, evaluate and manage the risks we assume in conducting our activities. These include market, credit, liquidity, operational, legal, regulatory and reputational risk exposures. Our risk management framework is built around three core components: governance, processes and people.”Major Risks

27. Major Industry Risks – Overview Market RiskCredit Risk Liquidity Risk Operational Risk Regulatory Risk Major Risks

28. GS – Market RiskMarket Risk

29. Market Risk Market risk is the potential for changes in the market value of trading and investment positionsPrimary exposures include interest rates, currencies, equities (and other asset prices), and commoditiesMarket Risk

30. Market Risk High sensitivity to the business environments being operated inThese depend on:Global GDP growthEfficient capital marketsLow inflationHigh business and investor confidenceGeopolitical conditionsBusiness earningsMarket Risk

31. Market Risk Market for M&A and underwriting is limited by investor and CEO confidence in the economyClients are also highly dependent on liquid credit markets to finance major transactionsThese large transactions are the major driver of Goldman’s M&A revenueMarket Risk

32. Market Risk Trading & Arbitrage opportunities depend on market volatilityA volatile market can therefore increase trading revenuesConversely increased volatility increases VaR as trading activity becomes more risky – this may force the firm to reduce trading activities to reduce VaRMarket Risk

33. Market Risk – Asset managementAsset Management fees are directly based on the value of client’s portfoliosUncertainty, volatility, adverse economic conditions and lower asset values can reduce these values and ultimately lower revenuesRisk of inability to attract new clients or hold onto existing clientsMarket Risk

34. How Market Risk is ManagedDiversify exposuresControl Position SizesEconomic hedges in related securities or derivativesE.g. hedging a portfolio of common stocks by taking an offsetting position in an equity indexMarket Risk

35. Tools for Managing Market RiskVaR; Value at Risk is a summary of market risk exposureSensitivity/scenario analyses, stress tests, other analytical tools to measure effect of variables such as widening credit spreads, decline in equity markets, emerging market movesInventory position limits for selected business unitsMarket Risk

36. Value at Risk - VaRPotential loss in value of trading positions due to adverse market movementsA one-day time horizon is used with a 95% confidence intervalMarket Risk

37. Benefits of VaR Covers linear and nonlinear risk exposuresResponds to the change in the composition of trading portfoliosEstimates aggregate riskReflects risk reduction due to diversification Market Risk

38. Drawbacks of VaRPast changes do not necessarily reflect future performanceTrading gains/losses due to market movements may differ from the modelMarket Risk

39. VaRComponents of Goldman’s VaR:Interest rate risk arises primarily from exposure to changes in level, slope, and curvature of the yield curve; interest rate volatility, mortgage prepayment speeds, and credit spreadsEquity price risk arises from exposure to individual equity prices, baskets of equities, and equity indicesMarket Risk

40. VaRComponents of Goldman’s VaRCurrency rate risks arise from changes in spot and forward prices and volatility of currency ratesCommodity price risk arises from changes in spot prices, forward prices, and volatilities of various commoditiesMarket Risk

41. Year End VaR – High/LowMarket Risk

42. Average Daily VaR at Year EndMarket Risk

43. Daily VaR – Last Four Quarters Market Risk

44. Analysis of VaROverall in the time from December 2009 until December 2010 they have significantly reduced their average daily VaR from $218m to $134mThis change is mostly due to a change in their interest rate and equity measures in year end VaRMarket Risk

45. Market Risks – Not in VaRMarket RiskVaR does not include the impact of changes in the credit spreads of derivative counter-parties or Goldman’s own credit spreadsA one basis point increase in these credit spreads would produce a $1M loss of net revenue and a one basis point decrease would produce an $8M gain for net revenue

46. Market Risks – Not in VaRMarket RiskFor inventory positions not included in VaR, sensitivity analysis is used, Goldman analyzes the effect on net revenues of a 10% decline in the underlying value of the positions

47. Market Risks – Not in VaRMarket Risk

48. GS – Credit RiskCredit Risk

49. What is Credit Risk?Potential for loss due to the default or deterioration in credit quality of a counterparty or an issuer of securities or other instruments Credit Risk

50. Sources of Credit RiskOTC derivatives Loans and lending commitmentsSecurities financing transactions (i.e., resale and repurchase agreements and securities borrowing and lending activities)Cash and cash equivalents receivables from:brokersdealersclearing organizations Credit Risk

51. Measuring Credit RiskPotential Exposure to credit risksEstimate credit exposure within a given confidence level, during the life of the transaction and market movementsChanges in Credit SpreadVARScenario Analysis/ Stress testsApplying shocks to counterparty credit ratings or credit risk factors Credit Risk

52. Managing Credit RiskTo Reduce credit exposures on derivatives and securities financing transactions:Enter into netting agreements with counterparties that allow to offset receivables and payablesObtain collateral or contingent basis Ability to terminate transactions if counterparty’s credit rating falls below a specified level Credit Risk

53. Managing Credit Risk For loans and lending commitmentsObtain upfront or contingent collateralsHave 3rd party as guarantor for the counterparties’ obligationsTransfer credit risk through hedging with available derivativesCovenants/ Guarantees For cash and cash equivalentAll deposits with highly rated banks and central banks Credit Risk

54. Overall Credit Ratings Credit Risk

55. Credit Exposure – By Industry Credit Risk

56. Credit Exposure – By Region Credit Risk

57. Credit Exposure – By Quality Credit Risk

58. GS – Liquidity RiskLiquidity Risk

59. What is Liquidity Risk ?Liquidity is defined as the ability of a financial firm to meet its debt obligations without incurring unacceptably large lossesMost of the recent failures of financial institutions have occurred in large part due to insufficient liquidityLiquidity Risk

60. Managing Liquidity Risk Excess LiquidityExcess capitalAsset liability management (ALM)Contingency Funding PlanLiquidity Risk

61. Excess Liquidity Reserve Cash reserve kept in highly liquid securities that allows same day conversion to cashConsists of:Foreign Sovereign securities – ‘unencumbered’ bonds, overnight cash deposits Only Japan, French, German, UKUS Government and agency securities, also US Agency backed mortgage-backed securityAll can be used as collateral to borrow from Federal ReserveLiquidity Risk

62. Excess LiquidityExcess liquidity to prepare for:Upcoming maturity of debtsLong term debt, commercial paper, promissory notes, term deposits, and other funding sourcesPotential buyback of outstanding unsecured fundingPotential withdrawal of client deposits GS, as a bank holding company, will have to worry about bank runsLiquidity Risk

63. Excess LiquidityExcess liquidity to prepare for:Adverse changes in the quality of underlying assets used for financingOutflow of cash from OTC derivatives, when counterparty takes deliveryCollateral related issuesCash outflow from prime brokerageTax payments to the government, and other fines and expensesLiquidity Risk

64. Asset-Liability Management (ALM)Goal is to have sufficient total capital toavoid reliance on asset sales However, sales of assets may be necessary in a severe or persistent liquidity crisisApproach:Actively managing and monitoring asset base, with focus on: liquidity holding period ability to fund assets on a secured basisLiquidity Risk

65. Asset Liability Management (ALM)Approach:Raise secured and unsecured financing with a sufficiently longer term than anticipated holding period of assets This reduces risk that liabilities will be due in advance of ability to generate liquidity from sales of assetsLiquidity Risk

66. Funding SourcesWhere funding sources come from:raised through all channelsIssuance of corporate bonds in both the US and internationallyShort-term U.S. and non-U.S. Commercial Papersold mainly through own sales team which already has a global reachOccasionally through other financial institutionsThere is a limit as to how much debt a single owner may ownLiquidity Risk

67. Secured FundingGS tends to prefer to operate on secured financingLess sensitive to credit ratings of companySubstantial part of its liabilities are in the form of long term secured financingAverage life is 100 daysRecognize that overnight secured funding will evaporate as the economy plunges / loses confidenceAll financing is done evenly among multiple sources, to reduce any counterparty risksLiquidity Risk

68. Unsecured Funding: Subsidiary FundingGoldman Sachs receives much of its unsecured funding from Group Inc.Each subsidiary operates on their own budget and incomeUnless legally allowed, funding are not freely availableMany subsidiaries are not allowed to give money back to parent company until maturity of financing agreementSignificant amount of cash are invested in such subdiariesLiquidity Risk68

69. Contingency Funding PlanSets out the plan of action to be used to fund business activity in crisis Outlines potential risk factors, key reports and metrics that are reviewed on an on going basis to assess the severity of a liquidity crisis Liquidity Risk

70. Contingency Funding Plan Identifies key groups of individuals to foster effective: coordination control distribution of informationAlso details responsibilities of these groups/individuals including making and disseminating key decisionsLiquidity Risk

71. Credit RatingCredit Ratings play a huge role in securing financing for the companyJust being downgraded a notch by a rating agency can have significant effects on the cost of borrowingCredit Ratings of GS as of December 2010Liquidity Risk

72. Credit Rating DowngradeTable presents the additional collateral or termination payments that could be called by counterparties in the event of a one and two-notch downgrade in Goldman Sachs credit ratingsLiquidity Risk

73. GS – Operational RiskOperational Risk

74. Operational RiskCauses of Operational Failure:Termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other financial intermediariesIncrease in interconnectivity with clients increases risk of client systemsOperational Risk

75. Operational Risk Consolidation:Recent years have shown a significant increase in consolidation among clearing agents, exchanges and clearing houses Industry consolidation among market participants or financial intermediaries Disparate complex systems are needed which can increase operational riskIncrease in the number of derivative transactions being cleared on exchangesOperational Risk

76. Operational Risk Centrality and interconnectivity of multiple financial institutions with central agents, exchanges and clearing housesFailure at one institution can cause industry-wide failuresOperational Risk

77. Operational Risk InfrastructureDisruption of electrical, internet, communications, transportation, and other third party servicesThese disruptions can be both regionally and globallyOperational Risk

78. Operational Risk Primary locationsNew York metropolitan area, London, Bangalore, Hong Kong, Tokyo and Salt Lake CityHeadquarters and the largest concentration of employees in the New York metropolitan areaCatastrophic events in these areas can negatively affect businessOperational Risk

79. Operational Risk Investment banks have a legal separation between their investment banking and sales & trading businesses – known as a Chinese FirewallRisk of operational failure and reputational harm when information is leaked between these two lines of businessOperational Risk

80. GS – Regulatory RiskRegulatory Risk

81. Regulatory Risk On January 14th, 2010, President Barack ObamaProposed a Financial Crises Responsibility FeePurpose is to recoup every last penny for American TaxpayersThe proposed fee would include the following:Require the financial sector to pay back for the extraordinary benefits received: taxpayer dollars used to support largest financial firms are reimbursed by financial sector to reduce deficit Regulatory Risk

82. Regulatory Risk Responsibility Fee will remain in place to fully pay back TARPFee would last for 10 yearsIf costs were not recouped at end, fee would remain in placeTreasury Department would be asked to report after five years on the effectiveness of the fee as well as its progress in repaying projected TARP losses Raise up to $117B to repay projected cost of TARPRegulatory Risk

83. Regulatory Risk Provide plan for taxpayer repayment Originally required by 2013; however, President Obama has already put forward a planAgain, recoup TARP funds to ensure the burden does not add to the deficit or national debtRegulatory Risk

84. Regulatory Risk Apply to the largest and most highly leveraged firmsFirms with more than $50B in consolidated assetsHeaviest burden will fall on those firms that have taken on the most debtEstimated over 60% of revenues will be paid by the 10 largest financial institutionsRegulatory Risk

85. Graham-Leach-Bliley ActEnacted November 12th, 1999Repealed part of the Glass-Steagall Act, allowing institutions to act as any combination of an investment bank, commercial bank, and insurance companyGoldman Sachs become bank holding company in September 2008 and a financial holding company in August 2009Regulatory Risk

86. Regulatory RequirementsAs a bank holding company, Goldman Sachs is subject to consolidated regulatory capital requirements administered by the Federal Reserve Board Capital levels must meet specific requirements as calculated under regulatory reporting practicesCapital levels are subject to qualitative judgments by regulators regarding components, risk weightings and other factorsRegulatory Risk

87. Capital Requirements Currently Goldman Sachs is in accordance with the minimum capital requirements outlined in the Basel I AccordTier 1 Capital > 4%Total Capital > 8%To be considered a “well capitalized” bank holding company:Tier 1 Capital > 6%Total Capital > 10%Regulatory Risk

88. Capital Requirements Cont.For bank holding companies that have received the highest supervisory rating under regulatory guidelines or implement Fed’s market risk measures:Tier 1 leverage ratio > 3%Other bank holding companies must have a minimum Tier 1 leverage ratio of 4%Regulatory Risk

89. Goldman’s Capital RatiosRegulatory Risk

90. Basel I to Basel IIU.S. banking regulators have incorporated the Basel II framework into the existing capital requirements by requiring internationally active banking organizations, of which Goldman Sachs is included, to transition to Basel II over several yearsRegulatory Risk

91. Subsidiary Capital RequirementsGS Bank USA is required to maintain cash reserves with a Federal Reserve BankCurrently, GS Bank USA holds excess reservesGS Bank Europe is regulated by the Irish Financial Services Regulatory Authority and is in compliance with their respective capital requirementsRegulatory Risk

92. Subsidiary Capital RequirementsGS & Co. and Goldman Sachs Execution & Clearing are registered U.S. broker-dealers and futures commission merchants subject to regulation by the SEC and the Commodity Futures Trading CommissionSEC and CFTC specify minimum capital requirements and require a significant part of the registrants; assets be kept in relatively liquid formAs of Dec 2009, GS & Co. and GSEC exceeded the minimum capital requirements by $11.81B and $1.86B respectively Regulatory Risk

93. Subsidiary Capital & DividendsRegulatory requirements restrict Goldman Sachs Group from withdrawing capital from subsidiariesInstead, subsidiary assets are restricted as to the payments of dividends to GS GroupThe Federal Reserve Board and FDIC have authority to prohibit or limit payment of dividends if they feel payment of a dividend would constitute an unsafe or unsound practiseRegulatory Risk

94. Basel III ChangesRecent Changes to the Basel Rules that have been formalized in Basel III include:Increase in Tier 1 Capital from 4% to 6%Minimum requirement for common equity raised from 2% to 4.5%Capital conservation buffer set at 2.5%New liquidity requirements involving short-term liquidity coverage ratio and long-term net stable funding ratioIn addition, financial instruments that qualify asTier 1 Capital may become stricter Regulatory Risk

95. Dodd-Frank Wall Street Reform ActThe act is divided into 16 titles The aim of the legislation is: “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” Regulatory Risk

96. Dodd-Frank Wall Street Reform ActTitle I – Financial StabilityTwo agencies created: Financial Stability Oversight Council and the Office of Financial ResearchFSOC has three main goals:Identify risks to the financial stability of the U.S.Promote market discipline Respond to any threats to financial stabilityRegulatory Risk

97. Dodd-Frank Wall Street Reform ActTitle I ContinuedFSOC can force financial institutions with assets exceeding $50B to submit reports regarding:The overall financial condition of the firmFirm’s current systems in place to monitor and control risksThe extent to which any of the company’s activities could impact financial marketsRegulatory Risk

98. Dodd-Frank Wall Street Reform ActTitle II – Orderly Liquidation AuthorityPurpose to assist in the orderly liquidation of bank and financial institutionsOrderly Liquidation Fund: FDIC run fund used in the event of financial company’s liquidation that is not covered by the FDICTitle III – Transfer of Powers Intended to streamline banking regulation and reduce competition and overlaps between regulatorsRegulatory Risk

99. Dodd-Frank Wall Street Reform ActTitle IV – Regulation of Advisors to Hedge Fundsand OthersIntroduces significant regulation of hedge funds by increasing reporting requirementsTitle VI – Improvements to Regulation (Volcker)Title VII – Wall Street Transparency andAccountabilityFocuses on increasing regulation of OTC swaps markets (CDS & CDs)Encourages trading through exchanges or clearinghouses Regulatory Risk

100. Dodd-Frank Wall Street Reform ActTitle IX – Investor Protections and Improvementsto the Regulation of SecuritiesSubtitle C: Involves expanding the regulation of credit rating agencies Subtitle D: Improving the transparency and securitization of asset-backed securitiesRegulatory Risk

101. The Volcker ProposalProposal introduced by former Federal Reserve Chairman Paul VolckerChairman under Jimmy Carter and Ronald Reagan AdministrationGraduate of Princeton, Harvard, & LSEMr. Volcker was appointed as the chair of the President’s Economic Recovery Advisory Board in February 2009Board created to advise Obama Administration on economic recovery mattersRegulatory Risk

102. The Volcker ProposalThe proposal will aim to do the following:Limit the Scope – Ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operation unrelated to serving customers for its own profit.Limit the Size – Limit the consolidation of our financial sector and place broader limits on the excessive growth or the market share of liabilities at the largest financial firms.Regulatory Risk

103. Regulatory Effect on Goldman SachsGoldman is well known for having one of the most aggressive and profitable proprietary trading outfits on Wall StreetGenerates about 10% of total revenue for the firmDodd-Frank Act allows banks at least four years to comply with a potential extension of up to 3 yearsReports indicate that Goldman and other Wall Street firms are disbanding proprietary units early…Regulatory Risk

104. Will it Work?Does Goldman really intend on ridding of such a profitable unit?Wall street insiders say they are merely disguising activityEx. JP Morgan Chief Investment Office supposedly a hedging operation, but makes massive bets with JP Morgan’s capitalLoophole in the bill = definition of “principal”Regulatory Risk

105. Goldman Sachs Capital PartnersGSCP is the private equity arm of the bankCurrently holds $40B in assetsIf and when forced to disband:Seller friendly economic climateFire sale pricesWhat sort of impact would this have on revenue?Regulatory Risk

106. Goldman Sachs Asset ManagementAs of 2009, 9th largest Hedge Fund with $20.59B assets under managementWhat sort of impact would it have on revenues?Regulatory Risk

107. Use of EstimatesGoldman admits the inherent difficulty in predicting costs that may arise out of litigation and regulatory proceedings, but offers estimating techniques as follows:Precedent casesEstimate of probable losses after considering the progress of each caseFirm’s experience in similar proceedingsAdvice of legal counselRegulatory Risk

108. Recommendations Credit RiskSupplementary evaluations of the firm’s current/potential credit exposure/losses from counterparty defaultIncreasing the use of credit risk mitigants, including collateral and hedgingLiquidity Riskmaintain substantial excess liquidity to meet a broad range of potential cash outflowsMaintain contingency funding plan to provide a framework for responding to a liquidity crisis situationManage maturities and diversity of funding across markets and counterparties; to maintain liabilities of appropriate tenor relative to assetRecommendations

109. Questions?? The End…