GOLDMAN SACHS GROUP INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 INDEX                                                                         Page No.        Introduction                                                         42        Executive Overview                                                   43        Business Environment                                                 45 

      Critical Accounting Policies                                        

47        Use of Estimates                                                     51        Results of Operations                                                52        Regulatory Developments                                              66 

      Balance Sheet and Funding Sources                                   

69        Equity Capital                                                       76 

Off-Balance-Sheet Arrangements and Contractual Obligations 82

      Overview and Structure of Risk Management                           

84

      Liquidity Risk Management                                           

89        Market Risk Management                                               96        Credit Risk Management                                              102 

      Operational Risk Management                                        

109

      Recent Accounting Developments                                     

111

      Certain Risk Factors That May Affect Our Businesses                 112         Goldman Sachs 2012 Form 10-K   41  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

   Introduction    The Goldman Sachs Group, Inc. (Group Inc.) is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.  We report our activities in four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management. See "Results of Operations" below for further information about our business segments.  

When we use the terms "Goldman Sachs," "the firm," "we," "us" and "our," we mean Group Inc., a Delaware corporation, and its consolidated subsidiaries.

  References to "this Form 10-K" are to our Annual Report on Form 10-K for the year ended December 31, 2012. All references to 2012, 2011 and 2010 refer to our years ended, or the dates, as the context requires, December 31, 2012, December 31, 2011 and December 31, 2010, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.  In this discussion and analysis of our financial condition and results of operations, we have included information that may constitute "forward-looking statements" within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. This information includes statements other than historical information or statements of current condition and may relate to our future plans and objectives and results, among other things, and may also include statements about the objectives and effectiveness of our risk management and liquidity policies, statements about trends in or growth opportunities for our businesses, statements about our future status, activities or reporting under U.S. or non-U.S. banking and financial regulation, and statements about our investment banking transaction backlog. By identifying these statements for you in this manner, we are alerting you to the possibility that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. Important factors that could cause our actual results and financial condition to differ from those indicated in these forward-looking statements include, among others, those discussed below under "Certain Risk Factors That May Affect Our Businesses" as well as "Risk Factors" in Part I, Item 1A of this Form 10-K and "Cautionary Statement Pursuant to the U.S. Private Securities Litigation Reform Act of 1995" in Part I, Item 1 of this Form 10-K.      

42 Goldman Sachs 2012 Form 10-K

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

   Executive Overview    The firm generated net earnings of $7.48 billion for 2012, compared with $4.44 billion and $8.35 billion for 2011 and 2010, respectively. Our diluted earnings per common share were <money>$14.13 for 2012, compared with $4.51 1 for 2011 and $13.18 2 for 2010. Return on average common shareholders' equity (ROE) 3 was 10.7% for 2012, compared with 3.7% 1 for 2011 and 11.5% 2 for 2010.  Book value per common share increased approximately 11% to $144.67 and tangible book value per common share 4 increased approximately 12% to $134.06 compared with the end of 2011. During the year, the firm repurchased 42.0 million shares of its common stock for a total cost of $4.64 billion. Our Tier 1 capital ratio under Basel 1 was 16.7% and our Tier 1 common ratio under Basel 1 5 was 14.5% as of December 2012.  The firm generated net revenues of $34.16 billion for 2012. These results reflected significantly higher net revenues in Investing & Lending, as well as higher net revenues in Institutional Client Services, Investment Banking and Investment Management compared with 2011.  

An overview of net revenues for each of our business segments is provided below.

    Investment Banking  Net revenues in Investment Banking increased compared with 2011, reflecting significantly higher net revenues in our Underwriting business, due to strong net revenues in debt underwriting. Net revenues in debt underwriting were significantly higher compared with 2011, primarily reflecting higher net revenues from investment-grade and leveraged finance activity. Net revenues in equity underwriting were lower compared with 2011, primarily reflecting a decline in industry-wide initial public offerings. Net revenues in Financial Advisory were essentially unchanged compared with 2011.  

Institutional Client Services

Net revenues in Institutional Client Services increased compared with 2011, reflecting higher net revenues in Fixed Income, Currency and Commodities Client Execution.

  The increase in Fixed Income, Currency and Commodities Client Execution compared with 2011 reflected strong net revenues in mortgages, which were significantly higher compared with 2011. In addition, net revenues in credit products and interest rate products were solid and higher compared with 2011. These increases were partially offset by significantly lower net revenues in commodities and slightly lower net revenues in currencies. Although broad market concerns persisted during 2012, Fixed Income, Currency and Commodities Client Execution operated in a generally improved environment characterized by tighter credit spreads and less challenging market-making conditions compared with 2011.   

1. Excluding the impact of the preferred dividend of $1.64 billion in the first

quarter of 2011 (calculated as the difference between the carrying value and

the redemption value of the preferred stock), related to the redemption of our

10% Cumulative Perpetual Preferred Stock, Series G (Series G Preferred Stock)

held by Berkshire Hathaway Inc. and certain of its subsidiaries (collectively,

Berkshire Hathaway), diluted earnings per common share were $7.46 and ROE was

5.9% for 2011. We believe that presenting our results for 2011 excluding this

dividend is meaningful, as it increases the comparability of period-to-period

results. Diluted earnings per common share and ROE excluding this dividend are

non-GAAP measures and may not be comparable to similar non-GAAP measures used

by other companies. See "Results of Operations - Financial Overview" below for

further information about our calculation of diluted earnings per common share

   and ROE excluding the impact of this dividend.    

2. Excluding the impact of the $465 million related to the U.K. bank payroll tax,

the $550 million related to the SEC settlement and the $305 million impairment

of our New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights,

diluted earnings per common share were $15.22 and ROE was 13.1% for 2010. We

believe that presenting our results for 2010 excluding the impact of these

items is meaningful, as it increases the comparability of period-to-period

results. Diluted earnings per common share and ROE excluding these items are

non-GAAP measures and may not be comparable to similar non-GAAP measures used

by other companies. See "Results of Operations - Financial Overview" below for

further information about our calculation of diluted earnings per common share

   and ROE excluding the impact of these items.    

3. See "Results of Operations - Financial Overview" below for further information

   about our calculation of ROE.    

4. Tangible book value per common share is a non-GAAP measure and may not be

comparable to similar non-GAAP measures used by other companies. See "Equity

   Capital - Other Capital Metrics" below for further information about our    calculation of tangible book value per common share.    

5. Tier 1 common ratio is a non-GAAP measure and may not be comparable to similar

non-GAAP measures used by other companies. See "Equity Capital - Consolidated

   Regulatory Capital Ratios" below for further information about our Tier 1    common ratio.         Goldman Sachs 2012 Form 10-K   43  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

    Net revenues in Equities were essentially unchanged compared with 2011. Net revenues in securities services were significantly higher compared with 2011, reflecting a gain of approximately $500 million on the sale of our hedge fund administration business. In addition, equities client execution net revenues were higher than 2011, primarily reflecting significantly higher results in cash products, principally due to increased levels of client activity. These increases were offset by lower commissions and fees, reflecting lower market volumes. During 2012, Equities operated in an environment generally characterized by an increase in global equity prices and lower volatility levels.  The net loss attributable to the impact of changes in our own credit spreads on borrowings for which the fair value option was elected was $714 million ($433 million and $281 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2012, compared with a net gain of $596 million ($399 million and $197 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2011.  Investing & Lending  Net revenues in Investing & Lending were $5.89 billion and $2.14 billion for 2012 and 2011, respectively. During 2012, Investing & Lending net revenues were positively impacted by tighter credit spreads and an increase in global equity prices. Results for 2012 included a gain of $408 million from our investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC), net gains of $2.39 billion from other investments in equities, primarily in private equities, net gains and net interest income of $1.85 billion from debt securities and loans, and other net revenues of $1.24 billion, principally related to our consolidated investment entities.  Results for 2011 included a loss of $517 million from our investment in the ordinary shares of ICBC and net gains of $1.12 billion from other investments in equities, primarily in private equities, partially offset by losses from public equities. In addition, Investing & Lending included net revenues of $96 million from debt securities and loans. This amount includes approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, offset by net interest income and net gains from other debt securities and loans. Results for 2011 also included other net revenues of $1.44 billion, principally related to our consolidated investment entities.  

Investment Management

  Net revenues in Investment Management increased compared with 2011, due to significantly higher incentive fees, partially offset by lower transaction revenues and slightly lower management and other fees. During the year, assets under supervision 1 increased $70 billion to $965 billion. Assets under management increased $26 billion to $854 billion, reflecting net market appreciation of $44 billion, primarily in fixed income and equity assets, partially offset by net outflows of $18 billion. Net outflows in assets under management included outflows in equity, alternative investment and money market assets, partially offset by inflows in fixed income assets 2. Other client assets increased $44 billion to $111 billion, primarily due to net inflows 2, principally in client assets invested with third-party managers and assets related to advisory relationships.  Our businesses, by their nature, do not produce predictable earnings. Our results in any given period can be materially affected by conditions in global financial markets, economic conditions generally and other factors. For a further discussion of the factors that may affect our future operating results, see "Certain Risk Factors That May Affect Our Businesses" below, as well as "Risk Factors" in Part I, Item 1A of this Form 10-K.   

1. Assets under supervision include assets under management and other client

assets. Assets under management include client assets where we earn a fee for

managing assets on a discretionary basis. Other client assets include client

assets invested with third-party managers, private bank deposits and assets

related to advisory relationships where we earn a fee for advisory and other

   services, but do not have discretion over the assets.    

2. Includes $34 billion of fixed income asset inflows in connection with our

acquisition of Dwight Asset Management Company LLC (Dwight Asset Management),

including $17 billion in assets under management and $17 billion in other

client assets, and $5 billion of fixed income and equity asset outflows in

connection with our liquidation of Goldman Sachs Asset Management Korea Co.,

Ltd. (Goldman Sachs Asset Management Korea, formerly known as Macquarie - IMM

Investment Management), all related to assets under management, for the year

    ended December 2012.     44   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

   Business Environment    Global economic conditions generally weakened in 2012, as real gross domestic product (GDP) growth slowed in most major economies. Market sentiment was affected by continued broad market concerns and uncertainties, although positive developments helped to improve market conditions. These developments included certain central bank actions to ease monetary policy and address funding risks for European financial institutions. In addition, the U.S. economy posted stable to improving economic data, including favorable developments in unemployment and housing. These improvements resulted in tighter credit spreads, higher global equity prices and lower levels of volatility. However, concerns about the outlook for the global economy and continued political uncertainty, particularly the political debate in the United States
Global
  During 2012, real GDP growth declined in most advanced economies and emerging markets. In advanced economies, the slowdown primarily reflected a decline in consumer expenditure and fixed investment growth, particularly in Europe, as well as a deceleration in international trade compared with 2011. In emerging markets, growth in domestic demand weakened, although the contribution from government spending was generally positive. Unemployment levels declined slightly in some economies compared with 2011, but increased in others, particularly in the Euro area. The rate of unemployment continued to  remain elevated in many advanced economies. During 2012, the U.S. Federal Reserve, the Bank of England and the Bank of Japan left interest rates unchanged, while the European Central Bank reduced its interest rate. In addition, the People's Bank of China lowered its one-year benchmark lending rate during the year. The price of crude oil generally declined during 2012. The U.S. dollar weakened against both the Euro and the British pound, while it strengthened against the Japanese yen.  
United States
  In the United States, real GDP increased by 2.2% in 2012, compared with an increase of 1.8% in 2011. Growth was supported by an acceleration in residential investment and a smaller decrease in state and local government spending, which were partially offset by a slowdown in consumer spending and business investment. Both house prices and housing starts increased. Industrial production expanded in 2012, despite the negative impact of Hurricane Sandy during the fourth quarter. Business and consumer confidence declined during parts of the year, primarily reflecting increased global economic concerns and heightened uncertainties, but ended the year higher compared with the end of 2011. Measures of core inflation on average were higher compared with 2011. The unemployment rate declined during 2012, but remained elevated. The U.S. Federal Reserve maintained its federal funds rate at a target range of zero to 0.25% during the year and extended its program to lengthen the maturity of the U.S. Treasury debt it holds. In addition, the U.S. Federal Reserve announced an open-ended program to purchase U.S. Treasury securities and mortgage-backed securities, as well as a commitment to keep short-term interest rates exceptionally low until the unemployment rate falls to 6.5% or inflation rises materially. The yield on the 10-year U.S. Treasury note fell by 11 basis points during 2012 to 1.78%. In equity markets, the NASDAQ Composite Index, the S&P 500 Index and the Dow Jones Industrial Average increased by 16%, 13% and 7%, respectively, compared with the end of 2011.          Goldman Sachs 2012 Form 10-K   45  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Europe
  In the Euro area, real GDP declined by 0.5% in 2012, compared with an increase of 1.5% in 2011. The contraction was principally due to a sharp fall in domestic demand, primarily reflecting downturns in consumer spending and fixed investment. Business and consumer confidence declined and measures of core inflation increased slightly during the year. The unemployment rate increased substantially, particularly in Spain and Italy. These negative developments reflected the impact that the sovereign debt crisis had on the region's economic growth, particularly during the first half of the year, as concerns about Greece's debt situation and the fiscal outlook in Spain and Italy intensified. To address these issues, the European Central Bank injected liquidity in the Eurosystem through its longer-term refinancing operations (LTROs), decreased its main refinancing operations rate by 25 basis points to 0.75%, and announced a program to make outright purchases of sovereign bonds in the secondary markets. The Euro appreciated by 2% against the U.S. dollar. In the United Kingdom, real GDP increased by 0.2% in 2012 compared with an increase of 0.9% in 2011. The Bank of England maintained its official bank rate at 0.50% and increased the size of its asset purchase program. The British pound appreciated by 4% against the U.S. dollar. Long-term government bond yields generally declined during the year. In equity markets, the DAX Index, the CAC 40 Index, the Euro Stoxx 50 Index, and the FTSE 100 index increased by 29%, 15%, 14% and 6%, respectively, compared with the end of 2011.  
Asia
  In Japan, real GDP increased by 1.9% in 2012, compared with a decline of 0.6% in 2011. Fixed investment growth increased, particularly from the public sector, helped by reconstruction efforts following the earthquake and tsunami in 2011. However, the trade balance continued to deteriorate during 2012. Measures of inflation remained negative or close to zero during the year. The Bank of Japan maintained its target overnight call rate at a range of zero to 0.10% during the year, increased the size of its asset purchase program, and announced measures to facilitate  outright purchases of government and corporate bonds. The yield on 10-year Japanese government bonds fell by 20 basis points during the year to 0.79%. The Japanese yen depreciated by 13% against the U.S. dollar and, in equity markets, the Nikkei 225 Index increased by 23%. In , real GDP increased by 7.8% in 2012, compared with an increase of 9.3% in 2011. Growth slowed as household consumption and fixed investment growth moderated. In addition, growth in industrial production declined. Measures of inflation declined during the year. The People's Bank of China lowered its one-year benchmark lending rate by 56 basis points to 6.00% and reduced the reserve requirement ratio by 100 basis points during the year. The Chinese yuan appreciated slightly against the U.S. dollar and, in equity markets, the Shanghai Composite Index increased by 3%. In India, real GDP increased by an estimated 5.4% in 2012, compared with an increase of 7.5% in 2011. Growth decelerated, primarily reflecting a slowdown in domestic demand growth and a deterioration in the trade balance. The rate of wholesale inflation declined compared with 2011, but remained elevated. The Indian rupee depreciated by 4% against the U.S. dollar and, in equity markets, the BSE Sensex Index increased 26%. Equity markets in Hong Kong and South Korea were higher, as the Hang Seng Index increased 23% and the KOSPI Composite Index increased 9%, respectively, compared with the end of 2011.  
Other Markets
  In Brazil, real GDP increased by an estimated 1.0% in 2012, compared with an increase of 2.7% in 2011. Growth decelerated, primarily reflecting a decline in private consumption growth and a downturn in fixed investment. The Brazilian real depreciated by 9% against the U.S. dollar and, in equity markets, the Bovespa Index increased by 7% compared with the end of 2011. In Russia, real GDP increased by 3.4% in 2012, compared with 4.3% in 2011. Growth slowed, primarily reflecting a decline in domestic demand growth, particularly during the second half of the year. The Russian ruble appreciated by 5% against the U.S. dollar and, in equity markets, the MICEX Index increased by 5% compared with the end of 2011.      46   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
   Critical Accounting Policies  Fair Value  Fair Value Hierarchy. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value (i.e., inventory), as well as certain other financial assets and financial liabilities, are reflected in our consolidated statements of financial condition at fair value (i.e., marked-to-market), with related gains or losses generally recognized in our consolidated statements of earnings. The use of fair value to measure financial instruments is fundamental to our risk management practices and is our most critical accounting policy.  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. In determining fair value, the hierarchy under U.S. generally accepted accounting principles (U.S. GAAP) gives (i) the highest priority to unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities (level 1 inputs), (ii) the next priority to inputs other than level 1 inputs that are observable, either directly or indirectly (level 2 inputs), and (iii) the lowest priority to inputs that cannot be observed in market activity (level 3 inputs). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.  The fair values for substantially all of our financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm's credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.  Instruments categorized within level 3 of the fair value hierarchy are those which require one or more significant inputs that are not observable. As of December 2012 and December 2011, level 3 assets represented 5.0% and 5.2%, respectively, of the firm's total assets. 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. Subsequent to the transaction date, we use other methodologies to determine fair value, which vary based on the type of instrument. Estimating the fair value of level 3 financial instruments requires judgments to be made. These judgments include:   
Ÿ   determining the appropriate valuation methodology and/or model for each type
    of level 3 financial instrument;    
Ÿ   determining model inputs based on an evaluation of all relevant empirical
    market data, including prices evidenced by market transactions, interest
    rates, credit spreads, volatilities and correlations; and     Ÿ   determining appropriate valuation adjustments related to illiquidity or     counterparty credit quality.  
Regardless of the methodology, valuation inputs and assumptions are only changed when corroborated by substantive evidence.
  Controls Over Valuation of Financial Instruments. Market makers and investment professionals in our revenue-producing units are responsible for pricing our financial instruments. Our control infrastructure is independent of the revenue-producing units and is fundamental to ensuring that all of our financial instruments are appropriately valued at market-clearing levels. In the event that there is a difference of opinion in situations where estimating the fair value of financial instruments requires judgment (e.g., calibration to market comparables or trade comparison, as described below), the final valuation decision is made by senior managers in control and support functions that are independent of the revenue-producing units (independent control and support functions). This independent price verification is critical to ensuring that our financial instruments are properly valued.          Goldman Sachs 2012 Form 10-K   47  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Price Verification. All financial instruments at fair value in levels 1, 2 and 3 of the fair value hierarchy are subject to our independent price verification process. The objective of price verification is to have an informed and independent opinion with regard to the valuation of financial instruments under review. Instruments that have one or more significant inputs which cannot be corroborated by external market data are classified within level 3 of the fair value hierarchy. Price verification strategies utilized by our independent control and support functions include:    
Ÿ   Trade Comparison. Analysis of trade data (both internal and external where
    available) is used to determine the most relevant pricing inputs and     valuations.    
Ÿ   External Price Comparison. Valuations and prices are compared to pricing data
    obtained from third parties (e.g., broker or dealers, MarkIt, Bloomberg, IDC,
    TRACE). Data obtained from various sources is compared to ensure consistency
    and validity. When broker or dealer quotations or third-party pricing vendors
    are used for valuation or price verification, greater priority is generally
    given to executable quotations.     Ÿ   Calibration to Market Comparables. Market-based transactions are used to
    corroborate the valuation of positions with similar characteristics, risks
    and components.    
Ÿ   Relative Value Analyses. Market-based transactions are analyzed to determine
    the similarity, measured in terms of risk, liquidity and return, of one
    instrument relative to another or, for a given instrument, of one maturity
    relative to another.     Ÿ   Collateral Analyses. Margin disputes on derivatives are examined and     investigated to determine the impact, if any, on our valuations.     Ÿ   Execution of Trades. Where appropriate, trading desks are instructed to     execute trades in order to provide evidence of market-clearing levels.    
Ÿ   Backtesting. Valuations are corroborated by comparison to values realized upon
    sales.
See Notes 5 through 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about fair value measurements.
  Review of Net Revenues. Independent control and support functions ensure adherence to our pricing policy through a combination of daily procedures, including the explanation and attribution of net revenues based on the underlying factors. Through this process we independently validate net revenues, identify and resolve potential fair value or trade booking issues on a timely basis and seek to ensure that risks are being properly categorized and quantified.  Review of Valuation Models. The firm's independent model validation group, consisting of quantitative professionals who are separate from model developers, performs an independent model approval process. This process incorporates a review of a diverse set of model and trade parameters across a broad range of values (including extreme and/or improbable conditions) in order to critically evaluate:    
Ÿ   the model's suitability for valuation and risk management of a particular
    instrument type;    
Ÿ   the model's accuracy in reflecting the characteristics of the related product
    and its significant risks;    
Ÿ   the suitability of the calculation techniques incorporated in the model;
Ÿ   the model's consistency with models for similar products; and
Ÿ   the model's sensitivity to input parameters and assumptions.
New or changed models are reviewed and approved prior to being put into use. Models are evaluated and re-approved annually to assess the impact of any changes in the product or market and any market developments in pricing theories.
     48   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Level 3 Financial Assets at Fair Value. The table below presents financial assets measured at fair value and the amount of such assets that are classified within level 3 of the fair value hierarchy.
Total level 3 financial assets were $47.10 billion and $47.94 billion as of December 2012 and December 2011, respectively.
See Notes 5 through 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about changes in level 3 financial assets and fair value measurements.
                                                     As of December 2012                 As of December 2011                                                 Total at        Level 3             Total at        Level 3 in millions                                   Fair Value          Total           Fair Value          Total Commercial paper, certificates of deposit, time deposits and other money market instruments              $  6,057         $    -     
$ 13,440         $    -
  U.S. government and federal agency obligations                                       93,241              -               87,040              -  Non-U.S. government and agency obligations                                       62,250             26               49,205            148  Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate                                        9,805          3,389                6,699          3,346  Loans and securities backed by residential real estate                            8,216          1,619                7,592          1,709  Bank loans and bridge loans                       22,407         11,235     
          19,745         11,285
  Corporate debt securities                         20,981          2,821     
          22,131          2,480
  State and municipal obligations                    2,477            619                3,089            599  Other debt obligations                             2,251          1,185                4,362          1,451  Equities and convertible debentures               96,454         14,855               65,113         13,667  Commodities                                       11,696              -                5,762              - Total cash instruments                           335,835         35,749              284,178         34,685  Derivatives                                       71,176          9,920               80,028         11,900 Financial instruments owned, at fair value                                            407,011         45,669     
         364,206         46,585
  Securities segregated for regulatory and other purposes                                    30,484              -               42,014              -  Securities purchased under agreements to resell                                           141,331            278              187,789            557  Securities borrowed                               38,395              -               47,621              -  Receivables from customers and counterparties                                     7,866            641                9,682            795  Other assets 1                                    13,426            507                    -              - Total                                           $638,513        $47,095             $651,312        $47,937    
1. Consists of assets classified as held for sale related to our reinsurance
   business, primarily consisting of securities accounted for as
   available-for-sale and insurance separate account assets, which were
   previously included in "Financial instruments owned, at fair value" and
   "Securities segregated for regulatory and other purposes," respectively. See
   Note 12 to the consolidated financial statements in Part II, Item 8 of this
   Form 10-K for further information about assets held for sale.         Goldman Sachs 2012 Form 10-K   49  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Goodwill and Identifiable Intangible Assets
  Goodwill. Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date. Goodwill is assessed annually for impairment, or more frequently if events occur or circumstances change that indicate an impairment may exist, by first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the results of the qualitative assessment are not conclusive, a quantitative goodwill impairment test is performed by comparing the estimated fair value of each reporting unit with its estimated net book value.  Estimating the fair value of our reporting units requires management to make judgments. Critical inputs to the fair value estimates include (i) projected earnings, (ii) estimated long-term growth rates and (iii) cost of equity. The net book value of each reporting unit reflects an allocation of total shareholders' equity and represents the estimated amount of shareholders' equity required to support the activities of the reporting unit under guidelines issued by the Basel Committee on Banking Supervision (Basel Committee) in December 2010.  Our market capitalization was below book value during 2012. Accordingly, we performed a quantitative impairment test during the fourth quarter of 2012 and determined that goodwill was not impaired. The estimated fair value of our reporting units in which we hold substantially all of our goodwill significantly exceeded the estimated carrying values. We believe that it is appropriate to consider market capitalization, among other factors, as an indicator of fair value over a reasonable period of time.  If the more recent improvement in market conditions does not continue, and we return to a prolonged period of weakness in the business environment or financial markets, our goodwill could be impaired in the future. In addition, significant changes to critical inputs of the goodwill impairment test (e.g., cost of equity) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future.  
See Note 13 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our goodwill.
  Identifiable Intangible Assets. We amortize our identifiable intangible assets (i) over their estimated lives, (ii) based on economic usage or (iii) 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. See Note 13 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for the carrying value and estimated remaining lives of our identifiable intangible assets by major asset class and impairments of our identifiable intangible assets.  A prolonged period of market weakness could adversely impact our businesses and impair the value of our identifiable intangible assets. In addition, certain events could indicate a potential impairment of our identifiable intangible assets, including (i) decreases in revenues from commodity-related customer contracts and relationships, (ii) decreases in cash receipts from television broadcast royalties, (iii) an adverse action or assessment by a regulator or (iv) adverse actual experience on the contracts in our variable annuity and life insurance business. Management judgment is required to evaluate whether indications of potential impairment have occurred, and to test intangibles for impairment if required.      50   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
   Use of Estimates    The use of generally accepted accounting principles requires management to make certain estimates and assumptions. In addition to the estimates we make in connection with fair value measurements, and the accounting for goodwill and identifiable intangible assets, the use of estimates and assumptions is also important in determining provisions for losses that may arise from litigation, regulatory proceedings and tax audits.  We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be reasonably estimated. In accounting for income taxes, we estimate and provide for potential liabilities that may arise out of tax audits to the extent that uncertain tax positions fail to meet the recognition standard under FASB Accounting Standards  
Codification 740. See Note 24 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about accounting for income taxes.
  Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on a case-by-case basis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. See Notes 18 and 27 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information on certain judicial, regulatory and legal proceedings.          Goldman Sachs 2012 Form 10-K   51  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
   Results of Operations    The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. See "Certain Risk Factors That May Affect Our Businesses" below and "Risk  
Factors" in Part I, Item 1A of this Form 10-K for a further discussion of the impact of economic and market conditions on our results of operations.
Financial Overview
The table below presents an overview of our financial results.
                                                                        Year Ended December $ in millions, except per share amounts                      2012           2011             2010 Net revenues                                              $34,163        $28,811          $39,161  Pre-tax earnings                                           11,207          6,169           12,892  Net earnings                                                7,475          4,442            8,354  Net earnings applicable to common shareholders              7,292          2,510            7,713  Diluted earnings per common share                           14.13           
4.51  2         13.18  3
  Return on average common shareholders' equity  1             10.7 %          3.7 % 2         11.5 % 3    
1. ROE is computed by dividing net earnings applicable to common shareholders by
   average monthly common shareholders' equity. The table below presents our
    average common shareholders' equity.                                                                   Average for the                                                             Year Ended December                     in millions                        2012           2011           2010                     Total shareholders' equity      $72,530        $72,708        $74,257                      Preferred stock                  (4,392 )       (3,990 )       (6,957 )                     Common shareholders' equity     $68,138        $68,718        $67,300    
2. Excluding the impact of the preferred dividend of $1.64 billion in the first
   quarter of 2011 (calculated as the difference between the carrying value and
   the redemption value of the preferred stock), related to the redemption of our
   Series G Preferred Stock, diluted earnings per common share were $7.46 and ROE
   was 5.9% for 2011. We believe that presenting our results for 2011 excluding
   this dividend is meaningful, as it increases the comparability of
   period-to-period results. Diluted earnings per common share and ROE excluding
   this dividend are non-GAAP measures and may not be comparable to similar
   non-GAAP measures used by other companies. The tables below present the
   calculation of net earnings applicable to common shareholders, diluted
   earnings per common share and average common shareholders' equity excluding
   the impact of this dividend.                                                                              Year Ended in millions, except per share amount                                  December 2011 Net earnings applicable to common shareholders                              
$ 2,510
  Impact of the Series G Preferred Stock dividend                             
  1,643
Net earnings applicable to common shareholders, excluding the impact of the Series G Preferred Stock dividend
  4,153
  Divided by: average diluted common shares outstanding                       
  556.9
Diluted earnings per common share, excluding the impact of the Series G Preferred Stock dividend
$  7.46                                                                         Average for the                                                                          Year Ended in millions                                                           December 2011 Total shareholders' equity                                                  $72,708  Preferred stock                                                              (3,990 ) Common shareholders' equity                                                  68,718  Impact of the Series G Preferred Stock dividend                             
  1,264
Common shareholders' equity, excluding the impact of the Series G Preferred Stock dividend
$69,982     52   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
3. Excluding the impact of the $465 million related to the U.K. bank payroll tax,
   the $550 million related to the SEC settlement and the $305 million impairment
   of our NYSE DMM rights, diluted earnings per common share were $15.22 and ROE
   was 13.1% for 2010. We believe that presenting our results for 2010 excluding
   the impact of these items is meaningful, as it increases the comparability of
   period-to-period results. Diluted earnings per common share and ROE excluding
   these items are non-GAAP measures and may not be comparable to similar
   non-GAAP measures used by other companies. The tables below present the
   calculation of net earnings applicable to common shareholders, diluted
   earnings per common share and average common shareholders' equity excluding
   the impact of these items.                                                                              Year Ended in millions, except per share amount                                  December 2010 Net earnings applicable to common shareholders                              
$ 7,713
  Impact of the U.K. bank payroll tax                                         
    465
  Pre-tax impact of the SEC settlement                                        
    550
  Tax impact of the SEC settlement                                            
     (6 )
  Pre-tax impact of the NYSE DMM rights impairment                            
    305
  Tax impact of the NYSE DMM rights impairment                                   (118 ) Net earnings applicable to common shareholders, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment                       
  8,909
  Divided by: average diluted common shares outstanding                       
  585.3
Diluted earnings per common share, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment
$ 15.22                                                                           Average for the                                                                            Year Ended in millions                                                             December 2010 Total shareholders' equity                                                    $74,257  Preferred stock                                                                (6,957 ) Common shareholders' equity                                                    67,300  Impact of the U.K. bank payroll tax                                         
      359
  Impact of the SEC settlement                                                
      293
  Impact of the NYSE DMM rights impairment                                    
       14
Common shareholders' equity, excluding the impact of the U.K. bank payroll tax, the SEC settlement and the NYSE DMM rights impairment
$67,966Goldman Sachs 2012 Form 10-K   53  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Net Revenues
  2012 versus 2011. Net revenues on the consolidated statements of earnings were $34.16 billion for 2012, 19% higher than 2011, reflecting significantly higher other principal transactions revenues, as well as higher market-making revenues, investment banking revenues and investment management revenues compared with 2011. These increases were partially offset by significantly lower net interest income and lower commissions and fees compared with 2011.  2011 versus 2010. Net revenues on the consolidated statements of earnings were $28.81 billion for 2011, 26% lower than 2010, reflecting significantly lower other principal transactions revenues and market-making revenues, as well as lower investment banking revenues and net interest income. These decreases were partially offset by higher commissions and fees compared with 2010. Investment management revenues were essentially unchanged compared with 2010.  
Non-interest Revenues
Investment banking
  During 2012, investment banking revenues reflected an operating environment generally characterized by continued concerns about the outlook for the global economy and political uncertainty. These concerns weighed on investment banking activity, as completed mergers and acquisitions activity declined compared with 2011, and equity and equity-related underwriting activity remained low, particularly in initial public offerings. However, industry-wide debt underwriting activity improved compared with 2011, as credit spreads tightened and interest rates remained low. If macroeconomic concerns continue and result in lower levels of client activity, investment banking revenues would likely be negatively impacted.  2012 versus 2011. Investment banking revenues on the consolidated statements of earnings were $4.94 billion for 2012, 13% higher than 2011, reflecting significantly higher revenues in our underwriting business, due to strong revenues in debt underwriting. Revenues in debt underwriting were significantly higher compared with 2011, primarily reflecting higher revenues from investment-grade and leveraged finance activity. Revenues in equity underwriting were lower compared with 2011, primarily reflecting a decline in industry-wide initial public offerings. Revenues in financial advisory were essentially unchanged compared with 2011.  2011 versus 2010. Investment banking revenues on the consolidated statements of earnings were $4.36 billion for 2011, 9% lower than 2010, primarily reflecting lower revenues in our underwriting business. Revenues in equity underwriting were significantly lower than 2010, principally due to a decline in industry-wide activity. Revenues in debt underwriting were essentially unchanged compared with 2010. Revenues in financial advisory decreased slightly compared with 2010.  Investment management  During 2012, investment management revenues reflected an operating environment generally characterized by improved asset prices, resulting in appreciation in the value of client assets. However, the mix of assets under supervision has shifted slightly from asset classes that typically generate higher fees to asset classes that typically generate lower fees compared with 2011. In the future, if asset prices were to decline, or investors continue to favor asset classes that typically generate lower fees or investors continue to withdraw their assets, investment management revenues would likely be negatively impacted. In addition, continued concerns about the global economic outlook could result in downward pressure on assets under supervision.  2012 versus 2011. Investment management revenues on the consolidated statements of earnings were $4.97 billion for 2012, 6% higher compared with 2011, due to significantly higher incentive fees, partially offset by slightly lower management and other fees.  2011 versus 2010. Investment management revenues on the consolidated statements of earnings were $4.69 billion for 2011, essentially unchanged compared with 2010, primarily due to higher management and other fees, reflecting favorable changes in the mix of assets under management, offset by lower incentive fees.      54   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Commissions and fees
  Although global equity prices increased during 2012, commissions and fees reflected an operating environment characterized by lower market volumes primarily due to lower volatility levels, concerns about the outlook for the global economy and continued political uncertainty. If macroeconomic concerns continue and result in lower market volumes, commissions and fees would likely continue to be negatively impacted.  
2012 versus 2011. Commissions and fees on the consolidated statements of earnings were $3.16 billion for 2012, 16% lower than 2011, reflecting lower market volumes.
2011 versus 2010. Commissions and fees on the consolidated statements of earnings were $3.77 billion for 2011, 6% higher than 2010, primarily reflecting higher market volumes, particularly during the third quarter of 2011.
Market making
  During 2012, market-making revenues reflected an operating environment generally characterized by continued broad market concerns and uncertainties, although positive developments helped to improve market conditions. These developments included certain central bank actions to ease monetary policy and address funding risks for European financial institutions. In addition, the U.S. economy posted stable to improving economic data, including favorable developments in unemployment and housing. These improvements resulted in tighter credit spreads, higher global equity prices and lower levels of volatility. However, concerns about the outlook for the global economy and continued political uncertainty, particularly the political debate in the United States surrounding the fiscal cliff, generally resulted in client risk aversion and lower activity levels. Also, uncertainty over financial regulatory reform persisted. If these concerns and uncertainties continue over the long term, market-making revenues would likely be negatively impacted.  2012 versus 2011. Market-making revenues on the consolidated statements of earnings were $11.35 billion for 2012, 22% higher than 2011, primarily reflecting significantly higher revenues in mortgages and higher revenues in interest rate products, credit products and equity cash products, partially offset by significantly lower revenues in commodities. In addition, market-making revenues included significantly higher revenues in securities services compared with 2011, reflecting a gain of approximately $500 million on the sale of our hedge fund administration business.  2011 versus 2010. Market-making revenues on the consolidated statements of earnings were $9.29 billion for 2011, 32% lower than 2010. Although activity levels during 2011 were generally consistent with 2010 levels, and results were solid during the first quarter of 2011, the environment during the remainder of 2011 was characterized by broad market concerns and uncertainty, resulting in volatile markets and significantly wider credit spreads, which contributed to difficult market-making conditions and led to reductions in risk by us and our clients. As a result of these conditions, revenues across most of our major market-making activities were lower during 2011 compared with 2010.  
Other principal transactions
  During 2012, other principal transactions revenues reflected an operating environment characterized by tighter credit spreads and an increase in global equity prices. However, concerns about the outlook for the global economy and uncertainty over financial regulatory reform persisted. If equity markets decline or credit spreads widen, other principal transactions revenues would likely be negatively impacted.  2012 versus 2011. Other principal transactions revenues on the consolidated statements of earnings were $5.87 billion and $1.51 billion for 2012 and 2011, respectively. Results for 2012 included a gain from our investment in the ordinary shares of ICBC, net gains from other investments in equities, primarily in private equities, net gains from debt securities and loans, and revenues related to our consolidated investment entities.  2011 versus 2010. Other principal transactions revenues on the consolidated statements of earnings were $1.51 billion and $6.93 billion for 2011 and 2010, respectively. Results for 2011 included a loss from our investment in the ordinary shares of ICBC and net gains from other investments in equities, primarily in private equities, partially offset by losses from public equities. In addition, revenues in other principal transactions included net losses from debt securities and loans, primarily reflecting approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, partially offset by net gains from other debt securities and loans. Results for 2011 also included revenues related to our consolidated investment entities. Results for 2010 included a gain from our investment in the ordinary shares of ICBC, net gains from other investments in equities, net gains from debt securities and loans, and revenues related to consolidated investment entities.          Goldman Sachs 2012 Form 10-K   55  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Net Interest Income
  2012 versus 2011. Net interest income on the consolidated statements of earnings was $3.88 billion for 2012, 25% lower than 2011. The decrease compared with 2011 was primarily due to lower average yields on financial instruments owned, at fair value, and collateralized agreements.  2011 versus 2010. Net interest income on the consolidated statements of earnings was $5.19 billion for 2011, 6% lower than 2010. The decrease compared with 2010 was primarily due to higher interest expense related to our long-term borrowings and higher dividend expense related to financial instruments sold, but not yet purchased, partially offset by an increase in interest income from higher yielding collateralized agreements.  
Operating Expenses
Our operating expenses are primarily influenced by compensation, headcount and levels of business activity.
  Compensation and benefits includes salaries, discretionary compensation, amortization of equity awards and other items such as benefits. Discretionary compensation is significantly impacted by, among other factors, the level of net revenues, overall financial performance, prevailing labor markets, business mix, the structure of our share-based compensation programs and the external environment.  In the context of more difficult economic and financial conditions, the firm launched an initiative during the second quarter of 2011 to identify areas where we can operate more efficiently and reduce our operating expenses. During 2012 and 2011, we announced targeted annual run rate compensation and non-compensation reductions of approximately $1.9 billion in aggregate.  
The table below presents our operating expenses and total staff.
                                                                       Year Ended December $ in millions                                                2012           2011           2010 Compensation and benefits                                 $12,944        $12,223        $15,376   U.K. bank payroll tax                                           -              -            465   Brokerage, clearing, exchange and distribution fees         2,208          2,463          2,281  Market development                                            509            640            530  Communications and technology                                 782            828            758  Depreciation and amortization                               1,738          1,865          1,889  Occupancy                                                     875          1,030          1,086  Professional fees                                             867            992            927  Insurance reserves 1                                          598            529            398  Other expenses                                              2,435          2,072          2,559 Total non-compensation expenses                            10,012         10,419         10,428 Total operating expenses                                  $22,956        $22,642        $26,269 Total staff at period-end 2                                32,400         33,300         35,700    
1. Related revenues are included in "Market making" on the consolidated
   statements of earnings.    
2. Includes employees, consultants and temporary staff.
    56   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    2012 versus 2011. Operating expenses on the consolidated statements of earnings were $22.96 billion for 2012, essentially unchanged compared with 2011. Compensation and benefits expenses on the consolidated statements of earnings were $12.94 billion for 2012, 6% higher compared with $12.22 billion for 2011. The ratio of compensation and benefits to net revenues for 2012 was 37.9%, compared with 42.4% for 2011. Total staff decreased 3% during 2012.  Non-compensation expenses on the consolidated statements of earnings were $10.01 billion for 2012, 4% lower compared with 2011. The decrease compared with 2011 primarily reflected the impact of expense reduction initiatives, lower brokerage, clearing, exchange and distribution fees, lower occupancy expenses and lower impairment charges. These decreases were partially offset by higher other expenses and increased reserves related to our reinsurance business. The increase in other expenses compared with 2011 primarily reflected higher net provisions for litigation and regulatory proceedings and higher charitable contributions. Net provisions for litigation and regulatory proceedings were $448 million during 2012 (including a settlement with the Board of Governors of the Federal Reserve System (Federal Reserve Board) regarding the independent foreclosure review). Charitable contributions were $225 million during 2012, including $159 million to Goldman Sachs Gives, our donor-advised fund, and $10 million to The Goldman Sachs Foundation. Compensation was reduced to fund the charitable contribution to Goldman Sachs Gives. The firm asks its participating managing directors to make recommendations regarding potential charitable recipients for this contribution.  2011 versus 2010. Operating expenses on the consolidated statements of earnings were $22.64 billion for 2011, 14% lower than 2010. Compensation and benefits expenses on the consolidated statements of earnings were $12.22 billion for 2011, a 21% decline compared with $15.38 billion for 2010. The ratio of compensation and benefits to net revenues for 2011 was 42.4%, compared with 39.3% 1 (which excludes the impact of the U.K. bank payroll tax) for 2010. Operating expenses for 2010 included $465 million related to the U.K. bank payroll tax. Total staff decreased 7% during 2011.  Non-compensation expenses on the consolidated statements of earnings were $10.42 billion for 2011, essentially unchanged compared with 2010. Non-compensation expenses for 2011 included higher brokerage, clearing, exchange and distribution fees, increased reserves related to our reinsurance business and higher market development expenses compared with 2010. These increases were offset by lower other expenses during 2011. The decrease in other expenses primarily reflected lower net provisions for litigation and regulatory proceedings (2010 included $550 million related to a settlement with the SEC). In addition, non-compensation expenses during 2011 included impairment charges of approximately $440 million, primarily related to consolidated investments and Litton Loan Servicing LP. Charitable contributions were $163 million during 2011, including $78 million to Goldman Sachs Gives and $25 million to The Goldman Sachs Foundation. Compensation was reduced to fund the charitable contribution to Goldman Sachs Gives. The firm asks its participating managing directors to make recommendations regarding potential charitable recipients for this contribution.       
1. We believe that presenting our ratio of compensation and benefits to net
   revenues excluding the impact of the $465 millionU.K. bank payroll tax is
   meaningful, as excluding it increases the comparability of period-to-period
   results. The ratio of compensation and benefits to net revenues excluding the
   impact of this item is a non-GAAP measure and may not be comparable to similar
   non-GAAP measures used by other companies. The table below presents the    calculation of the ratio of compensation and benefits to net revenues    including and excluding the impact of this item.                                                                              Year Ended $ in millions                                                         
December 2010 Compensation and benefits (which excludes the impact of the $465 millionU.K. bank payroll tax)
$15,376
  Ratio of compensation and benefits to net revenues                          
   39.3 %
Compensation and benefits, including the impact of the $465 millionU.K. bank payroll tax
$15,841
Ratio of compensation and benefits to net revenues, including the impact of the $465 millionU.K. bank payroll tax
   40.5 %         Goldman Sachs 2012 Form 10-K   57  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Provision for Taxes
The effective income tax rate for 2012 was 33.3%, up from 28.0% for 2011. The increase from 28.0% to 33.3% was primarily due to the earnings mix and a decrease in the impact of permanent benefits.
  The effective income tax rate for 2011 was 28.0%, down from 35.2% for 2010. Excluding the impact of the $465 millionU.K. bank payroll tax and the $550 millionSEC settlement, substantially all of which was non-deductible, the effective income tax rate for 2010 was 32.7% 1. The decrease from 32.7% to 28.0% was primarily due to an increase in permanent benefits as a percentage of earnings and the earnings mix. 
1. We believe that presenting our effective income tax rate for 2010 excluding
   the impact of the U.K. bank payroll tax and the SEC settlement, substantially
   all of which was non-deductible, is meaningful as excluding these items
   increases the comparability of period-to-period results. The effective income
   tax rate excluding the impact of these items is a non-GAAP measure and may not
   be comparable to similar non-GAAP measures used by other companies. The table
    below presents the calculation of the effective income tax rate excluding the    impact of these amounts.                                                                  Year Ended December 2010                                                    Pre-tax        Provision        Effective income $ in millions                                     earnings        for taxes                tax rate As reported                                        $12,892           $4,538                    35.2 %  Add back: Impact of the U.K. bank payroll tax                    465                -  Impact of the SEC settlement                           550                6 As adjusted                                        $13,907           $4,544                    32.7 %     58   Goldman Sachs 2012 Form 10-K   
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Segment Operating Results
  The table below presents the net revenues, operating expenses and pre-tax earnings of our segments.                                                                         Year Ended December in millions                                                    2012            2011             2010 Investment Banking              Net revenues                $ 4,926         $ 4,355          $ 4,810                                  Operating expenses            3,330           2,995            3,459                                 Pre-tax earnings            $ 1,596         $ 1,360          $ 1,351 Institutional Client Services   Net revenues                $18,124         $17,280          $21,796                                  Operating expenses           12,480          12,837           14,994                                 Pre-tax earnings            $ 5,644         $ 4,443          $ 6,802 Investing & Lending             Net revenues                $ 5,891         $ 2,142          $ 7,541                                  Operating expenses            2,666           2,673            3,361                                 Pre-tax earnings/(loss)     $ 3,225         $  (531 )        $ 4,180 Investment Management           Net revenues                $ 5,222         $ 5,034          $ 5,014                                  Operating expenses            4,294           4,020            4,082                                 Pre-tax earnings            $   928         $ 1,014          $   932 Total                           Net revenues                $34,163         $28,811          $39,161                                  Operating expenses           22,956          22,642           26,269                                 Pre-tax earnings            $11,207         $ 6,169          $12,892    
Total operating expenses in the table above include the following expenses that have not been allocated to our segments:
Ÿ   charitable contributions of $169 million, $103 million and $345 million for
    the years ended December 2012, December 2011 and December 2010,     respectively; and    
Ÿ   real estate-related exit costs of $17 million, $14 million and $28 million for
    the years ended December 2012, December 2011 and December 2010, respectively.
    Real estate-related exit costs are included in "Depreciation and amortization"
    and "Occupancy" in the consolidated statements of earnings.
Operating expenses related to net provisions for litigation and regulatory proceedings, previously not allocated to our segments, have now been allocated. This allocation is consistent with the manner in which management currently views the performance of our segments. Reclassifications have been made to previously reported segment amounts to conform to the current presentation.
  Net revenues in our segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. See Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our business segments.  The cost drivers of Goldman Sachs taken as a whole - compensation, headcount and levels of business activity - are broadly similar in each of our business segments. Compensation and benefits expenses within our segments reflect, among other factors, the overall performance of Goldman Sachs as well as the performance of individual businesses. Consequently, pre-tax margins in one segment of our business may be significantly affected by the performance of our other business segments. A discussion of segment operating results follows.          Goldman Sachs 2012 Form 10-K   59  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Investment Banking
Our Investment Banking segment is comprised of:
Financial Advisory. Includes strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, risk management, restructurings and spin-offs, and derivative transactions directly related to these client advisory assignments.
  Underwriting. Includes public offerings and private placements, including domestic and cross-border transactions, of a wide range of securities, loans and other financial instruments, and derivative transactions directly related to these client underwriting activities.  The table below presents the operating results of our Investment Banking segment.                                                  Year Ended December                  in millions               2012         2011         2010                  Financial Advisory      $1,975       $1,987       $2,062                   Equity underwriting        987        1,085        1,462                   Debt underwriting        1,964        1,283        1,286                  Total Underwriting       2,951        2,368        2,748                  Total net revenues       4,926        4,355        4,810                   Operating expenses       3,330        2,995        3,459                  Pre-tax earnings        $1,596       $1,360       $1,351   The table below presents our financial advisory and underwriting transaction volumes. 1                                                           Year Ended December            in billions                               2012       2011       2010            Announced mergers and acquisitions        $707       $634       $500             Completed mergers and acquisitions         574        652        441             Equity and equity-related offerings 2       57         55         67             Debt offerings 3                           236        206        234    
1. Source: Thomson Reuters. Announced and completed mergers and acquisitions
   volumes are based on full credit to each of the advisors in a transaction.
   Equity and equity-related offerings and debt offerings are based on full
   credit for single book managers and equal credit for joint book managers.
   Transaction volumes may not be indicative of net revenues in a given period.
   In addition, transaction volumes for prior periods may vary from amounts
   previously reported due to the subsequent withdrawal or a change in the value
   of a transaction.    
2. Includes Rule 144A and public common stock offerings, convertible offerings
   and rights offerings.    
3. Includes non-convertible preferred stock, mortgage-backed securities,
   asset-backed securities and taxable municipal debt. Includes publicly
   registered and Rule 144A issues. Excludes leveraged loans.
2012 versus 2011. Net revenues in Investment Banking were $4.93 billion for 2012, 13% higher than 2011.
  Net revenues in Financial Advisory were $1.98 billion, essentially unchanged compared with 2011. Net revenues in our Underwriting business were $2.95 billion, 25% higher than 2011, due to strong net revenues in debt underwriting. Net revenues in debt underwriting were significantly higher compared with 2011, primarily reflecting higher net revenues from investment-grade and leveraged finance activity. Net revenues in equity underwriting were lower compared with 2011, primarily reflecting a decline in industry-wide initial public offerings.  During 2012, Investment Banking operated in an environment generally characterized by continued concerns about the outlook for the global economy and political uncertainty. These concerns weighed on investment banking activity, as completed mergers and acquisitions activity declined compared with 2011, and equity and equity-related underwriting activity remained low, particularly in initial public offerings. However, industry-wide debt underwriting activity improved compared with 2011, as credit spreads tightened and interest rates remained low. If macroeconomic concerns continue and result in lower levels of client activity, net revenues in Investment Banking would likely be negatively impacted.  Our investment banking transaction backlog increased compared with the end of 2011. The increase compared with the end of 2011 was due to an increase in potential debt underwriting transactions, primarily reflecting an increase in leveraged finance transactions, and an increase in potential advisory transactions. These increases were partially offset by a decrease in potential equity underwriting transactions compared with the end of 2011, reflecting uncertainty in market conditions.  Our investment banking transaction backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not. We believe changes in our investment banking transaction backlog may be a useful indicator of client activity levels which, over the long term, impact our net revenues. However, the time frame for completion and corresponding revenue recognition of transactions in our backlog varies based on the nature of the assignment, as certain transactions may remain in our backlog for longer periods of time and others may enter and leave within the same reporting period. In addition, our transaction backlog is subject to certain limitations, such as assumptions about the likelihood that individual client transactions will occur in the future. Transactions may be cancelled or modified, and transactions not included in the estimate may also occur.      60   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Operating expenses were $3.33 billion for 2012, 11% higher than 2011, due to increased compensation and benefits expenses, primarily resulting from higher net revenues. Pre-tax earnings were $1.60 billion in 2012, 17% higher than 2011.  
2011 versus 2010. Net revenues in Investment Banking were $4.36 billion for 2011, 9% lower than 2010.
  Net revenues in Financial Advisory were $1.99 billion, 4% lower than 2010. Net revenues in our Underwriting business were $2.37 billion, 14% lower than 2010, reflecting significantly lower net revenues in equity underwriting, principally due to a decline in industry-wide activity. Net revenues in debt underwriting were essentially unchanged compared with 2010.  Investment Banking operated in an environment generally characterized by significant declines in industry-wide underwriting and mergers and acquisitions activity levels during the second half of 2011. These declines reflected increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk, which contributed to a significant widening in credit spreads, a sharp increase in volatility levels and a significant decline in global equity markets during the second half of 2011.  Our investment banking transaction backlog increased compared with the end of 2010. The increase compared with the end of 2010 was due to an increase in potential equity underwriting transactions, primarily reflecting an increase in client mandates to underwrite initial public offerings. Estimated net revenues from potential debt underwriting transactions decreased slightly compared with the end of 2010. Estimated net revenues from potential advisory transactions were essentially unchanged compared with the end of 2010.  Operating expenses were $3.00 billion for 2011, 13% lower than 2010, due to decreased compensation and benefits expenses, primarily resulting from lower net revenues. Pre-tax earnings were $1.36 billion in 2011, essentially unchanged compared with 2010.  Institutional Client Services 
Our Institutional Client Services segment is comprised of:
Fixed Income, Currency and Commodities Client Execution. Includes client execution activities related to making markets in interest rate products, credit products, mortgages, currencies and commodities.
We generate market-making revenues in these activities, in three ways:
Ÿ   In large, highly liquid markets (such as markets for U.S. Treasury bills or
    certain mortgage pass-through certificates), we execute a high volume of     transactions for our clients for modest spreads and fees.     Ÿ   In less liquid markets (such as mid-cap corporate bonds, growth market
    currencies or certain non-agency mortgage-backed securities), we execute
    transactions for our clients for spreads and fees that are generally     somewhat larger.    
Ÿ   We also structure and execute transactions involving customized or tailor-made
    products that address our clients' risk exposures, investment objectives or
    other complex needs (such as a jet fuel hedge for an airline).
Given the focus on the mortgage market, our mortgage activities are further described below.
  Our activities in mortgages include commercial mortgage-related securities, loans and derivatives, residential mortgage-related securities, loans and derivatives (including U.S. government agency-issued collateralized mortgage obligations, other prime, subprime and Alt-A securities and loans), and other asset-backed securities, loans and derivatives.  We buy, hold and sell long and short mortgage positions, primarily for market making for our clients. Our inventory therefore changes based on client demands and is generally held for short-term periods.  
See Notes 18 and 27 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about exposure to mortgage repurchase requests, mortgage rescissions and mortgage-related litigation.
  Equities. Includes client execution activities related to making markets in equity products, as well as commissions and fees from executing and clearing institutional client transactions on major stock, options and futures exchanges worldwide. Equities also includes our securities services business, which provides financing, securities lending and other prime brokerage services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and generates revenues primarily in the form of interest rate spreads or fees, and revenues related to our reinsurance activities.          Goldman Sachs 2012 Form 10-K   61  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    The table below presents the operating results of our Institutional Client Services segment.                                                                Year Ended December in millions                                          2012             2011             2010 Fixed Income, Currency and Commodities Client Execution                                  $ 9,914          $ 9,018          $13,707  Equities client execution 1                         3,171            3,031            3,231  Commissions and fees                                3,053            3,633            3,426  Securities services                                 1,986            1,598            1,432 Total Equities                                      8,210            8,262            8,089 Total net revenues                                 18,124           17,280           21,796  Operating expenses                                 12,480           12,837           14,994 Pre-tax earnings                                  $ 5,644          $ 4,443          $ 6,802    
1. Includes net revenues related to reinsurance of $1.08 billion, $880 million
   and $827 million for the years ended December 2012, December 2011 and
December 2010, respectively.
2012 versus 2011. Net revenues in Institutional Client Services were $18.12 billion for 2012, 5% higher than 2011.
  Net revenues in Fixed Income, Currency and Commodities Client Execution were $9.91 billion for 2012, 10% higher than 2011. These results reflected strong net revenues in mortgages, which were significantly higher compared with 2011. In addition, net revenues in credit products and interest rate products were solid and higher compared with 2011. These increases were partially offset by significantly lower net revenues in commodities and slightly lower net revenues in currencies. Although broad market concerns persisted during 2012, Fixed Income, Currency and Commodities Client Execution operated in a generally improved environment characterized by tighter credit spreads and less challenging market-making conditions compared with 2011.  Net revenues in Equities were $8.21 billion for 2012, essentially unchanged compared with 2011. Net revenues in securities services were significantly higher compared with 2011, reflecting a gain of approximately $500 million on the sale of our hedge fund administration business. In addition, equities client execution net revenues were higher than 2011, primarily reflecting significantly higher results in cash products, principally due to increased levels of client activity. These increases were offset by lower commissions and fees, reflecting lower market volumes. During 2012, Equities operated in an environment generally characterized by an increase in global equity prices and lower volatility levels.  The net loss attributable to the impact of changes in our own credit spreads on borrowings for which the fair value option was elected was $714 million ($433 million and $281 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2012, compared with a net gain of $596 million ($399 million and $197 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2011.  During 2012, Institutional Client Services operated in an environment generally characterized by continued broad market concerns and uncertainties, although positive developments helped to improve market conditions. These developments included certain central bank actions to ease monetary policy and address funding risks for European financial institutions. In addition, the U.S. economy posted stable to improving economic data, including favorable developments in unemployment and housing. These improvements resulted in tighter credit spreads, higher global equity prices and lower levels of volatility. However, concerns about the outlook for the global economy and continued political uncertainty, particularly the political debate in the United States surrounding the fiscal cliff, generally resulted in client risk aversion and lower activity levels. Also, uncertainty over financial regulatory reform persisted. If these concerns and uncertainties continue over the long term, net revenues in Fixed Income, Currency and Commodities Client Execution and Equities would likely be negatively impacted.  Operating expenses were $12.48 billion for 2012, 3% lower than 2011, primarily due to lower brokerage, clearing, exchange and distribution fees, and lower impairment charges, partially offset by higher net provisions for litigation and regulatory proceedings. Pre-tax earnings were $5.64 billion in 2012, 27% higher than 2011.  
2011 versus 2010. Net revenues in Institutional Client Services were $17.28 billion for 2011, 21% lower than 2010.
  Net revenues in Fixed Income, Currency and Commodities Client Execution were $9.02 billion for 2011, 34% lower than 2010. Although activity levels during 2011 were generally consistent with 2010 levels, and results were solid during the first quarter of 2011, the environment during the remainder of 2011 was characterized by broad market concerns and uncertainty, resulting in volatile markets and significantly wider credit spreads, which contributed to difficult market-making conditions and led to reductions in risk by us and our clients. As a result of these conditions, net revenues across the franchise were lower, including significant declines in mortgages and credit products, compared with 2010.      62   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Net revenues in Equities were $8.26 billion for 2011, 2% higher than 2010. During 2011, average volatility levels increased and equity prices in Europe and Asia declined significantly, particularly during the third quarter. The increase in net revenues reflected higher commissions and fees, primarily due to higher market volumes, particularly during the third quarter of 2011. In addition, net revenues in securities services increased compared with 2010, reflecting the impact of higher average customer balances. Equities client execution net revenues were lower than 2010, primarily reflecting significantly lower net revenues in shares.  The net gain attributable to the impact of changes in our own credit spreads on borrowings for which the fair value option was elected was $596 million ($399 million and $197 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2011, compared with a net gain of $198 million ($188 million and $10 million related to Fixed Income, Currency and Commodities Client Execution and equities client execution, respectively) for 2010.  Institutional Client Services operated in an environment generally characterized by increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk, and its impact on the European banking system and global financial institutions. These conditions also impacted expectations for economic prospects in the United States and were reflected in equity and debt markets more broadly. In addition, the downgrade in credit ratings of the U.S. government and federal agencies and many financial institutions during the second half of 2011 contributed to further uncertainty in the markets. These concerns, as well as other broad market concerns, such as uncertainty over financial regulatory reform, continued to have a negative impact on our net revenues during 2011.  Operating expenses were $12.84 billion for 2011, 14% lower than 2010, due to decreased compensation and benefits expenses, primarily resulting from lower net revenues, lower net provisions for litigation and regulatory proceedings (2010 included $550 million related to a settlement with the SEC), the impact of the U.K. bank payroll tax during 2010, as well as an impairment of our NYSE DMM rights of $305 million during 2010. These decreases were partially offset by higher brokerage, clearing, exchange and distribution fees, principally reflecting higher transaction volumes in Equities. Pre-tax earnings were $4.44 billion in 2011, 35% lower than 2010.  
Investing & Lending
  Investing & Lending includes our investing activities and the origination of loans to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, directly and indirectly through funds that we manage, in debt securities and loans, public and private equity securities, real estate, consolidated investment entities and power generation facilities.  The table below presents the operating results of our Investing & Lending segment.                                                          Year Ended December          in millions                              2012         2011          2010          ICBC                                   $  408       $ (517 )      $  747 
         Equity securities (excluding ICBC)      2,392        1,120         2,692
           Debt securities and loans               1,850           96         2,597           Other                                   1,241        1,443         1,505          Total net revenues                      5,891        2,142         7,541           Operating expenses                      2,666        2,673         3,361          Pre-tax earnings/(loss)                $3,225       $ (531 )      
$4,180
   2012 versus 2011. Net revenues in Investing & Lending were $5.89 billion and $2.14 billion for 2012 and 2011, respectively. During 2012, Investing & Lending net revenues were positively impacted by tighter credit spreads and an increase in global equity prices. Results for 2012 included a gain of $408 million from our investment in the ordinary shares of ICBC, net gains of $2.39 billion from other investments in equities, primarily in private equities, net gains and net interest income of $1.85 billion from debt securities and loans, and other net revenues of $1.24 billion, principally related to our consolidated investment entities. If equity markets decline or credit spreads widen, net revenues in Investing & Lending would likely be negatively impacted.  Operating expenses were $2.67 billion for 2012, essentially unchanged compared with 2011. Pre-tax earnings were $3.23 billion in 2012, compared with a pre-tax loss of $531 million in 2011.          Goldman Sachs 2012 Form 10-K   63  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    2011 versus 2010. Net revenues in Investing & Lending were $2.14 billion and $7.54 billion for 2011 and 2010, respectively. During 2011, Investing & Lending results reflected an operating environment characterized by a significant decline in equity markets in Europe and Asia, and unfavorable credit markets that were negatively impacted by increased concerns regarding the weakened state of global economies, including heightened European sovereign debt risk. Results for 2011 included a loss of $517 million from our investment in the ordinary shares of ICBC and net gains of $1.12 billion from other investments in equities, primarily in private equities, partially offset by losses from public equities. In addition, Investing & Lending included net revenues of $96 million from debt securities and loans. This amount includes approximately $1 billion of unrealized losses related to relationship lending activities, including the effect of hedges, offset by net interest income and net gains from other debt securities and loans. Results for 2011 also included other net revenues of $1.44 billion, principally related to our consolidated investment entities.  Results for 2010 included a gain of $747 million from our investment in the ordinary shares of ICBC, a net gain of $2.69 billion from other investments in equities, a net gain of $2.60 billion from debt securities and loans and other net revenues of $1.51 billion, principally related to our consolidated investment entities. The net gain from other investments in equities was primarily driven by an increase in global equity markets, which resulted in appreciation of both our public and private equity positions and provided favorable conditions for initial public offerings. The net gains and net interest from debt securities and loans primarily reflected the impact of tighter credit spreads and favorable credit markets during the year, which provided favorable conditions for borrowers to refinance.  Operating expenses were $2.67 billion for 2011, 20% lower than 2010, due to decreased compensation and benefits expenses, primarily resulting from lower net revenues. This decrease was partially offset by the impact of impairment charges related to consolidated investments during 2011. Pre-tax loss was $531 million in 2011, compared with pre-tax earnings of $4.18 billion in 2010.  
Investment Management
  Investment Management provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. Investment Management also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.  Assets under supervision include assets under management and other client assets. Assets under management include client assets where we earn a fee for managing assets on a discretionary basis. This includes net assets in our mutual funds, hedge funds, credit funds and private equity funds (including real estate funds), and separately managed accounts for institutional and individual investors. Other client assets include client assets invested with third-party managers, private bank deposits and assets related to advisory relationships where we earn a fee for advisory and other services, but do not have discretion over the assets. Assets under supervision do not include the self-directed brokerage accounts of our clients.  Assets under management and other client assets typically generate fees as a percentage of net asset value, which vary by asset class and are affected by investment performance as well as asset inflows and redemptions.  In certain circumstances, we are also entitled to receive incentive fees based on a percentage of a fund's return or when the return exceeds a specified benchmark or other performance targets. Incentive fees are recognized only when all material contingencies are resolved.  The table below presents the operating results of our Investment Management segment.                                                     Year Ended December               in millions                     2012         2011         2010               Management and other fees     $4,105       $4,188       $3,956                Incentive fees                   701          323          527                Transaction revenues             416          523          531               Total net revenues             5,222        5,034        5,014                Operating expenses             4,294        4,020        4,082               Pre-tax earnings              $  928       $1,014       $  932       64   Goldman Sachs 2012 Form 10-K   
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    The tables below present our assets under supervision, including assets under management by asset class and other client assets, as well as a summary of the changes in our assets under supervision.                                                           As of December 31,            in billions                              2012       2011       2010            Alternative investments 1                $133       $142       $148             Equity                                    133        126        144             Fixed income                              370        340        340            Total non-money market assets             636        608        632             Money markets                             218        220        208            Total assets under management (AUM)       854        828        840             Other client assets                       111         67         77            Total assets under supervision (AUS)     $965       $895       $917    
1. Primarily includes hedge funds, credit funds, private equity, real estate,
    currencies, commodities and asset allocation strategies.                                                              Year Ended December 31,     in billions                                       2012         2011          2010     Balance, beginning of year                        $895         $917          $955      Net inflows/(outflows)     Alternative investments                            (11 )         (5 )          (1 )      Equity                                             (13 )         (9 )         (21 )      Fixed income                                         8          (15 )           7     Total non-money market net inflows/(outflows)      (16 )        (29 )         (15 )      Money markets                                       (2 )         12           (56 )     Total AUM net inflows/(outflows)                   (18 )        (17 ) 2       (71 )      Other client assets net inflows/(outflows)          39          (10 )          (7 )     Total AUS net inflows/(outflows)                    21  1       (27 )         (78 )      Net market appreciation/(depreciation)     AUM                                                 44            5            40      Other client assets                                  5            -             -     Total AUS net market     appreciation/(depreciation)                         49            5            40     Balance, end of year                              $965         $895          $917    
1. Includes $34 billion of fixed income asset inflows in connection with our
   acquisition of Dwight Asset Management, including $17 billion in assets under
   management and $17 billion in other client assets, and $5 billion of fixed
   income and equity asset outflows in connection with our liquidation of Goldman
   Sachs Asset Management Korea, all related to assets under management.    
2. Includes $6 billion of asset inflows across all asset classes in connection
   with our acquisitions of Goldman Sachs Australia Pty Ltd and Benchmark Asset
Management Company Private Limited.
   2012 versus 2011. Net revenues in Investment Management were $5.22 billion for 2012, 4% higher than 2011, due to significantly higher incentive fees, partially offset by lower transaction revenues and slightly lower management and other fees. During the year, assets under supervision increased $70 billion to $965 billion. Assets under management increased $26 billion to $854 billion, reflecting net market appreciation of $44 billion, primarily in fixed income and equity assets, partially offset by net outflows of $18 billion. Net outflows in assets under management included outflows in equity, alternative investment and money market assets, partially offset by inflows in fixed income assets. Other client assets increased $44 billion to $111 billion, primarily due to net inflows, principally in client assets invested with third-party managers and assets related to advisory relationships.  During 2012, Investment Management operated in an environment generally characterized by improved asset prices, resulting in appreciation in the value of client assets. However, the mix of assets under supervision has shifted slightly from asset classes that typically generate higher fees to asset classes that typically generate lower fees compared with 2011. In the future, if asset prices were to decline, or investors continue to favor asset classes that typically generate lower fees or investors continue to withdraw their assets, net revenues in Investment Management would likely be negatively impacted. In addition, continued concerns about the global economic outlook could result in downward pressure on assets under supervision.  
Operating expenses were $4.29 billion for 2012, 7% higher than 2011, due to increased compensation and benefits expenses. Pre-tax earnings were $928 million in 2012, 8% lower than 2011.
  2011 versus 2010. Net revenues in Investment Management were $5.03 billion for 2011, essentially unchanged compared with 2010, primarily due to higher management and other fees, reflecting favorable changes in the mix of assets under management, offset by lower incentive fees. During 2011, assets under supervision decreased $22 billion to $895 billion. Assets under management decreased $12 billion to $828 billion, reflecting net outflows of $17 billion, partially offset by net market appreciation of $5 billion. Net outflows in assets under management primarily reflected outflows in fixed income and equity assets, partially offset by inflows in money market assets. Other client assets decreased $10 billion to $67 billion, primarily due to net outflows, principally in client assets invested with third-party managers in money market funds.          Goldman Sachs 2012 Form 10-K   65  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    During the first half of 2011, Investment Management operated in an environment generally characterized by improved asset prices and a shift in investor assets away from money markets in favor of asset classes with potentially higher risk and returns. However, during the second half of 2011, asset prices declined, particularly in equities, in part driven by increased uncertainty regarding the global economic outlook. Declining asset prices and economic uncertainty contributed to investors shifting assets away from asset classes with potentially higher risk and returns to asset classes with lower risk and returns.  
Operating expenses were $4.02 billion for 2011, 2% lower than 2010. Pre-tax earnings were $1.01 billion in 2011, 9% higher than 2010.
Geographic Data
See Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a summary of our total net revenues, pre-tax earnings and net earnings by geographic region.
Regulatory Developments
  The U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), enacted in July 2010, significantly altered the financial regulatory regime within which we operate. The implications of the Dodd-Frank Act for our businesses will depend to a large extent on the rules that will be adopted by the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), the SEC, the U.S. Commodity Futures Trading Commission (CFTC) and other agencies to implement the legislation, as well as the development of market practices and structures under the regime established by the legislation and the implementing rules. Other reforms have been adopted or are being considered by other regulators and policy makers worldwide and these reforms may affect our businesses. We expect that the principal areas of impact from regulatory reform for us will be:   
Ÿ   the Dodd-Frank prohibition on "proprietary trading" and the limitation on the
    sponsorship of, and investment in, hedge funds and private equity funds by
    banking entities, including bank holding companies, referred to as the     "Volcker Rule";    
Ÿ   increased regulation of and restrictions on over-the-counter (OTC) derivatives
    markets and transactions; and    
Ÿ   increased regulatory capital requirements.
   In October 2011, the proposed rules to implement the Volcker Rule were issued and included an extensive request for comments on the proposal. The proposed rules are highly complex, and many aspects of the Volcker Rule remain unclear. The full impact of the rule on us will depend upon the detailed scope of the prohibitions, permitted activities, exceptions and exclusions, and will not be known with certainty until the rules are finalized and market practices and structures develop under the final rules. Currently, companies are expected to be required to be in compliance by July 2014 (subject to possible extensions).      66   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    While many aspects of the Volcker Rule remain unclear, we evaluated the prohibition on "proprietary trading" and determined that businesses that engage in "bright line" proprietary trading are most likely to be prohibited. In 2011 and 2010, we liquidated substantially all of our Principal Strategies and Global Macro Proprietary trading positions.  In addition, we have evaluated the limitations on sponsorship of, and investments in, hedge funds and private equity funds. The firm earns management fees and incentive fees for investment management services from hedge funds and private equity funds, which are included in our Investment Management segment. The firm also makes investments in funds, and the gains and losses from these investments are included in our Investing & Lending segment; these gains and losses will be impacted by the Volcker Rule. The Volcker Rule limitation on investments in hedge funds and private equity funds requires the firm to reduce its investment in each hedge fund and private equity fund to 3% or less of the fund's net asset value, and to reduce the firm's aggregate investment in all such funds to 3% or less of the firm's Tier 1 capital. The firm's aggregate net revenues from its investments in hedge funds and private equity funds were not material to the firm's aggregate total net revenues over the period from 1999 through 2012. We continue to manage our existing private equity funds, taking into account the transition periods under the Volcker Rule. With respect to our hedge funds, we currently plan to comply with the Volcker Rule by redeeming certain of our interests in the funds. Since March 2012, we have been redeeming up to approximately 10% of certain hedge funds' total redeemable units per quarter, and expect to continue to do so through June 2014. We redeemed approximately $1.06 billion of these interests in hedge funds during the year ended December 2012. In addition, we have limited the firm's initial investment to 3% for certain new investments in hedge funds and private equity funds.  As required by the Dodd-Frank Act, the Federal Reserve Board and FDIC have jointly issued a rule requiring each bank holding company with over $50 billion in assets and each designated systemically important financial institution to provide to regulators an annual plan for its rapid and orderly resolution in the event of material financial distress or failure (resolution plan). Our resolution plan must,  among other things, demonstrate that Goldman Sachs Bank USA (GS Bank USA) is adequately protected from risks arising from our other entities. The regulators' joint rule sets specific standards for the resolution plans, including requiring a detailed resolution strategy and analyses of the company's material entities, organizational structure, interconnections and interdependencies, and management information systems, among other elements. We submitted our resolution plan to the regulators on June 29, 2012. GS Bank USA also submitted its resolution plan on June 29, 2012, as required by the FDIC.  In September 2011, the SEC proposed rules to implement the Dodd-Frank Act's prohibition against securitization participants' engaging in any transaction that would involve or result in any material conflict of interest with an investor in a securitization transaction. The proposed rules would except bona fide market-making activities and risk-mitigating hedging activities in connection with securitization activities from the general prohibition. We will also be affected by rules to be adopted by federal agencies pursuant to the Dodd-Frank Act that require any person who organizes or initiates an asset-backed security transaction to retain a portion (generally, at least five percent) of any credit risk that the person conveys to a third party.  In December 2011, the Federal Reserve Board proposed regulations designed to strengthen the regulation and supervision of large bank holding companies and systemically important nonbank financial institutions. These proposals address, among other things, risk-based capital and leverage requirements, liquidity requirements, overall risk management requirements, single counterparty limits and early remediation requirements that are designed to address financial weakness at an early stage. Although many of the proposals mirror initiatives to which bank holding companies are already subject, their full impact on the firm will not be known with certainty until the rules are finalized and market practices and structures develop under the final rules. In addition, in October 2012, the Federal Reserve Board issued final rules for stress testing requirements for certain bank holding companies, including the firm. See "Equity Capital" below for further information about our Comprehensive Capital Analysis and Review (CCAR).          Goldman Sachs 2012 Form 10-K   67  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    The Dodd-Frank Act also contains provisions that include (i) requiring the registration of all swap dealers and major swap participants with the CFTC and of security-based swap dealers and major security-based swap participants with the SEC, the clearing and execution of certain swaps and security-based swaps through central counterparties, regulated exchanges or electronic facilities and real-time public and regulatory reporting of trade information, (ii) placing new business conduct standards and other requirements on swap dealers, major swap participants, security-based swap dealers and major security-based swap participants, covering their relationships with counterparties, their internal oversight and compliance structures, conflict of interest rules, internal information barriers, general and trade-specific record-keeping and risk management, (iii) establishing mandatory margin requirements for trades that are not cleared through a central counterparty, (iv) position limits that cap exposure to derivatives on certain physical commodities and (v) entity-level capital requirements for swap dealers, major swap participants, security-based swap dealers and major security-based swap participants.  The CFTC is responsible for issuing rules relating to swaps, swap dealers and major swap participants, and the SEC is responsible for issuing rules relating to security-based swaps, security-based swap dealers and major security-based swap participants. Although the CFTC has not yet finalized its capital regulations, certain of the requirements, including registration of swap dealers and real-time public trade reporting, have taken effect already under CFTC rules, and the SEC and the CFTC have finalized the definitions of a number of key terms. The CFTC has finalized a number of other implementing rules and laid out a series of implementation deadlines in 2013, covering rules for business conduct standards for swap dealers and clearing requirements.  
The SEC has proposed rules to impose margin, capital and segregation requirements for security-based swap dealers and major security-based swap participants. The SEC has also proposed rules relating to registration of security-based swap dealers and major security-based swap participants, trade reporting and real-time reporting, and business conduct requirements for security-based swap dealers and major security-based swap participants.
  We have registered certain subsidiaries as "swap dealers" under the CFTC rules, including Goldman, Sachs & Co. (GS&Co.), GS Bank USA, Goldman Sachs International (GSI) and J. Aron & Company. We expect that these entities, and our businesses more broadly, will be subject to significant and developing regulation and regulatory oversight in connection with swap-related activities. Similar regulations have been proposed or adopted in jurisdictions outside the United States and, in July 2012 and February 2013, the Basel Committee and the International Organization of Securities Commissions released consultative documents proposing margin requirements for non-centrally-cleared derivatives. The full impact of the various U.S. and non-U.S. regulatory developments in this area will not be known with certainty until the rules are implemented and market practices and structures develop under the final rules.  The Dodd-Frank Act also establishes the Consumer Financial Protection Bureau, which has broad authority to regulate providers of credit, payment and other consumer financial products and services, and has oversight over certain of our products and services.  
See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information about regulatory developments as they relate to our regulatory capital ratios.
See "Business - Regulation" in Part I, Item 1 of this Form 10-K for more information on the laws, rules and regulations and proposed laws, rules and regulations that apply to us and our operations.
     68   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Balance Sheet and Funding Sources
Balance Sheet Management
  One of our most important risk management disciplines is our ability to manage the size and composition of our balance sheet. While our asset base changes due to client activity, market fluctuations and business opportunities, the size and composition of our balance sheet reflect (i) our overall risk tolerance, (ii) our ability to access stable funding sources and (iii) the amount of equity capital we hold.  Although our balance sheet fluctuates on a day-to-day basis, our total assets and adjusted assets at quarterly and year-end dates are generally not materially different from those occurring within our reporting periods.  In order to ensure appropriate risk management, we seek to maintain a liquid balance sheet and have processes in place to dynamically manage our assets and liabilities which include:    Ÿ   quarterly planning;     Ÿ   business-specific limits;     Ÿ   monitoring of key metrics; and     Ÿ   scenario analyses.  
Quarterly Planning. We prepare a quarterly balance sheet plan that combines our projected total assets and composition of assets with our expected funding sources and capital levels for the upcoming quarter. The objectives of this quarterly planning process are:
Ÿ   to develop our near-term balance sheet projections, taking into account the
    general state of the financial markets and expected business activity levels;
Ÿ   to ensure that our projected assets are supported by an adequate amount and
    tenor of funding and that our projected capital and liquidity metrics are
    within management guidelines and regulatory requirements; and    
Ÿ   to allow business risk managers and managers from our independent control and
    support functions to objectively evaluate balance sheet limit requests from
    business managers in the context of the firm's overall balance sheet
    constraints. These constraints include the firm's liability profile and equity
    capital levels, maturities and plans for new debt and equity issuances, share
    repurchases, deposit trends and secured funding transactions.
   To prepare our quarterly balance sheet plan, business risk managers and managers from our independent control and support functions meet with business managers to review current and prior period metrics and discuss expectations for the upcoming quarter. The specific metrics reviewed include asset and liability size and composition, aged inventory, limit utilization, risk and performance measures, and capital usage.  Our consolidated quarterly plan, including our balance sheet plans by business, funding and capital projections, and projected capital and liquidity metrics, is reviewed by the Firmwide Finance Committee. See "Overview and Structure of Risk Management" for an overview of our risk management structure.          Goldman Sachs 2012 Form 10-K   69  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Business-Specific Limits. The Firmwide Finance Committee sets asset and liability limits for each business and aged inventory limits for certain financial instruments as a disincentive to hold inventory over longer periods of time. These limits are set at levels which are close to actual operating levels in order to ensure prompt escalation and discussion among business managers and managers in our independent control and support functions on a routine basis. The Firmwide Finance Committee reviews and approves balance sheet limits on a quarterly basis and may also approve changes in limits on an ad hoc basis in response to changing business needs or market conditions.  Monitoring of Key Metrics. We monitor key balance sheet metrics daily both by business and on a consolidated basis, including asset and liability size and composition, aged inventory, limit utilization, risk measures and capital usage. We allocate assets to businesses and review and analyze movements resulting from new business activity as well as market fluctuations.  Scenario Analyses. We conduct scenario analyses to determine how we would manage the size and composition of our balance sheet and maintain appropriate funding, liquidity and capital positions in a variety of situations:    
Ÿ   These scenarios cover short-term and long-term time horizons using various
    macro-economic and firm-specific assumptions. We use these analyses to assist
    us in developing longer-term funding plans, including the level of unsecured
    debt issuances, the size of our secured funding program and the amount and
    composition of our equity capital. We also consider any potential future
    constraints, such as limits on our ability to grow our asset base in the
    absence of appropriate funding.    
Ÿ   Through our Internal Capital Adequacy Assessment Process (ICAAP), CCAR, the
    stress tests we are required to conduct under the Dodd-Frank Act, and our
    resolution and recovery planning, we further analyze how we would manage our
    balance sheet and risks through the duration of a severe crisis and we develop
    plans to access funding, generate liquidity, and/or redeploy or issue equity
     capital, as appropriate.   Balance Sheet Allocation  In addition to preparing our consolidated statements of financial condition in accordance with U.S. GAAP, we prepare a balance sheet that generally allocates assets to our businesses, which is a non-GAAP presentation and may not be comparable to similar non-GAAP presentations used by other companies. We believe that presenting our assets on this basis is meaningful because it is consistent with the way management views and manages risks associated with the firm's assets and better enables investors to assess the liquidity of the firm's assets. The table below presents a summary of this balance sheet allocation.                                                            As of December           in millions                                   2012            2011           Excess liquidity (Global Core Excess)     $174,622        $171,581            Other cash                                   6,839           7,888           Excess liquidity and cash                  181,461         179,469            Secured client financing                   229,442         283,707            Inventory                                  318,323         273,640            Secured financing agreements                76,277          71,103            Receivables                                 36,273          35,769           Institutional Client Services              430,873         380,512            ICBC 1                                       2,082           4,713            Equity (excluding ICBC)                     21,267          23,041            Debt                                        25,386          23,311            Receivables and other                        8,421           5,320           Investing & Lending                         57,156          56,385           Total inventory and related assets         488,029         436,897            Other assets 2                              39,623          23,152           Total assets                              $938,555        $923,225    
1. In January 2013, we sold approximately 45% of our ordinary shares of ICBC.
2. Includes assets related to our reinsurance business classified as held for
   sale as of December 2012. See Note 12 to the consolidated financial statements
   in Part II, Item 8 of this Form 10-K for further information.       70   Goldman Sachs 2012 Form 10-K   
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
The following is a description of the captions in the table above.
  Excess Liquidity and Cash. We maintain substantial excess liquidity to meet a broad range of potential cash outflows and collateral needs in the event of a stressed environment. See "Liquidity Risk Management" below for details on the composition and sizing of our excess liquidity pool or "Global Core Excess" (GCE). In addition to our excess liquidity, we maintain other operating cash balances, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.  Secured Client Financing. We provide collateralized financing for client positions, including margin loans secured by client collateral, securities borrowed, and resale agreements primarily collateralized by government obligations. As a result of client activities, we are required to segregate cash and securities to satisfy regulatory requirements. Our secured client financing arrangements, which are generally short-term, are accounted for at fair value or at amounts that approximate fair value, and include daily margin requirements to mitigate counterparty credit risk.  Institutional Client Services. In Institutional Client Services, we maintain inventory positions to facilitate market-making in fixed income, equity, currency and commodity products. Additionally, as part of client market-making activities, we enter into resale or securities borrowing arrangements to obtain securities which we can use to cover transactions in which we or our clients have sold securities that have not yet been purchased. The receivables in Institutional Client Services primarily relate to securities transactions.  Investing & Lending. In Investing & Lending, we make investments and originate loans to provide financing to clients. These investments and loans are typically longer-term in nature. We make investments, directly and indirectly through funds that we manage, in debt securities, loans, public and private equity securities, real estate and other investments.  
Other Assets. Other assets are generally less liquid, non-financial assets, including property, leasehold improvements and equipment, goodwill and identifiable intangible assets, income tax-related receivables, equity-method investments, assets classified as held for sale and miscellaneous receivables.
Goldman Sachs 2012 Form 10-K   71  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    The tables below present the reconciliation of this balance sheet allocation to our U.S. GAAP balance sheet. In the tables below, total assets for Institutional Client Services and Investing & Lending represent the inventory and related assets. These amounts differ from total assets by  business segment disclosed in Note 25 to the consolidated financial statements in Part II, Item 8 of this Form 10-K because total assets disclosed in Note 25 include allocations of our excess liquidity and cash, secured client financing and other assets.                                                                                                     As of December 2012                                                               Excess           Secured       Institutional                                                            Liquidity            Client              Client       Investing &         Other          Total in millions                                                 and Cash  1      Financing            Services           Lending        Assets         Assets Cash and cash equivalents                                   $ 72,669           $     -             $     -            $    -        $    -       $ 72,669  Cash and securities segregated for regulatory and other purposes                                                           -            49,671                   -                 -             -         49,671  Securities purchased under agreements to resell and federal funds sold                                            28,018            84,064              28,960               292             -        141,334  Securities borrowed                                           41,699            47,877              47,317                 -             -        136,893  Receivables from brokers, dealers and clearing organizations                                                      -             4,400              14,044                36             -         
18,480
  Receivables from customers and counterparties                      -            43,430              22,229             7,215             -         
72,874
  Financial instruments owned, at fair value                    39,075                 -             318,323            49,613             -        407,011  Other assets                                                       -                 -                   -                 -        39,623         39,623 Total assets                                                $181,461          $229,442            $430,873           $57,156       $39,623       $938,555                                                                                                 As of December 2011                                                               Excess           Secured       Institutional                                                            Liquidity            Client              Client       Investing &         Other          Total in millions                                                 and Cash  1      Financing            Services           Lending        Assets         Assets Cash and cash equivalents                                   $ 56,008           $     -             $     -            $    -        $    -       $ 56,008  Cash and securities segregated for regulatory and other purposes                                                           -            64,264                   -                 -             -         64,264  Securities purchased under agreements to resell and federal funds sold                                            70,220            98,445              18,671               453             -        187,789  Securities borrowed                                           14,919            85,990              52,432                 -             -        153,341  Receivables from brokers, dealers and clearing organizations                                                      -             3,252              10,612               340             -         
14,204
  Receivables from customers and counterparties                      -            31,756              25,157             3,348             -         
60,261
  Financial instruments owned, at fair value                    38,322                 -             273,640            52,244             -        364,206  Other assets                                                       -                 -                   -                 -        23,152         23,152 Total assets                                                $179,469          $283,707            $380,512           $56,385       $23,152       $923,225    
1. Includes unencumbered cash, U.S. government and federal agency obligations
   (including highly liquid U.S. federal agency mortgage-backed obligations), and
   German, French, Japanese and United Kingdom government obligations.     72   Goldman Sachs 2012 Form 10-K   
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Balance Sheet Analysis and Metrics
  As of December 2012, total assets on our consolidated statements of financial condition were $938.56 billion, an increase of $15.33 billion from December 2011. This increase was primarily due to (i) an increase in financial instruments owned, at fair value of $42.81 billion, due to increases in equities and convertible debentures and non-U.S. government and agency obligations and (ii) an increase in cash and cash equivalents of $16.66 billion, primarily due to increases in interest-bearing deposits with banks. These increases were partially offset by decreases in securities purchased under agreements to resell and federal funds sold of $46.46 billion, primarily due to firm and client activities.  As of December 2012, total liabilities on our consolidated statements of financial condition were $862.84 billion, an increase of $9.99 billion from December 2011. This increase was primarily due to an increase in deposits of $24.02 billion, primarily due to increases in client activity. This increase was partially offset by a decrease in financial instruments sold, but not yet purchased, at fair value of $18.37 billion, primarily due to decreases in derivatives and U.S. government and federal agency obligations.  As of December 2012, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $171.81 billion, which was essentially unchanged and 3% higher than the daily average amount of repurchase agreements during the quarter ended and year ended December 2012, respectively. As of December 2012, the increase in our repurchase agreements relative to the daily average during the year was primarily due to an increase in firm financing activities. As of December 2011, our total securities sold under agreements to repurchase, accounted for as collateralized financings, were $164.50 billion, which was 7% higher and 3% higher than the daily average amount of repurchase agreements during the quarter ended and year ended December 2011, respectively. As of December 2011, the increase in our repurchase agreements relative to the daily average during the quarter and year was primarily due to increases in client activity at the end of the year. The level of our repurchase agreements fluctuates between and within periods, primarily due to providing clients with access to highly liquid collateral, such as U.S. government and federal agency, and investment-grade sovereign obligations through collateralized financing activities.  
The table below presents information on our assets, unsecured long-term borrowings, shareholders' equity and leverage ratios.
                                                       As of December              $ in millions                          2012            2011              Total assets                       $938,555        $923,225               Adjusted assets                    $686,874        $604,391               Unsecured long-term borrowings     $167,305        $173,545               Total shareholders' equity         $ 75,716        $ 70,379               Leverage ratio                        12.4x           13.1x               Adjusted leverage ratio                9.1x            8.6x               Debt to equity ratio                   2.2x            2.5x   Adjusted assets. Adjusted assets equals total assets less (i) low-risk collateralized assets generally associated with our secured client financing transactions, federal funds sold and excess liquidity (which includes financial instruments sold, but not yet purchased, at fair value, less derivative liabilities) and (ii) cash and securities we segregate for regulatory and other purposes. Adjusted assets is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.  The table below presents the reconciliation of total assets to adjusted assets.                                                                               As of December in millions                                                                2012             2011 Total assets                                                          $ 938,555        $ 923,225  Deduct:   Securities borrowed                                          
(136,893 )       (153,341 )
          Securities purchased under agreements to resell and
          federal funds sold                                          
(141,334 )       (187,789 )
Add:      Financial instruments sold, but
          not yet purchased, at fair value                             
126,644          145,013
          Less derivative liabilities                                  
(50,427 )        (58,453 )
          Subtotal                                                    
(202,010 )       (254,570 )
Deduct:   Cash and securities segregated for regulatory and other
          purposes                                                      (49,671 )        (64,264 ) Adjusted assets                                                       $ 686,874        $ 604,391   Leverage ratio. The leverage ratio equals total assets divided by total shareholders' equity and measures the proportion of equity and debt the firm is using to finance assets. This ratio is different from the Tier 1 leverage ratio included in "Equity Capital - Consolidated Regulatory Capital Ratios" below, and further described in Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.          Goldman Sachs 2012 Form 10-K   73  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Adjusted leverage ratio. The adjusted leverage ratio equals adjusted assets divided by total shareholders' equity. We believe that the adjusted leverage ratio is a more meaningful measure of our capital adequacy than the leverage ratio because it excludes certain low-risk collateralized assets that are generally supported with little or no capital. The adjusted leverage ratio is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.  
Our adjusted leverage ratio increased to 9.1x as of December 2012 from 8.6x as of December 2011 as our adjusted assets increased.
Debt to equity ratio. The debt to equity ratio equals unsecured long-term borrowings divided by total shareholders' equity.
Funding Sources
  Our primary sources of funding are secured financings, unsecured long-term and short-term borrowings, and deposits. We seek to maintain broad and diversified funding sources globally.  
We raise funding through a number of different products, including:
Ÿ   collateralized financings, such as repurchase agreements, securities loaned
    and other secured financings;    
Ÿ   long-term unsecured debt (including structured notes) through syndicated U.S.
    registered offerings, U.S. registered and 144A medium-term note programs,
    offshore medium-term note offerings and other debt offerings;    
Ÿ   savings and demand deposits through deposit sweep programs and time deposits
    through internal and third-party broker-dealers; and    
Ÿ   short-term unsecured debt through U.S. and non-U.S. commercial paper and
    promissory note issuances and other methods.
   We generally distribute our funding products through our own sales force and third-party distributors, to a large, diverse creditor base in a variety of markets in the Americas, Europe and Asia. We believe that our relationships with our creditors are critical to our liquidity. Our creditors include banks, governments, securities lenders, pension funds, insurance companies, mutual funds and individuals. We have imposed various internal guidelines to monitor creditor concentration across our funding programs.  Secured Funding. We fund a significant amount of inventory on a secured basis. Secured funding is less sensitive to changes in our credit quality than unsecured funding, due to our posting of collateral to our lenders. Nonetheless, we continually analyze the refinancing risk of our secured funding activities, taking into account trade tenors, maturity profiles, counterparty concentrations, collateral eligibility and counterparty rollover probabilities. We seek to mitigate our refinancing risk by executing term trades with staggered maturities, diversifying counterparties, raising excess secured funding, and pre-funding residual risk through our GCE.  We seek to raise secured funding with a term appropriate for the liquidity of the assets that are being financed, and we seek longer maturities for secured funding collateralized by asset classes that may be harder to fund on a secured basis especially during times of market stress. Substantially all of our secured funding is executed for tenors of one month or greater. Assets that may be harder to fund on a secured basis during times of market stress include certain financial instruments in the following categories: mortgage and other asset-backed loans and securities, non-investment grade corporate debt securities, equities and convertible debentures and emerging market securities. Assets that are classified as level 3 in the fair value hierarchy are generally funded on an unsecured basis. See Note 6 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about the classification of financial instruments in the fair value hierarchy and see "-Unsecured Long-Term Borrowings" below for further information about the use of unsecured long-term borrowings as a source of funding.  
The weighted average maturity of our secured funding, excluding funding collateralized by highly liquid securities eligible for inclusion in our GCE, exceeded 100 days as of December 2012.
  A majority of our secured funding for securities not eligible for inclusion in the GCE is executed through term repurchase agreements and securities lending contracts. We also raise financing through other types of collateralized financings, such as secured loans and notes.  
GS Bank USA has access to funding through the Federal Reserve Bank discount window. While we do not rely on this funding in our liquidity planning and stress testing, we maintain policies and procedures necessary to access this funding and test discount window borrowing procedures.
     74   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Unsecured Long-Term Borrowings. We issue unsecured long-term borrowings as a source of funding for inventory and other assets and to finance a portion of our GCE. We issue in different tenors, currencies, and products to  maximize the diversification of our investor base. The table below presents our quarterly unsecured long-term borrowings maturity profile through 2018 as of December 2012.                                  [[Image Removed: LOGO]]    The weighted average maturity of our unsecured long-term borrowings as of December 2012 was approximately eight years. To mitigate refinancing risk, we seek to limit the principal amount of debt maturing on any one day or during any week or year. We enter into interest rate swaps to convert a substantial portion of our long-term borrowings into floating-rate obligations in order to manage our exposure to interest rates. See Note 16 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unsecured long-term borrowings.  Temporary Liquidity Guarantee Program (TLGP). The remaining portion of our senior unsecured short-term debt guaranteed by the FDIC under the TLGP matured during the second quarter of 2012. As of December 2012, no borrowings guaranteed by the FDIC under the TLGP were outstanding and the program had expired for new issuances.          Goldman Sachs 2012 Form 10-K   75  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    Deposits. As part of our efforts to diversify our funding base, deposits have become a more meaningful share of our funding activities. GS Bank USA has been actively growing its deposit base with an emphasis on issuance of long-term certificates of deposit and on expanding our deposit sweep program, which involves long-term contractual agreements with several U.S. broker-dealers who sweep client cash to FDIC-insured deposits. We utilize deposits to finance activities in our bank subsidiaries. The table below presents the sourcing of our deposits.                                                 As of December 2012                                                Type of Deposit            in millions                 Savings and Demand  1         Time  2            Private bank deposits 3                $30,460          $    -             Certificates of deposit                      -          21,507             Deposit sweep programs                  15,998               -             Institutional                               51           2,108            Total 4                                $46,509         $23,615    
1. Represents deposits with no stated maturity.
2. Weighted average maturity in excess of three years.
3. Substantially all were from overnight deposit sweep programs related to
   private wealth management clients.    
4. Deposits insured by the FDIC as of December 2012 were approximately
$42.77 billion.
   Unsecured Short-Term Borrowings. A significant portion of our short-term borrowings was originally long-term debt that is scheduled to mature within one year of the reporting date. We use short-term borrowings to finance liquid assets and for other cash management purposes. We primarily issue commercial paper, promissory notes, and other hybrid instruments.  As of December 2012, our unsecured short-term borrowings, including the current portion of unsecured long-term borrowings, were $44.30 billion. See Note 15 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unsecured short-term borrowings.  
Equity Capital
  Capital adequacy is of critical importance to us. Our objective is to be conservatively capitalized in terms of the amount and composition of our equity base. Accordingly, we have in place a comprehensive capital management policy that serves as a guide to determine the amount and composition of equity capital we maintain.  The level and composition of our equity capital are determined by multiple factors including our current and future consolidated regulatory capital requirements, our ICAAP, CCAR and results of stress tests, and may also be influenced by other factors such as rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to adverse changes in our business and market environments. In addition, we maintain a capital plan which projects sources and uses of capital given a range of business environments, and a contingency capital plan which provides a framework for analyzing and responding to an actual or perceived capital shortfall.  As part of the Federal Reserve Board's annual CCAR, U.S. bank holding companies with total consolidated assets of $50 billion or greater are required to submit annual capital plans for review by the Federal Reserve Board. The purpose of the Federal Reserve Board's review is to ensure that these institutions have robust, forward-looking capital planning processes that account for their unique risks and that permit continued operations during times of economic and financial stress. The Federal Reserve Board will evaluate a bank holding company based on whether it has the capital necessary to continue operating under the baseline and stressed scenarios provided by the Federal Reserve. As part of the capital plan review, the Federal Reserve Board evaluates an institution's plan to make capital distributions, such as increasing dividend payments or repurchasing or redeeming stock, across a range of macro-economic and firm-specific assumptions. In addition, the rules adopted by the Federal Reserve Board under the Dodd-Frank Act, require us to conduct stress tests on a semi-annual basis and publish a summary of certain results, beginning in March 2013. The Federal Reserve Board will conduct its own annual stress tests and is expected to publish a summary of certain results in March 2013.      76   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    As part of our 2012 CCAR submission, the Federal Reserve informed us that it did not object to our proposed capital actions through the first quarter of 2013, including the repurchase of outstanding common stock and increases in the quarterly common stock dividend. We submitted our 2013 CCAR to the Federal Reserve on January 7, 2013 and expect to publish a summary of our results in March 2013.  Our consolidated regulatory capital requirements are determined by the Federal Reserve Board, as described below. Our ICAAP incorporates an internal risk-based capital assessment designed to identify and measure material risks associated with our business activities, including market risk, credit risk and operational risk, in a manner that is closely aligned with our risk management practices. Our internal risk-based capital assessment is supplemented with the results of stress tests.  As of December 2012, our total shareholders' equity was $75.72 billion (consisting of common shareholders' equity of $69.52 billion and preferred stock of $6.20 billion). As of December 2011, our total shareholders' equity was $70.38 billion (consisting of common shareholders' equity of $67.28 billion and preferred stock of $3.10 billion). In addition, as of December 2012 and December 2011, $2.73 billion and $5.00 billion, respectively, of our junior subordinated debt issued to trusts qualified as equity capital for regulatory and certain rating agency purposes. See "- Consolidated Regulatory Capital Ratios" below for information regarding the impact of regulatory developments.  
Consolidated Regulatory Capital
  The Federal Reserve Board is the primary regulator of Group Inc., a bank holding company under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under amendments to the BHC Act effected by the U.S. Gramm-Leach-Bliley Act of 1999. As a bank holding company, we are subject to consolidated regulatory capital requirements that are computed in accordance with the Federal Reserve Board's risk-based capital requirements (which are based on the 'Basel 1' Capital Accord of the Basel Committee). These capital requirements are expressed as capital ratios that compare measures of capital to risk-weighted assets (RWAs). See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information regarding the firm's RWAs. The firm's capital levels are also subject to qualitative judgments by its regulators about components, risk weightings and other factors.  Federal Reserve Board regulations require bank holding companies to maintain a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio of 8%. The required minimum Tier 1 capital ratio and total capital ratio in order to be considered a "well-capitalized" bank holding company under the Federal Reserve Board guidelines are 6% and 10%, respectively. Bank holding companies may be expected to maintain ratios well above the minimum levels, depending on their particular condition, risk profile and growth plans. The minimum Tier 1 leverage ratio is 3% for bank holding companies that have received the highest supervisory rating under Federal Reserve Board guidelines or that have implemented the Federal Reserve Board's risk-based capital measure for market risk. Other bank holding companies must have a minimum Tier 1 leverage ratio of 4%.          Goldman Sachs 2012 Form 10-K   77  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Consolidated Regulatory Capital Ratios
The table below presents information about our regulatory capital ratios, which are based on Basel 1, as implemented by the Federal Reserve Board.
                                                               As of December      $ in millions                                          2012            2011      Common shareholders' equity                        $ 69,516        $ 67,279       Less: Goodwill                                       (3,702 )        (3,802 )       Less: Intangible assets                              (1,397 )        
(1,666 )
     Less: Equity investments in certain entities 1       (4,805 )        (4,556 )
       Less: Disallowed deferred tax assets                 (1,261 )        
(1,073 )
     Less: Debt valuation adjustment 2                      (180 )         
(664 )
     Less: Other adjustments 3                              (124 )         
(356 )
      Tier 1 Common Capital                                58,047          
55,162
     Non-cumulative preferred stock                        6,200          
3,100
     Junior subordinated debt issued to trusts  4          2,730           5,000
      Tier 1 Capital                                       66,977          
63,262
      Qualifying subordinated debt 5                       13,342          13,828       Other adjustments                                        87              53      Tier 2 Capital                                       13,429          13,881      Total Capital                                      $ 80,406        $ 77,143      Risk-Weighted Assets                               $399,928        $457,027       Tier 1 Capital Ratio                                   16.7 %          13.8 %       Total Capital Ratio                                    20.1 %          16.9 %       Tier 1 Leverage Ratio 6                                 7.3 %           7.0 %       Tier 1 Common Ratio 7                                  14.5 %          12.1 %    
1. Primarily represents a portion of our equity investments in
   non-financial companies.    
2. Represents the cumulative change in the fair value of our unsecured borrowings
   attributable to the impact of changes in our own credit spreads, (net of tax
   at the applicable tax rate).    
3. Includes net unrealized gains/(losses) on available-for-sale securities (net
   of tax at the applicable tax rate), the cumulative change in our pension and
   postretirement liabilities (net of tax at the applicable tax rate) and    investments in certain nonconsolidated entities.    
4. See Note 16 to the consolidated financial statements in Part II, Item 8 of
   this Form 10-K for additional information about the junior subordinated debt
   issued to trusts.    
5. Substantially all of our subordinated debt qualifies as Tier 2 capital for
Basel 1 purposes.    
6. See Note 20 to the consolidated financial statements in Part II, Item 8 of
   this Form 10-K for additional information about the firm's Tier 1    leverage ratio.    
7. The Tier 1 common ratio equals Tier 1 common capital divided by RWAs. We
   believe that the Tier 1 common ratio is meaningful because it is one of the
   measures that we and investors use to assess capital adequacy and, while not
   currently a formal regulatory capital ratio, this measure is of increasing
   importance to regulators. The Tier 1 common ratio is a non-GAAP measure and
   may not be comparable to similar non-GAAP measures used by other companies.
   Our Tier 1 capital ratio increased to 16.7% as of December 2012 from 13.8% as of December 2011 primarily reflecting an increase in common shareholders' equity and a reduction in market RWAs. The reduction in  market RWAs was primarily driven by lower volatilities, a decrease in derivative exposure and capital efficiency initiatives that, while driven by future Basel 3 rules, also reduced market RWAs as measured under the current rules.  Changes to the market risk capital rules of the U.S. federal bank regulatory agencies became effective on January 1, 2013. These changes require the addition of several new model-based capital requirements, as well as an increase in capital requirements for securitization positions and are designed to implement the new market risk framework of the Basel Committee, as well as the prohibition on the use of external credit ratings, as required by the Dodd-Frank Act. This revised market risk framework is a significant part of the regulatory capital changes that will ultimately be included in our Basel 3 capital ratios. The firm's estimated Tier 1 common ratio under Basel 1 reflecting these revised market risk regulatory capital requirements would have been approximately 350 basis points lower than the firm's reported Basel 1 Tier 1 common ratio as of December 2012.  See "Business - Regulation" in Part I, Item 1 of this Form 10-K and Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information about our regulatory capital ratios and the related regulatory requirements, including pending and proposed regulatory changes.  
Risk-Weighted Assets
RWAs under the Federal Reserve Board's risk-based capital requirements are calculated based on the amount of credit risk and market risk.
  RWAs for credit risk reflect amounts for on-balance sheet and off-balance sheet exposures. Credit risk requirements for on-balance sheet assets, such as receivables and cash, are generally based on the balance sheet value. Credit risk requirements for securities financing transactions are determined based upon the positive net exposure for each trade, and include the effect of counterparty netting and collateral, as applicable. For off-balance sheet exposures, including commitments and guarantees, a credit equivalent amount is calculated based on the notional amount of each trade. Requirements for OTC derivatives are based on a combination of positive net exposure and a percentage of the notional amount of each trade, and include the effect of counterparty netting and collateral, as applicable. All such assets and exposures are then assigned a risk weight depending on, among other things, whether the counterparty is a sovereign, bank or a qualifying securities firm or other entity (or if collateral is held, depending on the nature of the collateral).      78   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    RWAs for market risk are comprised of modeled and non-modeled risk requirements. Modeled risk requirements are determined by reference to the firm's Value-at-Risk (VaR) model. VaR is the potential loss in value of inventory positions due to adverse market movements over a defined time horizon with a specified confidence level. We use a single VaR model which captures risks including interest rates, equity prices, currency rates and commodity prices. For certain portfolios of debt and equity positions, the modeled RWAs also reflect requirements for specific risk, which is the risk of loss on a position that could result from changes in risk factors unique to that position. Regulatory VaR used for capital requirements will differ from risk management VaR, due to different time horizons (10-day vs. 1-day), confidence levels (99% vs. 95%), as well as other factors. Non-modeled risk requirements reflect specific risk for other debt and equity positions. The standardized measurement method is used to determine non-modeled risk by applying supervisory defined risk-weighting factors to positions after applicable netting is performed.  
The table below presents information on the components of RWAs within our consolidated regulatory capital ratios.
                                                         As of December            in millions                                 2012           2011            Credit RWAs            OTC derivatives                         $107,269       $119,848             Commitments and guarantees 1              46,007         37,648             Securities financing transactions 2       47,069         53,236             Other 3                                   87,181         84,039            Total Credit RWAs                       $287,526       $294,771            Market RWAs            Modeled requirements                    $ 23,302       $ 57,784             Non-modeled requirements                  89,100        104,472            Total Market RWAs                        112,402        162,256            Total RWAs 4                            $399,928       $457,027    
1. Principally includes certain commitments to extend credit and letters
   of credit.    
2. Represents resale and repurchase agreements and securities borrowed and
   loaned transactions.    
3. Principally includes receivables from customers, other assets, cash and cash
   equivalents and available-for-sale securities.    
4. Under the current regulatory capital framework, there is no explicit
   requirement for Operational Risk.
As outlined above, changes to the market risk capital rules that became effective on January 1, 2013, require the addition of several new model-based capital requirements, as well as an increase in capital requirements for securitization positions.
Internal Capital Adequacy Assessment Process
We perform an ICAAP with the objective of ensuring that the firm is appropriately capitalized relative to the risks in our business.
  As part of our ICAAP, we perform an internal risk-based capital assessment. This assessment incorporates market risk, credit risk and operational risk. Market risk is calculated by using VaR calculations supplemented by risk-based add-ons which include risks related to rare events (tail risks). Credit risk utilizes assumptions about our counterparties' probability of default, the size of our losses in the event of a default and the maturity of our counterparties' contractual obligations to us. Operational risk is calculated based on scenarios incorporating multiple types of operational failures. Backtesting is used to gauge the effectiveness of models at capturing and measuring relevant risks.  We evaluate capital adequacy based on the result of our internal risk-based capital assessment, supplemented with the results of stress tests which measure the firm's estimated performance under various market conditions. Our goal is to hold sufficient capital, under our internal risk-based capital framework, to ensure we remain adequately capitalized after experiencing a severe stress event. Our assessment of capital adequacy is viewed in tandem with our assessment of liquidity adequacy and is integrated into the overall risk management structure, governance and policy framework of the firm.  
We attribute capital usage to each of our businesses based upon our internal risk-based capital and regulatory frameworks and manage the levels of usage based upon the balance sheet and risk limits established.
Rating Agency Guidelines
  The credit rating agencies assign credit ratings to the obligations of Group Inc., which directly issues or guarantees substantially all of the firm's senior unsecured obligations. GS&Co. and GSI have been assigned long- and short-term issuer ratings by certain credit rating agencies. GS Bank USA has also been assigned long-term issuer ratings as well as ratings on its long-term and short-term bank deposits. In addition, credit rating agencies have assigned ratings to debt obligations of certain other subsidiaries of Group Inc.Goldman Sachs 2012 Form 10-K   79  
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Management's Discussion and Analysis
    The level and composition of our equity capital are among the many factors considered in determining our credit ratings. Each agency has its own definition of eligible capital and methodology for evaluating capital adequacy, and assessments are generally based on a combination of factors rather than a single calculation. See "Liquidity Risk Management - Credit Ratings" for further information about credit ratings of Group Inc., GS&Co., GSI and GS Bank USA.  
Subsidiary Capital Requirements
Many of our subsidiaries, including GS Bank USA and our broker-dealer subsidiaries, are subject to separate regulation and capital requirements of the jurisdictions in which they operate.
GS Bank USA is subject to minimum capital requirements that are calculated in a manner similar to those applicable to bank holding companies and computes its capital ratios in accordance with the regulatory capital requirements currently applicable to state member banks, which are based on Basel 1, as implemented by the Federal Reserve Board. As of December 2012, GS Bank USA's Tier 1 Capital ratio under Basel 1 as implemented by the Federal Reserve Board was 18.9%. See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about GS Bank USA's regulatory capital ratios under Basel 1, as implemented by the Federal Reserve Board. Effective January 1, 2013, GS Bank USA also implemented the revised market risk framework outlined above. This revised market risk framework is a significant part of the regulatory capital changes that will ultimately be included in GS Bank USA'sBasel 3 capital ratios.  For purposes of assessing the adequacy of its capital, GS Bank USA has established an ICAAP which is similar to that used by Group Inc. In addition, the rules adopted by the Federal Reserve Board under the Dodd-Frank Act require GS Bank USA to conduct stress tests on an annual basis and publish a summary of certain results, beginning in March 2013. GS Bank USA submitted its annual stress results to the Federal Reserve on January 7, 2013 and expects to publish a summary of its results in March 2013. GS Bank USA's capital levels and prompt corrective action classification are subject to qualitative judgments by its regulators about components, risk weightings and other factors.  We expect that the capital requirements of several of our subsidiaries are likely to increase in the future due to the various developments arising from the Basel Committee, the Dodd-Frank Act, and other governmental entities and regulators. See Note 20 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about the capital requirements of our other regulated subsidiaries and the potential impact of regulatory reform.  Subsidiaries not subject to separate regulatory capital requirements may hold capital to satisfy local tax and legal guidelines, rating agency requirements (for entities with assigned credit ratings) or internal policies, including policies concerning the minimum amount of capital a subsidiary should hold based on its underlying level of risk. In certain instances, Group Inc. may be limited in its ability to access capital held at certain subsidiaries as a result of regulatory, tax or other constraints. As of December 2012 and December 2011, Group Inc.'s equity investment in subsidiaries was $73.32 billion and $67.70 billion, respectively, compared with its total shareholders' equity of $75.72 billion and $70.38 billion, respectively.  Group Inc. has guaranteed the payment obligations of GS&Co., GS Bank USA, and Goldman Sachs Execution & Clearing, L.P. (GSEC) subject to certain exceptions. In November 2008, Group Inc. contributed subsidiaries into GS Bank USA, and Group Inc. agreed to guarantee certain losses, including credit-related losses, relating to assets held by the contributed entities. In connection with this guarantee, Group Inc. also agreed to pledge to GS Bank USA certain collateral, including interests in subsidiaries and other illiquid assets.  Our capital invested in non-U.S. subsidiaries is generally exposed to foreign exchange risk, substantially all of which is managed through a combination of derivatives and non-U.S. denominated debt.  
Contingency Capital Plan
  Our contingency capital plan provides a framework for analyzing and responding to a perceived or actual capital deficiency, including, but not limited to, identification of drivers of a capital deficiency, as well as mitigants and potential actions. It outlines the appropriate communication procedures to follow during a crisis period, including internal dissemination of information as well as ensuring timely communication with external stakeholders.      80   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Equity Capital Management
  Our objective is to maintain a sufficient level and optimal composition of equity capital. We principally manage our capital through issuances and repurchases of our common stock. We may also, from time to time, issue or repurchase our preferred stock, junior subordinated debt issued to trusts and other subordinated debt or other forms of capital as business conditions warrant and subject to approval of the Federal Reserve Board. We manage our capital requirements principally by setting limits on balance sheet assets and/or limits on risk, in each case both at the consolidated and business levels. We attribute capital usage to each of our businesses based upon our internal risk-based capital and regulatory frameworks and manage the levels of usage based upon the balance sheet and risk limits established.  
See Notes 16 and 19 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our preferred stock, junior subordinated debt issued to trusts and other subordinated debt.
  Berkshire Hathaway Warrant. In October 2008, we issued Berkshire Hathaway a warrant, which grants Berkshire Hathaway the option to purchase up to 43.5 million shares of common stock at an exercise price of $115.00 per share on or before October 1, 2013. See Note 19 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about the Series G Preferred Stock.  Share Repurchase Program. We seek to use our share repurchase program to help maintain the appropriate level of common equity. The repurchase program is effected primarily through regular open-market purchases, the amounts and timing of which are determined primarily by our current and projected capital positions (i.e., comparisons of our desired level and composition of capital to our actual level and composition of capital), but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock.  As of December 2012, under the share repurchase program approved by the Board of Directors of Group Inc. (Board), we can repurchase up to 21.5 million additional shares of common stock; however, any such repurchases are subject to the approval of the Federal Reserve Board. See "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" in Part II, Item 5 and Note 19 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for additional information on our repurchase program and see above for information about the annual CCAR.  
Other Capital Metrics
The table below presents information on our shareholders' equity and book value per common share.
                                                           As of December            in millions, except per share amounts        2012           2011            Total shareholders' equity                $75,716        $70,379             Common shareholders' equity                69,516         67,279             Tangible common shareholders' equity       64,417         61,811             Book value per common share                144.67         130.31             Tangible book value per common share       134.06         119.72   Tangible common shareholders' equity. Tangible common shareholders' equity equals total shareholders' equity less preferred stock, goodwill and identifiable intangible assets. We believe that tangible common shareholders' equity is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible common shareholders' equity is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.  
The table below presents the reconciliation of total shareholders' equity to tangible common shareholders' equity.
                                                          As of December            in millions                                 2012           2011            Total shareholders' equity               $75,716        $70,379             Deduct: Preferred stock                   (6,200 )       (3,100 )            Common shareholders' equity               69,516         67,279             Deduct: Goodwill and identifiable            intangible assets                         (5,099 )       (5,468 )            Tangible common shareholders' equity     $64,417        $61,811   Book value and tangible book value per common share. Book value and tangible book value per common share are based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 480.5 million and 516.3 million as of December 2012 and December 2011, respectively. We believe that tangible book value per common share (tangible common shareholders' equity divided by common shares outstanding) is meaningful because it is a measure that we and investors use to assess capital adequacy. Tangible book value per common share is a non-GAAP measure and may not be comparable to similar non-GAAP measures used by other companies.          Goldman Sachs 2012 Form 10-K   81  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
             Off-Balance-Sheet Arrangements and Contractual Obligations  
Off-Balance-Sheet Arrangements
  We have various types of off-balance-sheet arrangements that we enter into in the ordinary course of business. Our involvement in these arrangements can take many different forms, including:    
Ÿ   purchasing or retaining residual and other interests in special purpose
    entities such as mortgage-backed and other asset-backed     securitization vehicles;     Ÿ   holding senior and subordinated debt, interests in limited and general     partnerships, and preferred and common stock in other     nonconsolidated vehicles;    
Ÿ   entering into interest rate, foreign currency, equity, commodity and credit
    derivatives, including total return swaps;     Ÿ   entering into operating leases; and    
Ÿ   providing guarantees, indemnifications, loan commitments, letters of credit
    and representations and warranties.
   We enter into these arrangements for a variety of business purposes, including securitizations. The securitization vehicles that purchase mortgages, corporate bonds, and other types of financial assets are critical to the functioning of several significant investor markets, including the mortgage-backed and other asset-backed securities markets, since they offer investors access to specific cash flows and risks created through the securitization process.  We also enter into these arrangements to underwrite client securitization transactions; provide secondary market liquidity; make investments in performing and nonperforming debt, equity, real estate and other assets; provide investors with credit-linked and asset-repackaged notes; and receive or provide letters of credit to satisfy margin requirements and to facilitate the clearance and settlement process.  Our financial interests in, and derivative transactions with, such nonconsolidated entities are generally accounted for at fair value, in the same manner as our other financial instruments, except in cases where we apply the equity method of accounting.  The table below presents where a discussion of our various off-balance-sheet arrangements may be found in Part II, Items 7 and 8 of this Form 10-K. In addition, see Note 3 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for a discussion of our consolidation policies.      
Type of Off-Balance-Sheet Arrangement         Disclosure in Form 10-K Variable interests and other
                  See Note 11 to the 
consolidated
 obligations, including contingent             financial statements in Part 
II,
 obligations, arising from variable            Item 8 of this Form 10-K. 
interests in nonconsolidated VIEs
  Leases, letters of credit, and                See "Contractual Obligations" 
below
 lending and other commitments                 and Note 18 to the consolidated                                               financial statements in Part II,                                               Item 8 of this Form 10-K.  Guarantees                                    See "Contractual Obligations" below                                               and Note 18 to the consolidated                                               financial statements in Part II,                                               Item 8 of this Form 10-K.  Derivatives                                   See Notes 4, 5, 7 and 18 to the                                               consolidated financial statements in                                               Part II, Item 8 of this Form 10-K.     82   Goldman Sachs 2012 Form 10-K   
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Management's Discussion and Analysis
Contractual Obligations
  We have certain contractual obligations which require us to make future cash payments. These contractual obligations include our unsecured long-term borrowings, secured long-term financings, time deposits, contractual interest payments and insurance agreements, all of which are included in our consolidated statements of financial condition. Our obligations to make future cash payments  also include certain off-balance-sheet contractual obligations such as purchase obligations, minimum rental payments under noncancelable leases and commitments and guarantees.  The table below presents our contractual obligations, commitments and guarantees as of December 2012.                                                                                                  2018- in millions                                 2013       2014-2015       2016-2017       Thereafter          Total Amounts related to on-balance-sheet obligations Time deposits 1                          $     -        $  7,151         $ 
4,064          $ 5,069$ 16,284
  Secured long-term financings 2                 -           6,403           1,140            1,422          8,965  Unsecured long-term borrowings 3               -          43,920          42,601           80,784        167,305  Contractual interest payments 4            7,489          13,518          10,182           33,332         64,521  Insurance liabilities 5                      477             959             934           13,740         16,110  Subordinated liabilities issued by consolidated VIEs                             59              62              84            1,155          1,360  Amounts related to off-balance-sheet arrangements Commitments to extend credit              10,435          16,322          43,453            5,412         75,622  Contingent and forward starting resale and securities borrowing agreements                                47,599               -               -                -         47,599  Forward starting repurchase and secured lending agreements                 6,144               -               -                -          6,144  Letters of credit                            614             160               -               15            789  Investment commitments                     1,378           2,174             258            3,529          7,339  Other commitments                          4,471              53              31               69          4,624  Minimum rental payments                      439             752             623            1,375          3,189  Derivative guarantees                    339,460         213,012          49,413           61,264        663,149  Securities lending indemnifications       27,123               -               -                -         27,123  Other financial guarantees                   904             442           1,195              938          3,479    
1. Excludes $7.33 billion of time deposits maturing within one year.
2. The aggregate contractual principal amount of secured long-term financings for
   which the fair value option was elected, primarily consisting of transfers of
   financial assets accounted for as financings rather than sales and certain
   other nonrecourse financings, exceeded their related fair value by    $115 million.    
3. Includes $10.51 billion related to interest rate hedges on certain unsecured
   long-term borrowings. In addition, the fair value of unsecured long-term
   borrowings (principal and non-principal-protected) for which the fair value
   option was elected exceeded the related aggregate contractual principal amount
   by $379 million. Excludes $77 million of unsecured long-term borrowings
   related to our reinsurance business classified as held for sale as of
December 2012. See Note 17 to the consolidated financial statements in Part
   II, Item 8 of this Form 10-K for further information.    
4. Represents estimated future interest payments related to unsecured long-term
   borrowings, secured long-term financings and time deposits based on applicable
   interest rates as of December 2012. Includes stated coupons, if any, on    structured notes.    
5. Represents estimated undiscounted payments related to future benefits and
   unpaid claims arising from policies associated with our insurance activities,
   excluding separate accounts and estimated recoveries under reinsurance
   contracts. Excludes $13.08 billion of insurance liabilities related to our
   reinsurance business classified as held for sale as of December 2012. See
   Note 17 to the consolidated financial statements in Part II, Item 8 of this
   Form 10-K for further information.         Goldman Sachs 2012 Form 10-K   83  
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Management's Discussion and Analysis
   In the table above:   
Ÿ   Obligations maturing within one year of our financial statement date or
    redeemable within one year of our financial statement date at the option of
    the holder are excluded and are treated as short-term obligations.    
Ÿ   Obligations that are repayable prior to maturity at our option are reflected
    at their contractual maturity dates and obligations that are redeemable prior
    to maturity at the option of the holders are reflected at the dates such
    options become exercisable.    
Ÿ   Amounts included in the table do not necessarily reflect the actual future
    cash flow requirements for these arrangements because commitments and
    guarantees represent notional amounts and may expire unused or be reduced or
    cancelled at the counterparty's request.    
Ÿ   Due to the uncertainty of the timing and amounts that will ultimately be paid,
    our liability for unrecognized tax benefits has been excluded. See Note 24 to
    the consolidated financial statements in Part II, Item 8 of this Form 10-K for
    further information about our unrecognized tax benefits.
   See Notes 15 and 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our short-term borrowings, and commitments and guarantees.  As of December 2012, our unsecured long-term borrowings were $167.31 billion, with maturities extending to 2061, and consisted principally of senior borrowings. See Note 16 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our unsecured long-term borrowings.  As of December 2012, our future minimum rental payments net of minimum sublease rentals under noncancelable leases were $3.19 billion. These lease commitments, principally for office space, expire on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. See Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about our leases.  Our occupancy expenses include costs associated with office space held in excess of our current requirements. This excess space, the cost of which is charged to earnings as incurred, is being held for potential growth or to replace currently occupied space that we may exit in the future. We regularly evaluate our current and future space capacity in relation to current and projected staffing levels. For the year ended December 2012, total occupancy expenses for space held in excess of our current requirements were not material. In addition, for the year ended December 2012, we incurred exit costs of $17 million related to our office space. We may incur exit costs (included in "Depreciation and amortization" and "Occupancy") in the future to the extent we (i) reduce our space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate and, consequently, dispose of existing space that had been held for potential growth. These exit costs may be material to our results of operations in a given period.  
Overview and Structure of Risk Management
Overview
  We believe that effective risk management is of primary importance to the success of the firm. Accordingly, we have comprehensive risk management processes through which we monitor, evaluate and manage the risks we assume in conducting our activities. These include market, credit, liquidity, operational, legal, regulatory and reputational risk exposures. Our risk management framework is built around three core components: governance, processes and people.  Governance. Risk management governance starts with our Board, which plays an important role in reviewing and approving risk management policies and practices, both directly and through its Risk Committee, which consists of all of our independent directors. The Board also receives regular briefings on firmwide risks, including market risk, liquidity risk, credit risk and operational risk from our independent control and support functions, including the chief risk officer. The chief risk officer, as part of the review of the firmwide risk package, regularly advises the Risk Committee of the Board of relevant risk metrics and material exposures. Next, at the most senior levels of the firm, our leaders are experienced risk managers, with a sophisticated and detailed understanding of the risks we take. Our senior managers lead and participate in risk-oriented committees, as do the leaders of our independent control and support functions - including those in internal audit, compliance, controllers, credit risk management, human capital management, legal, market risk management, operations, operational risk management, tax, technology and treasury.     
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
    The firm's governance structure provides the protocol and responsibility for decision-making on risk management issues and ensures implementation of those decisions. We make extensive use of risk-related committees that meet regularly and serve as an important means to facilitate and foster ongoing discussions to identify, manage and mitigate risks.  We maintain strong communication about risk and we have a culture of collaboration in decision-making among the revenue-producing units, independent control and support functions, committees and senior management. While we believe that the first line of defense in managing risk rests with the managers in our revenue-producing units, we dedicate extensive resources to independent control and support functions in order to ensure a strong oversight structure and an appropriate segregation of duties. We regularly reinforce the firm's strong culture of escalation and accountability across all divisions and functions.  Processes. We maintain various processes and procedures that are critical components of our risk management. First and foremost is our daily discipline of marking substantially all of the firm's inventory to current market levels. Goldman Sachs carries its inventory at fair value, with changes in valuation reflected immediately in our risk management systems and in net revenues. We do so because we believe this discipline is one of the most effective tools for assessing and managing risk and that it provides transparent and realistic insight into our financial exposures.  We also apply a rigorous framework of limits to control risk across multiple transactions, products, businesses and markets. This includes setting credit and market risk limits at a variety of levels and monitoring these limits on a daily basis. Limits are typically set at levels that will be periodically exceeded, rather than at levels which reflect our maximum risk appetite. This fosters an ongoing dialogue on risk among revenue-producing units, independent control and support functions, committees and senior management, as well as rapid escalation of risk-related matters. See "Market Risk Management" and "Credit Risk Management" for further information on our risk limits.  
Active management of our positions is another important process. Proactive mitigation of our market and credit exposures minimizes the risk that we will be required to take outsized actions during periods of stress.
  We also focus on the rigor and effectiveness of the firm's risk systems. The goal of our risk management technology is to get the right information to the right people at the right  
time, which requires systems that are comprehensive, reliable and timely. We devote significant time and resources to our risk management technology to ensure that it consistently provides us with complete, accurate and timely information.
  People. Even the best technology serves only as a tool for helping to make informed decisions in real time about the risks we are taking. Ultimately, effective risk management requires our people to interpret our risk data on an ongoing and timely basis and adjust risk positions accordingly. In both our revenue-producing units and our independent control and support functions, the experience of our professionals, and their understanding of the nuances and limitations of each risk measure, guide the firm in assessing exposures and maintaining them within prudent levels.  
Structure
  Ultimate oversight of risk is the responsibility of the firm's Board. The Board oversees risk both directly and through its Risk Committee. Within the firm, a series of committees with specific risk management mandates have oversight or decision-making responsibilities for risk management activities. Committee membership generally consists of senior managers from both our revenue-producing units and our independent control and support functions. We have established procedures for these committees to ensure that appropriate information barriers are in place. Our primary risk committees, most of which also have additional sub-committees or working groups, are described below. In addition to these committees, we have other risk-oriented committees which provide oversight for different businesses, activities, products, regions and legal entities.  Membership of the firm's risk committees is reviewed regularly and updated to reflect changes in the responsibilities of the committee members. Accordingly, the length of time that members serve on the respective committees varies as determined by the committee chairs and based on the responsibilities of the members within the firm.  In addition, independent control and support functions, which report to the chief financial officer, the general counsel and the chief administrative officer, or in the case of Internal Audit, to the Audit Committee of the Board, are responsible for day-to-day oversight or monitoring of risk, as discussed in greater detail in the following sections. Internal Audit, which includes professionals with a broad range of audit and industry experience, including risk management expertise, is responsible for independently assessing and validating key controls within the risk management framework.          Goldman Sachs 2012 Form 10-K   85  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
The chart below presents an overview of our risk management governance structure, highlighting the
oversight of our Board, our key risk-related committees and the independence of our control and support functions.
                                 [[Image Removed: LOGO]]    Management Committee. The Management Committee oversees the global activities of the firm, including all of the firm's independent control and support functions. It provides this oversight directly and through authority delegated to committees it has established. This committee is comprised of the most senior leaders of the firm, and is chaired by the firm's chief executive officer. The Management Committee has established various committees with delegated authority and the chairperson of the Management Committee appoints the chairpersons of these committees. Most members of the Management Committee are also members of other firmwide, divisional and regional committees. The following are the committees that are principally involved in firmwide risk management.  Firmwide Client and Business Standards Committee. The Firmwide Client and Business Standards Committee assesses and makes determinations regarding business standards and practices, reputational risk management, client relationships and client service, is chaired by the firm's president and chief operating officer, and reports to the Management Committee. This committee also has responsibility for overseeing the implementation of the recommendations of the Business Standards Committee. This committee has established the following two risk-related committees that report to it:      
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Ÿ   Firmwide New Activity Committee. The Firmwide New Activity Committee is
    responsible for reviewing new activities and for establishing a process to
    identify and review previously approved activities that are significant and
    that have changed in complexity and/or structure or present different
    reputational and suitability concerns over time to consider whether these
    activities remain appropriate. This committee is co-chaired by the firm's head
    of operations/chief operating officer for Europe, Middle East and Africa and
    the chief administrative officer of our Investment Management Division who are
    appointed by the Firmwide Client and Business Standards Committee chairperson.
Ÿ   Firmwide Suitability Committee. The Firmwide Suitability Committee is
    responsible for setting standards and policies for product, transaction and
    client suitability and providing a forum for consistency across divisions,
    regions and products on suitability assessments. This committee also reviews
    suitability matters escalated from other firm committees. This committee is
    co-chaired by the firm's international general counsel and the co-head of our
Investment Management Division who are appointed by the Firmwide Client and
    Business Standards Committee chairperson.
   Firmwide Risk Committee. The Firmwide Risk Committee is globally responsible for the ongoing monitoring and control of the firm's financial risks. Through both direct and delegated authority, the Firmwide Risk Committee approves firmwide, product, divisional and business-level limits for both market and credit risks, approves sovereign credit risk limits and reviews results of stress tests and scenario analyses. This committee is co-chaired by the firm's chief financial officer and a senior managing director from the firm's executive office, and reports to the Management Committee. The following four committees report to the Firmwide Risk Committee. The chairperson of the Securities Division Risk Committee is appointed by the chairpersons of the Firmwide Risk Committee; the chairpersons of the Credit Policy and Firmwide Operational Risk Committees are appointed by the firm's chief risk officer; and the chairpersons of the Firmwide Finance Committee are appointed by the Firmwide Risk Committee.  
Ÿ   Securities Division Risk Committee. The Securities Division Risk Committee
    sets market risk limits, subject to overall firmwide risk limits, for the
    Securities Division based on a number of risk measures, including but not
    limited to VaR, stress tests, scenario analyses and balance sheet levels. This
    committee is chaired by the chief risk officer of our Securities Division.
Ÿ   Credit Policy Committee. The Credit Policy Committee establishes and reviews
    broad firmwide credit policies and parameters that are implemented by our
    Credit Risk Management department (Credit Risk Management). This committee is
    chaired by the firm's chief credit officer.    
Ÿ   Firmwide Operational Risk Committee. The Firmwide Operational Risk Committee
    provides oversight of the ongoing development and implementation of our
    operational risk policies, framework and methodologies, and monitors the
    effectiveness of operational risk management. This committee is chaired by a
    managing director in Credit Risk Management.    
Ÿ   Firmwide Finance Committee. The Firmwide Finance Committee has oversight of
    firmwide liquidity, the size and composition of our balance sheet and capital
    base, and our credit ratings. This committee regularly reviews and discusses
    our liquidity, balance sheet, funding position and capitalization in the
    context of current events, risks and exposures, and regulatory requirements.
    This committee is also responsible for reviewing and approving balance
    sheet limits and the size of our GCE. This committee is co-chaired by the
    firm's chief financial officer and the firm's global treasurer.           Goldman Sachs 2012 Form 10-K   87  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
The following committees report jointly to the Firmwide Risk Committee and the Firmwide Client and Business Standards Committee:
Ÿ   Firmwide Commitments Committee. The Firmwide Commitments Committee reviews the
    firm's underwriting and distribution activities with respect to equity and
    equity-related product offerings, and sets and maintains policies and
    procedures designed to ensure that legal, reputational, regulatory and
    business standards are maintained on a global basis. In addition to reviewing
    specific transactions, this committee periodically conducts general strategic
    reviews of sectors and products and establishes policies in connection with
    transaction practices. This committee is co-chaired by the firm's senior
    strategy officer and the co-head of Global Mergers & Acquisitions who are
    appointed by the Firmwide Client and Business Standards Committee chairperson.
Ÿ   Firmwide Capital Committee. The Firmwide Capital Committee provides approval
    and oversight of debt-related transactions, including principal commitments of
    the firm's capital. This committee aims to ensure that business and
    reputational standards for underwritings and capital commitments are
    maintained on a global basis. This committee is co-chaired by the firm's
    global treasurer and the head of credit finance for Europe, Middle East and
Africa who are appointed by the Firmwide Risk Committee chairpersons.
Investment Management Division Risk Committee. The Investment Management Division Risk Committee is responsible for the ongoing monitoring and control of global market, counterparty credit and liquidity risks associated with the activities of our investment management businesses. The head of Investment Management Division risk management is the chair of this committee. The Investment Management Division Risk Committee reports to the firm's chief risk officer.
Conflicts Management
  Conflicts of interest and the firm's approach to dealing with them are fundamental to our client relationships, our reputation and our long-term success. The term "conflict of interest" does not have a universally accepted meaning, and conflicts can arise in many forms within a business or between businesses. The responsibility for identifying potential conflicts, as well as complying with the firm's policies and procedures, is shared by the entire firm.  We have a multilayered approach to resolving conflicts and addressing reputational risk. The firm's senior management oversees policies related to conflicts resolution. The firm's senior management, the Business Selection and Conflicts Resolution Group, the Legal Department and Compliance Division, the Firmwide Client and Business Standards Committee and other internal committees all play roles in the formulation of policies, standards and principles and assist in making judgments regarding the appropriate resolution of particular conflicts. Resolving potential conflicts necessarily depends on the facts and circumstances of a particular situation and the application of experienced and informed judgment.  At the transaction level, various people and groups have roles. As a general matter, the Business Selection and Conflicts Resolution Group reviews all financing and advisory assignments in Investment Banking and investing, lending and other activities of the firm. Various transaction oversight committees, such as the Firmwide Capital, Commitments and Suitability Committees and other committees across the firm, also review new underwritings, loans, investments and structured products. These committees work with internal and external lawyers and the Compliance Division to evaluate and address any actual or potential conflicts.  
We regularly assess our policies and procedures that address conflicts of interest in an effort to conduct our business in accordance with the highest ethical standards and in compliance with all applicable laws, rules, and regulations.
88   Goldman Sachs 2012 Form 10-K
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
   Liquidity Risk Management    Liquidity is of critical importance to financial institutions. Most of the recent failures of financial institutions have occurred in large part due to insufficient liquidity. Accordingly, the firm has in place a comprehensive and conservative set of liquidity and funding policies to address both firm-specific and broader industry or market liquidity events. Our principal objective is to be able to fund the firm and to enable our core businesses to continue to serve clients and generate revenues, even under adverse circumstances.  
We manage liquidity risk according to the following principles:
Excess Liquidity. We maintain substantial excess liquidity to meet a broad range of potential cash outflows and collateral needs in a stressed environment.
  Asset-Liability Management. We assess anticipated holding periods for our assets and their expected liquidity in a stressed environment. We manage the maturities and diversity of our funding across markets, products and counterparties, and seek to maintain liabilities of appropriate tenor relative to our asset base.  Contingency Funding Plan. We maintain a contingency funding plan to provide a framework for analyzing and responding to a liquidity crisis situation or periods of market stress. This framework sets forth the plan of action to fund normal business activity in emergency and stress situations. These principles are discussed in more detail below.  
Excess Liquidity
  Our most important liquidity policy is to pre-fund our estimated potential cash and collateral needs during a liquidity crisis and hold this excess liquidity in the form of unencumbered, highly liquid securities and cash. We believe that the securities held in our global core excess would be readily convertible to cash in a matter of days, through liquidation, by entering into repurchase agreements or from maturities of reverse repurchase agreements, and that this cash would allow us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets.  As of December 2012 and December 2011, the fair value of the securities and certain overnight cash deposits included in our GCE totaled $174.62 billion and $171.58 billion, respectively. Based on the results of our internal liquidity risk model, discussed below, as well as our consideration of other factors including, but not limited to, a qualitative assessment of the condition of the financial markets and the firm, we believe our liquidity position as of December 2012 was appropriate.  
The table below presents the fair value of the securities and certain overnight cash deposits that are included in our GCE.
                                                     Average for the                                                 Year Ended December                in millions                         2012            2011                U.S. dollar-denominated         $125,111        $125,668                 Non-U.S. dollar-denominated       46,984          40,291                Total                           $172,095        $165,959   The U.S. dollar-denominated excess is composed of (i) unencumbered U.S. government and federal agency obligations (including highly liquid U.S. federal agency mortgage-backed obligations), all of which are eligible as collateral in Federal Reserve open market operations and (ii) certain overnight U.S. dollar cash deposits. The non-U.S. dollar-denominated excess is composed of only unencumbered German, French, Japanese and United Kingdom government obligations and certain overnight cash deposits in highly liquid currencies. We strictly limit our excess liquidity to this narrowly defined list of securities and cash because they are highly liquid, even in a difficult funding environment. We do not include other potential sources of excess liquidity, such as less liquid unencumbered securities or committed credit facilities, in our GCE.          Goldman Sachs 2012 Form 10-K   89  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
The table below presents the fair value of our GCE by asset class.
                                                                  Average for the                                                              Year Ended December in millions                                                 2012                   2011 Overnight cash deposits                                 $ 52,233               $ 34,622  U.S. government obligations                               72,379                 88,528  U.S. federal agency obligations, including highly liquid U.S. federal agency mortgage-backed obligations                                2,313            
      5,018
  German, French, Japanese and United Kingdom government obligations                                    45,170                 37,791 Total                                                   $172,095               $165,959  
The GCE is held at Group Inc. and our major broker-dealer and bank subsidiaries, as presented in the table below.
                                                       Average for the                                                   Year Ended December             in millions                              2012            2011             Group Inc.                           $ 37,405        $ 49,548              Major broker-dealer subsidiaries       78,229          75,086              Major bank subsidiaries                56,461          41,325             Total                                $172,095        $165,959  
Our GCE reflects the following principles:
Ÿ   The first days or weeks of a liquidity crisis are the most critical to a
     company's survival.     
Ÿ   Focus must be maintained on all potential cash and collateral outflows, not
    just disruptions to financing flows. Our businesses are diverse, and our
    liquidity needs are determined by many factors, including market movements,
    collateral requirements and client commitments, all of which can change     dramatically in a difficult funding environment.    
Ÿ   During a liquidity crisis, credit-sensitive funding, including unsecured debt
    and some types of secured financing agreements, may be unavailable, and the
    terms (e.g., interest rates, collateral provisions and tenor) or availability
    of other types of secured financing may change.    
Ÿ   As a result of our policy to pre-fund liquidity that we estimate may be needed
    in a crisis, we hold more unencumbered securities and have larger debt
    balances than our businesses would otherwise require. We believe that our
    liquidity is stronger with greater balances of highly liquid unencumbered
    securities, even though it increases our total assets and our funding costs.
   We believe that our GCE provides us with a resilient source of funds that would be available in advance of potential cash and collateral outflows and gives us significant flexibility in managing through a difficult funding environment.  In order to determine the appropriate size of our GCE, we use an internal liquidity model, referred to as the Modeled Liquidity Outflow, which captures and quantifies the firm's liquidity risks. We also consider other factors including, but not limited to, an assessment of our potential intraday liquidity needs and a qualitative assessment of the condition of the financial markets and the firm.  
We distribute our GCE across entities, asset types, and clearing agents to provide us with sufficient operating liquidity to ensure timely settlement in all major markets, even in a difficult funding environment.
  We maintain our GCE to enable us to meet current and potential liquidity requirements of our parent company, Group Inc., and our major broker-dealer and bank subsidiaries. The Modeled Liquidity Outflow incorporates a consolidated requirement as well as a standalone requirement for each of our major broker-dealer and bank subsidiaries. Liquidity held directly in each of these subsidiaries is intended for use only by that subsidiary to meet its liquidity requirements and is assumed not to be available to Group Inc. unless (i) legally provided for and (ii) there are no additional regulatory, tax or other restrictions. We hold a portion of our GCE directly at Group Inc. to support consolidated requirements not accounted for in the major subsidiaries. In addition to the GCE, we maintain operating cash balances in several of our other operating entities, primarily for use in specific currencies, entities, or jurisdictions where we do not have immediate access to parent company liquidity.  In addition to our GCE, we have a significant amount of other unencumbered cash and financial instruments, including other government obligations, high-grade money market securities, corporate obligations, marginable equities, loans and cash deposits not included in our GCE. The fair value of these assets averaged $87.09 billion and $83.32 billion for the years ended December 2012 and December 2011, respectively. We do not consider these assets liquid enough to be eligible for our GCE liquidity pool and therefore conservatively do not assume we will generate liquidity from these assets in our Modeled Liquidity Outflow.      90   Goldman Sachs 2012 Form 10-K  
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Modeled Liquidity Outflow. Our Modeled Liquidity Outflow is based on a scenario that includes both a market-wide stress and a firm-specific stress, characterized by the following qualitative elements:
Ÿ   Severely challenged market environments, including low consumer and corporate
    confidence, financial and political instability, adverse changes in market
    values, including potential declines in equity markets and widening of     credit spreads.    
Ÿ   A firm-specific crisis potentially triggered by material losses, reputational
    damage, litigation, executive departure, and/or a ratings downgrade.
The following are the critical modeling parameters of the Modeled Liquidity Outflow:
   Ÿ   Liquidity needs over a 30-day scenario.    
Ÿ   A two-notch downgrade of the firm's long-term senior unsecured credit ratings.    Ÿ   A combination of contractual outflows, such as upcoming maturities of     unsecured debt, and contingent outflows (e.g., actions though not

contractually required, we may deem necessary in a crisis). We assume that

    most contingent outflows will occur within the initial days and weeks of     a crisis.     Ÿ   No issuance of equity or unsecured debt.     Ÿ   No support from government funding facilities. Although we have access to

various central bank funding programs, we do not assume reliance on them as a

    source of funding in a liquidity crisis.    

Ÿ Maintenance of our normal business levels. We do not assume asset liquidation,

other than the GCE.

   The Modeled Liquidity Outflow is calculated and reported to senior management on a daily basis. We regularly refine our model to reflect changes in market or economic conditions and the firm's business mix.  

The potential contractual and contingent cash and collateral outflows covered in our Modeled Liquidity Outflow include:

Unsecured Funding

Ÿ Contractual: All upcoming maturities of unsecured long-term debt, commercial

paper, promissory notes and other unsecured funding products. We assume that

we will be unable to issue new unsecured debt or rollover any maturing debt.

Ÿ Contingent: Repurchases of our outstanding long-term debt, commercial paper

    and hybrid financial instruments in the ordinary course of business as a     market maker.   Deposits  

Ÿ Contractual: All upcoming maturities of term deposits. We assume that we will

be unable to raise new term deposits or rollover any maturing term deposits.

Ÿ Contingent: Withdrawals of bank deposits that have no contractual maturity.

The withdrawal assumptions reflect, among other factors, the type of deposit,

whether the deposit is insured or uninsured, and the firm's relationship with

     the depositor.   Secured Funding  

Ÿ Contractual: A portion of upcoming contractual maturities of secured funding

due to either the inability to refinance or the ability to refinance only at

wider haircuts (i.e., on terms which require us to post additional

collateral). Our assumptions reflect, among other factors, the quality of the

underlying collateral, counterparty roll probabilities (our assessment of the

counterparty's likelihood of continuing to provide funding on a secured basis

    at the maturity of the trade) and counterparty concentration.    

Ÿ Contingent: A decline in value of financial assets pledged as collateral for

financing transactions, which would necessitate additional collateral postings

    under those transactions.           Goldman Sachs 2012 Form 10-K   91  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

OTC Derivatives

Ÿ Contingent: Collateral postings to counterparties due to adverse changes in

    the value of our OTC derivatives.    

Ÿ Contingent: Other outflows of cash or collateral related to OTC derivatives,

including the impact of trade terminations, collateral substitutions,

collateral disputes, collateral calls or termination payments required by a

two-notch downgrade in our credit ratings, and collateral that has not been

called by counterparties, but is available to them.

Exchange-Traded Derivatives

Ÿ Contingent: Variation margin postings required due to adverse changes in the

    value of our outstanding exchange-traded derivatives.    

Ÿ Contingent: An increase in initial margin and guaranty fund requirements by

derivative clearing houses.

Customer Cash and Securities

Ÿ Contingent: Liquidity outflows associated with our prime brokerage business,

including withdrawals of customer credit balances, and a reduction in customer

short positions, which serve as a funding source for long positions.

Unfunded Commitments

Ÿ Contingent: Draws on our unfunded commitments. Draw assumptions reflect, among

other things, the type of commitment and counterparty.

Other

Ÿ Other upcoming large cash outflows, such as tax payments.

Asset-Liability Management

  Our liquidity risk management policies are designed to ensure we have a sufficient amount of financing, even when funding markets experience persistent stress. We seek to maintain a long-dated and diversified funding profile, taking into consideration the characteristics and liquidity profile of our assets.  

Our approach to asset-liability management includes:

Ÿ Conservatively managing the overall characteristics of our funding book, with

a focus on maintaining long-term, diversified sources of funding in excess of

our current requirements. See "Balance Sheet and Funding Sources - Funding

Sources" for additional details.

Ÿ Actively managing and monitoring our asset base, with particular focus on the

liquidity, holding period and our ability to fund assets on a secured basis.

This enables us to determine the most appropriate funding products and tenors.

See "Balance Sheet and Funding Sources - Balance Sheet Management" for more

detail on our balance sheet management process and "- Funding Sources -

Secured Funding" for more detail on asset classes that may be harder to fund

    on a secured basis.    

Ÿ Raising secured and unsecured financing that has a long tenor relative to the

liquidity profile of our assets. This reduces the risk that our liabilities

will come due in advance of our ability to generate liquidity from the sale of

our assets. Because we maintain a highly liquid balance sheet, the holding

period of certain of our assets may be materially shorter than their

contractual maturity dates.

   Our goal is to ensure that the firm maintains sufficient liquidity to fund its assets and meet its contractual and contingent obligations in normal times as well as during periods of market stress. Through our dynamic balance sheet management process (see "Balance Sheet and Funding Sources - Balance Sheet Management"), we use actual and projected asset balances to determine secured and unsecured funding requirements. Funding plans are reviewed and approved by the Firmwide Finance Committee on a quarterly basis. In addition, senior managers in our independent control and support functions regularly analyze, and the Firmwide Finance Committee reviews, our consolidated total capital position (unsecured long-term borrowings plus total shareholders' equity) so that we maintain a level of long-term funding that is sufficient to meet our long-term financing requirements. In a liquidity crisis, we would first use our GCE in order to avoid reliance on asset sales (other than our GCE). However, we recognize that orderly asset sales may be prudent or necessary in a severe or persistent liquidity crisis.      92   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

    Subsidiary Funding Policies. The majority of our unsecured funding is raised by Group Inc. which lends the necessary funds to its subsidiaries, some of which are regulated, to meet their asset financing, liquidity and capital requirements. In addition, Group Inc. provides its regulated subsidiaries with the necessary capital to meet their regulatory requirements. The benefits of this approach to subsidiary funding are enhanced control and greater flexibility to meet the funding requirements of our subsidiaries. Funding is also raised at the subsidiary level through a variety of products, including secured funding, unsecured borrowings and deposits.  Our intercompany funding policies assume that, unless legally provided for, a subsidiary's funds or securities are not freely available to its parent company or other subsidiaries. In particular, many of our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Group Inc. Regulatory action of that kind could impede access to funds that Group Inc. needs to make payments on its obligations. Accordingly, we assume that the capital provided to our regulated subsidiaries is not available to Group Inc. or other subsidiaries and any other financing provided to our regulated subsidiaries is not available until the maturity of such financing.  Group Inc. has provided substantial amounts of equity and subordinated indebtedness, directly or indirectly, to its regulated subsidiaries. For example, as of December 2012, Group Inc. had $29.52 billion of equity and subordinated indebtedness invested in GS&Co., its principal U.S. registered broker-dealer; $29.45 billion invested in GSI, a regulated U.K. broker-dealer; $2.62 billion invested in GSEC, a U.S. registered broker-dealer; $3.78 billion invested in Goldman Sachs Japan Co., Ltd., a regulated Japanese broker-dealer; and $20.67 billion invested in GS Bank USA, a regulated New York State-chartered bank. Group Inc. also provided, directly or indirectly, $68.44 billion of unsubordinated loans and $11.37 billion of collateral to these entities, substantially all of which was to GS&Co., GSI and GS Bank USA, as of December 2012. In addition, as of December 2012, Group Inc. had significant amounts of capital invested in and loans to its other regulated subsidiaries.  

Contingency Funding Plan

The Goldman Sachs contingency funding plan sets out the plan of action we would use to fund business activity in crisis situations and periods of market stress. The contingency funding plan outlines a list of potential risk factors, key reports and metrics that are reviewed on an ongoing basis to assist in assessing the severity of, and managing through, a liquidity crisis and/or market dislocation. The contingency funding plan also describes in detail the firm's potential responses if our assessments indicate that the firm has entered a liquidity crisis, which include pre-funding for what we estimate will be our potential cash and collateral needs as well as utilizing secondary sources of liquidity. Mitigants and action items to address specific risks which may arise are also described and assigned to individuals responsible for execution.  The contingency funding plan identifies key groups of individuals to foster effective coordination, control and distribution of information, all of which are critical in the management of a crisis or period of market stress. The contingency funding plan also details the responsibilities of these groups and individuals, which include making and disseminating key decisions, coordinating all contingency activities throughout the duration of the crisis or period of market stress, implementing liquidity maintenance activities and managing internal and external communication.  

Proposed Liquidity Framework

The Basel Committee on Banking Supervision's international framework for liquidity risk measurement, standards and monitoring calls for imposition of a liquidity coverage ratio, designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets based on expected cash outflows under an acute liquidity stress scenario, and a net stable funding ratio, designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. While the principles behind the new framework are broadly consistent with our current liquidity management framework, it is possible that the implementation of these standards could impact our liquidity and funding requirements and practices. Under the Basel Committee framework, the liquidity coverage ratio would be introduced on January 1, 2015; however there would be a phase-in period whereby firms would have a 60% minimum in 2015 which would be raised 10% per year until it reaches 100% in 2019. The net stable funding ratio is not expected to be introduced as a requirement until January 1, 2018.          Goldman Sachs 2012 Form 10-K   93  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Credit Ratings

  The table below presents the unsecured credit ratings and outlook of Group Inc.                                                                                 As of December 2012                                       Short-Term         Long-Term         Subordinated            Trust         Preferred          Ratings                                             Debt              Debt                 Debt        Preferred  1          Stock          Outlook DBRS, Inc.                           R-1 (middle )         A (high )                  A                A               BBB  3        Stable  Fitch, Inc.                                   F1                 A  2                A-             BBB-               BB+  3        Stable  Moody's Investors Service (Moody's)                                    P-2                A3  2              Baa1             Baa3               Ba2  3      Negative  4  Standard & Poor's Ratings Services (S&P)                               A-2                A-  2              BBB+              BB+               BB+  3      Negative  Rating and Investment Information, Inc.                            a-1                A+                    A              N/A               N/A         Negative    

1. Trust preferred securities issued by Goldman Sachs Capital I.

2. Includes the senior guaranteed trust securities issued by Murray Street

   Investment Trust I and Vesey Street Investment Trust I.    

3. Includes Group Inc.'s non-cumulative preferred stock and the APEX issued by

Goldman Sachs Capital II and Goldman Sachs Capital III.    

4. The ratings outlook for trust preferred and preferred stock is stable.

   The table below presents the unsecured credit ratings of GS Bank USA, GS&Co. and GSI.                                                As of December 2012                       Short-Term       Long-Term          Short-Term           Long-Term                             Debt            Debt       Bank Deposits       Bank Deposits       Fitch, Inc.       GS Bank USA             F1               A                  F1                  A+        GS&Co.                  F1               A                 N/A                 N/A        Moody's       GS Bank USA            P-1              A2                 P-1                  A2        S&P       GS Bank USA            A-1               A                 N/A                 N/A        GS&Co.                 A-1               A                 N/A                 N/A        GSI                    A-1               A                 N/A                 N/A    

On January 24, 2013, Fitch, Inc. assigned GSI a rating of F1 for short-term debt and A for long-term debt.

We rely on the short-term and long-term debt capital markets to fund a significant portion of our day-to-day operations and the cost and availability of debt financing is influenced by our credit ratings. Credit ratings are also

  important when we are competing in certain markets, such as OTC derivatives, and when we seek to engage in longer-term transactions. See "Certain Risk Factors That May Affect Our Businesses" below and "Risk Factors" in Part I, Item 1A of this Form 10-K for a discussion of the risks associated with a reduction in our credit ratings.      94   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

We believe our credit ratings are primarily based on the credit rating agencies' assessment of:

Ÿ our liquidity, market, credit and operational risk management practices;

    Ÿ   the level and variability of our earnings;     Ÿ   our capital base;     Ÿ   our franchise, reputation and management;     Ÿ   our corporate governance; and     Ÿ   the external operating environment, including the assumed level of     government support.   Certain of the firm's derivatives have been transacted under bilateral agreements with counterparties who may require us to post collateral or terminate the transactions based on changes in our credit ratings. We assess the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency's relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. We allocate a portion of our GCE to ensure we would be able to make the additional collateral or termination payments that may be required in the event of a two-notch reduction in our long-term credit ratings, as well as collateral that has not been called by counterparties, but is available to them. The table below presents the additional collateral or termination payments that could have been called at the reporting date by counterparties in the event of a one-notch and two-notch downgrade in our credit ratings.                                                                  As of December      in millions                                               2012         2011

Additional collateral or termination payments for a

      one-notch downgrade                                     $1,534

$1,303

Additional collateral or termination payments for a

     two-notch downgrade                                      2,500        2,183   Cash Flows  As a global financial institution, our cash flows are complex and bear little relation to our net earnings and net assets. Consequently, we believe that traditional cash flow analysis is less meaningful in evaluating our liquidity position than the excess liquidity and asset-liability management policies described above. Cash flow analysis may, however, be helpful in highlighting certain macro trends and strategic initiatives in our businesses.  Year Ended December 2012. Our cash and cash equivalents increased by $16.66 billion to $72.67 billion at the end of 2012. We generated $9.14 billion in net cash from operating and investing activities. We generated $7.52 billion in net cash from financing activities from an increase in bank deposits, partially offset by net repayments of unsecured and secured long-term borrowings.  Year Ended December 2011. Our cash and cash equivalents increased by $16.22 billion to $56.01 billion at the end of 2011. We generated $23.13 billion in net cash from operating and investing activities. We used net cash of $6.91 billion for financing activities, primarily for repurchases of our Series G Preferred Stock and common stock, partially offset by an increase in bank deposits.  Year Ended December 2010. Our cash and cash equivalents increased by $1.50 billion to $39.79 billion at the end of 2010. We generated $7.84 billion in net cash from financing activities primarily from net proceeds from issuances of short-term secured financings. We used net cash of $6.34 billion for operating and investing activities, primarily to fund an increase in securities purchased under agreements to resell and an increase in cash and securities segregated for regulatory and other purposes, partially offset by cash generated from a decrease in securities borrowed.          Goldman Sachs 2012 Form 10-K   95  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

   Market Risk Management    Overview  Market risk is the risk of loss in the value of our inventory due to changes in market prices. We hold inventory primarily for market making for our clients and for our investing and lending activities. Our inventory therefore changes based on client demands and our investment opportunities. Our inventory is accounted for at fair value and therefore fluctuates on a daily basis, with the related gains and losses included in "Market making," and "Other principal transactions." Categories of market risk include the following:    

Ÿ Interest rate risk: results from exposures to changes in the level, slope and

    curvature of yield curves, the volatilities of interest rates, mortgage     prepayment speeds and credit spreads.     Ÿ   Equity price risk: results from exposures to changes in prices and

volatilities of individual equities, baskets of equities and equity indices.

Ÿ Currency rate risk: results from exposures to changes in spot prices, forward

    prices and volatilities of currency rates.    

Ÿ Commodity price risk: results from exposures to changes in spot prices,

forward prices and volatilities of commodities, such as electricity, natural

gas, crude oil, petroleum products, and precious and base metals.

Market Risk Management Process

We manage our market risk by diversifying exposures, controlling position sizes and establishing economic hedges in related securities or derivatives. This includes:

Ÿ accurate and timely exposure information incorporating multiple risk metrics;

Ÿ a dynamic limit setting framework; and

Ÿ constant communication among revenue-producing units, risk managers and senior

management.

Market Risk Management, which is independent of the revenue-producing units and reports to the firm's chief risk officer, has primary responsibility for assessing, monitoring and managing market risk at the firm. We monitor and control risks through strong firmwide oversight and independent control and support functions across the firm's global businesses.

  Managers in revenue-producing units are accountable for managing risk within prescribed limits. These managers have in-depth knowledge of their positions, markets and the instruments available to hedge their exposures.  

Managers in revenue-producing units and Market Risk Management discuss market information, positions and estimated risk and loss scenarios on an ongoing basis.

Risk Measures

  Market Risk Management produces risk measures and monitors them against market risk limits set by our firm's risk committees. These measures reflect an extensive range of scenarios and the results are aggregated at trading desk, business and firmwide levels.  We use a variety of risk measures to estimate the size of potential losses for both moderate and more extreme market moves over both short-term and long-term time horizons. Risk measures used for shorter-term periods include VaR and sensitivity metrics. For longer-term horizons, our primary risk measures are stress tests. Our risk reports detail key risks, drivers and changes for each desk and business, and are distributed daily to senior management of both our revenue-producing units and our independent control and support functions.  

Systems

We have made a significant investment in technology to monitor market risk including:

   Ÿ   an independent calculation of VaR and stress measures;     Ÿ   risk measures calculated at individual position levels;    

Ÿ attribution of risk measures to individual risk factors of each position;

    Ÿ   the ability to report many different views of the risk measures (e.g., by     desk, business, product type or legal entity); and     Ÿ   the ability to produce ad hoc analyses in a timely manner.       96   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Value-at-Risk

  VaR is the potential loss in value of inventory positions due to adverse market movements over a defined time horizon with a specified confidence level. We typically employ a one-day time horizon with a 95% confidence level. We use a single VaR model which captures risks including interest rates, equity prices, currency rates and commodity prices. As such, VaR facilitates comparison across portfolios of different risk characteristics. VaR also captures the diversification of aggregated risk at the firmwide level.  We are aware of the inherent limitations to VaR and therefore use a variety of risk measures in our market risk management process. Inherent limitations to VaR include:   

Ÿ VaR does not estimate potential losses over longer time horizons where moves

    may be extreme.     Ÿ   VaR does not take account of the relative liquidity of different     risk positions.    

Ÿ Previous moves in market risk factors may not produce accurate predictions of

all future market moves.

   When calculating VaR, we use historical simulations with full valuation of approximately 70,000 market factors. VaR is calculated at a position level based on simultaneously shocking the relevant market risk factors for that position. We sample from 5 years of historical data to generate the scenarios for our VaR calculation. The historical data is weighted so that the relative importance of the data reduces over time. This gives greater importance to more recent observations and reflects current asset volatilities, which improves the accuracy of our estimates of potential loss. As a result, even if our inventory positions were unchanged, our VaR would increase with increasing market volatility and vice versa.  Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions.  

Our VaR measure does not include:

Ÿ positions that are best measured and monitored using sensitivity measures; and

    Ÿ   the impact of changes in counterparty and our own credit spreads on     derivatives, as well as changes in our own credit spreads on unsecured     borrowings for which the fair value option was elected.  

Model Review and Validation

Our VaR model is subject to review and validation by our independent model validation group at least annually. This review includes:

Ÿ a critical evaluation of the model, its theoretical soundness and adequacy for

    intended use;     Ÿ   verification of the testing strategy utilized by the model developers to     ensure that the model functions as intended; and    

Ÿ verification of the suitability of the calculation techniques incorporated in

the model.

   Our VaR model is regularly reviewed and enhanced in order to incorporate changes in the composition of inventory positions, as well as variations in market conditions. Prior to implementing significant changes to our assumptions and/or model, we perform model validation and test runs. Significant changes to our VaR model are reviewed with the firm's chief risk officer and chief financial officer, and approved by the Firmwide Risk Committee.  We evaluate the accuracy of our VaR model through daily backtesting (i.e., comparing daily trading net revenues to the VaR measure calculated as of the prior business day) at the firmwide level and for each of our businesses and major regulated subsidiaries.  Stress Testing  We use stress testing to examine risks of specific portfolios as well as the potential impact of significant risk exposures across the firm. We use a variety of stress testing techniques to calculate the potential loss from a wide range of market moves on the firm's portfolios, including sensitivity analysis, scenario analysis and firmwide stress tests. The results of our various stress tests are analyzed together for risk management purposes.  Sensitivity analysis is used to quantify the impact of a market move in a single risk factor across all positions (e.g., equity prices or credit spreads) using a variety of defined market shocks, ranging from those that could be expected over a one-day time horizon up to those that could take many months to occur. We also use sensitivity analysis to quantify the impact of the default of a single corporate entity, which captures the risk of large or concentrated exposures.          Goldman Sachs 2012 Form 10-K   97  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

    Scenario analysis is used to quantify the impact of a specified event, including how the event impacts multiple risk factors simultaneously. For example, for sovereign stress testing we calculate potential direct exposure associated with our sovereign inventory as well as the corresponding debt, equity and currency exposures associated with our non-sovereign inventory that may be impacted by the sovereign distress. When conducting scenario analysis, we typically consider a number of possible outcomes for each scenario, ranging from moderate to severely adverse market impacts. In addition, these stress tests are constructed using both historical events and forward-looking hypothetical scenarios.  Firmwide stress testing combines market, credit, operational and liquidity risks into a single combined scenario. Firmwide stress tests are primarily used to assess capital adequacy as part of the ICAAP process; however, we also ensure that firmwide stress testing is integrated into our risk governance framework. This includes selecting appropriate scenarios to use for the ICAAP process. See "Equity Capital - Internal Capital Adequacy Assessment Process" above for further information about our ICAAP process.  Unlike VaR measures, which have an implied probability because they are calculated at a specified confidence level, there is generally no implied probability that our stress test scenarios will occur. Instead, stress tests are used to model both moderate and more extreme moves in underlying market factors. When estimating potential loss, we generally assume that our positions cannot be reduced or hedged (although experience demonstrates that we are generally able to do so).  Stress test scenarios are conducted on a regular basis as part of the firm's routine risk management process and on an ad hoc basis in response to market events or concerns. Stress testing is an important part of the firm's risk management process because it allows us to quantify our exposure to tail risks, highlight potential loss concentrations, undertake risk/reward analysis, and assess and mitigate our risk positions.  

Limits

  We use risk limits at various levels in the firm (including firmwide, product and business) to govern risk appetite by controlling the size of our exposures to market risk. Limits are set based on VaR and on a range of stress tests relevant to the firm's exposures. Limits are reviewed frequently and amended on a permanent or temporary basis to reflect changing market conditions, business conditions or tolerance for risk.  The Firmwide Risk Committee sets market risk limits at firmwide and product levels and our Securities Division Risk Committee sets sub-limits for market-making and investing activities at a business level. The purpose of the firmwide limits is to assist senior management in controlling the firm's overall risk profile. Sub-limits set the desired maximum amount of exposure that may be managed by any particular business on a day-to-day basis without additional levels of senior management approval, effectively leaving day-to-day trading decisions to individual desk managers and traders. Accordingly, sub-limits are a management tool designed to ensure appropriate escalation rather than to establish maximum risk tolerance. Sub-limits also distribute risk among various businesses in a manner that is consistent with their level of activity and client demand, taking into account the relative performance of each area.  Our market risk limits are monitored daily by Market Risk Management, which is responsible for identifying and escalating, on a timely basis, instances where limits have been exceeded. The business-level limits that are set by the Securities Division Risk Committee are subject to the same scrutiny and limit escalation policy as the firmwide limits.  When a risk limit has been exceeded (e.g., due to changes in market conditions, such as increased volatilities or changes in correlations), it is reported to the appropriate risk committee and a discussion takes place with the relevant desk managers, after which either the risk position is reduced or the risk limit is temporarily or permanently increased.      98   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Metrics

  We analyze VaR at the firmwide level and a variety of more detailed levels, including by risk category, business, and region. The tables below present, by risk category, average daily VaR and period-end VaR, as well as the high and low VaR for the period. Diversification effect in the tables below represents the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.  Average Daily VaR                     in millions                    Year Ended December                  Risk Categories            2012         2011         2010                 Interest rates             $ 78         $ 94         $ 93                  Equity prices                26           33           68                  Currency rates               14           20           32                  Commodity prices             22           32           33                  Diversification effect      (54 )        (66 )        (92 )                 Total                      $ 86         $113         $134   Our average daily VaR decreased to $86 million in 2012 from $113 million in 2011, reflecting a decrease in the interest rates category due to lower levels of volatility, decreases in the commodity prices and currency rates categories due to reduced exposures and lower levels of volatility, and a decrease in the equity prices category due to reduced exposures. These decreases were partially offset by a decrease in the diversification benefit across risk categories.  Our average daily VaR decreased to $113 million in 2011 from $134 million in 2010, primarily reflecting decreases in the equity prices and currency rates categories, principally due to reduced exposures. These decreases were partially offset by a decrease in the diversification benefit across risk categories.  

Year-End VaR and High and Low VaR

                in millions                                               Year Ended                                        As of December               December 2012

            Risk Categories            2012         2011             High        Low             Interest rates             $ 64         $100             $103        $61              Equity prices                22           31               92         14              Currency rates                9           14               22          9              Commodity prices             18           23               32         15              Diversification effect      (42 )        (69 )             Total                      $ 71         $ 99             $122        $67   Our daily VaR decreased to $71 million as of December 2012 from $99 million as of December 2011, primarily reflecting decreases in the interest rates and equity prices categories due to lower levels of volatility. These decreases were partially offset by a decrease in the diversification benefit across risk categories.  

During the year ended December 2012, the firmwide VaR risk limit was not exceeded and was reduced on one occasion due to lower levels of volatility.

  During the year ended December 2011, the firmwide VaR risk limit was exceeded on one occasion. It was resolved by a temporary increase in the firmwide VaR risk limit, which was subsequently made permanent due to higher levels of volatility. The firmwide VaR risk limit had previously been reduced on one occasion in 2011, reflecting lower risk utilization and the market environment.          Goldman Sachs 2012 Form 10-K   99  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

The chart below reflects the VaR over the last four quarters.

                               [[Image Removed: LOGO]]   

The chart below presents the frequency distribution of our daily trading net revenues for substantially all inventory

positions included in VaR for the year ended December 2012.

                                 [[Image Removed: LOGO]]    Daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day did not exceed our 95% one-day VaR during 2012. Trading losses incurred on a single day exceeded our 95% one-day VaR (i.e., a VaR exception) on three occasions during 2011.  

During periods in which the firm has significantly more positive net revenue days than net revenue loss days, we

  expect to have fewer VaR exceptions because, under normal conditions, our business model generally produces positive net revenues. In periods in which our franchise revenues are adversely affected, we generally have more loss days, resulting in more VaR exceptions. In addition, VaR backtesting is performed against total daily market-making revenues, including bid/offer net revenues, which are more likely than not to be positive by their nature.      100   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Sensitivity Measures

  Certain portfolios and individual positions are not included in VaR because VaR is not the most appropriate risk measure. The market risk of these positions is determined by estimating the potential reduction in net revenues of a 10% decline in the underlying asset value.  The table below presents market risk for positions that are not included in VaR. These measures do not reflect diversification benefits across asset categories and therefore have not been aggregated.                    Asset Categories                 10% Sensitivity                                               Amount as of December                 in millions                        2012           2011                 ICBC                             $  208         $  212                  Equity (excluding ICBC) 1         2,263          2,458                  Debt 2                            1,676          1,521    

1. Relates to private and restricted public equity securities, including

interests in firm-sponsored funds that invest in corporate equities and real

   estate and interests in firm-sponsored hedge funds.    

2. Primarily relates to interests in our firm-sponsored funds that invest in

corporate mezzanine and senior debt instruments. Also includes loans backed by

commercial and residential real estate, corporate bank loans and other

corporate debt, including acquired portfolios of distressed loans.

   VaR excludes the impact of changes in counterparty and our own credit spreads on derivatives as well as changes in our own credit spreads on unsecured borrowings for which the fair value option was elected. The estimated sensitivity to a one basis point increase in credit spreads (counterparty and our own) on derivatives was a $3 million gain (including hedges) as of December 2012. In addition, the estimated sensitivity to a one basis point increase in our own credit spreads on unsecured borrowings for which the fair value option was elected was a $7 million gain (including hedges) as of December 2012. However, the actual net impact of a change in our own credit spreads is also affected by the liquidity, duration and convexity (as the sensitivity is not linear to changes in yields) of those unsecured borrowings for which the fair value option was elected, as well as the relative performance of any hedges undertaken.  The firm engages in insurance activities where we reinsure and purchase portfolios of insurance risk and pension liabilities. The risks associated with these activities include, but are not limited to: equity price, interest rate, reinvestment and mortality risk. The firm mitigates risks associated with insurance activities through the use of reinsurance and hedging. Certain of the assets associated with the firm's insurance activities are included in VaR. In addition to the positions included in VaR, we held $9.07 billion of securities accounted for as available-for-sale as of December 2012, which support the firm's  reinsurance business. As of December 2012, our available-for-sale securities primarily consisted of $3.63 billion of corporate debt securities with an average yield of 4%, the majority of which will mature after five years, $3.38 billion of mortgage and other asset-backed loans and securities with an average yield of 6%, the majority of which will mature after ten years, and $856 million of U.S. government and federal agency obligations with an average yield of 3%, the majority of which will mature after five years. As of December 2012, such assets were classified as held for sale and were included in "Other assets." See Note 12 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about assets held for sale. As of December 2011, we held $4.86 billion of securities accounted for as available-for-sale, primarily consisting of $1.81 billion of corporate debt securities with an average yield of 5%, the majority of which will mature after five years, $1.42 billion of mortgage and other asset-backed loans and securities with an average yield of 10%, the majority of which will mature after ten years, and $662 million of U.S. government and federal agency obligations with an average yield of 3%, the majority of which will mature after ten years.  In addition, as of December 2012 and December 2011, we had commitments and held loans for which we have obtained credit loss protection from Sumitomo Mitsui Financial Group, Inc. See Note 18 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about such lending commitments. As of December 2012, the firm also had $6.50 billion of loans held for investment which were accounted for at amortized cost and included in "Receivables from customers and counterparties," substantially all of which had floating interest rates. The estimated sensitivity to a 100 basis point increase in interest rates on such loans was $62 million of additional interest income over a 12-month period, which does not take into account the potential impact of an increase in costs to fund such loans. See Note 8 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for further information about loans held for investment.  Additionally, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in "Other assets" in the consolidated statements of financial condition. Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 12 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information on "Other assets."          Goldman Sachs 2012 Form 10-K   101  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

   Credit Risk Management    Overview  Credit risk represents the potential for loss due to the default or deterioration in credit quality of a counterparty (e.g., an OTC derivatives counterparty or a borrower) or an issuer of securities or other instruments we hold. Our exposure to credit risk comes mostly from client transactions in OTC derivatives and loans and lending commitments. Credit risk also comes from cash placed with banks, securities financing transactions (i.e., resale and repurchase agreements and securities borrowing and lending activities) and receivables from brokers, dealers, clearing organizations, customers and counterparties.  Credit Risk Management, which is independent of the revenue-producing units and reports to the firm's chief risk officer, has primary responsibility for assessing, monitoring and managing credit risk at the firm. The Credit Policy Committee and the Firmwide Risk Committee establish and review credit policies and parameters. In addition, we hold other positions that give rise to credit risk (e.g., bonds held in our inventory and secondary bank loans). These credit risks are captured as a component of market risk measures, which are monitored and managed by Market Risk Management, consistent with other inventory positions.  Policies authorized by the Firmwide Risk Committee and the Credit Policy Committee prescribe the level of formal approval required for the firm to assume credit exposure to a counterparty across all product areas, taking into account any applicable netting provisions, collateral or other credit risk mitigants.  

Credit Risk Management Process

  Effective management of credit risk requires accurate and timely information, a high level of communication and knowledge of customers, countries, industries and products. Our process for managing credit risk includes:    

Ÿ approving transactions and setting and communicating credit exposure limits;

    Ÿ   monitoring compliance with established credit exposure limits;    

Ÿ assessing the likelihood that a counterparty will default on its payment

    obligations;     Ÿ   measuring the firm's current and potential credit exposure and losses     resulting from counterparty default;    

Ÿ reporting of credit exposures to senior management, the Board and regulators;

    Ÿ   use of credit risk mitigants, including collateral and hedging; and    

Ÿ communication and collaboration with other independent control and support

functions such as operations, legal and compliance.

   As part of the risk assessment process, Credit Risk Management performs credit reviews which include initial and ongoing analyses of our counterparties. A credit review is an independent judgment about the capacity and willingness of a counterparty to meet its financial obligations. For substantially all of our credit exposures, the core of our process is an annual counterparty review. A counterparty review is a written analysis of a counterparty's business profile and financial strength resulting in an internal credit rating which represents the probability of default on financial obligations to the firm. The determination of internal credit ratings incorporates assumptions with respect to the counterparty's future business performance, the nature and outlook for the counterparty's industry, and the economic environment. Senior personnel within Credit Risk Management, with expertise in specific industries, inspect and approve credit reviews and internal credit ratings.  

Our global credit risk management systems capture credit exposure to individual counterparties and on an aggregate basis to counterparties and their subsidiaries (economic groups). These systems also provide management with comprehensive information on our aggregate credit risk by product, internal credit rating, industry, country and region.

     102   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Risk Measures and Limits

  We measure our credit risk based on the potential loss in an event of non-payment by a counterparty. For derivatives and securities financing transactions, the primary measure is potential exposure, which is our estimate of the future exposure that could arise over the life of a transaction based on market movements within a specified confidence level. Potential exposure takes into account netting and collateral arrangements. For loans and lending commitments, the primary measure is a function of the notional amount of the position. We also monitor credit risk in terms of current exposure, which is the amount presently owed to the firm after taking into account applicable netting and collateral.  We use credit limits at various levels (counterparty, economic group, industry, country) to control the size of our credit exposures. Limits for counterparties and economic groups are reviewed regularly and revised to reflect changing appetites for a given counterparty or group of counterparties. Limits for industries and countries are based on the firm's risk tolerance and are designed to allow for regular monitoring, review, escalation and management of credit risk concentrations.  

Stress Tests/Scenario Analysis

  We use regular stress tests to calculate the credit exposures, including potential concentrations that would result from applying shocks to counterparty credit ratings or credit risk factors (e.g., currency rates, interest rates, equity prices). These shocks include a wide range of moderate and more extreme market movements. Some of our stress tests include shocks to multiple risk factors, consistent with the occurrence of a severe market or economic event. In the case of sovereign default, we estimate the direct impact of the default on our sovereign credit exposures, changes to our credit exposures arising from potential market moves in response to the default, and the impact of credit market deterioration on corporate borrowers and counterparties that may result from the sovereign default. Unlike potential exposure, which is calculated within a specified confidence level, with a stress test there is generally no assumed probability of these events occurring.  We run stress tests on a regular basis as part of our routine risk management processes and conduct tailored stress tests on an ad hoc basis in response to market developments. Stress tests are regularly conducted jointly with the firm's market and liquidity risk functions.  

Risk Mitigants

  To reduce our credit exposures on derivatives and securities financing transactions, we may enter into netting agreements with counterparties that permit us to offset receivables and payables with such counterparties. We may also reduce credit risk with counterparties by entering into agreements that enable us to obtain collateral from them on an upfront or contingent basis and/or to terminate transactions if the counterparty's credit rating falls below a specified level.  For loans and lending commitments, depending on the credit quality of the borrower and other characteristics of the transaction, we employ a variety of potential risk mitigants. Risk mitigants include: collateral provisions, guarantees, covenants, structural seniority of the bank loan claims and, for certain lending commitments, provisions in the legal documentation that allow the firm to adjust loan amounts, pricing, structure and other terms as market conditions change. The type and structure of risk mitigants employed can significantly influence the degree of credit risk involved in a loan.  

When we do not have sufficient visibility into a counterparty's financial strength or when we believe a counterparty requires support from its parent company, we may obtain third-party guarantees of the counterparty's obligations. We may also mitigate our credit risk using credit derivatives or participation agreements.

Goldman Sachs 2012 Form 10-K   103  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Credit Exposures

The firm's credit exposures are described further below.

Cash and Cash Equivalents. Cash and cash equivalents include both interest-bearing and non-interest-bearing deposits. To mitigate the risk of credit loss, we place substantially all of our deposits with highly rated banks and central banks.

  OTC Derivatives. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement.  Derivatives are accounted for at fair value, net of cash collateral received or posted under credit support agreements. As credit risk is an essential component of fair value, the firm includes a credit valuation adjustment (CVA) in the fair value of derivatives to reflect counterparty credit risk, as described in Note 7 to the consolidated financial statements in Part II, Item 8 of this Form 10-K. CVA is a function of the present value of expected exposure, the probability of counterparty default and the assumed recovery upon default.  The tables below present the distribution of our exposure to OTC derivatives by tenor, based on expected duration for mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives, both before and after the effect of collateral and netting agreements. Receivable and payable balances for the same counterparty across tenor categories are netted under enforceable netting agreements, and cash collateral received is netted under credit support agreements. Receivable and payable balances with the same counterparty in the same tenor category are netted within such tenor category. The categories shown reflect our internally determined public rating agency equivalents.                                                                           As of December 2012 in millions                                                                                                                Exposure                               0 - 12         1 - 5          5 Years                                                          Net of Credit Rating Equivalent      Months         Years       or Greater          Total         Netting        Exposure       Collateral AAA/Aaa                      $   494       $ 1,934         $  2,778       $  5,206       $  (1,476 )       $ 3,730          $ 3,443  AA/Aa2                         4,631         7,483           20,357         32,471         (16,026 )        16,445           10,467  A/A2                          13,422        26,550           42,797         82,769         (57,868 )        24,901           16,326  BBB/Baa2                       7,032        12,173           27,676         46,881         (32,962 )        13,919            4,577  BB/Ba2 or lower                2,489         5,762            7,676         15,927          (9,116 )         6,811            4,544  Unrated                          326           927              358          1,611             (13 )         1,598            1,259 Total                        $28,394       $54,829         $101,642       $184,865       $(117,461 )       $67,404          $40,616                                                                       As of December 2011 in millions                                                                                                                Exposure                               0 - 12         1 - 5          5 Years                                                          Net of Credit Rating Equivalent      Months         Years       or Greater          Total         Netting        Exposure       Collateral AAA/Aaa                      $   727       $   786         $  2,297       $  3,810       $    (729 )       $ 3,081          $ 2,770  AA/Aa2                         4,661        10,198           28,094         42,953         (22,972 )        19,981           12,954  A/A2                          17,704        36,553           50,787        105,044         (73,873 )        31,171           17,109  BBB/Baa2                       7,376        14,222           25,612         47,210         (36,214 )        10,996            6,895  BB/Ba2 or lower                2,896         4,497            6,597         13,990          (6,729 )         7,261            4,527  Unrated                          752           664              391          1,807            (149 )         1,658            1,064 Total                        $34,116       $66,920         $113,778       $214,814       $(140,666 )       $74,148          $45,319     104   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

    Lending Activities. We manage the firm's traditional credit origination activities, including funded loans and lending commitments (both fair value and held for investment loans and lending commitments), using the credit risk process, measures and limits described above. Other lending positions, including secondary trading positions, are risk-managed as a component of market risk.  Other Credit Exposures. The firm is exposed to credit risk from its receivables from brokers, dealers and clearing organizations and customers and counterparties. Receivables from brokers, dealers and clearing organizations are primarily comprised of initial margin placed with clearing organizations and receivables related to sales of securities which have traded, but not yet settled. These receivables have minimal credit risk due to the low probability of clearing organization default and the short-term nature of receivables related to securities settlements. Receivables from customers and counterparties are generally comprised of collateralized receivables related to customer securities transactions and have minimal credit risk due to both the value of the collateral received and the short-term nature of these receivables.  

Credit Exposures

  As of December 2012, our credit exposures increased as compared with December 2011, reflecting an increase in cash and loans and lending commitments, partially offset by a decrease in OTC derivative exposures. The percentage of our credit exposure arising from non-investment-grade counterparties (based on our internally determined public rating agency equivalents) increased from December 2011 reflecting an increase in loans and lending commitments. Counterparty defaults rose slightly during the year ended December 2012; however, the estimated losses associated with these counterparty defaults were lower as compared with the prior year.  

The tables below present the firm's credit exposures related to cash, OTC derivatives, and loans and lending commitments associated with traditional credit origination activities broken down by industry, region and internal credit rating.

Goldman Sachs 2012 Form 10-K   105  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

   Credit Exposure by Industry                                                                                                                    Loans and Lending                                                      Cash                       OTC Derivatives                   Commitments 1                                                 As of December                   As of December                   As of December in millions                                     2012           2011              2012           2011              2012           2011 Asset Managers & Funds                        $    -        $    64           $10,552        $10,582           $ 1,673        $ 1,290  Banks, Brokers & Other Financial Institutions                                  10,507         12,535            21,310         25,041             6,192          3,591  Consumer Products, Non-Durables & Retail           -             11             1,516          1,031            13,304         12,685  Government & Central Banks                    62,162         43,389            14,729         16,642             1,782          1,828  Healthcare & Education                             -              -             3,764          2,962             7,717          7,158  Insurance                                          -              -             4,214          2,828             3,199          2,891  Natural Resources & Utilities                      -              -             4,383          4,803            16,360         14,795  Real Estate                                        -              -               381            327             3,796          2,695  Technology, Media, Telecommunications & Services                                           -              2             2,016          2,124            17,674         12,646  Transportation                                     -              -             1,207          1,104             6,557          5,753  Other                                              -              7             3,332          6,704             4,650          5,759 Total 2                                      $72,669        $56,008           $67,404        $74,148           $82,904        $71,091  Credit Exposure by Region                                                                                                                  Loans and Lending                                                      Cash                       OTC Derivatives                   Commitments 1                                                 As of December                   As of December                   As of December in millions                                     2012           2011              2012           2011              2012           2011 Americas                                     $65,193        $48,543           $32,968        $36,591           $59,792        $52,755  EMEA 3                                         1,683          1,800            26,739         29,549            21,104         16,989  Asia                                           5,793          5,665             7,697          8,008             2,008          1,347 Total 2                                      $72,669        $56,008           $67,404        $74,148           $82,904        $71,091 

Credit Exposure by Credit Quality

                                                                                                                 Loans and Lending                                                      Cash                       OTC Derivatives                   Commitments 1 in millions                                     As of December                   As of December                   As of December Credit Rating Equivalent                        2012           2011              2012           2011              2012           2011 AAA/Aaa                                      $59,825        $40,559           $ 3,730        $ 3,081           $ 2,179        $ 2,192  AA/Aa2                                         6,356          7,463            16,445         19,981             7,220          7,026  A/A2                                           5,068          6,464            24,901         31,171            21,901         21,055  BBB/Baa2                                         326            195            13,919         10,996            26,313         22,937  BB/Ba2 or lower                                1,094          1,209             6,811          7,261            25,291         17,820  Unrated                                            -            118             1,598          1,658                 -             61 Total 2                                      $72,669        $56,008           $67,404        $74,148           $82,904        $71,091    

1. Includes approximately $12 billion and $10 billion of loans as of

December 2012 and December 2011, respectively, and approximately $71 billion

and $61 billion of lending commitments as of December 2012 and December 2011,

respectively. Excludes certain bank loans and bridge loans and certain lending

   commitments that are risk managed as part of market risk using VaR and    sensitivity measures.    

2. The firm bears credit risk related to resale agreements and securities

borrowed only to the extent that cash advanced or the value of securities

pledged or delivered to the counterparty exceeds the value of the collateral

received. The firm also has credit exposure on repurchase agreements and

securities loaned to the extent that the value of securities pledged or

delivered to the counterparty for these transactions exceeds the amount of

cash or collateral received. We had approximately $37 billion and $41 billion

   as of December 2012 and December 2011, respectively, in credit exposure    related to securities financing transactions reflecting applicable    netting agreements and collateral.    

3. EMEA (Europe, Middle East and Africa).

    106   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

Selected Country Exposures

  During 2011 and throughout 2012, there have been concerns about European sovereign debt risk and its impact on the European banking system and a number of European member states have been experiencing significant credit deterioration. The most pronounced market concerns relate to Greece, Ireland, Italy, Portugal and Spain. The tables below present our credit exposure (both gross and net of hedges) to all sovereigns, financial institutions and corporate counterparties or borrowers in these countries. Credit exposure represents the potential for loss due to the default or deterioration in credit quality of a counterparty or borrower. In addition, the tables include the market  exposure of our long and short inventory for which the issuer or underlier is located in these countries. Market exposure represents the potential for loss in value of our inventory due to changes in market prices. There is no overlap between the credit and market exposures in the tables below.  The country of risk is determined by the location of the counterparty, issuer or underlier's assets, where they generate revenue, the country in which they are headquartered, and/or the government whose policies affect their ability to repay their obligations.                                                                                                                            As of December 2012                                                                                      Credit Exposure                                                                                    Market Exposure                                                                                                               Total                                                                                                                 Net                                                                                                              Funded                                                              Equities                                Total                                                           OTC                   Gross                        Credit          Unfunded       Total Credit                              and             Credit            Market in millions                         Loans         Derivatives       Other      Funded        Hedges        Exposure   Credit Exposure           Exposure             Debt           Other        Derivatives          Exposure Greece Sovereign                           $   -               $   -        $  -       $   -        $    -           $   -             $   -              $   -           $   30            $  -             $    -            $   30  Non-Sovereign                           -                   5           1           6             -               6                 -                  6               65              15                 (5 )              75 Total Greece                            -                   5           1           6             -               6                 -                  6               95              15                 (5 )             105  Ireland Sovereign                               -                   1         103         104             -             104                 -                104                8               -               (150 )            (142 )  Non-Sovereign                           -                 126          36         162             -             162                 -                162              801              74                155             1,030 Total Ireland                           -                 127         139         266             -             266                 -                266              809              74                  5               888  Italy Sovereign                               -               1,756           1       1,757        (1,714 )            43                 -                 43             (415 )             -               (603 )          (1,018 )  Non-Sovereign                          43                 560         129         732           (33 )           699               587              1,286              434              65               (996 )            (497 ) Total Italy                            43               2,316         130       2,489        (1,747 )           742               587              1,329               19              65             (1,599 )          (1,515 )  Portugal Sovereign                               -                 141          61         202             -             202                 -                202              155               -               (226 )             (71 )  Non-Sovereign                           -                  44           2          46             -              46                 -                 46              168              (6 )             (133 )              29 Total Portugal                          -                 185          63         248             -             248                 -                248              323              (6 )             (359 )             (42 )  Spain Sovereign                               -                  75           -          75             -              75                 -                 75              986               -               (268 )             718  Non-Sovereign                       1,048                 259          23       1,330           (95 )         1,235               733              1,968            1,268              83               (186 )           1,165 Total Spain                         1,048                 334          23       1,405           (95 )         1,310               733              2,043            2,254              83               (454 )           1,883 Subtotal                           $1,091  1           $2,967  2     $356$4,414       $(1,842 ) 3      $2,572$1,320$3,892$3,500$231            $(2,412 ) 3       $ 1,319

1. Principally consists of collateralized loans.

2. Includes the benefit of $6.6 billion of cash and U.S. Treasury securities

   collateral and excludes non-U.S. government and agency obligations and    corporate securities collateral of $357 million.    

3. Includes written and purchased credit derivative notionals reduced by the fair

   values of such credit derivatives.         Goldman Sachs 2012 Form 10-K   107  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

                                                                                                                             As of December 2011                                                                                          Credit Exposure                                                                                 Market Exposure                                                                                                                   Total Net                                                                                                                      Funded       Unfunded          Total                          Equities                               Total                                                               OTC                      Gross                         Credit         Credit         Credit                               and            Credit            Market in millions                               Loans       Derivatives         Other       Funded        Hedges         Exposure       Exposure       Exposure              Debt           Other       Derivatives          Exposure Greece Sovereign                                  $  -             $   -          $  -        $   -        $    -            $   -            $ -          $   -            $  329            $  -           $   (22 )           $ 307  Non-Sovereign                                20                53             -           73             -               73              -             73                32              11                18                61 Total Greece                                 20                53             -           73             -               73              -             73               361              11                (4 )             368  Ireland Sovereign                                     -                 1           256          257             -              257              -            257               411               -              (352 )              59  Non-Sovereign                                 -               542            66          608            (8 )            600             57            657               412              85               115               612 Total Ireland                                 -               543           322          865            (8 )            857             57            914               823              85              (237 )             671  Italy Sovereign                                     -             1,666             3        1,669        (1,410 )            259              -            259               210               -               200               410  Non-Sovereign                               126               457             -          583           (25 )            558            408            966               190             297              (896 )            (409 ) Total Italy                                 126             2,123             3        2,252        (1,435 )            817            408          1,225               400             297              (696 )               1  Portugal Sovereign                                     -               151             -          151             -              151              -            151               (98 )             -                23               (75 )  Non-Sovereign                                 -                53             2           55             -               55              -             55               230              13              (179 )              64 Total Portugal                                -               204             2          206             -              206              -            206               132              13              (156 )             (11 )  Spain Sovereign                                     -                88             -           88             -               88              -             88               151               -              (550 )            (399 )  Non-Sovereign                               153               254            11          418          (141 )            277            146            423               345             239              (629 )             (45 ) Total Spain                                 153               342            11          506          (141 )            365            146            511               496             239            (1,179 )            (444 ) Subtotal                                   $299            $3,265  1      

$338       $3,902       $(1,584 )         $2,318           $611         $2,929            $2,212            $645           $(2,272 ) 2         $ 585    

1. Includes the benefit of $6.5 billion of cash and U.S. Treasury securities

   collateral and excludes non-U.S. government and agency obligations and    corporate securities collateral of $341 million.    

2. Includes written and purchased credit derivative notionals reduced by the fair

   values of such credit derivatives.     We economically hedge our exposure to written credit derivatives by entering into offsetting purchased credit derivatives with identical underlyings. Where possible, we endeavor to match the tenor and credit default terms of such hedges to that of our written credit derivatives. Substantially all purchased credit derivatives included above are bought from investment-grade counterparties domiciled outside of these countries and are collateralized with cash or U.S. Treasury securities. The gross purchased and written credit derivative notionals across the above countries for single-name and index credit default swaps (included in 'Hedges' and 'Credit Derivatives' in the tables above) were $179.4 billion and $168.6 billion, respectively, as of December 2012, and $177.8 billion and $167.3 billion, respectively, as of December 2011. Including netting under legally enforceable netting agreements, within each and across all of the countries above, the purchased and written credit derivative notionals for single-name and index credit default swaps  were $26.0 billion and $15.3 billion, respectively, as of December 2012, and $28.2 billion and $17.7 billion, respectively, as of December 2011. These notionals are not representative of our exposure because they exclude available netting under legally enforceable netting agreements on other derivatives outside of these countries and collateral received or posted under credit support agreements.  

In credit exposure above, 'Other' principally consists of deposits, secured lending transactions and other secured receivables, net of applicable collateral. As of December 2012 and December 2011, $4.8 billion and $7.0 billion, respectively, of secured lending transactions and other secured receivables were fully collateralized.

  For information about the nature of or payout under trigger events related to written and purchased credit protection contracts see Note 7 to the consolidated financial statements in Part II, Item 8 of this Form 10-K.      108   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

    We conduct stress tests intended to estimate the direct and indirect impact that might result from a variety of possible events involving the above countries, including sovereign defaults and the exit of one or more countries from the Euro area. In the stress tests, described in "Market Risk Management - Stress Testing" and "Credit Risk Management - Stress Tests/Scenario Analysis," we estimate the direct impact of the event on our credit and market exposures resulting from shocks to risk factors including, but not limited to, currency rates, interest rates, and equity prices. The parameters of these shocks vary based on the scenario reflected in each stress test. We also estimate the indirect impact on our exposures arising from potential market moves in response to the event, such as the impact of credit market deterioration on corporate borrowers and counterparties along with the shocks to the risk factors described above. We review estimated losses produced by the stress tests in order to understand their magnitude, highlight potential loss concentrations, and assess and mitigate our exposures where necessary.  Euro area exit scenarios include analysis of the impacts on exposure that might result from the redenomination of assets in the exiting country or countries. Constructing stress tests for these scenarios requires many assumptions about how exposures might be directly impacted and how resulting secondary market moves would indirectly impact such exposures. Given the multiple parameters involved in such scenarios, losses from such events are inherently difficult to quantify and may materially differ from our estimates. In order to prepare for any market disruption that might result from a Euro area exit, we test our operational and risk management readiness and capability to respond to a redenomination event.  

See "Liquidity Risk Management - Modeled Liquidity Outflow," "Market Risk Management - Stress Testing" and "Credit Risk Management - Stress Tests/Scenario Analysis" for further discussion.

Operational Risk Management

Overview

  Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Our exposure to operational risk arises from routine processing errors as well as extraordinary incidents, such as major systems failures. Potential types of loss events related to internal and external operational risk include:    

Ÿ clients, products and business practices;

Ÿ execution, delivery and process management;

Ÿ business disruption and system failures;

Ÿ employment practices and workplace safety;

Ÿ damage to physical assets;

    Ÿ   internal fraud; and     Ÿ   external fraud.   The firm maintains a comprehensive control framework designed to provide a well-controlled environment to minimize operational risks. The Firmwide Operational Risk Committee, along with the support of regional or entity-specific working groups or committees, provides oversight of the ongoing development and implementation of our operational risk policies and framework. Our Operational Risk Management department (Operational Risk Management) is a risk management function independent of our revenue-producing units, reports to the firm's chief risk officer, and is responsible for developing and implementing policies, methodologies and a formalized framework for operational risk management with the goal of minimizing our exposure to operational risk.          Goldman Sachs 2012 Form 10-K   109  

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Management's Discussion and Analysis

Operational Risk Management Process

Managing operational risk requires timely and accurate information as well as a strong control culture. We seek to manage our operational risk through:

   Ÿ   the training, supervision and development of our people;    

Ÿ the active participation of senior management in identifying and mitigating

    key operational risks across the firm;    

Ÿ independent control and support functions that monitor operational risk on a

daily basis and have instituted extensive policies and procedures and

implemented controls designed to prevent the occurrence of operational risk

    events;    

Ÿ proactive communication between our revenue-producing units and our

    independent control and support functions; and    

Ÿ a network of systems throughout the firm to facilitate the collection of data

used to analyze and assess our operational risk exposure.

   We combine top-down and bottom-up approaches to manage and measure operational risk. From a top-down perspective, the firm's senior management assesses firmwide and business level operational risk profiles. From a bottom-up perspective, revenue-producing units and independent control and support functions are responsible for risk management on a day-to-day basis, including identifying, mitigating, and escalating operational risks to senior management.  

Our operational risk framework is in part designed to comply with the operational risk measurement rules under Basel 2 and has evolved based on the changing needs of our businesses and regulatory guidance. Our framework comprises the following practices:

   Ÿ   Risk identification and reporting;     Ÿ   Risk measurement; and     Ÿ   Risk monitoring.   Internal Audit performs a review of our operational risk framework, including our key controls, processes and applications, on an annual basis to assess the effectiveness of our framework.  

Risk Identification and Reporting

  The core of our operational risk management framework is risk identification and reporting. We have a comprehensive data collection process, including firmwide policies and procedures, for operational risk events.  We have established policies that require managers in our revenue-producing units and our independent control and support functions to escalate operational risk events. When operational risk events are identified, our policies require that the events be documented and analyzed to determine whether changes are required in the firm's systems and/or processes to further mitigate the risk of future events.  In addition, our firmwide systems capture internal operational risk event data, key metrics such as transaction volumes, and statistical information such as performance trends. We use an internally-developed operational risk management application to aggregate and organize this information. Managers from both revenue-producing units and independent control and support functions analyze the information to evaluate operational risk exposures and identify businesses, activities or products with heightened levels of operational risk. We also provide periodic operational risk reports to senior management, risk committees and the Board.      110   Goldman Sachs 2012 Form 10-K  

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Management's Discussion and Analysis

Risk Measurement

  We measure the firm's operational risk exposure over a twelve-month time horizon using both statistical modeling and scenario analyses, which involve qualitative assessments of the potential frequency and extent of potential operational risk losses, for each of the firm's businesses. Operational risk measurement incorporates qualitative and quantitative assessments of factors including:    

Ÿ internal and external operational risk event data;

Ÿ assessments of the firm's internal controls;

Ÿ evaluations of the complexity of the firm's business activities;

Ÿ the degree of and potential for automation in the firm's processes;

Ÿ new product information;

Ÿ the legal and regulatory environment;

Ÿ changes in the markets for the firm's products and services, including the

diversity and sophistication of the firm's customers and counterparties; and

Ÿ the liquidity of the capital markets and the reliability of the infrastructure

that supports the capital markets.

The results from these scenario analyses are used to monitor changes in operational risk and to determine business lines that may have heightened exposure to operational risk. These analyses ultimately are used in the determination of the appropriate level of operational risk capital to hold.

Risk Monitoring

  We evaluate changes in the operational risk profile of the firm and its businesses, including changes in business mix or jurisdictions in which the firm operates, by monitoring the factors noted above at a firmwide level. The firm has both detective and preventive internal controls, which are designed to reduce the frequency and severity of operational risk losses and the probability of operational risk events. We monitor the results of assessments and independent internal audits of these internal controls.  

Recent Accounting Developments

See Note 3 to the consolidated financial statements in Part II, Item 8 of this Form 10-K for information about Recent Accounting Developments.

Goldman Sachs 2012 Form 10-K   111  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

                     Certain Risk Factors That May Affect Our                   Businesses   We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal, regulatory and reputational risks. For a discussion of how management seeks to manage some of these risks, see "Overview and Structure of Risk Management." A summary of the more important factors that could affect our businesses follows. For a further discussion of these and other important factors that could affect our businesses, financial condition, results of operations, cash flows and liquidity, see "Risk Factors" in Part I, Item 1A of this Form 10-K.    

Ÿ Our businesses have been and may continue to be adversely affected by

conditions in the global financial markets and economic conditions generally.

Ÿ Our businesses have been and may be adversely affected by declining asset

values. This is particularly true for those businesses in which we have net

    "long" positions, receive fees based on the value of assets managed, or     receive or post collateral.    

Ÿ Our businesses have been and may be adversely affected by disruptions in the

    credit markets, including reduced access to credit and higher costs of     obtaining credit.    

Ÿ Our market-making activities have been and may be affected by changes in the

    levels of market volatility.    

Ÿ Our investment banking, client execution and investment management businesses

    have been adversely affected and may continue to be adversely affected by     market uncertainty or lack of confidence among investors and CEOs due to     general declines in economic activity and other unfavorable economic,     geopolitical or market conditions.    

Ÿ Our investment management business may be affected by the poor investment

    performance of our investment products.    

Ÿ We may incur losses as a result of ineffective risk management processes and

    strategies.    

Ÿ Our liquidity, profitability and businesses may be adversely affected by an

inability to access the debt capital markets or to sell assets or by a

reduction in our credit ratings or by an increase in our credit spreads.

Ÿ Conflicts of interest are increasing and a failure to appropriately identify

and address conflicts of interest could adversely affect our businesses.

Ÿ Group Inc. is a holding company and is dependent for liquidity on payments

from its subsidiaries, many of which are subject to restrictions.

Ÿ Our businesses, profitability and liquidity may be adversely affected by

deterioration in the credit quality of, or defaults by, third parties who owe

us money, securities or other assets or whose securities or obligations we

    hold.    

Ÿ Concentration of risk increases the potential for significant losses in our

    market-making, underwriting, investing and lending activities.    

Ÿ The financial services industry is highly competitive.

Ÿ We face enhanced risks as new business initiatives lead us to transact with a

broader array of clients and counterparties and expose us to new asset classes

    and new markets.    

Ÿ Derivative transactions and delayed settlements may expose us to unexpected

    risk and potential losses.    

Ÿ Our businesses may be adversely affected if we are unable to hire and retain

    qualified employees.    

Ÿ Our businesses and those of our clients are subject to extensive and pervasive

    regulation around the world.    

Ÿ We may be adversely affected by increased governmental and regulatory scrutiny

    or negative publicity.    

Ÿ A failure in our operational systems or infrastructure, or those of third

parties, could impair our liquidity, disrupt our businesses, result in the

    disclosure of confidential information, damage our reputation and cause     losses.    

Ÿ Substantial legal liability or significant regulatory action against us could

have material adverse financial effects or cause us significant reputational

    harm, which in turn could seriously harm our business prospects.     Ÿ   The growth of electronic trading and the introduction of new trading

technology may adversely affect our business and may increase competition.

Ÿ Our commodities activities, particularly our power generation interests and

our physical commodities activities, subject us to extensive regulation,

potential catastrophic events and environmental, reputational and other risks

    that may expose us to significant liabilities and costs.    

Ÿ In conducting our businesses around the world, we are subject to political,

economic, legal, operational and other risks that are inherent in operating in

    many countries.     Ÿ   We may incur losses as a result of unforeseen or catastrophic events,

including the emergence of a pandemic, terrorist attacks, extreme weather

    events or other natural disasters.       112   Goldman Sachs 2012 Form 10-K   

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    Item 7A.  Quantitative and Qualitative Disclosures About Market Risk  Quantitative and qualitative disclosures about market risk are set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Structure of Risk Management" in Part II, Item 7 of this Form 10-K.         Goldman Sachs 2012 Form 10-K   113  

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Item 8. Financial Statements and Supplementary Data

 INDEX                                                                               Page No.    Management's Report on Internal Control over Financial Reporting              115    Report of Independent Registered Public Accounting Firm                       116  Consolidated Financial Statements                                               117   Consolidated Statements of Earnings                                           117    Consolidated Statements of Comprehensive Income                               118    Consolidated Statements of Financial Condition                                119    Consolidated Statements of Changes in Shareholders' Equity                    120    Consolidated Statements of Cash Flows                                         121    Notes to Consolidated Financial Statements                                    122   Note 1.    Description of Business                                            122    Note 2.    Basis of Presentation                                              122    Note 3.    Significant Accounting Policies                                    123 

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

    127    Note 5.    Fair Value Measurements                                            128    Note 6.    Cash Instruments                                                   130    Note 7.    Derivatives and Hedging Activities                                 138    Note 8.    Fair Value Option                                                  153    Note 9.    Collateralized Agreements and Financings                           162    Note 10.   Securitization Activities                                          165    Note 11.   Variable Interest Entities                                         168    Note 12.   Other Assets                                                       173    Note 13.   Goodwill and Identifiable Intangible Assets                        175    Note 14.   Deposits                                                           177    Note 15.   Short-Term Borrowings                                              178    Note 16.   Long-Term Borrowings                                               179    Note 17.   Other Liabilities and Accrued Expenses                             183    Note 18.   Commitments, Contingencies and Guarantees                          184    Note 19.   Shareholders' Equity                                               191    Note 20.   Regulation and Capital Adequacy                                    194    Note 21.   Earnings Per Common Share                                          199    Note 22.   Transactions with Affiliated Funds                                 200    Note 23.   Interest Income and Interest Expense                               201    Note 24.   Income Taxes                                                       202    Note 25.   Business Segments                                                  205    Note 26.   Credit Concentrations                                              209    Note 27.   Legal Proceedings                                                  210    Note 28.   Employee Benefit Plans                                             223    Note 29.   Employee Incentive Plans                                           224    Note 30.   Parent Company                                                     227    Supplemental Financial Information                                            228    Quarterly Results                                                             228    Common Stock Price Range                                                      229    Common Stock Performance                                                      229    Selected Financial Data                                                       230    Statistical Disclosures                                                       231     114   Goldman Sachs 2012 Form 10-K   

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Management's Report on Internal Control over Financial Reporting

    Management of The Goldman Sachs Group, Inc., together with its consolidated subsidiaries (the firm), is responsible for establishing and maintaining adequate internal control over financial reporting. The firm's internal control over financial reporting is a process designed under the supervision of the firm's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the firm's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.  As of December 31, 2012, management conducted an assessment of the firm's internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the firm's internal control over financial reporting as of December 31, 2012 was effective.  Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the firm; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the firm's assets that could have a material effect on our financial statements.  The firm's internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing on page 116, which expresses an unqualified opinion on the effectiveness of the firm's internal control over financial reporting as of December 31, 2012.          Goldman Sachs 2012 Form 10-K   115  

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Shareholders of

The Goldman Sachs Group, Inc.:

    In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The Goldman Sachs Group, Inc. and its subsidiaries (the Company) at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing on page 115. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.  A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New YorkFebruary 28, 2013      116   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

                                                                      Year Ended December in millions, except per share amounts                      2012            2011            2010 Revenues Investment banking                                      $ 4,941         $ 4,361         $ 4,810  Investment management                                     4,968           4,691           4,669  Commissions and fees                                      3,161           3,773           3,569  Market making                                            11,348           9,287          13,678  Other principal transactions                              5,865           1,507           6,932 Total non-interest revenues                              30,283          23,619          33,658   Interest income                                          11,381          13,174          12,309  Interest expense                                          7,501           7,982           6,806 Net interest income                                       3,880           5,192           5,503 Net revenues, including net interest income              34,163          28,811          39,161  Operating expenses Compensation and benefits                                12,944          12,223          15,376   U.K. bank payroll tax                                         -               -             465   Brokerage, clearing, exchange and distribution fees       2,208           2,463           2,281  Market development                                          509             640             530  Communications and technology                               782             828             758  Depreciation and amortization                             1,738           1,865           1,889  Occupancy                                                   875           1,030           1,086  Professional fees                                           867             992             927  Insurance reserves                                          598             529             398  Other expenses                                            2,435           2,072           2,559 Total non-compensation expenses                          10,012          10,419          10,428 Total operating expenses                                 22,956          22,642          26,269  Pre-tax earnings                                         11,207           6,169          12,892  Provision for taxes                                       3,732           1,727           4,538 Net earnings                                              7,475           4,442           8,354  Preferred stock dividends                                   183           1,932             641 Net earnings applicable to common shareholders          $ 7,292         $ 2,510         $ 7,713  Earnings per common share Basic                                                   $ 14.63         $  4.71         $ 14.15  Diluted                                                   14.13            4.51           13.18   Average common shares outstanding Basic                                                     496.2           524.6           542.0  Diluted                                                   516.1           556.9           585.3    

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

Goldman Sachs 2012 Form 10-K   117  

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Consolidated Statements of Comprehensive Income

                                                                        Year Ended December in millions                                                    2012          2011          2010 Net earnings                                                 $7,475        $4,442        $8,354  Other comprehensive income/(loss), net of tax: Currency translation adjustment, net of tax                     (89 )       

(55 ) (38 )

Pension and postretirement liability adjustments, net of tax

                                                             168         

(145 ) 88

Net unrealized gains/(losses) on available-for-sale securities, net of tax

                                          244           (30 )          26 Other comprehensive income/(loss)                               323          (230 )          76 Comprehensive income                                         $7,798        $4,212        $8,430          

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

   118   Goldman Sachs 2012 Form 10-K  

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Consolidated Statements of Financial Condition

                                                                                                                                     As of December in millions, except share and per share amounts                                                                                 2012            2011 Assets Cash and cash equivalents                                                                                                   $ 72,669        $ 56,008 

Cash and securities segregated for regulatory and other purposes (includes $30,484 and $42,014 at fair value as of December 2012 and December 2011, respectively)

                                                                                49,671          64,264  Collateralized agreements: Securities purchased under agreements to resell and federal funds sold (includes $141,331 and $187,789 at fair value as of December 2012 and December 2011, respectively)                                                                            141,334         187,789  

Securities borrowed (includes $38,395 and $47,621 at fair value as of December 2012 and December 2011, respectively)

                                                                                                                136,893         153,341  Receivables from brokers, dealers and clearing organizations                                                                  18,480          14,204  

Receivables from customers and counterparties (includes $7,866 and $9,682 at fair value as of December 2012 and December 2011, respectively)

                                                                                                  72,874          60,261  

Financial instruments owned, at fair value (includes $67,177 and $53,989 pledged as collateral as of December 2012 and December 2011, respectively)

                                                                                                 407,011         364,206  

Other assets (includes $13,426 and $0 at fair value as of December 2012 and December 2011, respectively)

                      39,623          23,152 Total assets                                                                                                                $938,555        $923,225  

Liabilities and shareholders' equity Deposits (includes $5,100 and $4,526 at fair value as of December 2012 and December 2011, respectively)

                     $ 70,124        $ 46,109  Collateralized financings: Securities sold under agreements to repurchase, at fair value                                                                171,807         164,502  

Securities loaned (includes $1,558 and $107 at fair value as of December 2012 and December 2011, respectively)

                                                                                                                 13,765           7,182  

Other secured financings (includes $30,337 and $30,019 at fair value as of December 2012 and December 2011, respectively)

                                                                                                  32,010          37,364  Payables to brokers, dealers and clearing organizations                                                                        5,283           3,667  Payables to customers and counterparties                                                                                     189,202         194,625  Financial instruments sold, but not yet purchased, at fair value                                                             126,644         145,013  

Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $17,595 and $17,854 at fair value as of December 2012 and December 2011, respectively)

                                                    44,304          49,038  

Unsecured long-term borrowings (includes $12,593 and $17,162 at fair value as of December 2012 and December 2011, respectively)

                                                                                                 167,305         173,545  

Other liabilities and accrued expenses (includes $12,043 and $9,486 at fair value as of December 2012 and December 2011, respectively)

                                                  42,395          31,801 Total liabilities                                                                                                            862,839         852,846  

Commitments, contingencies and guarantees

Shareholders' equity Preferred stock, par value $0.01 per share; aggregate liquidation preference of $6,200 and $3,100 as of December 2012 and December 2011, respectively

                                                                                                6,200           3,100  Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 816,807,400 and 795,555,310 shares issued as of December 2012 and December 2011, respectively, and 465,148,387 and 485,467,565 shares outstanding as of December 2012 and December 2011, respectively                                                                                      8               8  Restricted stock units and employee stock options                                                                              3,298           5,681  

Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding

                 -               -  Additional paid-in capital                                                                                                    48,030          45,553  Retained earnings                                                                                                             65,223          58,834  Accumulated other comprehensive loss                                                                                            (193 )          (516 )  

Stock held in treasury, at cost, par value $0.01 per share; 351,659,015 and 310,087,747 shares as of December 2012 and December 2011, respectively

                                                                                                  (46,850 )       (42,281 ) Total shareholders' equity                                                                                                    75,716          70,379 Total liabilities and shareholders' equity                                                                                  $938,555        $923,225   

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

Goldman Sachs 2012 Form 10-K   119  

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Consolidated Statements of Changes in Shareholders' Equity

                                                                      Year Ended December in millions                                                 2012            2011            2010 Preferred stock Balance, beginning of year                              $  3,100        $  6,957        $  6,957  Issued                                                     3,100               -               -  Repurchased                                                    -          (3,857 )             - Balance, end of year                                       6,200           3,100           6,957  Common stock Balance, beginning of year                                     8               8               8  Issued                                                         -               -               - Balance, end of year                                           8               8               8  Restricted stock units and employee stock options Balance, beginning of year                                 5,681           7,706           6,245  

Issuance and amortization of restricted stock units and employee stock options

                                 1,368           2,863           4,137  Delivery of common stock underlying restricted stock units                                               (3,659 )        

(4,791 ) (2,521 )

  Forfeiture of restricted stock units and employee stock options                                                (90 )          

(93 ) (149 )

  Exercise of employee stock options                            (2 )            (4 )            (6 ) Balance, end of year                                       3,298           5,681           7,706  Additional paid-in capital Balance, beginning of year                                45,553          42,103          39,770  Issuance of common stock                                       -             103               -  Delivery of common stock underlying share-based awards                                                     3,939           5,160           3,067  Cancellation of restricted stock units in satisfaction of withholding tax requirements              (1,437 )        

(1,911 ) (972 )

  Preferred stock issuance costs                               (13 )             -               -  Excess net tax benefit/(provision) related to share-based awards                                           (11 )           138             239  Cash settlement of share-based compensation                   (1 )           (40 )            (1 ) Balance, end of year                                      48,030          45,553          42,103  Retained earnings Balance, beginning of year                                58,834          57,163          50,252  Net earnings                                               7,475           4,442           8,354  Dividends and dividend equivalents declared on common stock and restricted stock units                     (903 )          (769 )          (802 )  Dividends on preferred stock                                (183 )        (2,002 )          (641 ) Balance, end of year                                      65,223          58,834          57,163  Accumulated other comprehensive loss Balance, beginning of year                                  (516 )          

(286 ) (362 )

  Other comprehensive income/(loss)                            323            (230 )            76 Balance, end of year                                        (193 )          

(516 ) (286 )

  Stock held in treasury, at cost Balance, beginning of year                               (42,281 )       (36,295 )       (32,156 )  Repurchased                                               (4,646 )        (6,051 )        (4,185 )  Reissued                                                      77              65              46 Balance, end of year                                     (46,850 )       (42,281 )       (36,295 ) Total shareholders' equity                              $ 75,716        $ 70,379        $ 77,356    

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

   120   Goldman Sachs 2012 Form 10-K  

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Consolidated Statements of Cash Flows

                                                                      Year Ended December in millions                                                 2012            2011            2010 Cash flows from operating activities Net earnings                                            $  7,475        $  

4,442 $ 8,354

  Adjustments to reconcile net earnings to net cash provided by/(used for) operating activities Depreciation and amortization                              1,738           1,869           1,904  Deferred income taxes                                       (356 )           726           1,339  Share-based compensation                                   1,319           2,849           4,035 

Gain on sale of hedge fund administration business (494 )

    -               -  Changes in operating assets and liabilities Cash and securities segregated for regulatory and other purposes                                            10,817         

(10,532 ) (17,094 )

Net receivables from brokers, dealers and clearing organizations

                                             (2,838 )        (3,780 )           201  Net payables to customers and counterparties             (17,661 )        

13,883 (4,637 )

  Securities borrowed, net of securities loaned             23,031           

8,940 19,638

Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold

                                    53,527            

122 (10,092 )

  Financial instruments owned, at fair value               (48,783 )         

5,085 (9,231 )

  Financial instruments sold, but not yet purchased, at fair value                                            (18,867 )         4,243          11,602  Other, net                                                 3,971          (5,346 )       (11,376 ) Net cash provided by/(used for) operating activities                                                12,879          

22,501 (5,357 )

  Cash flows from investing activities Purchase of property, leasehold improvements and equipment                                                   (961 )        

(1,184 ) (1,227 )

  Proceeds from sales of property, leasehold improvements and equipment                                    49              78              72  Business acquisitions, net of cash acquired                 (593 )          

(431 ) (804 )

  Proceeds from sales of investments                         1,195           2,645           1,371  Purchase of available-for-sale securities                 (5,220 )        

(2,752 ) (1,885 )

  Proceeds from sales of available-for-sale securities                                                 4,537           3,129           2,288  Loans held for investment, net                            (2,741 )          (856 )          (800 ) Net cash provided by/(used for) investing activities                                                (3,734 )           629            (985 )  Cash flows from financing activities Unsecured short-term borrowings, net                      (1,952 )        

(3,780 ) 1,196

  Other secured financings (short-term), net                 1,540          

(1,195 ) 12,689

Proceeds from issuance of other secured financings (long-term)

                                                4,687           9,809           5,500  

Repayment of other secured financings (long-term), including the current portion

                            (11,576 )        

(8,878 ) (4,849 )

  Proceeds from issuance of unsecured long-term borrowings                                                27,734          

29,169 20,231

  Repayment of unsecured long-term borrowings, including the current portion                            (36,435 )       

(29,187 ) (22,607 )

  Derivative contracts with a financing element, net         1,696           1,602           1,222  Deposits, net                                             24,015           7,540            (849 )  Preferred stock repurchased                                    -          (3,857 )             -  Common stock repurchased                                  (4,640 )        (6,048 )        (4,183 ) 

Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units (1,086 ) (2,771 ) (1,443 )

  Proceeds from issuance of preferred stock, net of issuance costs                                             3,087               -               -  Proceeds from issuance of common stock, including stock option exercises                                       317             368             581  Excess tax benefit related to share-based compensation                                                 130             358             352  Cash settlement of share-based compensation                   (1 )           (40 )            (1 ) Net cash provided by/(used for) financing activities                                                 7,516          (6,910 )         7,839 Net increase in cash and cash equivalents                 16,661          16,220           1,497  Cash and cash equivalents, beginning of year              56,008          39,788          38,291 Cash and cash equivalents, end of year                  $ 72,669        $ 56,008        $ 39,788   SUPPLEMENTAL DISCLOSURES:  Cash payments for interest, net of capitalized interest, were $9.25 billion, $8.05 billion and $6.74 billion for the years ended December 2012, December 2011 and December 2010, respectively.  

Cash payments for income taxes, net of refunds, were $1.88 billion, $1.78 billion and $4.48 billion for the years ended December 2012, December 2011 and December 2010, respectively.

Non-cash activities:

  During the year ended December 2012, the firm assumed $77 million of debt in connection with business acquisitions. During the year ended December 2011, the firm assumed $2.09 billion of debt and issued $103 million of common stock in connection with the acquisition of Goldman Sachs Australia Pty Ltd (GS Australia), formerly Goldman Sachs & Partners Australia Group Holdings Pty Ltd. During the year ended December 2010, the firm assumed $90 million of debt in connection with business acquisitions. In addition, in the first quarter of 2010, the firm recorded an increase of approximately $3 billion in both assets (primarily financial instruments owned, 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 consolidated financial statements.

Goldman Sachs 2012 Form 10-K   121  

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Notes to Consolidated Financial Statements

Note 1. Description of Business

Note 1.

Description of Business

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

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

Investment Banking

The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds and governments. Services include strategic advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, risk management, restructurings and spin-offs, and debt and equity underwriting of public offerings and private placements, including domestic and cross-border transactions, as well as derivative transactions directly related to these activities.

Institutional Client Services

  The firm facilitates client transactions and makes markets in fixed income, equity, currency and commodity products, primarily with institutional clients such as corporations, financial institutions, investment funds and governments. The firm also makes markets in and clears client transactions on major stock, options and futures exchanges worldwide and provides financing, securities lending and other prime brokerage services to institutional clients.  

Investing & Lending

  The firm invests in and originates loans to provide financing to clients. These investments and loans are typically longer-term in nature. The firm makes investments, directly and indirectly through funds that the firm manages, in debt securities and loans, public and private equity securities, real estate, consolidated investment entities and power generation facilities.  

Investment Management

  The firm provides investment management services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse set of institutional and individual clients. The firm also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families.      Note 2. Basis of Presentation  Note 2.  Basis of Presentation  These consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. Intercompany transactions and balances have been eliminated.  All references to 2012, 2011 and 2010 refer to the firm's years ended, or the dates, as the context requires, December 31, 2012, December 31, 2011 and December 31, 2010, respectively. Any reference to a future year refers to a year ending on December 31 of that year. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.      122   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

Note 3. Significant Accounting Policies

Note 3.

Significant Accounting Policies

    The firm's significant accounting policies include when and how to measure the fair value of assets and liabilities, accounting for goodwill and identifiable intangible assets, and when to consolidate an entity. See Notes 5 through 8 for policies on fair value measurements, Note 13 for policies on goodwill and identifiable intangible assets, and below and Note 11 for policies on consolidation accounting. All other significant accounting policies are either discussed below or included in the following footnotes:            Financial Instruments Owned, at Fair Value and         Financial Instruments Sold, But Not Yet Purchased, at         Fair Value                                                 Note 4          Fair Value Measurements                                    Note 5          Cash Instruments                                           Note 6          Derivatives and Hedging Activities                         Note 7          Fair Value Option                                          Note 8          Collateralized Agreements and Financings                   Note 9          Securitization Activities                                 Note 10          Variable Interest Entities                                Note 11          Other Assets                                              Note 12          Goodwill and Identifiable Intangible Assets               Note 13          Deposits                                                  Note 14          Short-Term Borrowings                                     Note 15          Long-Term Borrowings                                      Note 16          Other Liabilities and Accrued Expenses                    Note 17          Commitments, Contingencies and Guarantees                 Note 18          Shareholders' Equity                                      Note 19          Regulation and Capital Adequacy                           Note 20          Earnings Per Common Share                                 Note 21          Transactions with Affiliated Funds                        Note 22          Interest Income and Interest Expense                      Note 23          Income Taxes                                              Note 24          Business Segments                                         Note 25          Credit Concentrations                                     Note 26          Legal Proceedings                                         Note 27          Employee Benefit Plans                                    Note 28          Employee Incentive Plans                                  Note 29          Parent Company                                            Note 30   Consolidation  The firm consolidates entities in which the firm has a controlling financial interest. The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (VIE).  Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the firm has a majority voting interest in a voting interest entity, the entity is consolidated.  Variable Interest Entities. A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. The firm has a controlling financial interest in a VIE when the firm has a variable interest or interests that provide it with (i) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. See Note 11 for further information about VIEs.  Equity-Method Investments. When the firm does not have a controlling financial interest in an entity but can exert significant influence over the entity's operating and financial policies, the investment is accounted for either (i) under the equity method of accounting or (ii) at fair value by electing the fair value option available under U.S. GAAP. Significant influence generally exists when the firm owns 20% to 50% of the entity's common stock or in-substance common stock.          Goldman Sachs 2012 Form 10-K   123  

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Notes to Consolidated Financial Statements

    In general, the firm accounts for investments acquired after the fair value option became available, at fair value. In certain cases, the firm applies the equity method of accounting to new investments that are strategic in nature or closely related to the firm's principal business activities, when the firm has a significant degree of involvement in the cash flows or operations of the investee or when cost-benefit considerations are less significant. See Note 12 for further information about equity-method investments.  Investment Funds. The firm has formed numerous investment funds with third-party investors. These funds are typically organized as limited partnerships or limited liability companies for which the firm acts as general partner or manager. Generally, the firm does not hold a majority of the economic interests in these funds. These funds are usually voting interest entities and generally are not consolidated because third-party investors typically have rights to terminate the funds or to remove the firm as general partner or manager. Investments in these funds are included in "Financial instruments owned, at fair value." See Notes 6, 18 and 22 for further information about investments in funds.  

Use of Estimates

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

Revenue Recognition

  Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market  participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in "Market making" for positions in Institutional Client Services and "Other principal transactions" for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.  Investment Banking. Fees from financial advisory assignments and underwriting revenues are recognized in earnings when the services related to the underlying transaction are completed under the terms of the assignment. Expenses associated with such transactions are deferred until the related revenue is recognized or the assignment is otherwise concluded. Expenses associated with financial advisory assignments are recorded as non-compensation expenses, net of client reimbursements. Underwriting revenues are presented net of related expenses.  Investment Management. The firm earns management fees and incentive fees for investment management services. Management fees are calculated as a percentage of net asset value, invested capital or commitments, and are recognized over the period that the related service is provided. Incentive fees are calculated as a percentage of a fund's or separately managed account's return, or excess return above a specified benchmark or other performance target. Incentive fees are generally based on investment performance over a 12-month period or over the life of a fund. Fees that are based on performance over a 12-month period are subject to adjustment prior to the end of the measurement period. For fees that are based on investment performance over the life of the fund, future investment underperformance may require fees previously distributed to the firm to be returned to the fund. Incentive fees are recognized only when all material contingencies have been resolved. Management and incentive fee revenues are included in "Investment management" revenues.  Commissions and Fees. The firm earns "Commissions and fees" from executing and clearing client transactions on stock, options and futures markets. Commissions and fees are recognized on the day the trade is executed.      124   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

Transfers of Assets

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

Receivables from Customers and Counterparties

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

Payables to Customers and Counterparties

  Payables to customers and counterparties primarily consist of customer credit balances related to the firm's prime brokerage activities. Payables to customers and counterparties are accounted for at cost plus accrued interest, which generally approximates fair value. While these payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these payables been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2012.  

Receivables from and Payables to Brokers, Dealers and Clearing Organizations

  Receivables from and payables to brokers, dealers and clearing organizations are accounted for at cost plus accrued interest, which generally approximates fair value. While these receivables and payables are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these receivables and payables been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2012.  

Insurance Activities

  Certain of the firm's insurance and reinsurance contracts are accounted for at fair value under the fair value option, with changes in fair value included in "Market making" revenues. See Note 8 for further information about the fair values of these insurance and reinsurance contracts. See Note 12 for further information about the firm's reinsurance business classified as held for sale as of December 2012.  Revenues from variable annuity and life insurance and reinsurance contracts not accounted for at fair value generally consist of fees assessed on contract holder account balances for mortality charges, policy administration fees and surrender charges. These revenues are recognized in earnings over the period that services are provided and are included in "Market making" revenues. Changes in reserves, including interest credited to policyholder account balances, are recognized in "Insurance reserves."  Premiums earned for underwriting property catastrophe reinsurance are recognized in earnings over the coverage period, net of premiums ceded for the cost of reinsurance, and are included in "Market making" revenues. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of losses that have been incurred but not reported, are included in "Insurance reserves."          Goldman Sachs 2012 Form 10-K   125  

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Notes to Consolidated Financial Statements

Foreign Currency Translation

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

Cash and Cash Equivalents

  The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of December 2012 and December 2011, "Cash and cash equivalents" included $6.75 billion and $7.95 billion, respectively, of cash and due from banks, and $65.92 billion and $48.05 billion, respectively, of interest-bearing deposits with banks.  

Recent Accounting Developments

  Reconsideration of Effective Control for Repurchase Agreements (ASC 860). In April 2011, the FASB issued ASU No. 2011-03, "Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements." ASU No. 2011-03 changes the assessment of effective control by removing (i) the criterion that requires the transferor to have the ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance implementation guidance related to that criterion. ASU No. 2011-03 was effective for periods beginning after December 15, 2011. The firm adopted the standard on January 1, 2012. Adoption of ASU No. 2011-03 did not affect the firm's financial condition, results of operations or cash flows.  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASC 820). In May 2011, the FASB issued ASU No. 2011-04, "Fair Value Measurements and Disclosures (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." ASU No. 2011-04  clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 was effective for periods beginning after December 15, 2011. The firm adopted the standard on January 1, 2012. Adoption of ASU No. 2011-04 did not materially affect the firm's financial condition, results of operations or cash flows.  Derecognition of in Substance Real Estate (ASC 360). In December 2011, the FASB issued ASU No. 2011-10, "Property, Plant, and Equipment (Topic 360) - Derecognition of in Substance Real Estate - a Scope Clarification." ASU No. 2011-10 clarifies that in order to deconsolidate a subsidiary (that is in substance real estate) as a result of a parent no longer controlling the subsidiary due to a default on the subsidiary's nonrecourse debt, the parent also must satisfy the sale criteria in ASC 360-20, "Property, Plant, and Equipment - Real Estate Sales." The ASU was effective for fiscal years beginning on or after June 15, 2012. The firm will apply the provisions of the ASU to such events occurring on or after January 1, 2013. Since the ASU applies only to events occurring on or after January 1, 2013, adoption did not affect the firm's financial condition, results of operations or cash flows.  Disclosures about Offsetting Assets and Liabilities (ASC 210). In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities." ASU No. 2011-11, as amended by ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," requires disclosure of the effect or potential effect of offsetting arrangements on the firm's financial position as well as enhanced disclosure of the rights of setoff associated with the firm's recognized derivative instruments, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. ASU No. 2011-11 is effective for periods beginning on or after January 1, 2013. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption will not affect the firm's financial condition, results of operations or cash flows.      126   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Note 4. Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value Note 4.  Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value     Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are accounted for at fair value either under the fair value option or in accordance with other U.S. GAAP. See Note 8 for further information about the fair value option. The table below presents the firm's financial instruments owned, at fair value, including those pledged as collateral, and financial instruments sold, but not yet purchased, at fair value. The firm held $9.07 billion and $4.86 billion as of  December 2012 and December 2011, respectively, of securities accounted for as available-for-sale related to the firm's reinsurance business. As of December 2012, such assets were classified as held for sale and were included in "Other assets." See Note 12 for further information about assets held for sale. As of December 2011, all available-for-sale securities were included in "Financial instruments owned, at fair value."                                                     As of December 2012                       As of December 2011                                                              Financial                                 Financial                                                            Instruments                               Instruments                                            Financial         Sold, But               Financial         Sold, But                                          Instruments           Not Yet             Instruments           Not Yet in millions                                    Owned         Purchased                   Owned         Purchased Commercial paper, certificates of deposit, time deposits and other money market instruments                    $  6,057           $     -                $ 13,440           $     -  U.S. government and federal agency obligations                                   93,241            15,905                  87,040            21,006  Non-U.S. government and agency obligations                                   62,250            32,361                  49,205            34,886  Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate                         9,805                 -                   6,699                27  Loans and securities backed by residential real estate                        8,216                 4                   7,592                 3  Bank loans and bridge loans                   22,407             1,779  3               19,745             2,756  3  Corporate debt securities                     20,981             5,761                  22,131             6,553  State and municipal obligations                2,477                 1                   3,089                 3  Other debt obligations                         2,251                 -                   4,362                 -  Equities and convertible debentures           96,454            20,406                  65,113            21,326  Commodities 1                                 11,696                 -                   5,762                 -  Derivatives 2                                 71,176            50,427                  80,028            58,453 Total                                       $407,011          $126,644                $364,206          $145,013    

1. Includes commodities that have been transferred to third parties, which were

accounted for as collateralized financings rather than sales, of $4.29 billion

   and $2.49 billion as of December 2012 and December 2011, respectively.    

2. Net of cash collateral received or posted under credit support agreements and

reported on a net-by-counterparty basis when a legal right of setoff exists

   under an enforceable netting agreement.    

3. Primarily relates to the fair value of unfunded lending commitments for which

   the fair value option was elected.         Goldman Sachs 2012 Form 10-K   127  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Gains and Losses from Market Making and Other Principal Transactions

  The table below presents, by major product type, the firm's "Market making" and "Other principal transactions" revenues. These gains/(losses) are primarily related to the firm's financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, including both derivative and non-derivative financial instruments. These gains/(losses) exclude related interest income and interest expense. See Note 23 for further information about interest income and interest expense.  The gains/(losses) in the table are not representative of the manner in which the firm manages its business activities because many of the firm's market-making, client facilitation, and investing and lending strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types. For example, most of the firm's longer-term derivatives are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm's cash instruments and derivatives has exposure to foreign currencies and may be economically hedged with foreign currency contracts.                                                 Year Ended December                 in millions           2012            2011           2010                 Interest rates     $ 4,366         $ 1,557       $ (2,042 )                  Credit               5,506           2,715          8,679                  Currencies          (1,004 )           901          3,219                  Equities             5,802           2,788          6,862                  Commodities            575           1,588          1,567                  Other                1,968  1        1,245          2,325                 Total              $17,213         $10,794        $20,610    

1. Includes a gain of approximately $500 million on the sale of the firm's hedge

fund administration business, which is included in "Market making" revenues.

Note 5. Fair Value Measurements

Note 5.

Fair Value Measurements

  The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The firm measures certain financial assets and financial liabilities as a portfolio (i.e., based on its net exposure to market and/or credit risks).  The best evidence of fair value is a quoted price in an active market. If quoted prices in active markets are not available, fair value is determined by reference to prices for similar instruments, quoted prices or recent transactions in less active markets, or internally developed models that primarily use market-based or independently sourced parameters as inputs including, but not limited to, interest rates, volatilities, equity or debt prices, foreign exchange rates, commodity prices, credit spreads and funding spreads (i.e., the spread, or difference, between the interest rate at which a borrower could finance a given financial instrument relative to a benchmark interest rate).  U.S. GAAP has a three-level fair value hierarchy for disclosure of fair value measurements. The fair value hierarchy prioritizes inputs to the valuation techniques used to measure fair value, giving the highest priority to level 1 inputs and the lowest priority to level 3 inputs. A financial instrument's level in the fair value hierarchy is based on the lowest level of input that is significant to its fair value measurement.  

The fair value hierarchy is as follows:

Level 1. Inputs are unadjusted quoted prices in active markets to which the firm had access at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs to valuation techniques are observable, either directly or indirectly.

Level 3. One or more inputs to valuation techniques are significant and unobservable.

     128   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

    The fair values for substantially all of the firm's financial assets and financial liabilities are based on observable prices and inputs and are classified in levels 1 and 2 of the fair value hierarchy. Certain level 2 and level 3 financial assets and financial liabilities may require appropriate valuation adjustments that a market participant would require to arrive at fair value for factors such as counterparty and the firm's credit quality, funding risk, transfer restrictions, liquidity and bid/offer spreads. Valuation adjustments are generally based on market evidence.  See Notes 6 and 7 for further information about fair value measurements of cash instruments and derivatives, respectively, included in "Financial instruments owned, at fair value" and "Financial instruments sold, but not yet purchased, at fair value," and Note 8 for further information about fair value measurements of other financial assets and financial liabilities accounted for at fair value under the fair value option.  Financial assets and financial liabilities accounted for at fair value under the fair value option or in accordance with other U.S. GAAP are summarized below.                                                                            As of December $ in millions                                                       2012             2011 Total level 1 financial assets                                 $ 190,737    

$ 136,780

  Total level 2 financial assets                                   502,293    

587,416

  Total level 3 financial assets                                    47,095    

47,937

  Cash collateral and counterparty netting  1                     (101,612 )       (120,821 ) Total financial assets at fair value                           $ 638,513        $ 651,312  Total assets                                                   $ 938,555        $ 923,225 

Total level 3 financial assets as a percentage of Total assets

                                                               5.0 %  

5.2 %

Total level 3 financial assets as a percentage of Total financial assets at fair value

                                       7.4 %  

7.4 %

  Total level 1 financial liabilities                            $  65,994

$ 75,557

  Total level 2 financial liabilities                              318,764    

319,160

  Total level 3 financial liabilities                               25,679    

25,498

  Cash collateral and counterparty netting  1                      (32,760 )        (31,546 ) Total financial liabilities at fair value                      $ 377,677    

$ 388,669

Total level 3 financial liabilities as a percentage of Total financial liabilities at fair value

                            6.8 %            6.6 %    

1. Represents the impact on derivatives of cash collateral netting, and

counterparty netting across levels of the fair value hierarchy. Netting among

   positions classified in the same level is included in that level.     Level 3 financial assets as of December 2012 decreased compared with December 2011, primarily reflecting a decrease in derivative assets, partially offset by an increase in private equity investments. The decrease in derivative assets primarily reflected a decline in credit derivative assets, principally due to settlements, unrealized losses and sales, partially offset by net transfers from level 2. Level 3 currency derivative assets also declined compared with December 2011, principally due to unrealized losses and net transfers to level 2. The increase in private equity investments primarily reflected purchases and unrealized gains, partially offset by settlements and net transfers to level 2.  See Notes 6, 7 and 8 for further information about level 3 cash instruments, derivatives and other financial assets and financial liabilities accounted for at fair value under the fair value option, respectively, including information about significant unrealized gains and losses, and transfers in and out of level 3.          Goldman Sachs 2012 Form 10-K   129  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Note 6. Cash Instruments  Note 6.  Cash Instruments      Cash instruments include U.S. government and federal agency obligations, non-U.S. government and agency obligations, bank loans and bridge loans, corporate debt securities, equities and convertible debentures, and other non-derivative financial instruments owned and financial instruments sold, but not yet purchased. See below for the types of cash instruments included in each level of the fair value hierarchy and the valuation techniques and significant inputs used to determine their fair values. See Note 5 for an overview of the firm's fair value measurement policies.  

Level 1 Cash Instruments

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

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

  Level 2 Cash Instruments  Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, certain non-U.S. government obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, restricted or less liquid listed equities, most state and municipal obligations and certain lending commitments.  Valuations of level 2 cash instruments can be verified to quoted prices, recent trading activity for identical or similar instruments, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.  

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

Level 3 Cash Instruments

  Level 3 cash instruments have one or more significant valuation inputs that are not observable. Absent evidence to the contrary, level 3 cash instruments are initially valued at transaction price, which is considered to be the best initial estimate of fair value. Subsequently, the firm uses other methodologies to determine fair value, which vary based on the type of instrument. Valuation inputs and assumptions are changed when corroborated by substantive observable evidence, including values realized on sales of financial assets.      130   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

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

fair values of each type of level 3 cash instrument.

      Level 3 Cash  Instruments             Valuation Techniques and Significant Inputs 

Loans and securities Valuation techniques vary by instrument, but are

backed by commercial generally based on discounted cash flow techniques.

real estate

                          Significant inputs are generally determined based 

on

Ÿ Collateralized by relative value analyses and include:

a single commercial

  real estate property    Ÿ  Transaction prices in both the underlying collateral  or a portfolio          and instruments with the same or similar underlying  of properties           collateral and the basis, or price difference, to such                          prices  Ÿ  May include  tranches of varying     Ÿ  Market yields implied by transactions of similar or  levels                  related assets and/or current levels and changes in  of subordination        market indices such as the CMBX (an index that tracks                          the performance of commercial mortgage bonds)                           Ÿ  Recovery rates implied by the value of the                          underlying collateral, which is mainly driven by                          current performance of the underlying collateral,                          capitalization rates and multiples                           Ÿ  Timing of expected future cash flows (duration)  

Loans and securities Valuation techniques vary by instrument, but are

backed by residential generally based on discounted cash flow techniques.

real estate

                          Significant inputs are generally determined based 

on

  Ÿ  Collateralized by    relative value analyses, which incorporate comparisons  portfolios of           to instruments with similar collateral and risk  residential             profiles, including relevant indices such as the ABX  real estate             (an index that tracks the performance of subprime                          residential mortgage bonds). Significant  Ÿ  May include          inputs include:  tranches of varying  levels                  Ÿ  Transaction prices in both the underlying collateral  of subordination        and instruments with the same or similar underlying                          collateral                           Ÿ  Market yields implied by transactions of similar or                          related assets                           Ÿ  Cumulative loss expectations, driven by default                          rates, home price projections, residential property                          liquidation timelines and related costs                           Ÿ  Duration, driven by underlying loan prepayment                          speeds and residential property liquidation timelines  

Bank loans and bridge Valuation techniques vary by instrument, but are

 loans                   generally based on discounted cash flow techniques.                           Significant inputs are generally determined based on                          relative value analyses, which incorporate comparisons                          both to prices of credit default swaps that reference                          the same or similar underlying instrument or entity and                          to other debt instruments for the same issuer for which                          observable prices or broker quotations are available.                          Significant inputs include:                           Ÿ  Market yields implied by transactions of similar or                          related assets and/or current levels and trends of                          market indices such as CDX and LCDX (indices that track                          the performance of corporate credit and loans,                          respectively)                           Ÿ  Current performance and recovery assumptions and,                          where the firm uses credit default swaps to value the                          related cash instrument, the cost of borrowing the                          underlying reference obligation                           Ÿ  Duration    Non-U.S. government     Valuation techniques vary by instrument, but are  and                     generally based on discounted cash flow techniques.  agency obligations                          Significant inputs are generally determined based on  Corporate debt          relative value analyses, which incorporate comparisons  securities              both to prices of credit default swaps that reference                          the same or similar underlying instrument or entity and  State and municipal     to other debt instruments for the same issuer for which  obligations             observable prices or broker quotations are available.                          Significant inputs include:  Other debt  obligations             Ÿ  Market yields implied by transactions of similar or                          related assets and/or current levels and trends of                          market indices such as CDX, LCDX and MCDX (an index                          that tracks the performance of municipal obligations)                           Ÿ  Current performance and recovery assumptions and,                          where the firm uses credit default swaps to value the                          related cash instrument, the cost of borrowing the                          underlying reference obligation                             Ÿ  Duration    Equities and            Recent third-party completed or pending transactions  convertible             (e.g., merger proposals, tender offers, debt  debentures (including   restructurings) are considered to be the best evidence  private equity          for any change in fair value. When these are not  investments and         available, the following valuation methodologies are  investments in real     used, as appropriate:  estate entities)                          Ÿ  Industry multiples (primarily EBITDA multiples) and                          public comparables                           Ÿ  Transactions in similar instruments                           Ÿ  Discounted cash flow techniques                           Ÿ  Third-party appraisals                           The firm also considers changes in the outlook for the                          relevant industry and financial performance of the                          issuer as compared to projected performance.                          Significant inputs include:                           Ÿ  Market and transaction multiples                           Ÿ  Discount rates, long-term growth rates, earnings                          compound annual growth rates and capitalization rates                           Ÿ  For equity instruments with debt-like features:                          market yields implied by transactions of similar or                          related assets, current performance and recovery                          assumptions, and duration          Goldman Sachs 2012 Form 10-K   131   

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Notes to Consolidated Financial Statements

Significant Unobservable Inputs

  The table below presents the ranges of significant unobservable inputs used to value the firm's level 3 cash instruments. These ranges represent the significant unobservable inputs that were used in the valuation of each type of cash instrument. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one cash instrument. For example, the highest multiple presented in  the table for private equity investments is appropriate for valuing a specific private equity investment but may not be appropriate for valuing any other private equity investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm's level 3 cash instruments.                                                                                                                                      Range of Significant Unobservable                                                 Level 3 Assets as of   

December 2012 Significant Unobservable Inputs Inputs (Weighted Average 1) as of Level 3 Cash Instruments

                                    (in millions)                by Valuation Technique               December 2012                                                                                            Discounted cash flows: Loans and securities backed by commercial                      $3,389 real estate                                                                              Ÿ Yield                              4.0% to 43.3% (9.8%)  Ÿ Collateralized by a single commercial real                                             Ÿ Recovery rate 3                    37.0% to 96.2% (81.7%) 

estate property or a portfolio of properties

             Ÿ Duration (years) 4                 0.1 to 7.0 (2.6) Ÿ May include tranches of varying levels of subordination                                                                                                              (13) points to 18 points                                                                                          Ÿ Basis                              (2 points)   Loans and securities backed by residential                     $1,619                    Discounted cash flows: 

real estate

  Ÿ Collateralized by portfolios of                                                        Ÿ Yield                              3.1% to 17.0% (9.7%) 

residential real estate

                                                                                          Ÿ Cumulative loss rate               0.0% to 61.6% (31.6%) Ÿ May include tranches of varying levels of subordination                                                                         Ÿ Duration (years) 4                 1.3 to 5.9 (3.7)   Bank loans and bridge loans                                    $11,235                   Discounted cash flows:                                                                                           Ÿ Yield                              0.3% to 34.5% (8.3%)                                                                                           Ÿ Recovery rate 3                    16.5% to 85.0% (56.0%)                                                                                           Ÿ Duration (years) 4                 0.2 to 4.4 (1.9)   Non-U.S. government and agency obligations                     $4,651                    Discounted cash flows:  Corporate debt securities                                                                Ÿ Yield                              0.6% to 33.7% (8.6%)  State and municipal obligations                                                          Ÿ Recovery rate 3                    0.0% to 70.0% (53.4%)  Other debt obligations                                                                   Ÿ Duration (years) 4                 0.5 to 15.5 (4.0)   Equities and convertible debentures                          $14,855  2                  Comparable multiples: (including private equity investments and investments in real estate entities)                                                     Ÿ Multiples                          0.7x to 21.0x (7.2x)                                                                                           Discounted cash flows:                                                                                           Ÿ Discount rate                      10.0% to 25.0% (14.3%)                                                                                           Ÿ Long-term growth                   0.7% to 25.0% (9.3%)                                                                                          rate/compound annual growth rate                                                                                           Ÿ Capitalization rate                3.9% to 11.4% (7.3%)     

1. Weighted averages are calculated by weighting each input by the relative fair

   value of the respective financial instruments.    

2. The fair value of any one instrument may be determined using multiple

valuation techniques. For example, market comparables and discounted cash

flows may be used together to determine fair value. Therefore, the level 3

balance encompasses both of these techniques.

3. Recovery rate is a measure of expected future cash flows in a default

   scenario, expressed as a percentage of notional or face value of the    instrument, and reflects the benefit of credit enhancement on certain    instruments.    

4. Duration is an estimate of the timing of future cash flows and, in certain

   cases, may incorporate the impact of other unobservable inputs (e.g.,    prepayment speeds).     Increases in yield, discount rate, capitalization rate, duration or cumulative loss rate used in the valuation of the firm's level 3 cash instruments would result in a lower fair value measurement, while increases in recovery rate, basis, multiples, long-term growth rate or compound annual  

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

     132   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair Value of Cash Instruments by Level

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

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

                                                                       Cash

Instrument Assets at Fair Value as of December 2012 in millions

                                                     Level 1                 Level 2          Level 3             Total Commercial paper, certificates of deposit, time deposits and other money market instruments                                       $  2,155                $  3,902           $    -          $  6,057  U.S. government and federal agency obligations                   42,856                  50,385                -            93,241  Non-U.S. government and agency obligations                       46,715                  15,509               26            62,250  Mortgage and other asset-backed loans and securities 1: Loans and securities backed by commercial real estate                                                                -                   6,416            3,389             9,805  Loans and securities backed by residential real estate                                                                -                   6,597            1,619             8,216  Bank loans and bridge loans                                           -                  11,172           11,235            22,407  Corporate debt securities 2                                         111                  18,049            2,821            20,981  State and municipal obligations                                       -                   1,858              619             2,477  Other debt obligations 2                                              -                   1,066            1,185             2,251  Equities and convertible debentures                              72,875                   8,724           14,855  3         96,454  Commodities                                                           -                  11,696                -            11,696 Total                                                          $164,712                $135,374          $35,749          $335,835                                                               Cash

Instrument Liabilities at Fair Value as of December 2012 in millions

                                                     Level 1                 Level 2          Level 3             Total U.S. government and federal agency obligations                 $ 15,475                $    430           $    -          $ 15,905  Non-U.S. government and agency obligations                       31,011                   1,350                -            32,361  Mortgage and other asset-backed loans and securities: Loans and securities backed by residential real estate                                                                -                       4                -                 4  Bank loans and bridge loans                                           -                   1,143              636             1,779  Corporate debt securities                                            28                   5,731                2             5,761  State and municipal obligations                                       -                       1                -                 1  Equities and convertible debentures                              19,416                     986                4            20,406 Total                                                          $ 65,930                $  9,645          $   642          $ 76,217    

1. Includes $489 million and $446 million of collateralized debt obligations

   (CDOs) backed by real estate in level 2 and level 3, respectively.    

2. Includes $284 million and $1.76 billion of CDOs and collateralized loan

obligations (CLOs) backed by corporate obligations in level 2 and level 3,

   respectively.    

3. Includes $12.67 billion of private equity investments, $1.58 billion of

   investments in real estate entities and $600 million of convertible    debentures.         Goldman Sachs 2012 Form 10-K   133  

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Notes to Consolidated Financial Statements

                                                                    Cash 

Instrument Assets at Fair Value as of December 2011 in millions

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

Instrument Liabilities at Fair Value as of December 2011 in millions

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

1. Includes $213 million and $595 million of CDOs backed by real estate in

   level 2 and level 3, respectively.    

2. Includes $403 million and $1.19 billion of CDOs and CLOs backed by corporate

   obligations in level 2 and level 3, respectively.    

3. Includes $12.07 billion of private equity investments, $1.10 billion of

   investments in real estate entities and $497 million of convertible    debentures.    

4. Includes $27 million of CDOs and CLOs backed by corporate obligations in

level 3.

Transfers Between Levels of the Fair Value Hierarchy

  Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the year ended December 2012, transfers into level 2 from level 1 of cash instruments were $1.85 billion, including transfers of non-U.S. government obligations of $1.05 billion, reflecting the level of market activity in these instruments, and transfers of equity  

securities of $806 million, primarily reflecting the impact of transfer restrictions. Transfers into level 1 from level 2 of cash instruments were $302 million, including transfers of non-U.S. government obligations of $180 million, reflecting the level of market activity in these instruments, and transfers of equity securities of $102 million, where the firm was able to obtain quoted prices for certain actively traded instruments.

     134   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Level 3 Rollforward

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

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

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

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

         Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2012                                                                                  Net unrealized                                                                                  gains/(losses)                                                                      Net            relating to                                                  Balance,       realized            instruments                                                             Transfers       Transfers          Balance,                                                 beginning         gains/          still held at                                                                  into          out of            end of in millions                                       of year       (losses)               year-end         Purchases  1        Sales        Settlements          level 3         level 3              year 

Non-U.S. government and agency obligations $ 148$ 2

              $  (52 )         $    16         $   (40 )          $   (45 )  

$ 1 $ (4 ) $ 26

  Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate                                         3,346            238                    232             1,613            (910 )           (1,389 )            337             (78 )           3,389  Loans and securities backed by residential real estate                                         1,709            146                    276               703            (844 )             (380 )             65             (56 )           1,619  Bank loans and bridge loans                        11,285            592                    322             4,595          (2,794 )           (2,738 )  

1,178 (1,205 ) 11,235

  Corporate debt securities                           2,480            331                    266             1,143            (961 )             (438 )            197            (197 )           2,821  State and municipal obligations                       599             26                      2                96             (90 )              (22 )              8               -               619  Other debt obligations                              1,451             64                    (25 )             759            (355 )             (125 )             39            (623 ) 2         1,185  Equities and convertible debentures                13,667            292                    992             3,071            (702 )           (1,278 )            965          (2,152 )          14,855 Total                                             $34,685$1,691  3              $2,013  3        $11,996         $(6,696 )          $(6,415 )         $2,790         $(4,315 )         $35,749                                                                                   Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2012                                                                                  Net unrealized                                                                                  (gains)/losses                                                                      Net            relating to                                                  Balance,       realized            instruments                                                             Transfers       Transfers          Balance,                                                 beginning       (gains)/          still held at                                                                  into          out of            end of in millions                                       of year         losses               year-end         Purchases  1        Sales        Settlements          level 3         level 3              year Total                                             $   905         $  (19 )               $  (54 )         $  (530 )        $  366$   45$   63         $  (134 )         $   642

1. Includes both originations and secondary market purchases.

2. Primarily reflects transfers related to the firm's reinsurance business of

level 3 other debt obligations within cash instruments at fair value to

level 3 "Other assets," within other financial assets at fair value, as this

business was classified as held for sale as of December 2012. See Note 8 for

   further information.    

3. The aggregate amounts include approximately $617 million, $2.13 billion and

$962 million reported in "Market making," "Other principal transactions" and

   "Interest income," respectively.     The net unrealized gain on level 3 cash instruments of $2.07 billion (reflecting $2.01 billion on cash instrument assets and $54 million on cash instrument liabilities) for the year ended December 2012 primarily consisted of gains on private equity investments, mortgage and other asset-backed loans and securities, bank loans and bridge loans, and corporate debt securities. Unrealized gains during the year ended December 2012 primarily reflected the impact of an increase in global equity prices and tighter credit spreads.  

Transfers into level 3 during the year ended December 2012 primarily reflected transfers from level 2 of certain bank loans and bridge loans, and private equity investments,

principally due to a lack of market transactions in these instruments.

  Transfers out of level 3 during the year ended December 2012 primarily reflected transfers to level 2 of certain private equity investments and bank loans and bridge loans. Transfers of private equity investments to level 2 were principally due to improved transparency of market prices as a result of market transactions in these instruments. Transfers of bank loans and bridge loans to level 2 were principally due to market transactions in these instruments and unobservable inputs no longer being significant to the valuation of certain loans.          Goldman Sachs 2012 Form 10-K   135  

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Notes to Consolidated Financial Statements

Level 3 Cash Instrument Assets at Fair Value for the Year Ended December 2011

                                                                                          Net unrealized                                                                                           gains/(losses)                                                                    Net                                                                                              relating to                                                              transfers                                                       Balance,       Net realized            instruments                                                              in and/or        Balance,                                                      beginning             gains/          still held at                                                               (out) of          end of in millions                                            of year           (losses)               year-end          Purchases  1        Sales        Settlements          level 3            year Non-U.S. government obligations                         $    -             $   25                  $ (63 )          $    27         $  (123 )          

$ (8 ) $ 290$ 148

  Mortgage and other asset-backed loans and securities: Loans and securities backed by commercial real estate                                   3,976                222                     80              1,099          (1,124 )             (831 )            (76 )         3,346  Loans and securities backed by residential real estate                                  2,501                253                    (81 )              768            (702 )             (456 )           (574 )         1,709  Bank loans and bridge loans                              9,905                540                   (216 )            6,725          (2,329 )           

(1,554 ) (1,786 ) 11,285

  Corporate debt securities                                2,737                391                   (132 )            1,319          (1,137 )             (697 )             (1 )         2,480  State and municipal obligations                            754                 12                     (1 )              448            (591 )              (13 )            (10 )           599  Other debt obligations                                   1,274                124                    (17 )              560            (388 )             (212 )            110           1,451  Equities and convertible debentures                     11,060                240                    338              2,731          (1,196 )             (855 )          1,349          13,667 Total                                                  $32,207             $1,807  2               $ (92 ) 2        $13,677         $(7,590 )          $(4,626 )         $ (698 )       $34,685                                                                                  Level 3 Cash Instrument Liabilities at Fair Value for the Year Ended December 2011                                                                                           Net unrealized                                                                                           (gains)/losses                                                                    Net                                                                                              relating to                                                              transfers                                                       Balance,       Net realized            instruments                                                              in and/or        Balance,                                                      beginning           (gains)/          still held at                                                               (out) of          end of

in millions                                            of year             losses               year-end          Purchases  1        Sales        Settlements          level 3            year Total                                                  $   446             $  (27 )                $ 218            $  (491 )        $  475             $  272           $   12         $   905    

1. Includes both originations and secondary market purchases.

2. The aggregate amounts include approximately $(202) million, $623 million and

$1.29 billion reported in "Market making," "Other principal transactions" and

   "Interest income," respectively.     The net unrealized loss on level 3 cash instruments of $310 million (reflecting losses of $92 million on cash instrument assets and $218 million on cash instrument liabilities) for the year ended December 2011 primarily consisted of losses on bank loans and bridge loans and corporate debt securities, primarily reflecting the impact of unfavorable credit markets and losses on relationship lending. These losses were partially offset by gains in private equity investments, where prices were generally corroborated through market transactions in similar financial instruments during the year.  

Significant transfers in or out of level 3 during the year ended December 2011 included:

Ÿ Bank loans and bridge loans: net transfer out of level 3 of $1.79 billion,

primarily due to transfers to level 2 of certain loans due to improved

transparency of market prices as a result of market transactions in these or

similar loans, partially offset by transfers to level 3 of other loans

primarily due to reduced transparency of market prices as a result of less

    market activity in these loans.   Ÿ   Equities and convertible debentures: net transfer into level 3 of

$1.35 billion, primarily due to transfers to level 3 of certain private equity

investments due to reduced transparency of market prices as a result of less

market activity in these financial instruments, partially offset by transfers

to level 2 of other private equity investments due to improved transparency of

    market prices as a result of market transactions in these     financial instruments.    

Ÿ Loans and securities backed by residential real estate: net transfer out of

level 3 of $574 million, principally due to transfers to level 2 of certain

loans due to improved transparency of market prices used to value these loans,

as well as unobservable inputs no longer being significant to the valuation of

     these loans.       136   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

             Investments in Funds That Calculate Net Asset Value Per Share   Cash instruments at fair value include investments in funds that are valued based on the net asset value per share (NAV) of the investment fund. The firm uses NAV as its measure of fair value for fund investments when (i) the fund investment does not have a readily determinable fair value and (ii) the NAV of the investment fund is calculated in a manner consistent with the measurement principles of investment company accounting, including measurement of the underlying investments at fair value.  The firm's investments in funds that calculate NAV primarily consist of investments in firm-sponsored funds where the firm co-invests with third-party investors. The private equity, credit and real estate funds are primarily closed-end funds in which the firm's investments are not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated and it is estimated that substantially all of the underlying assets of  existing funds will be liquidated over the next seven years. The firm continues to manage its existing funds taking into account the transition periods under the Volcker Rule of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), although the rules have not yet been finalized.  The firm's investments in hedge funds are generally redeemable on a quarterly basis with 91 days' notice, subject to a maximum redemption level of 25% of the firm's initial investments at any quarter-end. The firm currently plans to comply with the Volcker Rule by redeeming certain of its interests in hedge funds. The firm redeemed approximately $1.06 billion of these interests in hedge funds during the year ended December 2012.  

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

                                                   As of December 2012                         As of December 2011                                      Fair Value of            Unfunded           Fair Value of            Unfunded in millions                            Investments         Commitments             Investments         Commitments Private equity funds 1                     $ 7,680              $2,778                 $ 8,074              $3,514  Credit funds 2                               3,927               2,843                   3,596               3,568  Hedge funds 3                                2,167                   -                   3,165                   -  Real estate funds 4                          2,006                 870                   1,531               1,613 Total                                      $15,780              $6,491                 $16,366              $8,695    

1. These funds primarily invest in a broad range of industries worldwide in a

variety of situations, including leveraged buyouts, recapitalizations and

   growth investments.    

2. These funds generally invest in loans and other fixed income instruments and

are focused on providing private high-yield capital for mid- to large-sized

leveraged and management buyout transactions, recapitalizations, financings,

   refinancings, acquisitions and restructurings for private equity firms,    private family companies and corporate issuers.    

3. These funds are primarily multi-disciplinary hedge funds that employ a

fundamental bottom-up investment approach across various asset classes and

strategies including long/short equity, credit, convertibles, risk arbitrage,

   special situations and capital structure arbitrage.    

4. These funds invest globally, primarily in real estate companies, loan

   portfolios, debt recapitalizations and direct property.         Goldman Sachs 2012 Form 10-K   137  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7. Derivatives and Hedging Activities

Note 7.

Derivatives and Hedging Activities

Derivative Activities

  Derivatives are instruments that derive their value from underlying asset prices, indices, reference rates and other inputs, or a combination of these factors. Derivatives may be privately negotiated contracts, which are usually referred to as over-the-counter (OTC) derivatives, or they may be listed and traded on an exchange (exchange-traded).  Market-Making. As a market maker, the firm enters into derivative transactions to provide liquidity and to facilitate the transfer and hedging of risk. In this capacity, the firm typically acts as principal and is consequently required to commit capital to provide execution. As a market maker, it is essential to maintain an inventory of financial instruments sufficient to meet expected client and market demands.  Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from market-making and investing and lending activities in derivative and cash instruments. The firm's holdings and exposures are hedged, in many cases, on either a portfolio or risk-specific basis, as opposed to an instrument-by-instrument basis. The offsetting impact of this economic hedging is reflected in the same business segment as the related revenues. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage foreign currency exposure on the net investment in certain non-U.S. operations and to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and deposits.  

The firm enters into various types of derivatives, including:

Ÿ Futures and Forwards. Contracts that commit counterparties to purchase or sell

    financial instruments, commodities or currencies in the future.    

Ÿ Swaps. Contracts that require counterparties to exchange cash flows such as

currency or interest payment streams. The amounts exchanged are based on the

specific terms of the contract with reference to specified rates, financial

    instruments, commodities, currencies or indices.    

Ÿ Options. Contracts in which the option purchaser has the right, but not the

    obligation, to purchase from or sell to the option writer financial     instruments, commodities or currencies within a defined time period for a     specified price.   Derivatives are accounted for at fair value, net of cash collateral received or posted under credit support agreements. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement. Derivative assets and liabilities are included in "Financial instruments owned, at fair value" and "Financial instruments sold, but not yet purchased, at fair value," respectively.  

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

     138   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

    The table below presents the fair value of derivatives on a net-by-counterparty basis.                                  As of December 2012                     As of December 2011                         Derivative         Derivative           Derivative         Derivative    in millions              Assets        Liabilities               Assets        Liabilities    Exchange-traded        $  3,772            $ 2,937              $ 5,880            $ 3,172     Over-the-counter         67,404             47,490               74,148             55,281    Total                   $71,176            $50,427              $80,028            $58,453     The table below presents the fair value and the notional amount of derivative contracts by major product type on a gross basis. Gross fair values in the table below exclude the effects of both netting of receivable balances with payable balances under enforceable netting agreements, and netting of cash collateral received or posted under credit support  

agreements, and therefore are not representative of the firm's exposure. Notional amounts, which represent the sum of gross long and short derivative contracts, provide an indication of the volume of the firm's derivative activity; however, they do not represent anticipated losses.

                                                               As of December 2012                                        As of December 2011                                            Derivative         Derivative           Notional           Derivative         Derivative           Notional in millions                                    Assets        Liabilities             Amount               Assets        Liabilities             Amount Derivatives not accounted for as hedges Interest rates                              $ 584,584          $ 545,605        $34,891,763            $ 624,189          $ 582,608        $38,111,097  Credit                                         85,816             74,927          3,615,757              150,816            130,659          4,032,330  Currencies                                     72,128             60,808          3,833,114               88,654             71,736          3,919,525  Commodities                                    23,320             24,350            774,115               35,966             38,050            799,925  Equities                                       49,483             43,681          1,202,181               64,135             51,928          1,433,087 Subtotal                                      815,331            749,371         44,316,930              963,760            874,981         48,295,964 Derivatives accounted for as hedges Interest rates                                 23,772                 66            128,302               21,981                 13            109,860  Currencies                                         21                 86              8,452                  124                 21              8,307 Subtotal                                       23,793                152            136,754               22,105                 34            118,167 Gross fair value/notional amount of derivatives                                 $ 839,124          $ 749,523        $44,453,684            $ 985,865          $ 875,015        $48,414,131  Counterparty netting  1                      (668,460 )         (668,460 )                              (787,733 )         (787,733 )  Cash collateral netting 2                     (99,488 )          (30,636 )                              (118,104 )          (28,829 ) Fair value included in financial instruments owned                           $  71,176                                                  $  80,028 Fair value included in financial instruments sold, but not yet purchased                                          $  50,427                                                  $  58,453    

1. Represents the netting of receivable balances with payable balances for the

   same counterparty under enforceable netting agreements.    

2. Represents the netting of cash collateral received and posted on a

   counterparty basis under credit support agreements.         Goldman Sachs 2012 Form 10-K   139  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Valuation Techniques for Derivatives

  The firm's level 2 and level 3 derivatives are valued using derivative pricing models (e.g., models that incorporate option pricing methodologies, Monte Carlo simulations and discounted cash flows). Price transparency of derivatives can generally be characterized by product type.  Interest Rate. In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate) are more complex, but the prices and other inputs are generally observable.  Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to have less price transparency than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.  Currency. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the price transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.  Commodity. Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.  Equity. Price transparency for equity derivatives varies by market and underlier. Options on indices and the common stock of corporates included in major equity indices exhibit the most price transparency. Equity derivatives generally have observable market prices, except for contracts with long tenors or reference prices that differ significantly from current market prices. More complex equity derivatives, such as those sensitive to the correlation between two or more individual stocks, generally have less price transparency.  

Liquidity is essential to observability of all product types. If transaction volumes decline, previously transparent prices and other inputs may become unobservable. Conversely, even highly structured products may at times have trading volumes large enough to provide observability of prices and other inputs. See Note 5 for an overview of the firm's fair value measurement policies.

Level 1 Derivatives

Level 1 derivatives include short-term contracts for future delivery of securities when the underlying security is a level 1 instrument, and exchange-traded derivatives if they are actively traded and are valued at their quoted market price.

  Level 2 Derivatives  Level 2 derivatives include OTC derivatives for which all significant valuation inputs are corroborated by market evidence and exchange-traded derivatives that are not actively traded and/or that are valued using models that calibrate to market-clearing levels of OTC derivatives.  The selection of a particular model to value a derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. For derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.      140   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

    Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. Inputs to the valuations of level 2 derivatives can be verified to market transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.  

Level 3 Derivatives

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

   Ÿ   For the majority of the firm's interest rate and currency derivatives     classified within level 3, significant unobservable inputs include

correlations of certain currencies and interest rates (e.g., the correlation

    between Euro inflation and Euro interest rates) and specific interest     rate volatilities.    

Ÿ For level 3 credit derivatives, significant level 3 inputs include illiquid

credit spreads, which are unique to specific reference obligations and

reference entities, recovery rates and certain correlations required to value

    credit and mortgage derivatives (e.g., the likelihood of default of the     underlying reference obligation relative to one another).    

Ÿ For level 3 equity derivatives, significant level 3 inputs generally include

equity volatility inputs for options that are very long-dated and/or have

strike prices that differ significantly from current market prices. In

addition, the valuation of certain structured trades requires the use of

level 3 inputs for the correlation of the price performance of two or more

individual stocks or the correlation of the price performance for a basket of

    stocks to another asset class such as commodities.     Ÿ   For level 3 commodity derivatives, significant level 3 inputs include

volatilities for options with strike prices that differ significantly from

current market prices and prices or spreads for certain products for which the

product quality or physical location of the commodity is not aligned with

benchmark indices.

   Subsequent to the initial valuation of a level 3 derivative, the firm updates the level 1 and level 2 inputs to reflect observable market changes and any resulting gains and losses are recorded in level 3. Level 3 inputs are changed when corroborated by evidence such as similar market transactions, third-party pricing services and/or broker or dealer quotations or other empirical market data. In circumstances where the firm cannot verify the model value by reference to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See below for further information about unobservable inputs used in the valuation of level 3 derivatives.  

Valuation Adjustments

  Valuation adjustments are integral to determining the fair value of derivatives and are used to adjust the mid-market valuations, produced by derivative pricing models, to the appropriate exit price valuation. These adjustments incorporate bid/offer spreads, the cost of liquidity, credit valuation adjustments (CVA) and funding valuation adjustments, which account for the credit and funding risk inherent in derivative portfolios. Market-based inputs are generally used when calibrating valuation adjustments to market-clearing levels.  

In addition, for derivatives that include significant unobservable inputs, the firm makes model or exit price adjustments to account for the valuation uncertainty present in the transaction.

         Goldman Sachs 2012 Form 10-K   141  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Significant Unobservable Inputs

  The table below presents the ranges of significant unobservable inputs used to value the firm's level 3 derivatives. These ranges represent the significant unobservable inputs that were used in the valuation of each type of derivative. The ranges, averages and medians of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one derivative.  For example, the highest correlation presented in the table for interest rate derivatives is appropriate for valuing a specific interest rate derivative but may not be appropriate for valuing any other interest rate derivative. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm's level 3 derivatives.                                                                                              Range of Significant                                                            Significant

Unobservable Unobservable

                      Net Level 3 Assets/(Liabilities)      Inputs                     Inputs (Average / Level 3 Derivative           as of December 2012           of Derivative Pricing      Median) 1 Product Type                    (in millions)              Models                     as of December 2012  Interest rates                     $(355)                  Correlation  2  

          22% to 97% (67% / 68%)                                                             Volatility                 37 basis points per                                                                                       annum (bpa) to 59 bpa                                                                                       (48 bpa / 47 bpa)   Credit                             $6,228                  Correlation  2             5% to 95% (50% / 50%)                                                             Credit spreads             9 bps to 2,341 bps                                                                                       (225 bps / 140 bps) 3                                                             Recovery rates             15% to 85% (54% / 53%)   Currencies                           $35                   Correlation  2   

65% to 87% (76% / 79%)

    Commodities                        $(304)                  Volatility                 13% to 53% (30% / 29%)                                                             Spread per million                                                            British Thermal units      $(0.61) to $6.07 ($0.02                                                            (MMBTU) of natural gas     / $0.00)                                                             Price per megawatt hour    $17.30 to $57.39                                                            of power                   ($33.17 / $32.80)                                                             Price per barrel of oil    $86.64 to $98.43                                                                                       ($92.76 / $93.62)  Equities                          $(1,248)                 Correlation  2  

          48% to 98% (68% / 67%)                                                             Volatility                 15% to 73% (31% / 30%)      

1. Averages represent the arithmetic average of the inputs and are not weighted

by the relative fair value or notional of the respective financial

instruments. An average greater than the median indicates that the majority of

   inputs are below the average.    

2. The range of unobservable inputs for correlation across derivative product

types (i.e., cross-asset correlation) was (51)% to 66% (Average: 30% / Median:

   35%) as of December 2012.    

3. The difference between the average and the median for the credit spreads input

indicates that the majority of the inputs fall in the lower end of the range.

    142   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Range of Significant Unobservable Inputs

The following provides further information about the ranges of unobservable inputs used to value the firm's level 3 derivative instruments.

Ÿ Correlation: Ranges for correlation cover a variety of underliers both within

one market (e.g., equity index and equity single stock names) and across

markets (e.g., correlation of a commodity price and a foreign exchange rate),

as well as across regions. Generally, cross-asset correlation inputs are used

to value more complex instruments and are lower than correlation inputs on

    assets within the same derivative product type.    

Ÿ Volatility: Ranges for volatility cover numerous underliers across a variety

of markets, maturities and strike prices. For example, volatility of equity

    indices is generally lower than volatility of single stocks.    

Ÿ Credit spreads and recovery rates: The ranges for credit spreads and recovery

rates cover a variety of underliers (index and single names), regions,

sectors, maturities and credit qualities (high-yield and

investment-grade). The broad range of this population gives rise to the width

    of the ranges of unobservable inputs.    

Ÿ Commodity prices and spreads: The ranges for commodity prices and spreads

cover variability in products, maturities and locations, as well as peak and

off-peak prices.

Sensitivity of Fair Value Measurement to Changes in Significant Unobservable Inputs

  The following provides a description of the directional sensitivity of the firm's level 3 fair value measurements to changes in significant unobservable inputs, in isolation. Due to the distinctive nature of each of the firm's level 3 derivatives, the interrelationship of inputs is not necessarily uniform within each product type.   

Ÿ Correlation: In general, for contracts where the holder benefits from the

convergence of the underlying asset or index prices (e.g., interest rates,

credit spreads, foreign exchange rates, inflation rates and equity prices), an

    increase in correlation results in a higher fair value measurement.    

Ÿ Volatility: In general, for purchased options an increase in volatility

    results in a higher fair value measurement.    

Ÿ Credit spreads and recovery rates: In general, the fair value of purchased

credit protection increases as credit spreads increase or recovery rates

decrease. Credit spreads and recovery rates are strongly related to

distinctive risk factors of the underlying reference obligations, which

include reference entity-specific factors such as leverage, volatility and

industry, market-based risk factors, such as borrowing costs or liquidity of

    the underlying reference obligation, and macro-economic conditions.    

Ÿ Commodity prices and spreads: In general, for contracts where the holder is

receiving a commodity, an increase in the spread (price difference from a

benchmark index due to differences in quality or delivery location) or price

    results in a higher fair value measurement.           Goldman Sachs 2012 Form 10-K   143  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair Value of Derivatives by Level

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

  enforceable netting agreements, and netting of cash received or posted under credit support agreements both in and across levels of the fair value hierarchy, and therefore are not representative of the firm's exposure.                                                         Derivative Assets at Fair Value as of December 2012                                                                                      Cross-Level in millions                        Level 1           Level 2         Level 3             Netting               Total Interest rates                         $13         $ 608,151         $   192               $   -           $ 608,356  Credit                                   -            74,907          10,909                   -              85,816  Currencies                               -            71,157             992                   -              72,149  Commodities                              -            22,697             623                   -              23,320  Equities                                43            48,698             742                   -              49,483 Gross fair value of derivative assets                                  56           825,610          13,458                   -             839,124  Counterparty netting 1                   -          (662,798 )        (3,538 )            (2,124 ) 3        (668,460 ) Subtotal                               $56         $ 162,812         $ 9,920             $(2,124 )         $ 170,664  Cash collateral netting 2                                                                                    (99,488 ) Fair value included in financial instruments owned                                                                                $  71,176                                                Derivative Liabilities at 

Fair Value as of December 2012

                                                                                     Cross-Level in millions                        Level 1           Level 2         Level 3             Netting               Total Interest rates                         $14         $ 545,110          $  547               $   -           $ 545,671  Credit                                   -            70,246           4,681                   -              74,927  Currencies                               -            59,937             957                   -              60,894  Commodities                              -            23,423             927                   -              24,350  Equities                                50            41,641           1,990                   -              43,681 Gross fair value of derivative liabilities                             64           740,357           9,102                   -             749,523  Counterparty netting 1                   -          (662,798 )        (3,538 )            (2,124 ) 3        (668,460 ) Subtotal                               $64         $  77,559         $ 5,564             $(2,124 )         $  81,063  Cash collateral netting 2                                                                                    (30,636 ) Fair value included in financial instruments sold, but not yet purchased                                                                                      $  50,427    

1. Represents the netting of receivable balances with payable balances for the

   same counterparty under enforceable netting agreements.    

2. Represents the netting of cash collateral received and posted on a

   counterparty basis under credit support agreements.    

3. Represents the netting of receivable balances with payable balances for the

same counterparty across levels of the fair value hierarchy under enforceable

    netting agreements.     144   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Fair Value as of December 2011

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

1. Represents the netting of receivable balances with payable balances for the

   same counterparty under enforceable netting agreements.    

2. Represents the netting of cash collateral received and posted on a

   counterparty basis under credit support agreements.    

3. Represents the netting of receivable balances with payable balances for the

same counterparty across levels of the fair value hierarchy under enforceable

   netting agreements.         Goldman Sachs 2012 Form 10-K   145  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Level 3 Rollforward

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

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

Ÿ A derivative with level 1 and/or level 2 inputs is classified in level 3 in

    its entirety if it has at least one significant level 3 input.    

Ÿ If there is one significant level 3 input, the entire gain or loss from

    adjusting only observable inputs (i.e., level 1 and level 2 inputs) is     classified as level 3.  

Ÿ Gains or losses that have been reported in level 3 resulting from changes in

level 1 or level 2 inputs are frequently offset by gains or losses

attributable to level 1 or level 2 derivatives and/or level 1, level 2 and

level 3 cash instruments. As a result, gains/(losses) included in the level 3

rollforward below do not necessarily represent the overall impact on the

firm's results of operations, liquidity or capital resources.

The tables below present changes in fair value for all derivatives categorized as level 3 as of the end of the year.

         Level 3 Derivative Assets and Liabilities at Fair Value for the Year Ended December 2012                                                                                      Net unrealized                                                       Asset/                         gains/(losses)                                                                                                         Asset/                                                  (liability)             Net            relating to                                                                                                    (liability)                                                     balance,        realized            instruments                                                               Transfers          Transfers            balance,                                                    beginning          gains/          still held at                                                                    into             out of              end of in millions                                          of year        (losses)               year-end             Purchases         Sales        Settlements          level 3            level 3                year Interest rates - net                                  $ (371 )         $ (60 )               $   19$  7       $   (28 )           $   71$   68              $ (61 )            $ (355 )  Credit - net                                           6,300             246                   (701 )                 138          (270 )           (1,597 )          2,503               (391 )             6,228  Currencies - net                                         842             (17 )                 (502 )                  17            (5 )             (144 )             65               (221 )                35  Commodities - net                                       (605 )           (11 )                  228                    63          (410 )              307              (41 ) 3            165  4             (304 )  Equities - net                                          (432 )           (80 )                 (276 )                 123          (724 )              267              (50 ) 3            (76 )            (1,248 ) Total derivatives - net                               $5,734            $

78  1             $(1,232 ) 1, 2           $348       $(1,437 )          $(1,096 )         $2,545              $(584 )            $4,356    

1. The aggregate amounts include approximately $(903) million and $(251) million

reported in "Market making" and "Other principal transactions," respectively.

2. Principally resulted from changes in level 2 inputs.

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

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

     The net unrealized loss on level 3 derivatives of $1.23 billion for the year ended December 2012 was primarily attributable to the impact of tighter credit spreads, changes in foreign exchange rates and increases in global equity prices on certain derivatives, partially offset by the impact of a decline in volatility on certain commodity derivatives.  Transfers into level 3 derivatives during the year ended December 2012 primarily reflected transfers from level 2 of certain credit derivative assets, principally due to unobservable inputs becoming significant to the valuation of these derivatives, and transfers from level 2 of other credit derivative assets, principally due to reduced transparency of correlation inputs used to value these derivatives.  Transfers out of level 3 derivatives during the year ended December 2012 primarily reflected transfers to level 2 of certain credit derivative assets, principally due to unobservable inputs no longer being significant to the valuation of these derivatives, transfers to level 2 of certain currency derivative assets, principally due to unobservable correlation inputs no longer being significant to the valuation of these derivatives, and transfers to level 2 of certain commodity derivative liabilities, principally due to increased transparency of volatility inputs used to value these derivatives.      146   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

                                                                       Level 3 Derivative Assets and Liabilities at Fair Value for the Year Ended December 2011                                                                              Net unrealized                                               Asset/                         gains/(losses)                                                                    Net             Asset/                                          (liability)             Net            relating to                                                              transfers        (liability)                                             balance,        realized            instruments                                                              in and/or           balance,                                            beginning          gains/          still held at                                                               (out) of             end of in millions                                  of year        (losses)               year-end            Purchases         Sales        Settlements          level 3               year Interest rates - net                          $  194           $ (38 )               $ (305 )               $ 23       $   (29 )           $   84            $(300 )           $ (371 )  Credit - net                                   7,040              46                  2,525                  348        (1,310 )           (1,713 )           (636 )            6,300  Currencies - net                               1,098             (26 )                 (351 )                 29           (25 )              (54 )            171                842  Commodities - net                                220             (35 )                  259                  125          (835 )              150             (489 )             (605 )  Equities - net                                  (990 )           184                    151                  382          (683 )              159              365               (432 ) Total derivatives - net                       $7,562            $131  1              $2,279  1, 2           $907       $(2,882 )          $(1,374 )          $(889 )           $5,734    

1. The aggregate amounts include approximately $2.35 billion and $62 million

reported in "Market making" and "Other principal transactions," respectively.

2. Principally resulted from changes in level 2 inputs.

     The net unrealized gain on level 3 derivatives of $2.28 billion for the year ended December 2011 was primarily attributable to the impact of changes in interest rates and exchange rates underlying certain credit derivatives. Unrealized gains on level 3 derivatives were substantially offset by unrealized losses on derivatives classified within level 2 which economically hedge derivatives classified within level 3.  

Significant transfers in or out of level 3 derivatives during the year ended December 2011 included:

Ÿ Credit - net: net transfer out of level 3 of $636 million, primarily

reflecting transfers to level 2 of certain credit derivative assets

principally due to unobservable inputs no longer being significant to the

valuation of these derivatives, and transfers into level 3 of certain credit

derivative liabilities due to reduced transparency of the correlation inputs

used to value these derivatives. The impact of these transfers was partially

offset by transfers into level 3 of certain credit and mortgage derivative

assets, primarily due to reduced transparency of the correlation inputs used

    to value these derivatives.    

Ÿ Commodities - net: net transfer out of level 3 of $489 million, primarily

reflecting transfers to level 2, due to increased transparency of market

prices used to value certain commodity derivative assets as a result of market

activity in similar instruments, and unobservable inputs becoming less

significant to the valuation of other commodity derivative assets. In

addition, certain commodity derivative liabilities were transferred into

level 3 due to reduced transparency of volatility inputs used to value

these derivatives.

Impact of Credit Spreads on Derivatives

On an ongoing basis, the firm realizes gains or losses relating to changes in credit risk through the unwind of derivative contracts and changes in credit mitigants.

  The net gain/(loss), including hedges, attributable to the impact of changes in credit exposure and credit spreads (counterparty and the firm's) on derivatives was $(735) million, $573 million and $68 million for the years ended December 2012, December 2011 and December 2010, respectively.  

Bifurcated Embedded Derivatives

  The table below presents the fair value and the notional amount of derivatives that have been bifurcated from their related borrowings. These derivatives, which are recorded at fair value, primarily consist of interest rate, equity and commodity products and are included in "Unsecured short-term borrowings" and "Unsecured long-term borrowings." See Note 8 for further information.                                                       As of December                  in millions                      2012          2011                  Fair value of assets          $   320        $  422                   Fair value of liabilities         398           304                  Net asset/(liability)         $   (78 )      $  118                  Notional amount               $10,567        $9,530           Goldman Sachs 2012 Form 10-K   147  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

OTC Derivatives

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

  derivatives and generally on remaining contractual maturity for other derivatives.        in millions                                             OTC Derivatives as of December 2012 Assets                                        0 -12           1 - 5         5 Years or Product Type                                 Months           Years            Greater            Total Interest rates                              $10,318         $28,445           $ 80,449         $119,212  Credit                                        2,190          12,244              7,970           22,404  Currencies                                   11,100           8,379             11,044           30,523  Commodities                                   3,840           3,862                304            8,006  Equities                                      3,757           7,730              6,957           18,444  Netting across product types  1              (2,811 )        (5,831 )           (5,082 )        (13,724 ) Subtotal                                    $28,394         $54,829         

$101,642 184,865

  Cross maturity netting 2                                                                        (17,973 )  Cash collateral netting 3                                                                       (99,488 ) Total                                                                                          $ 67,404  Liabilities                                  0 - 12           1 - 5         5 Years or Product Type                                 Months           Years            Greater            Total Interest rates                              $ 6,266         $17,860           $ 32,422         $ 56,548  Credit                                          809           7,537              3,168           11,514  Currencies                                    8,586           4,849              5,782           19,217  Commodities                                   3,970           3,119              2,267            9,356  Equities                                      3,775           5,476              3,937           13,188  Netting across product types  1              (2,811 )        (5,831 )           (5,082 )        (13,724 ) Subtotal                                    $20,595         $33,010           $ 42,494           96,099  Cross maturity netting 2                                                                        (17,973 )  Cash collateral netting 3                                                                       (30,636 ) Total                                                                                          $ 47,490    

1. Represents the netting of receivable balances with payable balances for the

same counterparty across product types within a tenor category under

enforceable netting agreements. Receivable and payable balances with the same

counterparty in the same product type and tenor category are netted within

   such product type and tenor category.    

2. Represents the netting of receivable balances with payable balances for the

   same counterparty across tenor categories under enforceable netting    agreements.    

3. Represents the netting of cash collateral received and posted on a

   counterparty basis under credit support agreements.     148   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

   in millions                                            OTC Derivatives as of December 2011 Assets                                      0 - 12           1 - 5         5 Years or Product Type                                Months           Years            Greater             Total Interest rates                             $10,931         $32,194           $ 82,480         $ 125,605  Credit                                       3,054          15,468             13,687            32,209  Currencies                                  11,253          11,592             16,023            38,868  Commodities                                  5,286           5,931                147            11,364  Equities                                     6,663           7,768              7,468            21,899  Netting across product types  1             (3,071 )        (6,033 )           (6,027 )         (15,131 ) Subtotal                                   $34,116         $66,920           $113,778           214,814  Cross maturity netting 2                                                                        (22,562 )  Cash collateral netting 3                                                                      (118,104 ) Total                                                                                         $  74,148  Liabilities                                 0 - 12           1 - 5         5 Years or Product Type                                Months           Years            Greater             Total Interest rates                             $ 5,787         $18,607            $37,739          $ 62,133  Credit                                       1,200           6,957              3,894            12,051  Currencies                                   9,826           5,514              6,502            21,842  Commodities                                  6,322           5,174              2,727            14,223  Equities                                     3,290           4,018              4,246            11,554  Netting across product types  1             (3,071 )        (6,033 )           (6,027 )         (15,131 ) Subtotal                                   $23,354         $34,237            $49,081           106,672  Cross maturity netting 2                                                                        (22,562 )  Cash collateral netting 3                                                                       (28,829 ) Total                                                                                          $ 55,281    

1. Represents the netting of receivable balances with payable balances for the

same counterparty across product types within a tenor category under

enforceable netting agreements. Receivable and payable balances with the same

counterparty in the same product type and tenor category are netted within

   such product type and tenor category.    

2. Represents the netting of receivable balances with payable balances for the

   same counterparty across tenor categories under enforceable netting    agreements.    

3. Represents the netting of cash collateral received and posted on a

   counterparty basis under credit support agreements.         Goldman Sachs 2012 Form 10-K   149  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Derivatives with Credit-Related Contingent Features

  Certain of the firm's derivatives have been transacted under bilateral agreements with counterparties who may require the firm to post collateral or terminate the transactions based on changes in the firm's credit ratings. The firm assesses the impact of these bilateral agreements by determining the collateral or termination payments that would occur assuming a downgrade by all rating agencies. A downgrade by any one rating agency, depending on the agency's relative ratings of the firm at the time of the downgrade, may have an impact which is comparable to the impact of a downgrade by all rating agencies. The table below presents the aggregate fair value of net derivative liabilities under such agreements (excluding application of collateral posted to reduce these liabilities), the related aggregate fair value of the assets posted as collateral, and the additional collateral or termination payments that could have been called at the reporting date by counterparties in the event of a one-notch and two-notch downgrade in the firm's credit ratings.                                                                            As of December in millions                                                           2012           2011 Net derivative liabilities under bilateral agreements              $27,885        $35,066  Collateral posted                                                   24,296         29,002 

Additional collateral or termination payments for a one-notch downgrade

                                                            1,534  

1,303

  Additional collateral or termination payments for a two-notch downgrade                                                            2,500          2,183   Credit Derivatives  The firm enters into a broad array of credit derivatives in locations around the world to facilitate client transactions and to manage the credit risk associated with market-making and investing and lending activities. Credit derivatives are actively managed based on the firm's net risk position.  

Credit derivatives are individually negotiated contracts and can have various settlement and payment conventions. Credit events include failure to pay, bankruptcy, acceleration of indebtedness, restructuring, repudiation and dissolution of the reference 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 the issuer (reference entity) of the reference obligations suffers a credit event. The buyer of protection pays an initial or periodic premium to the seller and receives  protection for the period of the contract. If there is no credit event, as defined in the contract, the seller of protection makes no payments to the buyer of protection. However, if a credit event occurs, the seller of protection is required to make a payment to the buyer of protection, which is calculated in accordance with the terms of the contract.  Credit Indices, Baskets and Tranches. Credit derivatives may reference a basket of single-name credit default swaps or a broad-based index. If a credit event occurs in one of the underlying reference obligations, the protection seller pays the protection buyer. The payment is typically a pro-rata portion of the transaction's total notional amount based on the underlying defaulted reference obligation. In certain transactions, the credit risk of a basket or index is separated into various portions (tranches), each having different levels of subordination. The most junior tranches cover initial defaults and once losses exceed the notional amount of these junior tranches, any excess loss 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, but does not assume the obligation, 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.  The firm economically hedges its exposure to written credit derivatives primarily by entering into offsetting purchased credit derivatives with identical underlyings. Substantially all of the firm's purchased credit derivative transactions are with financial institutions and are subject to stringent collateral thresholds. 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.      150   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    As of December 2012, written and purchased credit derivatives had total gross notional amounts of $1.76 trillion and $1.86 trillion, respectively, for total net notional purchased protection of $98.33 billion. As of December 2011, written and purchased credit derivatives had total gross notional amounts of $1.96 trillion and $2.08 trillion, respectively, for total net notional purchased protection of $116.93 billion.  

The table below presents certain information about credit derivatives. In the table below:

Ÿ fair values exclude the effects of both netting of receivable balances with

payable balances under enforceable netting agreements, and netting of cash

received or posted under credit support agreements, and therefore are not

representative of the firm's credit exposure;

Ÿ tenor is based on expected duration for mortgage-related credit derivatives

    and on remaining contractual maturity for other credit derivatives; and    

Ÿ the credit spread on the underlying, together with the tenor of the contract,

are indicators of payment/performance risk. The firm is less likely to pay or

     otherwise be required to perform where the credit spread and the tenor are     lower.                                                                                                                              Maximum Payout/Notional                                                           Maximum Payout/Notional Amount                               Amount of Purchased                                 Fair Value of                                                       of Written Credit Derivatives by Tenor                           Credit Derivatives                           Written Credit Derivatives                                                                                                                    Offsetting               Other                                                                                5 Years                              Purchased           Purchased                                                   Net                                                 0 - 12            1 - 5             or                                 Credit              Credit                                                Asset/ $ in millions                                   Months            Years        Greater            Total           Derivatives  1      Derivatives  2            Asset       Liability       (Liability) As of December 2012 Credit spread on underlying (basis points) 0 - 250                                       $360,289       $  989,941       $103,481       $1,453,711            $1,343,561            $201,459             $28,817        $  8,249          $ 20,568  251 - 500                                       13,876          126,659         35,086          175,621               157,371              19,063               4,284           7,848            (3,564 )  501 - 1,000                                      9,209           52,012          5,619           66,840                60,456               8,799                 769           4,499            (3,730 )  Greater than 1,000                              11,453           49,721          3,622           64,796                57,774              10,812                 568          21,970           (21,402 ) Total                                         $394,827$1,218,333$147,808$1,760,968$1,619,162$240,133$34,438$ 42,566          $ (8,128 )  As of December 2011 Credit spread on underlying (basis points) 0 - 250                                       $282,851       $  794,193       $141,688       $1,218,732            $1,122,296            $180,316             $17,572        $ 16,907           $   665  251 - 500                                       42,682          269,687         69,864          382,233               345,942              47,739               4,517          20,810           (16,293 )  501 - 1,000                                     29,377          140,389         21,819          191,585               181,003              23,176                 138          15,398           (15,260 )  Greater than 1,000                              30,244          114,103         22,995          167,342               147,614              28,734                 512          57,201           (56,689 ) Total                                         $385,154       $1,318,372    

  $256,366       $1,959,892            $1,796,855            $279,965             $22,739        $110,316          $(87,577 )    

1. Offsetting purchased credit derivatives represent the notional amount of

purchased credit derivatives to the extent they economically hedge written

   credit derivatives with identical underlyings.    

2. This purchased protection represents the notional amount of purchased credit

derivatives in excess of the notional amount included in "Offsetting Purchased

    Credit Derivatives."   Hedge Accounting  The firm applies hedge accounting for (i) certain interest rate swaps used to manage the interest rate exposure of certain fixed-rate unsecured long-term and short-term borrowings and certain fixed-rate certificates of deposit and (ii) certain foreign currency forward contracts and foreign currency-denominated debt used to manage foreign currency exposures on the firm's net investment in certain non-U.S. operations.  To qualify for hedge accounting, the derivative hedge must be highly effective at reducing the risk from the exposure being hedged. Additionally, the firm must formally document the hedging relationship at inception and test the hedging relationship at least on a quarterly basis to ensure the derivative hedge continues to be highly effective over the life of the hedging relationship.          Goldman Sachs 2012 Form 10-K   151  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Interest Rate Hedges

The firm designates certain interest rate swaps as fair value hedges. These interest rate swaps hedge changes in fair value attributable to the relevant benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR)), effectively converting a substantial portion of fixed-rate obligations into floating-rate obligations.

  The firm applies a statistical method that utilizes regression analysis when assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk). 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%.  For qualifying fair value hedges, gains or losses on derivatives are included in "Interest expense." 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." When a derivative is no longer designated as a hedge, any remaining difference between the carrying value and par value of the hedged item is amortized to interest expense over the remaining life of the hedged item using the effective interest method. See Note 23 for further information about interest income and interest expense.  

The table below presents the gains/(losses) from interest rate derivatives accounted for as hedges, the related hedged borrowings and bank deposits, and the hedge ineffectiveness on these derivatives.

                                                           Year Ended December       in millions                                2012           2011           2010       Interest rate hedges                    $(2,383 )      $ 4,679        $ 1,617 

Hedged borrowings and bank deposits 665 (6,300 )

 (3,447 )        Hedge ineffectiveness 1                  (1,718 )       (1,621 )       (1,836 )    

1. Primarily consisted of amortization of prepaid credit spreads resulting from

the passage of time.

The gain/(loss) excluded from the assessment of hedge effectiveness was not material for the years ended December 2012, December 2011 and December 2010.

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 (i.e., 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 the hedging instruments, to the extent effective, are included in "Currency translation adjustment, net of tax" within the consolidated statements of comprehensive income.

The table below presents the gains/(losses) from net investment hedging.

                                                       Year Ended December             in millions                       2012         2011         2010             Currency hedges                  $(233 )      $ 160        $(261 )              Foreign currency-denominated             debt hedges                        347         (147 )       (498 )   The gain/(loss) related to ineffectiveness was not material for the years ended December 2012, December 2011 and December 2010. The loss reclassified to earnings from accumulated other comprehensive income was not material for the years ended December 2012 and December 2010, and was $186 million for the year ended December 2011.  As of December 2012 and December 2011, the firm had designated $2.77 billion and $3.11 billion, respectively, of foreign currency-denominated debt, included in "Unsecured long-term borrowings" and "Unsecured short-term borrowings," as hedges of net investments in non-U.S. subsidiaries.      152   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

      Note 8. Fair Value Option  Note 8.  Fair Value Option            Other Financial Assets and Financial Liabilities at Fair Value   In addition to all cash and derivative instruments included in "Financial instruments owned, at fair value" and "Financial instruments sold, but not yet purchased, at fair value," the firm has elected to account for certain of its other financial assets and financial liabilities at fair value under the fair value option.  

The primary reasons for electing the fair value option are to:

Ÿ reflect economic events in earnings on a timely basis;

Ÿ mitigate volatility in earnings from using different measurement attributes

(e.g., transfers of financial instruments owned accounted for as financings

are recorded at fair value whereas the related secured financing would be

recorded on an accrual basis absent electing the fair value option); and

Ÿ address simplification and cost-benefit considerations (e.g., accounting for

hybrid financial instruments at fair value in their entirety versus

bifurcation of embedded derivatives and hedge accounting for debt hosts).

   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 hedges. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under the fair value option.  

Other financial assets and financial liabilities accounted for at fair value under the fair value option include:

   Ÿ   repurchase agreements and substantially all resale agreements;    

Ÿ securities borrowed and loaned within Fixed Income, Currency and Commodities

    Client Execution;    

Ÿ substantially all other secured financings, including transfers of assets

accounted for as financings rather than sales and certain other nonrecourse

    financings;    

Ÿ certain unsecured short-term borrowings, consisting of all promissory notes

    and commercial paper and certain hybrid financial instruments;   Ÿ   certain unsecured long-term borrowings, including prepaid commodity     transactions and certain hybrid financial instruments;    

Ÿ certain receivables from customers and counterparties, including certain

margin loans and transfers of assets accounted for as secured loans rather

    than purchases;    

Ÿ certain insurance and reinsurance contract assets and liabilities and certain

    guarantees;     Ÿ   certain subordinated liabilities issued by consolidated VIEs; and    

Ÿ certain time deposits issued by the firm's bank subsidiaries (deposits with no

stated maturity are not eligible for a fair value option election), including

structured certificates of deposit, which are hybrid financial instruments.

   These 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 as level 2 because the inputs are observable. Valuation adjustments may be made for liquidity and for counterparty and the firm's credit quality.  See below for information about the significant inputs used to value other financial assets and financial liabilities at fair value, including the ranges of significant unobservable inputs used to value the level 3 instruments within these categories. These ranges represent the significant unobservable inputs that were used in the valuation of each type of other financial assets and financial liabilities at fair value. The ranges and weighted averages of these inputs are not representative of the appropriate inputs to use when calculating the fair value of any one instrument. For example, the highest yield presented below for resale and repurchase agreements is appropriate for valuing a specific agreement in that category but may not be appropriate for valuing any other agreements in that category. Accordingly, the range of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the firm's level 3 other financial assets and financial liabilities.          Goldman Sachs 2012 Form 10-K   153  

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Notes to Consolidated Financial Statements

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 are collateral funding spreads, the amount and timing of expected future cash flows and interest rates. The ranges of significant unobservable inputs used to value level 3 resale and repurchase agreements as of December 2012 are as follows:

   Ÿ   Yield: 1.7% to 5.4% (weighted average: 1.9%)     Ÿ   Duration: 0.4 to 4.5 years (weighted average: 4.1 years)   Generally, increases in yield or duration, in isolation, would result in a lower fair value measurement. Due to the distinctive nature of each of the firm's level 3 resale and repurchase agreements, the interrelationship of inputs is not necessarily uniform across such agreements.  

See Note 9 for further information about collateralized agreements.

  Other Secured Financings. The significant inputs to the valuation of other secured financings at fair value are the amount and timing of expected future cash flows, interest rates, collateral funding spreads, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market prices, market yields and recovery assumptions) and the frequency of additional collateral calls. The ranges of significant unobservable inputs used to value level 3 other secured financings as of December 2012 are as follows:    Ÿ   Yield: 0.3% to 20.0% (weighted average: 4.2%)     Ÿ   Duration: 0.3 to 10.8 years (weighted average: 2.4 years)  

Generally, increases in yield or duration, in isolation, would result in a lower fair value measurement. Due to the distinctive nature of each of the firm's level 3 other secured financings, the interrelationship of inputs is not necessarily uniform across such financings.

See Note 9 for further information about collateralized financings.

  Unsecured Short-term and Long-term Borrowings. The significant inputs to the valuation of unsecured short-term and long-term borrowings at fair value 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 commodity transactions. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm's other derivative instruments. See Note 7 for further information about derivatives. See Notes 15 and 16 for further information about unsecured short-term and long-term borrowings, respectively.  

Certain of the firm's unsecured short-term and long-term instruments are included in level 3, substantially all of which are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these borrowings, these inputs are incorporated in the firm's derivative disclosures related to unobservable inputs in Note 7.

  Insurance and Reinsurance Contracts. Insurance and reinsurance contracts at fair value are primarily included in "Receivables from customers and counterparties" and "Other liabilities and accrued expenses." In addition, assets related to the firm's reinsurance business that were classified as held for sale as of December 2012 are included in "Other assets." The insurance and reinsurance contracts for which the firm has elected the fair value option are contracts that can be settled only in cash and that qualify for the fair value option because they are recognized financial instruments. 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 inputs are interest rates, inflation rates, volatilities, funding spreads, yield and duration, which incorporates policy lapse and projected mortality assumptions. When unobservable inputs to a valuation model are significant to the fair value measurement of an instrument, the instrument is classified in level 3. The range of significant unobservable inputs used to value level 3 insurance and reinsurance contracts as of December 2012 is as follows:    Ÿ   Funding spreads: 64 bps to 105 bps (weighted average: 85 bps)     Ÿ   Yield: 4.4% to 15.1% (weighted average: 6.2%)     Ÿ   Duration: 5.3 to 8.8 years (weighted average: 7.6 years)  

Generally, increases in funding spreads, yield or duration, in isolation, would result in a lower fair value measurement.

     154   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    Receivables from Customers and Counterparties. Receivables from customers and counterparties at fair value, excluding insurance and reinsurance contracts, are primarily comprised of transfers of assets accounted for as secured loans rather than purchases. The significant inputs to the valuation of such receivables are commodity prices, interest rates, the amount and timing of expected future cash flows and funding spreads. The range of significant unobservable inputs used to value level 3 receivables from customers and counterparties as of December 2012 is as follows:    Ÿ   Funding spreads: 57 bps to 145 bps (weighted average: 105 bps)  

Generally, an increase in funding spreads would result in a lower fair value measurement.

  Receivables from customers and counterparties not accounted for at fair value are accounted for at amortized cost net of estimated uncollectible amounts, which generally approximates fair value. Such receivables are primarily comprised of customer margin loans and collateral posted in connection with certain derivative transactions. While these items are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these items been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2012. Receivables from customers and counterparties not accounted for at fair value also includes loans held for investment, which are primarily comprised of collateralized loans to private wealth management clients and corporate loans. As of December 2012 and December 2011, the carrying value of such loans was $6.50 billion and $3.76 billion, respectively, which generally approximated fair value. As of December 2012, had these loans been carried at fair value and included in the fair value hierarchy, $2.41 billion and $4.06 billion would have been classified in level 2 and level 3, respectively.  Deposits. The significant inputs to the valuation of time deposits are interest rates and the amount and timing of future cash flows. The inputs used to value the embedded derivative component of hybrid financial instruments are consistent with the inputs used to value the firm's other derivative instruments. See Note 7 for further information about derivatives. See Note 14 for further information about deposits.  

The firm's deposits that are included in level 3 are hybrid financial instruments. As the significant unobservable inputs used to value hybrid financial instruments primarily relate to the embedded derivative component of these deposits, these inputs are incorporated in the firm's derivative disclosures related to unobservable inputs in Note 7.

         Goldman Sachs 2012 Form 10-K   155  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair Value of Other Financial Assets and Financial

Liabilities by Level

The tables below present, by level within the fair value hierarchy, other financial assets and financial liabilities

accounted for at fair value primarily under the fair value option.

                                                     Other Financial Assets at Fair Value as of December 2012 in millions                                Level 1                   Level 2           Level 3              Total Securities segregated for regulatory and other purposes 1            $21,549                  $  8,935            $    -           $ 30,484  Securities purchased under agreements to resell                             -                   141,053               278            141,331  Securities borrowed                              -                    38,395                 -             38,395  Receivables from customers and counterparties                                   -                     7,225               641              7,866  Other assets 2                               4,420                     8,499               507  3          13,426 Total                                      $25,969                  $204,107           $ 1,426           $231,502                                             Other Financial Liabilities at Fair Value as of December  2012 in millions                                Level 1                   Level 2           Level 3              Total Deposits                                    $    -                  $  4,741           $   359           $  5,100  Securities sold under agreements to repurchase                                    -                   169,880             1,927            171,807  Securities loaned                                -                     1,558                 -              1,558  Other secured financings                         -                    28,925             1,412             30,337  Unsecured short-term borrowings                  -                    15,011             2,584             17,595  Unsecured long-term borrowings                   -                    10,676             1,917             12,593  Other liabilities and accrued expenses                                         -                       769            11,274  4          12,043 Total                                       $    -                  $231,560           $19,473           $251,033    

1. Includes securities segregated for regulatory and other purposes accounted for

at fair value under the fair value option, which consists of securities

borrowed and resale agreements. The table above includes $21.55 billion of

level 1 securities segregated for regulatory and other purposes accounted for

at fair value under other U.S. GAAP, consisting of U.S. Treasury securities

   and money market instruments.    

2. Consists of assets classified as held for sale related to the firm's

reinsurance business, primarily consisting of securities accounted for as

available-for-sale and insurance separate account assets which are accounted

for at fair value under other U.S. GAAP. Such assets were previously included

in "Financial instruments owned, at fair value" and "Securities segregated for

   regulatory and other purposes," respectively.    

3. Consists of insurance contracts and derivatives classified as held for sale.

   See "Insurance and Reinsurance Contracts" above and Note 7 for further    information about valuation techniques and inputs related to insurance    contracts and derivatives, respectively.    

4. Includes $692 million of liabilities classified as held for sale related to

the firm's reinsurance business accounted for at fair value under the fair

    value option.     156   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

                                                       Other Financial Assets at Fair Value as of December 2011 in millions                                     Level 1                   Level 2               Level 3           Total Securities segregated for regulatory and other purposes 1                            $21,263                  $ 20,751                $    -        $ 42,014  Securities purchased under agreements to resell                                  -                   187,232                   557         187,789  Securities borrowed                                   -                    47,621                     -          47,621  Receivables from customers and counterparties                                        -                     8,887                   795           9,682 Total                                           $21,263                  $264,491               $ 1,352        $287,106                                                  Other Financial Liabilities at Fair Value as of December  2011 in millions                                     Level 1                   Level 2               Level 3           Total Deposits                                         $    -                  $  4,513               $    13        $  4,526  Securities sold under agreements to repurchase                                            -                   162,321                 2,181         164,502  Securities loaned                                     -                       107                     -             107  Other secured financings                              -                    28,267                 1,752          30,019  Unsecured short-term borrowings                       -                    14,560                 3,294          17,854  Unsecured long-term borrowings                        -                    14,971                 2,191          17,162  Other liabilities and accrued expenses                                              -                       490                 8,996           9,486 Total                                            $    -                  $225,229               $18,427        $243,656    

1. Includes securities segregated for regulatory and other purposes accounted for

at fair value under the fair value option, which consists of securities

borrowed and resale agreements. The table above includes $21.26 billion of

level 1 and $528 million of level 2 securities segregated for regulatory and

other purposes accounted for at fair value under other U.S. GAAP, principally

consisting of U.S. Treasury securities, money market instruments and insurance

   separate account assets.         Goldman Sachs 2012 Form 10-K   157  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Transfers Between Levels of the Fair Value Hierarchy

  Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. There were no transfers of other financial assets and financial liabilities between level 1 and level 2 during the year ended December 2012. The tables below present information about transfers between level 2 and level 3.  

Level 3 Rollforward

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

  The tables below present changes in fair value for other financial assets and financial liabilities accounted for at fair value categorized as level 3 as of the end of the year. Level 3 other financial assets and liabilities are frequently economically hedged with cash instruments and derivatives. Accordingly, gains or losses that are reported in level 3 can be partially offset by gains or losses attributable to level 1, 2 or 3 cash instruments or derivatives. As a result, gains or losses included in the level 3 rollforward below do not necessarily represent the overall impact on the firm's results of operations, liquidity or capital resources.                                                                                                     Level 3 Other Financial Assets at Fair Value for the Year Ended December 2012                                                                                      Net unrealized                                                                                      gains/(losses)                                                                          Net            relating to                                                      Balance,       realized            instruments                                                                        Transfers       Transfers         Balance,                                                     beginning         gains/          still held at                                                                             into          out of           end of in millions                                           of year       (losses)               year-end         Purchases       Sales       Issuances       Settlements          level 3         level 3             year Securities purchased under agreements to resell       $   557$  7                  $   -            $  116          $-           $   -           $  (402 )           $  -          $    -          $   278  Receivables from customers and counterparties             795              -                     37               199           -               -               (17 )              -            (373 )            641  Other assets                                                -              -                     82                 -           -               -               (23 )            448               -              507 Total                                                 $ 1,352$  7  1              $  119  1         $  315          $-           $   -           $  (442 )           $448         $  (373 )        $ 1,426

1. The aggregate amounts include gains/(losses) of approximately $119 million,

$(3) million and $10 million reported in "Market making," "Other principal

   transactions" and "Interest income," respectively.                                                                                      Level 3 Other Financial Liabilities at Fair Value for the Year Ended December 2012                                                                            Net unrealized                                                                            (gains)/losses                                                                Net            relating to                                            Balance,       realized            instruments                                                                         Transfers       Transfers         Balance,                                           beginning       (gains)/          still held at                                                                              into          out of           end of in millions                                 of year         losses               year-end         Purchases        Sales       Issuances       Settlements          level 3         level 3             year Deposits                                    $    13           $  -                 $    5             $   -           $-          $  326           $    (1 )           $ 16          $    -          $   359  Securities sold under agreements to repurchase, at fair value                     2,181              -                      -                 -            -               -              (254 )              -               -            1,927  Other secured financings                      1,752             12                    (51 )               -            -             854            (1,155 )              -               -            1,412  Unsecured short-term borrowings               3,294            (13 )                  204               (13 )          -             762            (1,206 )            240            (684 )          2,584  Unsecured long-term borrowings                2,191             31                    286                 -            -             329              (344 )            225            (801 )          1,917  Other liabilities and accrued expenses                              8,996             78                    941             1,617            -               -              (360 )              2               -           11,274 Total                                       $18,427           $108  1              $1,385  1         $1,604           $-          $2,271          

$(3,320 )           $483         $(1,485 )        $19,473    

1. The aggregate amounts include losses of approximately $1.37 billion,

$113 million and $15 million reported in "Market making," "Other principal

   transactions" and "Interest expense," respectively.     The net unrealized loss on level 3 other financial liabilities of $1.39 billion for the year ended December 2012 primarily reflected the impact of tighter funding spreads and changes in foreign exchange rates on certain insurance liabilities, and an increase in global equity prices and tighter credit spreads on certain hybrid financial instruments.  Transfers into level 3 of other financial assets during the year ended December 2012 reflected transfers of level 3 assets classified as held for sale related to the firm's reinsurance business, which were previously included in level 3 "Financial instruments owned, at fair value."      158   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    Transfers out of level 3 of other financial assets during the year ended December 2012 reflected transfers to level 2 of certain insurance receivables primarily due to increased transparency of the mortality inputs used to value these receivables.  

Transfers into level 3 of other financial liabilities during the year ended December 2012 primarily reflected transfers from level 2 of certain hybrid financial instruments, principally due to decreased transparency of certain correlation and volatility inputs used to value these instruments.

Transfers out of level 3 of other financial liabilities during the year ended December 2012 primarily reflected transfers to level 2 of certain hybrid financial instruments, principally due to increased transparency of certain correlation and volatility inputs used to value these instruments, and unobservable inputs no longer being significant to the valuation of other instruments.

         Level 3 Other Financial Assets at Fair Value for the Year Ended December 2011                                                                                      Net unrealized                                                                                      gains/(losses)                                                                              Net                                                                          Net            relating to                                                                        transfers                                                      Balance,       realized            instruments                                                                        in and/or       Balance,                                                     beginning         gains/          still held at                                                                         (out) of         end of in millions                                           of year       (losses)               year-end         Purchases       Sales       Issuances       Settlements          level 3           year Securities purchased under agreements to resell       $   100            $ 2                  $   -            $  620          $-           $   -           $  (165 )         $    -        $   557  Receivables from customers and counterparties                                        298              -                     54               468           -               -               (25 )              -            795 Total                                                 $   398            $ 2  1              $   54  1         $1,088          $-           $   -           $  (190 )         $    -        $ 1,352    

1. The aggregate amounts include gains of approximately $54 million and

$2 million reported in "Market making" and "Other principal transactions,"    respectively.                                                                                Level 3 Other Financial Liabilities at Fair Value for the Year Ended December 2011                                                                               Net unrealized                                                                               (gains)/losses                                                                               Net                                                                   Net            relating to                                                                         transfers                                               Balance,       realized            instruments                                                                         in and/or        Balance,                                              beginning       (gains)/          still held at                                                                          (out) of          end of in millions                                    of year         losses               year-end         Purchases        Sales       Issuances       Settlements          level 3            year Deposits                                        $    -             $-                  $   -             $   -           $-          $   13            $    -           $    -         $    13  Securities sold under agreements to repurchase, at fair value                        2,060              -                      -                 -            -             299              (178 )              -           2,181  Other secured financings                         8,349              8                      3                 -            -             483            (4,062 )         (3,029 )         1,752  Unsecured short-term borrowings                  3,476            (15 )                 (340 )              (5 )          -             815            (1,080 )            443           3,294  Unsecured long-term borrowings                   2,104             25                      5                 -            -             441              (193 )           (191 )         2,191  Other liabilities and accrued expenses           2,409              -                  1,095             5,840            -               -              (348 )              -           8,996 Total                                          $18,398            $18  1              $  763  1         $5,835           $-          $2,051           $(5,861 )        $(2,777 )       $18,427    

1. The aggregate amounts include losses of approximately $766 million, $7 million

and $8 million reported in "Market making," "Other principal transactions" and

   "Interest expense," respectively.     The net unrealized loss on other financial assets and liabilities at fair value of $709 million for the year ended December 2011 primarily consisted of losses on other liabilities and accrued expenses, primarily attributable to the impact of a change in interest rates on certain insurance liabilities. These losses were primarily offset by gains on unsecured short-term borrowings, primarily reflecting gains on certain equity-linked notes, principally due to a decline in global equity markets.  

Significant transfers in or out of level 3 during the year ended December 2011 included:

Ÿ Other secured financings: net transfer out of level 3 of $3.03 billion,

principally due to transfers to level 2 of certain borrowings as unobservable

inputs were no longer significant to the valuation of these borrowings as they

    neared maturity.    

Ÿ Unsecured short-term borrowings: net transfer into level 3 of $443 million,

principally due to transfers to level 3 of certain borrowings due to less

    transparency of market prices as a result of less activity in these     financial instruments.           Goldman Sachs 2012 Form 10-K   159  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    Gains and Losses on Financial Assets and Financial Liabilities Accounted for at Fair Value Under the Fair Value Option   The table below presents the gains and losses recognized as a result of the firm electing to apply the fair value option to certain financial assets and financial liabilities. These gains and losses are included in "Market making" and "Other principal transactions." The table below also includes gains and losses on the embedded derivative component of hybrid financial instruments included in unsecured short-term borrowings and unsecured long-term borrowings. These  

gains and losses would have been recognized under other U.S. GAAP even if the firm had not elected to account for the entire hybrid instrument at fair value.

  The amounts in the table exclude contractual interest, which is included in "Interest income" and "Interest expense," for all instruments other than hybrid financial instruments. See Note 23 for further information about interest income and interest expense.                                                               Gains/(Losses) on

Financial Assets and Financial Liabilities

                                                                 at Fair  

Value Under the Fair Value Option

                                                                             Year Ended December in millions                                                    2012                      2011                        2010 Receivables from customers and counterparties 1              $  190                    $   97                     $   (97 )  Other secured financings                                       (190 )                     (63 )                      (227 )  Unsecured short-term borrowings 2                              (973 )                   2,149                      (1,455 )  Unsecured long-term borrowings 3                             (1,523 )                   2,336                      (1,169 )  Other liabilities and accrued expenses 4                     (1,486 )                    (911 )                        50  Other 5                                                         (81 )                      90                         (10 ) Total                                                       $(4,063 )                  $3,698                     $(2,908 )    

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

   certain transfers accounted for as receivables rather than purchases.    

2. Includes gains/(losses) on the embedded derivative component of hybrid

financial instruments of $(814) million, $2.01 billion, and $(1.49) billion as

   of December 2012, December 2011 and December 2010, respectively.    

3. Includes gains/(losses) on the embedded derivative component of hybrid

financial instruments of $(887) million, $1.80 billion and $(1.32) billion as

   of December 2012, December 2011 and December 2010, respectively.    

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

5. Primarily consists of gains/(losses) on resale and repurchase agreements,

   securities borrowed and loaned and deposits.    

Excluding the gains and losses on the instruments accounted for under the fair value option described above, "Market making" and "Other principal transactions"

primarily represent gains and losses on "Financial instruments owned, at fair value" and "Financial instruments sold, but not yet purchased, at fair value."

     160   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Loans and Lending Commitments

  The table below presents the difference between the aggregate fair value and the aggregate contractual principal amount for loans and long-term receivables for which the fair value option was elected.                                                                         As of December in millions                                                        2012           2011 Aggregate contractual principal amount of performing loans and long-term receivables in excess of the related fair value                                              $ 2,742        $ 3,826  Aggregate contractual principal amount of loans on nonaccrual status and/or more than 90 days past due in excess of the related fair value                                        22,610         23,034 Total 1                                                         $25,352        $26,860 Aggregate fair value of loans on nonaccrual status and/or more than 90 days past due                        $ 1,832        $ 3,174    

1. 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 December 2012 and December 2011, the fair value of unfunded lending commitments for which the fair value option was elected was a liability of $1.99 billion and $2.82 billion, respectively, and the related total contractual amount of these lending commitments was $59.29 billion and $66.12 billion, respectively. See Note 18 for further information about lending commitments.

Long-term Debt Instruments

  The aggregate contractual principal amount of long-term other secured financings for which the fair value option was elected exceeded the related fair value by $115 million and $239 million as of December 2012 and December 2011, respectively. The fair value of unsecured long-term borrowings for which the fair value option was elected exceeded the related aggregate contractual principal amount by $379 million as of December 2012, whereas the aggregate contractual principal amount exceeded the related fair value by $693 million as of December 2011. The amounts above include both principal and non-principal-protected long-term borrowings.  

Impact of Credit Spreads on Loans and Lending Commitments

  The estimated net gain/(loss) attributable to changes in instrument-specific credit spreads on loans and lending commitments for which the fair value option was elected was $3.07 billion, $(805) million and $1.85 billion for the years ended December 2012, December 2011 and December 2010, respectively. Changes in the fair value of loans and lending commitments are primarily attributable to changes in instrument-specific credit spreads. Substantially all of the firm's performing loans and lending commitments are floating-rate.  

Impact of Credit Spreads on Borrowings

  The table below presents 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 credit spreads.                                                            Year Ended December            in millions                              2012        2011       2010            Net gains/(losses) including hedges     $(714 )      $596       $198             Net gains/(losses) excluding hedges      (800 )       714        199           Goldman Sachs 2012 Form 10-K   161   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9. Collateralized Agreements and Financings

Note 9.

Collateralized Agreements and Financings

    Collateralized agreements are securities purchased under agreements to resell (resale agreements or reverse repurchase agreements) and securities borrowed. Collateralized financings are securities sold under agreements to repurchase (repurchase agreements), securities loaned and other secured financings. The firm enters into these transactions in order to, among other things, facilitate client activities, invest excess cash, acquire securities to cover short positions and finance certain firm activities.  Collateralized agreements and financings are presented on a net-by-counterparty basis when a legal right of setoff exists. Interest on collateralized agreements and collateralized financings is recognized over the life of the transaction and included in "Interest income" and "Interest expense," respectively. See Note 23 for further information about interest income and interest expense.  

The table below presents the carrying value of resale and repurchase agreements and securities borrowed and loaned transactions.

                                                            As of December           in millions                                   2012           2011           Securities purchased under agreements           to resell 1                               $141,334       $187,789            Securities borrowed 2                      136,893        153,341            Securities sold under agreements           to repurchase 1                            171,807        164,502            Securities loaned 2                         13,765          7,182    

1. Substantially all resale and repurchase agreements are carried at fair value

under the fair value option. See Note 8 for further information about the

valuation techniques and significant inputs used to determine fair value.

2. As of December 2012 and December 2011, $38.40 billion and $47.62 billion of

securities borrowed, and $1.56 billion and $107 million of securities loaned

were at fair value, respectively.

Resale and Repurchase Agreements

  A resale agreement is a transaction in which the firm purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller at a stated price plus accrued interest at a future date.  

A repurchase agreement is a transaction in which the firm sells financial instruments to a buyer, typically in exchange for cash, and simultaneously enters into an agreement to repurchase the same or substantially the same financial instruments from the buyer at a stated price plus accrued interest at a future date.

The financial instruments purchased or sold in resale and repurchase agreements typically include U.S. government and federal agency, and investment-grade sovereign obligations.

  The firm receives financial instruments purchased under resale agreements, makes delivery of financial instruments sold under repurchase agreements, monitors the market value of these financial instruments on a daily basis, and delivers or obtains additional collateral due to changes in the market value of the financial instruments, as appropriate. For resale agreements, the firm typically requires delivery of collateral with a fair value approximately equal to the carrying value of the relevant assets in the consolidated statements of financial condition.  Even though repurchase and resale agreements involve the legal transfer of ownership of financial instruments, they are accounted for as financing arrangements because they require the financial instruments to be repurchased or resold at the maturity of the agreement. However, "repos to maturity" are accounted for as sales. A repo to maturity is a transaction in which the firm transfers a security under an agreement to repurchase the security where the maturity date of the repurchase agreement matches the maturity date of the underlying security. Therefore, the firm effectively no longer has a repurchase obligation and has relinquished control over the underlying security and, accordingly, accounts for the transaction as a sale. The firm had no repos to maturity outstanding as of December 2012 or December 2011.      162   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Securities Borrowed and Loaned Transactions

  In a securities borrowed transaction, the firm borrows securities from a counterparty in exchange for cash. When the firm returns the securities, the counterparty returns the cash. Interest is generally paid periodically over the life of the transaction.  In a securities loaned transaction, the firm lends securities to a counterparty typically in exchange for cash or securities, or a letter of credit. When the counterparty returns the securities, the firm returns the cash or securities posted as collateral. Interest is generally paid periodically over the life of the transaction.  

The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of these securities on a daily basis, and delivers or obtains additional collateral due to changes in the market value of the securities, as appropriate. For securities borrowed transactions, the firm typically requires collateral with a fair value approximately equal to the carrying value of the securities borrowed transaction.

  Securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution are recorded at fair value under the fair value option. See Note 8 for further information about securities borrowed and loaned accounted for at fair value.  Securities borrowed and loaned within Securities Services 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. Therefore, the carrying value of such arrangements approximates fair value. While these arrangements are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these arrangements been included in the firm's fair value hierarchy, they would have been classified in level 2 as of December 2012.  As of December 2012 and December 2011, the firm had $8.94 billion and $20.22 billion, respectively, of securities received under resale agreements and securities borrowed transactions that were segregated to satisfy certain regulatory requirements. These securities are included in "Cash and securities segregated for regulatory and other purposes."  

Other Secured Financings

In addition to repurchase agreements and securities lending transactions, the firm funds certain assets through the use of other secured financings and pledges financial instruments and other assets as collateral in these transactions. These other secured financings consist of:

   Ÿ   liabilities of consolidated VIEs;    

Ÿ transfers of assets accounted for as financings rather than sales (primarily

collateralized central bank financings, pledged commodities, bank loans and

    mortgage whole loans); and    

Ÿ other structured financing arrangements.

Other secured financings include arrangements that are nonrecourse. As of December 2012 and December 2011, nonrecourse other secured financings were $1.76 billion and $3.14 billion, respectively.

  The firm has elected to apply the fair value option to substantially all other secured financings because the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. See Note 8 for further information about other secured financings that are accounted for at fair value.  Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest, which generally approximates fair value. While these financings are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these financings been included in the firm's fair value hierarchy, they would have primarily been classified in level 3 as of December 2012.          Goldman Sachs 2012 Form 10-K   163  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents information about other secured financings. In the table below:

Ÿ short-term secured financings include financings maturing within one year of

the financial statement date and financings that are redeemable within one

year of the financial statement date at the option of the holder;

Ÿ long-term secured financings that are repayable prior to maturity at the

option of the firm are reflected at their contractual maturity dates; and

Ÿ long-term secured financings that are redeemable prior to maturity at the

option of the holders are reflected at the dates such options

become exercisable.

                                                          As of December 2012                              As of December 2011                                             U.S.        Non-U.S.                             U.S.        Non-U.S. $ in millions                             Dollar          Dollar          Total            Dollar          Dollar          Total Other secured financings (short-term): At fair value                            $16,504          $6,181        $22,685           $18,519         $ 5,140        $23,659  At amortized cost                             34             326            360               155           5,371          5,526  Interest rates 1                            6.18 %          0.10 %                           3.85 %          0.22 %  Other secured financings (long-term): At fair value                              6,134           1,518          7,652             4,305           2,055          6,360  At amortized cost                            577             736          1,313             1,024             795          1,819  Interest rates 1                            2.61 %          2.55 %                           1.88 %          3.28 % Total 2                                  $23,249          $8,761        $32,010           $24,003         $13,361        $37,364 Amount of other secured financings collateralized by: Financial instruments 3                  $22,323          $8,442        $30,765           $22,850         $12,274        $35,124  Other assets 4                               926             319          1,245             1,153           1,087          2,240    

1. The weighted average interest rates exclude secured financings at fair value

   and include the effect of hedging activities. See Note 7 for further    information about hedging activities.    

2. Includes $8.68 billion and $9.36 billion related to transfers of financial

assets accounted for as financings rather than sales as of December 2012 and

December 2011, respectively. Such financings were collateralized by financial

   assets included in "Financial instruments owned, at fair value" of    $8.92 billion and $9.51 billion as of December 2012 and December 2011,    respectively.    

3. Includes $17.24 billion and $14.33 billion of other secured financings

collateralized by financial instruments owned, at fair value as of

December 2012 and December 2011, respectively, and includes $13.53 billion and

$20.79 billion of other secured financings collateralized by financial    instruments received as collateral and repledged as of December 2012 and    December 2011, respectively.    

4. Primarily real estate and cash.

The table below presents other secured financings by maturity.

                                                                       As of            in millions                                    December 2012            Other secured financings (short-term)                $23,045             Other secured financings (long-term):            2014                                                   4,957             2015                                                   1,446             2016                                                     869             2017                                                     271             2018-thereafter                                        1,422            Total other secured financings (long-term)             8,965            Total other secured financings                       $32,010       164   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Collateral Received and Pledged

The firm receives financial instruments (e.g., U.S. government and federal agency, other sovereign and corporate obligations, as well as equities and convertible debentures) as collateral, primarily in connection with resale agreements, securities borrowed, derivative transactions and customer margin loans.

  In many cases, the firm is permitted to deliver or repledge these financial instruments when entering into repurchase agreements and securities lending agreements, primarily in connection with secured client financing activities. The firm is also permitted to deliver or repledge these financial instruments in connection with other secured financings, collateralizing derivative transactions and meeting firm or customer settlement requirements.  The table below presents financial instruments at fair value received as collateral that were available to be delivered or repledged and were delivered or repledged by the firm.                                                                As of December         in millions                                        2012           2011         Collateral available to be delivered         or repledged                                   $540,949      

$622,926

Collateral that was delivered or repledged 397,652 454,604

   The firm also pledges certain financial instruments owned, at fair value in connection with repurchase agreements, securities lending agreements and other secured financings, and other assets (primarily real estate and cash) in connection with other secured financings to counterparties who may or may not have the right to deliver or repledge them. The table below presents information about assets pledged by the firm.                                                                       As of December in millions                                                      2012             2011

Financial instruments owned, at fair value pledged to counterparties that: Had the right to deliver or repledge

$ 67,177

$ 53,989

  Did not have the right to deliver or repledge                                                      120,980       

110,949

  Other assets pledged to counterparties that: Did not have the right to deliver or repledge                                                        2,031            3,444    

Note 10. Securitization Activities

Note 10.

Securitization Activities

  The firm securitizes residential and commercial mortgages, corporate bonds, loans and other types of financial assets by selling these assets to securitization vehicles (e.g., trusts, corporate entities and limited liability companies) and acts as underwriter of the beneficial interests that are sold to investors. The firm's residential mortgage securitizations are substantially all in connection with government agency securitizations.  

Beneficial interests issued by securitization entities are debt or equity securities that give the investors rights to receive all or portions of specified cash inflows to a securitization vehicle and include senior and subordinated shares of principal, interest and/or other cash inflows. The proceeds from the sale of beneficial interests are used to pay the transferor for the financial assets sold to the securitization vehicle or to purchase securities which serve as collateral.

  The firm accounts for a securitization as a sale when it has relinquished control over the transferred assets. Prior to securitization, the firm accounts for assets pending transfer at fair value and therefore does not typically recognize significant gains or losses upon the transfer of assets. Net revenues from underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.  For transfers of assets that are not accounted for as sales, the assets remain in "Financial instruments owned, at fair value" and the transfer is accounted for as a collateralized financing, with the related interest expense recognized over the life of the transaction. See Notes 9 and 23 for further information about collateralized financings and interest expense, respectively.  The firm generally receives cash in exchange for the transferred assets but may also have continuing involvement with transferred assets, including ownership of beneficial interests in securitized financial assets, primarily in the form of senior or subordinated securities. The firm may also purchase senior or subordinated securities issued by securitization vehicles (which are typically VIEs) in connection with secondary market-making activities.          Goldman Sachs 2012 Form 10-K   165  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    The primary risks included in beneficial interests and other interests from the firm's continuing involvement with securitization vehicles are the performance of the underlying collateral, the position of the firm's investment in the capital structure of the securitization vehicle and the market yield for the security. These interests are accounted for at fair value and are included in "Financial instruments owned, at fair value" and are generally classified in level 2 of the fair value hierarchy. See Notes 5 through 8 for further information about fair value measurements.  The table below presents the amount of financial assets securitized and the cash flows received on retained interests in securitization entities in which the firm had continuing involvement.                                                      Year Ended December               in millions                   2012          2011          2010               Residential mortgages      $33,755       $40,131       $47,803                Commercial mortgages           300             -         1,451                Other financial assets           -           269            12                Total                      $34,055       $40,400       $49,266               Cash flows on retained               interests                  $   389       $   569       $   517  

The table below presents the firm's continuing involvement in nonconsolidated 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. In this table:

Ÿ the outstanding principal amount 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;    

Ÿ for retained or purchased interests, the firm's risk of loss is limited to the

    fair value of these interests; and    

Ÿ purchased interests represent senior and subordinated interests, purchased in

connection with secondary market-making activities, in securitization entities

     in which the firm also holds retained interests.                                                                      As of December 2012                                            As of December 2011                                                Outstanding       Fair Value of         Fair Value            Outstanding       Fair Value of       Fair Value of                                                  Principal            Retained       of Purchased              Principal            Retained           Purchased in millions                                         Amount           Interests          Interests                 Amount           Interests           Interests U.S. government agency-issued collateralized mortgage obligations 1              $57,685              $4,654                $ -                $70,448              $5,038        

$ -

  Other residential mortgage-backed 2                  3,656                 106                  -                  4,459                 101                   3  Commercial mortgage-backed 3                         1,253                   1                 56                  3,398                 606                 331  CDOs, CLOs and other 4                               8,866                  51                331                  9,972                  32                 211 Total 5                                            $71,460              $4,812               $387                $88,277              $5,777                $545    

1. Outstanding principal amount and fair value of retained interests primarily

   relate to securitizations during 2012 and 2011 as of December 2012, and    securitizations during 2011 and 2010 as of December 2011.    

2. Outstanding principal amount and fair value of retained interests as of both

December 2012 and December 2011 primarily relate to prime and Alt-A    securitizations during 2007 and 2006.    

3. As of December 2012, the outstanding principal amount primarily relates to

securitizations during 2012 and 2007 and the fair value of retained interests

primarily relate to securitizations during 2012. As of December 2011, the

outstanding principal amount primarily relates to securitizations during

2010, 2007 and 2006 and the fair value of retained interests primarily relates

   to securitizations during 2010.    

4. Outstanding principal amount and fair value of retained interests as of both

December 2012 and December 2011 primarily relate to CDO and CLO    securitizations during 2007 and 2006.    

5. Outstanding principal amount includes $835 million and <money>$774 million as of

December 2012 and December 2011, respectively, related to securitization

entities in which the firm's only continuing involvement is retained servicing

    which is not a variable interest.     166   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    In addition to the interests in the table above, the firm had other continuing involvement in the form of derivative transactions and guarantees with certain nonconsolidated VIEs. The carrying value of these derivatives and guarantees was a net asset of $45 million and a net liability of $52 million as of December 2012 and December 2011, respectively. The notional amounts of these derivatives and guarantees are included in maximum exposure to loss in the nonconsolidated VIE tables in Note 11.  The table below presents the weighted average key economic assumptions used in measuring the fair value of retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions.                                                     As of December 2012                        As of December 2011                                          Type of Retained Interests                  Type of Retained Interests $ in millions                           Mortgage-Backed         Other 1             Mortgage-Backed        Other 1 Fair value of retained interests                 $4,761           $  51                      $5,745          $  32  Weighted average life (years)                       8.2             2.0                         7.1            4.7   Constant prepayment rate  2                        10.9 %          N.M.                        14.1 %         N.M.  Impact of 10% adverse change 2                   $  (57 )          N.M.                      $  (55 )         N.M.  Impact of 20% adverse change 2                     (110 )          N.M.                        (108 )         N.M.   Discount rate  3                                    4.6 %          N.M.                         5.4 %         N.M.  Impact of 10% adverse change                     $  (96 )          N.M.                      $ (125 )         N.M.  Impact of 20% adverse change                       (180 )          N.M.                        (240 )         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 December 2012 and December 2011. The firm's maximum exposure

to adverse changes in the value of these interests is the carrying value of

$51 million and $32 million as of December 2012 and December 2011,    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 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 retained interests, the expected

   credit loss assumptions are reflected in 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 in the preceding table is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.          Goldman Sachs 2012 Form 10-K   167  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11. Variable Interest Entities

 Note 11.  Variable Interest Entities    VIEs generally finance the purchase of assets by issuing debt and equity securities that are either collateralized by or indexed to the assets held by the VIE. The debt and equity securities issued by a VIE may include tranches of varying levels of subordination. The firm's involvement with VIEs includes securitization of financial assets, as described in Note 10, and investments in and loans to other types of VIEs, as described below. See Note 10 for additional information about securitization activities, including the definition of beneficial interests. See Note 3 for the firm's consolidation policies, including the definition of a VIE.  

The firm is principally involved with VIEs through the following business activities:

  Mortgage-Backed VIEs and Corporate CDO and CLO VIEs. The firm sells residential and commercial mortgage loans and securities to mortgage-backed VIEs and corporate bonds and loans to corporate CDO and CLO VIEs and may retain beneficial interests in the assets sold to these VIEs. The firm purchases and sells beneficial interests issued by mortgage-backed and corporate CDO and CLO VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain of these VIEs, primarily interest rate swaps, which are typically not variable interests. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs.  Certain mortgage-backed and corporate CDO and CLO VIEs, usually referred to as synthetic CDOs or credit-linked note VIEs, synthetically create the exposure for the beneficial interests they issue by entering into credit derivatives, rather than purchasing the underlying assets. These credit derivatives may reference a single asset, an index, or a portfolio/basket of assets or indices. See Note 7 for further information about credit derivatives. These VIEs use the funds from the sale of beneficial interests and the premiums received from credit derivative counterparties to purchase securities which serve to collateralize the beneficial interest holders and/or the credit derivative counterparty. These VIEs may enter into other derivatives, primarily interest rate swaps, which are typically not variable interests. The firm may be a counterparty to derivatives with these VIEs and generally enters into derivatives with other counterparties to mitigate its risk.  Real Estate, Credit-Related and Other Investing VIEs. The firm purchases equity and debt securities issued by and makes loans to VIEs that hold real estate, performing and nonperforming debt, distressed loans and equity securities. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.  Other Asset-Backed VIEs. The firm structures VIEs that issue notes to clients and purchases and sells beneficial interests issued by other asset-backed VIEs in connection with market-making activities. In addition, the firm may enter into derivatives with certain other asset-backed VIEs, primarily total return swaps on the collateral assets held by these VIEs under which the firm pays the VIE the return due to the note holders and receives the return on the collateral assets owned by the VIE. The firm generally can be removed as the total return swap counterparty. The firm generally enters into derivatives with other counterparties to mitigate its risk from derivatives with these VIEs. The firm typically does not sell assets to the other asset-backed VIEs it structures.  

Power-Related VIEs. The firm purchases debt and equity securities issued by, and may provide guarantees to, VIEs that hold power-related assets. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.

  Investment Funds. The firm purchases equity securities issued by and may provide guarantees to certain of the investment funds it manages. The firm typically does not sell assets to, or enter into derivatives with, these VIEs.  Principal-Protected Note VIEs. The firm structures VIEs that issue principal-protected notes to clients. These VIEs own portfolios of assets, principally with exposure to hedge funds. Substantially all of the principal protection on the notes issued by these VIEs is provided by the asset portfolio rebalancing that is required under the terms of the notes. The firm enters into total return swaps with these VIEs under which the firm pays the VIE the return due to the principal-protected note holders and receives the return on the assets owned by the VIE. The firm may enter into derivatives with other counterparties to mitigate the risk it has from the derivatives it enters into with these VIEs. The firm also obtains funding through these VIEs.      

168 Goldman Sachs 2012 Form 10-K

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

VIE Consolidation Analysis

  A variable interest in a VIE is an investment (e.g., debt or equity securities) or other interest (e.g., derivatives or loans and lending commitments) in a VIE that will absorb portions of the VIE's expected losses and/or receive portions of the VIE's expected residual returns.  The firm's variable interests in VIEs include senior and subordinated debt in residential and commercial mortgage-backed and other asset-backed securitization entities, CDOs and CLOs; loans and lending commitments; limited and general partnership interests; preferred and common equity; derivatives that may include foreign currency, equity and/or credit risk; guarantees; and certain of the fees the firm receives from investment funds. Certain interest rate, foreign currency and credit derivatives the firm enters into with VIEs are not variable interests because they create rather than absorb risk.  The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. The firm determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers:    

Ÿ which variable interest holder has the power to direct the activities of the

    VIE that most significantly impact the VIE's economic performance;    

Ÿ which variable interest holder has the obligation to absorb losses or the

right to receive benefits from the VIE that could potentially be significant

    to the VIE;     Ÿ   the VIE's purpose and design, including the risks the VIE was designed to     create and pass through to its variable interest holders;     Ÿ   the VIE's capital structure;    

Ÿ the terms between the VIE and its variable interest holders and other parties

    involved with the VIE; and    

Ÿ related-party relationships.

   The firm reassesses its initial evaluation of whether an entity is a VIE when certain reconsideration events occur. The firm reassesses its determination of whether it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.  

Nonconsolidated VIEs

The firm's exposure to the obligations of VIEs is generally limited to its interests in these entities. In certain instances, the firm provides guarantees, including derivative guarantees, to VIEs or holders of variable interests in VIEs.

  The tables below present information about nonconsolidated VIEs in which the firm holds variable interests. Nonconsolidated VIEs are aggregated based on principal business activity. The nature of the firm's variable interests can take different forms, as described in the rows under maximum exposure to loss. In the tables below:   

Ÿ The maximum exposure to loss excludes the benefit of offsetting financial

    instruments that are held to mitigate the risks associated with these     variable interests.    

Ÿ For retained and purchased interests and loans and investments, the maximum

    exposure to loss is the carrying value of these interests.    

Ÿ For commitments and guarantees, and derivatives, the maximum exposure to loss

is the notional amount, which does not represent anticipated losses and also

has not been reduced by unrealized losses already recorded. As a result, the

maximum exposure to loss exceeds liabilities recorded for commitments and

guarantees, and derivatives provided to VIEs.

The carrying values of the firm's variable interests in nonconsolidated VIEs are included in the consolidated statement of financial condition as follows:

Ÿ Substantially all assets held by the firm related to mortgage-backed,

corporate CDO and CLO and other asset-backed VIEs and investment funds are

included in "Financial instruments owned, at fair value." Substantially all

liabilities held by the firm related to corporate CDO and CLO and other

asset-backed VIEs are included in "Financial instruments sold, but not yet

    purchased, at fair value."           Goldman Sachs 2012 Form 10-K   169  

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<p>THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ Assets and liabilities held by the firm related to real estate, credit-related

and other investing VIEs are primarily included in "Financial instruments

    owned, at fair value" and in "Financial instruments sold, but not yet     purchased, at fair value," and "Other liabilities and accrued     expenses," respectively.  

Ÿ Assets and liabilities held by the firm related to power-related VIEs are

primarily included in "Financial instruments owned, at fair value" and "Other

     assets" and in "Other liabilities and accrued expenses," respectively.                                                                                              Nonconsolidated VIEs                                                                                       As of December 2012                                                                                Real estate,                                                              Corporate       credit-related        Other                                            Mortgage-          CDOs and            and other       asset-        Power-       Investment in millions                                   backed              CLOs            investing       backed       related            funds          Total Assets in VIE                                $79,171  2        $23,842               $9,244       $3,510          $147           $1,898       $117,812  Carrying Value of the Firm's Variable Interests Assets                                         6,269             1,193                1,801          220            32                4          9,519  Liabilities                                        -                12                    -           30             -                -             42  Maximum Exposure to Loss in Nonconsolidated VIEs Retained interests                             4,761                51                    -            -             -                -          4,812  Purchased interests                            1,162               659                    -          204             -                -          2,025  Commitments and guarantees 1                       -                 1                  438            -             -                1            440  Derivatives 1                                  1,574             6,761                    -          952             -                -          9,287  Loans and investments                             39                 -                1,801            -            32                4          1,876 Total                                        $ 7,536  2        $ 7,472               $2,239       $1,156          $ 32           $    5       $ 18,440                                                                                       Nonconsolidated VIEs                                                                                       As of December 2011                                                                                Real estate,                                                              Corporate       credit-related        Other                                            Mortgage-          CDOs and            and other       asset-        Power-       Investment in millions                                   backed              CLOs            investing       backed       related            funds          Total Assets in VIE                                $94,047  2        $20,340               $8,974       $4,593          $519           $2,208       $130,681  Carrying Value of the Firm's Variable Interests Assets                                         7,004               911                1,495          352           289                5         10,056  Liabilities                                        -                63                    3           24             2                -             92  Maximum Exposure to Loss in Nonconsolidated VIEs Retained interests                             5,745                32                    -            -             -                -          5,777  Purchased interests                              962               368                    -          333             -                -          1,663  Commitments and guarantees 1                       -                 1                  373            -            46                -            420  Derivatives 1                                  2,469             7,529                    -        1,221             -                -         11,219  Loans and investments                             82                 -                1,495            -           288                5          1,870 Total                                        $ 9,258  2        $ 7,930               $1,868       $1,554          $334           $    5       $ 20,949    

1. The aggregate amounts include $3.25 billion and $4.17 billion as of

December 2012 and December 2011, respectively, related to guarantees and    derivative transactions with VIEs to which the firm transferred assets.    

2. Assets in VIE and maximum exposure to loss include $3.57 billion and

$1.72 billion, respectively, as of December 2012, and $6.15 billion and

$2.62 billion, respectively, as of December 2011, related to CDOs backed by

    mortgage obligations.     170   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Consolidated VIEs

  The tables below present the carrying amount and classification of assets and liabilities in consolidated VIEs, excluding the benefit of offsetting financial instruments that are held to mitigate the risks associated with the firm's variable interests. Consolidated VIEs are aggregated based on principal business activity and their assets and liabilities are presented net of intercompany eliminations. The majority of the assets in principal-protected notes VIEs are intercompany and are eliminated in consolidation.  

Substantially all the assets in consolidated VIEs can only be used to settle obligations of the VIE.

  The tables below exclude VIEs in which the firm holds a majority voting interest if (i) the VIE meets the definition of a business and (ii) the VIE's assets can be used for purposes other than the settlement of its obligations.  

The liabilities of real estate, credit-related and other investing VIEs and CDOs, mortgage-backed and other asset-backed VIEs do not have recourse to the general credit of the firm.

                                                                           Consolidated VIEs                                                                    As of December 2012                                                                           CDOs,                                                 Real estate,          mortgage-                                               credit-related         backed and       Principal-                                                    and other       other asset-        protected in millions                                        investing             backed            notes        Total Assets Cash and cash equivalents                             $  236               $107            $   -       $  343  Cash and securities segregated for regulatory and other purposes                            134                  -               92          226  Receivables from brokers, dealers and clearing organizations                                     5                  -                -            5  Financial instruments owned, at fair value                                                  2,958                763              124        3,845  Other assets                                           1,080                  -                -        1,080 Total                                                 $4,413               $870           $  216       $5,499  Liabilities Other secured financings                              $  594               $699           $  301       $1,594  Financial instruments sold, but not yet purchased, at fair value                                   -                107                -          107  Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings                             -                  -            1,584        1,584  Unsecured long-term borrowings                             4                  -              334          338  Other liabilities and accrued expenses                 1,478                  -                -        1,478 Total                                                 $2,076               $806           $2,219       $5,101         Goldman Sachs 2012 Form 10-K   171   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

                                                                     Consolidated VIEs                                                                  As of December 2011                                              Real estate,                 CDOs,                                            credit-related       mortgage-backed       Principal-                                                 and other             and other        protected in millions                                     investing          asset-backed            notes        Total 

Assets

 Cash and cash equivalents                          $  660                  $ 51           $    1       $  712  Cash and securities segregated for regulatory and other purposes                         139                     -                -          139  Receivables from brokers, dealers and clearing organizations                                  4                     -                -            4  Receivables from customers and counterparties                                          -                    16                -           16  Financial instruments owned, at fair value                                               2,369                   352              112        2,833  Other assets                                        1,552                   437                -        1,989 Total                                              $4,724                  $856           $  113       $5,693 Liabilities Other secured financings                           $1,418                  $298           $3,208       $4,924  Payables to customers and counterparties                                          -                     9                -            9  Financial instruments sold, but not yet purchased, at fair value                            -                     -                2            2  Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings                        185                     -            1,941        2,126  Unsecured long-term borrowings                          4                     -              269          273  Other liabilities and accrued expenses              2,046                    40                -        2,086 Total                                              $3,653                  $347           $5,420       $9,420    

172 Goldman Sachs 2012 Form 10-K

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Note 12. Other Assets  Note 12.  Other Assets   

Other assets are generally less liquid, non-financial assets. The table below presents other assets by type.

                                                                As of December        in millions                                          2012          2011        Property, leasehold improvements        and equipment 1                                   $ 8,217       $ 8,697         Goodwill and identifiable intangible assets 2       5,099         5,468         Income tax-related assets 3                         5,620         5,017         Equity-method investments 4                           453           664         Miscellaneous receivables and other  5             20,234         3,306        Total                                             $39,623      

$23,152

1. Net of accumulated depreciation and amortization of $9.05 billion and

$8.46 billion as of December 2012 and December 2011, respectively.    

2. Includes $149 million of intangible assets classified as held for sale. See

   Note 13 for further information about goodwill and identifiable    intangible assets.    

3. See Note 24 for further information about income taxes.

4. Excludes investments accounted for at fair value under the fair value option

where the firm would otherwise apply the equity method of accounting of

$5.54 billion and $4.17 billion as of December 2012 and December 2011,

respectively, which are included in "Financial instruments owned, at fair

   value." The firm has generally elected the fair value option for such    investments acquired after the fair value option became available.    

5. Includes $16.77 billion of assets related to the firm's reinsurance business

which were classified as held for sale as of December 2012.

Assets Held for Sale

  In the fourth quarter of 2012, the firm classified its reinsurance business within its Institutional Client Services segment as held for sale. Assets related to this business of $16.92 billion, consisting primarily of available-for-sale securities and separate account assets at fair value, are included in "Other assets." Liabilities related to the business of $14.62 billion are included in "Other liabilities and accrued expenses." See Note 8 for further information about insurance-related assets and liabilities held for sale at fair value.  The firm expects to complete the sale of a majority stake in its reinsurance business in 2013 and does not expect to recognize a material gain or loss upon the sale. Upon completion of the sale, the firm will no longer consolidate this business.  

Property, Leasehold Improvements and Equipment

  Property, leasehold improvements and equipment included $6.20 billion and $6.48 billion as of December 2012 and December 2011, respectively, related to property, leasehold improvements and equipment that the firm uses in connection with its operations. The remainder is held by investment entities, including VIEs, consolidated by the firm.  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. The firm's policy for impairment testing of property, leasehold improvements and equipment is the same as is used for identifiable intangible assets with finite lives. See Note 13 for further information.          Goldman Sachs 2012 Form 10-K   173  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Impairments

  As a result of a decline in the market conditions in which certain of the firm's consolidated investments operate, during 2012 and 2011, the firm tested certain property, leasehold improvements and equipment, intangible assets and other assets for impairment in accordance with ASC 360. The carrying value of these assets exceeded the projected undiscounted cash flows over the estimated remaining useful lives of these assets; as such, the firm determined the assets were impaired and recorded impairment losses. In addition, the firm sold assets during 2012 and 2011 and recognized impairment losses prior to the sale of these assets. These impairment losses represented the excess of the carrying values of these assets over their estimated fair values, which are primarily level 3 measurements, using a combination of discounted cash flow analyses and relative value analyses, including the estimated cash flows expected to be received from the disposition of certain of these assets.  The impairment losses were approximately $400 million during the year ended December 2012, substantially all of which were included in "Depreciation and amortization" within the firm's Investing & Lending segment. Impairment losses related to property, leasehold improvements and equipment were approximately $250 million, including approximately $160 million attributable to commodity-related assets. Impairment losses related to intangible and other assets were approximately $150 million, including approximately $80 million attributable to commodity-related assets and approximately $40 million attributable to the firm's New York Stock Exchange (NYSE) Designated Market Maker (DMM) rights.  The impairment losses were approximately $440 million during the year ended December 2011 (approximately $220 million related to assets classified as held for sale, primarily related to Litton Loan Servicing LP (Litton), approximately $120 million related to commodity-related intangible assets and approximately $100 million related to property, leasehold improvements and equipment), all of which were included in "Depreciation and amortization." The impairment losses related to commodity-related intangible assets and property, leasehold improvements and equipment were included in the firm's Investing & Lending segment and the impairment losses related to assets classified as held for sale were principally included in the firm's Institutional Client Services segment. Litton was sold in the third quarter of 2011 and the firm received total consideration that approximated the firm's adjusted carrying value for Litton. See Note 18 for further information about the sale of Litton.      174   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 13. Goodwill and Identifiable Intangible Assets

Note 13.

Goodwill and Identifiable Intangible Assets

The tables below present the carrying values of goodwill and identifiable intangible assets, which are included in "Other assets."

                                                                            Goodwill                                                                     As of December in millions                                                         2012               2011 Investment Banking: Financial Advisory                                                $   98             $  104  Underwriting                                                         183                186  Institutional Client Services: Fixed Income, Currency and Commodities Client Execution              269                284  Equities Client Execution                                          2,402              2,390  Securities Services                                                  105                117  Investing & Lending                                                   59                147  Investment Management                                                586                574 Total                                                             $3,702             $3,802                                                                  Identifiable Intangible                                                                         Assets                                                                     As of December in millions                                                         2012               2011 Investment Banking: Financial Advisory                                                $    1             $    4  Underwriting                                                           -                  1  Institutional Client Services: Fixed Income, Currency and Commodities Client Execution              421                488  Equities Client Execution                                            565                677  Investing & Lending                                                  281                369  Investment Management                                                129                127 Total                                                             $1,397             $1,666   Goodwill 

Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date.

  Goodwill is assessed annually in the fourth quarter for impairment or more frequently if events occur or circumstances change that indicate an impairment may exist. Qualitative factors are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If results of the qualitative assessment are not conclusive, a quantitative goodwill impairment test is performed.  

The quantitative goodwill impairment test consists of two steps.

Ÿ The first step compares the estimated fair value of each reporting unit with

its estimated net book value (including goodwill and identified intangible

assets). If the reporting unit's fair value exceeds its estimated net book

    value, goodwill is not impaired.    

Ÿ If the estimated fair value of a reporting unit is less than its estimated net

book value, the second step of the goodwill impairment test is performed to

measure the amount of impairment loss, if any. An impairment loss is equal to

the excess of the carrying amount of goodwill over its fair value.

Goodwill was tested for impairment, using a quantitative test, during the fourth quarter of 2012 and goodwill was not impaired.

To estimate the fair value of each reporting unit, both relative value and residual income valuation techniques are used because the firm believes market participants would use these techniques to value the firm's reporting units.

  Relative value techniques apply average observable price-to-earnings multiples of comparable competitors to certain reporting units' net earnings. For other reporting units, fair value is estimated using price-to-book multiples based on residual income techniques, which consider a reporting unit's return on equity in excess of the firm's cost of equity capital. The net book value of each reporting unit reflects an allocation of total shareholders' equity and represents the estimated amount of shareholders' equity required to support the activities of the reporting unit under guidelines issued by the Basel Committee on Banking Supervision (Basel Committee) in December 2010.          Goldman Sachs 2012 Form 10-K   175  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Identifiable Intangible Assets

The table below presents the gross carrying amount, accumulated amortization and net carrying amount of

identifiable intangible assets and their weighted average remaining lives.

                                                                               As of December                                                                          Weighted Average                                                                          Remaining Lives $ in millions                                                  2012          (years)             2011   Customer lists               Gross carrying amount          $ 1,099                           $ 1,119                               Accumulated amortization          (643 )                            (593 )                              Net carrying amount                456             8                 526    Commodities-related intangibles 1                Gross carrying amount              513                               595                               Accumulated amortization          (226 )                            (237 )                              Net carrying amount                287             10                358    Television broadcast royalties                    Gross carrying amount              560                               560                               Accumulated amortization          (186 )                            (123 )                              Net carrying amount                374             6                 437    Insurance-related intangibles 2                Gross carrying amount              380                               292                               Accumulated amortization          (231 )                            (146 )                              Net carrying amount                149           N/A 2               146    Other 3                      Gross carrying amount              950                               950                               Accumulated amortization          (819 )                            (751 )                              Net carrying amount                131             12                199    Total                        Gross carrying amount            3,502                             3,516                               Accumulated amortization        (2,105 )                          (1,850 )                              Net carrying amount            $ 1,397             8             $ 1,666    

1. Primarily includes commodity-related customer contracts and relationships,

   permits and access rights.    

2. Primarily related to the firm's reinsurance business, which is classified as

   held for sale. See Note 12 for further information.    

3. Primarily includes the firm's exchange-traded fund lead market maker rights

   and NYSE DMM rights.     Substantially all of the firm's identifiable intangible assets are considered to have finite lives and are amortized (i) over their estimated lives, (ii) based on economic usage for certain commodity-related intangibles or (iii) in proportion  

to estimated gross profits or premium revenues. Amortization expense for identifiable intangible assets is included in "Depreciation and amortization."

     176   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    The tables below present amortization expense for identifiable intangible assets for the years ended December 2012, December 2011 and December 2010, and the estimated future amortization expense through 2017 for identifiable intangible assets as of December 2012.                                                    Year Ended December                    in millions              2012       2011       2010                    Amortization expense     $338       $389       $520                                                                       As of              in millions                                December 2012              Estimated future amortization expense:              2013                                                $225               2014                                                 189               2015                                                 157               2016                                                 155               2017                                                 153  

Identifiable intangible assets are tested for recoverability whenever events or changes in circumstances indicate that an asset's or asset group's carrying value may not be recoverable.

  If a recoverability test is necessary, the carrying value of an asset or asset group is compared to the total of the undiscounted cash flows expected to be received over the remaining useful life and from the disposition of the asset or asset group.   

Ÿ If the total of the undiscounted cash flows exceeds the carrying value, the

    asset or asset group is not impaired.    

Ÿ If the total of the undiscounted cash flows is less than the carrying value,

the asset or asset group is not fully recoverable and an impairment loss is

recognized as the difference between the carrying amount of the asset or asset

group and its estimated fair value.

See Note 12 for information about impairments of the firm's identifiable intangible assets.

      Note 14. Deposits  Note 14.  Deposits  

The table below presents deposits held in U.S. and non-U.S. offices, substantially all of which were interest-bearing. Substantially all U.S. deposits were held at Goldman Sachs Bank USA (GS Bank USA) and substantially all non-U.S.

deposits were held at Goldman Sachs Bank (Europe) plc (GS Bank Europe) and Goldman Sachs International Bank (GSIB). On January 18, 2013, GS Bank Europe surrendered its banking license to the Central Bank of Ireland after transferring its deposits to GSIB.

                                                 As of December                     in millions             2012            2011                     U.S. offices         $62,377         $38,477                      Non-U.S. offices       7,747           7,632                     Total                $70,124  1      $46,109  1   The table below presents maturities of time deposits held in U.S. and non-U.S. offices.                                                  As of December 2012              in millions              U.S.         Non-U.S.           Total              2013                  $ 5,248           $2,083         $ 7,331               2014                    3,866                -           3,866               2015                    3,285                -           3,285               2016                    1,687                -           1,687               2017                    2,377                -           2,377               2018 - thereafter       5,069                -           5,069              Total                 $21,532  2        $2,083  3      $23,615  1    

1. Includes $5.10 billion and $4.53 billion as of December 2012 and

December 2011, respectively, of time deposits accounted for at fair value

under the fair value option. See Note 8 for further information about deposits

   accounted for at fair value.    

2. Includes $44 million greater than $100,000, of which $7 million matures within

   three months, $24 million matures within three to six months, $8 million    matures within six to twelve months, and $5 million matures after twelve    months.    

3. Substantially all were greater than $100,000.

   As of December 2012, savings and demand deposits, which represent deposits with no stated maturity, were $46.51 billion, which were recorded based on the amount of cash received plus accrued interest, which approximates fair value. In addition, the firm designates certain derivatives as fair value hedges on substantially all of its time deposits for which it has not elected the fair value option. Accordingly, $18.52 billion of time deposits were effectively converted from fixed-rate obligations to floating-rate obligations and were recorded at amounts that generally approximate fair value. While these savings and demand deposits and time deposits are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these deposits been included in the firm's fair value hierarchy, they would have been classified in level 2.          Goldman Sachs 2012 Form 10-K   177  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15. Short-Term Borrowings

 Note 15.  Short-Term Borrowings   

Short-term borrowings were comprised of the following:

                                                            As of December            in millions                                  2012          2011            Other secured financings (short-term)     $23,045       $29,185             Unsecured short-term borrowings            44,304        49,038            Total                                     $67,349       $78,223  

See Note 9 for further information about other secured financings.

Unsecured short-term borrowings include the portion of unsecured long-term borrowings maturing within one year of the financial statement date and unsecured long-term borrowings that are redeemable within one year of the financial statement date at the option of the holder.

  The firm accounts for promissory notes, commercial paper and certain hybrid financial instruments at fair value under the fair value option. See Note 8 for further information about unsecured short-term borrowings that are accounted for at fair value. The carrying value of short-term borrowings that are not recorded at fair value generally approximates fair value due to the short-term nature of the obligations. While these short-term borrowings are carried at amounts that approximate fair value, they are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP and therefore are not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these borrowings been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2012.  

The table below presents unsecured short-term borrowings.

                                                                     As of December  $ in millions                                                  2012           2011

Current portion of unsecured long-term borrowings 1, 2 $25,344$28,836

   Hybrid financial instruments                                 12,295         11,526   Promissory notes                                                260          1,328   Commercial paper                                                884          1,491   Other short-term borrowings                                   5,521        

5,857

  Total                                                       $44,304

$49,038

   Weighted average interest rate 3                               1.57 %         1.89 %    

1. As of December 2012, no borrowings guaranteed by the Federal Deposit Insurance

Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP) were

outstanding and the program had expired for new issuances. Includes

$8.53 billion as of December 2011, issued by Group Inc. and guaranteed by the

   FDIC under the TLGP.    

2. Includes $24.65 billion and $27.95 billion as of December 2012 and

December 2011, respectively, issued by Group Inc.

3. The weighted average interest rates for these borrowings include the effect of

hedging activities and exclude financial instruments accounted for at fair

value under the fair value option. See Note 7 for further information about

    hedging activities.       178   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Note 16. Long-Term Borrowings  Note 16.  Long-Term Borrowings 

Long-term borrowings were comprised of the following:

                                                            As of December           in millions                                  2012            2011           Other secured financings (long-term)     $  8,965        $  8,179            Unsecured long-term borrowings            167,305         173,545           Total                                    $176,270        $181,724    

See Note 9 for further information about other secured financings. The table below presents unsecured long-term

  borrowings extending through 2061 and consisting principally of senior borrowings.                                                          As of December 2012                                As of December 2011                                              U.S.        Non-U.S.                               U.S.        Non-U.S. in millions                                Dollar          Dollar           Total             Dollar          Dollar           Total Fixed-rate obligations 1 Group Inc.                               $ 86,170         $36,207        $122,377           $ 82,396         $38,012        $120,408  Subsidiaries                                2,391             662           3,053              1,662             557           2,219  Floating-rate obligations 2 Group Inc.                                 17,075          19,227          36,302             19,936          25,878          45,814  Subsidiaries                                3,719           1,854           5,573              3,500           1,604           5,104 Total                                    $109,355         $57,950        $167,305           $107,494         $66,051        $173,545    

1. Interest rates on U.S. dollar-denominated debt ranged from 0.20% to 10.04%

(with a weighted average rate of 5.48%) and 0.10% to 10.04% (with a weighted

average rate of 5.62%) as of December 2012 and December 2011, respectively.

Interest rates on non-U.S. dollar-denominated debt ranged from 0.10% to 14.85%

(with a weighted average rate of 4.66%) and 0.85% to 14.85% (with a weighted

average rate of 4.75%) as of December 2012 and December 2011, respectively.

2. Floating interest rates generally are based on LIBOR or the federal funds

   target rate. Equity-linked and indexed instruments are included in    floating-rate obligations.         Goldman Sachs 2012 Form 10-K   179  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents unsecured long-term borrowings by maturity date. In the table below:

Ÿ unsecured long-term borrowings maturing within one year of the financial

statement date and unsecured long-term borrowings that are redeemable within

one year of the financial statement date at the option of the holders are

    included as unsecured short-term borrowings;    

Ÿ unsecured long-term borrowings that are repayable prior to maturity at the

option of the firm are reflected at their contractual maturity dates; and

Ÿ unsecured long-term borrowings that are redeemable prior to maturity at the

     option of the holders are reflected at the dates such options become     exercisable.                                                    As of December 2012             in millions           Group Inc.       Subsidiaries          Total             2014                    $ 22,279             $  496       $ 22,775              2015                      20,734                411         21,145              2016                      21,717                172         21,889              2017                      20,218                494         20,712              2018 - thereafter         73,731              7,053         80,784             Total 1                 $158,679             $8,626       $167,305    

1. Includes $10.51 billion related to interest rate hedges on certain unsecured

long-term borrowings, by year of maturity as follows: $564 million in 2014,

$536 million in 2015, $1.15 billion in 2016, $1.44 billion in 2017 and

$6.82 billion in 2018 and thereafter.

   The firm designates certain derivatives as fair value hedges to effectively convert a substantial portion of its fixed-rate unsecured long-term borrowings which are not accounted for at fair value into floating-rate obligations. Accordingly, excluding the cumulative impact of changes in the firm's credit spreads, the carrying value of unsecured long-term borrowings approximated fair value as of December 2012 and December 2011. See Note 7 for further information about hedging activities. For unsecured long-term borrowings for which the firm did not elect the fair value option, the cumulative impact due to changes in the firm's own credit spreads would be an increase of less than 2% and a reduction of less than 4% in the carrying value of total unsecured long-term borrowings as of December 2012 and December 2011, respectively. As these borrowings are not accounted for at fair value under the fair value option or at fair value in accordance with other U.S. GAAP, their fair value is not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these borrowings been included in the firm's fair value hierarchy, substantially all would have been classified in level 2 as of December 2012.  

The table below presents unsecured long-term borrowings, after giving effect to hedging activities that converted a substantial portion of fixed-rate obligations to floating-rate obligations.

                                                            As of December 2012                                      As of December 2011 in millions                              Group Inc.        Subsidiaries           Total           Group Inc.        Subsidiaries           Total

Fixed-rate obligations At fair value                              $     28              $   94        $    122             $     10              $   66        $     76  At amortized cost 1                          22,500               2,047          24,547               26,839               1,934          28,773  Floating-rate obligations At fair value                                 8,166               4,305          12,471               12,903               4,183          17,086  At amortized cost 1                         127,985               2,180         130,165              126,470               1,140         127,610 Total                                      $158,679              $8,626        $167,305             $166,222              $7,323        $173,545    

1. The weighted average interest rates on the aggregate amounts were 2.47% (5.26%

related to fixed-rate obligations and 1.98% related to floating-rate

obligations) and 2.59% (5.18% related to fixed-rate obligations and 2.03%

related to floating-rate obligations) as of December 2012 and December 2011,

respectively. These rates exclude financial instruments accounted for at fair

   value under the fair value option.     180   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Subordinated Borrowings

Unsecured long-term borrowings include subordinated debt and junior subordinated debt. Junior subordinated debt is junior in right of payment to other subordinated borrowings, which are junior to senior borrowings. As of

December 2012 and December 2011, subordinated debt had maturities ranging from 2015 to 2038 and 2017 to 2038, respectively. The table below presents subordinated borrowings.

                                                      As of December 2012                              As of December 2011                                            Par        Carrying                              Par        Carrying $ in millions                           Amount          Amount        Rate  1            Amount          Amount        Rate  1 Subordinated debt 2                    $14,409         $17,358        4.24 %            $14,310         $17,362        4.39 %  Junior subordinated debt                 2,835           4,228        3.16 %              5,085           6,533        2.43 %

Total subordinated borrowings $17,244$21,586 4.06 %

            $19,395         $23,895        3.87 %     

1. Weighted average interest rate after giving effect to fair value hedges used

to convert these fixed-rate obligations into floating-rate obligations. See

   Note 7 for further information about hedging activities. See below for    information about interest rates on junior subordinated debt.    

2. Par amount and carrying amount of subordinated debt issued by Group Inc. was

$13.85 billion and $16.80 billion, respectively, as of December 2012, and

$13.75 billion and $16.80 billion, respectively, as of December 2011.

Junior Subordinated Debt

  Junior Subordinated Debt Issued to APEX Trusts. In 2007, Group Inc. issued a total of $2.25 billion of remarketable junior subordinated debt to Goldman Sachs Capital II and Goldman Sachs Capital III (APEX Trusts), Delaware statutory trusts. The APEX Trusts issued $2.25 billion of guaranteed perpetual Normal Automatic Preferred Enhanced Capital Securities (APEX) to third parties and a de minimis amount of common securities to Group Inc. Group Inc. also entered into contracts with the APEX Trusts to sell $2.25 billion of Group Inc. perpetual non-cumulative preferred stock (the stock purchase contracts). See Note 19 for more information about the preferred stock that Group Inc. has issued in connection with the stock purchase contracts.  The firm accounted for the stock purchase contracts as equity instruments and, accordingly, recorded the cost of the stock purchase contracts as a reduction to additional paid-in capital.  During the first quarter of 2012, pursuant to a remarketing provided for by the initial terms of the junior subordinated debt, Goldman Sachs Capital II sold all of its $1.75 billion of junior subordinated debt to Murray Street Investment Trust I (Murray Street Trust), a new trust sponsored by the firm. On June 1, 2012, pursuant to the stock purchase contracts, Goldman Sachs Capital II used the proceeds of this sale to purchase shares of Group Inc.'s Perpetual Non-Cumulative Preferred Stock, Series E (Series E Preferred Stock).  During the third quarter of 2012, pursuant to a remarketing provided for by the initial terms of the junior subordinated debt, Goldman Sachs Capital III sold all of its $500 million of junior subordinated debt to Vesey Street Investment Trust I (Vesey Street Trust), a new trust sponsored by the firm. On September 4, 2012, pursuant to the stock purchase contracts, Goldman Sachs Capital III used the proceeds of this sale to purchase shares of Group Inc.'s Perpetual Non-Cumulative Preferred Stock, Series F (Series F Preferred Stock).  In connection with the remarketing of the junior subordinated debt to the Murray Street Trust and Vesey Street Trust (together, the 2012 Trusts), pursuant to the terms of the junior subordinated debt, the interest rate and other terms were modified. Following such sales, the firm pays interest semi-annually on the $1.75 billion of junior subordinated debt held by the Murray Street Trust at a fixed annual rate of 4.647% and the debt matures on March 9, 2017 and on the $500 million of junior subordinated debt held by the Vesey Street Trust at a fixed annual rate of 4.404% and the debt matures on September 1, 2016. To fund the purchase of the junior subordinated debt, the 2012 Trusts issued an aggregate of $2.25 billion of senior guaranteed trust securities. The 2012 Trusts are required to pay distributions on their senior guaranteed trust securities in the same amounts and on the same dates that they are scheduled to receive interest on the junior subordinated debt they hold, and are required to redeem their respective senior guaranteed trust securities upon the maturity or earlier redemption of the junior subordinated debt they hold. Group Inc. fully and unconditionally guarantees the payment of these distribution and redemption amounts when due on a senior basis and, as such, the $2.25 billion of junior subordinated debt held by the 2012 Trusts for the benefit of investors is no longer classified as junior subordinated debt.          Goldman Sachs 2012 Form 10-K   181  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    The firm has the right to defer payments on the junior subordinated debt, subject to limitations. During any such extension period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common or preferred stock. If the firm were to defer payment of interest on the junior subordinated debt and the 2012 Trusts were therefore unable to make scheduled distributions to the holders of the senior guaranteed trust securities, under the guarantee, Group Inc. would be obligated to make those payments to the holders of the senior guaranteed trust securities.  The APEX Trusts and the 2012 Trusts are wholly-owned finance subsidiaries of the firm for regulatory and legal purposes but are not consolidated for accounting purposes.  In connection with the APEX issuance, the firm covenanted in favor of certain of its debtholders, who were initially and are currently the holders of Group Inc.'s 6.345% Junior Subordinated Debentures due February 15, 2034, that, subject to certain exceptions, the firm would not redeem or purchase APEX or shares of Group Inc.'s Series E Preferred Stock or Series F Preferred Stock prior to the date that is ten years after the applicable stock purchase date, unless the applicable redemption or purchase price does not exceed a maximum amount determined by reference to the aggregate amount of net cash proceeds that the firm has received from the sale of qualifying securities.  Junior Subordinated Debt Issued in Connection with Trust Preferred Securities. Group Inc. issued $2.84 billion of junior subordinated debentures in 2004 to Goldman Sachs Capital I (Trust), a Delaware statutory trust. The Trust issued $2.75 billion of guaranteed preferred beneficial interests to third parties and $85 million of common beneficial interests to Group Inc. and used the proceeds from the issuances to purchase the junior subordinated debentures from Group Inc. The Trust is a wholly-owned finance subsidiary of the firm for regulatory and legal purposes but is not consolidated for accounting purposes.  The firm pays interest semi-annually on the debentures at an annual rate of 6.345% and the debentures mature on February 15, 2034. The coupon rate and the payment dates applicable to the beneficial interests are the same as the interest rate and payment dates for the debentures. The firm has the right, from time to time, to defer payment of interest on the debentures, and therefore cause payment on the Trust's preferred beneficial interests to be deferred, in each case up to ten consecutive semi-annual periods. During any such extension period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common stock. The Trust is not permitted to pay any distributions on the common beneficial interests held by Group Inc. unless all dividends payable on the preferred beneficial interests have been paid in full.     

182 Goldman Sachs 2012 Form 10-K

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 17. Other Liabilities and Accrued Expenses

Note 17.

Other Liabilities and Accrued Expenses

The table below presents other liabilities and accrued expenses by type.

                                                              As of December           in millions                                     2012          2011

          Compensation and benefits                    $ 8,292       $

5,701

          Insurance-related liabilities 1               10,274       

18,614

          Noncontrolling interests 2                       508        

1,450

           Income tax-related liabilities 3               2,724           533            Employee interests in consolidated funds         246           305            Subordinated liabilities issued           by consolidated VIEs                           1,360        

1,090

          Accrued expenses and other 4                  18,991        

4,108           Total                                        $42,395       $31,801    

1. As of December 2012, certain insurance-related liabilities were classified as

held for sale and included within "Accrued expenses and other." See Note 12

   for further information.    

2. Includes $419 million and $1.17 billion related to consolidated investment

   funds as of December 2012 and December 2011, respectively.    

3. See Note 24 for further information about income taxes.

4. Includes $14.62 billion of liabilities related to the firm's reinsurance

business which were classified as held for sale as of December 2012. See

Note 12 for further information.

The table below presents insurance-related liabilities by type.

                                                                      As of December  in millions                                                      2012          2011  Separate account liabilities                                   $    -       $ 3,296 

Liabilities for future benefits

  and unpaid claims                                              10,274      

14,213

   Contract holder account balances                                    -      

835

   Reserves for guaranteed minimum death and income benefits           -           270  Total 1                                                       $10,274       $18,614    

1. As of December 2012, certain insurance-related liabilities were classified as

held for sale and included within "Accrued expenses and other." See Note 12

for further information.

   Separate account liabilities are supported by separate account assets, representing segregated contract holder funds under variable annuity and life insurance contracts. As of December 2011, separate account assets were included in "Cash and securities segregated for regulatory and other purposes."  Liabilities for future benefits and unpaid claims include liabilities arising from reinsurance provided by the firm to other insurers. The firm had a receivable of $1.30 billion as of December 2011 related to such reinsurance contracts, which was reported in "Receivables from customers and counterparties." In addition, the firm has ceded risks to reinsurers related to certain of its liabilities for future benefits and unpaid claims and had a receivable of $648 million as of December 2011 related to such reinsurance contracts, which was reported in "Receivables from customers and counterparties." Contracts to cede risks to reinsurers do not relieve the firm of its obligations to contract holders. Liabilities for future benefits and unpaid claims include $10.27 billion and $8.75 billion carried at fair value under the fair value option as of December 2012 and December 2011, respectively.  

Contract holder account balances primarily include fixed annuities under reinsurance contracts.

  Reserves for guaranteed minimum death and income benefits represent a liability for the expected value of guaranteed benefits in excess of projected annuity account balances. These reserves are based on total payments expected to be made less total fees expected to be assessed over the life of the contract. As of December 2011, such reserves were related to $5.52 billion of contract holder account balances. The net amount at risk, representing guaranteed minimum death and income benefits in excess of contract holder account balances, was $1.51 billion as of December 2011. The weighted average attained age of these contract holders was 69 years as of December 2011.          Goldman Sachs 2012 Form 10-K   183  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 18. Commitments, Contingencies and Guarantees

Note 18.

Commitments, Contingencies and Guarantees

Commitments

The table below presents the firm's commitments.

                                                                Commitment Amount by Period                           Total Commitments                                                         of Expiration as of December 2012                         as of December                                                                 2014-         2016-            2018- in millions                                        2013          2015          2017       Thereafter               2012           2011 Commitments to extend credit 1 Commercial lending: 2 Investment-grade                                $ 7,765       $11,632       $33,620           $  719           $ 53,736       $ 51,281  Non-investment-grade                              2,114         4,462         9,833            4,693             21,102         14,217  Warehouse financing                                 556           228             -                -                784            247 Total commitments to extend credit               10,435        16,322        43,453            5,412             75,622         65,745  Contingent and forward starting resale and securities borrowing agreements  3                          47,599             -             -                -             47,599         54,522  Forward starting repurchase and secured lending agreements 3                              6,144             -             -                -              6,144         17,964  Letters of credit 4                                 614           160             -               15                789          1,353  Investment commitments                            1,378         2,174           258            3,529              7,339          9,118  Other                                             4,471            53            31               69              4,624          5,342 Total commitments                               $70,641       $18,709       $43,742           $9,025           $142,117       $154,044    

1. Commitments to extend credit are presented net of amounts syndicated to third

   parties.    

2. Includes commitments associated with the former William Street credit

   extension program.    

3. These agreements generally settle within three business days.

4. Consists of commitments under letters of credit issued by various banks which

the firm provides to counterparties in lieu of securities or cash to satisfy

various collateral and margin deposit requirements.

Commitments to Extend Credit

  The firm's commitments to extend credit are agreements to lend with fixed termination dates and depend on the satisfaction of all contractual conditions to borrowing. The total commitment amount does not necessarily reflect actual future cash flows because the firm may syndicate all or substantial portions of these commitments and commitments can expire unused or be reduced or cancelled at the counterparty's request.  

The firm generally accounts for commitments to extend credit at fair value. Losses, if any, are generally recorded, net of any fees in "Other principal transactions."

  As of December 2012, approximately $16.09 billion of the firm's lending commitments were held for investment and were accounted for on an accrual basis. As of December 2012, the carrying value and the estimated fair value of such lending commitments were liabilities of $63 million and $523 million, respectively. As these lending commitments are not accounted for at fair value under the  fair value option or at fair value in accordance with other U.S. GAAP, their fair value is not included in the firm's fair value hierarchy in Notes 6, 7 and 8. Had these commitments been included in the firm's fair value hierarchy, they would have primarily been classified in level 3 as of December 2012.  Commercial Lending. The firm's commercial lending commitments are extended to investment-grade and non-investment-grade corporate borrowers. Commitments to investment-grade corporate borrowers are principally used for operating liquidity and general corporate purposes. The firm also extends lending commitments in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. Commitments that are extended for contingent acquisition financing are often intended to be short-term in nature, as borrowers often seek to replace them with other funding sources.      184   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection on certain approved loan commitments (primarily investment-grade commercial lending commitments). The notional amount of such loan commitments was $32.41 billion and $31.94 billion as of December 2012 and December 2011, respectively. The credit loss protection on loan commitments provided by SMFG is generally limited to 95% of the first loss the firm realizes on such commitments, up to a maximum of approximately $950 million. In addition, subject to the satisfaction of certain conditions, upon the firm's request, SMFG will provide protection for 70% of additional losses on such commitments, up to a maximum of $1.13 billion, of which $300 million of protection had been provided as of both December 2012 and December 2011. The firm also uses other financial instruments to mitigate credit risks related to certain commitments not covered by SMFG. These instruments primarily include credit default swaps that reference the same or similar underlying instrument or entity or credit default swaps that reference a market index.  

Warehouse Financing. The firm provides financing to clients who warehouse financial assets. These arrangements are secured by the warehoused assets, primarily consisting of commercial mortgage loans.

Contingent and Forward Starting Resale and Securities Borrowing Agreements/Forward Starting Repurchase and Secured Lending Agreements

  The firm enters into resale and securities borrowing agreements and repurchase and secured lending agreements that settle at a future date. The firm also enters into commitments to provide contingent financing to its clients and counterparties through resale agreements. The firm's funding of these commitments depends on the satisfaction of all contractual conditions to the resale agreement and these commitments can expire unused.  

Investment Commitments

  The firm's investment commitments consist of commitments to invest in private equity, real estate and other assets directly and through funds that the firm raises and manages. These commitments include $872 million and $1.62 billion as of December 2012 and December 2011, respectively, related to real estate private investments and $6.47 billion and $7.50 billion as of December 2012 and December 2011, respectively, related to corporate and other private investments. Of these amounts, $6.21 billion and $8.38 billion as of December 2012 and December 2011, respectively, relate to commitments to invest in funds managed by the firm, which will be funded at market value on the date of investment.  

Leases

The firm has contractual obligations under long-term noncancelable lease agreements, principally for office space, expiring on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. The table below presents future minimum rental payments, net of minimum sublease rentals.

                                                          As of                        in millions           December 2012                        2013                         $  439                         2014                            407                         2015                            345                         2016                            317                         2017                            306                         2018 - thereafter             1,375                        Total                        $3,189

Rent charged to operating expense for the years ended December 2012, December 2011 and December 2010 was $374 million, $475 million and $508 million, respectively.

  Operating leases include office space held in excess of current requirements. Rent expense relating to space held for growth is included in "Occupancy." 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 on termination.          Goldman Sachs 2012 Form 10-K   185  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Contingencies

Legal Proceedings. See Note 27 for information about legal proceedings, including certain mortgage-related matters.

  Certain Mortgage-Related Contingencies. There are multiple areas of focus by regulators, governmental agencies and others within the mortgage market that may impact originators, issuers, servicers and investors. There remains significant uncertainty surrounding the nature and extent of any potential exposure for participants in this market.    

Ÿ Representations and Warranties. The firm has not been a significant originator

of residential mortgage loans. The firm did purchase loans originated by

others and generally received loan-level representations of the type described

below from the originators. During the period 2005 through 2008, the firm sold

approximately $10 billion of loans to government-sponsored enterprises and

approximately $11 billion of loans to other third parties. In addition, the

firm transferred loans to trusts and other mortgage securitization vehicles.

As of December 2012 and December 2011, the outstanding balance of the loans

transferred to trusts and other mortgage securitization vehicles during the

period 2005 through 2008 was approximately $35 billion and $42 billion,

respectively. This amount reflects paydowns and cumulative losses of

approximately $90 billion ($20 billion of which are cumulative losses) as of

December 2012 and approximately $83 billion ($17 billion of which are     cumulative losses) as of December 2011. A small number of these Goldman     Sachs-issued securitizations with an outstanding principal balance of     $540 million and total paydowns and cumulative losses of $1.52 billion

($508 million of which are cumulative losses) as of December 2012, and an

outstanding principal balance of $635 million and total paydowns and

cumulative losses of $1.42 billion ($465 million of which are cumulative

losses) as of December 2011, were structured with credit protection obtained

from monoline insurers. In connection with both sales of loans and

securitizations, the firm provided loan level representations of the type

described below and/or assigned the loan level representations from the party

    from whom the firm purchased the loans.       The loan level representations made in connection with the sale or

securitization of mortgage loans varied among transactions but were generally

detailed representations applicable to each loan in the portfolio and addressed

matters relating to the property, the borrower and the note. These

representations generally included, but were not limited to, the following:

(i) certain attributes of the borrower's financial status; (ii) loan-to-value

ratios, owner occupancy status and certain other characteristics of the

property; (iii) the lien position; (iv) the fact that the loan was originated

  in compliance with law; and (v) completeness of the loan documentation.    

The firm has received repurchase claims for residential mortgage loans based on

alleged breaches of representations, from government-sponsored enterprises,

other third parties, trusts and other mortgage securitization vehicles, which

have not been significant. During the years ended December 2012 and

December 2011, the firm repurchased loans with an unpaid principal balance of

less than $10 million. The loss related to the repurchase of these loans was

  not material for the years ended December 2012 and December 2011.       Ultimately, the firm's exposure to claims for repurchase of residential

mortgage loans based on alleged breaches of representations will depend on a

number of factors including the following: (i) the extent to which these claims

are actually made; (ii) the extent to which there are underlying breaches of

representations that give rise to valid claims for repurchase; (iii) in the

case of loans originated by others, the extent to which the firm could be held

liable and, if it is, the firm's ability to pursue and collect on any claims

against the parties who made representations to the firm; (iv) macro-economic

factors, including developments in the residential real estate market; and

  (v) legal and regulatory developments.    

Based upon the large number of defaults in residential mortgages, including

those sold or securitized by the firm, there is a potential for increasing

  claims for repurchases. However, the firm is not in a position to make a   meaningful estimate of that exposure at this time.       186   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Ÿ Foreclosure and Other Mortgage Loan Servicing Practices and Procedures. The

firm had received a number of requests for information from regulators and

other agencies, including state attorneys general and banking regulators, as

part of an industry-wide focus on the practices of lenders and servicers in

connection with foreclosure proceedings and other aspects of mortgage loan

servicing practices and procedures. The requests sought information about the

foreclosure and servicing protocols and activities of Litton, a residential

mortgage servicing subsidiary sold by the firm to Ocwen Financial Corporation

(Ocwen) in the third quarter of 2011. The firm is cooperating with the

requests and these inquiries may result in the imposition of fines or other

regulatory action. In the third quarter of 2010, prior to the firm's sale of

Litton, Litton had temporarily suspended evictions and foreclosure and real

estate owned sales in a number of states, including those with judicial

foreclosure procedures. Litton resumed these activities beginning in the

    fourth quarter of 2010.       In connection with the sale of Litton, the firm provided customary   representations and warranties, and indemnities for breaches of these

representations and warranties, to Ocwen. These indemnities are subject to

various limitations, and are capped at approximately $50 million. The firm has

not yet received any claims relating to these indemnities. The firm also agreed

to provide specific indemnities to Ocwen related to claims made by third

parties with respect to servicing activities during the period that Litton was

owned by the firm and which are in excess of the related reserves accrued for

such matters by Litton at the time of the sale. These indemnities are capped at

approximately $125 million. The firm has recorded a reserve for the portion of

these potential losses that it believes is probable and can be reasonably

estimated. As of December 2012, the firm had not received material claims with

respect to these indemnities and had not made material payments in connection

  with these claims.    

The firm further agreed to provide indemnities to Ocwen not subject to a cap,

which primarily relate to potential liabilities constituting fines or civil

monetary penalties which could be imposed in settlements with certain terms

with U.S. states' attorneys general or in consent orders with certain terms

with the Federal Reserve, the Office of Thrift Supervision, the Office of the

  Comptroller of the Currency, the FDIC or the New York State Department of   Financial Services, in each case relating to Litton's  

foreclosure and servicing practices while it was owned by the firm. The firm

has entered into a settlement in principle with the Board of Governors of the

Federal Reserve System (Federal Reserve Board) relating to foreclosure and

    servicing matters as described below.    

Under the Litton sale agreement the firm also retained liabilities associated

with claims related to Litton's failure to maintain lender-placed mortgage

insurance, obligations to repurchase certain loans from government-sponsored

enterprises, subpoenas from one of Litton's regulators, and fines or civil

penalties imposed by the Federal Reserve or the New York State Department of

Financial Services in connection with certain compliance matters. Management is

unable to develop an estimate of the maximum potential amount of future

payments under these indemnities because the firm has received no claims under

these indemnities other than an immaterial amount with respect to

government-sponsored enterprises. However, management does not believe, based

on currently available information, that any payments under these indemnities

  will have a material adverse effect on the firm's financial condition.    

On September 1, 2011, Group Inc. and GS Bank USA entered into a Consent Order

(the Order) with the Federal Reserve Board relating to the servicing of

residential mortgage loans. The terms of the Order were substantially similar

and, in many respects, identical to the orders entered into with the Federal

Reserve Board by other large U.S. financial institutions. The Order set forth

various allegations of improper conduct in servicing by Litton, requires that

Group Inc. and GS Bank USA cease and desist such conduct, and required that

Group Inc. and GS Bank USA, and their boards of directors, take various

affirmative steps. The Order required (i) Group Inc. and GS Bank USA to engage

a third-party consultant to conduct a review of certain foreclosure actions or

proceedings that occurred or were pending between January 1, 2009 and

December 31, 2010; (ii) the adoption of policies and procedures related to

management of third parties used to outsource residential mortgage servicing,

loss mitigation or foreclosure; (iii) a "validation report" from an independent

third-party consultant regarding compliance with the Order for the first year;

and (iv) submission of quarterly progress reports as to compliance with the

Order by the boards of directors (or committees thereof) of Group Inc. and

GS Bank USA.             Goldman Sachs 2012 Form 10-K   187  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

On January 16, 2013, Group Inc. and GS Bank USA entered into a settlement in

principle with the Federal Reserve Board relating to the servicing of

residential mortgage loans and foreclosure processing. This settlement in

principle, amends the Order which is described above, provides for the

termination of the independent foreclosure review under the Order and calls for

Group Inc. and GS Bank USA collectively to: (i) make cash payments into a

settlement fund for distribution to eligible borrowers; and (ii) provide other

assistance for foreclosure prevention and loss mitigation over the next two

years. The other provisions of the Order will remain in effect. The firm's

  reserves for legal and regulatory matters as of December 2012 include   provisions relating to this settlement.    

In addition, on September 1, 2011, GS Bank USA entered into an Agreement on

Mortgage Servicing Practices with the New York State Department of Financial

Services, Litton and Ocwen relating to the servicing of residential mortgage

loans, and, in a related agreement with the New York State Department of

Financial Services, Group Inc. agreed to forgive 25% of the unpaid principal

balance on certain delinquent first lien residential mortgage loans owned by

Group Inc. or a subsidiary, totaling approximately $13 million in principal

   forgiveness.   Guarantees  The firm enters into various derivatives that meet the definition of a guarantee under U.S. GAAP, including written equity and commodity put options, written currency contracts and interest rate caps, floors and swaptions. Disclosures about derivatives are not required if they may be cash settled and the firm has no basis to conclude it is probable that the counterparties held the underlying instruments at inception of the contract. The firm has concluded that these conditions have been met for certain large, internationally active commercial and investment bank counterparties and certain other counterparties. Accordingly, the firm has not included such contracts in the table below.  The firm, in its capacity as an agency lender, indemnifies most of its securities lending customers against losses incurred in the event that borrowers do not return securities and the collateral held is insufficient to cover the market value of the securities borrowed.  In the ordinary course of business, the firm provides other financial guarantees of the obligations of third parties (e.g., standby letters of credit and other guarantees to enable clients to complete transactions and fund-related guarantees). These guarantees represent obligations to make payments to beneficiaries if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary.      188   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    The table below presents certain information about derivatives that meet the definition of a guarantee and certain other guarantees. The maximum payout in the table below is based on the notional amount of the contract and therefore does not represent anticipated losses. See Note 7 for further information about credit derivatives that meet the definition of a guarantee which are not included below.    

Because derivatives are accounted for at fair value, the carrying value is considered the best indication of payment/performance risk for individual contracts. However, the carrying values below exclude the effect of a legal right of setoff that may exist under an enforceable netting agreement and the effect of netting of cash collateral posted under credit support agreements.

                                                                                                 As of December 2012                                                                                    Maximum Payout/Notional Amount by Period of Expiration                                                           Carrying                                                           Value of                             2014-         2016-            2018- in millions                                          Net Liability               2013           2015          2017       Thereafter          Total Derivatives 1                                               $8,581           $339,460       $213,012       $49,413          $61,264       $663,149  Securities lending indemnifications 2                            -             27,123              -             -                -         27,123  Other financial guarantees 3                                   152                904            442         1,195              938          3,479    

1. These derivatives are risk managed together with derivatives that do not meet

the definition of a guarantee, and therefore these amounts do not reflect the

firm's overall risk related to its derivative activities. As of December 2011,

the carrying value of the net liability related to derivative guarantees was

$11.88 billion.    

2. Collateral held by the lenders in connection with securities lending

indemnifications was $27.89 billion as of December 2012. Because the

contractual nature of these arrangements requires the firm to obtain

collateral with a market value that exceeds the value of the securities lent

   to the borrower, there is minimal performance risk associated with these    guarantees.    

3. Other financial guarantees excludes certain commitments to issue standby

letters of credit that are included in "Commitments to extend credit." See

table in "Commitments" above for a summary of the firm's commitments. As of

December 2011, the carrying value of the net liability related to other    financial guarantees was $205 million.         Goldman Sachs 2012 Form 10-K   189  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    Guarantees of Securities Issued by Trusts. The firm has established trusts, including Goldman Sachs Capital I, the APEX Trusts, the 2012 Trusts, and other entities for the limited purpose of issuing securities to third parties, lending the proceeds to the firm and entering into contractual arrangements with the firm and third parties related to this purpose. The firm does not consolidate these entities. See Note 16 for further information about the transactions involving Goldman Sachs Capital I, the APEX Trusts, and the 2012 Trusts.  The firm effectively provides for the full and unconditional guarantee of the securities issued by these entities. Timely payment by the firm of amounts due to these entities under the guarantee, borrowing, preferred stock and related contractual arrangements will be sufficient to cover payments due on the securities issued by these entities.  Management believes that it is unlikely that any circumstances will occur, such as nonperformance on the part of paying agents or other service providers, that would make it necessary for the firm to make payments related to these entities other than those required under the terms of the guarantee, borrowing, preferred stock and related contractual arrangements and in connection with certain expenses incurred by these entities.  Indemnities and Guarantees of Service Providers. In the ordinary course of business, the firm indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the firm or its affiliates.  The firm may also be liable to some clients for losses caused by acts or omissions of third-party service providers, including sub-custodians and third-party brokers. In addition, the firm is a member of payment, clearing and settlement networks as well as securities exchanges around the world that may require the firm to meet the obligations of such networks and exchanges in the event of member defaults.  In connection with its prime brokerage and clearing businesses, the firm agrees to clear and settle on behalf of its clients the transactions entered into by them with other brokerage firms. The firm's obligations in respect of such transactions are secured by the assets in the client's account as well as any proceeds received from the transactions cleared and settled by the firm on behalf of the client. In connection with joint venture investments, the firm may issue loan guarantees under which it may be liable in the event of fraud, misappropriation, environmental liabilities and certain other matters involving the borrower.  

The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no material liabilities related to these guarantees and indemnifications have been recognized in the consolidated statements of financial condition as of December 2012 and December 2011.

  Other Representations, Warranties and Indemnifications. The firm provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The firm may also provide indemnifications protecting against changes in or adverse application of certain U.S. tax laws in connection with ordinary-course transactions such as securities issuances, borrowings or derivatives.  In addition, the firm may provide indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or an adverse application of certain non-U.S. tax laws.  These indemnifications generally are standard contractual terms and are entered into in the ordinary course of business. Generally, there are no stated or notional amounts included in these indemnifications, and the contingencies triggering the obligation to indemnify are not expected to occur. The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no material liabilities related to these arrangements have been recognized in the consolidated statements of financial condition as of December 2012 and December 2011.      190   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Guarantees of Subsidiaries. Group Inc. fully and unconditionally guarantees the securities issued by GS Finance Corp., a wholly-owned finance subsidiary of the firm.

Group Inc. has guaranteed the payment obligations of Goldman, Sachs & Co. (GS&Co.), GS Bank USA and Goldman Sachs Execution & Clearing, L.P. (GSEC), subject to certain exceptions.

  In November 2008, the firm contributed subsidiaries into GS Bank USA, and Group Inc. agreed to guarantee the reimbursement of certain losses, including credit-related losses, relating to assets held by the contributed entities. In connection with this guarantee, Group Inc. also agreed to pledge to GS Bank USA certain collateral, including interests in subsidiaries and other illiquid assets.  In addition, Group Inc. guarantees many of the obligations of its other consolidated subsidiaries on a transaction-by-transaction basis, as negotiated with counterparties. Group Inc. is unable to develop an estimate of the maximum payout under its subsidiary guarantees; however, because these guaranteed obligations are also obligations of consolidated subsidiaries included in the table above, Group Inc.'s liabilities as guarantor are not separately disclosed.    

Note 19. Shareholders' Equity

 Note 19.  Shareholders' Equity  Common Equity  Dividends declared per common share were $1.77 in 2012, $1.40 in 2011 and $1.40 in 2010. On January 15, 2013, Group Inc. declared a dividend of $0.50 per common share to be paid on March 28, 2013 to common shareholders of record on February 28, 2013.  The firm's share repurchase program is intended to help maintain the appropriate level of common equity. The repurchase program is effected primarily through regular open-market purchases, the amounts and timing of which are determined primarily by the firm's current and projected capital positions (i.e., comparisons of the firm's desired level and composition of capital to its actual level and composition of capital), but which may also be influenced by general market conditions and the prevailing price and trading volumes of the firm's common stock. Any repurchase of the firm's common stock requires approval by the Federal Reserve Board.  During 2012, 2011 and 2010, the firm repurchased 42.0 million shares, 47.0 million shares and 25.3 million shares of its common stock at an average cost per share of $110.31, $128.33 and $164.48, for a total cost of $4.64 billion, $6.04 billion and $4.16 billion, respectively, under the share repurchase program. In addition, pursuant to the terms of certain share-based compensation plans, employees may remit shares to the firm or the firm may cancel restricted stock units (RSUs) to satisfy minimum statutory employee tax withholding requirements. Under these plans, during 2012, 2011 and 2010, employees remitted 33,477 shares, 75,517 shares and 164,172 shares with a total value of $3 million, $12 million and $25 million, and the firm cancelled 12.7 million, 12.0 million and 6.2 million of RSUs with a total value of $1.44 billion, $1.91 billion and $972 million, respectively.          Goldman Sachs 2012 Form 10-K   191  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Preferred Equity

  The table below presents perpetual preferred stock issued and outstanding as of December 2012.                                                                                                         Redemption                Shares         Shares             Shares                                                 Value Series     Authorized         Issued        Outstanding                      Dividend Rate      (in millions) A              50,000         30,000             29,999             3 month LIBOR + 0.75%,             $  750                                                              with floor of 3.75% per annum  B              50,000         32,000             32,000                    6.20% per annum                800  C              25,000          8,000              8,000             3 month LIBOR + 0.75%,                200                                                              with floor of 4.00% per annum  D              60,000         54,000             53,999             3 month LIBOR + 0.67%,              1,350                                                              with floor of 4.00% per annum  E              17,500         17,500             17,500             3 month LIBOR + 0.77%,              1,750                                                              with floor of 4.00% per annum  F               5,000          5,000              5,000             3 month LIBOR + 0.77%,                500                                                              with floor of 4.00% per annum  I              34,500         34,000             34,000                    5.95% per annum                850               242,000        180,500            180,498                                                $6,200     Each share of non-cumulative Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock issued and outstanding has a par value of $0.01, has a liquidation preference of $25,000, is represented by 1,000 depositary shares and is redeemable at the firm's option, subject to the approval of the Federal Reserve Board, at a redemption price equal to $25,000 plus declared and unpaid dividends. On October 24, 2012, Group Inc. issued 34,000 shares of non-cumulative Series I Preferred Stock, par value $0.01 per share. Each share of Series I Preferred Stock issued and outstanding has a liquidation preference of $25,000, is represented by 1,000 depositary shares and is redeemable at the firm's option beginning November 10, 2017, subject to the approval of the Federal Reserve Board, at a redemption price equal to $25,000 plus accrued and unpaid dividends.  In 2007, the Board of Directors of Group Inc. (Board) authorized 17,500 shares of Series E Preferred Stock, and 5,000 shares of Series F Preferred Stock, in connection with the APEX Trusts. On June 1, 2012, Group Inc. issued 17,500 shares of Series E Preferred Stock to Goldman Sachs Capital II pursuant to the stock purchase contracts held by Goldman Sachs Capital II. On September 4, 2012, Group  Inc. issued 5,000 shares of Series F Preferred Stock to Goldman Sachs Capital III pursuant to the stock purchase contracts held by Goldman Sachs Capital III. Each share of Series E and Series F Preferred Stock issued and outstanding has a par value of $0.01, has a liquidation preference of $100,000 and is redeemable at the option of the firm at any time subject to approval from the Federal Reserve Board and to certain covenant restrictions governing the firm's ability to redeem or purchase the preferred stock without issuing common stock or other instruments with equity-like characteristics, at a redemption price equal to $100,000 plus declared and unpaid dividends. See Note 16 for further information about the APEX Trusts.  All series of preferred stock are pari passu and have a preference over the firm's common stock on liquidation. Dividends on each series of preferred stock, if declared, are payable quarterly in arrears. The firm's ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the firm fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period.      192   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    In March 2011, the firm provided notice to Berkshire Hathaway Inc. and certain of its subsidiaries (collectively, Berkshire Hathaway) that it would redeem in full the 50,000 shares of the firm's 10% Cumulative Perpetual Preferred Stock, Series G (Series G Preferred Stock) held by Berkshire Hathaway for the stated redemption price of $5.50 billion ($110,000 per share), plus accrued and unpaid dividends. In connection with this notice, the firm recognized a preferred dividend of $1.64 billion (calculated as the difference between the carrying value and the redemption value of the preferred stock), which was recorded as a reduction to earnings applicable to common shareholders for the first quarter of 2011. The redemption also resulted in the acceleration of $24 million of preferred dividends related to the period from April 1, 2011 to the redemption date, which was included in the firm's results during the three months ended March 2011.  The Series G Preferred Stock was redeemed on April 18, 2011. Berkshire Hathaway continues to hold a five-year warrant, issued in October 2008, to purchase up to 43.5 million shares of common stock at an exercise price of $115.00 per share.  On January 9, 2013, Group Inc. declared dividends of $234.38, $387.50, $250.00, $250.00 and $437.99 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series I Preferred Stock, respectively, to be paid on February 11, 2013 to preferred shareholders of record on January 27, 2013. In addition, the firm declared dividends of $977.78 per each share of Series E Preferred Stock and Series F Preferred Stock, to be paid on March 1, 2013 to preferred shareholders of record on February 14, 2013.  

The table below presents preferred dividends declared on preferred stock.

                                                                 Year Ended December                           2012                                   2011                                   2010                per share        in millions           per share        in millions            per share        in millions Series A       $  960.94               $ 29           $  950.51               $ 28           $   950.51               $ 28  Series B        1,550.00                 50            1,550.00                 50             1,550.00                 50  Series C        1,025.01                  8            1,013.90                  8             1,013.90                  8  Series D        1,025.01                 55            1,013.90                 55             1,013.90                 55  Series E        2,055.56                 36                   -                  -                    -                  -  Series F        1,000.00                  5                   -                  -                    -                  -  Series G 1             -                  -            2,500.00                125            10,000.00                500 Total                                  $183                                   $266                                    $641    

1. Amount for the year ended December 2011 excludes preferred dividends related

to the redemption of the firm's Series G Preferred Stock.

Accumulated Other Comprehensive Income/(Loss)

  The tables below present accumulated other comprehensive income/(loss) by type.                                                                                                       As of December 2012                                                              Currency                    Pension and                 Net unrealized          Accumulated other                                                           translation                 postretirement              gains/(losses) on              comprehensive                                                           adjustment,         liability adjustments,             available-for-sale             income/(loss), in millions                                                net of tax                     net of tax         securities, net of tax                 net of tax Balance, beginning of year                                      $(225 )                        $(374 )                         $ 83                      $(516 )  Other comprehensive income/(loss)                                 (89 )                          168                            244                        323 Balance, end of year                                            $(314 )                        $(206 )                         $327  1                   $(193 )                                                                                                   As of December 2011                                                              Currency                    Pension and                 Net unrealized          Accumulated other                                                           translation                 postretirement              gains/(losses) on              comprehensive                                                           adjustment,         liability adjustments,             available-for-sale             income/(loss), in millions                                                net of tax                     net of tax         securities, net of tax                 net of tax Balance, beginning of year                                      $(170 )                        $(229 )                         $113                      $(286 )  Other comprehensive loss                                          (55 )                         (145 )                          (30 )                     (230 ) Balance, end of year                                            $(225 )                        $(374 )                         $ 83  1                   $(516 )    

1. Substantially all consists of net unrealized gains on securities held by the

firm's insurance subsidiaries as of both December 2012 and December 2011.

        Goldman Sachs 2012 Form 10-K   193  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 20. Regulation and Capital Adequacy

Note 20.

Regulation and Capital Adequacy

    The Federal Reserve Board is the primary regulator of Group Inc., a bank holding company under the Bank Holding Company Act of 1956 (BHC Act) and a financial holding company under amendments to the BHC Act effected by the U.S. Gramm-Leach-Bliley Act of 1999. As a bank holding company, the firm is subject to consolidated regulatory capital requirements that are computed in accordance with the Federal Reserve Board's risk-based capital requirements (which are based on the 'Basel 1' Capital Accord of the Basel Committee). These capital requirements are expressed as capital ratios that compare measures of capital to risk-weighted assets (RWAs). The firm's U.S. bank depository institution subsidiaries, including GS Bank USA, are subject to similar capital requirements.  Under the Federal Reserve Board's capital adequacy requirements and the regulatory framework for prompt corrective action that is applicable to GS Bank USA, the firm and its U.S. bank depository institution subsidiaries must meet specific capital requirements that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory reporting practices. The firm and its U.S. bank depository institution subsidiaries' capital amounts, as well as GS Bank USA's prompt corrective action classification, are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  

Many of the firm's subsidiaries, including GS&Co. and the firm's other broker-dealer subsidiaries, are subject to separate regulation and capital requirements as described below.

Group Inc.

  Federal Reserve Board regulations require bank holding companies to maintain a minimum Tier 1 capital ratio of 4% and a minimum total capital ratio of 8%. The required minimum Tier 1 capital ratio and total capital ratio in order to be considered a "well-capitalized" bank holding company under the Federal Reserve Board guidelines are 6% and 10%, respectively. Bank holding companies may be expected to maintain ratios well above the minimum levels, depending on their particular condition, risk profile and growth plans. The minimum Tier 1 leverage ratio is 3% for bank holding companies that have received the highest supervisory rating under Federal Reserve Board guidelines or that have implemented the Federal Reserve Board's risk-based capital measure for market risk. Other bank holding companies must have a minimum Tier 1 leverage ratio of 4%.  The table below presents information regarding Group Inc.'s regulatory capital ratios.                                                     As of December                  $ in millions                 2012             2011                  Tier 1 capital            $ 66,977         $ 63,262                   Tier 2 capital            $ 13,429         $ 13,881                   Total capital             $ 80,406         $ 77,143                   Risk-weighted assets      $399,928         $457,027                   Tier 1 capital ratio          16.7 %           13.8 %                   Total capital ratio           20.1 %           16.9 %                   Tier 1 leverage ratio          7.3 %            7.0 %   RWAs under the Federal Reserve Board's risk-based capital requirements are calculated based on the amount of market risk and credit risk. RWAs for market risk are determined by reference to the firm's Value-at-Risk (VaR) model, supplemented by other measures to capture risks not reflected in the firm's VaR model. Credit risk for on-balance sheet assets is based on the balance sheet value. For off-balance sheet exposures, including OTC derivatives and commitments, a credit equivalent amount is calculated based on the notional amount of each trade. All such assets and exposures are then assigned a risk weight depending on, among other things, whether the counterparty is a sovereign, bank or a qualifying securities firm or other entity (or if collateral is held, depending on the nature of the collateral).  

Tier 1 leverage ratio is defined as Tier 1 capital under Basel 1 divided by average adjusted total assets (which includes adjustments for disallowed goodwill and intangible assets, and the carrying value of equity investments in non-financial companies that are subject to deductions from Tier 1 capital).

     194   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Regulatory Reform

  Changes to the market risk capital rules of the U.S. federal bank regulatory agencies (the Agencies) became effective on January 1, 2013. These changes require the addition of several new model-based capital requirements, as well as an increase in capital requirements for securitization positions, and are designed to implement the new market risk framework of the Basel Committee, as well as the prohibition on the use of external credit ratings, as required by the Dodd-Frank Act. This revised market risk framework is a significant part of the regulatory capital changes that will ultimately be included in the firm's capital ratios under the guidelines issued by the Basel Committee in December 2010 (Basel 3). These changes resulted in increased regulatory capital requirements for market risk, and will be reflected in all of the firm's Basel-based capital ratios for periods beginning on or after January 1, 2013.  The firm is currently working to implement the requirements set out in the Agencies' Risk-Based Capital Standards: Advanced Capital Adequacy Framework - Basel 2, as applicable to Group Inc. as a bank holding company and as an advanced approach banking organization (Basel 2). These requirements are based on the advanced approaches under the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee. Basel 2, among other things, revises the regulatory capital framework for credit risk, equity investments, and introduces a new operational risk capital requirement. The firm will adopt Basel 2 once approved to do so by regulators. The firm's capital adequacy ratio will also be impacted by the further changes outlined below under Basel 3 and provisions of the Dodd-Frank Act.  The "Collins Amendment" of the Dodd-Frank Act requires advanced approach banking organizations to continue, upon adoption of Basel 2, to calculate risk-based capital ratios under both Basel 2 and Basel 1. For each of the Tier 1 and Total capital ratios, the lower of the Basel 1 and Basel 2 ratios calculated will be used to determine whether such advanced approach banking organizations meet their minimum risk-based capital requirements. Furthermore, the June 2012 proposals described below include provisions which, if enacted as proposed, would modify these minimum risk-based capital requirements.  In June 2012, the Agencies proposed further modifications to their capital adequacy regulations to address aspects of both the Dodd-Frank Act and Basel 3. If enacted as proposed, the most significant changes that would impact the firm include (i) revisions to the definition of Tier 1 capital, including new deductions from Tier 1 capital, (ii) higher minimum capital and leverage ratios, (iii) a new minimum ratio of Tier 1 common equity to RWAs, (iv) new capital conservation and counter-cyclical capital buffers, (v) an additional leverage ratio that includes measures of off-balance sheet exposures, (vi) revisions to the methodology for calculating RWAs, particularly for credit risk capital requirements for derivatives and (vii) a new "standardized approach" to the calculation of RWAs that would replace the Federal Reserve's current Basel 1 risk-based capital framework in 2015, including for purposes of calculating the requisite capital floor under the Collins Amendment. In November 2012, the Agencies announced that the proposed effective date of January 1, 2013 for these modifications would be deferred, but have not indicated a revised effective date. These proposals incorporate the phase-out of Tier 1 capital treatment for the firm's junior subordinated debt issued to trusts; such capital would instead be eligible as Tier 2 capital under the proposals. Under the Collins Amendment, this phase-out was scheduled to begin on January 1, 2013. Due to the aforementioned deferral of the effective date of the proposed capital rules, however, the application of this phase-out remains uncertain at this time.          Goldman Sachs 2012 Form 10-K   195  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    In November 2011, the Basel Committee published its final provisions for assessing the global systemic importance of banking institutions and the range of additional Tier 1 common equity that should be maintained by banking institutions deemed to be globally systemically important. The additional capital for these institutions would initially range from 1% to 2.5% of Tier 1 common equity and could be as much as 3.5% for a banking institution that increases its systemic footprint (e.g., by increasing total assets). In November 2012, the Financial Stability Board (established at the direction of the leaders of the Group of 20) indicated that the firm, based on its 2011 financial data, would be required to hold an additional 1.5% of Tier 1 common equity as a globally systemically important banking institution under the Basel Committee's methodology. The final determination of the amount of additional Tier 1 common equity that the firm will be required to hold will be based on the firm's 2013 financial data and the manner and timing of the U.S. banking regulators' implementation of the Basel Committee's methodology. The Basel Committee indicated that globally systemically important banking institutions will be required to meet the capital surcharges on a phased-in basis from 2016 through 2019.  In October 2012, the Basel Committee published its final provisions for calculating incremental capital requirements for domestic systemically important banking institutions. The provisions are complementary to the framework outlined above for global systemically important banking institutions, but are more principles-based in order to provide an appropriate degree of national discretion. The impact of these provisions on the regulatory capital requirements of GS Bank USA and the firm's other subsidiaries, including Goldman Sachs International (GSI), will depend on how they are implemented by the banking and non-banking regulators in the United States and other jurisdictions.  The Basel Committee has released other consultation papers that may result in further changes to the regulatory capital requirements, including a "Fundamental Review of the Trading Book." and "Revisions to the Basel Securitization Framework." The full impact of these developments on the firm will not be known with certainty until after any resulting rules are finalized.  The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers and major security-based swap participants. The firm has registered certain subsidiaries as "swap dealers" under the U.S. Commodity Futures Trading Commission (CFTC) rules, including GS&Co., GS Bank USA, GSI and J. Aron & Company. These entities and other entities that would require registration under the CFTC or SEC rules will be subject to regulatory capital requirements, which have not yet been finalized by the CFTC and SEC.  The interaction among the Dodd-Frank Act, other reform initiatives contemplated by the Agencies, the Basel Committee's proposed and announced changes and other proposed or announced changes from other governmental entities and regulators (including the European Union (EU) and the U.K.'s Financial Services Authority (FSA)) adds further uncertainty to the firm's future capital and liquidity requirements and those of the firm's subsidiaries.      196   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Bank Subsidiaries

GS Bank USA, an FDIC-insured, New York State-chartered bank and a member of the Federal Reserve System, is supervised and regulated by the Federal Reserve Board, the FDIC, the New York State Department of Financial Services and the Consumer Financial Protection Bureau, and is subject to minimum capital requirements (described below) that are calculated in a manner similar to those applicable to bank holding companies. GS Bank USA computes its capital ratios in accordance with the regulatory capital requirements currently applicable to state member banks, which are based on Basel 1 as implemented by the Federal Reserve Board, for purposes of assessing the adequacy of its capital. Under the regulatory framework for prompt corrective action that is applicable to GS Bank USA, in order to be considered a "well-capitalized" depository institution, GS Bank USA must maintain a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a Tier 1 leverage ratio of at least 5%. GS Bank USA has agreed with the Federal Reserve Board to maintain minimum capital ratios in excess of these "well-capitalized" levels. Accordingly, for a period of time, GS Bank USA is expected to maintain a Tier 1 capital ratio of at least 8%, a total capital ratio of at least 11% and a Tier 1 leverage ratio of at least 6%. As noted in the table below, GS Bank USA was in compliance with these minimum capital requirements as of December 2012 and December 2011.  

The table below presents information regarding GS Bank USA's regulatory capital ratios under Basel 1 as implemented by the Federal Reserve Board.

                                                    As of December                  $ in millions                 2012             2011                  Tier 1 capital            $ 20,704         $ 19,251                   Tier 2 capital            $     39         $      6                   Total capital             $ 20,743         $ 19,257                   Risk-weighted assets      $109,669         $112,824                   Tier 1 capital ratio          18.9 %           17.1 %                   Total capital ratio           18.9 %           17.1 %                   Tier 1 leverage ratio         17.6 %           18.5 %  

Effective January 1, 2013, GS Bank USA implemented the revised market risk regulatory framework outlined above. These changes resulted in increased regulatory capital requirements for market risk, and will be reflected in all of GS Bank USA's Basel-based capital ratios for periods beginning on or after January 1, 2013.

GS Bank USA is also currently working to implement the Basel 2 framework, as implemented by the Federal Reserve Board. GS Bank USA will adopt Basel 2 once approved to do so by regulators.  In addition, the capital requirements for GS Bank USA are expected to be impacted by the June 2012 proposed modifications to the Agencies' capital adequacy regulations outlined above, including the requirements of a floor to the advanced risk-based capital ratios. If enacted as proposed, these proposals would also change the regulatory framework for prompt corrective action that is applicable to GS Bank USA by, among other things, introducing a common equity Tier 1 ratio requirement, increasing the minimum Tier 1 capital ratio requirement and introducing a supplementary leverage ratio as a component of the prompt corrective action analysis. GS Bank USA will also be impacted by aspects of the Dodd-Frank Act, including new stress tests.  The deposits of GS Bank USA are insured by the FDIC to the extent provided by law. The Federal Reserve Board requires depository institutions to maintain cash reserves with a Federal Reserve Bank. The amount deposited by the firm's depository institution held at the Federal Reserve Bank was approximately $58.67 billion and $40.06 billion as of December 2012 and December 2011, respectively, which exceeded required reserve amounts by $58.59 billion and $39.51 billion as of December 2012 and December 2011, respectively.  Transactions between GS Bank USA and its subsidiaries and Group Inc. and its subsidiaries and affiliates (other than, generally, subsidiaries of GS Bank USA) are regulated by the Federal Reserve Board. These regulations generally limit the types and amounts of transactions (including credit extensions from GS Bank USA) that may take place and generally require those transactions to be on market terms or better to GS Bank USA.  The firm's principal non-U.S. bank subsidiaries include GSIB, a wholly-owned credit institution, regulated by the FSA, and GS Bank Europe, a wholly-owned credit institution, regulated by the Central Bank of Ireland, which are both subject to minimum capital requirements. As of December 2012 and December 2011, GSIB and GS Bank Europe were both in compliance with all regulatory capital requirements. On January 18, 2013, GS Bank Europe surrendered its banking license to the Central Bank of Ireland after transferring its deposits to GSIB.          Goldman Sachs 2012 Form 10-K   197  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Broker-Dealer Subsidiaries

  The firm's U.S. regulated broker-dealer subsidiaries include GS&Co. and GSEC. GS&Co. and GSEC are registered U.S. broker-dealers and futures commission merchants, and are subject to regulatory capital requirements, including those imposed by the SEC, the CFTC, Chicago Mercantile Exchange, the Financial Industry Regulatory Authority, Inc. (FINRA) and the National Futures Association. Rule 15c3-1 of the SEC and Rule 1.17 of the CFTC specify uniform minimum net capital requirements, as defined, for their registrants, and also effectively require that a significant part of the registrants' assets be kept in relatively liquid form. GS&Co. and GSEC have elected to compute their minimum capital requirements in accordance with the "Alternative Net Capital Requirement" as permitted by Rule 15c3-1.  As of December 2012 and December 2011, GS&Co. had regulatory net capital, as defined by Rule 15c3-1, of $14.12 billion and $11.24 billion, respectively, which exceeded the amount required by $12.42 billion and $9.34 billion, respectively. As of December 2012 and December 2011, GSEC had regulatory net capital, as defined by Rule 15c3-1, of $2.02 billion and $2.10 billion, respectively, which exceeded the amount required by $1.92 billion and $2.00 billion, respectively.  In addition to its alternative minimum net capital requirements, GS&Co. is also required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E of Rule 15c3-1. GS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As of December 2012 and December 2011, GS&Co. had tentative net capital and net capital in excess of both the minimum and the notification requirements.  

Insurance Subsidiaries

  The firm has U.S. insurance subsidiaries that are subject to state insurance regulation and oversight in the states in which they are domiciled and in the other states in which they are licensed. In addition, certain of the firm's insurance subsidiaries outside of the U.S. are regulated by the FSA and certain are regulated by the Bermuda Monetary Authority. The firm's insurance subsidiaries were in compliance with all regulatory capital requirements as of December 2012 and December 2011.  

Other Non-U.S. Regulated Subsidiaries

  The firm's principal non-U.S. regulated subsidiaries include GSI and Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firm's regulated U.K. broker-dealer, is subject to the capital requirements imposed by the FSA. GSJCL, the firm's regulated Japanese broker-dealer, is subject to the capital requirements imposed by Japan's Financial Services Agency. As of December 2012 and December 2011, GSI and GSJCL were in compliance with their local capital adequacy requirements. Certain other non-U.S. subsidiaries of the firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of December 2012 and December 2011, these subsidiaries were in compliance with their local capital adequacy requirements.  

Restrictions on Payments

  The regulatory requirements referred to above restrict Group Inc.'s ability to withdraw capital from its regulated subsidiaries. As of December 2012 and December 2011, Group Inc. was required to maintain approximately $31.01 billion and $25.53 billion, respectively, of minimum equity capital in these regulated subsidiaries. This minimum equity capital requirement includes certain restrictions imposed by federal and state laws as to the payment of dividends to Group Inc. by its regulated subsidiaries. In addition to limitations on the payment of dividends imposed by federal and state laws, the Federal Reserve Board, the FDIC and the New York State Department of Financial Services have authority to prohibit or to limit the payment of dividends by the banking organizations they supervise (including GS Bank USA) if, in the relevant regulator's opinion, payment of a dividend would constitute an unsafe or unsound practice in the light of the financial condition of the banking organization.      198   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 21. Earnings Per Common Share

 Note 21.  Earnings Per Common Share    Basic earnings per common share (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 for stock warrants and options and for RSUs for which future service is required as a condition to the delivery of the underlying common stock.  

The table below presents the computations of basic and diluted EPS.

                                                                           Year Ended December in millions, except per share amounts                           2012        

2011 2010 Numerator for basic and diluted EPS - net earnings applicable to common shareholders

$7,292

$2,510$7,713

Denominator for basic EPS - weighted average number of common shares

                                                  496.2        

524.6 542.0

  Effect of dilutive securities: RSUs                                                            11.3          14.6          15.0  Stock options and warrants                                       8.6          17.7          28.3 Dilutive potential common shares                                19.9          32.3          43.3 Denominator for diluted EPS - weighted average number of common shares and dilutive potential common shares                                        516.1         556.9         585.3  Basic EPS                                                     $14.63        $ 4.71        $14.15  Diluted EPS                                                    14.13          4.51         13.18     In the table above, unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents are treated as a separate class of securities in calculating EPS. The impact of applying this methodology was a reduction in basic EPS of $0.07 for both the years  

ended December 2012 and December 2011, and $0.08 for the year ended December 2010.

  The diluted EPS computations in the table above do not include the following:                                                                            Year Ended December in millions                                                      2012      

2011 2010 Number of antidilutive RSUs and common shares underlying antidilutive stock options and warrants

                          52.4         9.2         6.2         Goldman Sachs 2012 Form 10-K   199  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 22. Transactions with Affiliated Funds

Note 22.

Transactions with Affiliated Funds

    The firm has formed numerous nonconsolidated investment funds with third-party investors. As the firm generally acts as the investment manager for these funds, it is entitled to receive management fees and, in certain cases, advisory fees or incentive fees from these funds. Additionally, the firm invests alongside the third-party investors in certain funds.  The tables below present fees earned from affiliated funds, fees receivable from affiliated funds and the aggregate carrying value of the firm's interests in affiliated funds.                                                           Year Ended December           in millions                             2012         2011         2010           Fees earned from affiliated funds     $2,935       $2,789       $2,882                                                                   As of December        in millions                                           2012          2011        Fees receivable from funds                         $   704       $   721  

Aggregate carrying value of interests in funds 14,725 14,960

   As of December 2012 and December 2011, the firm had outstanding loans and guarantees to certain of its funds of $582 million and $289 million, respectively, which are collateralized by certain fund assets. These amounts relate primarily to certain real estate funds for which the firm voluntarily provided financial support to alleviate liquidity constraints during the financial crisis and, more recently, to enable them to fund investment opportunities. As of December 2012 and December 2011, the firm had no outstanding commitments to extend credit to these funds.  The Volcker Rule, as currently drafted, would restrict the firm from providing additional voluntary financial support to these funds after July 2014 (subject to extension by the Federal Reserve Board). As a general matter, in the ordinary course of business, the firm does not expect to provide additional voluntary financial support to these funds; however, in the event that such support is provided, the amount of any such support is not expected to be material. In addition, in the ordinary course of business, the firm may also engage in other activities with these funds, including, among others, securities lending, trade execution, market making, custody, and acquisition and bridge financing. See Note 18 for the firm's investment commitments related to these funds.      

200 Goldman Sachs 2012 Form 10-K

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 23. Interest Income and Interest Expense

Note 23.

Interest Income and Interest Expense

Interest income is recorded on an accrual basis based on contractual interest rates. The table below presents the

sources of interest income and interest expense.

                                                                         Year Ended December in millions                                                   2012           2011          2010 Interest income Deposits with banks                                        $   156        $   125       $    86  Securities borrowed, securities purchased under agreements to resell and federal funds sold  1                 (77 )          666           540  Financial instruments owned, at fair value                   9,817         10,718        10,346  Other interest 2                                             1,485          1,665         1,337 Total interest income                                       11,381         13,174        12,309 Interest expense Deposits                                                       399            280           304 

Securities loaned and securities sold under agreements to repurchase

                                                  822            905           708  Financial instruments sold, but not yet purchased, at fair value                                                   2,438          2,464         1,859  Short-term borrowings 3                                        581            526           453  Long-term borrowings 3                                       3,736          3,439         3,155  Other interest 4                                              (475 )          368           327 Total interest expense                                       7,501          7,982         6,806 Net interest income                                        $ 3,880        $ 5,192       $ 5,503    

1. Includes rebates paid and interest income on securities borrowed.

2. Includes interest income on customer debit balances and other interest-earning

   assets.    

3. Includes interest on unsecured borrowings and other secured financings.

4. Includes rebates received on other interest-bearing liabilities and interest

   expense on customer credit balances.         Goldman Sachs 2012 Form 10-K   201  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Note 24. Income Taxes  Note 24.  Income Taxes  Provision for Income Taxes  Income taxes are provided for using the asset and liability method under which deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities. The firm reports interest expense related to income tax matters in "Provision for taxes" and income tax penalties in "Other expenses."    The tables below present the components of the provision/(benefit) for taxes and a reconciliation of the U.S. federal statutory income tax rate to the firm's effective income tax rate.                                                                          Year Ended December in millions                                                   2012          2011          2010 Current taxes U.S. federal                                                $3,013        $  405        $1,791  State and local                                                628           392           325  Non-U.S.                                                       447           204         1,083 Total current tax expense                                    4,088         1,001         3,199 Deferred taxes U.S. federal                                                  (643 )         683         1,516  State and local                                                 38            24           162  Non-U.S.                                                       249            19          (339 ) Total deferred tax (benefit)/expense                          (356 )         726         1,339 Provision for taxes                                         $3,732        $1,727        $4,538                                                                    Year Ended December                                                               2012          2011          2010 U.S. federal statutory income tax rate                        35.0 %        

35.0 % 35.0 %

  State and local taxes, net of U.S. federal income tax effects                                                        3.8           4.4           2.5  Tax credits                                                   (1.0 )        (1.6 )        (0.7 )  Non-U.S. operations                                           (4.8 )        (6.7 )        (2.3 )  Tax-exempt income, including dividends                        (0.5 )        (2.4 )        (1.0 )  Other                                                          0.8          (0.7 )         1.7  1 Effective income tax rate                                     33.3 %        28.0 %        35.2 %    

1. Primarily includes the effect of the SEC settlement of $550 million,

   substantially all of which is non-deductible.     202   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Deferred Income Taxes

  Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse. Valuation allowances are established to reduce  deferred tax assets to the amount that more likely than not will be realized. Tax assets and liabilities are presented as a component of "Other assets" and "Other liabilities and accrued expenses," respectively.  The table below presents the significant components of deferred tax assets and liabilities.                                                                      As of December      in millions                                              2012          2011      Deferred tax assets      Compensation and benefits                              $2,447        $3,126       Unrealized losses                                       1,477           849 

ASC 740 asset related to unrecognized tax benefits 685

 569       Non-U.S. operations                                       965           662       Foreign tax credits                                         -            12       Net operating losses                                      222           213       Occupancy-related                                         119           110 

     Other comprehensive income-related                        114         

 168       Other, net                                                435           581                                                              6,464         6,290       Valuation allowance 1                                    (168 )         (65 )      Total deferred tax assets  2                           $6,296        

$6,225

     Depreciation and amortization                           1,230        

1,959

     Other comprehensive income-related                         85         

36

      Total deferred tax liabilities  2                      $1,315        $1,995    

1. Relates primarily to the ability to utilize losses in various tax

   jurisdictions.    

2. Before netting within tax jurisdictions.

     The firm has recorded deferred tax assets of $222 million and $213 million as of December 2012 and December 2011$60 million and $59 million as of December 2012 and December 2011, respectively, related to these net operating loss carryforwards. As of December 2012, the U.S. federal and foreign net operating loss carryforwards were $39 million and $640 million, respectively. If not utilized, the U.S. federal net operating loss carryforward will begin to expire in 2026. The foreign net operating loss carryforwards can be carried forward indefinitely. State and local net operating loss carryforwards of $1.19 billion will begin to expire in 2013. If these carryforwards expire, they will not have a material impact on the firm's results of operations. The firm  had foreign tax credit carryforwards of $0 and $12 million as of December 2012 and December 2011, respectively. The firm recorded a related net deferred income tax asset of $0 and $6 million as of December 2012 and December 2011, respectively.  The firm had capital loss carryforwards of $0 and $6 million as of December 2012 and December 2011, respectively. The firm recorded a related net deferred income tax asset of $0 and $2 million as of December 2012 and December 2011, respectively.  The valuation allowance increased by $103 million and $15 million during 2012 and 2011, respectively. The increase in 2012 was primarily due to the acquisition of deferred tax assets considered more likely than not to be unrealizable. The increase in 2011 was due to losses considered more likely than not to expire unused.          Goldman Sachs 2012 Form 10-K   203  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

    The firm permanently reinvests eligible earnings of certain foreign subsidiaries and, accordingly, does not accrue any U.S. income taxes that would arise if such earnings were repatriated. As of December 2012 and December 2011, this policy resulted in an unrecognized net deferred tax liability of $3.75 billion and $3.32 billion, respectively, attributable to reinvested earnings of $21.69 billion and $20.63 billion, respectively.  

Unrecognized Tax Benefits

  The firm recognizes tax positions in the financial statements only when it is more likely than not that the position will be sustained on 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 on settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements.    As of December 2012 and December 2011, the accrued liability for interest expense related to income tax matters and income tax penalties was $374 million and $233 million, respectively. The firm recognized $95 million, $21 million and $28 million of interest and income tax penalties for the years ended December 2012, December 2011 and December 2010, respectively. It is reasonably possible that unrecognized tax benefits could change significantly during the twelve months subsequent to December 2012 due to potential audit settlements, however, at this time it is not possible to estimate any potential change.  

The table below presents the changes in the liability for unrecognized tax benefits. This liability is included in "Other liabilities and accrued expenses." See Note 17 for further information.

                                                                                 As of December in millions                                                        2012          2011          2010 Balance, beginning of year                                       $1,887        $2,081        $1,925 

Increases based on tax positions related to the current year 190

       171           171  Increases based on tax positions related to prior years             336           278           162  Decreases related to tax positions of prior years                  (109 )   

(41 ) (104 )

  Decreases related to settlements                                    (35 )        (638 )        (128 )  Acquisitions/(dispositions)                                         (47 )          47            56  Exchange rate fluctuations                                           15           (11 )          (1 ) Balance, end of year                                             $2,237        $1,887        $2,081 Related deferred income tax asset 1                                 685           569           972  Net unrecognized tax benefit  2                                  $1,552        $1,318        $1,109    

1. Included in "Other assets." See Note 12.

2. If recognized, the net tax benefit would reduce the firm's effective income

    tax rate.     204   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Regulatory Tax Examinations

  The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong, Korea and various states, such as New York. The tax years under examination vary by jurisdiction. The firm believes that during 2013, certain audits have a reasonable possibility of being completed. The firm does not expect completion of these audits to have a material impact on the firm's financial condition but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.  

The table below presents the earliest tax years that remain subject to examination by major jurisdiction.

                                                              As of                    Jurisdiction                  December 2012                    U.S. Federal 1                         2005                     New York State and City 2              2004                     United Kingdom                         2007                     Japan 3                                2008                     Hong Kong                              2005                     Korea                                  2008    

1. IRS examination of fiscal 2008 through calendar 2010 began during 2011. IRS

examination of fiscal 2005, 2006 and 2007 began during 2008. IRS examination

of fiscal 2003 and 2004 has been completed, but the liabilities for those

years are not yet final. The firm anticipates that the audits of fiscal 2005

through calendar 2010 should be completed during 2013, and the audits of 2011

   through 2012 should begin in 2013.    

2. New York State and City examination of fiscal 2004, 2005 and 2006 began

   in 2008.    

3. Japan National Tax Agency examination of fiscal 2005 through 2009 began in

2010. The examinations have been completed, but the liabilities for 2008 and

2009 are not yet final.

All years subsequent to the above remain open to examination by the taxing authorities. The firm believes that the liability for unrecognized tax benefits it has established is adequate in relation to the potential for additional assessments.

  In January 2013, the firm was accepted into the Compliance Assurance Process program by the IRS. This program will allow the firm to work with the IRS to identify and resolve potential U.S. federal tax issues before the filing of tax returns. The 2013 tax year will be the first year examined under the program.    Note 25. Business Segments  Note 25.  Business Segments 

The firm reports its activities in the following four business segments: Investment Banking, Institutional Client Services, Investing & Lending and Investment Management.

Basis of Presentation

  In reporting segments, certain of the firm's business lines have been aggregated where they have similar economic characteristics and are similar in each of the following areas: (i) the nature of the services they provide, (ii) their methods of distribution, (iii) the types of clients they serve and (iv) the regulatory environments in which they operate.  The cost drivers of the firm taken as a whole - compensation, headcount and levels of business activity - are broadly similar in each of the firm's business segments. Compensation and benefits expenses in the firm's segments reflect, among other factors, the overall performance of the firm as well as the performance of individual businesses. Consequently, pre-tax margins in one segment of the firm's business may be significantly affected by the performance of the firm's other business segments.  The firm allocates assets (including allocations of excess liquidity and cash, secured client financing and other assets), revenues and expenses among the four reportable business segments. Due to the integrated nature of these segments, estimates and judgments are made in allocating certain assets, revenues and expenses. Transactions between segments are based on specific criteria or approximate third-party rates. Total operating expenses include corporate items that have not been allocated to individual business segments. The allocation process is based on the manner in which management currently views the performance of the segments.          Goldman Sachs 2012 Form 10-K   205  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The segment information presented in the table below is prepared according to the following methodologies:

Ÿ Revenues and expenses directly associated with each segment are included in

    determining pre-tax earnings.    

Ÿ Net revenues in the firm's segments include allocations of interest income and

interest expense to specific securities, commodities and other positions in

relation to the cash generated by, or funding requirements of, such underlying

positions. Net interest is included in segment

net revenues as it is consistent with the way in which management assesses

    segment performance.    

Ÿ Overhead expenses not directly allocable to specific segments are allocated

ratably based on direct segment expenses.

Management believes that the following information provides a reasonable representation of each segment's contribution to consolidated pre-tax earnings and total assets.

                                                                      For the Years Ended or as of December in millions                                                       2012              2011             2010 Investment Banking              Net revenues                  $  4,926          $  4,355         $  4,810                                  Operating expenses               3,330             2,995            3,459                                 Pre-tax earnings              $  1,596          $  1,360         $  1,351                                 Segment assets                $  1,712          $  1,983         $  1,870  Institutional Client Services   Net revenues 1                $ 18,124          $ 17,280         $ 21,796                                  Operating expenses              12,480            12,837           14,994                                 Pre-tax earnings              $  5,644          $  4,443         $  6,802                                 Segment assets                $825,496          $813,660         $799,775  Investing & Lending             Net revenues                  $  5,891          $  2,142         $  7,541                                  Operating expenses               2,666             2,673            3,361                                 Pre-tax earnings/(loss)       $  3,225          $   (531 )       $  4,180                                 Segment assets                $ 98,600          $ 94,330         $ 95,373  Investment Management           Net revenues                  $  5,222          $  5,034         $  5,014                                  Operating expenses               4,294             4,020            4,082                                 Pre-tax earnings              $    928          $  1,014         $    932                                 Segment assets                $ 12,747          $ 13,252         $ 14,314  Total                           Net revenues                  $ 34,163          $ 28,811         $ 39,161                                  Operating expenses              22,956            22,642           26,269                                 Pre-tax earnings              $ 11,207          $  6,169         $ 12,892                                 Total assets                  $938,555          $923,225         $911,332    

1. Includes $121 million, $115 million and $111 million for the years ended

December 2012, December 2011 and December 2010, respectively, of realized

   gains on available-for-sale securities held in the firm's reinsurance    subsidiaries.    

Total operating expenses in the table above include the following expenses that have not been allocated to the firm's segments:

Ÿ charitable contributions of $169 million, $103 million and $345 million for

the years ended December 2012, December 2011 and December 2010, respectively;

    and    

Ÿ real estate-related exit costs of $17 million, $14 million and $28 million for

the years ended December 2012, December 2011 and December 2010, respectively.

Real estate-related exit costs are included in "Depreciation and amortization"

and "Occupancy" in the consolidated statements of earnings.

   Operating expenses related to net provisions for litigation and regulatory proceedings, previously not allocated to the firm's segments, have now been allocated. This allocation is consistent with the manner in which management currently views the performance of the firm's segments. Reclassifications have been made to previously reported segment amounts to conform to the current presentation.      206   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The tables below present the amounts of net interest income or interest expense included in net revenues, and the amounts of depreciation and amortization expense included in pre-tax earnings.

                                                        Year Ended December            in millions                         2012          2011          2010            Investment Banking                $  (15 )      $   (6 )       $   -             Institutional Client Services      3,723         4,360         4,692             Investing & Lending                   26           635           609             Investment Management                146           203           202            Total net interest income         $3,880        $5,192        $5,503                                                              Year Ended December       in millions                                  2012          2011          2010       Investment Banking                         $  164        $  174        $  172        Institutional Client Services                 796           944         1,109        Investing & Lending                           564           563           422        Investment Management                         204           188           200       Total depreciation and amortization  1     $1,738        $1,869      

$1,904

1. Includes real estate-related exit costs of $10 million and $1 million for the

years ended December 2012 and December 2010, respectively, that have not been

allocated to the firm's segments.

Geographic Information

  Due to the highly integrated nature of international financial markets, the firm manages its businesses based on the profitability of the enterprise as a whole. The methodology for allocating profitability to geographic regions is dependent on estimates and management judgment because a significant portion of the firm's activities require cross-border coordination in order to facilitate the needs of the firm's clients.  

Geographic results are generally allocated as follows:

Ÿ Investment Banking: location of the client and investment banking team.

Ÿ Institutional Client Services: Fixed Income, Currency and Commodities Client

Execution, and Equities (excluding Securities Services): location of the

market-making desk; Securities Services: location of the primary market for

    the underlying security.    

Ÿ Investing & Lending: Investing: location of the investment; Lending: location

    of the client.     Ÿ   Investment Management: location of the sales team.           Goldman Sachs 2012 Form 10-K   207  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the total net revenues, pre-tax earnings and net earnings of the firm by geographic region allocated based on the methodology referred to above, as

well as the percentage of total net revenues, pre-tax earnings and net earnings (excluding Corporate) for each geographic region.

                                                            Year Ended December   $ in millions                      2012                      2011                      2010   Net revenues   Americas 1                 $20,159         59 %      $17,873         62 %      $21,564         55 %    EMEA 2                       8,612         25          7,074         25         10,449         27    Asia  3, 4                   5,392         16          3,864         13          7,148         18    Total net revenues         $34,163        100 %      $28,811        100 %      $39,161        100 %   Pre-tax earnings   Americas 1                 $ 6,960         61 %      $ 5,307         85 %      $ 7,303         55 %    EMEA 2                       2,943         26          1,210         19          3,029         23    Asia 3                       1,490         13           (231 )       (4 )        2,933         22    Subtotal                    11,393        100 %        6,286        100 %       13,265        100 %    Corporate 5                   (186 )                    (117 )                    (373 )    Total pre-tax earnings     $11,207                   $ 6,169                   $12,892   Net earnings   Americas 1                 $ 4,259         56 %      $ 3,522         78 %      $ 4,322         50 %    EMEA 2                       2,369         31          1,103         24          2,200         26    Asia 3                         972         13           (103 )       (2 )        2,083         24   Subtotal                     7,600        100 %        4,522        100 %        8,605        100 %    Corporate                     (125 )                     (80 )                    (251 )   Total net earnings         $ 7,475                   $ 4,442                   $ 8,354    

1. Substantially all relates to the U.S.

2. EMEA (Europe, Middle East and Africa).

3. Asia also includes Australia and New Zealand.

4. Net revenues in Asia in 2011 primarily reflect lower net revenues in

   Investing & Lending, principally due to losses from public equities,    reflecting a significant decline in equity markets in Asia during 2011.    

5. Consists of charitable contributions of $169 million, $103 million and

$345 million for the years ended December 2012, December 2011 and

December 2010, respectively, and real estate-related exit costs of

$17 million, $14 million and $28 million for the years ended December 2012,

December 2011 and December 2010, respectively. Net provisions for litigation

and regulatory proceedings, previously included in Corporate have now been

   allocated to the geographic regions. Reclassifications have been made to    previously reported geographic region amounts to conform to the current    presentation.     208   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 26. Credit Concentrations

 Note 26.  Credit Concentrations   

Credit concentrations may arise from market making, client facilitation, investing, underwriting, lending and collateralized transactions and may be impacted by changes in economic, industry or political factors. The firm seeks to mitigate credit risk by actively monitoring exposures and obtaining collateral from counterparties as deemed appropriate.

While the firm's activities expose it to many different industries and counterparties, the firm routinely executes a high volume of transactions with asset managers, investment funds, commercial banks, brokers and dealers, clearing houses and exchanges, which results in significant credit concentrations.

In the ordinary course of business, the firm may also be subject to a concentration of credit risk to a particular counterparty, borrower or issuer, including sovereign issuers, or to a particular clearing house or exchange.

  The table below presents the credit concentrations in assets held by the firm. As of December 2012 and December 2011, the firm did not have credit exposure to any other counterparty that exceeded 2% of total assets.                                                                   As of December     $ in millions                                            2012            2011     U.S. government and federal agency obligations 1     $114,418        $103,468      % of total assets                                        12.2 %          11.2 %      Non-U.S. government and agency obligations 1,  2     $ 62,252        $ 49,025      % of total assets                                         6.6 %           5.3 %    

1. Substantially all included in "Financial instruments owned, at fair value" and

   "Cash and securities segregated for regulatory and other purposes."    

2. Principally related to Germany, Japan and the United Kingdom as of both

December 2012 and December 2011.

   To reduce credit exposures, the firm may enter into agreements with counterparties that permit the firm to offset receivables and payables with such counterparties and/or enable the firm to obtain collateral on an upfront or contingent basis. Collateral obtained by the firm related to derivative assets is principally cash and is held by the firm or a third-party custodian. Collateral obtained by the firm related to resale agreements and securities borrowed transactions is primarily U.S. government and federal agency obligations and non-U.S. government and agency obligations. See Note 9 for further information about collateralized agreements and financings.  The table below presents U.S. government and federal agency obligations, and non-U.S. government and agency obligations that collateralize resale agreements and securities borrowed transactions (including those in "Cash and securities segregated for regulatory and other purposes"). Because the firm's primary credit exposure on such transactions is to the counterparty to the transaction, the firm would be exposed to the collateral issuer only in the event of counterparty default.                                                                  As of December       in millions                                           2012            2011

U.S. government and federal agency obligations $73,477$ 94,603

Non-U.S. government and agency obligations 1 64,724 110,178

1. Principally consisting of securities issued by the governments of Germany and

   France.           Goldman Sachs 2012 Form 10-K   209  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

     Note 27. Legal Proceedings  Note 27.  Legal Proceedings   

The firm is involved in a number of judicial, regulatory and arbitration proceedings (including those described below) concerning matters arising in connection with the conduct of the firm's businesses. Many of these proceedings are in early stages, and many of these cases seek an indeterminate amount of damages.

  Under ASC 450, an event is "reasonably possible" if "the chance of the future event or events occurring is more than remote but less than likely" and an event is "remote" if "the chance of the future event or events occurring is slight." Thus, references to the upper end of the range of reasonably possible loss for cases in which the firm is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the firm believes the risk of loss is more than slight. The amounts reserved against such matters are not significant as compared to the upper end of the range of reasonably possible loss.  With respect to proceedings described below for which management has been able to estimate a range of reasonably possible loss where (i) plaintiffs have claimed an amount of money damages, (ii) the firm is being sued by purchasers in an underwriting and is not being indemnified by a party that the firm believes will pay any judgment, or (iii) the purchasers are demanding that the firm repurchase securities, management has estimated the upper end of the range of reasonably possible loss as being equal to (a) in the case of (i), the amount of money damages claimed, (b) in the case of (ii), the amount of securities that the firm sold in the underwritings and (c) in the case of (iii), the price that purchasers paid for the securities less the estimated value, if any, as of December 2012 of the relevant securities, in each of cases (i), (ii) and (iii), taking into account any factors believed to be relevant to the particular proceeding or proceedings of that type. As of the date hereof, the firm has estimated the upper end of the range of reasonably possible aggregate loss for such proceedings and for any other proceedings described below where management has been able to estimate a range of reasonably possible aggregate loss to be approximately $3.5 billion.  Management is generally unable to estimate a range of reasonably possible loss for proceedings other than those included in the estimate above, including where (i) plaintiffs have not claimed an amount of money damages, unless  management can otherwise determine an appropriate amount, (ii) the proceedings are in early stages, (iii) there is uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) there is uncertainty as to the outcome of pending appeals or motions, (v) there are significant factual issues to be resolved, and/or (vi) there are novel legal issues presented. However, for these cases, management does not believe, based on currently available information, that the outcomes of such proceedings will have a material adverse effect on the firm's financial condition, though the outcomes could be material to the firm's operating results for any particular period, depending, in part, upon the operating results for such period.  IPO Process Matters. Group Inc. and GS&Co. are among the numerous financial services companies that have been named as defendants in a variety of lawsuits alleging improprieties in the process by which those companies participated in the underwriting of public offerings.  GS&Co. has been named as a defendant in an action commenced on May 15, 2002 in New York Supreme Court, New York County, by an official committee of unsecured creditors on behalf of eToys, Inc., alleging that the firm intentionally underpriced eToys, Inc.'s initial public offering. The action seeks, among other things, unspecified compensatory damages resulting from the alleged lower amount of offering proceeds. On appeal from rulings on GS&Co.'s motion to dismiss, the New York Court of Appeals dismissed claims for breach of contract, professional malpractice and unjust enrichment, but permitted claims for breach of fiduciary duty and fraud to continue. On remand, the lower court granted GS&Co.'s motion for summary judgment and, on December 8, 2011, the appellate court affirmed the lower court's decision. On September 6, 2012, the New York Court of Appeals granted the creditors' motion for leave to appeal.  

Group Inc. and certain of its affiliates have, together with various underwriters in certain offerings, received subpoenas and requests for documents and information from various governmental agencies and self-regulatory organizations in connection with investigations relating to the public offering process. Goldman Sachs has cooperated with these investigations.

     210   Goldman Sachs 2012 Form 10-K  

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    World Online Litigation. In March 2001, a Dutch shareholders' association initiated legal proceedings for an unspecified amount of damages against GSI and others in Amsterdam District Court in connection with the initial public offering of World Online in March 2000, alleging misstatements and omissions in the offering materials and that the market was artificially inflated by improper public statements and stabilization activities. Goldman Sachs and ABN AMRO Rothschild served as joint global coordinators of the approximately €2.9 billion offering. GSI underwrote 20,268,846 shares and GS&Co. underwrote 6,756,282 shares for a total offering price of approximately €1.16 billion.  The district court rejected the claims against GSI and ABN AMRO, but found World Online liable in an amount to be determined. On appeal, the Netherlands Court of Appeals affirmed in part and reversed in part the decision of the district court, holding that certain of the alleged disclosure deficiencies were actionable as to GSI and ABN AMRO. On further appeal, the Netherlands Supreme Court affirmed the rulings of the Court of Appeals, except that it found certain additional aspects of the offering materials actionable and held that individual investors could potentially hold GSI and ABN AMRO responsible for certain public statements and press releases by World Online and its former CEO. The parties entered into a definitive settlement agreement, dated July 15, 2011, and GSI has paid the full amount of its contribution. In the first quarter of 2012, GSI and ABN AMRO, on behalf of the underwriting syndicate, entered into a settlement agreement with respect to a claim filed by another shareholders' association, and has paid the settlement amount in full. Other shareholders have made demands for compensation of alleged damages, and GSI and other syndicate members are discussing the possibility of settlement with certain of these shareholders.  Adelphia Communications Fraudulent Conveyance Litigation. GS&Co. is named as a defendant in two proceedings commenced in the U.S. Bankruptcy Court for the Southern District of New York, one on July 6, 2003 by a creditors committee, and the second on or about July 31, 2003 by an equity committee of Adelphia Communications, Inc. Those proceedings were consolidated in a single amended complaint filed by the Adelphia Recovery Trust on October 31, 2007. The complaint seeks, among other things, to recover, as fraudulent conveyances, approximately $62.9 million allegedly paid to GS&Co. by Adelphia Communications, Inc. and its affiliates in respect of margin calls made in the ordinary course of business on accounts owned by members of the family that formerly controlled Adelphia Communications, Inc. The district court assumed jurisdiction over the action and, on April 8, 2011, granted GS&Co.'s motion for summary judgment. The plaintiff appealed on May 6, 2011.  Specialist Matters. Spear, Leeds & Kellogg Specialists LLC, Spear, Leeds & Kellogg, L.P. and Group Inc. are among numerous defendants named in purported class actions brought beginning in October 2003 on behalf of investors in the U.S. District Court for the Southern District of New York alleging violations of the federal securities laws and state common law in connection with NYSE floor specialist activities. On October 24, 2012, the parties entered into a definitive settlement agreement, subject to court approval. The firm has reserved the full amount of its proposed contribution to the settlement.          Goldman Sachs 2012 Form 10-K   211  

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    Fannie Mae Litigation. GS&Co. was added as a defendant in an amended complaint filed on August 14, 2006 in a purported class action pending in the U.S. District Court for the District of Columbia. The complaint asserts violations of the federal securities laws generally arising from allegations concerning Fannie Mae's accounting practices in connection with certain Fannie Mae-sponsored REMIC transactions that were allegedly arranged by GS&Co. The complaint does not specify a dollar amount of damages. The other defendants include Fannie Mae, certain of its past and present officers and directors, and accountants. By a decision dated May 8, 2007, the district court granted GS&Co.'s motion to dismiss the claim against it. The time for an appeal will not begin to run until disposition of the claims against other defendants. A motion to stay the action filed by the Federal Housing Finance Agency (FHFA), which took control of the foregoing action following Fannie Mae's conservatorship, was denied on November 14, 2011.  Compensation-Related Litigation. On January 17, 2008, Group Inc., its Board, executive officers and members of its management committee were named as defendants in a purported shareholder derivative action in the U.S. District Court for the Eastern District of New York predicting that the firm's 2008 Proxy Statement would violate the federal securities laws by undervaluing certain stock option awards and alleging that senior management received excessive compensation for 2007. The complaint seeks, among other things, an equitable accounting for the allegedly excessive compensation. Plaintiff's motion for a preliminary injunction to prevent the 2008 Proxy Statement from using options valuations that the plaintiff alleges are incorrect and to require the amendment of SEC Forms 4 filed by certain of the executive officers named in the complaint to reflect the stock option valuations alleged by the plaintiff was denied, and plaintiff's appeal from this denial was dismissed. On February 13, 2009, the plaintiff filed an amended complaint, which added purported direct (i.e., non-derivative) claims based on substantially the same theory. The plaintiff filed a further amended complaint on March 24, 2010, and the defendants' motion to dismiss this further amended complaint was granted on the ground that dismissal of the shareholder plaintiff's prior action relating to the firm's 2007 Proxy Statement based on the failure to make a demand to  the Board precluded relitigation of demand futility. On December 19, 2011, the appellate court vacated the order of dismissal, holding only that preclusion principles did not mandate dismissal and remanding for consideration of the alternative grounds for dismissal. On April 18, 2012, plaintiff disclosed that he no longer is a Group Inc. shareholder and thus lacks standing to continue to prosecute the action. On January 7, 2013, the district court dismissed the claim due to the plaintiff's lack of standing and the lack of any intervening shareholder.  On March 24, 2009, the same plaintiff filed an action in New York Supreme Court, New York County, against Group Inc., its directors and certain senior executives alleging violation of Delaware statutory and common law in connection with substantively similar allegations regarding stock option awards. On January 4, 2013, another purported shareholder moved to intervene as plaintiff, which defendants have opposed. On January 15, 2013, the court dismissed the action only as to the original plaintiff with prejudice due to his lack of standing.  Mortgage-Related Matters. On April 16, 2010, the SEC brought an action (SEC Action) under the U.S. federal securities laws in the U.S. District Court for the Southern District of New York against GS&Co. and Fabrice Tourre, a former employee, in connection with a CDO offering made in early 2007 (ABACUS 2007-AC1 transaction), alleging that the defendants made materially false and misleading statements to investors and seeking, among other things, unspecified monetary penalties. Investigations of GS&Co. by FINRA and of GSI by the FSA were subsequently initiated, and Group Inc. and certain of its affiliates have received subpoenas and requests for information from other regulators, regarding CDO offerings, including the ABACUS 2007-AC1 transaction, and related matters.  On July 14, 2010, GS&Co. entered into a consent agreement with the SEC, settling all claims made against GS&Co. in the SEC Action, pursuant to which GS&Co. paid $550 million of disgorgement and civil penalties, and which was approved by the U.S. District Court for the Southern District of New York on July 20, 2010.      

212 Goldman Sachs 2012 Form 10-K

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    On January 6, 2011, ACA Financial Guaranty Corp. filed an action against GS&Co. in respect of the ABACUS 2007-AC1 transaction in New York Supreme Court, New York County. The complaint includes allegations of fraudulent inducement, fraudulent concealment and unjust enrichment and seeks at least $30 million in compensatory damages, at least $90 million in punitive damages and unspecified disgorgement. On April 25, 2011, the plaintiff filed an amended complaint and, on June 3, 2011, GS&Co. moved to dismiss the amended complaint. By a decision dated April 23, 2012, the court granted the motion to dismiss as to the unjust enrichment claim and denied the motion as to the other claims, and on May 29, 2012, GS&Co. appealed the decision to the extent that its motion was denied and filed counterclaims for breach of contract and fraudulent inducement, and third-party claims against ACA Management, LLC for breach of contract, unjust enrichment and indemnification. ACA Financial Guaranty Corp. and ACA Management, LLC moved to dismiss GS&Co.'s counterclaims and third-party claims on August 31, 2012. On January 30, 2013, the court granted ACA's motion for leave to file an amended complaint naming a third party to the ABACUS 2007-AC1 transaction as an additional defendant.  Since April 23, 2010, the Board has received letters from shareholders demanding that the Board take action to address alleged misconduct by GS&Co., the Board and certain officers and employees of Group Inc. and its affiliates. These demands, which the Board has rejected, generally alleged misconduct in connection with the firm's securitization practices, including the ABACUS 2007-AC1 transaction, the alleged failure by Group Inc. to adequately disclose the SEC investigation that led to the SEC Action, and Group Inc.'s 2009 compensation practices.  In addition, the Board has received books and records demands from several shareholders for materials relating to, among other subjects, the firm's mortgage servicing and foreclosure activities, participation in federal programs providing assistance to financial institutions and homeowners, loan sales to Fannie Mae and Freddie Mac, mortgage-related activities and conflicts management.  Beginning April 26, 2010, a number of purported securities law class actions have been filed in the U.S. District Court for the Southern District of New York challenging the adequacy of Group Inc.'s public disclosure of, among other things, the firm's activities in the CDO market and the SEC investigation that led to the SEC Action. The purported class action complaints, which name as defendants Group Inc. and certain officers and employees of Group Inc. and its affiliates, have been consolidated, generally allege violations of Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages. Plaintiffs filed a consolidated amended complaint on July 25, 2011. On October 6, 2011, the defendants moved to dismiss, and by a decision dated June 21, 2012, the district court dismissed the claims based on Group Inc.'s not disclosing that it had received a "Wells" notice from the staff of the SEC related to the ABACUS 2007-AC1 transaction, but permitted the plaintiffs' other claims to proceed.  On February 1, 2013, a putative shareholder derivative action was filed in the U.S. District Court for the Southern District of New York against Group Inc. and certain of its officers and directors in connection with mortgage-related activities during 2006 and 2007, including three CDO offerings. The derivative complaint, which is based on similar allegations to those at issue in the consolidated class action discussed above and purported shareholder derivative actions that were previously dismissed, includes allegations of breach of fiduciary duty, challenges the accuracy and adequacy of Group Inc.'s disclosure and seeks, among other things, declaratory relief, unspecified compensatory and punitive damages and restitution from the individual defendants and certain corporate governance reforms.  In June 2012, the Board received a demand from a shareholder that the Board investigate and take action relating to the firm's mortgage-related activities and to stock sales by certain directors and executives of the firm. On February 15, 2013, this shareholder filed a putative shareholder derivative action in the New York Supreme Court, New York County, against Group Inc. and certain current or former directors and employees, based on these activities and stock sales. The derivative complaint includes allegations of breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and corporate waste, and seeks, among other things, unspecified monetary damages, disgorgement of profits and certain corporate governance and disclosure reforms.          Goldman Sachs 2012 Form 10-K   213  

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    GS&Co., Goldman Sachs Mortgage Company (GSMC) and GS Mortgage Securities Corp. (GSMSC) and three current or former Goldman Sachs employees are defendants in a putative class action commenced on December 11, 2008 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts established by the firm and underwritten by GS&Co. in 2007. The complaint generally alleges that the registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory damages and rescission or rescissionary damages. Following dismissals of certain of the plaintiff's claims under the initial and three amended complaints, on May 5, 2011, the court granted plaintiff's motion for entry of a final judgment dismissing all its claims, thereby allowing plaintiff to appeal. The plaintiff appealed from the dismissal with respect to all 17 of the offerings included in its original complaint. By a decision dated September 6, 2012, the U.S. Court of Appeals for the Second Circuit affirmed the district court's dismissal of plaintiff's claims with respect to 10 of the offerings included in plaintiff's original complaint but vacated the dismissal and remanded the case to the district court with instructions to reinstate the plaintiff's claims with respect to the other seven offerings. On October 26, 2012, the defendants filed a petition for certiorari with the U.S. Supreme Court seeking review of the Second Circuit decision. On October 31, 2012, the plaintiff served defendants with a fourth amended complaint relating to those seven offerings, plus seven additional offerings. On June 3, 2010, another investor (who had unsuccessfully sought to intervene in the action) filed a separate putative class action asserting substantively similar allegations relating to one of the offerings included in the initial plaintiff's complaint. The district court twice granted defendants' motions to dismiss this separate action, both times with leave to replead. On July 9, 2012, that separate plaintiff filed a second amended complaint, and the  defendants moved to dismiss on September 21, 2012. On December 26, 2012, that separate plaintiff filed a motion to amend the second amended complaint to add claims with respect to two additional offerings included in the initial plaintiff's complaint. The securitization trusts issued, and GS&Co. underwrote, approximately $11 billion principal amount of certificates to all purchasers in the fourteen offerings at issue in the complaints.  Group Inc., GS&Co., GSMC and GSMSC are among the defendants in a separate putative class action commenced on February 6, 2009 in the U.S. District Court for the Southern District of New York brought on behalf of purchasers of various mortgage pass-through certificates and asset-backed certificates issued by various securitization trusts established by the firm and underwritten by GS&Co. in 2006. The other original defendants include three current or former Goldman Sachs employees and various rating agencies. The second amended complaint generally alleges that the registration statement and prospectus supplements for the certificates violated the federal securities laws, and seeks unspecified compensatory and rescissionary damages. Defendants moved to dismiss the second amended complaint. On January 12, 2011, the district court granted the motion to dismiss with respect to offerings in which plaintiff had not purchased securities as well as all claims against the rating agencies, but denied the motion to dismiss with respect to a single offering in which the plaintiff allegedly purchased securities. These trusts issued, and GS&Co. underwrote, approximately $698 million principal amount of certificates to all purchasers in the offerings at issue in the complaint (excluding those offerings for which the claims have been dismissed). On February 2, 2012, the district court granted the plaintiff's motion for class certification and on June 13, 2012, the U.S. Court of Appeals for the Second Circuit granted defendants' petition to review that ruling. On November 8, 2012, the court approved a settlement between the parties, and GS&Co. has paid the full amount of the settlement into an escrow account. The time for any appeal from the approval of the settlement has expired.      214   Goldman Sachs 2012 Form 10-K  

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    On September 30, 2010, a putative class action was filed in the U.S. District Court for the Southern District of New York against GS&Co., Group Inc. and two former GS&Co. employees on behalf of investors in $821 million of notes issued in 2006 and 2007 by two synthetic CDOs (Hudson Mezzanine 2006-1 and 2006-2). The complaint, which was amended on February 4, 2011, asserts federal securities law and common law claims, and seeks unspecified compensatory, punitive and other damages. The defendants moved to dismiss on April 5, 2011, and the motion was granted as to plaintiff's claim of market manipulation and denied as to the remainder of plaintiff's claims by a decision dated March 21, 2012. On May 21, 2012, the defendants counterclaimed for breach of contract and fraud. On December 17, 2012, the plaintiff moved for class certification.  GS&Co., GSMC and GSMSC are among the defendants in a lawsuit filed in August 2011 by CIFG Assurance of North America, Inc. (CIFG) in New York Supreme Court, New York County. The complaint alleges that CIFG was fraudulently induced to provide credit enhancement for a 2007 securitization sponsored by GSMC, and seeks, among other things, the repurchase of $24.7 million in aggregate principal amount of mortgages that CIFG had previously stated to be non-conforming, an accounting for any proceeds associated with mortgages discharged from the securitization and unspecified compensatory damages. On October 17, 2011, the Goldman Sachs defendants moved to dismiss. By a decision dated May 1, 2012, the court dismissed the fraud and accounting claims but denied the motion as to certain breach of contract claims that were also alleged. On June 6, 2012, the Goldman Sachs defendants filed counterclaims for breach of contract. In addition, the parties have each appealed the court's May 1, 2012 decision to the extent adverse. The parties have been ordered to mediate, and proceedings in the trial court have been stayed pending mediation.  In addition, on January 15, 2013, CIFG filed a complaint against GS&Co. in New York Supreme Court, New York County, alleging that GS&Co. falsely represented that a third party would independently select the collateral for a 2006 CDO. CIFG seeks unspecified compensatory and punitive damages, including approximately $10 million in connection with its purchase of notes and over $30 million for payments to discharge alleged liabilities arising from its issuance of a financial guaranty insurance policy guaranteeing payment on a credit default swap referencing the CDO.  Various alleged purchasers of, and counterparties involved in transactions relating to, mortgage pass-through certificates, CDOs and other mortgage-related products (including certain Allstate affiliates, Bank Hapoalim B.M., Basis Yield Alpha Fund (Master), Bayerische Landesbank, Cambridge Place Investment Management Inc., the Charles Schwab Corporation, Deutsche Zentral-Genossenschaftbank, the FDIC (as receiver for Guaranty Bank), the Federal Home Loan Banks of Boston, Chicago, Indianapolis and Seattle, the FHFA (as conservator for Fannie Mae and Freddie Mac), HSH Nordbank, IKB Deutsche Industriebank AG, Landesbank Baden-Württemberg, Joel I. Sher (Chapter 11 Trustee) on behalf of TMST, Inc. (TMST), f/k/a Thornburg Mortgage, Inc. and certain TMST affiliates, John Hancock and related parties, Massachusetts Mutual Life Insurance Company, MoneyGram Payment Systems, Inc., National Australia Bank, the National Credit Union Administration, Phoenix Light SF Limited and related parties, Prudential Insurance Company of America and related parties, Royal Park Investments SA/NV, Sealink Funding Limited, Stichting Pensioenfonds ABP, The Union Central Life Insurance Company, Ameritas Life Insurance Corp., Acacia Life Insurance Company, Watertown Savings Bank, and The Western and Southern Life Insurance Co.) have filed complaints or summonses with notice in state and federal court or initiated arbitration proceedings against firm affiliates, generally alleging that the offering documents for the securities that they purchased contained untrue statements of material fact and material omissions and generally seeking rescission and/or damages. Certain of these complaints allege fraud and seek punitive damages. Certain of these complaints also name other firms as defendants.  A number of other entities (including American International Group, Inc. (AIG), Deutsche Bank National Trust Company, John Hancock and related parties, M&T Bank, Norges Bank Investment Management and Selective Insurance Company) have threatened to assert claims of various types against the firm in connection with various mortgage-related transactions, and the firm has entered into agreements with a number of these entities to toll the relevant statute of limitations.          Goldman Sachs 2012 Form 10-K   215  

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    As of the date hereof, the aggregate notional amount of mortgage-related securities sold to plaintiffs in active cases brought against the firm where those plaintiffs are seeking rescission of such securities was approximately $20.7 billion (which does not reflect adjustment for any subsequent paydowns or distributions or any residual value of such securities, statutory interest or any other adjustments that may be claimed). This amount does not include the threatened claims noted above, potential claims by these or other purchasers in the same or other mortgage-related offerings that have not actually been brought against the firm, or claims that have been dismissed.  In June 2011, Heungkuk Life Insurance Co. Limited (Heungkuk) filed a criminal complaint against certain past and present employees of the firm in South Korea relating to its purchase of a CDO securitization from Goldman Sachs. Heungkuk had earlier initiated civil litigation against the firm relating to this matter. This civil litigation has now been settled and, on January 23, 2013, Heungkuk withdrew the criminal complaint in its entirety.  Group Inc. and GS Bank USA have entered into a Consent Order and a settlement in principle with the Federal Reserve Board relating to the servicing of residential mortgage loans and foreclosure practices. In addition, GS Bank USA has entered into an Agreement on Mortgage Servicing Practices with the New York State Department of Financial Services, Litton and Ocwen. See Note 18 for information about these settlements.  Group Inc., GS&Co. and GSMC are among the numerous financial services firms named as defendants in a qui tam action originally filed by a relator on April 7, 2010 purportedly on behalf of the City of Chicago and State of Illinois in Cook County, Illinois Circuit Court asserting claims under the Illinois Whistleblower Reward and Protection Act and Chicago False Claims Act, based on allegations that defendants had falsely certified compliance with various Illinois laws, which were purportedly violated in connection with mortgage origination and servicing activities. The complaint, which was originally filed under seal, seeks treble damages and civil penalties. Plaintiff filed an amended complaint on December 28, 2011, naming  GS&Co. and GSMC, among others, as additional defendants and a second amended complaint on February 8, 2012. On March 12, 2012, the action was removed to the U.S. District Court for the Northern District of Illinois, and on September 17, 2012 the district court granted the plaintiff's motion to remand the action to state court. On November 16, 2012, the defendants moved to dismiss and to stay discovery.  Group Inc., Litton and Ocwen are defendants in a putative class action filed on January 23, 2013 in the U.S. District Court for the Southern District of New York generally challenging the procurement manner and scope of "force-placed" hazard insurance arranged by Litton when homeowners failed to arrange for insurance as required by their mortgages. The complaint asserts claims for breach of contract, breach of fiduciary duty, misappropriation, conversion, unjust enrichment and violation of Florida unfair practices law, and seeks unspecified compensatory and punitive damages as well as declaratory and injunctive relief.  The firm has also received, and continues to receive, requests for information and/or subpoenas from federal, state and local regulators and law enforcement authorities, relating to the mortgage-related securitization process, subprime mortgages, CDOs, synthetic mortgage-related products, particular transactions involving these products, and servicing and foreclosure activities, and is cooperating with these regulators and other authorities, including in some cases agreeing to the tolling of the relevant statute of limitations. See also "Financial Crisis-Related Matters" below.  The firm expects to be the subject of additional putative shareholder derivative actions, purported class actions, rescission and "put back" claims and other litigation, additional investor and shareholder demands, and additional regulatory and other investigations and actions with respect to mortgage-related offerings, loan sales, CDOs, and servicing and foreclosure activities. See Note 18 for further information regarding mortgage-related contingencies.      

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    Private Equity-Sponsored Acquisitions Litigation. Group Inc. and "GS Capital Partners" are among numerous private equity firms and investment banks named as defendants in a federal antitrust action filed in the U.S. District Court for the District of Massachusetts in December 2007. As amended, the complaint generally alleges that the defendants have colluded to limit competition in bidding for private equity-sponsored acquisitions of public companies, thereby resulting in lower prevailing bids and, by extension, less consideration for shareholders of those companies in violation of Section 1 of the U.S. Sherman Antitrust Act and common law. The complaint seeks, among other things, treble damages in an unspecified amount. Defendants moved to dismiss on August 27, 2008. The district court dismissed claims relating to certain transactions that were the subject of releases as part of the settlement of shareholder actions challenging such transactions, and by an order dated December 15, 2008 otherwise denied the motion to dismiss. On April 26, 2010, the plaintiffs moved for leave to proceed with a second phase of discovery encompassing additional transactions. On August 18, 2010, the court permitted discovery on eight additional transactions, and the plaintiffs filed a fourth amended complaint on October 7, 2010. On January 13, 2011, the court granted defendants' motion to dismiss certain aspects of the fourth amended complaint. On March 1, 2011, the court granted the motion filed by certain defendants, including Group Inc., to dismiss another claim of the fourth amended complaint on the grounds that the transaction was the subject of a release as part of the settlement of a shareholder action challenging the transaction. On June 14, 2012, the plaintiffs filed a fifth amended complaint encompassing additional transactions. On July 18, 2012, the court granted defendants' motion to dismiss certain newly asserted claims on the grounds that certain transactions are subject to releases as part of settlements of shareholder actions challenging those transactions, and denied defendants' motion to dismiss certain additional claims as time-barred. On July 23, 2012, the defendants filed motions for summary judgment.  IndyMac Pass-Through Certificates Litigation. GS&Co. is among numerous underwriters named as defendants in a putative securities class action filed on May 14, 2009 in the U.S. District Court for the Southern District of New York. As to the underwriters, plaintiffs allege that the offering documents in connection with various securitizations of mortgage-related assets violated the disclosure requirements of the federal securities laws. The defendants include IndyMac-related entities formed in connection with the securitizations, the underwriters of the offerings, certain ratings agencies which evaluated the credit quality of the securities, and certain former officers and directors of IndyMac affiliates. On November 2, 2009, the underwriters moved to dismiss the complaint. The motion was granted in part on February 17, 2010 to the extent of dismissing claims based on offerings in which no plaintiff purchased, and the court reserved judgment as to the other aspects of the motion. By a decision dated June 21, 2010, the district court formally dismissed all claims relating to offerings in which no named plaintiff purchased certificates (including all offerings underwritten by GS&Co.), and both granted and denied the defendants' motions to dismiss in various other respects. On November 16, 2012 the district court denied the plaintiffs' motion seeking reinstatement of claims relating to 42 offerings previously dismissed for lack of standing (one of which was co-underwritten by GS&Co.) without prejudice to renewal depending on the outcome of the petition for a writ of certiorari to the U.S. Supreme Court with respect to the Second Circuit's decision described above. On May 17, 2010, four additional investors filed a motion seeking to intervene in order to assert claims based on additional offerings (including two underwritten by GS&Co.). The defendants opposed the motion on the ground that the putative intervenors' claims were time-barred and, on June 21, 2011, the court denied the motion to intervene with respect to, among others, the claims based on the offerings underwritten by GS&Co. Certain of the putative intervenors (including those seeking to assert claims based on two offerings underwritten by GS&Co.) have appealed. GS&Co. underwrote approximately $751 million principal amount of securities to all purchasers in the offerings at issue in the May 2010 motion to intervene.  On July 11, 2008, IndyMac Bank was placed under an FDIC receivership, and on July 31, 2008, IndyMac Bancorp, Inc. filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court in Los Angeles, California.          Goldman Sachs 2012 Form 10-K   217  

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Notes to Consolidated Financial Statements

    RALI Pass-Through Certificates Litigation. GS&Co. is among numerous underwriters named as defendants in a putative securities class action initially filed in September 2008 in New York Supreme Court, and subsequently removed to the U.S. District Court for the Southern District of New York. As to the underwriters, plaintiffs allege that the offering documents in connection with various offerings of mortgage-backed pass-through certificates violated the disclosure requirements of the federal securities laws. In addition to the underwriters, the defendants include Residential Capital, LLC (ResCap), Residential Accredit Loans, Inc. (RALI), Residential Funding Corporation (RFC), Residential Funding Securities Corporation (RFSC), and certain of their officers and directors. On March 31, 2010, the defendants' motion to dismiss was granted in part and denied in part by the district court, resulting in dismissal on the basis of standing of all claims relating to offerings in which no plaintiff purchased securities and, by an order dated January 3, 2013, the district court denied, without prejudice, plaintiffs' motion for reconsideration. In June and July 2010, the lead plaintiff and five additional investors moved to intervene in order to assert claims based on additional offerings (including two underwritten by GS&Co.). On April 28, 2011, the court granted defendants' motion to dismiss as to certain of these claims (including those relating to one offering underwritten by GS&Co. based on a release in an unrelated settlement), but otherwise permitted the intervenor case to proceed. By an order dated January 3, 2013, the district court denied the defendants' motions to dismiss certain of the intervenors' remaining claims as time barred. Class certification of the claims based on the pre-intervention offerings was initially denied by the district court, and that denial was upheld on appeal; however, following remand, on October 15, 2012, the district court certified a class in connection with the pre-intervention offerings. On November 5, 2012, the defendants filed a petition seeking leave from the U.S. Court of Appeals to appeal the certification order. By an order dated January 3, 2013, the district court granted the plaintiffs' application to modify the class definition to include initial purchasers who bought the securities directly from the underwriters or their agents no later than ten trading days after the offering date (rather than just on the offering date). On January 18, 2013, the defendants filed a supplemental petition seeking leave from the U.S. Court of Appeals to appeal the order modifying the class definition.  GS&Co. underwrote approximately $1.28 billion principal amount of securities to all purchasers in the offerings for which claims have not been dismissed. On May 14, 2012, ResCap, RALI and RFC filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York and the action has been stayed with respect to them, RFSC and certain of their officers and directors.  MF Global Securities Litigation. GS&Co. is among numerous underwriters named as defendants in class action complaints filed in the U.S. District Court for the Southern District of New York commencing November 18, 2011. These complaints generally allege that the offering materials for two offerings of MF Global Holdings Ltd. convertible notes (aggregating approximately $575 million in principal amount) in February 2011 and July 2011, among other things, failed to describe adequately the nature, scope and risks of MF Global's exposure to European sovereign debt, in violation of the disclosure requirements of the federal securities laws. On August 20, 2012, the plaintiffs filed a consolidated amended complaint and on October 19, 2012, the defendants filed motions to dismiss the amended complaint. GS&Co. underwrote an aggregate principal amount of approximately $214 million of the notes. On October 31, 2011, MF Global Holdings Ltd. filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Manhattan, New York.  GS&Co. has also received inquiries from various governmental and regulatory bodies and self-regulatory organizations concerning certain transactions with MF Global prior to its bankruptcy filing. Goldman Sachs is cooperating with all such inquiries.     

218 Goldman Sachs 2012 Form 10-K

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Notes to Consolidated Financial Statements

    Employment-Related Matters. On September 15, 2010, a putative class action was filed in the U.S. District for the Southern District of New York by three former female employees alleging that Group Inc. and GS&Co. have systematically discriminated against female employees in respect of compensation, promotion, assignments, mentoring and performance evaluations. The complaint alleges a class consisting of all female employees employed at specified levels by Group Inc. and GS&Co. since July 2002, and asserts claims under federal and New York City discrimination laws. The complaint seeks class action status, injunctive relief and unspecified amounts of compensatory, punitive and other damages. Group Inc. and GS&Co. filed a motion to stay the claims of one of the named plaintiffs and to compel individual arbitration with that individual, based on an arbitration provision contained in an employment agreement between Group Inc. and the individual. On April 28, 2011, the magistrate judge to whom the district judge assigned the motion denied the motion, and the district court affirmed the magistrate judge's decision on November 15, 2011. Group Inc. and GS&Co. have appealed that decision to the U.S. Court of Appeals for the Second Circuit. On June 13, 2011, Group Inc. and GS&Co. moved to strike the class allegations of one of the three named plaintiffs based on her failure to exhaust administrative remedies. On September 29, 2011, the magistrate judge recommended denial of the motion to strike and, on January 10, 2012, the district court denied the motion to strike. On July 22, 2011, Group Inc. and GS&Co. moved to strike all of the plaintiffs' class allegations, and for partial summary judgment as to plaintiffs' disparate impact claims. By a decision dated January 19, 2012, the magistrate judge recommended that defendants' motion be denied as premature. The defendants filed objections to that recommendation with the district judge and on July 17, 2012, the district court issued a decision granting in part Group Inc.'s and GS&Co.'s motion to strike plaintiffs' class allegations on the ground that plaintiffs lacked standing to pursue certain equitable remedies and denying in part Group Inc.'s and GS&Co.'s motion to strike plaintiffs' class allegations in their entirety as premature.  Investment Management Services. Group Inc. and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with clients relating to losses allegedly sustained as a result of the firm's investment management services. These claims generally seek, among other things, restitution or other compensatory damages and, in some cases, punitive damages. In addition, Group Inc. and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with the firm's investment management services. Goldman Sachs is cooperating with all such investigations and reviews.  Goldman Sachs Asset Management International (GSAMI) is the defendant in an action filed on July 9, 2012 with the High Court of Justice in London by certain entities representing Vervoer, a Dutch pension fund, alleging that GSAMI was negligent in performing its duties as investment manager in connection with the allocation of the plaintiffs' funds among asset managers in accordance with asset allocations provided by plaintiffs and that GSAMI breached its contractual and common law duties to the plaintiffs. Specifically, plaintiffs allege that GSAMI caused their assets to be invested in unsuitable products for an extended period, thereby causing in excess of €67 million in losses, and caused them to be under-exposed for a period of time to certain other investments that performed well, thereby resulting in foregone potential gains. The plaintiffs are seeking unspecified monetary damages. On November 2, 2012, GSAMI served its defense to the allegations and on December 21, 2012, the plaintiffs served their reply to the defense.          Goldman Sachs 2012 Form 10-K   219  

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Notes to Consolidated Financial Statements

    Financial Advisory Services. Group Inc. and certain of its affiliates are parties to various civil litigation and arbitration proceedings and other disputes with clients and third parties relating to the firm's financial advisory activities. These claims generally seek, among other things, compensatory damages and, in some cases, punitive damages, and in certain cases allege that the firm did not appropriately disclose or deal with conflicts of interest. In addition, Group Inc. and its affiliates are subject from time to time to investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations in connection with conflicts of interest. Goldman Sachs is cooperating with all such investigations and reviews.  Group Inc., GS&Co. and The Goldman, Sachs & Co. L.L.C. are defendants in an action brought by the founders and former majority shareholders of Dragon Systems, Inc. (Dragon) on November 18, 2008, alleging that the plaintiffs incurred losses due to GS&Co.'s financial advisory services provided in connection with the plaintiffs' exchange of their purported $300 million interest in Dragon for stock of Lernout & Hauspie Speech Products, N.V. (L&H) in 2000. L&H filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court in Wilmington, Delaware on November 29, 2000. The action is pending in the United States District Court for the District of Massachusetts. The complaint, which was amended in November 2011 following the 2009 dismissal of certain of the plaintiffs' initial claims, seeks unspecified compensatory, punitive and other damages, and alleges breach of fiduciary duty, violation of Massachusetts unfair trade practices laws, negligence, negligent and intentional misrepresentation, gross negligence, willful misconduct and bad faith. Former minority shareholders of Dragon have brought a similar action against GS&Co. with respect to their purported $49 million interest in Dragon, and this action has been consolidated with the action described above. All parties moved for summary judgment. By an order dated October 31, 2012, the court granted summary judgment with respect to certain counterclaims and an indemnification claim brought by the Goldman Sachs defendants against one of the shareholders, but denied summary judgment with respect to all other claims. On January 23, 2013, a jury found in favor of the Goldman Sachs defendants on the plaintiffs' claims for negligence, negligent and intentional misrepresentation, gross negligence, and breach of fiduciary duty. The plaintiffs' claims for violation of Massachusetts unfair trade practices laws will be addressed by the district court and have not yet been decided.  Sales, Trading and Clearance Practices. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SEC's short sale rule, algorithmic and quantitative trading, futures trading, transaction reporting, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices and compliance with the U.S. Foreign Corrupt Practices Act.  The European Commission announced in April 2011 that it was initiating proceedings to investigate further numerous financial services companies, including Group Inc., in connection with the supply of data related to credit default swaps and in connection with profit sharing and fee arrangements for clearing of credit default swaps, including potential anti-competitive practices. The proceedings in connection with the supply of data related to credit default swaps are ongoing. Group Inc.'s current understanding is that the proceedings related to profit sharing and fee arrangements for clearing of credit default swaps have been suspended indefinitely. The firm has received civil investigative demands from the U.S. Department of Justice (DOJ) for information on similar matters. Goldman Sachs is cooperating with the investigations and reviews.  Insider Trading Investigations. From time to time, the firm and its employees are the subject of or otherwise involved in regulatory investigations relating to insider trading, the potential misuse of material nonpublic information and the effectiveness of the firm's insider trading controls and information barriers. It is the firm's practice to cooperate fully with any such investigations.      220   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

    Research Investigations. From time to time, the firm is the subject of or otherwise involved in regulatory investigations relating to research practices, including research independence and interactions between research analysts and other firm personnel, including investment banking personnel. It is the firm's practice to cooperate fully with any such investigations.  EU Price-Fixing Matter. On July 5, 2011, the European Commission issued a Statement of Objections to Group Inc. raising allegations of an industry-wide conspiracy to fix prices for power cables, including by an Italian cable company in which certain Goldman Sachs-affiliated investment funds held ownership interests from 2005 to 2009. The Statement of Objections proposes to hold Group Inc. jointly and severally liable for some or all of any fine levied against the cable company under the concept of parental liability under EU competition law.  Municipal Securities Matters. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations relating to transactions involving municipal securities, including wall-cross procedures and conflict of interest disclosure with respect to state and municipal clients, the trading and structuring of municipal derivative instruments in connection with municipal offerings, political contribution rules, underwriting of Build America Bonds and the possible impact of credit default swap transactions on municipal issuers. Goldman Sachs is cooperating with the investigations and reviews.  Group Inc., Goldman Sachs Mitsui Marine Derivative Products, L.P. (GSMMDP) and GS Bank USA are among numerous financial services firms that have been named as defendants in numerous substantially identical individual antitrust actions filed beginning on November 12, 2009 that have been coordinated with related antitrust class action litigation and individual actions, in which no Goldman Sachs affiliate is named, for pre-trial proceedings in the U.S. District Court for the Southern District of New York. The plaintiffs include individual California municipal entities and three New York non-profit entities. All of these complaints against Group Inc., GSMMDP and GS Bank USA generally allege that the Goldman Sachs defendants  participated in a conspiracy to arrange bids, fix prices and divide up the market for derivatives used by municipalities in refinancing and hedging transactions from 1992 to 2008. The complaints assert claims under the federal antitrust laws and either California's Cartwright Act or New York's Donnelly Act, and seek, among other things, treble damages under the antitrust laws in an unspecified amount and injunctive relief. On April 26, 2010, the Goldman Sachs defendants' motion to dismiss complaints filed by several individual California municipal plaintiffs was denied. On August 19, 2011, Group Inc., GSMMDP and GS Bank USA were voluntarily dismissed without prejudice from all actions except one brought by a California municipal entity.  On August 21, 2008, GS&Co. entered into a settlement in principle with the Office of the Attorney General of the State of New York and the Illinois Securities Department (on behalf of the North American Securities Administrators Association) regarding auction rate securities. Under the agreement, Goldman Sachs agreed, among other things, (i) to offer to repurchase at par the outstanding auction rate securities that its private wealth management clients purchased through the firm prior to February 11, 2008, with the exception of those auction rate securities where auctions were clearing, (ii) to continue to work with issuers and other interested parties, including regulatory and governmental entities, to expeditiously provide liquidity solutions for institutional investors, and (iii) to pay a $22.5 million fine. The settlement is subject to approval by the various states. GS&Co. has entered into consent orders with New York, Illinois and most other states and is in the process of doing so with the remaining states.  On September 4, 2008, Group Inc. was named as a defendant, together with numerous other financial services firms, in two complaints filed in the U.S. District Court for the Southern District of New York alleging that the defendants engaged in a conspiracy to manipulate the auction securities market in violation of federal antitrust laws. The actions were filed, respectively, on behalf of putative classes of issuers of and investors in auction rate securities and seek, among other things, treble damages in an unspecified amount. Defendants' motion to dismiss was granted on January 26, 2010. On March 1, 2010, the plaintiffs appealed from the dismissal of their complaints.          Goldman Sachs 2012 Form 10-K   221  

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Notes to Consolidated Financial Statements

    Beginning in February 2012, GS&Co. was named as respondent in four FINRA arbitrations filed, respectively, by the cities of Houston, Texas and Reno, Nevada, a California school district and a North Carolina municipal power authority, based on GS&Co.'s role as underwriter and broker-dealer of the claimants' issuances of an aggregate of over $1.8 billion of auction rate securities from 2003 through 2007 (in the Houston arbitration, two other financial services firms were named as respondents, and in the North Carolina arbitration, one other financial services firm was named). Each claimant alleges that GS&Co. failed to disclose that it had a practice of placing cover bids on auctions, and failed to offer the claimant the option of a formulaic maximum rate (rather than a fixed maximum rate), and that, as a result, the claimant was forced to engage in a series of expensive refinancing and conversion transactions after the failure of the auction market (at an estimated cost, in the case of Houston, of approximately $90 million). Houston and Reno also allege that GS&Co. advised them to enter into interest rate swaps in connection with their auction rate securities issuances, causing them to incur additional losses (including, in the case of Reno, a swap termination obligation of over $8 million). The claimants assert claims for breach of fiduciary duty, fraudulent concealment, negligent misrepresentation, breach of contract, violations of the Exchange Act and state securities laws, and breach of duties under the rules of the Municipal Securities Rulemaking Board and the NASD, and seek unspecified damages. GS&Co. has moved in federal court to enjoin the Reno and California school district arbitrations pursuant to an exclusive forum selection clause in the transaction documents. On November 26, 2012, this motion was denied with regard to the Reno arbitration and, on February 8, 2013, this motion was granted with regard to the California school district arbitration.  Financial Crisis-Related Matters. Group Inc. and certain of its affiliates are subject to a number of investigations and reviews by various governmental and regulatory bodies and self-regulatory organizations and litigation relating to the 2008 financial crisis. Goldman Sachs is cooperating with the investigations and reviews.      222   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

Note 28. Employee Benefit Plans

 Note 28.  Employee Benefit Plans    The firm sponsors various pension plans and certain other postretirement benefit plans, primarily healthcare and life insurance. The firm also provides certain benefits to former or inactive employees prior to retirement.  

Defined Benefit Pension Plans and Postretirement Plans

  Employees of certain non-U.S. subsidiaries participate in various defined benefit pension plans. These plans generally provide benefits based on years of credited service and a percentage of the employee's eligible compensation. The firm maintains a defined benefit pension plan for certain U.K. employees. As of April 2008, the U.K. defined benefit plan was closed to new participants, but will continue to accrue benefits for existing participants. These plans do not have a material impact on the firm's consolidated results of operations.  The firm also maintains a defined benefit pension plan for substantially all U.S. employees hired prior to November 1, 2003. As of November 2004, this plan was closed to new participants and frozen such that existing participants would not accrue any additional benefits. In addition, the firm maintains unfunded postretirement benefit plans that provide medical and life insurance for eligible retirees and their dependents covered under these programs. These plans do not have a material impact on the firm's consolidated results of operations.  The firm recognizes the funded status of its defined benefit pension and postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation, in the consolidated statements of financial condition. As of December 2012, "Other assets" and "Other liabilities and accrued expenses" included $225 million (related to an overfunded pension plan) and $645 million, respectively, related to these plans. As of December 2011, "Other assets" and "Other liabilities and accrued expenses" included $135 million (related to an overfunded pension plan) and $858 million, respectively, related to these plans.  

Defined Contribution Plans

  The firm contributes to employer-sponsored U.S. and non-U.S. defined contribution plans. The firm's contribution to these plans was $221 million, $225 million and $193 million for the years ended December 2012, December 2011 and December 2010, respectively.          Goldman Sachs 2012 Form 10-K   223  

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Notes to Consolidated Financial Statements

Note 29. Employee Incentive Plans

 Note 29.  Employee Incentive Plans    The cost of employee services received in exchange for a share-based award is generally measured based on the grant-date fair value of the award. Share-based awards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately. Share-based awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determining share-based employee compensation expense.  The firm pays cash dividend equivalents on outstanding RSUs. Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense. The firm accounts for the tax benefit related to dividend equivalents paid on RSUs as an increase to additional paid-in capital.  In certain cases, primarily related to conflicted employment (as outlined in the applicable award agreements), the firm may cash settle share-based compensation awards accounted for as equity instruments. For these awards, whose terms allow for cash settlement, additional paid-in capital is adjusted to the extent of the difference between the value of the award at the time of cash settlement and the grant-date value of the award.  

Stock Incentive Plan

  The firm sponsors a stock incentive plan, The Goldman Sachs Amended and Restated Stock Incentive Plan (SIP), which provides for grants of incentive stock options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, RSUs, awards with performance conditions and other share-based awards. In the second quarter of 2003, the SIP was approved by the firm's shareholders, effective for grants after April 1, 2003. The SIP was amended and restated, effective December 31, 2008 and further amended on December 20, 2012 to extend its term until Group Inc.'s 2013 Annual Meeting of Shareholders, at which meeting approval of a new equity compensation plan will be voted upon by shareholders.  The total number of shares of common stock that may be delivered pursuant to awards granted under the SIP through the end of the 2008 fiscal year could not exceed 250 million shares. The total number of shares of common stock that may be delivered for awards granted under the SIP in the 2009 fiscal year and each fiscal year thereafter cannot exceed 5% of the issued and outstanding shares of common stock, determined as of the last day of the immediately preceding fiscal year, increased by the number of shares available for awards in previous years but not covered by awards granted in such years. As of December 2012 and December 2011, 188.3 million and 161.0 million shares, respectively, were available for grant under the SIP.  

Restricted Stock Units

  The firm grants RSUs to employees under the SIP, primarily in connection with year-end compensation and acquisitions. RSUs are valued based on the closing price of the underlying shares on the date of grant after taking into account a liquidity discount for any applicable post-vesting transfer restrictions. Year-end RSUs generally vest and underlying shares of common stock deliver as outlined in the applicable RSU agreements. Employee RSU agreements generally provide that vesting is accelerated in certain circumstances, such as on retirement, death and extended absence. Delivery of the underlying shares of common stock is conditioned on the grantees satisfying certain vesting and other requirements outlined in the award agreements. The table below presents the activity related to RSUs.      224   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

                                                                                                 Weighted Average                                               Restricted Stock                    Grant-Date Fair Value of Restricted                                               Units Outstanding                         Stock Units Outstanding                                              Future           No Future                    Future            No Future                                             Service             Service                   Service              Service                                            Required            Required                  Required             Required Outstanding, December 2011               14,302,189  4       30,840,580                   $139.46              $124.33  Granted 1, 2                              6,967,886           4,246,015                     84.59                84.92  Forfeited                                (1,228,200 )           (68,350 )                  126.97               122.40  Delivered 3                                       -         (30,980,248 )                       -               120.35  Vested 2                                (11,352,354 )        11,352,354                    125.03               125.03 Outstanding, December 2012                8,689,521  4       15,390,351                    116.07               121.99    

1. The weighted average grant-date fair value of RSUs granted during the years

ended December 2012, December 2011 and December 2010 was $84.72, $141.21 and

$132.64, respectively. The fair value of the RSUs granted during the year

ended December 2012, December 2011 and December 2010 includes a liquidity

discount of 21.7%, 12.7% and 13.2%, respectively, to reflect post-vesting

   transfer restrictions of up to 4 years.    

2. The aggregate fair value of awards that vested during the years ended

December 2012, December 2011 and December 2010 was $1.57 billion,    $2.40 billion and $4.07 billion, respectively.    

3. Includes RSUs that were cash settled.

4. Includes restricted stock subject to future service requirements as of

December 2012 and December 2011 of 276,317 and 754,482 shares, respectively.

     In the first quarter of 2013, the firm granted to its employees 16.7 million year-end RSUs, of which 5.7 million RSUs require future service as a condition of delivery. These awards are subject to additional conditions as outlined in the award agreements. Generally, shares underlying these awards, net of required withholding tax, deliver over a three-year period but are subject to post-vesting transfer restrictions through January 2018. These grants are not included in the above table.  Stock Options  Stock options generally vest as outlined in the applicable stock option agreement. Options granted in February 2010 generally became exercisable in one-third installments in January 2011, January 2012 and January 2013 and will expire in February 2014. In general, options granted prior to February 2010 expire on the tenth anniversary of the grant date, although they may be subject to earlier termination or cancellation under certain circumstances in accordance with the terms of the SIP and the applicable stock option agreement.  

The table below presents the activity related to stock options.

                                                                                               Aggregate       Weighted Average                                            Options        Weighted Average       Intrinsic Value         Remaining Life                                        Outstanding          Exercise Price         (in millions)                (years) Outstanding, December 2011              47,256,938                 $ 97.76                $  444                   6.08  Exercised                               (4,009,948 )                 78.93  Forfeited                                  (21,600 )                113.68  Expired                                     (8,279 )                 78.87 Outstanding, December 2012              43,217,111                   99.51                 1,672                   5.55 Exercisable, December 2012              43,203,775                   99.49                 1,672                   5.55         Goldman Sachs 2012 Form 10-K   225   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The total intrinsic value of options exercised during the years ended December 2012, December 2011 and December 2010 was $151 million, $143 million and

$510 million, respectively. The table below presents options outstanding.

                                                               Weighted       Weighted Average                                     Options              Average              Remaining   Exercise Price                Outstanding       Exercise Price           Life (years)   $ 75.00 - $ 89.99              34,103,907              $ 78.78                   6.00      90.00 -  104.99                 275,580                96.08                   0.92     105.00 -  119.99                       -                    -                      -     120.00 -  134.99               2,791,500               131.64                   2.92     135.00 -  149.99                       -                    -                      -     150.00 -  164.99                  65,000               154.16                   1.17     165.00 -  194.99                       -                    -                      -     195.00 -  209.99               5,981,124               202.27                   4.48   Outstanding, December 2012     43,217,111                99.51                   5.55    

The weighted average grant-date fair value of options granted during the year ended December 2010 was $37.58.

  The tables below present the primary weighted average assumptions used to estimate fair value as of the grant date based on a Black-Scholes option-pricing model, and share-based compensation and the related excess tax benefit/(provision).                                                                                    Year Ended December                                                                      2012           2011             2010 Risk-free interest rate                                              N/A             N/A              1.6 %  Expected volatility                                                  N/A             N/A             32.5  Annual dividend per share                                            N/A             N/A            $1.40  Expected life                                                        N/A             N/A       3.75 years                                                                             Year Ended December in millions                                                          2012           2011             2010 Share-based compensation                                          $1,338          $2,843           $4,070  Excess tax benefit related to options exercised                       53              55              183  Excess tax benefit/(provision) related to share-based awards  1                                                (11)            138              239    

1. Represents the tax benefit/(provision) recognized in additional paid-in

capital on stock options exercised and the delivery of common stock underlying

   share-based awards.    

As of December 2012, there was $434 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is

expected to be recognized over a weighted average period of 1.62 years.

     226   Goldman Sachs 2012 Form 10-K  

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Notes to Consolidated Financial Statements

     Note 30. Parent Company  Note 30.  Parent Company

Group Inc. - Condensed Statements of Earnings

                                                             Year Ended December   in millions                                          2012          2011           2010   Revenues   Dividends from bank subsidiaries                    $   -       $ 1,000         $    -    Dividends from nonbank subsidiaries                 3,622         4,967          6,032    Undistributed earnings of subsidiaries              3,682           481          2,884    Other revenues                                      1,567        (3,381 )          964   Total non-interest revenues                         8,871         3,067          9,880    Interest income                                     4,751         4,547          4,153    Interest expense                                    4,287         3,917          3,429   Net interest income                                   464           630            724   Net revenues, including net interest income         9,335         3,697         10,604    Operating expenses   Compensation and benefits                             452           300            423    Other expenses                                        448           252            238   Total operating expenses                              900           552            661   Pre-tax earnings                                    8,435         3,145          9,943    Provision/(benefit) for taxes                         960        (1,297 )        1,589   Net earnings                                        7,475         4,442          8,354    Preferred stock dividends                             183         1,932            641   Net earnings applicable to common shareholders     $7,292       $ 2,510        $ 7,713    

Group Inc. - Condensed Statements of Financial Condition

                                                                  As of December in millions                                                       2012            2011 Assets Cash and cash equivalents                                     $     14        $     14  Loans to and receivables from subsidiaries Bank subsidiaries                                                4,103           7,196  Nonbank subsidiaries 1                                         174,609         180,397  Investments in subsidiaries and other affiliates Bank subsidiaries                                               20,671      

19,226

  Nonbank subsidiaries and other affiliates                       52,646      

48,473

  Financial instruments owned, at fair value                      19,132          20,698  Other assets                                                     4,782           7,912 Total assets                                                  $275,957        $283,916  Liabilities and shareholders' equity Payables to subsidiaries                                      $    657      

$ 693

Financial instruments sold, but not yet purchased, at fair value

                                                         301      

241

  Unsecured short-term borrowings With third parties 2                                            29,898          35,368  With subsidiaries                                                4,253           4,701  Unsecured long-term borrowings With third parties 3                                           158,761         166,342  With subsidiaries 4                                              3,574           1,536  Other liabilities and accrued expenses                           2,797           4,656 Total liabilities                                              200,241         213,537  

Commitments, contingencies and guarantees

 Shareholders' equity Preferred stock                                                  6,200           3,100  Common stock                                                         8               8  Restricted stock units and employee stock options                3,298           5,681  Additional paid-in capital                                      48,030          45,553  Retained earnings                                               65,223          58,834  Accumulated other comprehensive loss                              (193 )    

(516 )

  Stock held in treasury, at cost                                (46,850 )       (42,281 ) Total shareholders' equity                                      75,716      

70,379

 Total liabilities and shareholders' equity                    $275,957

$283,916

Group Inc. - Condensed Statements of Cash Flows

                                                              Year Ended 

December

 in millions                                             2012            2011            2010 Cash flows from operating activities Net earnings                                        $  7,475        $  

4,442 $ 8,354

  Adjustments to reconcile net earnings to net cash provided by operating activities Undistributed earnings of subsidiaries                (3,682 )          (481 )        (2,884 )  Depreciation and amortization                             15              14              18  Deferred income taxes                                 (1,258 )           809             214  Share-based compensation                                  81             244             393  Changes in operating assets and liabilities Financial instruments owned, at fair value             1,464           3,557            (176 )  Financial instruments sold, but not yet purchased, at fair value                                  (3 )          (536 )        (1,091 )  Other, net                                             2,621           1,422          10,852 Net cash provided by operating activities              6,713           

9,471 15,680

   Cash flows from investing activities Purchase of property, leasehold improvements and equipment                                            (12 )           (42 )           (15 )  Repayments of short-term loans by subsidiaries, net of issuances                                       6,584          

20,319 (9,923 )

  Issuance of term loans to subsidiaries               (17,414 )       

(42,902 ) (5,532 )

  Repayments of term loans by subsidiaries              18,715          21,850           1,992  Capital distributions from/(contributions to) subsidiaries, net                                       (298 )         4,642          (1,038 ) Net cash provided by/(used for) investing activities                                   7,575           

3,867 (14,516 )

   Cash flows from financing activities Unsecured short-term borrowings, net                  (2,647 )          (727 )         3,137  Proceeds from issuance of long-term borrowings                                  26,160          27,251          21,098  Repayment of long-term borrowings, including the current portion                                  (35,608 )       (27,865 )       (21,838 )  Preferred stock repurchased                                -          (3,857 )             -  Common stock repurchased                              (4,640 )        (6,048 )        (4,183 )  Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units                                           (1,086 )        

(2,771 ) (1,443 )

  Proceeds from issuance of preferred stock, net of issuance costs                                      3,087               -               -  Proceeds from issuance of common stock, including stock option exercises                         317             368             581  Excess tax benefit related to share-based compensation                                 130             358             352  Cash settlement of share-based compensation               (1 )           (40 )            (1 ) Net cash used for financing activities               (14,288 )       (13,331 )        (2,297 ) Net increase/(decrease) in cash and cash equivalents                                           -               

7 (1,133 )

  Cash and cash equivalents, beginning of year              14               7           1,140 Cash and cash equivalents, end of year               $    14         $    14         $     7   SUPPLEMENTAL DISCLOSURES: 

Cash payments for third-party interest, net of capitalized interest, were $5.11 billion, $3.83 billion and $3.07 billion for the years ended December 2012, December 2011 and December 2010, respectively.

Cash payments for income taxes, net of refunds, were $1.59 billion, $1.39 billion and $2.05 billion for the years ended December 2012, December 2011 and December 2010, respectively.

Non-cash activity:

During the year ended December 2011, $103 million of common stock was issued in connection with the acquisition of GS Australia.

1. Primarily includes overnight loans, the proceeds of which can be used to

   satisfy the short-term obligations of Group Inc.

2. Includes $4.91 billion and $6.25 billion at fair value as of December 2012 and

December 2011, respectively.    

3. Includes $8.19 billion and $12.91 billion at fair value as of December 2012

   and December 2011, respectively.    

4. Unsecured long-term borrowings with subsidiaries by maturity date are

$434 million in 2014, $191 million in 2015, $2.08 billion in 2016,    $107 million in 2017, and $766 million in 2018-thereafter.           Goldman Sachs 2012 Form 10-K   227  

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Supplemental Financial Information

   Quarterly Results (unaudited)    The following represents the firm's unaudited quarterly results for the years ended December 2012 and December 2011. These quarterly results were prepared in accordance with U.S. GAAP and reflect all adjustments that  

are, in the opinion of management, necessary for a fair statement of the results. These adjustments are of a normal, recurring nature.

                                                                   Three Months Ended                                            December         September            June           March in millions, except per share data             2012              2012            2012            2012 Total non-interest revenues                  $8,263            $7,515          $5,537         $ 8,968  Interest income                               2,864             2,629           3,055           2,833  Interest expense                              1,891             1,793           1,965           1,852 Net interest income                             973               836           1,090             981 Net revenues, including net interest income                                        9,236             8,351           6,627           9,949  Operating expenses 1                          4,923             6,053           5,212           6,768 Pre-tax earnings                              4,313             2,298           1,415           3,181  Provision for taxes                           1,421               786             453           1,072 Net earnings                                  2,892             1,512             962           2,109  Preferred stock dividends                        59                54              35              35 Net earnings applicable to common shareholders                                 $2,833            $1,458          $  927         $ 2,074 Earnings per common share Basic                                        $ 5.87            $ 2.95          $ 1.83         $  4.05  Diluted                                        5.60              2.85            1.78            3.92  Dividends declared per common share            0.50              0.46            0.46            0.35                                                                Three Months Ended                                            December         September            June           March in millions, except per share data             2011              2011            2011            2011 Total non-interest revenues                  $4,984            $2,231          $5,868         $10,536  Interest income                               3,032             3,354           3,681           3,107  Interest expense                              1,967             1,998           2,268           1,749 Net interest income                           1,065             1,356           1,413           1,358 Net revenues, including net interest income                                        6,049             3,587           7,281          11,894  Operating expenses 1                          4,802             4,317           5,669           7,854 Pre-tax earnings/(loss)                       1,247              (730 )         1,612           4,040  Provision/(benefit) for taxes                   234              (337 )           525           1,305 Net earnings/(loss)                           1,013              (393 )         1,087           2,735  Preferred stock dividends                        35                35              35           1,827 Net earnings/(loss) applicable to common shareholders                          $  978            $ (428 )        $1,052         $   908 Earnings/(loss) per common share Basic                                        $ 1.91            $(0.84 )        $ 1.96         $  1.66  Diluted                                        1.84             (0.84 )          1.85            1.56  Dividends declared per common share            0.35              0.35            0.35            0.35    

1. The timing and magnitude of changes in the firm's discretionary compensation

   accruals can have a significant effect on results in a given quarter.     228   Goldman Sachs 2012 Form 10-K   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

Common Stock Price Range

  The table below presents the high and low sales prices per share of the firm's common stock.                                                                        Year Ended December                                            2012                             2011                             2010                                       High            Low              High            Low              High            Low First quarter                      $128.72        $ 92.42           $175.34        $153.26           $178.75        $147.81  Second quarter                      125.54          90.43            164.40         128.30            186.41         131.02  Third quarter                       122.60          91.15            139.25          91.40            157.25         129.50  Fourth quarter                      129.72         113.84            118.07          84.27            171.61         144.70    

As of February 15, 2013, there were 13,297 holders of record of the firm's common stock.

On February 15, 2013, the last reported sales price for the firm's common stock on the New York Stock Exchange was $154.99 per share.

     Common Stock Performance    The following graph compares the performance of an investment in the firm's common stock from November 30, 2007 through December 31, 2012, with the S&P 500 Index and the S&P 500 Financials Index. The graph assumes $100 was invested on November 30, 2007 in each of the firm's common stock, the S&P 500 Index and  the S&P 500 Financials Index, and the dividends were reinvested on the date of payment without payment of any commissions. The performance shown in the graph represents past performance and should not be considered an indication of future performance.      [[Image Removed: LOGO]]   

The table below shows the cumulative total returns in dollars of the firm's common stock, the S&P 500 Index and the S&P 500 Financials Index for Goldman Sachs' last five fiscal year ends 1, assuming $100 was invested on November 30, 2007 in each of the firm's common stock,

the S&P 500 Index and the S&P 500 Financials Index, and the dividends were reinvested on the date of payment without payment of any commissions. The performance shown in the table represents past performance and should not be considered an indication of future performance.

                                       11/30/07        11/28/08        12/31/09        12/31/10        12/31/11        12/31/12 The Goldman Sachs Group, Inc.      $100.00          $35.16          $76.08          $76.49          $41.61         $ 59.66  S&P 500 Index                       100.00           61.91           79.13           91.04           92.96          107.84  S&P 500 Financials Index            100.00           42.42           49.61           55.65           46.18           59.53    

1. As a result of the firm's change in fiscal year-end during 2009, this table

includes 61 months beginning November 30, 2007 and ending December 31, 2012.

        Goldman Sachs 2012 Form 10-K   229  

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Supplemental Financial Information

   Selected Financial Data                                                                                   As of or for the                                                                      Year Ended                                        One Month Ended                                          December       December       December       December       November                  December                                              2012           2011           2010           2009           2008                    2008   1 Income statement data (in millions) Total non-interest revenues              $ 30,283       $ 23,619       $ 33,658       $ 37,766       $ 17,946                $     (502 )  Interest income                            11,381         13,174         12,309         13,907         35,633                     1,687  Interest expense                            7,501          7,982          6,806          6,500         31,357                     1,002 Net interest income                         3,880          5,192          5,503          7,407          4,276                       685 Net revenues, including net interest income                                     34,163         28,811         39,161         45,173         22,222                       183  Compensation and benefits                  12,944         12,223         15,376         16,193         10,934                       744  U.K. bank payroll tax                           -              -            465              -              -                         -  Other operating expenses                   10,012         10,419         10,428          9,151          8,952                       697 Pre-tax earnings/(loss)                  $ 11,207       $  6,169       $ 12,892       $ 19,829       $  2,336               $    (1,258 ) Balance sheet data (in millions) Total assets                             $938,555       $923,225       $911,332       $848,942       $884,547                $1,112,225  

Other secured financings (long-term) 8,965 8,179 13,848 11,203 17,458

                    18,413  Unsecured long-term borrowings            167,305        173,545        174,399        185,085        168,220                   185,564  Total liabilities                         862,839        852,846        833,976        778,228        820,178                 1,049,171  Total shareholders' equity                 75,716         70,379         77,356         70,714         64,369                    63,054 Common share data (in millions, except per share amounts) Earnings/(loss) per common share Basic                                    $  14.63       $   4.71       $  14.15       $  23.74       $   4.67                $    (2.15 )  Diluted                                     14.13           4.51          13.18          22.13           4.47                     (2.15 )  Dividends declared per common share          1.77           1.40           1.40           1.05           1.40                      0.47  3  Book value per common share 2              144.67         130.31         128.72         117.48          98.68                     95.84 Average common shares outstanding Basic                                       496.2          524.6          542.0          512.3          437.0                     485.5  Diluted                                     516.1          556.9          585.3          550.9          456.2                     485.5 Selected data (unaudited) Total staff Americas                                   16,400         17,200         19,900         18,900         19,700                    19,200  Non-Americas                               16,000         16,100         15,800         13,600         14,800                    14,100 Total staff                                32,400         33,300         35,700         32,500         34,500                    33,300 Assets under management (in billions) Asset class Alternative investments                  $    133       $    142       $    148       $    146       $    146                 $     145  Equity                                        133            126            144            146            112                       114  Fixed income                                  370            340            340            315            248                       253 Total non-money market assets                 636            608            632            607            506                       512  Money markets                                 218            220            208            264            273                       286 Total assets under management            $    854       $    828       $    840       $    871       $    779                 $     798    

1. In connection with becoming a bank holding company, the firm was required to

change its fiscal year-end from November to December. December 2008 represents

   the period from November 29, 2008 to December 26, 2008.    

2. Book value per common share is based on common shares outstanding, including

RSUs granted to employees with no future service requirements, of

480.5 million, 516.3 million, 546.9 million, 542.7 million, 485.4 million and

   485.9 million as of December 2012, December 2011, December 2010,    December 2009, November 2008 and December 2008, respectively.    

3. Rounded to the nearest penny. Exact dividend amount was $0.4666666 per common

   share and was reflective of a four-month period (December 2008 through    March 2009), due to the change in the firm's fiscal year-end.     230   Goldman Sachs 2012 Form 10-K   

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Supplemental Financial Information

Statistical Disclosures

Distribution of Assets, Liabilities and Shareholders' Equity

  The table below presents a summary of consolidated average balances and interest rates.                                                                                                             For the Year Ended December                                                                   2012                                               2011                                               2010                                                    Average                       Average              Average                       Average              Average                       Average in millions, except rates                          balance       Interest           rate              balance       Interest           rate              balance       Interest           rate Assets Deposits with banks                               $ 52,500        $   156           0.30 %           $ 38,039        $   125           0.33 %           $ 29,371        $    86           0.29 %  U.S.                                                49,123            132           0.27               32,770             95           0.29               24,988             67           0.27  Non-U.S.                                             3,377             24           0.71                5,269             30           0.57                4,383             19           0.43  Securities borrowed, securities purchased under agreements to resell and federal funds sold                                               331,828            (77 )        (0.02 )            351,896            666           0.19              353,719            540           0.15  U.S.                                               191,166           (431 )        (0.23 )            219,240           (249 )        (0.11 )            243,907             75           0.03  Non-U.S.                                           140,662            354           0.25              132,656            915           0.69              109,812            465           0.42  Financial instruments owned, at fair value 1, 2                                                  310,982          9,817           3.16              287,322         10,718           3.73              273,801         10,346           3.78  U.S.                                               190,490          6,548           3.44              183,920          7,477           4.07              189,136          7,865           4.16  Non-U.S.                                           120,492          3,269           2.71              103,402          3,241           3.13               84,665          2,481           2.93  Other interest-earning assets 3                    136,427          1,485           1.09              143,270          1,665           1.16              118,364          1,337           1.13  U.S.                                                90,071            974           1.08               99,042            915           0.92               82,965            689           0.83  Non-U.S.                                            46,356            511           1.10               44,228            750           1.70               35,399            648           1.83 Total interest-earning assets                      831,737         11,381           1.37              820,527         13,174           1.61              775,255         12,309           1.59  Cash and due from banks                              7,357                                              4,987                                              3,709  Other non-interest-earning assets  2               107,702                                            118,901                                            113,310 Total Assets                                      $946,796                                           $944,415                                           $892,274 Liabilities Interest-bearing deposits                         $ 56,399            399           0.71             $ 40,266            280           0.70             $ 38,011            304           0.80  U.S.                                                48,668            362           0.74               33,234            243           0.73               31,418            279           0.89  Non-U.S.                                             7,731             37           0.48                7,032             37           0.53                6,593             25           0.38  Securities loaned and securities sold under agreements to repurchase                           177,550            822           0.46              171,753            905           0.53              160,280            708           0.44  U.S.                                               121,145            380           0.31              110,235            280           0.25              112,839            355           0.31  Non-U.S.                                            56,405            442           0.78               61,518            625           1.02               47,441            353           0.74  Financial instruments sold, but not yet purchased, at fair value 1, 2                       94,740          2,438           2.57              102,282          2,464           2.41               89,040          1,859           2.09  U.S.                                                41,436            852           2.06               52,065            984           1.89               44,713            818           1.83  Non-U.S.                                            53,304          1,586           2.98               50,217          1,480           2.95               44,327          1,041           2.35  Short-term borrowings 4, 5                          70,359            581           0.83               78,497            526           0.67               55,512            453           0.82  U.S.                                                47,614            479           1.01               50,659            431           0.85               33,306            394           1.18  Non-U.S.                                            22,745            102           0.45               27,838             95           0.34               22,206             59           0.27  Long-term borrowings 5, 6                          176,698          3,736           2.11              186,148          3,439           1.85              193,031          3,155           1.63  U.S.                                               170,163          3,582           2.11              179,004          3,235           1.81              183,338          2,910           1.59  Non-U.S.                                             6,535            154           2.36                7,144            204           2.86                9,693            245           2.53  Other interest-bearing liabilities 7               206,790           (475 )        (0.23 )            203,940            368           0.18              189,008            327           0.17  U.S.                                               150,986           (988 )        (0.65 )            149,958           (535 )        (0.36 )            142,752           (221 )        (0.15 )  Non-U.S.                                            55,804            513           0.92               53,982            903           1.67               46,256            548           1.18 Total interest-bearing liabilities                 782,536          7,501           0.96              782,886          7,982           1.02              724,882          6,806           0.94  Non-interest-bearing deposits                          324                                                140                                           

169

  Other non-interest-bearing liabilities  2           91,406                                             88,681                                             92,966 Total liabilities                                  874,266                                            871,707                                            818,017  Shareholders' equity Preferred stock                                      4,392                                              3,990                                              6,957  Common stock                                        68,138                                             68,718                                             67,300 Total shareholders' equity                          72,530                                             72,708                                           

74,257

  Total liabilities and shareholders' equity        $946,796                                           $944,415                                           $892,274 Interest rate spread                                                                0.41 %                                             0.59 %                                             0.65 %  Net interest income and net yield on interest-earning assets                                           $ 3,880           0.47                             $ 5,192           0.63                             $ 5,503           0.71  U.S.                                                                2,556           0.49                               3,600           0.67                               4,161           0.77  Non-U.S.                                                            1,324           0.43                               1,592           0.56                               1,342           0.57  Percentage of interest-earning assets and interest-bearing liabilities attributable to non-U.S. operations  8  Assets                                                                             37.38 %                                            34.80 %                                            30.22 %  Liabilities                                                                        25.88                                              26.53                                              24.35         Goldman Sachs 2012 Form 10-K   231   

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Supplemental Financial Information

1. Consists of cash financial instruments, including equity securities and

   convertible debentures.    

2. Derivative instruments and commodities are included in other

   non-interest-earning assets and other non-interest-bearing liabilities.    

3. Primarily consists of cash and securities segregated for regulatory and other

   purposes and certain receivables from customers and counterparties.    

4. Consists of short-term other secured financings and unsecured short-term

   borrowings.    

5. Interest rates include the effects of interest rate swaps accounted for as

   hedges.    

6. Consists of long-term secured financings and unsecured long-term borrowings.

7. Primarily consists of certain payables to customers and counterparties.

8. Assets, liabilities and interest are attributed to U.S. and non-U.S. based on

the location of the legal entity in which the assets and liabilities are held.

    232   Goldman Sachs 2012 Form 10-K  

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

              Changes in Net Interest Income, Volume and Rate Analysis  

The table below presents an analysis of the effect on net interest income of volume and rate changes. In this analysis,

changes due to volume/rate variance have been allocated to volume.

                                                                                          For the Year Ended                                                  December 2012 versus December 2011                     December 2011 versus December 2010                                              Increase (decrease) due to                              Increase (decrease) due to                                                      change in:                                              change in:                                                                                       Net                                                    Net in millions                                        Volume             Rate         change                 Volume              Rate        change Interest-earning assets Deposits with banks                                 $  32          $    (1 )       $   31                  $  28             $  11        $   39  U.S.                                                   45               (8 )           37                     23                 5            28  Non-U.S.                                              (13 )              7             (6 )                    5                 6            11  Securities borrowed, securities purchased under agreements to resell and federal funds sold                                     83             (826 )         (743 )                  186               (60 )         126  U.S.                                                   63             (245 )         (182 )                   28              (352 )        (324 )  Non-U.S.                                               20             (581 )         (561 )                  158               292           450  Financial instruments owned, at fair value                                                 689           (1,590 )         (901 )                  375                (3 )         372  U.S.                                                  225           (1,154 )         (929 )                 (212 )            (176 )        (388 )  Non-U.S.                                              464             (436 )           28                    587               173           760  Other interest-earning assets                         (74 )           (106 )         (180 )                  299                29           328  U.S.                                                  (97 )            156             59                    149                77           226  Non-U.S.                                               23             (262 )         (239 )                  150               (48 )         102 Change in interest income                             730           (2,523 )       (1,793 )                  888               (23 )         865 Interest-bearing liabilities Interest-bearing deposits                             118                1            119                     15               (39 )         (24 )  U.S.                                                  115                4            119                     13               (49 )         (36 )  Non-U.S.                                                3               (3 )            -                      2                10            12  Securities loaned and securities sold under agreements to repurchase                         (6 )            (77 )          (83 )                  136                61           197  U.S.                                                   34               66            100                     (7 )             (68 )         (75 )  Non-U.S.                                              (40 )           (143 )         (183 )                  143               129           272  Financial instruments sold, but not yet purchased, at fair value                             (127 )            101            (26 )                  313               292           605  U.S.                                                 (219 )             87           (132 )                  139                27           166  Non-U.S.                                               92               14            106                    174               265           439  Short-term borrowings                                 (54 )            109             55                    167               (94 )          73  U.S.                                                  (31 )             79             48                    147              (110 )          37  Non-U.S.                                              (23 )             30              7                     20                16            36  Long-term borrowings                                 (200 )            497            297                   (151 )             435           284  U.S.                                                 (186 )            533            347                    (78 )             403           325  Non-U.S.                                              (14 )            (36 )          (50 )                  (73 )              32           (41 )  Other interest-bearing liabilities                     10             (853 )         (843 )                  103               (62 )          41  U.S.                                                   (7 )           (446 )         (453 )                  (26 )            (288 )        (314 )  Non-U.S.                                               17             (407 )         (390 )                  129               226           355 Change in interest expense                           (259 )           (222 )         (481 )                  583               593         1,176 Change in net interest income                       $ 989          $(2,301 )      $(1,312 )                $ 305             $(616 )      $ (311 )         Goldman Sachs 2012 Form 10-K   233   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

Available-for-sale Securities Portfolio

The table below presents the fair value of available-for-sale securities. As of December 2012, such assets related to the firm's reinsurance business were classified as held for sale

  and were included in "Other assets." See Note 12 for further information about assets held for sale.                                                                            Gross            Gross                                                  Amortized       Unrealized       Unrealized          Fair in millions                                           Cost            Gains           Losses         Value Available-for-sale securities, December 2012 Commercial paper, certificates of deposit, time deposits and other money market instruments                                         $  467             $  -             $  -        $  467  U.S. government and federal agency obligations                                            814               47               (5 )         856  Non-U.S. government and agency obligations               2                -                -             2  Mortgage and other asset-backed loans and securities                                           3,049              341               (8 )       3,382  Corporate debt securities                            3,409              221               (5 )       3,625  State and municipal obligations                        539               91               (1 )         629  Other debt obligations                                 112                3               (2 )         113 Total available-for-sale securities                 $8,392             $703            $ (21 )      $9,074 Available-for-sale securities, December 2011 Commercial paper, certificates of deposit, time deposits and other money market instruments                                         $  406             $  -             $  -        $  406  U.S. government and federal agency obligations                                            582               80                -           662  Non-U.S. government and agency obligations              19                -                -            19  Mortgage and other asset-backed loans and securities                                           1,505               30             (119 )       1,416  Corporate debt securities                            1,696              128              (11 )       1,813  State and municipal obligations                        418               63                -           481  Other debt obligations                                  67                -               (3 )          64 Total available-for-sale securities                 $4,693             $301            $(133 )      $4,861     234   Goldman Sachs 2012 Form 10-K  

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Supplemental Financial Information

The table below presents the fair value, amortized cost and weighted average yields of available-for-sale securities by</p>

contractual maturity. Yields are calculated on a weighted average basis.

                                                                                                                           As of December 2012                                                                                             Due After                       Due After                                                               Due in                    One Year Through               Five Years Through                  Due After                                                          One Year or Less                  Five Years                       Ten Years                      Ten Years                       Total $ in millions                                             Amount       Yield             Amount       Yield               Amount       Yield            Amount       Yield            Amount       Yield Fair value of available-for-sale securities Commercial paper, certificates of deposit, time deposits and other money market instruments            $467           - %            $   -           - %              $   -           - %           $   -           - %          $  467           %  U.S. government and federal agency obligations                57           -                267           1                   88           2               444           4               856           3  Non-U.S. government and agency obligations                     -           -                  -           -                    -           -                 2           4                 2           4  Mortgage and other asset-backed loans and securities           4           3                218           5                   23           6             3,137           6             3,382           6  Corporate debt securities                                     74           2                804           3                1,567           4             1,180           5             3,625           4  State and municipal obligations                                -           -                 10           5                    -           -               619           6               629           6  Other debt obligations                                        18           1                  6           1                    5           5                84           4               113           3 Total available-for-sale securities                         $620                         $1,305                           $1,683                        $5,466                        $9,074 Amortized cost of available-for-sale securities             $617                         $1,267                           $1,593                        $4,915                        $8,392                                                                                                                        As of December 2011                                                                                             Due After                       Due After                                                               Due in                    One Year Through               Five Years Through                  Due After                                                          One Year or Less                  Five Years                       Ten Years                      Ten Years                       Total $ in millions                                             Amount       Yield             Amount       Yield               Amount       Yield            Amount       Yield            Amount       Yield Fair value of available-for-sale securities Commercial paper, certificates of deposit, time deposits and other money market instruments            $406           - %            $   -           - %              $   -           - %           $   -           - %          $  406           - %  U.S. government and federal agency obligations                72           -                132           3                   69           2               389           4               662           3  Non-U.S. government and agency obligations                     -           -                  9           3                    9           6                 1           4                19           4  Mortgage and other asset-backed loans and securities           -           -                120           7                   19           5             1,277          10             1,416          10  Corporate debt securities                                     33           5                425           4                  848           5               507           6             1,813           5  State and municipal obligations                                1           5                 12           5                    -           -               468           6               481           6  Other debt obligations                                         -           -                 10           4                    -           -                54           3                64           3 Total available-for-sale securities                         $512                          $ 708                           $  945                        $2,696                        $4,861 Amortized cost of available-for-sale securities             $512                          $ 696                           $  899                        $2,586                        $4,693         Goldman Sachs 2012 Form 10-K   235   

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES

Supplemental Financial Information

Deposits

The table below presents a summary of the firm's interest-bearing deposits.

                                                       Average Balances                         Average Interest Rates                                                   Year Ended December                         Year Ended December $ in millions                                2012           2011           2010            2012        2011        2010 U.S.: Savings 1                                 $32,235        $25,916        $23,260            0.42 %      0.42 %      0.44 %  Time                                       16,433          7,318          8,158            1.38        1.84        2.16 Total U.S. deposits                        48,668         33,234         31,418            0.74        0.73        0.89  Non-U.S.: Demand                                      5,318          5,378          5,559            0.30        0.46        0.34  Time                                        2,413          1,654          1,034            0.87        0.73        0.58 Total Non-U.S. deposits                     7,731          7,032          6,593            0.48        0.53        0.38 Total deposits                            $56,399        $40,266        $38,011            0.71        0.70        0.80    

1. Amounts are available for withdrawal upon short notice, generally within seven

    days.   Ratios  

The table below presents selected financial ratios.

                                                                Year Ended December                                                         2012         2011        2010     Net earnings to average assets                       0.8 %        0.5 %       0.9 %      Return on average common shareholders' equity 1     10.7          3.7        11.5      Return on average total shareholders' equity 2      10.3          6.1        11.3      Total average equity to average assets               7.7          7.7         8.3      Dividend payout ratio 3                             12.5         31.0        10.6    

1. Based on net earnings applicable to common shareholders divided by average

   monthly common shareholders' equity.    

2. Based on net earnings divided by average monthly total shareholders' equity.

3. Dividends declared per common share as a percentage of diluted earnings per

common share.

Short-term and Other Borrowed Funds

The table below presents a summary of the firm's securities loaned and securities sold under agreements to repurchase and short-term borrowings. These borrowings generally

  mature within one year of the financial statement date and include borrowings that are redeemable at the option of the holder within one year of the financial statement date.                                                 Securities Loaned and Securities Sold Under                                                      Agreements to Repurchase                              Short-Term Borrowings 1, 2                                                           As of December                                         As of December $ in millions                                    2012                  2011            2010               2012           2011           2010 Amounts outstanding at year-end              $185,572              $171,684        $173,557            $67,349        $78,223        $72,371  Average outstanding during the year           177,550               171,753         160,280             70,359         78,497         55,512  Maximum month-end outstanding                 198,456               190,453         173,557             75,280         87,281         72,371  Weighted average interest rate During the year                                  0.46 %                0.53 %          0.44 %             0.83 %         0.67 %         0.82 %  At year-end                                      0.44                  0.39            0.44               0.79           0.92           0.63    

1. Includes short-term secured financings of $23.05 billion, $29.19 billion and

$24.53 billion as of December 2012, December 2011 and December 2010,    respectively.    

2. The weighted average interest rates for these borrowings include the effect of

    hedging activities.     236   Goldman Sachs 2012 Form 10-K  

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Supplemental Financial Information

Cross-border Outstandings

  Cross-border outstandings are based on the Federal Financial Institutions Examination Council's (FFIEC) regulatory guidelines for reporting cross-border information and represent the amounts that the firm may not be able to obtain from a foreign country due to country-specific events, including unfavorable economic and political conditions, economic and social instability, and changes in government policies.  Credit exposure represents the potential for loss due to the default or deterioration in credit quality of a counterparty or an issuer of securities or other instruments the firm holds and is measured based on the potential loss in an event of non-payment by a counterparty. Credit exposure is reduced through the effect of risk mitigants, such as netting agreements with counterparties that permit the firm to offset receivables and payables with such counterparties or obtaining collateral from counterparties. The tables below do not include all the effects of such risk mitigants and do not represent the firm's credit exposure.  Claims in the tables below include cash, receivables, securities purchased under agreements to resell, securities borrowed and cash financial instruments, but exclude derivative instruments and commitments. Securities purchased under agreements to resell and securities borrowed are presented gross, without reduction for related securities collateral held, based on the domicile of the counterparty. Margin loans (included in receivables) are presented based on the amount of collateral advanced by the counterparty.  The tables below present cross-border outstandings for each country in which cross-border outstandings exceed 0.75% of consolidated assets in accordance with the FFIEC guidelines.                                                  As of December 2012       in millions          Banks          Governments          Other            Total       Country       Cayman Islands      $    -               $    -        $39,283          $39,283        France              24,333  1             2,370          5,819           32,522        Japan               16,679                   19          8,908           25,606        Germany              4,012               10,976          7,912           22,900        Spain                3,790                4,237          1,816            9,843        Ireland                438                   68          7,057            7,563  2        United Kingdom       1,422                  237          5,874            7,533        China                2,564                1,265          3,564            7,393        Brazil               1,383                3,704          2,280            7,367        Switzerland          3,706                  230          3,133            7,069                                              As of December 2011       in millions          Banks          Governments          Other            Total       Country       France             $33,916  1           $ 2,859        $ 3,776          $40,551        Cayman Islands           -                    -         33,742           33,742        Japan               18,745                   31          6,457           25,233        Germany              5,458               16,089          3,162           24,709        United Kingdom       2,111                3,349          5,243           10,703        Italy                6,143                3,054            841           10,038  3        Ireland              1,148                   63          8,801  2        10,012        China                6,722                   38          2,908            9,668        Switzerland          3,836                   40          5,112            8,988        Canada                 676                1,019          6,841            8,536        Australia            1,597                  470          5,209            7,276    

1. Primarily comprised of secured lending transactions with a clearing house

   which are secured by collateral.    

2. Primarily comprised of interests in and receivables from funds domiciled in

Ireland, but whose underlying investments are primarily located outside of

   Ireland, and secured lending transactions.    

3. Primarily comprised of secured lending transactions which are primarily

   secured by German government obligations.         Goldman Sachs 2012 Form 10-K   237  

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Supplemental Financial Information

                                                As of December 2010         in millions          Banks          Governments          Other          Total         Country         France             $29,250  1           $ 7,373        $ 4,860        $41,483          Cayman Islands           7                    -         35,850         35,857          Japan               21,881                   49          8,002         29,932          Germany              3,767               16,572          2,782         23,121          China               10,849                  701          2,931         14,481          United Kingdom       2,829                2,401          6,800         12,030          Switzerland          2,473                  151          7,616         10,240          Canada                 260                  366          6,741          7,367    

1. Primarily comprised of secured lending transactions with a clearing house

    which are secured by collateral.     238   Goldman Sachs 2012 Form 10-K  

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