Risk Management at Goldman Sachs
Presentation to the Stanford Finance Forum
David Viniar
Chief Financial Officer
June 3, 2011
GS Risk Management Strategy
 In the business of taking risks
 Balance our ability to profit from underwriting, market-making, lending and investing
activities with our exposure to potential losses
— Fully understand the risk; properly price and distribute it; limit down side
— Maintain a liquid balance sheet and diversified business risks
 Key risk exposures
— Market
— Credit
— Operational
— Liquidity
— Reputational
 Key elements of risk management
— Sophisticated measurement, monitoring and reporting
— Pro-active management and mitigation
— Conservative capital, funding and liquidity risk management
1
GS Liquidity Risk Management Policies
 Excess liquidity
 Asset-liability management
 Prudent intercompany funding policies
 Continuing Liquidity Stress Testing and Crisis Planning
2
Excess Liquidity
“Global Core Excess”
 Pre-fund potential stressed cash
and collateral needs during a crisis
 Comprised of cash and highlyliquid, unencumbered securities
“Modeled Liquidity Outflow”
 Debt maturities
 Disruptions to unsecured and
secured financing flows
 Collateral outflows
 Can be sold or pledged to generate
liquidity
 Draws on unfunded commitments
 $168B 1Q11 average
 Other contractual and contingent
cash outflows
3
Funding
1Q11
Unsecured Short-Term: $54bn
Secured Funding: $213bn
CP
2%
Prom Notes
5%
WAM >100 days1
Loans
1%
Other
10%
Secured
Debt
11%
Equities
13%
Hybrid Debt
27%
Current LTD
56%
Fixed
Income
11%
Deposits: $39bn
Non-U.S.
Time
3%
Liquid
Gov'ts,
Agencies,
MBS
64%
Unsecured Long-Term : $174bn
CP
2%
WAM ~ 3yrs2
Non-U.S.
Demand
13%
Prom Notes
5%
WAM ~ 7yrs3
Other
10%
U.S. Time
18%
U.S. Savings
66%
1
Hybrid Debt
27%
Does not include trades collateralized by GCE-eligible assets (i.e., “Governments” excludes GCE-eligible government securities).
applies to U.S. and non-U.S. time deposits.
excludes equity.
2 WAM
3 WAM
Current LTD
56%
4
2008 Financial Crisis –
Challenges to Balance Sheet and Risk Management
 Assets became less liquid
 Asset valuations were impaired
 More assets moved into Level 3
 Bank loan origination inventory was elevated
 Counterparty credit issues multiplied
 Volatility spikes increased our risk metrics
 Liquidity left the firm
 Funding markets became dislocated
— Capacity was reduced, repo haircuts widened
— Counterparties were dislocated, funding cost rose
5
Financial Crisis –
Perception Became Reality…
$250
700bps
Lehman
Bankruptcy
600bps
$200
$150
$100
400bps
JPM acquired
Bear Stearns
300bps
CDS Spread
Stock Price
500bps
200bps
$50
100bps
$0
Jan-2008
0bps
Apr-2008
Jul-2008
Oct-2008
Jan-2009
CDS
Apr-2009
Jul-2009
Oct-2009
Stock Price
6
Response
 Became a Bank Holding Company
 Raised capital from Warren Buffet
 Generated material new funding and efficiencies
Key Takeaways:
 Liquidity risk management framework largely validated
 Pro-active measures mitigated risk and yielded substantial new funding
 Government intervention and programs helped stabilize financial markets
7
Reduced Key Risk Exposures
60
50
$43
$bn
40
30
$27
$22
20
$19
$19
$17
$16
$15
$11
$10
10
$11
$10
$8
$8
$8
$5
$4 $5
$7 $6
$4
0
4Q07
1Q08
2Q08
Lev Loans
3Q08
4Q08
ResRE
3Q09
4Q09
CRE
8
Reduced Assets and Leverage
40.0 x
$1,400
1,189
1,200
1,120
1,088
1,046
1,000
913
943
$bn
24.7x
885
27.9x
26.7x
800
35.0
1,082
925
890
882
849
30.0
26.2x
24.5x
24.3x
23.7x
25.0
600
20.0
400
13.7x
200
14.6x
14.2x
13.5x
12.0x
0
15.0
10.0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
Total Assets
Gross Leverage
9
Made Our Balance Sheet More Liquid
1,200
1,000
800
600
400
200
0
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
Liquid Assets
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
Less Liquid Assets
10
Grew our Excess Liquidity
Average Global Core Excess ($bn)
$171
$164
$113
$111
3Q08
4Q08
$167
$163
$88
$61
1Q08
2Q08
1Q09
2Q09
3Q09
4Q09
11
Key Lessons Learned
1.
Liquidity and funding are key to life
2.
Be creative when identifying potential liquidity outflows
3.
Adequate capital does not mean adequate liquidity
4.
Size is important – of firms and of specific risk positions
5.
“Tail risk” is problematic
6.
Good risk management processes do not equal good risk management
12