Edgar Filing: GOLDMAN SACHS GROUP INC

Form 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2012

¨	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 (Zip Code)
(Address of principal executive offices)

(212) 902-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes ¨ No

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


Large accelerated filer x Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS

As of April 27, 2012, there were 491,877,148 shares of the registrant’s common stock outstanding.

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012

INDEX


Form 10-Q Item Number		Page No.
PART I	FINANCIAL INFORMATION		2
Item 1	Financial Statements (Unaudited)		2
	Condensed Consolidated Statements of Earnings for the three months ended March 31, 2012 and March 31, 2011		2
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and March 31, 2011		3
	Condensed Consolidated Statements of Financial Condition as of March 31, 2012 and December 31, 2011		4
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and year ended December 31, 2011		5
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and March 31, 2011		6
	Notes to Condensed Consolidated Financial Statements		7
	Note 1. Description of Business		7
	Note 2. Basis of Presentation		7
	Note 3. Significant Accounting Policies		8
	Note 4. Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value		12
	Note 5. Fair Value Measurements		13
	Note 6. Cash Instruments		15
	Note 7. Derivatives and Hedging Activities		23
	Note 8. Fair Value Option		37
	Note 9. Collateralized Agreements and Financings		45
	Note 10. Securitization Activities		48
	Note 11. Variable Interest Entities		51
	Note 12. Other Assets		56
	Note 13. Goodwill and Identifiable Intangible Assets		57
	Note 14. Deposits		59
	Note 15. Short-Term Borrowings		60
	Note 16. Long-Term Borrowings		61
	Note 17. Other Liabilities and Accrued Expenses		65
	Note 18. Commitments, Contingencies and Guarantees		66
	Note 19. Shareholders’ Equity		72
	Note 20. Regulation and Capital Adequacy		75
	Note 21. Earnings Per Common Share		79
	Note 22. Transactions with Affiliated Funds		80
	Note 23. Interest Income and Interest Expense		81
	Note 24. Income Taxes		81
	Note 25. Business Segments		82
	Note 26. Credit Concentrations		86
	Note 27. Legal Proceedings		87
	Report of Independent Registered Public Accounting Firm		101
	Statistical Disclosures		102
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations		105
Item 3	Quantitative and Qualitative Disclosures About Market Risk		169
Item 4	Controls and Procedures		169
PART II	OTHER INFORMATION		169
Item 1	Legal Proceedings		169
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		170
Item 6	Exhibits		171
SIGNATURES			172

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings

(Unaudited)


	Three Months Ended March
in millions, except per share amounts	2012		2011
Revenues
Investment banking		$1,160		$ 1,269
Investment management		1,105		1,174
Commissions and fees		860		1,019
Market making		3,905		4,462
Other principal transactions		1,938		2,612
Total non-interest revenues		8,968		10,536

Interest income		2,833		3,107
Interest expense		1,852		1,749
Net interest income		981		1,358
Net revenues, including net interest income		9,949		11,894

Operating expenses
Compensation and benefits		4,378		5,233

Brokerage, clearing, exchange and distribution fees		567		620
Market development		117		179
Communications and technology		196		198
Depreciation and amortization		433		590
Occupancy		212		267
Professional fees		234		233
Insurance reserves		157		88
Other expenses		474		446
Total non-compensation expenses		2,390		2,621
Total operating expenses		6,768		7,854

Pre-tax earnings		3,181		4,040
Provision for taxes		1,072		1,305
Net earnings		2,109		2,735
Preferred stock dividends		35		1,827
Net earnings applicable to common shareholders		$2,074		$ 908

Earnings per common share
Basic		$ 4.05		$ 1.66
Diluted		3.92		1.56

Dividends declared per common share		$ 0.35		$ 0.35

Average common shares outstanding
Basic		510.8		540.6
Diluted		529.2		583.0

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended March
in millions	2012			2011
Net earnings		$2,109			$2,735
Other comprehensive income/(loss), net of tax:
Currency translation adjustment, net of tax		(28	)		(22	)
Pension and postretirement liability adjustments, net of tax		7			1
Net unrealized gains/(losses) on available-for-sale securities, net of tax		30			(23	)
Other comprehensive income/(loss)		9			(44	)
Comprehensive income		$2,118			$2,691

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Unaudited)


	As of
in millions, except share and per share amounts	March 2012			December 2011
Assets
Cash and cash equivalents	$	57,138		$ 56,008
Cash and securities segregated for regulatory and other purposes (includes $33,679 and $42,014 at fair value as of March 2012 and December 2011, respectively)		53,099		64,264
Collateralized agreements:
Securities purchased under agreements to resell and federal funds sold (includes $181,050 and $187,789 at fair value as of March 2012 and December 2011, respectively)		181,050		187,789
Securities borrowed (includes $57,062 and $47,621 at fair value as of March 2012 and December 2011, respectively)		169,092		153,341
Receivables from brokers, dealers and clearing organizations		16,886		14,204
Receivables from customers and counterparties (includes $8,328 and $9,682 at fair value as of March 2012 and December 2011, respectively)		65,211		60,261
Financial instruments owned, at fair value (includes $67,404 and $53,989 pledged as collateral as of March 2012 and December 2011, respectively)		385,506		364,206
Other assets		22,950		23,152
Total assets	$	950,932		$923,225
Liabilities and shareholders’ equity
Deposits (includes $5,524 and $4,526 at fair value as of March 2012 and December 2011, respectively)	$	50,874		$ 46,109
Collateralized financings:
Securities sold under agreements to repurchase, at fair value		173,092		164,502
Securities loaned (includes $550 and $107 at fair value as of March 2012 and December 2011, respectively)		8,121		7,182
Other secured financings (includes $28,367 and $30,019 at fair value as of March 2012 and December 2011, respectively)		33,139		37,364
Payables to brokers, dealers and clearing organizations		3,678		3,667
Payables to customers and counterparties		206,627		194,625
Financial instruments sold, but not yet purchased, at fair value		151,251		145,013
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $17,772 and $17,854 at fair value as of March 2012 and December 2011, respectively)		48,721		49,038
Unsecured long-term borrowings (includes $17,509 and $17,162 at fair value as of March 2012 and December 2011, respectively)		171,592		173,545
Other liabilities and accrued expenses (includes $9,451 and $9,486 at fair value as of March 2012 and December 2011, respectively)		32,181		31,801
Total liabilities		879,276		852,846

Commitments, contingencies and guarantees

Shareholders’ equity
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $3,100 as of both March 2012 and December 2011		3,100		3,100
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 808,213,029 and 795,555,310 shares issued as of March 2012 and December 2011, respectively, and 495,210,854 and 485,467,565 shares outstanding as of March 2012 and December 2011, respectively		8		8
Restricted stock units and employee stock options		3,889		5,681
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding		—		—
Additional paid-in capital		47,035		45,553
Retained earnings		60,723		58,834
Accumulated other comprehensive loss		(507	)	(516)
Stock held in treasury, at cost, par value $0.01 per share; 313,002,177 and 310,087,747 shares as of March 2012 and December 2011, respectively		(42,592	)	(42,281)
Total shareholders’ equity		71,656		70,379
Total liabilities and shareholders’ equity	$	950,932		$923,225

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)


	Three Months Ended			Year Ended
in millions	March 2012			December 2011
Preferred stock Balance, beginning of year		$ 3,100			$ 6,957
Repurchased		—			(3,857	)
Balance, end of period		3,100			3,100
Common stock Balance, beginning of year		8			8
Issued		—			—
Balance, end of period		8			8
Restricted stock units and employee stock options Balance, beginning of year		5,681			7,706
Issuance and amortization of restricted stock units and employee stock options		640			2,863
Delivery of common stock underlying restricted stock units		(2,415	)		(4,791	)
Forfeiture of restricted stock units and employee stock options		(16	)		(93	)
Exercise of employee stock options		(1	)		(4	)
Balance, end of period		3,889			5,681
Additional paid-in capital Balance, beginning of year		45,553			42,103
Issuance of common stock		—			103
Delivery of common stock underlying share-based awards		2,419			5,160
Cancellation of restricted stock units in satisfaction of withholding tax requirements		(872	)		(1,911	)
Excess net tax benefit/(provision) related to share-based awards		(64	)		138
Cash settlement of share-based compensation		(1	)		(40	)
Balance, end of period		47,035			45,553
Retained earnings Balance, beginning of year		58,834			57,163
Net earnings		2,109			4,442
Dividends and dividend equivalents declared on common stock and restricted stock units		(185	)		(769	)
Dividends on preferred stock		(35	)		(2,002	)
Balance, end of period		60,723			58,834
Accumulated other comprehensive income/(loss) Balance, beginning of year		(516	)		(286	)
Other comprehensive income/(loss)		9			(230	)
Balance, end of period		(507	)		(516	)
Stock held in treasury, at cost Balance, beginning of year		(42,281	)		(36,295	)
Repurchased		(368	)		(6,051	)
Reissued		57			65
Balance, end of period		(42,592	)		(42,281	)
Total shareholders’ equity		$ 71,656			$ 70,379

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended March
in millions	2012			2011
Cash flows from operating activities
Net earnings	$	2,109		$ 2,735
Non-cash items included in net earnings
Depreciation and amortization		433		594
Share-based compensation		643		1,512
Changes in operating assets and liabilities
Cash and securities segregated for regulatory and other purposes		11,165		219
Net receivables from brokers, dealers and clearing organizations		(2,671	)	568
Net payables to customers and counterparties		7,052		(9,671)
Securities borrowed, net of securities loaned		(14,813	)	(16,901)
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold		15,328		29,391
Financial instruments owned, at fair value		(22,023	)	(14,701)
Financial instruments sold, but not yet purchased, at fair value		6,304		10,278
Other, net		11		(2,124)
Net cash provided by operating activities		3,538		1,900
Cash flows from investing activities
Purchase of property, leasehold improvements and equipment		(390	)	(277)
Proceeds from sales of property, leasehold improvements and equipment		13		9
Business acquisitions, net of cash acquired		(39	)	(5)
Proceeds from sales of investments		130		216
Purchase of available-for-sale securities		(653	)	(761)
Proceeds from sales of available-for-sale securities		699		930
Net cash provided by/(used for) investing activities		(240	)	112
Cash flows from financing activities
Unsecured short-term borrowings, net		(869	)	1,501
Other secured financings (short-term), net		(483	)	1,340
Proceeds from issuance of other secured financings (long-term)		798		1,291
Repayment of other secured financings (long-term), including the current portion		(4,334	)	(3,580)
Proceeds from issuance of unsecured long-term borrowings		9,358		8,805
Repayment of unsecured long-term borrowings, including the current portion		(11,134	)	(7,364)
Derivative contracts with a financing element, net		208		210
Deposits, net		4,765		158
Common stock repurchased		(365	)	(1,481)
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units		(220	)	(358)
Proceeds from issuance of common stock, including stock option exercises		39		63
Excess tax benefit related to share-based compensation		70		333
Cash settlement of share-based compensation		(1	)	(35)
Net cash provided by/(used for) financing activities		(2,168	)	883
Net increase in cash and cash equivalents		1,130		2,895
Cash and cash equivalents, beginning of year		56,008		39,788
Cash and cash equivalents, end of period	$	57,138		$ 42,683

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $4.04 billion and $2.71 billion during the three months ended March 2012 and March 2011, respectively.

Income tax refunds, net of cash payments, were $29 million during the three months ended March 2012. Cash payments for income taxes, net of refunds, were $296 million during the three months ended March 2011.

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.

Description of Business

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

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

Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, risk management, restructurings and spin-offs, and debt and equity underwriting of public offerings and private placements, 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 and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and 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, directly and indirectly through funds that the firm manages, in debt securities, loans, public and private equity securities, real estate, consolidated investment entities and power generation facilities.

Investment Management

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

Note 2.

Basis of Presentation

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

These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report on Form 10-K for the year ended December 31, 2011. References to “the firm’s Annual Report on Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2011. The condensed consolidated financial information as of December 31, 2011 has been derived from audited consolidated financial statements not included herein.

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

All references to March 2012 and March 2011 refer to the firm’s periods ended, or the dates, as the context requires, March 31, 2012 and March 31, 2011, respectively. All references to December 2011 refer to the date December 31, 2011. 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.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3.

Significant Accounting Policies

The firm’s significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 11 for policies on consolidation accounting. All other significant accounting policies are either discussed below or included in the following footnotes:


Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value			Note 4

Fair Value Measurements			Note 5

Cash Instruments			Note 6

Derivatives and Hedging Activities			Note 7

Fair Value Option			Note 8

Collateralized Agreements and Financings			Note 9

Securitization Activities			Note 10

Variable Interest Entities			Note 11

Other Assets			Note 12

Goodwill and Identifiable Intangible Assets			Note 13

Deposits			Note 14

Short-Term Borrowings			Note 15

Long-Term Borrowings			Note 16

Other Liabilities and Accrued Expenses			Note 17

Commitments, Contingencies and Guarantees			Note 18

Shareholders’ Equity			Note 19

Regulation and Capital Adequacy			Note 20

Earnings Per Common Share			Note 21

Transactions with Affiliated Funds			Note 22

Interest Income and Interest Expense			Note 23

Income Taxes			Note 24

Business Segments			Note 25

Credit Concentrations			Note 26

Legal Proceedings			Note 27

Consolidation

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

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

Variable Interest Entities. A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 11 for further information about VIEs.

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In general, the firm accounts for investments acquired subsequent to November 24, 2006, when the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 12 for further information about equity-method investments.

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

Use of Estimates

Preparation of these condensed consolidated financial statements requires management to make certain estimates and assumptions, the most important of which relate to fair value measurements, accounting for goodwill and identifiable intangible assets, discretionary compensation accruals and the provision for losses that may arise from litigation, regulatory proceedings and tax audits. These estimates and assumptions are based on the best available information but actual results could be materially different.

Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to

transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

Investment Banking. Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.

Investment Management. The firm earns management fees and incentive fees for investment management services. Management fees are calculated as a percentage of net asset value, invested capital or commitments, and are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund’s or separately managed account’s return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in “Investment management” revenues.

Commissions and Fees. The firm earns “Commissions and fees” from executing and clearing client transactions on stock, options and futures markets. Commissions and fees are recognized on the day the trade is executed.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Transfers of Assets

Transfers of assets are accounted for as sales when the firm has relinquished control over the assets transferred. For transfers of assets accounted for as sales, any related gains or losses are recognized in net revenues. Assets or liabilities that arise from the firm’s continuing involvement with transferred assets are measured at fair value. For transfers of assets that are not accounted for as sales, the assets remain in “Financial instruments owned, at fair value” and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Note 9 for further information about transfers of assets accounted for as collateralized financings and Note 10 for further information about transfers of assets accounted for as sales.

Receivables from Customers and Counterparties

Receivables from customers and counterparties generally relate to collateralized transactions. Such receivables are primarily comprised of customer margin loans, transfers of assets accounted for as secured loans rather than purchases and collateral posted in connection with certain derivative transactions. Certain of the firm’s receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in “Market making” revenues. See Note 8 for further information about the fair values of these receivables. Receivables from customers and counterparties not accounted for at fair value are accounted for at amortized cost net of estimated uncollectible amounts. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.”

Insurance Activities

Certain of the firm's insurance and reinsurance contracts are accounted for at fair value under the fair value option, with changes in fair value included in “Market making” revenues. See Note 8 for further information about the fair values of these insurance and reinsurance contracts.

Revenues from variable annuity and life insurance and reinsurance contracts not accounted for at fair value generally consist of fees assessed on contract holder account balances for mortality charges, policy administration fees and surrender charges. These revenues are recognized in earnings over the period that services are provided and are included in “Market making” revenues. Changes in reserves, including interest credited to policyholder account balances, are recognized in “Insurance reserves.”

Premiums earned for underwriting property catastrophe reinsurance are recognized in earnings over the coverage period, net of premiums ceded for the cost of reinsurance, and are included in “Market making” revenues. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported, are included in “Insurance reserves.”

Share-based Compensation

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

The firm pays cash dividend equivalents on outstanding restricted stock units (RSUs). Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense. The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.

In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards. For awards accounted for as equity instruments, additional paid-in capital is adjusted to the extent of the difference between the current value of the award and the grant-date value of the award.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Foreign Currency Translation

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

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of March 2012 and December 2011, “Cash and cash equivalents” included $7.22 billion and $7.95 billion, respectively, of cash and due from banks, and $49.92 billion and $48.05 billion, respectively, of interest-bearing deposits with banks.

Recent Accounting Developments

Reconsideration of Effective Control for Repurchase Agreements (ASC 860). In April 2011, the FASB issued ASU No. 2011-03, “Transfers and Servicing (Topic 860) — Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 changes the assessment of effective control by removing (i) the criterion that requires the transferor to have the ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 is effective for periods beginning after December 15, 2011. The firm adopted the standard on January 1, 2012. Adoption of ASU No. 2011-03 did not affect the firm’s financial condition, results of operations or cash flows.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASC 820). In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. The firm adopted the standard on January 1, 2012. Adoption of ASU No. 2011-04 did not materially affect the firm’s financial condition, results of operations or cash flows.

Derecognition of in Substance Real Estate (ASC 360). In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant, and Equipment (Topic 360) — Derecognition of in Substance Real Estate — a Scope Clarification.” ASU No. 2011-10 clarifies that in order to deconsolidate a subsidiary (that is in substance real estate) as a result of a parent no longer controlling the subsidiary due to a default on the subsidiary’s nonrecourse debt, the parent also must satisfy the sale criteria in ASC 360-20, “Property, Plant, and Equipment — Real Estate Sales.” The ASU is effective for fiscal years beginning on or after June 15, 2012. The firm will apply the provisions of the ASU to such events occurring on or after January 1, 2013. Adoption is not expected to materially affect the firm’s financial condition, results of operations or cash flows.

Disclosures about Offsetting Assets and Liabilities (ASC 210). In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 will require disclosure of the effect or potential effect of offsetting arrangements on the firm’s financial position as well as enhanced disclosure of the rights of setoff associated with the firm’s recognized assets and recognized liabilities. ASU No. 2011-11 is effective for periods beginning on or after January 1, 2013. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption will not affect the firm’s financial condition, results of operations or cash flows.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 4.

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

Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about the fair value option. The table below presents the firm’s financial instruments owned, at fair value, including those pledged as collateral, and

financial instruments sold, but not yet purchased, at fair value. Financial instruments owned, at fair value included $4.69 billion and $4.86 billion as of March 2012 and December 2011, respectively, of securities accounted for as available-for-sale, substantially all of which are held in the firm’s insurance subsidiaries.


	As of March 2012					As of December 2011
in millions	Financial Instruments Owned		Financial Instruments Sold, But Not Yet Purchased			Financial Instruments Owned		Financial Instruments Sold, But Not Yet Purchased
Commercial paper, certificates of deposit, time deposits and other money market instruments		$ 10,553		$ —			$ 13,440		$ —
U.S. government and federal agency obligations		90,488		27,489			87,040		21,006
Non-U.S. government obligations		60,812		43,791			49,205		34,886
Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate		6,724		1			6,699		27
Loans and securities backed by residential real estate		8,815		7			7,592		3
Bank loans and bridge loans		18,988		2,242	²		19,745		2,756	²
Corporate debt securities		24,370		6,841			22,131		6,553
State and municipal obligations		3,407		47			3,089		3
Other debt obligations		4,702		—			4,362		—
Equities and convertible debentures		75,927		19,483			65,113		21,326
Commodities		9,462		—			5,762		—
Derivatives ¹		71,258		51,350			80,028		58,453
Total		$385,506		$151,251			$364,206		$145,013

1.	Net of cash collateral received or posted under credit support agreements and reported on a net-by-counterparty basis when a legal right of setoff exists under an enforceable netting agreement.

2.	Includes the fair value of unfunded lending commitments for which the fair value option was elected.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Gains and Losses from Market Making and Other Principal Transactions

The table below presents, by major product type, the firm’s “Market making” and “Other principal transactions” revenues. These gains/(losses) are primarily related to the firm’s financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments. These gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.

The gains/(losses) in the table are not representative of the manner in which the firm manages its business activities because many of the firm’s market-making, client facilitation, and investing and lending 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 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 has exposure to foreign currencies and may be economically hedged with foreign currency contracts.


	Three Months Ended March
in millions	2012			2011
Interest rates		$1,889			$ 2,406
Credit		1,710			2,051
Currencies		(724	)		(1,606	)
Equities		1,973			2,850
Commodities		471			957
Other		524			416
Total		$5,843			$ 7,074

Note 5.

Fair Value Measurements

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

The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced parameters as inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodities prices, credit spreads and funding spreads.

U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument’s level in the fair value hierarchy is based on the lowest level of input that is significant to its fair value measurement.

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 GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 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 and 7 for further information about fair value measurements of cash instruments and derivatives, respectively, included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” and Note 8 for further information about fair value measurements of other financial assets and financial liabilities accounted for at fair value under the fair value option.

Financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP are summarized below.


	As of
$ in millions	March 2012			December 2011
Total level 1 financial assets		$ 159,906		$ 136,780
Total level 2 financial assets		566,165		587,416
Total level 3 financial assets		48,015		47,937
Netting and collateral ¹		(108,461	)	(120,821)
Total financial assets at fair value		$ 665,625		$ 651,312
Total assets		$ 950,932		$ 923,225
Total level 3 financial assets as a percentage of Total assets		5.0	%	5.2%
Total level 3 financial assets as a percentage of Total financial assets at fair value		7.2	%	7.4%
Total level 3 financial liabilities at fair value		$ 23,941		$ 25,498
Total financial liabilities at fair value		$ 403,516		$ 388,669
Total level 3 financial liabilities as a percentage of Total financial liabilities at fair value		5.9	%	6.6%

1.	Represents the impact on derivatives of cash collateral and counterparty netting across levels of the fair value hierarchy. Netting among positions classified in the same level is included in that level.

Level 3 financial assets as of March 2012 were essentially unchanged compared with December 2011, primarily reflecting an increase in private equity investments, principally due to transfers to level 3 and purchases, offset by a decrease in derivative assets. The decrease in derivative assets primarily reflected settlements and net unrealized losses on credit and currency derivatives, partially offset by the impact of decreased counterparty netting and transfers to level 3 of certain credit derivatives.

See Notes 6, 7 and 8 for further information about level 3 cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value under the fair value option, respectively, including information about significant unrealized gains or losses and transfers in or out of level 3.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 6.

Cash Instruments

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

Level 1 Cash Instruments

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

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

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, certain non-U.S. government obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, restricted or less liquid listed equities, most state and municipal obligations and certain lending commitments.

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

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

Level 3 Cash Instruments

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

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The table below presents the valuation techniques and the nature of significant inputs generally used to determine

the fair values of each type of level 3 cash instrument.


Level 3 Cash Instrument		Valuation Techniques and Significant Inputs
Loans and securities backed by commercial real estate Ÿ Collateralized by a single commercial real estate property or a portfolio of properties Ÿ May include tranches of varying levels of subordination		Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs for these valuations, which may be determined based on relative value analyses, include: Ÿ Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral Ÿ Market yields implied by transactions of similar or related assets and/or current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds) Ÿ 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 Ÿ Timing of expected future cash flows (duration)
Loans and securities backed by residential real estate Ÿ Collateralized by portfolios of residential real estate Ÿ May include tranches of varying levels of subordination		Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs are determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices such as the ABX (an index that tracks the performance of subprime residential mortgage bonds). Significant inputs include: Ÿ Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral Ÿ Market yields implied by transactions of similar or related assets Ÿ Cumulative loss expectations, driven by default rates, home price projections, residential property liquidation timelines and related costs Ÿ Duration, driven by underlying loan prepayment speeds and residential property liquidation timelines
Bank loans and bridge loans		Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include: Ÿ Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX and LCDX (indices that track the performance of corporate credit and loans, respectively) Ÿ Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation Ÿ Duration
Corporate debt securities State and municipal obligations Non-U.S. government obligations Other debt obligations		Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying instrument or entity and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include: Ÿ Market yields implied by transactions of similar or related assets and/or current levels and trends of market indices such as CDX, LCDX and MCDX (an index that tracks the performance of municipal obligations) Ÿ Current performance and recovery assumptions and, where the firm uses credit default swaps to value the related cash instrument, the cost of borrowing the underlying reference obligation Ÿ Duration
Equities and convertible debentures Ÿ Private equity investments (including investments in real estate entities)		Recent third-party completed or pending transactions (e.g., merger proposals, tender offers, debt restructurings) are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available: Ÿ Industry multiples and public comparables Ÿ Transactions in similar instruments Ÿ Discounted cash flow techniques Ÿ 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: Ÿ Market and transaction multiples Ÿ Discount rates, long-term growth rates, earnings compound annual growth rates and capitalization rates Ÿ For equity instruments with debt-like features: market yields implied by transactions of similar or related assets, current performance and recovery assumptions, and duration

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Significant Unobservable Inputs

The table below presents the ranges of significant unobservable inputs used to value the firm’s level 3 cash instruments. These ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument. These inputs are not representative of the inputs that could have been used in the valuation of any one cash instrument. For example, the highest multiple

presented in the table for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 cash instruments.


Level 3 Cash Instrument	Significant Unobservable Inputs by Valuation Technique	Range of Significant Unobservable Inputs as of March 2012
Loans and securities backed by commercial real estate • Collateralized by a single commercial real estate property or a portfolio of properties • May include tranches of varying levels of subordination	Discounted cash flows: • Yield • Recovery rate ¹ • Duration (years) ²	3.3% to 27.7% 20.0% to 100.0% 0.6 to 7.4
Loans and securities backed by residential real estate • Collateralized by portfolios of residential real estate • May include tranches of varying levels of subordination	Discounted cash flows: • Yield • Cumulative loss rate • Duration (years) ²	3.2% to 30.0% 0.0% to 79.0% 0.1 to 9.7
Bank loans and bridge loans	Discounted cash flows: • Yield • Recovery rate ¹ • Duration (years) ²	0.7% to 28.1% 15.0% to 100.0% 0.5 to 7.9
Corporate debt securities State and municipal obligations Non-U.S. government obligations Other debt obligations	Discounted cash flows: • Yield • Recovery rate ¹ • Duration (years) ²	1.5% to 35.3% 0.0% to 100.0% 0.4 to 18.0
Equities and convertible debentures • Private equity investments (including investments in real estate entities)	Comparable multiples: • Multiples Discounted cash flows: • Yield/discount rate • Long-term growth rate/compound annual growth rate • Capitalization rate • Recovery rate ¹ • Duration (years) ²	0.8x to 20.0x 10.0% to 30.0% (0.7)% to 55.9% 5.5% to 11.5% 45.0% to 100.0% 1.0 to 9.0

1.	A measure of expected future cash flows, expressed as a percentage of notional or face value of the instrument.

2.	Duration is an estimate of the timing of future cash flows and, in certain cases, may incorporate the impact of other unobservable inputs (e.g., prepayment speeds).

Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm’s level 3 cash instruments would result in a lower fair value measurement; while increases in recovery rate, multiples, long-term growth rate or compound annual

growth rate would result in a higher fair value measurement. Due to the distinctive nature of each of the firm’s level 3 cash instruments, the interrelationship of inputs is not necessarily uniform within each product type.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Fair Value of Cash Instruments by Level

The tables below present, by level within the fair value hierarchy, cash instrument assets and liabilities, at fair value. Cash instrument assets and liabilities are included in

“Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.


	Cash Instrument Assets at Fair Value as of March 2012
in millions	Level 1	Level 2	Level 3	Total
Commercial paper, certificates of deposit, time deposits and other money market instruments	$ 1,985	$ 8,560	$ 8	$ 10,553
U.S. government and federal agency obligations	37,228	53,260	—	90,488
Non-U.S. government obligations	47,657	13,050	105	60,812
Mortgage and other asset-backed loans and securities ¹:
Loans and securities backed by commercial real estate	—	3,568	3,156	6,724
Loans and securities backed by residential real estate	—	7,205	1,610	8,815
Bank loans and bridge loans	—	7,937	11,051	18,988
Corporate debt securities ²	90	21,768	2,512	24,370
State and municipal obligations	—	2,795	612	3,407
Other debt obligations ²	—	3,153	1,549	4,702
Equities and convertible debentures	48,535 ³	12,518 ⁴	14,874⁵	75,927
Commodities	—	9,462	—	9,462
Total	$135,495	$143,276	$35,477	$314,248

	Cash Instrument Liabilities at Fair Value as of March 2012
in millions	Level 1	Level 2	Level 3	Total
U.S. government and federal agency obligations	$ 27,289	$ 200	$ —	$ 27,489
Non-U.S. government obligations	43,255	536	—	43,791
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	—	1	—	1
Loans and securities backed by residential real estate	—	7	—	7
Bank loans and bridge loans	—	1,519	723	2,242
Corporate debt securities ⁶	9	6,816	16	6,841
State and municipal obligations	—	47	—	47
Equities and convertible debentures	18,489 ³	986 ⁴	8	19,483
Total	$ 89,042	$ 10,112	$ 747	$ 99,901

1.	Includes $437 million and $590 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

2.	Includes $404 million and $1.40 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

3.	Consists of listed equity securities.

4.	Principally consists of restricted or less liquid listed securities.

5.	Includes $13.05 billion of private equity investments, $1.23 billion of real estate investments and $592 million of convertible debentures.

6.	Includes $7 million of CDOs and CLOs backed by corporate obligations in level 3.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Cash Instrument Assets at Fair Value as of December 2011
in millions	Level 1			Level 2			Level 3			Total
Commercial paper, certificates of deposit, time deposits and other money market instruments		$ 3,255			$ 10,185			$ —		$ 13,440
U.S. government and federal agency obligations		29,263			57,777			—		87,040
Non-U.S. government obligations		42,854			6,203			148		49,205
Mortgage and other asset-backed loans and securities ¹: Loans and securities backed by commercial real estate		—			3,353			3,346		6,699
Loans and securities backed by residential real estate		—			5,883			1,709		7,592
Bank loans and bridge loans		—			8,460			11,285		19,745
Corporate debt securities ²		133			19,518			2,480		22,131
State and municipal obligations		—			2,490			599		3,089
Other debt obligations ²		—			2,911			1,451		4,362
Equities and convertible debentures		39,955	³		11,491	⁴		13,667	⁵	65,113
Commodities		—			5,762			—		5,762
Total		$115,460			$134,033			$34,685		$284,178

	Cash Instrument Liabilities at Fair Value as of December 2011
in millions	Level 1			Level 2			Level 3			Total
U.S. government and federal agency obligations		$ 20,940			$ 66			$ —		$ 21,006
Non-U.S. government obligations		34,339			547			—		34,886
Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate		—			27			—		27
Loans and securities backed by residential real estate		—			3			—		3
Bank loans and bridge loans		—			1,891			865		2,756
Corporate debt securities ⁶		—			6,522			31		6,553
State and municipal obligations		—			3			—		3
Equities and convertible debentures		20,069	³		1,248	⁴		9		21,326
Total		$ 75,348			$ 10,307			$ 905		$ 86,560

1.	Includes $213 million and $595 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

2.	Includes $403 million and $1.19 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

3.	Consists of listed equity securities.

4.	Principally consists of restricted or less liquid listed securities.

5.	Includes $12.07 billion of private equity investments, $1.10 billion of real estate investments and $497 million of convertible debentures.

6.	Includes $27 million of CDOs and CLOs backed by corporate obligations in level 3.

Transfers Between Levels of the Fair Value Hierarchy

Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. Transfers of cash instruments between level 1 and level 2 were $728 million for the three months ended March 2012, consisting of transfers to level 2 of public

equity investments, primarily reflecting the impact of transfer restrictions. See level 3 rollforwards below for further information about transfers between level 2 and level 3.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Rollforward

If a cash instrument asset or liability was transferred to level 3 during a reporting period, its entire gain or loss for the period is included in level 3.

Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 or level 3 derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1 or level 2 cash

instruments and/or level 1, level 2 or level 3 derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm’s results of operations, liquidity or capital resources.

The tables below present changes in fair value for all cash instrument assets and liabilities categorized as level 3 as of the end of the period.

Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended March 2012

in millions

Balance,
beginning
of period

Net
realized
gains/
(losses)

Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end

Purchases¹

Sales

Settlements

Transfers
into
level 3

Transfers
out of
level 3

Balance,
end of
period

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

$ —

$ 8

$ —

$ 8

Non-U.S. government obligations

148

)

(59

)

—

)

105

Mortgage and other asset-backed

loans and securities:

Loans and securities backed by commercial real estate

3,346

295

(276

)

(289

)

486

(541

)

3,156

Loans and securities backed by residential real estate

1,709

254

(181

)

(101

)

(151

)

1,610

Bank loans and bridge loans

11,285

150

206

1,188

(1,246

)

(792

)

960

(700

)

11,051

Corporate debt securities

2,480

158

295

(422

)

(128

)

260

(223

)

2,512

State and municipal obligations

599

(39

)

612

Other debt obligations

1,451

(120

)

(56

)

123

(16

)

1,549

Equities and convertible debentures

13,667

332

558

(150

)

(194

)

779

(157

)

14,874

Total

$34,685

$408

$788

$2,724

$(2,442

)

$(1,562

)

$2,667

$(1,791

)

$35,477

Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended March 2012

in millions

Balance,
beginning
of period

Net

realized
(gains)/
losses

Net unrealized
(gains)/losses
relating to
instruments
still held at
period-end

Purchases

Sales

Settlements

Transfers
into
level 3

Transfers
out of
level 3

Balance,
end of

period

Total

$ 905

$ (34

)

$ (68

)

$ (326

)

$ 87

$ 195

$ 102

$ (114

)

$ 747

1.	Includes both originations and secondary market purchases.

2.	The aggregate amounts include approximately $167 million, $654 million and $375 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain on level 3 cash instruments of $856 million (reflecting $788 million on cash instrument assets and $68 million on cash instrument liabilities) for the three months ended March 2012 primarily consisted of gains on private equity investments, bank loans and bridge loans, and corporate debt securities, primarily reflecting an increase in global equity prices and tighter credit spreads.

Transfers into level 3 during the three months ended March 2012 primarily reflected transfers from level 2 of certain bank loans and bridge loans, private equity

investments, and loans and securities backed by commercial real estate, principally due to reduced transparency of market prices as a result of less market activity in these instruments.

Transfers out of level 3 during the three months ended March 2012 primarily reflected transfers to level 2 of certain bank and bridge loans, and loans and securities backed by commercial real estate, principally due to improved transparency of market prices as a result of market activity in these instruments.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended March 2011
in millions	Balance, beginning of period		Net realized gains/ (losses)			Net unrealized gains/(losses) relating to instruments still held at period-end			Purchases¹			Sales			Settlements			Net transfers in and/or (out) of level 3			Balance, end of period
Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate		$ 3,976		$ 58			$ 162			$ 389			$ (527	)		$ (323	)		$ (22	)		$ 3,713
Loans and securities backed by residential real estate		2,501		50			50			575			(230	)		(206	)		16			2,756
Bank loans and bridge loans		9,905		169			568			491			(274	)		(604	)		(326	)		9,929
Corporate debt securities		2,737		92			216			789			(459	)		(104	)		(133	)		3,138
State and municipal obligations		754		1			13			7			(3	)		(1	)		(29	)		742
Other debt obligations		1,274		24			20			297			(149	)		(53	)		70			1,483
Equities and convertible debentures		11,060		40			233			268			(302	)		(121	)		587			11,765
Total		$32,207		$434	²		$1,262	²		$2,816			$(1,944	)		$(1,412	)		$ 163			$33,526

	Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended March 2011
in millions	Balance, beginning of period		Net realized (gains)/ losses			Net unrealized (gains)/losses relating to instruments still held at period-end			Purchases			Sales			Settlements			Net transfers in and/or (out) of level 3			Balance, end of period
Total		$ 446		$ (22	)		$ 41			$ (59	)		$ 90			$ 8			$ (22	)		$ 482

1.	Includes both originations and secondary market purchases.

2.	The aggregate amounts include approximately $608 million, $656 million and $432 million reported in “Market making,” “Other principal transactions” and “Interest income,” respectively.

The net unrealized gain/(loss) on level 3 cash instruments of $1.22 billion (reflecting $1.26 billion on cash instrument assets and $(41) million on cash instrument liabilities) for the three months ended March 2011 primarily consisted of unrealized gains on bank loans and bridge loans, private equity investments and corporate debt securities, reflecting strengthening global credit markets and equity markets.

Significant transfers in or out of level 3 during the three months ended March 2011 included:

Bank loans and bridge loans: net transfer out of level 3 of $326 million, principally due to transfers to level 2 of certain loans due to improved transparency of market

prices as a result of market transactions in these financial instruments, partially offset by transfers to level 3 of certain loans due to reduced transparency of market prices as a result of less market activity in these financial instruments.

Equities and convertible debentures: net transfer into level 3 of $587 million, principally due to transfers to level 3 of certain private equity investments due to reduced transparency of market prices as a result of less market activity in these financial instruments, partially offset by transfers to level 2 of certain equity investments due to improved transparency of market prices as a result of initial public offerings.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Investments in Funds That Calculate Net Asset

Value Per Share

Cash instruments at fair value include investments in funds that are valued based on the net asset value per share (NAV) of the investment fund. The firm uses NAV as its measure of fair value for fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.

The firm’s investments in funds that calculate NAV primarily consist of investments in firm-sponsored funds where the firm co-invests with third-party investors. The private equity, private debt and real estate funds are primarily closed-end funds in which the firm’s investments are not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated and it is estimated that substantially all of the underlying assets of existing funds will be liquidated over

the next 10 years. The firm continues to manage its existing private equity funds taking into account the transition periods under the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), although the rules have not yet been finalized.

The firm’s investments in hedge funds are generally redeemable on a quarterly basis with 91 days’ notice, subject to a maximum redemption level of 25% of the firm’s initial investments at any quarter-end. The firm currently plans to comply with the Volcker Rule by redeeming certain of its interests in hedge funds. The firm redeemed approximately $250 million of these interests in hedge funds during the quarter ended March 2012.

The table below presents the fair value of the firm’s investments in, and unfunded commitments to, funds that calculate NAV.

As of March 2012

As of December 2011

in millions

Fair Value of
Investments

Unfunded
Commitments

Fair Value of
Investments

Unfunded
Commitments

Private equity funds ¹

$ 8,828

$3,066

$ 8,074

$3,514

Private debt funds ²

3,744

3,244

3,596

3,568

Hedge funds ³

3,058

—

3,165

—

Real estate funds ⁴

1,541

1,463

1,531

1,613

Total

$17,171

$7,773

$16,366

$8,695

1.	These funds primarily invest in a broad range of industries worldwide in a variety of situations, including leveraged buyouts, recapitalizations and growth investments.

These funds generally invest in loans and other fixed income instruments and are focused on providing private high-yield capital for mid- to large-sized leveraged and management buyout transactions, recapitalizations, financings, refinancings, acquisitions and restructurings for private equity firms, private family companies and corporate issuers.

3.	These funds are primarily multi-disciplinary hedge funds that employ a fundamental bottom-up investment approach across various asset classes and strategies including long/short equity, credit, convertibles, risk arbitrage, special situations and capital structure arbitrage.

4.	These funds invest globally, primarily in real estate companies, loan portfolios, debt recapitalizations and direct property.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 7.

Derivatives and Hedging Activities

Derivative Activities

Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be privately negotiated contracts, which are usually referred to as over-the-counter (OTC) derivatives, or they may be listed and traded on an exchange (exchange-traded).

Market-Making. As a market maker, the firm enters into derivative transactions with clients and other market participants to provide liquidity and to facilitate the transfer and hedging of risk. In this capacity, the firm typically acts as principal and is consequently required to commit capital to provide execution. As a market maker, it is essential to maintain an inventory of financial instruments sufficient to meet expected client and market demands.

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from 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 foreign currency exposure on the net investment in certain non-U.S. operations and to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and certificates of deposit.

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 accounted for at fair value, net of cash collateral received or posted under credit support agreements. 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. Derivative assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

Substantially all gains and losses on derivatives not designated as hedges under ASC 815 are included in “Market making” and “Other principal transactions.”

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The table below presents the fair value of derivatives on a net-by-counterparty basis.

As of March 2012

As of December 2011

in millions

Derivative
Assets

Derivative
Liabilities

Derivative
Assets

Derivative
Liabilities

Exchange-traded

$ 5,379

$ 3,878

$ 5,880

$ 3,172

Over-the-counter

65,879

47,472

74,148

55,281

Total

$71,258

$51,350

$80,028

$58,453

The table below presents the fair value and the number of derivative contracts by major product type on a gross basis. Gross fair values in the table below exclude the effects of both netting under enforceable netting agreements and

netting of cash collateral received or posted under credit support agreements, and therefore are not representative of the firm’s exposure.


	As of March 2012								As of December 2011
in millions, except number of contracts	Derivative Assets			Derivative Liabilities			Number of Contracts		Derivative Assets			Derivative Liabilities			Number of Contracts
Derivatives not accounted for as hedges Interest rates		$ 552,324			$ 512,372			304,937		$ 624,189			$ 582,608			287,351
Credit		115,065			97,845			363,617		150,816			130,659			362,407
Currencies		74,699			61,091			242,500		88,654			71,736			203,205
Commodities		36,058			36,959			85,787		35,966			38,050			93,755
Equities		59,623			51,704			299,762		64,135			51,928			332,273
Subtotal		837,769			759,971			1,296,603		963,760			874,981			1,278,991
Derivatives accounted for as hedges Interest rates		22,238			68			1,308		21,981			13			1,125
Currencies		64			48			75		124			21			71
Subtotal		22,302			116			1,383		22,105			34			1,196
Gross fair value of derivatives		$ 860,071			$ 760,087			1,297,986		$ 985,865			$ 875,015			1,280,187

Counterparty netting¹		(682,726	)		(682,726	)				(787,733	)		(787,733	)
Cash collateral netting²		(106,087	)		(26,011	)				(118,104	)		(28,829	)
Fair value included in financial instruments owned		$ 71,258								$ 80,028
Fair value included in financial instruments sold, but not yet purchased					$ 51,350								$ 58,453

1.	Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.

2.	Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Valuation Techniques for Derivatives

Price transparency of derivatives can generally be characterized by product type.

Interest Rate. In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate), are more complex and are therefore less transparent, but the prices and other 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 be less transparent 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 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 exchange-traded derivatives that are not actively traded and OTC derivatives for which all significant valuation inputs are corroborated by market evidence.

Level 2 exchange-traded derivatives are valued using models that calibrate to market-clearing levels of OTC derivatives. Inputs to the valuations of level 2 OTC 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.

Where models are used, the selection of a particular model to value an OTC 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. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. For OTC 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.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Derivatives

Level 3 OTC derivatives are valued using models which utilize observable level 1 and/or level 2 inputs, as well as unobservable level 3 inputs.

For the majority of the firm’s interest rate and currency derivatives classified within level 3, the significant unobservable inputs are correlations of certain currencies and interest rates (e.g., the correlation between Euro inflation and Euro interest rates) and specific interest rate volatilities.

For level 3 credit derivatives, significant level 3 inputs include illiquid credit spreads, which are unique to specific reference obligations and reference entities, certain correlations required to value credit and mortgage derivatives (e.g., the likelihood of default of the underlying reference obligation relative to one another) and the basis, or price difference, of certain reference obligations to benchmark indices.

For level 3 equity derivatives, significant level 3 inputs generally include equity volatility inputs for options that are very 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 inputs for 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.

For level 3 commodity derivatives, significant level 3 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.

Subsequent to the initial valuation of a level 3 OTC derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are recorded 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 unobservable inputs used in the valuation of level 3 derivatives.

Valuation Adjustments

Valuation adjustments are integral to determining the fair value of derivatives 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 (CVA) and funding valuation adjustments, which account for the credit and funding risk inherent in derivative portfolios. 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.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Significant Unobservable Inputs

The table below presents the ranges of significant unobservable inputs used to value the firm’s level 3 derivatives. These ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative. These inputs are not representative of the inputs that could have been used in the valuation of any one derivative. For example, the highest correlation presented

in the table 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 presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm’s level 3 derivatives.


Significant Unobservable Inputs	Derivative Product Type	Range of Significant Unobservable Inputs as of March 2012	Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs ¹
Correlation	Interest rates Credit Currencies Equities Various²	14% to 70% 5% to 91% 66% to 87% 46% to 91% (51)% to 83%	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 generally results in a higher fair value measurement.
Volatility	Interest rates Commodities Equities	36% to 91% 4% to 80% 12% to 56%	In general, for purchased options an increase in volatility results in a higher fair value measurement.
Credit spreads Recovery rates Basis	Credit Credit Credit	88 basis points (bps) to 2,250 bps 0% to 85% 1 point to 10 points	In general, the fair value of purchased credit protection increases as credit spreads increase, recovery rates decrease or basis widens. Credit spreads, recovery rates and basis 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 macro-economic conditions.
Spread per million British Thermal units (MMBTU) of natural gas	Commodities	$(0.82) to $3.91	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) generally results in a higher fair value measurement.

Represents the directional sensitivity of the firm’s level 3 fair value measurements to changes in significant unobservable inputs, in isolation. 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.

2.	Represents correlation across derivative product types.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Fair Value of Derivatives by Level

The tables below present the fair value of derivatives on a gross basis by level and major product type. Gross fair values in the tables below exclude the effects of both netting under enforceable netting agreements and netting of cash

received or posted under credit support agreements both in and across levels of the fair value hierarchy, and therefore are not representative of the firm’s exposure.

Derivative Assets at Fair Value as of March 2012

in millions

Level 1

Level 2

Level 3

Cross-Level
Netting

Total

Interest rates

$149

$ 574,153

$ 260

$ —

$ 574,562

Credit

—

103,453

11,612

—

115,065

Currencies

—

73,384

1,379

—

74,763

Commodities

—

35,198

860

—

36,058

Equities

58,180

1,412

—

59,623

Gross fair value of derivative assets

180

844,368

15,523

—

860,071

Counterparty netting ¹

—

(675,980

)

(4,372

)

(2,374

) ³

(682,726

)

Subtotal

$180

$ 168,388

$11,151

$(2,374

)

$ 177,345

Cash collateral netting ²

(106,087

)

Fair value included in financial instruments owned

$ 71,258

Derivative Liabilities at Fair Value as of March 2012

in millions

Level 1

Level 2

Level 3

Cross-Level
Netting

Total

Interest rates

$139

$ 511,801

$ 500

$ —

$ 512,440

Credit

—

92,735

5,110

—

97,845

Currencies

—

60,150

989

—

61,139

Commodities

—

36,000

959

—

36,959

Equities

49,739

1,932

—

51,704

Gross fair value of derivative liabilities

172

750,425

9,490

—

760,087

Counterparty netting ¹

—

(675,980

)

(4,372

)

(2,374

) ³

(682,726

)

Subtotal

$172

$ 74,445

$ 5,118

$(2,374

)

$ 77,361

Cash collateral netting ²

(26,011

)

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

$ 51,350

1.	Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.

2.	Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

3.	Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

		$172		$172			$172			$172			$172
	Derivative Assets at Fair Value as of December 2011
in millions	Level 1		Level 2			Level 3			Cross-Level Netting			Total
Interest rates		$33		$ 645,923			$ 214			$ —			$ 646,170
Credit		—		137,110			13,706			—			150,816
Currencies		—		86,752			2,026			—			88,778
Commodities		—		35,062			904			—			35,966
Equities		24		62,684			1,427			—			64,135
Gross fair value of derivative assets		57		967,531			18,277			—			985,865
Counterparty netting ¹		—		(778,639	)		(6,377	)		(2,717	) ³		(787,733	)
Subtotal		$57		$ 188,892			$11,900			$(2,717	)		$ 198,132
Cash collateral netting ²													(118,104	)
Fair value included in financial instruments owned													$ 80,028


	Derivative Liabilities at Fair Value as of December 2011
in millions	Level 1		Level 2			Level 3			Cross-Level Netting			Total
Interest rates		$ 24		$ 582,012			$ 585			$ —			$ 582,621
Credit		—		123,253			7,406			—			130,659
Currencies		—		70,573			1,184			—			71,757
Commodities		—		36,541			1,509			—			38,050
Equities		185		49,884			1,859			—			51,928
Gross fair value of derivative liabilities		209		862,263			12,543			—			875,015
Counterparty netting ¹		—		(778,639	)		(6,377	)		(2,717	) ³		(787,733	)
Subtotal		$209		$ 83,624			$6,166			$(2,717	)		$ 87,282
Cash collateral netting ²													(28,829	)
Fair value included in financial instruments sold, but not yet purchased													$ 58,453

1.	Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.

2.	Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

3.	Represents the netting of receivable balances with payable balances for the same counterparty across levels of the fair value hierarchy under enforceable netting agreements.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Level 3 Rollforward

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

Gains and losses on level 3 derivatives should be considered in the context of the following:

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 as level 3.

Gains or losses that have been reported 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 tables below present changes in fair value for all derivatives categorized as level 3 as of the end of the period.

Level 3 Derivative Assets and Liabilities at Fair Value for the Three Months Ended March 2012

in millions

Asset/

(liability)
balance,
beginning
of period

Net
realized
gains/
(losses)

Net unrealized
gains/(losses)
relating to
instruments
still held at
period-end

Purchases

Sales

Settlements

Transfers
into
level 3

Transfers
out of
level 3

Asset/

(liability)

balance,
end of

period

Interest rates — net

$ (371

)

$(63

)

$ 32

$ 3

$ (1

)

$ 164

$ 8

$ (12

)

$ (240

)

Credit — net

6,300

(308

)

(73

)

(553

)

1,332

(281

)

6,502

Currencies — net

842

)

(266

)

(234

)

390

Commodities — net

(605

)

206

(99

)

100

119

(99

)

Equities — net

(432

)

(25

)

(277

)

(100

)

306

(80

)

(520

)

Total derivatives — net

$5,734

$(44

)¹

$(613

)^1,2

$251

$(280

)

$(276

)

$1,457

$(196

)

$6,033

1.	The aggregate amounts include approximately $(444) million and $(213) million reported in “Market making” and “Other principal transactions,” respectively.

2.	Principally resulted from changes in level 2 inputs.

3.	Reflects a net transfer to level 2 of derivative liabilities.

The net unrealized loss on level 3 derivatives of $613 million for the three months ended March 2012 was primarily attributable to the impact of tighter credit spreads, increases in equity prices and changes in foreign exchange rates on the underlying derivatives, partially offset by the impact of changes in commodity prices.

Transfers into level 3 derivatives during the three months ended March 2012 primarily reflected transfers of certain credit derivative assets from level 2, primarily due to unobservable inputs becoming more significant to the valuation of these derivatives.

Transfers out of level 3 derivatives during the three months ended March 2012 primarily reflected transfers to level 2 of certain credit derivative assets, principally due to unobservable inputs no longer being significant to the valuation of these derivatives.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	Level 3 Derivative Assets and Liabilities at Fair Value for the Three Months Ended March 2011
in millions	Asset/ (liability) balance, beginning of period			Net realized gains/ (losses)			Net unrealized gains/(losses) relating to instruments still held at period-end			Purchases	Sales	Settlements			Net transfers in and/or (out) of level 3			Asset/ (liability) balance, end of period
Interest rates — net		$ 194			$ (26	)		$ (58	)	$ 1	$ —		$ 13			$(221	)		$ (97	)
Credit — net		7,040			3			(104	)	70	(81)		(722	)		385			6,591
Currencies — net		1,098			(1	)		(194	)	25	(6)		(31	)		241			1,132
Commodities — net		220			(78	)		90		241	(233)		115			(162	)		193
Equities — net		(990	)		176			(294	)	459	(625)		58			200			(1,016	)
Total derivatives — net		$7,562			$ 74	¹		$(560	) ^1, 2	$796	$(945)		$(567	)		$443			$ 6,803

1.	The aggregate amounts include approximately $(501) million and $15 million reported in “Market making” and “Other principal transactions,” respectively.

2.	Principally resulted from changes in level 2 inputs.

The net unrealized loss on level 3 derivatives of $560 million for the three months ended March 2011 was primarily attributable to increases in equity index prices, tighter credit spreads and changes in foreign exchange rates on the underlying instruments.

Significant transfers in or out of level 3 derivatives during the three months ended March 2011 included:

Credit — net: net transfer to level 3 of $385 million, principally due to reduced transparency of the correlation inputs used to value certain mortgage derivatives.

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 loss, including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm’s) on derivatives was $179 million and $25 million for the three months ended March 2012 and March 2011, respectively.

Bifurcated Embedded Derivatives

The table below presents derivatives, primarily equity and interest rate products, that have been bifurcated from their related borrowings. These derivatives are recorded at fair value and included in “Unsecured short-term borrowings” and “Unsecured long-term borrowings.” See Note 8 for further information.


	As of
in millions, except number of contracts	March 2012	December 2011
Fair value of assets	$387	$422
Fair value of liabilities	310	304
Net	$ 77	$118
Number of contracts	357	333

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

OTC Derivatives

The tables below present the fair values of OTC derivative assets and liabilities by tenor and by product type. Tenor is based on expected duration for mortgage-related credit

derivatives and generally on remaining contractual maturity for other derivatives.

in millions

OTC Derivatives as of March 2012

Assets

Product Type

0 - 12
Months

1 - 5
Years

5 Years or
Greater

Total

Interest rates

$ 9,356

$31,554

$ 74,244

$ 115,154

Credit

2,705

13,987

10,976

27,668

Currencies

9,877

9,280

12,990

32,147

Commodities

5,768

4,837

124

10,729

Equities

4,306

7,620

7,370

19,296

Netting across product types ¹

(1,960

)

(6,135

)

(5,092

)

(13,187

)

Subtotal

$30,052

$61,143

$100,612

191,807

Cross maturity netting ²

(19,841

)

Cash collateral netting ³

(106,087

)

Total

$ 65,879

Liabilities

Product Type

0 - 12
Months

1 - 5
Years

5 Years or
Greater

Total

Interest rates

$ 6,541

$17,077

$29,390

$ 53,008

Credit

1,222

5,826

3,400

10,448

Currencies

7,685

4,853

5,965

18,503

Commodities

5,235

4,747

2,556

12,538

Equities

3,626

4,544

3,844

12,014

Netting across product types ¹

(1,960

)

(6,135

)

(5,092

)

(13,187

)

Subtotal

$22,349

$30,912

$40,063

93,324

Cross maturity netting ²

(19,841

)

Cash collateral netting ³

(26,011

)

Total

$ 47,472

Represents the netting of receivable balances with payable balances for the same counterparty across product types within a tenor category under enforceable netting agreements. Receivable and payable balances with the same counterparty in the same product type and tenor category are netted within such product type and tenor category.

2.	Represents the netting of receivable balances with payable balances for the same counterparty across tenor categories under enforceable netting agreements.

3.	Represents the netting of cash collateral received and posted on a counterparty basis under credit support agreements.

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


in millions	OTC Derivatives as of December 2011
Assets Product Type	0 - 12 Months			1 - 5 Years			5 Years or Greater			Total
Interest rates		$10,931			$32,194			$ 82,480			$ 125,605
Credit		3,054			15,468			13,687			32,209
Currencies		11,253			11,592			16,023			38,868
Commodities		5,286			5,931			147			11,364
Equities		6,663			7,768			7,468			21,899
Netting across product types ¹		(3,071	)		(6,033	)		(6,027	)		(15,131	)
Subtotal		$34,116			$66,920			$113,778			214,814
Cross maturity netting ²											(22,562	)
Cash collateral netting ³											(118,104	)
Total											$ 74,148

Liabilities Product Type	0 - 12 Months			1 - 5 Years			5 Years or Greater			Total
Interest rates		$ 5,787			$18,607			$37,739			$ 62,133
Credit		1,200			6,957			3,894			12,051
Currencies		9,826			5,514			6,502			21,842
Commodities		6,322			5,174			2,727			14,223
Equities

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