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Risk Management at Goldman Sachs. Presentation to the Stanford Finance Forum. David Viniar Chief Financial Officer. June 3, 2011. GS Risk Management Strategy. In the business of taking risks

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Risk Management at Goldman Sachs


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    1. Risk Management at Goldman Sachs Presentation to the Stanford Finance Forum David Viniar Chief Financial Officer June 3, 2011

    2. GS Risk Management Strategy • In the business of taking risks • Balance our ability to profit from underwriting, market-making, lending and investing activities with our exposure to potential losses • Fully understand the risk; properly price and distribute it; limit down side • Maintain a liquid balance sheet and diversified business risks • Key risk exposures • Market • Credit • Operational • Liquidity • Reputational • Key elements of risk management • Sophisticated measurement, monitoring and reporting • Pro-active management and mitigation • Conservative capital, funding and liquidity risk management

    3. GS Liquidity Risk Management Policies • Excess liquidity • Asset-liability management • Prudent intercompany funding policies • Continuing Liquidity Stress Testing and Crisis Planning

    4. Excess Liquidity “Global Core Excess” “Modeled Liquidity Outflow” • Pre-fund potential stressed cash and collateral needs during a crisis • Comprised of cash and highly-liquid, unencumbered securities • Can be sold or pledged to generate liquidity • $168B 1Q11 average • Debt maturities • Disruptions to unsecured and secured financing flows • Collateral outflows • Draws on unfunded commitments • Other contractual and contingent cash outflows

    5. Funding1Q11 Secured Funding: $213bn Deposits: $39bn Unsecured Short-Term: $54bn Unsecured Long-Term : $174bn WAM >100 days1 WAM ~ 7yrs3 WAM ~ 3yrs2 1 Does not include trades collateralized by GCE-eligible assets (i.e., “Governments” excludes GCE-eligible government securities). 2 WAM applies to U.S. and non-U.S. time deposits. 3 WAM excludes equity.

    6. 2008 Financial Crisis –Challenges to Balance Sheet and Risk Management • Assets became less liquid • Asset valuations were impaired • More assets moved into Level 3 • Bank loan origination inventory was elevated • Counterparty credit issues multiplied • Volatility spikes increased our risk metrics • Liquidity left the firm • Funding markets became dislocated • Capacity was reduced, repo haircuts widened • Counterparties were dislocated, funding cost rose

    7. Financial Crisis –Perception Became Reality… Lehman Bankruptcy JPM acquired Bear Stearns

    8. Response • Became a Bank Holding Company • Raised capital from Warren Buffet • Generated material new funding and efficiencies • Key Takeaways: • Liquidity risk management framework largely validated • Pro-active measures mitigated risk and yielded substantial new funding • Government intervention and programs helped stabilize financial markets

    9. 60 50 $43 40 $bn 30 $27 $22 $19 $19 20 $17 $16 $15 $11 $11 $10 $10 10 $8 $8 $8 $7 $6 $5 $5 $4 $4 0 4Q07 1Q08 2Q08 3Q08 4Q08 3Q09 4Q09 ResRE LevLoans CRE Reduced Key Risk Exposures

    10. Reduced Assets and Leverage

    11. Made Our Balance Sheet More Liquid CAGR Liquid = (17)% Less Liquid = (23)% CAGR Liquid = 24% Less Liquid = 39%

    12. Grew our Excess Liquidity Average Global Core Excess ($bn) 166% Increase

    13. Key Lessons Learned Liquidity and funding are key to life Be creative when identifying potential liquidity outflows Adequate capital does not mean adequate liquidity Size is important – of firms and of specific risk positions “Tail risk” is problematic Good risk management processes do not equal good risk management