Edgar Filing: GOLDMAN SACHS GROUP INC

e10vq

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 September 30, 2010

or

o		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, NY		10282
(Address of principal executive offices)		(Zip Code)

(212) 902-1000

(Registrant’s telephone number, including area code)

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of October 29, 2010, there were 511,243,352 shares of the registrant’s common stock outstanding.

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2010

INDEX


		Page
Form 10-Q Item Number:		No.


PART I:	FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2010 and September 25, 2009		2
	Condensed Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009		3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2010 and year ended December 31, 2009		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 25, 2009		5
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2010 and September 25, 2009		6
	Notes to Condensed Consolidated Financial Statements		7
	Note 1 — Description of Business		7
	Note 2 — Significant Accounting Policies		7
	Note 3 — Financial Instruments		22
	Note 4 — Securitization Activities and Variable Interest Entities		47
	Note 5 — Deposits		54
	Note 6 — Short-Term Borrowings		55
	Note 7 — Long-Term Borrowings		56
	Note 8 — Commitments, Contingencies and Guarantees		60
	Note 9 — Shareholders’ Equity		71
	Note 10 — Earnings Per Common Share		74
	Note 11 — Goodwill and Identifiable Intangible Assets		75
	Note 12 — Other Assets and Other Liabilities		77
	Note 13 — Transactions with Affiliated Funds		79
	Note 14 — Income Taxes		79
	Note 15 — Regulation and Capital Adequacy		80
	Note 16 — Business Segments		83
	Note 17 — Interest Income and Interest Expense		87
	Report of Independent Registered Public Accounting Firm		88
	Statistical Disclosures		89

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		93

Item 3:	Quantitative and Qualitative Disclosures About Market Risk		155

Item 4:	Controls and Procedures		155

PART II:	OTHER INFORMATION

Item 1:	Legal Proceedings		156

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		156

Item 6:	Exhibits		157

SIGNATURES			158
EX-12.1 STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND RATIOS
EX-15.1 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
EX-31.1 RULE 13A-14(A) CERTIFICATIONS
EX-32.1 SECTION 1350 CERTIFICATIONS
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I: FINANCIAL INFORMATION


Item 1:	Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)


	Three Months				Nine Months
	Ended September				Ended September
	2010		2009		2010		2009
	(in millions, except per share amounts)

Revenues
Investment banking	$	1,119	$	899	$	3,220	$	3,162
Trading and principal investments		5,605		8,801		20,092		23,829
Asset management and securities services		1,051		982		3,042		2,928

Total non-interest revenues		7,775		10,682		26,354		29,919

Interest income		2,937		3,000		9,240		10,832
Interest expense		1,809		1,310		5,075		5,193

Net interest income		1,128		1,690		4,165		5,639

Net revenues, including net interest income		8,903		12,372		30,519		35,558


Operating expenses
Compensation and benefits		3,828		5,351		13,123		16,712

U.K. bank payroll tax		—		—		600		—

Brokerage, clearing, exchange and distribution fees		519		580		1,703		1,690
Market development		129		84		355		234
Communications and technology		192		194		554		540
Depreciation and amortization		355		367		1,164		1,342
Occupancy		297		230		827		713
Professional fees		256		183		665		463
Other expenses		516		589		2,110		1,412

Total non-compensation expenses		2,264		2,227		7,378		6,394

Total operating expenses		6,092		7,578		21,101		23,106


Pre-tax earnings		2,811		4,794		9,418		12,452
Provision for taxes		913		1,606		3,451		4,015

Net earnings		1,898		3,188		5,967		8,437
Preferred stock dividends		161		160		481		1,032

Net earnings applicable to common shareholders	$	1,737	$	3,028	$	5,486	$	7,405

Earnings per common share
Basic	$	3.19	$	5.74	$	10.06	$	14.60
Diluted		2.98		5.25		9.39		13.74

Dividends declared per common share	$	0.35	$	0.35	$	1.05	$	0.70

Average common shares outstanding
Basic		541.2		525.9		542.3		505.8
Diluted		582.7		576.9		584.4		539.0

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


	As of
	September			December
	2010			2009
	(in millions, except share
	and per share amounts)

Assets
Cash and cash equivalents	$	36,129		$	38,291
Cash and securities segregated for regulatory and other purposes (includes $36,449 and $18,853 at fair value as of September 2010 and December 2009, respectively)		52,192			36,663
Collateralized agreements:
Securities purchased under agreements to resell and federal funds sold (includes $178,109 and $144,279 at fair value as of September 2010 and December 2009, respectively)		178,109			144,279
Securities borrowed (includes $59,881 and $66,329 at fair value as of September 2010 and December 2009, respectively)		184,068			189,939
Receivables from brokers, dealers and clearing organizations		15,924			12,597
Receivables from customers and counterparties (includes $2,072 and $1,925 at fair value as of September 2010 and December 2009, respectively)		61,391			55,303
Trading assets, at fair value (includes $42,336 and $31,485 pledged as collateral as of September 2010 and December 2009, respectively)		351,795			342,402
Other assets		29,071			29,468

Total assets	$	908,679		$	848,942


Liabilities and shareholders’ equity
Deposits (includes $2,091 and $1,947 at fair value as of September 2010 and December 2009, respectively)	$	38,444		$	39,418
Collateralized financings:
Securities sold under agreements to repurchase, at fair value		150,429			128,360
Securities loaned (includes $1,127 and $6,194 at fair value as of September 2010 and December 2009, respectively)		12,041			15,207
Other secured financings (includes $16,449 and $15,228 at fair value as of September 2010 and December 2009, respectively)		26,593			24,134
Payables to brokers, dealers and clearing organizations		3,459			5,242
Payables to customers and counterparties		186,393			180,392
Trading liabilities, at fair value		155,217			129,019
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $22,881 and $18,403 at fair value as of September 2010 and December 2009, respectively)		43,949			37,516
Unsecured long-term borrowings (includes $18,260 and $21,392 at fair value as of September 2010 and December 2009, respectively)		185,120			185,085
Other liabilities and accrued expenses (includes $3,100 and $2,054 at fair value as of September 2010 and December 2009, respectively)		31,377			33,855

Total liabilities		833,022			778,228

Commitments, contingencies and guarantees

Shareholders’ equity
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $8,100 as of both September 2010 and December 2009		6,957			6,957
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 768,251,778 and 753,412,247 shares issued as of September 2010 and December 2009, respectively, and 511,518,083 and 515,113,890 shares outstanding as of September 2010 and December 2009, respectively		8			8
Restricted stock units and employee stock options		7,257			6,245
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding		—			—
Additional paid-in capital		41,785			39,770
Retained earnings		55,136			50,252
Accumulated other comprehensive loss		(284	)		(362	)
Stock held in treasury, at cost, par value $0.01 per share; 256,733,697 and 238,298,357 shares as of September 2010 and December 2009, respectively		(35,202	)		(32,156	)

Total shareholders’ equity		75,657			70,714

Total liabilities and shareholders’ equity	$	908,679		$	848,942

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)


	Nine Months
	Ended			Year Ended
	September 2010			December 2009
	(in millions)

Preferred stock
Balance, beginning of year	$	6,957		$	16,483
Accretion		—			48
Repurchased		—			(9,574	)

Balance, end of period		6,957			6,957
Common stock
Balance, beginning of year		8			7
Issued		—			1

Balance, end of period		8			8
Restricted stock units and employee stock options
Balance, beginning of year		6,245			9,463
Issuance and amortization of restricted stock units and employee stock options		3,611			2,064
Delivery of common stock underlying restricted stock units		(2,501	)		(5,206	)
Forfeiture of restricted stock units and employee stock options		(93	)		(73	)
Exercise of employee stock options		(5	)		(3	)

Balance, end of period		7,257			6,245
Additional paid-in capital
Balance, beginning of year		39,770			31,070
Issuance of common stock		—			5,750
Repurchase of common stock warrants		—			(1,100	)
Delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options		2,822			5,708
Cancellation of restricted stock units in satisfaction of withholding tax requirements		(963	)		(863	)
Excess net tax benefit/(provision) related to share-based compensation		157			(793	)
Cash settlement of share-based compensation		(1	)		(2	)

Balance, end of period		41,785			39,770
Retained earnings
Balance, beginning of year		50,252			38,579
Net earnings		5,967			13,385
Dividends and dividend equivalents declared on common stock and restricted stock units		(602	)		(588	)
Dividends declared on preferred stock		(481	)		(1,076	)
Preferred stock accretion		—			(48	)

Balance, end of period		55,136			50,252
Accumulated other comprehensive income/(loss)
Balance, beginning of year		(362	)		(372	)
Currency translation adjustment, net of tax		(37	)		(70	)
Pension and postretirement liability adjustments, net of tax		17			(17	)
Net unrealized gains on available-for-sale securities, net of tax		98			97

Balance, end of period		(284	)		(362	)
Stock held in treasury, at cost
Balance, beginning of year		(32,156	)		(32,176	)
Repurchased		(3,089	)		(2	) ⁽¹⁾
Reissued		43			22

Balance, end of period		(35,202	)		(32,156	)

Total shareholders’ equity	$	75,657		$	70,714


⁽¹⁾	Relates primarily to repurchases of common stock by a broker-dealer subsidiary to facilitate customer transactions in the ordinary course of business and shares withheld to satisfy withholding tax requirements.

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)


	Nine Months
	Ended September
	2010			2009
	(in millions)

Cash flows from operating activities
Net earnings	$	5,967		$	8,437
Non-cash items included in net earnings
Depreciation and amortization		1,173			1,549
Share-based compensation		3,539			1,345
Changes in operating assets and liabilities
Cash and securities segregated for regulatory and other purposes		(15,553	)		69,748
Net receivables from brokers, dealers and clearing organizations		(5,061	)		4,001
Net payables to customers and counterparties		(2	)		(45,872	)
Securities borrowed, net of securities loaned		2,704			(22,485	)
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold		(11,760	)		(146,443	)
Trading assets, at fair value		3,516			177,292
Trading liabilities, at fair value		26,102			(35,646	)
Other, net		(7,500	)		11,426

Net cash provided by operating activities		3,125			23,352
Cash flows from investing activities
Purchase of property, leasehold improvements and equipment		(899	)		(1,077	)
Proceeds from sales of property, leasehold improvements and equipment		63			52
Business acquisitions, net of cash acquired		(779	)		(210	)
Proceeds from sales of investments		717			201
Purchase of available-for-sale securities		(1,748	)		(2,405	)
Proceeds from sales of available-for-sale securities		1,869			2,139

Net cash used for investing activities		(777	)		(1,300	)
Cash flows from financing activities
Unsecured short-term borrowings, net		213			(12,052	)
Other secured financings (short-term), net		2,744			(8,820	)
Proceeds from issuance of other secured financings (long-term)		2,505			3,703
Repayment of other secured financings (long-term), including the current portion		(3,503	)		(3,652	)
Proceeds from issuance of unsecured long-term borrowings		15,652			23,989
Repayment of unsecured long-term borrowings, including the current portion		(18,494	)		(22,087	)
Preferred stock repurchased		—			(9,574	)
Repurchase of common stock warrants		—			(1,100	)
Derivative contracts with a financing element, net		865			2,130
Deposits, net		(974	)		10,301
Common stock repurchased		(3,088	)		(2	)
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units		(1,083	)		(1,850	)
Proceeds from issuance of common stock, including stock option exercises		357			6,089
Excess tax benefit related to share-based compensation		297			85
Cash settlement of share-based compensation		(1	)		(2	)

Net cash used for financing activities		(4,510	)		(12,842	)

Net increase/(decrease) in cash and cash equivalents		(2,162	)		9,210
Cash and cash equivalents, beginning of year		38,291			13,805

Cash and cash equivalents, end of period	$	36,129		$	23,015

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $5.35 billion and $6.05 billion during the nine months ended September 2010 and September 2009, respectively.

Cash payments for income taxes, net of refunds, were $3.09 billion and $3.60 billion during the nine months ended September 2010 and September 2009, respectively.

Non-cash activities:

The firm assumed $90 million and $16 million of debt in connection with business acquisitions during the nine months ended September 2010 and September 2009, respectively. In addition, in the first quarter of 2010, the firm recorded an increase of approximately $3 billion in both assets (primarily trading assets, at fair value) and liabilities (primarily unsecured short-term borrowings and other liabilities) upon adoption of Accounting Standards Update (ASU) No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.”

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						Nine Months
	Ended September						Ended September
	2010			2009			2010			2009
	(in millions)

Net earnings	$	1,898		$	3,188		$	5,967		$	8,437
Currency translation adjustment, net of tax		(23	)		(1	)		(37	)		(30	)
Pension and postretirement liability adjustments, net of tax		6			8			17			25
Net unrealized gains on available-for-sale securities, net of tax		51			103			98			137

Comprehensive income	$	1,932		$	3,298		$	6,045		$	8,569

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 London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

The firm’s activities are divided into three segments:


	•	Investment Banking. The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals.

	•	Trading and Principal Investments. The firm facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. The firm also takes proprietary positions on certain of these products. In addition, the firm engages in market-making activities on equities and options exchanges, and the firm clears client transactions on major stock, options and futures exchanges worldwide. In connection with the firm’s merchant banking and other investing activities, the firm makes principal investments directly and through funds that the firm raises and manages.

	•	Asset Management and Securities Services. The firm provides investment and wealth advisory 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 group of institutions and individuals worldwide and provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and to high-net-worth individuals worldwide.


Note 2.	Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. All material intercompany transactions and balances have been eliminated.

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) under generally accepted accounting principles (GAAP).


	•	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. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	•	Variable Interest Entities. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that provides the enterprise 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. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (i) the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders, (ii) the VIE’s capital structure, (iii) the terms between the VIE and its variable interest holders and other parties involved with the VIE, (iv) which variable interest holders have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, (v) which variable interest holders have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE and (vi) related party relationships. The firm reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events. The firm reassesses its determination of whether the firm is the primary beneficiary of a VIE upon changes in facts and circumstances that could potentially alter the firm’s assessment. See “— Recent Accounting Developments” below for further information regarding accounting for VIEs.


	•	Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting interest of 20% to 50%) and has an investment in common stock or in-substance common stock, the firm accounts for its investment either under the equity method of accounting or at fair value pursuant to the fair value option available under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 825-10. 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, where the firm has a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. See “— Revenue Recognition — Other Financial Assets and Financial Liabilities at Fair Value” below for a discussion of the firm’s application of the fair value option.

	•	Other. If the firm does not consolidate an entity or apply the equity method of accounting, the firm accounts for its investment at fair value. The firm also has formed numerous nonconsolidated investment funds with third-party investors that are typically organized as limited partnerships. The firm acts as general partner for these funds and generally does not hold a majority of the economic interests in these funds. The firm has generally provided the third-party investors with rights to terminate the funds or to remove the firm as the general partner. As a result, the firm does not consolidate these funds. Investments in these funds are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.

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 fiscal year ended December 31, 2009. References herein to the firm’s 2009 Annual Report on Form 10-K are to the firm’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The condensed consolidated financial information as of December 31, 2009 has been derived from audited consolidated financial statements not included herein.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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 September 2010 and September 2009, unless specifically stated otherwise, refer to the firm’s fiscal periods ended, or the dates, as the context requires, September 30, 2010 and September 25, 2009, respectively. Beginning with the fourth quarter of fiscal 2009, the firm changed its fiscal year-end from the last Friday of December to December 31. All references to December 2009, unless specifically stated otherwise, refer to the firm’s fiscal year ended, or the date, as the context requires, December 31, 2009. All references to 2010, unless specifically stated otherwise, refer to the firm’s year ending, or the date, as the context requires, December 31, 2010. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

Use of Estimates

These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make certain estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements, the accounting for goodwill and identifiable intangible assets, discretionary compensation accruals and the provision for potential losses that may arise from litigation and regulatory proceedings and tax audits. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Revenue Recognition

Investment Banking

Underwriting revenues and fees from mergers and acquisitions and other financial advisory assignments are recognized in the condensed consolidated statements of earnings when the services related to the underlying transaction are completed under the terms of the engagement. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. Underwriting revenues are presented net of related expenses. Expenses associated with financial advisory transactions are recorded as non-compensation expenses, net of client reimbursements.

Trading Assets and Trading Liabilities

Substantially all trading assets and trading liabilities are reflected in the condensed consolidated statements of financial condition at fair value. Related gains or losses are generally recognized in “Trading and principal investments” in the condensed consolidated statements of earnings.

Other Financial Assets and Financial Liabilities at Fair Value

In addition to trading assets, at fair value and trading liabilities, at fair value, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value under ASC 815-15 and 825-10 (i.e., the fair value option). The primary reasons for electing the fair value option are to reflect economic events in earnings on a timely basis, to mitigate volatility in earnings from using different measurement attributes and to address simplification and cost-benefit considerations.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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Such financial assets and financial liabilities accounted for at fair value include:


	•	certain unsecured short-term borrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments;

	•	certain other secured financings, primarily transfers of financial assets accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings;

	•	certain unsecured long-term borrowings, including prepaid physical commodity transactions and certain hybrid financial instruments;

	•	resale and repurchase agreements;

	•	securities borrowed and loaned within Trading and Principal Investments, consisting of the firm’s matched book and certain firm financing activities;

	•	certain deposits issued by the firm’s bank subsidiaries, as well as securities held by Goldman Sachs Bank USA (GS Bank USA);

	•	certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards;

	•	certain insurance and reinsurance contracts and certain guarantees;

	•	certain subordinated liabilities issued by consolidated VIEs; and

	•	in general, investments acquired after November 24, 2006, when the fair value option became available, where the firm has significant influence over the investee and would otherwise apply the equity method of accounting.

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 (i.e., the exit price). Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs.

The fair value hierarchy under ASC 820 prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are as follows:

Basis of Fair Value Measurement


	Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

	Level 2	Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;

	Level 3	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Transfers between levels and sales are recognized at the beginning of the reporting period in which they occur.

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.

Credit risk is an essential component of fair value. Cash products (e.g., bonds and loans) and derivative instruments (particularly those with significant future projected cash flows) trade in the market at levels which reflect credit considerations. The firm calculates the fair value of derivative assets by discounting future cash flows at a rate which incorporates counterparty credit spreads and the fair value of derivative liabilities by discounting future cash flows at a rate which incorporates the firm’s own credit spreads. In doing so, credit exposures are adjusted to reflect mitigants, namely collateral agreements which reduce exposures based on triggers and contractual posting requirements. The firm manages its exposure to credit risk as it does other market risks and will price, economically hedge, facilitate and intermediate trades which involve credit risk. The firm records liquidity valuation adjustments to reflect the cost of exiting concentrated risk positions, including exposure to the firm’s own credit spreads.

Trading Assets, at Fair Value and Trading Liabilities, at Fair Value

Level 1 and level 2 trading assets, at fair value and trading liabilities, at fair value. In determining fair value, the firm separates trading assets, at fair value and trading liabilities, at fair value into two categories: cash instruments and derivative contracts.

The valuation techniques and significant inputs used in determining the fair values of cash instruments and derivative contracts classified within level 1 and level 2 of the fair value hierarchy are as follows:


	•	Cash instruments. The firm’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted prices in active markets include U.S. and non-U.S. government obligations, actively traded listed equities and certain money market instruments. These instruments are generally classified within level 1 of the fair value hierarchy. Instruments classified within level 1 of the fair value hierarchy are required to be carried at quoted market prices, even in situations where the firm holds a large position and a sale could reasonably impact the quoted price.

		The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include commercial paper, certificates of deposit, time deposits, most government agency obligations, most corporate debt securities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, less liquid publicly listed equities, certain state and municipal obligations and certain money market instruments and loan commitments. These instruments are generally classified within level 2 of the fair value hierarchy. For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability. Such adjustments are generally based on market evidence where available.

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	•	Derivative contracts. Derivative contracts are instruments such as futures, forwards, swaps or option contracts that derive their value from underlying asset prices, indices, reference rates and other inputs or a combination of these factors. Derivative instruments may be privately negotiated contracts, which are often referred to as over-the-counter (OTC) derivatives, or they may be listed and traded on an exchange. The assets and inputs underlying derivative instruments may include financial instruments (such as government and corporate bonds, mortgage and other asset-backed loans and securities and bank loans), currencies, commodities, interest rates and related indices.

		Exchange-traded derivatives typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The firm generally values exchange-traded derivatives using models which calibrate to market-clearing levels and eliminate timing differences between the closing price of the exchange-traded derivatives and their underlying instruments. In such cases, exchange-traded derivatives are classified within level 2 of the fair value hierarchy.

		OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, calibration to market-clearing transactions, broker or dealer quotations, or other alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument, as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, voluntary and involuntary prepayment rates, loss severity rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, model inputs can generally be verified and model selection does not involve significant management judgment. OTC derivatives are classified within level 2 of the fair value hierarchy when all of the significant inputs are corroborated by market evidence. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on market evidence where available.

Level 3 trading assets, at fair value and trading liabilities, at fair value. Absent evidence to the contrary, instruments classified within level 3 of the fair value hierarchy are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. Subsequent to the transaction date, the firm uses other methodologies to determine fair value, which vary based on the type of instrument, as described below. Regardless of methodology, valuation inputs and assumptions are only changed when corroborated by substantive evidence. Valuations are further corroborated by values realized upon sales of the firm’s level 3 assets. The valuation techniques and significant inputs used in determining the fair values of each class of cash instrument and derivative contracts classified within level 3 of the fair value hierarchy are as follows:


	•	Equities and convertible debentures. For private equity investments, recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. In the absence of such evidence, valuations are based on one or more of the following methodologies, as appropriate and available: transactions in similar instruments, discounted cash flow techniques, third-party independent appraisals, valuation multiples and public comparables. Such evidence includes pending reorganizations (e.g., merger proposals,

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		tender offers or debt restructurings), and significant changes in financial metrics (e.g., operating results as compared to previous projections, industry multiples, credit ratings and balance sheet ratios). Real estate fund investments are carried at net asset value per share. The underlying investments in the funds are generally valued using discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, capitalization rates and valuation multiples.


	•	Bank loans and bridge loans, Corporate debt securities, State and municipal obligations and Other debt obligations. Valuations are generally based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows, market yields and recovery assumptions. The significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to credit default swaps that reference the same underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotes are available.

	•	Loans and securities backed by commercial real estate. Loans and securities backed by commercial real estate are collateralized by specific assets and may be tranched into varying levels of subordination. Due to the nature of these instruments, valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof. Significant inputs for these valuations include transactions in both the underlying collateral and instruments with the same or substantially the same underlying collateral, credit default swap prices, current levels and trends of market indices (such as the CMBX), market yields and other factors (such as the operating income generated by the underlying collateral) which are used in determining the amount and timing of expected future cash flows.

	•	Loans and securities backed by residential real estate. Valuations are based on both proprietary and industry recognized models (including Intex and Bloomberg), and discounted cash flow techniques. The most significant inputs to the valuation of these instruments are the rates and timing of delinquencies, the rates and timing of prepayments, and default and loss expectations, which are driven in part by housing prices. The 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.

	•	Loan portfolios. Loan portfolios are acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral. Valuations are based on discounted cash flow techniques, for which the significant inputs are the amount and timing of expected future cash flows and market yields. The significant inputs are determined based on relative value analyses which incorporate comparisons to recent auction data for other similar loan portfolios.

	•	Derivative contracts. Certain OTC derivatives trade in less liquid markets with limited pricing information and the determination of fair value for these derivatives is inherently more difficult. The valuations of these less liquid OTC derivatives are typically based on level 1 and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Unobservable inputs typically include certain correlations as well as credit spreads, equity volatilities, commodity prices and commodity volatilities that are long-dated or derived from trading activity in inactive or less liquid markets. When unobservable inputs to a valuation model are significant to the fair value measurement of an instrument, the instrument is classified within level 3 of the fair value hierarchy. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes with resulting gains

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		and losses reflected within level 3. Level 3 inputs are only 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 to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.

Other Financial Assets and Financial Liabilities at Fair Value

Other financial assets and financial liabilities at fair value are generally valued based on discounted cash flow techniques which incorporate inputs with reasonable levels of price transparency and are generally classified within level 2 of the fair value hierarchy. Significant inputs for each category of other financial asset and financial liability at fair value are as follows:


	•	Resale and Repurchase Agreements and Securities Borrowed and Loaned. The significant inputs to the valuation of resale and repurchase agreements and securities borrowed and loaned within Trading and Principal Investments (which are related to the firm’s matched book and certain firm financing activities) are generally the amount and timing of expected future cash flows, interest rates and collateral funding spreads.

	•	Other Secured Financings. The significant inputs to the valuation of other secured financings at fair value, including transfers of financial assets accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings, are the amount and timing of expected future cash flows, interest rates, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market yields and recovery assumptions), the frequency of additional collateral calls and the credit spreads of the firm.

	•	Unsecured short-term and long-term borrowings. The significant inputs to the valuation of certain short-term and long-term borrowings at fair value, including all promissory notes and commercial paper, certain hybrid financial instruments and prepaid physical commodity transactions, are the amount and timing of expected future cash flows, interest rates, the credit spreads of the firm, as well as commodity prices in the case of prepaid physical commodity transactions and, for certain hybrid financial instruments, equity prices, inflation rates and index levels.

	•	Receivables from customers and counterparties. The significant inputs to the valuation of certain receivables from customers and counterparties, including certain margin loans, transfers of financial assets accounted for as secured loans rather than purchases and prepaid variable share forwards, are interest rates and the amount and timing of expected future cash flows.

	•	Insurance and reinsurance contracts. Insurance and reinsurance contracts at fair value are included in “Receivables from customers and counterparties” and “Other liabilities and accrued expenses” in the firm’s condensed consolidated statements of financial condition. These contracts are valued using market transactions and other market evidence where possible, including market-based inputs to models, calibration to market-clearing transactions or other alternative pricing sources with reasonable levels of price transparency. Significant level 2 inputs typically include interest rates and inflation risk. Significant level 3 inputs typically include mortality or funding benefit assumptions. When unobservable inputs to a valuation model are significant to the fair value measurement of an instrument, the instrument is classified within level 3 of the fair value hierarchy.

	•	Deposits. The significant inputs to the valuation of deposits are interest rates.

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Collateralized Agreements and Financings

Collateralized agreements consist of resale agreements and securities borrowed. For these agreements, the firm requires delivery of collateral with a fair value approximately equal to the carrying value of the relevant assets in the condensed consolidated statements of financial condition. Collateralized financings consist of repurchase agreements, securities loaned and other secured financings. Interest on collateralized agreements and collateralized financings is recognized in “Interest income” and “Interest expense,” respectively, in the condensed consolidated statements of earnings over the life of the transaction. Collateralized agreements and financings are presented on a net-by-counterparty basis when a right of setoff exists.


	•	Resale and Repurchase Agreements. Securities purchased under agreements to resell and securities sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade sovereign obligations, represent collateralized financing transactions. The firm receives securities purchased under agreements to resell, makes delivery of securities sold under agreements to repurchase, monitors the market value of these securities on a daily basis and delivers or obtains additional collateral as appropriate. As noted above, resale and repurchase agreements are carried in the condensed consolidated statements of financial condition at fair value under the fair value option.

	•	Securities Borrowed and Loaned. Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Securities borrowed and loaned within Securities Services, relating to both customer activities and, to a lesser extent, certain firm financing activities, are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminated on demand, they exhibit little, if any, sensitivity to changes in interest rates. As noted above, securities borrowed and loaned within Trading and Principal Investments, which are related to the firm’s matched book and certain firm financing activities, are recorded at fair value under the fair value option.

	•	Other Secured Financings. In addition to repurchase agreements and securities loaned, the firm funds assets through the use of other secured financing arrangements and pledges financial instruments and other assets as collateral in these transactions. As noted above, the firm has elected to apply the fair value option to transfers of financial assets accounted for as financings rather than sales, debt raised through the firm’s William Street credit extension program and certain other nonrecourse financings, for which the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest. See Note 3 for further information regarding other secured financings.

Hybrid Financial Instruments

Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives and do not require settlement by physical delivery of non-financial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative from the associated debt, the derivative is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedge accounting relationships. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option. See Notes 3 and 6 for further information regarding hybrid financial instruments.

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Transfers of Financial Assets

In general, transfers of financial assets are accounted for as sales when the firm has relinquished control over the transferred assets. For transfers of financial 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 financial assets are measured at fair value. For transfers that are not accounted for as sales, the financial assets remain in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and the transfer is accounted for as a collateralized financing, with the related interest expense recognized in net revenues over the life of the transaction. When the firm transfers a security that has very little, if any, default risk under an agreement to repurchase the security where the maturity date of the repurchase agreement matches the maturity date of the underlying security (such that the firm effectively no longer has a repurchase obligation) and the firm has relinquished control over the underlying security, the firm records such transactions as sales. See “— Recent Accounting Developments” below for further information regarding accounting for transfers of financial assets.

Commissions

Commission revenues from executing and clearing client transactions on stock, options and futures markets are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings on a trade-date basis.

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 “Trading and principal investments” in the condensed consolidated statements of earnings.

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, and are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings in the period that services are provided.

Interest credited to variable annuity and life insurance and reinsurance contract account balances and changes in reserves are recognized in “Other expenses” in the condensed consolidated statements of earnings.

Premiums earned for underwriting property catastrophe reinsurance are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings over the coverage period, net of premiums ceded for the cost of reinsurance. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported, are recognized in “Other expenses” in the condensed consolidated statements of earnings.

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Merchant Banking Overrides

The firm is entitled to receive merchant banking overrides (i.e., an increased share of a fund’s income and gains) when the return on the funds’ investments exceeds certain threshold returns. Overrides are based on investment performance over the life of each merchant banking fund, and future investment underperformance may require amounts of override previously distributed to the firm to be returned to the funds. Accordingly, overrides are recognized in the condensed consolidated statements of earnings only when all material contingencies have been resolved. Overrides are included in “Trading and principal investments” in the condensed consolidated statements of earnings.

Asset Management

Management fees are recognized over the period that the related service is provided based upon average net asset values. In certain circumstances, the firm is also entitled to receive incentive fees based on a percentage of a fund’s return or when the return on assets under management exceeds specified benchmark returns or other performance targets. Incentive fees are generally based on investment performance over a 12-month period and are subject to adjustment prior to the end of the measurement period. Accordingly, incentive fees are recognized in the condensed consolidated statements of earnings when the measurement period ends. Asset management fees and incentive fees are included in “Asset management and securities services” in the condensed consolidated statements of earnings.

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 in accordance with ASC 718. 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 employee 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. In the first quarter of fiscal 2009, the firm adopted amended accounting principles related to income tax benefits of dividends on share-based payment awards (ASC 718). These amended principles require the tax benefit related to dividend equivalents paid on RSUs to be accounted for as an increase to additional paid-in capital. Previously, the firm accounted for this tax benefit as a reduction to income tax expense.

In certain cases, primarily related to the death of an employee or 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.

Goodwill

Goodwill is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. Goodwill is tested at least annually for impairment. An impairment loss is recognized if the estimated fair value of an operating segment, which is a component one level below the firm’s three business segments, is less than its estimated net book value. Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.

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Identifiable Intangible Assets

Identifiable intangible assets, which consist primarily of customer lists, television broadcast royalties, contractual rights related to commodity-related acquisitions, New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights and the value of business acquired (VOBA) in the firm’s insurance subsidiaries, are amortized over their estimated lives or, in the case of insurance contracts, in proportion to estimated gross profits or premium revenues. Identifiable intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. An impairment loss, generally calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

Property, Leasehold Improvements and Equipment

Property, leasehold improvements and equipment, net of accumulated depreciation and amortization, are recorded at cost and included in “Other assets” in the condensed consolidated statements of financial condition.

Substantially all property and equipment are depreciated on a straight-line basis over the useful life of the asset. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter. Certain costs of software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the useful life of the software.

Property, leasehold improvements and equipment are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the expected undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

The firm’s operating leases include office space held in excess of current requirements. Rent expense relating to space held for growth is included in “Occupancy” in the condensed consolidated statements of earnings. The firm records a liability, based on the fair value of the remaining lease rentals reduced by any potential or existing sublease rentals, for leases where the firm has ceased using the space and management has concluded that the firm will not derive any future economic benefits. Costs to terminate a lease before the end of its term are recognized and measured at fair value upon termination.

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. 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. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are included in the condensed consolidated statements of earnings.

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Hedge Accounting

The firm applies hedge accounting for certain derivative contracts used to manage the interest rate exposure of certain fixed-rate obligations, and for certain derivative contracts and foreign currency-denominated debt used to manage foreign currency exposures resulting from the firm’s net investment in certain non-U.S. operations. The firm documents its risk management strategy at the inception of each hedging relationship and assesses the effectiveness of each hedging relationship at least quarterly.

Fair Value Hedges — Interest Rate. The firm designates certain interest rate swap contracts as fair value hedges. These interest rate swap contracts hedge changes in the relevant benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR)), effectively converting a substantial portion of the firm’s unsecured long-term fixed-rate borrowings and certificates of deposit, as well as certain unsecured short-term fixed-rate borrowings, into floating rate obligations.

The firm applies the “long-haul method” in assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and hedged item. During the three months ended March 31, 2010, the firm changed its method of prospectively and retrospectively assessing the effectiveness of all of its fair value hedging relationships from a dollar-offset method, which is a non-statistical method, to regression analysis, which is a statistical method. An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%. The dollar-offset method compared the change in the fair value of the hedging instrument to the change in the fair value of the hedged item, excluding the effect of the passage of time. The firm’s prospective dollar-offset assessment utilized scenario analyses to test hedge effectiveness via simulations of numerous parallel and slope shifts of the relevant yield curve. Parallel shifts changed the interest rate of all maturities by identical amounts. Slope shifts changed the curvature of the yield curve. For both the prospective assessment, in response to each of the simulated yield curve shifts, and the retrospective assessment, a hedging relationship was deemed to be effective if the fair value of the hedging instrument and the hedged item changed inversely within a range of 80% to 125%.

For qualifying fair value hedges, gains or losses on derivative transactions are recognized in “Interest expense” in the condensed consolidated statements of earnings. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is subsequently amortized into interest expense over its remaining life. Gains or losses resulting from hedge ineffectiveness are included in “Interest expense” in the condensed consolidated statements of earnings.

Net Investment Hedges. The firm seeks to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts designated as hedges, the effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts (that is, based on changes in forward rates). For foreign currency-denominated debt designated as a hedge, the effectiveness of the hedge is assessed based on changes in spot rates. For qualifying net investment hedges, the gains or losses on hedging instruments, to the extent effective, are included in the condensed consolidated statements of comprehensive income.

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Income Taxes

Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of the firm’s assets and liabilities. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized. The firm’s tax assets and liabilities are presented as a component of “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. The firm recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. The firm reports interest expense related to income tax matters in “Provision for taxes” in the condensed consolidated statements of earnings and income tax penalties in “Other expenses” in the condensed consolidated statements of earnings.

Earnings Per Common Share (EPS)

Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and RSUs for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock warrants and options and to RSUs for which future service is required as a condition to the delivery of the underlying common stock. In the first quarter of fiscal 2009, the firm adopted amended accounting principles related to determining whether instruments granted in share-based payment transactions are participating securities. Accordingly, the firm treats unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per common share.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of September 2010 and December 2009, “Cash and cash equivalents” in the condensed consolidated statements of financial condition included $4.32 billion and $4.45 billion, respectively, of cash and due from banks and $31.81 billion and $33.84 billion, respectively, of interest-bearing deposits with banks.

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(UNAUDITED)

Recent Accounting Developments

Transfers of Financial Assets and Interests in Variable Interest Entities (ASC 860 and 810). In June 2009, the FASB issued amended accounting principles that changed the accounting for securitizations and VIEs. These principles were codified as ASU No. 2009-16, “Transfers and Servicing (Topic 860) — Accounting for Transfers of Financial Assets” and ASU No. 2009-17, “Consolidations (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” in December 2009. ASU No. 2009-16 eliminates the concept of a qualifying special-purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures about transfers of financial assets, including securitization transactions and continuing involvement with transferred financial assets. ASU No. 2009-17 changes the accounting and requires additional disclosures for VIEs. Under ASU No. 2009-17, the determination of whether to consolidate a VIE is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance together with either the obligation to absorb losses or the right to receive benefits that could be significant to the VIE, as well as the VIE’s purpose and design. Additionally, entities previously classified as QSPEs are now required to be evaluated for consolidation and disclosure as VIEs. Previously, QSPEs were not consolidated and not considered for disclosure as VIEs and the determination of whether to consolidate a VIE was based on whether an enterprise had a variable interest, or combination of variable interests, that would absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. ASU Nos. 2009-16 and 2009-17 were effective for fiscal years beginning after November 15, 2009. In February 2010, the FASB issued ASU No. 2010-10, “Consolidations (Topic 810) — Amendments For Certain Investment Funds,” which defers the requirements of ASU No. 2009-17 for certain interests in investment funds and certain similar entities.

The firm adopted ASU Nos. 2009-16 and 2009-17 as of January 1, 2010 and reassessed whether it was the primary beneficiary of any VIEs in which it had variable interests (including VIEs that were formerly QSPEs) as of that date. Adoption resulted in an increase to the firm’s total assets of approximately $3 billion as of March 31, 2010, principally within “Trading assets, at fair value” in the condensed consolidated statement of financial condition. In addition, “Other assets” in the condensed consolidated statement of financial condition increased by $545 million as of March 31, 2010, with a corresponding decrease in “Trading assets, at fair value,” as a result of the consolidation of an entity which holds intangible assets. Upon adoption, the firm elected the fair value option for all eligible assets and liabilities of newly consolidated VIEs, except for (i) those VIEs where the financial assets and financial liabilities are accounted for either at fair value or in a manner that approximates fair value under other GAAP and (ii) those VIEs where the election would have caused volatility in earnings as a result of using different measurement attributes for financial instruments and nonfinancial assets. Adoption did not have a material impact on the firm’s results of operations or cash flows.

Improving Disclosures about Fair Value Measurements (ASC 820). In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements. Certain disclosure requirements of ASU No. 2010-06 were effective for the firm beginning in the first quarter of 2010, while other disclosure requirements of the ASU are effective for financial statements issued for reporting periods beginning after December 15, 2010. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not and 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 (Continued)

(UNAUDITED)


Note 3.	Financial Instruments

Fair Value of Financial Instruments

The following table sets forth the firm’s trading assets, at fair value, including those pledged as collateral, and trading liabilities, at fair value. At any point in time, the firm may use cash instruments as well as derivatives to manage a long or short risk position.


	As of
	September 2010						December 2009
	Assets			Liabilities			Assets			Liabilities
	(in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments	$	10,537	⁽¹⁾	$	—		$	9,111	⁽¹⁾	$	—
U.S. government and federal agency obligations		84,882			20,948			78,336			20,982
Non-U.S. government obligations		46,980			33,073			38,858			23,843
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		5,963			1			6,203			29
Loans and securities backed by residential real estate		6,900			4			6,704			74
Loan portfolios		1,488	⁽²⁾		—			1,370	⁽²⁾		—
Bank loans and bridge loans		17,789			1,470	⁽⁵⁾		19,345			1,541	⁽⁵⁾
Corporate debt securities		25,497			7,872			26,368			6,229
State and municipal obligations		2,471			—			2,759			36
Other debt obligations		2,888			—			2,914			—
Equities and convertible debentures		60,544			28,020			71,474			20,253
Physical commodities		4,382			62			3,707			23
Derivative contracts		81,474	⁽³⁾		63,767	⁽⁶⁾		75,253	⁽³⁾		56,009	⁽⁶⁾

Total	$	351,795	⁽⁴⁾	$	155,217		$	342,402	⁽⁴⁾	$	129,019


	⁽¹⁾	Includes $4.09 billion and $4.31 billion as of September 2010 and December 2009, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 8 for further information regarding the William Street credit extension program.

	⁽²⁾	Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate collateral.

	⁽³⁾	Net of cash collateral received pursuant to credit support agreements of $121.09 billion and $124.60 billion as of September 2010 and December 2009, respectively.

	⁽⁴⁾	Includes $4.00 billion and $3.86 billion as of September 2010 and December 2009, respectively, of securities accounted for as available-for-sale, substantially all of which is held within the firm’s insurance subsidiaries.

	⁽⁵⁾	Includes the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is included in trading assets, at fair value.

	⁽⁶⁾	Net of cash collateral posted pursuant to credit support agreements of $18.88 billion and $14.74 billion as of September 2010 and December 2009, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Fair Value Hierarchy

The firm’s financial assets at fair value classified within level 3 of the fair value hierarchy are summarized below:


	As of
	September			June			December
	2010			2010			2009
	($ in millions)
Total level 3 assets	$	46,491		$	46,125		$	46,475
Level 3 assets for which the firm bears economic exposure ⁽¹⁾		43,826			43,516			43,348

Total assets		908,679			883,188			848,942
Total financial assets at fair value		628,306			614,270			573,788

Total level 3 assets as a percentage of Total assets		5.1	%		5.2	%		5.5	%
Level 3 assets for which the firm bears economic exposure as a percentage of Total assets		4.8			4.9			5.1

Total level 3 assets as a percentage of Total financial assets at fair value		7.4			7.5			8.1
Level 3 assets for which the firm bears economic exposure as a percentage of Total financial assets at fair value		7.0			7.1			7.6


	⁽¹⁾	Excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

The following tables set forth by level within the fair value hierarchy trading assets, at fair value, trading liabilities, at fair value, and other financial assets and financial liabilities accounted for at fair value under the fair value option as of September 2010 and December 2009. See Note 2 for further information on the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Assets at Fair Value as of September 2010
										Netting and
	Level 1			Level 2			Level 3			Collateral			Total
	(in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments	$	4,311		$	6,226		$	—		$	—		$	10,537
U.S. government and federal agency obligations		40,927			43,955			—			—			84,882
Non-U.S. government obligations		42,873			4,107			—			—			46,980
Mortgage and other asset-backed loans and securities ⁽¹⁾:
Loans and securities backed by commercial real estate		—			1,973			3,990			—			5,963
Loans and securities backed by residential real estate		—			4,651			2,249			—			6,900
Loan portfolios		—			222			1,266			—			1,488
Bank loans and bridge loans		—			8,256			9,533			—			17,789
Corporate debt securities ⁽²⁾		142			23,004			2,351			—			25,497
State and municipal obligations		—			1,613			858			—			2,471
Other debt obligations		—			1,484			1,404			—			2,888
Equities and convertible debentures		34,449	⁽⁴⁾		14,477	⁽⁶⁾		11,618	⁽⁸⁾		—			60,544
Physical commodities		—			4,382			—			—			4,382

Total cash instruments		122,702			114,350			33,269			—			270,321
Derivative contracts		141			191,907			12,752			(123,326	) ⁽⁹⁾		81,474

Trading assets, at fair value		122,843			306,257			46,021			(123,326	)		351,795
Securities segregated for regulatory and other purposes		22,815	⁽⁵⁾		13,634	⁽⁷⁾		—			—			36,449
Securities purchased under agreements to resell		—			177,923			186			—			178,109
Securities borrowed		—			59,881			—			—			59,881
Receivables from customers and counterparties		—			1,788			284			—			2,072

Total financial assets at fair value	$	145,658		$	559,483		$	46,491		$	(123,326	)	$	628,306

Level 3 assets for which the firm does not bear economic exposure ⁽³⁾								(2,665	)

Level 3 assets for which the firm bears economic exposure							$	43,826


⁽¹⁾	Includes $146 million and $566 million of collateralized debt obligations (CDOs) backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy.

⁽²⁾	Includes $430 million and $814 million of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.

⁽³⁾	Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

⁽⁴⁾	Consists of publicly listed equity securities. Includes the firm’s $7.55 billion investment in the ordinary shares of Industrial and Commercial Bank of China Limited, which was transferred from level 2 within the fair value hierarchy upon expiration of transfer restrictions in April 2010.

⁽⁵⁾	Principally consists of U.S. Department of the Treasury (U.S. Treasury) securities and money market instruments as well as insurance separate account assets measured at fair value.

⁽⁶⁾	Principally consists of less liquid publicly listed securities.

⁽⁷⁾	Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.

⁽⁸⁾	Includes $10.50 billion of private equity investments, $950 million of real estate investments and $165 million of convertible debentures.

⁽⁹⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Liabilities at Fair Value as of September 2010
								Netting and
	Level 1		Level 2		Level 3			Collateral			Total
	(in millions)
U.S. government and federal agency obligations	$	20,792	$	156	$	—		$	—		$	20,948
Non-U.S. government obligations		32,555		518		—			—			33,073
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		—		2		2			—			4
Bank loans and bridge loans		—		1,057		413			—			1,470
Corporate debt securities ⁽¹⁾		42		7,755		75			—			7,872
Equities and convertible debentures ⁽²⁾		26,931		1,084		5			—			28,020
Physical commodities		—		62		—			—			62

Total cash instruments		80,320		10,635		495			—			91,450
Derivative contracts		116		78,328		6,439			(21,116	) ⁽⁴⁾		63,767

Trading liabilities, at fair value		80,436		88,963		6,934			(21,116	)		155,217
Deposits		—		2,091		—			—			2,091
Securities sold under agreements to repurchase, at fair value		—		148,358		2,071			—			150,429
Securities loaned		—		1,127		—			—			1,127
Other secured financings		—		8,468		7,981			—			16,449
Unsecured short-term borrowings		—		19,990		2,891			—			22,881
Unsecured long-term borrowings		—		16,357		1,903			—			18,260
Other liabilities and accrued expenses		—		624		2,476			—			3,100

Total financial liabilities at fair value	$	80,436	$	285,978	$	24,256	⁽³⁾	$	(21,116	)	$	369,554


⁽¹⁾	Includes $65 million of CDOs and CLOs backed by corporate obligations, all of which are within level 3 of the fair value hierarchy.

⁽²⁾	Substantially all consists of publicly listed equity securities.

⁽³⁾	Level 3 liabilities were 6.6% of Total financial liabilities at fair value.

⁽⁴⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Assets at Fair Value as of December 2009
										Netting and
	Level 1			Level 2			Level 3			Collateral			Total
	(in millions)
Commercial paper, certificates of deposit, time deposits and other money market instruments	$	5,026		$	4,085		$	—		$	—		$	9,111
U.S. government and federal agency obligations		36,391			41,945			—			—			78,336
Non-U.S. government obligations		33,881			4,977			—			—			38,858
Mortgage and other asset-backed loans and securities ⁽¹⁾:
Loans and securities backed by commercial real estate		—			1,583			4,620			—			6,203
Loans and securities backed by residential real estate		—			4,824			1,880			—			6,704
Loan portfolios		—			6			1,364			—			1,370
Bank loans and bridge loans		—			9,785			9,560			—			19,345
Corporate debt securities ⁽²⁾		164			23,969			2,235			—			26,368
State and municipal obligations		—			1,645			1,114			—			2,759
Other debt obligations		—			679			2,235			—			2,914
Equities and convertible debentures		37,103	⁽⁴⁾		22,500	⁽⁶⁾		11,871	⁽⁹⁾		—			71,474
Physical commodities		—			3,707			—			—			3,707

Total cash instruments		112,565			119,705			34,879			—			267,149
Derivative contracts		161			190,816	⁽⁷⁾		11,596	⁽⁷⁾		(127,320	) ⁽¹⁰⁾		75,253

Trading assets, at fair value		112,726			310,521			46,475			(127,320	)		342,402
Securities segregated for regulatory and other purposes		14,381	⁽⁵⁾		4,472	⁽⁸⁾		—			—			18,853
Securities purchased under agreements to resell		—			144,279			—			—			144,279
Securities borrowed		—			66,329			—			—			66,329
Receivables from customers and counterparties		—			1,925			—			—			1,925

Total financial assets at fair value	$	127,107		$	527,526		$	46,475		$	(127,320	)	$	573,788

Level 3 assets for which the firm does not bear economic exposure ⁽³⁾								(3,127	)

Level 3 assets for which the firm bears economic exposure							$	43,348


	⁽¹⁾	Includes $291 million and $311 million of CDOs and CLOs backed by real estate within level 2 and level 3, respectively, of the fair value hierarchy.

	⁽²⁾	Includes $338 million and $741 million of CDOs and CLOs backed by corporate obligations within level 2 and level 3, respectively, of the fair value hierarchy.

	⁽³⁾	Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

	⁽⁴⁾	Consists of publicly listed equity securities.

	⁽⁵⁾	Principally consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value.

	⁽⁶⁾	Substantially all consists of less liquid publicly listed securities.

	⁽⁷⁾	Includes $31.44 billion and $9.58 billion of credit derivative assets within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types.

	⁽⁸⁾	Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.

	⁽⁹⁾	Includes $10.56 billion of private equity investments, $1.23 billion of real estate investments and $79 million of convertible debentures.


⁽¹⁰⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Liabilities at Fair Value as of December 2009
									Netting and
	Level 1		Level 2			Level 3			Collateral			Total
	(in millions)
U.S. government and federal agency obligations	$	20,940	$	42		$	—		$	—		$	20,982
Non-U.S. government obligations		23,306		537			—			—			23,843
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		—		29			—			—			29
Loans and securities backed by residential real estate		—		74			—			—			74
Bank loans and bridge loans		—		1,128			413			—			1,541
Corporate debt securities ⁽¹⁾		65		6,018			146			—			6,229
State and municipal obligations		—		36			—			—			36
Equities and convertible debentures ⁽²⁾		19,072		1,168			13			—			20,253
Physical commodities		—		23			—			—			23

Total cash instruments		63,383		9,055			572			—			73,010
Derivative contracts		126		66,943	⁽³⁾		6,400	⁽³⁾		(17,460	) ⁽⁵⁾		56,009

Trading liabilities, at fair value		63,509		75,998			6,972			(17,460	)		129,019
Deposits		—		1,947			—			—			1,947
Securities sold under agreements to repurchase, at fair value		—		127,966			394			—			128,360
Securities loaned		—		6,194			—			—			6,194
Other secured financings		118		8,354			6,756			—			15,228
Unsecured short-term borrowings		—		16,093			2,310			—			18,403
Unsecured long-term borrowings		—		18,315			3,077			—			21,392
Other liabilities and accrued expenses		—		141			1,913			—			2,054

Total financial liabilities at fair value	$	63,627	$	255,008		$	21,422	⁽⁴⁾	$	(17,460	)	$	322,597


⁽¹⁾	Includes $45 million of CDOs and CLOs backed by corporate obligations, all of which are within level 3 of the fair value hierarchy.

⁽²⁾	Substantially all consists of publicly listed equity securities.

⁽³⁾	Includes $7.96 billion and $3.20 billion of credit derivative liabilities within level 2 and level 3, respectively, of the fair value hierarchy. These amounts exclude the effects of netting under enforceable netting agreements across other derivative product types.

⁽⁴⁾	Level 3 liabilities were 6.6% of Total financial liabilities at fair value.

⁽⁵⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The fair value of the firm’s derivative contracts is reflected net of cash collateral posted or received pursuant to credit support agreements and is reported on a net-by-counterparty basis in the firm’s consolidated statements of financial condition when management believes a legal right of setoff exists under an enforceable netting agreement. The following table sets forth the fair value of the firm’s derivative contracts on a gross basis by level within the fair value hierarchy and major product type as of September 2010. Gross fair values in the tables below exclude the effects of both netting under enforceable netting agreements and netting of cash collateral received or posted pursuant to credit support agreements both within and across the levels of the fair value hierarchy, and therefore are not representative of the firm’s exposure.


	Derivative Assets at Fair Value as of September 2010
									Cross-Level
	Level 1		Level 2			Level 3			Netting			Total
	(in millions)
Interest rates	$	20	$	651,491		$	124		$	—		$	651,635
Credit		—		122,212			13,258			—			135,470
Currencies		—		90,610			1,775			—			92,385
Commodities		—		35,365			1,870			—			37,235
Equities		121		73,322			1,296			—			74,739

Gross fair value of derivative assets		141		973,000			18,323			—			991,464
Counterparty netting ⁽¹⁾		—		(781,093	)		(5,571	)		(2,241	) ⁽³⁾		(788,905	)

Subtotal	$	141	$	191,907		$	12,752		$	(2,241	)	$	202,559
Cash collateral netting ⁽²⁾													(121,085	)

Fair value included in trading assets, at fair value												$	81,474


	Derivative Liabilities at Fair Value as of September 2010
									Cross-Level
	Level 1		Level 2			Level 3			Netting			Total
	(in millions)
Interest rates	$	11	$	579,721		$	397		$	—		$	580,129
Credit		—		104,792			5,844			—			110,636
Currencies		—		79,650			845			—			80,495
Commodities		—		38,696			2,354			—			41,050
Equities		105		56,562			2,570			—			59,237

Gross fair value of derivative liabilities		116		859,421			12,010			—			871,547
Counterparty netting ⁽¹⁾		—		(781,093	)		(5,571	)		(2,241	) ⁽³⁾		(788,905	)

Subtotal	$	116	$	78,328		$	6,439		$	(2,241	)	$	82,642
Cash collateral netting ⁽²⁾													(18,875	)

Fair value included in trading liabilities, at fair value												$	63,767


	⁽¹⁾	Represents the netting of receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements.

	⁽²⁾	Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 Unrealized Gains/(Losses)

The table below sets forth a summary of unrealized gains/(losses) on the firm’s level 3 financial assets and financial liabilities at fair value still held at the reporting date for the three and nine months ended September 2010 and September 2009:


	Level 3 Unrealized Gains/(Losses)
	Three Months						Nine Months
	Ended September						Ended September
	2010			2009			2010			2009
	(in millions)
Cash instruments — assets	$	522		$	377		$	1,497		$	(4,703	)
Cash instruments — liabilities		(6	)		180			(56	)		433

Net unrealized gains/(losses) on level 3 cash instruments		516			557			1,441			(4,270	)
Derivative contracts — net		(272	)		(639	)		4,100			(1,216	)
Securities purchased under agreements to resell		21			—			21			—
Receivables from customers and counterparties		(17	)		—			(66	)		—
Other secured financings		(61	)		(295	)		(25	)		(720	)
Unsecured short-term borrowings		(207	)		(193	)		37			(137	)
Unsecured long-term borrowings		(202	)		(217	)		(66	)		(268	)
Other liabilities and accrued expenses		(147	)		(22	)		(121	)		56

Total level 3 unrealized gains/(losses)	$	(369	)	$	(809	)	$	5,321		$	(6,555	)

Cash Instruments

The net unrealized gain on level 3 cash instruments of $516 million for the three months ended September 2010 primarily consisted of unrealized gains on private equity investments and real estate fund investments and bank loans and bridge loans. These gains were primarily attributable to changes in certain foreign exchange rates which increased the value of non-U.S. dollar denominated assets, higher prices in the equity markets and tighter credit spreads which increased the prices of fixed income assets. The net unrealized gain on level 3 cash instruments of $557 million for the three months ended September 2009 primarily consisted of unrealized gains on certain bank loans, partially offset by unrealized losses on loans and securities backed by commercial real estate. The net unrealized gain on level 3 cash instruments of $1.44 billion for the nine months ended September 2010 primarily consisted of unrealized gains on private equity investments and real estate fund investments and bank loans and bridge loans, where prices were corroborated through sales and partial sales of similar assets in these asset classes during the period. The net unrealized loss on level 3 cash instruments of $4.27 billion for the nine months ended September 2009 primarily consisted of unrealized losses on private equity and real estate fund investments, and loans and securities backed by commercial real estate, reflecting weakness in these less liquid asset classes.

Level 3 cash instruments are frequently economically hedged with instruments classified within level 1 and level 2, and accordingly, gains or losses that have been reported in level 3 can be partially offset by gains or losses attributable to instruments classified within level 1 or level 2 or by gains or losses on derivative contracts classified within level 3 of the fair value hierarchy.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Derivative Contracts

The net unrealized loss on level 3 derivative contracts of $272 million for the three months ended September 2010 was primarily driven by tighter credit spreads, which are level 2 inputs, on the underlying instruments. The net unrealized loss on level 3 derivative contracts of $639 million for the three months ended September 2009 was primarily attributable to changes in observable prices and observable credit spreads on the underlying instruments (which are level 2 inputs). The net unrealized gain on level 3 derivative contracts of $4.10 billion for the nine months ended September 2010 was primarily attributable to lower interest rates, which are level 2 inputs, underlying certain credit derivative contracts. These unrealized gains were substantially offset by unrealized losses on currency, interest rate and credit derivative contracts which are classified within level 2 of the fair value hierarchy and are used to economically hedge derivative contracts classified within level 3 of the fair value hierarchy. The net unrealized loss of $1.22 billion for the nine months ended September 2009 was primarily attributable to tighter credit spreads on the underlying instruments, partially offset by increases in commodities prices (which are level 2 observable inputs). Level 3 gains and losses on derivative contracts should be considered in the context of the following:


	•	A derivative contract with level 1 and/or level 2 inputs is classified as a level 3 financial instrument 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) is still 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 instruments classified within level 1 or level 2 or cash instruments reported within level 3 of the fair value hierarchy.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The tables below set forth a summary of changes in the fair value of the firm’s level 3 financial assets and financial liabilities at fair value for the three and nine months ended September 2010 and September 2009. The tables reflect gains and losses, including gains and losses for the entire period on financial assets and financial liabilities at fair value that were transferred to level 3 during the period, for all financial assets and financial liabilities at fair value categorized as level 3 as of September 2010 and September 2009, respectively. Transfers between levels and sales are recognized at the beginning of the reporting period in which they occur. Accordingly, the tables do not include gains or losses that were reported in level 3 in prior periods for financial instruments that were transferred out of level 3 or sold prior to the end of the period presented.


	Level 3 Financial Assets and Financial Liabilities at Fair Value
							Net unrealized
							gains/(losses)			Net
							relating to			purchases,
	Balance,						instruments still			issuances			Net transfers			Balance,
	beginning			Net realized			held at the			and			in and/or out			end of
	of period			gains/(losses)			reporting date			settlements			of level 3			period
	(in millions)
Three Months Ended September 2010
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	3,868		$	46		$	25		$	128		$	(77	) ⁽⁴⁾	$	3,990
Loans and securities backed by residential real estate		2,124			45			25			(44	)		99	⁽⁴⁾		2,249
Loan portfolios		1,258			22			—			(16	)		2	⁽⁴⁾		1,266
Bank loans and bridge loans		9,573			165			157			(346	)		(16	) ⁽⁴⁾		9,533
Corporate debt securities		2,592			69			96			(428	)		22	⁽⁴⁾		2,351
State and municipal obligations		825			2			20			(55	)		66	⁽⁴⁾		858
Other debt obligations		1,376			26			17			(174	)		159	⁽⁴⁾		1,404
Equities and convertible debentures		10,335			20			182			86			995	⁽⁵⁾		11,618

Total cash instruments — assets		31,951			395	⁽¹⁾		522	⁽¹⁾		(849	)		1,250			33,269

Cash instruments — liabilities		(595	)		10	⁽²⁾		(6	) ⁽²⁾		47			49	⁽⁴⁾		(495	)
Derivative contracts:
Interest rates — net		(115	)		(21	)		24			18			(110	) ⁽⁴⁾		(204	)
Credit — net		8,526			133			(378	)		(1,075	)		520	⁽⁶⁾		7,726
Currencies — net		1,100			(12	)		(137	)		12			(323	) ⁽⁴⁾		640
Commodities — net		(271	)		(54	)		144			(253	)		(64	) ⁽⁴⁾		(498	)
Equities — net		(1,368	)		(5	)		75			(119	)		66	⁽⁴⁾		(1,351	)

Total derivative contracts — net		7,872			41	⁽²⁾		(272	) ⁽²⁾⁽³⁾		(1,417	)		89			6,313

Securities purchased under agreements to resell		—			(13	) ⁽²⁾		21	⁽²⁾		(56	)		234	⁽⁴⁾		186
Receivables from customers and counterparties		218			6	⁽²⁾		(17	) ⁽²⁾		—			77	⁽⁴⁾		284
Securities sold under agreements to repurchase, at fair value		(1,419	)		—			—			(652	)		—	⁽⁴⁾		(2,071	)
Other secured financings		(8,086	)		—	⁽²⁾		(61	) ⁽²⁾		(7	)		173	⁽⁴⁾		(7,981	)
Unsecured short-term borrowings		(2,768	)		10	⁽²⁾		(207	) ⁽²⁾		(27	)		101	⁽⁴⁾		(2,891	)
Unsecured long-term borrowings		(1,899	)		1	⁽²⁾		(202	) ⁽²⁾		(108	)		305	⁽⁴⁾		(1,903	)
Other liabilities and accrued expenses		(2,386	)		(3	) ⁽²⁾		(147	) ⁽²⁾		154			(94	) ⁽⁴⁾		(2,476	)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Level 3 Financial Assets and Financial Liabilities at Fair Value
							Net unrealized
							gains/(losses)			Net
							relating to			purchases,
	Balance,						instruments still			issuances			Net transfers			Balance,
	beginning			Net realized			held at the			and			in and/or out			end of
	of period			gains/(losses)			reporting date			settlements			of level 3			period
	(in millions)
Nine Months Ended September 2010
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	4,620		$	178		$	132		$	(1,227	)	$	287	⁽⁴⁾	$	3,990
Loans and securities backed by residential real estate		1,880			125			139			11			94	⁽⁴⁾		2,249
Loan portfolios		1,364			61			(10	)		(219	)		70	⁽⁴⁾		1,266
Bank loans and bridge loans		9,560			449			406			(1,095	)		213	⁽⁴⁾		9,533
Corporate debt securities		2,235			228			149			285			(546	) ⁽⁷⁾		2,351
State and municipal obligations		1,114			—			44			(379	)		79	⁽⁴⁾		858
Other debt obligations		2,235			(7	)		181			(249	)		(756	) ⁽⁸⁾		1,404
Equities and convertible debentures		11,871			120			456			(563	)		(266	) ⁽⁴⁾		11,618

Total cash instruments — assets		34,879			1,154	⁽¹⁾		1,497	⁽¹⁾		(3,436	)		(825	)		33,269

Cash instruments — liabilities		(572	)		24	⁽²⁾		(56	) ⁽²⁾		80			29	⁽⁴⁾		(495	)
Derivative contracts:
Interest rates — net		(71	)		(57	)		62			48			(186	) ⁽⁴⁾		(204	)
Credit — net		6,366			328			3,599			(3,054	)		487	⁽⁶⁾		7,726
Currencies — net		215			368			(27	)		(369	)		453	⁽⁹⁾		640
Commodities — net		(90	)		(250	)		113			(27	)		(244	) ⁽⁴⁾		(498	)
Equities — net		(1,224	)		(44	)		353			(440	)		4	⁽⁴⁾		(1,351	)

Total derivative contracts — net		5,196			345	⁽²⁾		4,100	⁽²⁾⁽³⁾		(3,842	)		514			6,313

Securities purchased under agreements to resell		—			(13	) ⁽²⁾		21	⁽²⁾		(56	)		234	⁽⁴⁾		186
Receivables from customers and counterparties		—			16	⁽²⁾		(66	) ⁽²⁾		—			334	⁽⁴⁾		284
Securities sold under agreements to repurchase, at fair value		(394	)		—			—			(1,677	)		—	⁽⁴⁾		(2,071	)
Other secured financings		(6,756	)		(21	) ⁽²⁾		(25	) ⁽²⁾		(1,181	)		2	⁽⁴⁾		(7,981	)
Unsecured short-term borrowings		(2,310	)		(52	) ⁽²⁾		37	⁽²⁾		378			(944	) ⁽¹⁰⁾		(2,891	)
Unsecured long-term borrowings		(3,077	)		(15	) ⁽²⁾		(66	) ⁽²⁾		(87	)		1,342	⁽¹¹⁾		(1,903	)
Other liabilities and accrued expenses		(1,913	)		(8	) ⁽²⁾		(121	) ⁽²⁾		153			(587	) ⁽¹²⁾		(2,476	)


	⁽¹⁾	The aggregate amounts include approximately $506 million and $411 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the three months ended September 2010. The aggregate amounts include approximately $1.67 billion and $979 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the nine months ended September 2010.
	⁽²⁾	Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings.
	⁽³⁾	Principally resulted from changes in level 2 inputs.
	⁽⁴⁾	Includes no individually significant transfers into or out of level 3 during the three and nine months ended September 2010.
	⁽⁵⁾	Principally reflects transfers from level 2 within the fair value hierarchy of certain private equity investments, reflecting reduced transparency of prices as a result of less trading activity for these financial instruments.
	⁽⁶⁾	Principally reflects transfers from level 2 within the fair value hierarchy of certain credit default swaps reflecting reduced transparency of prices for the underlying instruments as a result of less trading activity.
	⁽⁷⁾	Principally reflects a reduction in financial instruments as a result of the consolidation of a VIE, which holds identifiable intangible assets, as a result of the adoption of ASU No. 2009-17. Such assets are included in “Other assets” in the condensed consolidated statements of financial condition.
	⁽⁸⁾	Principally reflects a reduction in financial instruments as a result of the consolidation of a VIE, which holds real estate assets. Such assets are included in “Other assets” in the condensed consolidated statements of financial condition.
	⁽⁹⁾	Principally reflects transfers from level 2 within the fair value hierarchy of certain currency derivative assets reflecting reduced transparency of the correlation inputs used to value these financial instruments as a result of less trading activity.

⁽¹⁰⁾ Principally reflects consolidation of certain VIEs as a result of the adoption of ASU No. 2009-17.


⁽¹¹⁾	Upon the firm’s consolidation of certain VIEs as a result of the adoption of ASU No. 2009-17, the firm’s borrowings from such VIEs, substantially all of which were level 3, became intercompany borrowings and were eliminated in consolidation.
⁽¹²⁾	Principally reflects an increase related to subordinated liabilities issued by VIEs which were consolidated upon the adoption of ASU No. 2009-17.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Level 3 Financial Assets and Financial Liabilities at Fair Value
							Net unrealized
							gains/(losses)			Net
							relating to			purchases,
	Balance,						instruments still			issuances			Net transfers			Balance,
	beginning			Net realized			held at the			and			in and/or out			end of
	of period			gains/(losses)			reporting date			settlements			of level 3			period
	(in millions)
Three Months Ended September 2009
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	6,839		$	95		$	(259	)	$	(370	)	$	(193	)	$	6,112
Loans and securities backed by residential real estate		1,862			49			62			(40	)		(90	)		1,843
Loan portfolios		1,774			32			(4	)		(126	)		—			1,676
Bank loans and bridge loans		9,669			182			409			(493	)		14			9,781
Corporate debt securities		2,372			22			39			(327	)		(248	)		1,858
State and municipal obligations		1,430			(2	)		23			(39	)		(148	)		1,264
Other debt obligations		2,803			26			20			(236	)		(127	)		2,486
Equities and convertible debentures		12,679			5			87			190			(480	) ⁽⁴⁾		12,481

Total cash instruments — assets		39,428			409	⁽¹⁾		377	⁽¹⁾		(1,441	)		(1,272	)		37,501

Cash instruments — liabilities		(1,020	)		10	⁽²⁾		180	⁽²⁾		250			38			(542	)
Derivative contracts — net		3,076			170	⁽²⁾		(639	) ⁽²⁾⁽³⁾		367			1,187	⁽⁵⁾		4,161
Other secured financings		(8,067	)		(4	) ⁽²⁾		(295	) ⁽²⁾		491			(27	)		(7,902	)
Unsecured short-term borrowings		(2,229	)		(61	) ⁽²⁾		(193	) ⁽²⁾		172			370			(1,941	)
Unsecured long-term borrowings		(3,427	)		(5	) ⁽²⁾		(217	) ⁽²⁾		85			135			(3,429	)
Other liabilities and accrued expenses		(1,644	)		—	⁽²⁾		(22	) ⁽²⁾		(156	)		—			(1,822	)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Level 3 Financial Assets and Financial Liabilities at Fair Value
							Net unrealized
							gains/(losses)			Net
							relating to			purchases,
	Balance,						instruments still			issuances			Net transfers			Balance,
	beginning			Net realized			held at the			and			in and/or out			end of
	of period			gains/(losses)			reporting date			settlements			of level 3			period
	(in millions)
Nine Months Ended September 2009
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	9,170		$	202		$	(1,464	)	$	(1,481	)	$	(315	)	$	6,112
Loans and securities backed by residential real estate		1,927			79			66			(395	)		166			1,843
Loan portfolios		4,266			148			(300	)		(891	)		(1,547	) ⁽⁶⁾		1,676
Bank loans and bridge loans		11,169			559			(194	)		(1,963	)		210			9,781
Corporate debt securities		2,734			152			(192	)		(525	)		(311	)		1,858
State and municipal obligations		1,356			(23	)		33			(424	)		322			1,264
Other debt obligations		3,903			123			(200	)		(1,054	)		(286	)		2,486
Equities and convertible debentures		15,127			(14	)		(2,452	)		586			(766	) ⁽⁴⁾		12,481

Total cash instruments — assets		49,652			1,226	⁽¹⁾		(4,703	) ⁽¹⁾		(6,147	)		(2,527	)		37,501

Cash instruments — liabilities		(1,727	)		5	⁽²⁾		433	⁽²⁾		560			187			(542	)
Derivative contracts — net		3,315			547	⁽²⁾		(1,216	) ⁽²⁾⁽³⁾		1,928			(413	)		4,161
Other secured financings		(4,039	)		(24	) ⁽²⁾		(720	) ⁽²⁾		(564	)		(2,555	) ⁽⁷⁾		(7,902	)
Unsecured short-term borrowings		(4,712	)		(70	) ⁽²⁾		(137	) ⁽²⁾		(837	)		3,815	⁽⁷⁾		(1,941	)
Unsecured long-term borrowings		(1,689	)		(45	) ⁽²⁾		(268	) ⁽²⁾		318			(1,745	) ⁽⁷⁾		(3,429	)
Other liabilities and accrued expenses		—			(21	) ⁽²⁾		56	⁽²⁾		(904	)		(953	) ⁽⁸⁾		(1,822	)


⁽¹⁾	The aggregate amounts include approximately $317 million and $469 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the three months ended September 2009. The aggregate amounts include approximately $(4.92) billion and $1.44 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statement of earnings for the nine months ended September 2009.

⁽²⁾	Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings.

⁽³⁾	Primarily resulted from changes in level 2 inputs.

⁽⁴⁾	Principally reflects transfers to level 2 within the fair value hierarchy of certain private equity investments, reflecting improved transparency of prices for these financial instruments, primarily as a result of trading activity.

⁽⁵⁾	Principally reflects transfers from level 2 within the fair value hierarchy of credit derivative assets, reflecting reduced transparency of certain credit spread inputs used to value these financial instruments, partially offset by transfers to level 2 within the fair value hierarchy of equity derivative assets, reflecting improved transparency of the equity index volatility inputs used to value these financial instruments.

⁽⁶⁾	Principally reflects the deconsolidation of certain loan portfolios for which the firm did not bear economic exposure.

⁽⁷⁾	Principally reflects transfers from level 3 unsecured short-term borrowings to level 3 other secured financings and level 3 unsecured long-term borrowings related to changes in the terms of certain notes.

⁽⁸⁾	Principally reflects transfers from level 2 within the fair value hierarchy of certain insurance contracts, reflecting reduced transparency of mortality curve inputs used to value these financial instruments as a result of less observable trading activity.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Derivative Activities

Derivative contracts are instruments such as futures, forwards, swaps or option contracts that derive their value from underlying asset prices, indices, reference rates and other inputs or a combination of these factors. Derivative instruments may be privately negotiated contracts, which are often referred to as OTC derivatives, or they may be listed and traded on an exchange. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange 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.

Certain cash instruments such as mortgage-backed securities, interest-only and principal-only obligations, and indexed debt instruments are not considered derivatives even though their values or contractually required cash flows are derived from the price of some other security or index. However, certain commodity-related contracts are included in the firm’s derivatives disclosure, as these contracts may be settled in cash or the assets to be delivered under the contract are readily convertible into cash.

The firm enters into derivative transactions to facilitate client transactions, as a means of risk management or to take proprietary positions. Risk exposures are managed through diversification, by controlling position sizes and by entering into offsetting positions. For example, the firm may manage the risk related to a portfolio of common stock by entering into an offsetting position in a related equity-index futures contract.

Gains and losses on derivatives used for trading purposes are included in “Trading and principal investments” in the condensed consolidated statements of earnings. See Note 2 for information regarding the firm’s accounting policy and use of derivatives for hedge accounting.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The fair value of the firm’s derivative contracts is reflected net of cash collateral posted or received pursuant to credit support agreements and is reported on a net-by-counterparty basis in the firm’s condensed consolidated statements of financial condition when management believes a legal right of setoff exists under an enforceable netting agreement. The following table sets forth the fair value and the number of contracts of the firm’s derivative contracts by major product type on a gross basis as of September 2010 and December 2009. 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 pursuant to credit support agreements, and therefore are not representative of the firm’s exposure:


	As of September 2010								As of December 2009
							Number								Number
	Derivative			Derivative			of		Derivative			Derivative			of
	Assets			Liabilities			Contracts		Assets			Liabilities			Contracts
	(in millions, except number of contracts)
Derivative contracts for trading activities
Interest rates	$	622,234		$	580,121			266,933	$	458,614		$	407,125			270,707
Credit		135,470			110,636			389,256		164,669			134,810			443,450
Currencies		92,384			80,399			247,859		77,223			62,413			171,760
Commodities		37,235			41,050			76,323		47,234			48,163			73,010
Equities		74,739			59,237			333,977		67,559			53,207			237,625

Subtotal	$	962,062		$	871,443			1,314,348	$	815,299		$	705,718			1,196,552

Derivative contracts accounted for as hedges
Interest rates	$	29,401		$	8			935	$	19,563		$	1			806
Currencies		1			96			73		8			47			58

Subtotal	$	29,402		$	104			1,008	$	19,571		$	48			864
Gross fair value of derivative contracts	$	991,464		$	871,547			1,315,356	$	834,870		$	705,766			1,197,416

Counterparty netting ⁽¹⁾		(788,905	)		(788,905	)				(635,014	)		(635,014	)
Cash collateral netting ⁽²⁾		(121,085	)		(18,875	)				(124,603	)		(14,743	)

Fair value included in trading assets, at fair value	$	81,474							$	75,253

Fair value included in trading liabilities, at fair value				$	63,767							$	56,009


⁽¹⁾	Represents the netting of receivable balances with payable balances for the same counterparty pursuant to enforceable netting agreements.

⁽²⁾	Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

For the three months ended September 2010 and September 2009, the gain recognized on interest rate derivative contracts accounted for as hedges was $2.12 billion and $844 million, respectively, and the related loss recognized on the hedged borrowings and bank deposits was $2.66 billion and $832 million, respectively. For the nine months ended September 2010 and September 2009, the gain/(loss) recognized on interest rate derivative contracts accounted for as hedges was $7.76 billion and $(7.17) billion, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $(9.13) billion and $7.14 billion, respectively. These gains and losses are included in “Interest expense” in the condensed consolidated statements of earnings. The hedge ineffectiveness recognized on these derivative contracts for the three and nine months ended September 2010 was a loss of $537 million and a loss of $1.37 billion, respectively. This loss consisted primarily of the amortization of prepaid credit spreads, and was not material for the three and nine months ended September 2009. The gain/(loss) excluded from the assessment of hedge effectiveness was not material for the three and nine months ended September 2010 and was a loss of $223 million and a loss of $889 million for the three and nine months ended September 2009, respectively.

For the three months ended September 2010 and September 2009, the loss on currency derivative contracts accounted for as hedges was $489 million and $145 million, respectively. For the nine months ended September 2010 and September 2009, the loss on currency derivative contracts accounted for as hedges was $172 million and $442 million, respectively. Such amounts are included in “Currency translation adjustment, net of tax” in the condensed consolidated statements of comprehensive income. The gain/(loss) related to ineffectiveness was not material for the three and nine months ended September 2010 and September 2009. The gain reclassified to earnings from accumulated other comprehensive income was $14 million and $19 million, respectively, for the three and nine months ended September 2010. The gain/(loss) reclassified to earnings from accumulated other comprehensive income was not material for the three and nine months ended September 2009.

The firm also has embedded derivatives that have been bifurcated from related borrowings. Such derivatives, which are classified in unsecured short-term and unsecured long-term borrowings in the firm’s condensed consolidated statements of financial condition, had a net asset carrying value of $141 million and $96 million as of September 2010 and December 2009, respectively. The net asset as of September 2010, which represented 327 contracts, included gross assets of $418 million (primarily comprised of equity and interest rate derivatives) and gross liabilities of $277 million (primarily comprised of interest rate and equity derivatives). The net asset as of December 2009, which represented 297 contracts, included gross assets of $478 million (primarily comprised of equity and interest rate derivatives) and gross liabilities of $382 million (primarily comprised of equity and interest rate derivatives). See Notes 6 and 7 for further information regarding the firm’s unsecured borrowings.

As of September 2010 and December 2009, the firm has designated $3.77 billion and $3.38 billion, respectively, of foreign currency-denominated debt, included in unsecured long-term borrowings and unsecured short-term borrowings in the firm’s condensed consolidated statements of financial condition, as hedges of net investments in non-U.S. subsidiaries. For the three months ended September 2010 and September 2009, the loss on these debt instruments was $217 million and $195 million, respectively. For the nine months ended September 2010 and September 2009, the loss on these debt instruments was $395 million and $16 million, respectively. Such amounts are included in “Currency translation adjustment, net of tax” in the condensed consolidated statements of comprehensive income. The gain/(loss) related to ineffectiveness and the gain/(loss) reclassified to earnings from accumulated other comprehensive income was not material for the three and nine months ended September 2010 and September 2009.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth by major product type the firm’s gains/(losses) related to trading activities, including both derivative and nonderivative financial instruments, for the three and nine months ended September 2010 and September 2009. These gains/(losses) are not representative of the firm’s individual business unit results because many of the firm’s trading 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 derivative contracts 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 and derivatives trading inventory has exposure to foreign currencies and may be economically hedged with foreign currency contracts. The gains/(losses) set forth below are included in “Trading and principal investments” in the condensed consolidated statements of earnings and exclude related interest income and interest expense.


	Three Months						Nine Months
	Ended September						Ended September
	2010			2009			2010			2009
	(in millions)
Interest rates	$	3,612		$	2,295		$	(1,116	)	$	7,170
Credit		1,642			2,189			8,121			5,303
Currencies ⁽¹⁾		(4,351	)		(1,728	)		2,440			(2,149	)
Equities		2,651			2,983			4,600			5,825
Commodities and other		554			964			1,715			4,307

Total	$	4,108		$	6,703		$	15,760		$	20,456


	⁽¹⁾	Includes gains/(losses) on currency contracts used to economically hedge positions included in other product types in this table.

Certain of the firm’s derivative instruments have been transacted pursuant to bilateral agreements with certain counterparties that may require the firm to post collateral or terminate the transactions based on the firm’s long-term credit ratings. As of September 2010, the aggregate fair value of such derivative contracts that were in a net liability position was $29.82 billion, and the aggregate fair value of assets posted by the firm as collateral for these derivative contracts was $24.61 billion. As of September 2010, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately $1.50 billion and $2.98 billion could have been called by counterparties in the event of a one-notch and two-notch reduction, respectively, in the firm’s long-term credit ratings. As of December 2009, the aggregate fair value of such derivative contracts that were in a net liability position was $20.85 billion, and the aggregate fair value of assets posted by the firm as collateral for these derivative contracts was $14.48 billion. As of December 2009, additional collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately $1.12 billion and $2.36 billion could have been called by counterparties in the event of a one-notch and two-notch reduction, respectively, in the firm’s long-term credit ratings.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The firm enters into a broad array of credit derivatives to facilitate client transactions, to take proprietary positions and as a means of risk management. The firm uses each of the credit derivatives described below for these purposes. These credit derivatives are entered into by various trading desks around the world, and are actively managed based on the underlying risks. These activities are frequently part of a broader trading strategy and are dynamically managed based on the net risk position. As individually negotiated contracts, credit derivatives can have numerous settlement and payment conventions. The more common types of triggers include bankruptcy of the reference credit entity, acceleration of indebtedness, failure to pay, restructuring, repudiation and dissolution of the entity.


	•	Credit default swaps. Single-name credit default swaps protect the buyer against the loss of principal on one or more bonds, loans or mortgages (reference obligations) in the event of a default by the issuer (reference entity). The buyer of protection pays an initial or periodic premium to the seller and receives credit default protection for the period of the contract. If there is no credit default event, as defined by the specific derivative contract, then the seller of protection makes no payments to the buyer of protection. However, if a credit default event occurs, the seller of protection will be required to make a payment to the buyer of protection. Typical credit default events requiring payment include bankruptcy of the reference credit entity, failure to pay the principal or interest, and restructuring of the relevant obligations of the reference entity.


	•	Credit indices, baskets and tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. Typically, in the event of a default of one of the underlying reference obligations, the protection seller will pay to the protection buyer a pro-rata portion of a transaction’s total notional amount relating to the underlying defaulted reference obligation. In tranched transactions, the credit risk of a basket or index is separated into various portions each having different levels of subordination. The most junior tranches cover initial defaults, and once losses exceed the notional amount of these tranches, the excess is covered by the next most senior tranche in the capital structure.

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


	•	Credit options. In a credit option, the option writer assumes the obligation to purchase or sell a reference obligation at a specified price or credit spread. The option purchaser buys the right to sell the reference obligation to, or purchase it from, the option writer. The payments on credit options depend either on a particular credit spread or the price of the reference obligation.

Substantially all of the firm’s purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underlyings. In addition, upon the occurrence of a specified trigger event, the firm may take possession of the reference obligations underlying a particular written credit derivative, and consequently may, upon liquidation of the reference obligations, recover amounts on the underlying reference obligations in the event of default. As of September 2010, the firm’s written and purchased credit derivatives had total gross notional amounts of $2.17 trillion and $2.30 trillion, respectively, for total net purchased protection of $129.44 billion in notional value. As of December 2009, the firm’s written and purchased credit derivatives had total gross notional amounts of $2.54 trillion and $2.71 trillion, respectively, for total net purchased protection of $164.13 billion in notional value.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth certain information related to the firm’s credit derivatives. Fair values in the table below exclude the effects of both netting under enforceable netting agreements and netting of cash collateral posted or received pursuant to credit support agreements, and therefore are not representative of the firm’s exposure.


									Maximum Payout/Notional
	Maximum Payout/Notional Amount								Amount of Purchased				Fair Value of
	of Written Credit Derivatives by Tenor ⁽¹⁾								Credit Derivatives				Written Credit Derivatives
									Offsetting		Other
					5 Years				Purchased		Purchased						Net
	0 - 12		1 - 5		or				Credit		Credit						Asset/
	Months		Years		Greater		Total		Derivatives ⁽²⁾		Derivatives ⁽³⁾		Asset		Liability		(Liability)
	($ in millions)
As of September 2010
Credit spread on underlying (basis points) ⁽⁴⁾
0-250	$	237,103	$	1,109,624	$	319,563	$	1,666,290	$	1,561,087	$	226,091	$	26,854	$	16,957	$	9,897
251-500		14,204		176,055		58,067		248,326		215,173		35,448		7,400		8,709		(1,309	)
501-1,000		13,114		104,947		44,075		162,136		138,377		23,489		2,610		12,627		(10,017	)
Greater than 1,000		8,684		70,375		17,670		96,729		74,399		28,861		827		39,462		(38,635	)

Total	$	273,105	$	1,461,001	$	439,375	$	2,173,481	$	1,989,036	$	313,889	$	37,691	$	77,755	$	(40,064	) ⁽⁵⁾

As of December 2009
Credit spread on underlying (basis points) ⁽⁴⁾
0-250	$	283,353	$	1,342,649	$	414,809	$	2,040,811	$	1,884,864	$	299,329	$	39,740	$	13,441	$	26,299
251-500		15,151		142,732		39,337		197,220		182,583		27,194		5,008		6,816		(1,808	)
501-1,000		10,364		101,621		34,194		146,179		141,317		5,673		2,841		12,448		(9,607	)
Greater than 1,000		20,262		107,768		31,208		159,238		117,914		48,699		1,524		60,279		(58,755	)

Total	$	329,130	$	1,694,770	$	519,548	$	2,543,448	$	2,326,678	$	380,895	$	49,113	$	92,984	$	(43,871	) ⁽⁵⁾


⁽¹⁾	Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives.

⁽²⁾	Offsetting purchased credit derivatives represent the notional amount of purchased credit derivatives to the extent they economically hedge written credit derivatives with identical underlyings.

⁽³⁾	Comprised of purchased protection in excess of the amount of written protection on identical underlyings and purchased protection on other underlyings on which the firm has not written protection.

⁽⁴⁾	Credit spread on the underlying, together with the tenor of the contract, are indicators of payment/performance risk. For example, the firm is least likely to pay or otherwise be required to perform where the credit spread on the underlying is “0-250” basis points and the tenor is “0-12 Months.” The likelihood of payment or performance is generally greater as the credit spread on the underlying and tenor increase.

⁽⁵⁾	These net liabilities differ from the carrying values related to credit derivatives in the firm’s condensed consolidated statements of financial condition because they exclude the effects of both netting under enforceable netting agreements and netting of cash collateral posted or received pursuant to credit support agreements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Impact of Credit Spreads

On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk on derivative contracts through changes in credit mitigants or the sale or unwind of the contracts. The net gain/(loss) attributable to the impact of changes in credit exposure and credit spreads on derivative contracts (including derivative assets and liabilities and related hedges) was $(129) million and $264 million for the three months ended September 2010 and September 2009, respectively, and $60 million and $350 million for the nine months ended September 2010 and September 2009, respectively.

The following table sets forth the net gains/(losses) attributable to the impact of changes in the firm’s own credit spreads on borrowings for which the fair value option was elected. The firm calculates the fair value of borrowings by discounting future cash flows at a rate which incorporates the firm’s observable credit spreads.


	Three Months						Nine Months
	Ended September						Ended September
	2010			2009			2010		2009
	(in millions)
Net gains/(losses) including hedges	$	(178	)	$	(278	)	$	319	$	(823	)
Net gains/(losses) excluding hedges		(188	)		(285	)		326		(830	)

The net gain attributable to changes in instrument-specific credit spreads on loans and loan commitments for which the fair value option was elected was a gain of $680 million and $1.33 billion for the three months ended September 2010 and September 2009, respectively, and a gain of $1.63 billion and $1.03 billion for the nine months ended September 2010 and September 2009, respectively. The firm attributes changes in the fair value of floating rate loans and loan commitments to changes in instrument-specific credit spreads. For fixed rate loans and loan commitments, the firm allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. See below for additional details regarding the fair value option.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The Fair Value Option

Gains/(Losses)

The following table sets forth the gains/(losses) included in earnings for the three and nine months ended September 2010 and September 2009 as a result of the firm electing to apply the fair value option to certain financial assets and financial liabilities, as described in Note 2. The table excludes gains and losses related to (i) trading assets, at fair value and trading liabilities, at fair value, (ii) gains and losses on assets and liabilities that would have been accounted for at fair value under other GAAP if the firm had not elected the fair value option, (iii) gains and losses on secured financings related to transfers of financial assets accounted for as financings rather than sales, as such gains and losses are offset by gains and losses on the related financial assets, and (iv) gains and losses on subordinated liabilities issued by consolidated VIEs, as such gains and losses are offset by gains and losses on the financial assets held by the consolidated VIEs.


	Three Months						Nine Months
	Ended September						Ended September
	2010			2009			2010			2009
	(in millions)
Unsecured long-term borrowings ⁽¹⁾	$	(122	)	$	(209	)	$	248		$	(651	)
Other secured financings ⁽²⁾		(69	)		(349	)		(15	)		(766	)
Unsecured short-term borrowings ⁽³⁾		(22	)		(44	)		52			(138	)
Receivables from customers and counterparties ⁽⁴⁾		(12	)		241			(105	)		323
Other liabilities and accrued expenses ⁽⁵⁾⁽⁶⁾		(103	)		(180	)		(176	)		(260	)
Other ⁽⁷⁾		(18	)		53			(1	)		61

Total ⁽⁸⁾	$	(346	)	$	(488	)	$	3		$	(1,431	)


	⁽¹⁾	Excludes losses of $57 million and $1.45 billion for the three months ended September 2010 and September 2009, respectively, and $1.65 billion and $3.17 billion for the nine months ended September 2010 and September 2009, respectively, related to the embedded derivative component of hybrid financial instruments. Such losses would have been recognized even if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option.

	⁽²⁾	Excludes gains/(losses) of $(53) million and $34 million for the three months ended September 2010 and September 2009, respectively, and $(58) million and $41 million for the nine months ended September 2010 and September 2009, respectively, related to financings recorded as a result of transactions that were accounted for as secured financings rather than sales. Changes in the fair value of these secured financings are offset by changes in the fair value of the related financial instruments included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition.

	⁽³⁾	Excludes losses of $1.20 billion and $893 million for the three months ended September 2010 and September 2009, respectively, and $445 million and $2.37 billion for the nine months ended September 2010 and September 2009, respectively, related to the embedded derivative component of hybrid financial instruments. Such gains and losses would have been recognized even if the firm had not elected to account for the entire hybrid instrument at fair value under the fair value option.

	⁽⁴⁾	Primarily consists of gains/(losses) on certain reinsurance contracts.

	⁽⁵⁾	Excludes gains/(losses) of $(54) million and $97 million for the three and nine months ended September 2010, respectively, related to subordinated liabilities issued by consolidated VIEs. Changes in the fair value of these financial instruments are offset by changes in the fair value of the financial assets held by the consolidated VIEs.

	⁽⁶⁾	Primarily consists of losses on certain insurance and reinsurance contracts.

	⁽⁷⁾	Primarily consists of gains/(losses) on resale and repurchase agreements, securities borrowed and loaned within Trading and Principal Investments, and deposits.

	⁽⁸⁾	Reported in “Trading and principal investments” in the condensed consolidated statements of earnings. The amounts exclude contractual interest, which is included in “Interest income” and “Interest expense” in the condensed consolidated statements of earnings, for all instruments other than hybrid financial instruments.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

All trading assets and trading liabilities are accounted for at fair value either under the fair value option or as required by other accounting standards (principally ASC 320, ASC 940 and ASC 815). Excluding equities commissions of $806 million and $930 million for the three months ended September 2010 and September 2009, respectively, and $2.66 billion and $2.93 billion for the nine months ended September 2010 and September 2009, respectively, and the gains and losses on the instruments accounted for under the fair value option described above, “Trading and principal investments” in the condensed consolidated statements of earnings primarily represents gains and losses on “Trading assets, at fair value” and “Trading liabilities, at fair value” in the condensed consolidated statements of financial condition.

Loans and Loan Commitments

As of September 2010, the aggregate contractual principal amount of loans and long-term receivables for which the fair value option was elected exceeded the related fair value by $37.29 billion, including a difference of $33.23 billion related to loans with an aggregate fair value of $4.29 billion that were on nonaccrual status (including loans more than 90 days past due). As of December 2009, the aggregate contractual principal amount of loans and long-term receivables for which the fair value option was elected exceeded the related fair value by $41.96 billion, including a difference of $36.30 billion related to loans with an aggregate fair value of $4.28 billion that were on nonaccrual status (including loans more than 90 days past due). The aggregate contractual principal exceeds the related fair value primarily because the firm regularly purchases loans, such as distressed loans, at values significantly below contractual principal amounts.

As of September 2010 and December 2009, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $1.30 billion and $879 million, respectively, and the related total contractual amount of these lending commitments was $49.66 billion and $44.05 billion, respectively.

Long-term Debt Instruments

The aggregate contractual principal amount of long-term debt instruments (principal and non-principal protected) for which the fair value option was elected exceeded the related fair value by $762 million and $752 million as of September 2010 and December 2009, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Investments in Funds That Calculate Net Asset Value Per Share

The firm’s investments in funds that calculate net asset value per share 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 these existing funds will be liquidated over the next 10 years. 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 following table sets forth the fair value of the firm’s investments in and unfunded commitments to funds that calculate net asset value per share:


	As of September 2010				As of December 2009
	Fair Value of		Unfunded		Fair Value of		Unfunded
	Investments		Commitments		Investments		Commitments
	(in millions)
Private equity funds ⁽¹⁾	$	7,726	$	5,207	$	8,229	$	5,722
Private debt funds ⁽²⁾		4,383		3,974		3,628		4,048
Hedge funds ⁽³⁾		3,075		—		3,133		—
Real estate and other funds ⁽⁴⁾		1,107		2,214		939		2,398

Total	$	16,291	$	11,395	$	15,929	$	12,168


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

	⁽²⁾	These funds generally invest in 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 (Continued)

(UNAUDITED)

Collateralized Transactions

The firm receives financial instruments as collateral, primarily in connection with resale agreements, securities borrowed, derivative transactions and customer margin loans. Such financial instruments may include obligations of the U.S. government, federal agencies, sovereigns and corporations, as well as equities and convertible debentures.

In many cases, the firm is permitted to deliver or repledge these financial instruments in connection with entering into repurchase agreements, securities lending agreements and other secured financings, collateralizing derivative transactions and meeting firm or customer settlement requirements. As of September 2010 and December 2009, the fair value of financial instruments received as collateral by the firm that it was permitted to deliver or repledge was $609.14 billion and $561.77 billion, respectively, of which the firm delivered or repledged $442.02 billion and $392.89 billion, respectively.

The firm also pledges assets that it owns to counterparties who may or may not have the right to deliver or repledge them. Trading assets pledged to counterparties that have the right to deliver or repledge are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and were $42.34 billion and $31.49 billion as of September 2010 and December 2009, respectively. Trading assets, pledged in connection with repurchase agreements, securities lending agreements and other secured financings to counterparties that did not have the right to sell or repledge are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and were $122.55 billion and $109.11 billion as of September 2010 and December 2009, respectively. Other assets (primarily real estate and cash) owned and pledged in connection with other secured financings to counterparties that did not have the right to sell or repledge were $5.42 billion and $7.93 billion as of September 2010 and December 2009, respectively.

In addition to repurchase agreements and securities lending agreements, the firm obtains secured funding through the use of other arrangements. Other secured financings include arrangements that are nonrecourse, that is, only the subsidiary that executed the arrangement or a subsidiary guaranteeing the arrangement is obligated to repay the financing. Other secured financings consist of liabilities related to the firm’s William Street credit extension program; consolidated VIEs; collateralized central bank financings and other transfers of financial assets accounted for as financings rather than sales (primarily pledged bank loans and mortgage whole loans); and other structured financing arrangements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Other secured financings by maturity are set forth in the table below:


	As of
	September		December
	2010		2009
	(in millions)
Other secured financings (short-term) ⁽¹⁾⁽²⁾	$	14,646	$	12,931
Other secured financings (long-term):
2011		222		3,832
2012		5,617		1,726
2013		1,328		1,518
2014		2,062		1,617
2015		469		255
2016-thereafter		2,249		2,255

Total other secured financings (long-term) ^(3)(4)(5)		11,947		11,203

Total other secured financings ⁽⁶⁾⁽⁷⁾	$	26,593	$	24,134


	⁽¹⁾	As of September 2010 and December 2009, consists of U.S. dollar-denominated financings of $3.65 billion and $6.47 billion (including $3.53 billion and $6.15 billion at fair value) and non-U.S. dollar-denominated financings of $11.00 billion and $6.46 billion (including $3.42 billion and $1.08 billion at fair value), respectively. As of September 2010 and December 2009, after giving effect to hedging activities, the U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 2.88% and 3.44%, respectively, and the non-U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 0.45% and 1.57%, respectively.

	⁽²⁾	Includes other secured financings maturing within one year of the financial statement date and other secured financings that are redeemable within one year of the financial statement date at the option of the holder.

	⁽³⁾	As of September 2010 and December 2009, consists of U.S. dollar-denominated financings of $8.71 billion and $7.28 billion (including $7.32 billion and $5.90 billion at fair value) and non-U.S. dollar-denominated financings of $3.24 billion and $3.92 billion (including $2.18 billion and $2.10 billion at fair value), respectively. As of September 2010 and December 2009, after giving effect to hedging activities, the U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 2.14% and 1.83%, respectively, and the non-U.S. dollar-denominated financings not at fair value had a weighted average interest rate of 2.51% and 2.30%, respectively.

	⁽⁴⁾	Secured long-term financings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Secured long-term financings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable.

	⁽⁵⁾	The aggregate contractual principal amount of other secured financings (long-term) for which the fair value option was elected, primarily consisting of transfers of financial assets accounted for as financings rather than sales, debt raised through the William Street credit extension program and certain other nonrecourse financings, exceeded the related fair value by $342 million as of September 2010.

	⁽⁶⁾	As of September 2010 and December 2009, $23.35 billion and $18.25 billion, respectively, of these financings were collateralized by trading assets and $3.24 billion and $5.88 billion, respectively, by other assets (primarily real estate and cash). Other secured financings include $9.01 billion and $10.63 billion of nonrecourse obligations as of September 2010 and December 2009, respectively.

	⁽⁷⁾	As of September 2010 and December 2009, other secured financings include $11.23 billion and $9.51 billion, respectively, related to transfers of financial assets accounted for as financings rather than sales. Such financings were collateralized by financial assets included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition of $11.46 billion and $9.78 billion as of September 2010 and December 2009, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 4.	Securitization Activities and Variable Interest Entities

Securitization Activities

The firm securitizes residential and commercial mortgages, corporate bonds and other types of financial assets. The firm acts as underwriter of the beneficial interests that are sold to investors. The firm derecognizes financial assets transferred in securitizations, provided it has relinquished control over such assets. Transferred assets are accounted for at fair value prior to securitization. The firm generally receives cash in exchange for the transferred assets. Net revenues related to underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.

The firm may have continuing involvement with transferred assets, including: retaining interests in securitized financial assets, primarily in the form of senior or subordinated securities; and retaining servicing rights. The firm may also purchase senior or subordinated securities in connection with secondary market-making activities. Retained interests and other interests related to the firm’s continuing involvement are accounted for at fair value and are included in “Trading assets, at fair value” in the condensed consolidated statements of financial condition and are generally classified within level 2 of the fair value hierarchy. See Note 2 for additional information regarding fair value measurement.

During the three months ended September 2010 and September 2009, the firm securitized $9.14 billion and $18.75 billion, respectively, of financial assets in which the firm had continuing involvement, substantially all of which related to residential mortgages, primarily in connection with government agency securitizations. During the nine months ended September 2010 and September 2009, the firm securitized $29.78 billion and $35.22 billion, respectively, of financial assets in which the firm had continuing involvement, substantially all of which related to residential mortgages, primarily in connection with government agency securitizations. Cash flows received on retained interests were $149 million and $135 million for the three months ended September 2010 and September 2009, respectively, and $366 million and $335 million for the nine months ended September 2010 and September 2009, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth certain information related to the firm’s continuing involvement in securitization entities to which the firm sold assets, as well as the total outstanding principal amount of transferred assets in which the firm has continuing involvement, as of September 2010 and December 2009. The outstanding principal amount set forth in the table below is presented for the purpose of providing information about the size of the securitization entities in which the firm has continuing involvement, and is not representative of the firm’s risk of loss. For retained or purchased interests, the firm’s risk of loss is limited to the fair value of these interests.


	As of September 2010						As of December 2009
	Outstanding		Fair Value of		Fair Value of		Outstanding		Fair Value of		Fair Value of
	Principal		Retained		Purchased		Principal		Retained		Purchased
	Amount		Interests		Interests ⁽¹⁾		Amount		Interests		Interests ⁽¹⁾
	(in millions)
Residential mortgage-backed ⁽²⁾	$	63,164	$	4,095	$	6	$	59,410	$	3,956	$	17
Commercial mortgage-backed		6,555		59		150		11,643		56		96
Other ⁽³⁾		13,280		67		141		17,768		93		54

Total ⁽⁴⁾	$	82,999	$	4,221	$	297	$	88,821	$	4,105	$	167


	⁽¹⁾	Comprised of senior and subordinated interests in securitization-related entities purchased in connection with secondary market-making activities in which the firm also holds retained interests. In addition to these interests, the firm had other continuing involvement in the form of derivative transactions and guarantees with certain nonconsolidated VIEs for which the carrying value was a net liability of $78 million and $87 million as of September 2010 and December 2009, respectively. The notional amounts of these transactions are included in maximum exposure to loss in the nonconsolidated VIE table below.

	⁽²⁾	Primarily consists of outstanding principal and retained interests related to government agency securitization entities.

	⁽³⁾	Primarily consists of CDOs backed by corporate and mortgage obligations and CLOs.

	⁽⁴⁾	Includes $7.32 billion of outstanding principal amount and $22 million of fair value of retained interests as of September 2010 related to securitization entities in which the firm’s only continuing involvement is retained servicing, which is market-based and therefore not a variable interest.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth the weighted average key economic assumptions used in measuring the fair value of the firm’s retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions:


	As of September 2010					As of December 2009
	Type of Retained Interests					Type of Retained Interests
	Mortgage-					Mortgage-
	Backed			Other ⁽¹⁾		Backed			Other ⁽¹⁾
	($ in millions)
Fair value of retained interests	$	4,154		$	67	$	4,012		$	93

Weighted average life (years)		5.9			4.0		4.4			4.4

Constant prepayment rate ⁽²⁾		16.6	%		N.M.		23.5	%		N.M.
Impact of 10% adverse change ⁽²⁾	$	(36	)		N.M.	$	(44	)		N.M.
Impact of 20% adverse change ⁽²⁾		(73	)		N.M.		(92	)		N.M.

Discount rate ⁽³⁾		6.3	%		N.M.		8.4	%		N.M.
Impact of 10% adverse change	$	(81	)		N.M.	$	(76	)		N.M.
Impact of 20% adverse change		(157	)		N.M.		(147	)		N.M.


	⁽¹⁾	Due to the nature and current fair value of certain of these retained interests, the weighted average assumptions for constant prepayment and discount rates and the related sensitivity to adverse changes are not meaningful as of September 2010 and December 2009. The firm’s maximum exposure to adverse changes in the value of these interests is the firm’s carrying value of $67 million and $93 million as of September 2010 and December 2009, respectively.

	⁽²⁾	Constant prepayment rate is included only for positions for which constant prepayment rate is a key assumption in the determination of fair value.

	⁽³⁾	The majority of the firm’s mortgage-backed retained interests are U.S. government agency-issued collateralized mortgage obligations, for which there is no anticipated credit loss. For the remainder of the firm’s retained interests, the expected credit loss assumptions are reflected within the discount rate.

The preceding table does not give effect to the offsetting benefit of other financial instruments that are held to mitigate risks inherent in these retained interests. Changes in fair value based on an adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value is not usually linear. In addition, the impact of a change in a particular assumption is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.

Variable Interest Entities

The firm, in the ordinary course of business, retains interests in VIEs in connection with its securitization activities. The firm also purchases and sells variable interests in VIEs, which primarily issue residential and commercial mortgage-backed and other asset-backed securities, CDOs and CLOs, in connection with its market-making activities and makes investments in and loans to VIEs that hold performing and nonperforming debt, equity, real estate, power-related and other assets. In addition, the firm utilizes VIEs to provide investors with principal-protected notes, credit-linked notes and asset-repackaged notes designed to meet their objectives. VIEs generally finance the purchase of assets by issuing debt and equity instruments.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The firm’s variable interests in VIEs include senior and subordinated debt interests in mortgage-backed and asset-backed securitization vehicles, CDOs and CLOs; loan commitments; limited and general partnership interests; preferred and common stock; interest rate, foreign currency, equity, commodity and credit derivatives; and guarantees.

The firm’s exposure to the obligations of VIEs is generally limited to its interests in these entities. In the tables set forth below, the maximum exposure to loss for retained and purchased interests and loans and investments is the carrying value of these interests. In certain instances, the firm provides guarantees, including derivative guarantees, to VIEs or holders of variable interests in VIEs. For these contracts, maximum exposure to loss set forth in the tables below is the notional amount of such guarantees, which does not represent anticipated losses and also has not been reduced by unrealized losses already recorded by the firm in connection with these guarantees. As a result, the maximum exposure to loss exceeds the firm’s liabilities related to VIEs. The firm has aggregated nonconsolidated VIEs based on principal business activity, as reflected in the tables below. The nature of the firm’s variable interests can take different forms, as described in the rows under maximum exposure to loss.

The following tables set forth total assets in nonconsolidated VIEs in which the firm holds variable interests, the firm’s maximum exposure to loss excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with these variable interests and the total assets and total liabilities included in the condensed consolidated statements of financial condition related to the firm’s variable interests in these nonconsolidated VIEs. For September 2010, in accordance with ASU Nos. 2009-16 and 2009-17, the following table also includes nonconsolidated VIEs in which the firm holds variable interests (and to which the firm sold assets and has continuing involvement as of September 2010) that were formerly considered to be QSPEs prior to the adoption of these standards on January 1, 2010.


	As of September 2010
							Real estate,
				Corporate			credit-related		Other
	Mortgage-			CDOs and			and other		asset-		Power-		Investment
	backed ⁽¹⁾			CLOs ⁽¹⁾			investing ⁽²⁾		backed ⁽¹⁾		related ⁽³⁾		funds ⁽⁴⁾		Total
	(in millions)
Assets in VIE	$	77,532	⁽⁶⁾	$	21,101		$	13,661	$	3,615	$	563	$	2,087	$	118,559

Carrying Value of the Firm’s Variable Interests

Assets	$	5,007		$	839		$	1,297	$	123	$	248	$	5	$	7,519
Liabilities		4			125			2		7		7		—		145

Maximum Exposure to Loss in Nonconsolidated VIEs ⁽⁵⁾

Retained interests	$	4,132		$	52		$	—	$	15	$	—	$	—	$	4,199
Purchased interests		615			273			—		100		—		—		988
Commitments and guarantees		—			2			180		—		56		—		238	⁽⁹⁾
Derivatives		3,326	⁽⁷⁾		6,992	⁽⁸⁾		—		1,122		—		—		11,440	⁽⁹⁾
Loans and investments		94			—			1,297		—		254		5		1,650

Total	$	8,167	⁽⁶⁾	$	7,319		$	1,477	$	1,237	$	310	$	5	$	18,515

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	As of December 2009
							Real estate,
				Corporate			credit-related		Other				Principal-
	Mortgage			CDOs and			and other		asset-		Power-		protected
	CDOs ⁽¹⁾			CLOs ⁽¹⁾			investing ⁽²⁾		backed ⁽¹⁾		related ⁽³⁾		notes ⁽¹⁰⁾		Total
	(in millions)
Assets in VIE	$	9,114		$	32,490		$	22,618	$	497	$	592	$	2,209	$	67,520

Carrying Value of the Firm’s Variable Interests

Assets	$	182		$	834		$	2,386	$	16	$	224	$	12	$	3,654
Liabilities		10			400			204		12		3		1,357		1,986

Maximum Exposure to Loss in Nonconsolidated VIEs ⁽⁵⁾

Retained and purchased interests	$	135		$	259		$	—	$	—	$	—	$	—	$	394
Commitments and guarantees		—			3			397		—		37		—		437	⁽⁹⁾
Derivatives		4,111	⁽⁷⁾		7,577	⁽⁸⁾		—		497		—		2,512		14,697	⁽⁹⁾
Loans and investments		—			—			2,425		—		224		—		2,649

Total	$	4,246		$	7,839		$	2,822	$	497	$	261	$	2,512	$	18,177


	⁽¹⁾	These VIEs are generally financed through the issuance of debt instruments collateralized by assets held by the VIE. Substantially all assets and liabilities held by the firm related to these VIEs are included in “Trading assets, at fair value” and “Trading liabilities, at fair value,” respectively, in the condensed consolidated statements of financial condition.

	⁽²⁾	The firm obtains interests in these VIEs in connection with making investments in real estate, distressed loans and other types of debt, mezzanine instruments and equities. These VIEs are generally financed through the issuance of debt and equity instruments which are either collateralized by or indexed to assets held by the VIE. Assets and liabilities held by the firm related to these VIEs are primarily included in “Trading assets, at fair value” and “Other assets,” and “Other liabilities and accrued expenses” and “Payables to customer and counterparties,” respectively, in the condensed consolidated statements of financial condition.

	⁽³⁾	These VIEs are financed through the issuance of debt instruments. Assets and liabilities held by the firm related to these VIEs are included in “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition.

	⁽⁴⁾	These VIEs are generally financed through the issuance of equity instruments. Assets held by the firm related to these VIEs are included in “Trading assets, at fair value” in the condensed consolidated statement of financial condition.

	⁽⁵⁾	Such amounts do not represent the anticipated losses in connection with these transactions because they exclude the effect of offsetting financial instruments that are held to mitigate these risks.

	⁽⁶⁾	Assets in VIE and maximum exposure to loss include $7.62 billion and $3.44 billion, respectively, related to CDOs backed by mortgage obligations as of September 2010.

	⁽⁷⁾	Primarily consists of written protection on investment-grade, short-term collateral held by VIEs that have issued CDOs.

	⁽⁸⁾	Primarily consists of total return swaps on CDOs and CLOs. The firm has generally transferred the risks related to the underlying securities through derivatives with non-VIEs.

	⁽⁹⁾	The aggregate amounts include $4.02 billion and $4.66 billion as of September 2010 and December 2009, respectively, related to guarantees and derivative transactions with VIEs to which the firm transferred assets.

⁽¹⁰⁾

Consists of out-of-the-money written put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing. Assets related to these VIEs are included in “Trading assets, at fair value” and liabilities related to these VIEs are included in “Other secured financings,” “Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings” or “Unsecured long-term borrowings” in the condensed consolidated statement of financial condition. Assets in VIE, carrying value of liabilities and maximum exposure to loss exclude $3.97 billion as of December 2009, associated with guarantees related to the firm’s performance under borrowings from the VIE, which are recorded as liabilities in the condensed consolidated statement of financial condition. Substantially all of the liabilities included in the table above relate to additional borrowings from the VIE associated with principal-protected notes guaranteed by the firm. These VIEs were consolidated by the firm upon adoption of ASU No. 2009-17.