Risk Management at Goldman Sachs

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Nov 18, 2013 (3 years and 8 months ago)

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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


Balance our ability to profit from underwriting, market
-
making, lending and investing
activities with our exposure to potential losses


Fully understand the risk; properly price and distribute it; limit down side


Maintain a liquid balance sheet and diversified business risks


Key risk exposures


Market




Credit


Operational


Liquidity


Reputational



Key elements of risk management


Sophisticated measurement, monitoring and reporting


Pro
-
active management and mitigation


Conservative capital, funding and liquidity risk management

1

GS Liquidity Risk Management Policies


Excess liquidity


Asset
-
liability management


Prudent intercompany funding policies


Continuing Liquidity Stress Testing and Crisis Planning


2

Excess Liquidity


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

“Global Core Excess”

“Modeled Liquidity Outflow”

3

Funding

1Q11

Secured Funding:
$213bn

Deposits:
$39bn

Unsecured Short
-
Term: $54bn

Unsecured Long
-
Term
: $174bn

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.


WAM ~
7yrs
3

WAM >100 days
1

WAM ~
3yrs
2

Current LTD
56%
Hybrid Debt
27%
Prom Notes
5%
Other
10%
CP
2%
U.S. Savings
66%
U.S. Time
18%
Non
-
U.S.
Demand
13%
Non
-
U.S.
Time
3%
Current LTD
56%
Hybrid Debt
27%
Prom Notes
5%
Other
10%
CP
2%
Liquid
Gov'ts,
Agencies,
MBS
64%
Fixed
Income
11%
Equities
13%
Loans
1%
Secured
Debt
11%
4

2008 Financial Crisis


Challenges to Balance Sheet and Risk Management


Assets became less liquid


Asset valuations were impaired


More assets moved into Level 3


Bank loan origination inventory was elevated


Counterparty credit issues multiplied


Volatility spikes increased our risk metrics


Liquidity left the firm


Funding markets became dislocated


Capacity was reduced, repo haircuts widened


Counterparties were dislocated, funding cost ros
e

5

$0
$50
$100
$150
$200
$250
Jan
-
2008
Apr
-
2008
Jul
-
2008
Oct
-
2008
Jan
-
2009
Apr
-
2009
Jul
-
2009
Oct
-
2009
0bps
100bps
200bps
300bps
400bps
500bps
600bps
700bps
Stock Price
CDS Spread
CDS
Stock Price
Financial Crisis


Perception Became Reality…


JPM acquired
Bear

Stearns

Lehman
Bankruptcy

6

7

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




Reduced Key Risk Exposures

8

$43

$27

$22

$10

$8

$4

$4

$16

$11

$10

$8

$5

$5

$7

$19

$19

$17

$15

$11

$8

$6

0

10

20

30

40

50

60

4Q07

1Q08

2Q08

3Q08

4Q08

3Q09

4Q09

$bn

Lev

Loans

ResRE

CRE

Reduced Assets and Leverage

913
943
1,046
1,120
1,189
1,088
1,082
885
925
890
882
849
24.7x
24.5x
26.7x
26.2x
27.9x
24.3x
23.7x
13.7x
14.6x
14.2x
13.5x
12.0x
0
200
400
600
800
1,000
1,200
1,400
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
$bn
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Total Assets
Gross Leverage
x
$
9

0
200
400
600
800
1,000
1,200
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
Liquid Assets
Less Liquid Assets
Made Our Balance Sheet More Liquid

10

Grew our Excess Liquidity

Average Global Core Excess ($
bn
)

$61
$88
$113
$111
$164
$171
$167
$163
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
11

Key Lessons Learned

1.
Liquidity and funding are key to life

2.
Be creative when identifying potential liquidity outflows

3.
Adequate capital does not mean adequate liquidity

4.
Size is important


of firms and of specific risk positions

5.
“Tail risk” is problematic

6.
Good risk management processes do not equal good risk managem
ent


12