Edgar Filing: GOLDMAN SACHS GROUP INC

e10vq

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


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

		For the quarterly period ended March 31, 2011

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the transition period from to

Commission File Number: 001-14965

The Goldman Sachs Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		13-4019460
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

200 West Street, New York, NY		10282
(Address of principal executive offices)		(Zip Code)

(212) 902-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No

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

Large accelerated filer x Accelerated filer o

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of April 21, 2011, there were 517,735,289 shares of the registrant’s common stock outstanding.

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED MARCH 31, 2011

INDEX



Form 10-Q Item Number		Page No.

PART I	FINANCIAL INFORMATION		2
Item 1	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings for the three months ended March 31, 2011 and March 31, 2010		2
	Condensed Consolidated Statements of Financial Condition as of March 31, 2011 and December 31, 2010		3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2011 and year ended December 31, 2010		4
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and March 31, 2010		5
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and March 31, 2010		6
	Notes to Condensed Consolidated Financial Statements		7
	Note 1. Description of Business		7
	Note 2. Basis of Presentation		7
	Note 3. Significant Accounting Policies		8
	Note 4. Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value		12
	Note 5. Fair Value Measurements		13
	Note 6. Cash Instruments		19
	Note 7. Derivatives and Hedging Activities		26
	Note 8. Fair Value Option		39
	Note 9. Collateralized Agreements and Financings		43
	Note 10. Securitization Activities		46
	Note 11. Variable Interest Entities		49
	Note 12. Other Assets		54
	Note 13. Goodwill and Identifiable Intangible Assets		55
	Note 14. Deposits		57
	Note 15. Short-Term Borrowings		57
	Note 16. Long-Term Borrowings		58
	Note 17. Other Liabilities and Accrued Expenses		61
	Note 18. Commitments, Contingencies and Guarantees		62
	Note 19. Shareholders’ Equity		68
	Note 20. Regulation and Capital Adequacy		70
	Note 21. Earnings Per Common Share		74
	Note 22. Transactions with Affiliated Funds		74
	Note 23. Interest Income and Interest Expense		75
	Note 24. Income Taxes		75
	Note 25. Business Segments		76
	Note 26. Credit Concentrations		80
	Note 27. Legal Proceedings		81
	Report of Independent Registered Public Accounting Firm		92
	Statistical Disclosures		93
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		96
Item 3	Quantitative and Qualitative Disclosures About Market Risk		149
Item 4	Controls and Procedures		149
PART II	OTHER INFORMATION		149
Item 1	Legal Proceedings		149
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		150
Item 5	Other Information		150
Item 6	Exhibits		151
SIGNATURES			152


EX-3.1 : CERTIFICATE OF ELIMINATION OF 10% CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES G, OF THE GOLDMAN SACHS GROUP, INC.
EX-3.2: RESTATED CERTIFICATE OF INCORPORATION OF THE GOLDMAN SACHS GROUP, INC.
EX-12.1: STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
EX-15.1: LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
EX-31.1: RULE 13A-14(A) CERTIFICATIONS
EX-32.1: SECTION 1350 CERTIFICATIONS
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)



	Three Months
	Ended March
in millions, except per share amounts	2011		2010

Revenues
Investment banking	$	1,269	$	1,203
Investment management		1,174		1,008
Commissions and fees		1,019		880
Market making		4,462		6,385
Other principal transactions		2,612		1,881


Total non-interest revenues		10,536		11,357

Interest income		3,107		3,001
Interest expense		1,749		1,583


Net interest income		1,358		1,418


Net revenues, including net interest income		11,894		12,775



Operating expenses
Compensation and benefits		5,233		5,493

Brokerage, clearing, exchange and distribution fees		620		562
Market development		179		110
Communications and technology		198		176
Depreciation and amortization		590		372
Occupancy		267		256
Professional fees		233		182
Other expenses		534		465


Total non-compensation expenses		2,621		2,123


Total operating expenses		7,854		7,616



Pre-tax earnings		4,040		5,159
Provision for taxes		1,305		1,703


Net earnings		2,735		3,456
Preferred stock dividends		1,827		160


Net earnings applicable to common shareholders	$	908	$	3,296



Earnings per common share
Basic	$	1.66	$	6.02
Diluted		1.56		5.59

Dividends declared per common share	$	0.35	$	0.35

Average common shares outstanding
Basic		540.6		546.0
Diluted		583.0		590.0

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)



	As of
	March			December
in millions, except share and per share amounts	2011			2010

Assets
Cash and cash equivalents	$	42,683		$	39,788
Cash and securities segregated for regulatory and other purposes (includes $34,325 and $36,182 at fair value as of March 2011 and December 2010, respectively)		53,512			53,731
Collateralized agreements:
Securities purchased under agreements to resell and federal funds sold (includes $162,094 and $188,355 at fair value as of March 2011 and December 2010, respectively)		162,094			188,355
Securities borrowed (includes $62,236 and $48,822 at fair value as of March 2011 and December 2010, respectively)		184,217			166,306
Receivables from brokers, dealers and clearing organizations		12,207			10,437
Receivables from customers and counterparties (includes $8,095 and $7,202 at fair value as of March 2011 and December 2010, respectively)		75,412			67,703
Financial instruments owned, at fair value (includes $47,268 and $51,010 pledged as collateral as of March 2011 and December 2010, respectively)		374,806			356,953
Other assets		28,358			28,059


Total assets	$	933,289		$	911,332



Liabilities and shareholders’ equity
Deposits (includes $1,914 and $1,975 at fair value as of March 2011 and December 2010, respectively)	$	38,727		$	38,569
Collateralized financings:
Securities sold under agreements to repurchase, at fair value		165,475			162,345
Securities loaned (includes $1,430 and $1,514 at fair value as of March 2011 and December 2010, respectively)		12,222			11,212
Other secured financings (includes $25,153 and $31,794 at fair value as of March 2011 and December 2010, respectively)		36,914			38,377
Payables to brokers, dealers and clearing organizations		5,572			3,234
Payables to customers and counterparties		187,824			187,270
Financial instruments sold, but not yet purchased, at fair value		150,998			140,717
Unsecured short-term borrowings, including the current portion of unsecured long-term borrowings (includes $22,212 and $22,116 at fair value as of March 2011 and December 2010, respectively)		53,746			47,842
Unsecured long-term borrowings (includes $20,665 and $18,171 at fair value as of March 2011 and December 2010, respectively)		173,793			174,399
Other liabilities and accrued expenses (includes $7,400 and $2,972 at fair value as of March 2011 and December 2010, respectively)		35,549			30,011


Total liabilities		860,820			833,976

Commitments, contingencies and guarantees

Shareholders’ equity
Preferred stock, par value $0.01 per share; aggregate liquidation preference of $3,100 and $8,100 as of March 2011 and December 2010, respectively		3,100			6,957
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 790,021,786 and 770,949,268 shares issued as of March 2011 and December 2010, respectively, and 517,917,496 and 507,530,772 shares outstanding as of March 2011 and December 2010, respectively		8			8
Restricted stock units and employee stock options		4,759			7,706
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding		—			—
Additional paid-in capital		44,852			42,103
Retained earnings		57,803			57,163
Accumulated other comprehensive loss		(330	)		(286	)
Stock held in treasury, at cost, par value $0.01 per share; 272,104,292 and 263,418,498 shares as of March 2011 and December 2010, respectively		(37,723	)		(36,295	)


Total shareholders’ equity		72,469			77,356


Total liabilities and shareholders’ equity	$	933,289		$	911,332

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)



	Three Months Ended			Year Ended
	March			December
in millions	2011			2010


Preferred stock
Balance, beginning of year		$ 6,957		$	6,957
Repurchased		(3,857	)		—


Balance, end of period		3,100			6,957
Common stock
Balance, beginning of year		8			8
Issued		—			—


Balance, end of period		8			8
Restricted stock units and employee stock options
Balance, beginning of year		7,706			6,245
Issuance and amortization of restricted stock units and employee stock options		1,541			4,137
Delivery of common stock underlying restricted stock units		(4,448	)		(2,521	)
Forfeiture of restricted stock units and employee stock options		(38	)		(149	)
Exercise of employee stock options		(2	)		(6	)


Balance, end of period		4,759			7,706
Additional paid-in capital
Balance, beginning of year		42,103			39,770
Delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options		4,461			3,067
Cancellation of restricted stock units in satisfaction of withholding tax requirements		(1,782	)		(972	)
Excess net tax benefit related to share-based compensation		105			239
Cash settlement of share-based compensation		(35	)		(1	)


Balance, end of period		44,852			42,103
Retained earnings
Balance, beginning of year		57,163			50,252
Net earnings		2,735			8,354
Dividends and dividend equivalents declared on common stock and restricted stock units		(198	)		(802	)
Dividends on preferred stock		(1,897	)		(641	)


Balance, end of period		57,803			57,163
Accumulated other comprehensive income/(loss)
Balance, beginning of year		(286	)		(362	)
Currency translation adjustment, net of tax		(22	)		(38	)
Pension and postretirement liability adjustments, net of tax		1			88
Net unrealized gains/(losses) on available-for-sale securities, net of tax		(23	)		26


Balance, end of period		(330	)		(286	)
Stock held in treasury, at cost
Balance, beginning of year		(36,295	)		(32,156	)
Repurchased		(1,482	)		(4,185	)
Reissued		54			46


Balance, end of period		(37,723	)		(36,295	)


Total shareholders’ equity		$ 72,469		$	77,356

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



	Three Months
	Ended March
in millions	2011			2010

Cash flows from operating activities
Net earnings	$	2,735		$	3,456
Non-cash items included in net earnings
Depreciation and amortization		594			375
Share-based compensation		1,512			2,160
Changes in operating assets and liabilities
Cash and securities segregated for regulatory and other purposes		219			(6,378	)
Net receivables from brokers, dealers and clearing organizations		568			(1,540	)
Net payables to customers and counterparties		(9,671	)		(1,793	)
Securities borrowed, net of securities loaned		(16,901	)		(13,269	)
Securities sold under agreements to repurchase, net of securities purchased under agreements to resell and federal funds sold		29,391			3,068
Financial instruments owned, at fair value		(14,701	)		6,986
Financial instruments sold, but not yet purchased, at fair value		10,278			11,056
Other, net		(2,124	)		(11,625	)


Net cash provided by/(used for) operating activities		1,900			(7,504	)
Cash flows from investing activities
Purchase of property, leasehold improvements and equipment		(277	)		(278	)
Proceeds from sales of property, leasehold improvements and equipment		9			28
Business acquisitions, net of cash acquired		(5	)		(699	)
Proceeds from sales of investments		216			173
Purchase of available-for-sale securities		(761	)		(864	)
Proceeds from sales of available-for-sale securities		930			674


Net cash provided by/(used for) investing activities		112			(966	)
Cash flows from financing activities
Unsecured short-term borrowings, net		1,501			525
Other secured financings (short-term), net		1,340			(312	)
Proceeds from issuance of other secured financings (long-term)		1,291			1,541
Repayment of other secured financings (long-term), including the current portion		(3,580	)		(1,880	)
Proceeds from issuance of unsecured long-term borrowings		8,805			6,081
Repayment of unsecured long-term borrowings, including the current portion		(7,364	)		(5,584	)
Derivative contracts with a financing element, net		210			110
Deposits, net		158			(987	)
Common stock repurchased		(1,481	)		(2,269	)
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units		(358	)		(363	)
Proceeds from issuance of common stock, including stock option exercises		63			138
Excess tax benefit related to share-based compensation		333			243
Cash settlement of share-based compensation		(35	)		—


Net cash provided by/(used for) financing activities		883			(2,757	)


Net increase/(decrease) in cash and cash equivalents		2,895			(11,227	)
Cash and cash equivalents, beginning of year		39,788			38,291


Cash and cash equivalents, end of period	$	42,683		$	27,064

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $2.71 billion and $2.01 billion during the three months ended March 2011 and March 2010, respectively.

Cash payments for income taxes, net of refunds, were $296 million and $778 million during the three months ended March 2011 and March 2010, respectively.

Non-cash activities:

The firm assumed $90 million of debt in connection with business acquisitions during the three months ended March 2010. 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 condensed consolidated financial statements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months
	Ended March
in millions	2011			2010

Net earnings	$	2,735		$	3,456
Currency translation adjustment, net of tax		(22	)		(4	)
Pension and postretirement liability adjustments, net of tax		1			6
Net unrealized gains/(losses) on available-for-sale securities, net of tax		(23	)		4


Comprehensive income	$	2,691		$	3,462

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Description of Business

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

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

Investment Banking

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

Institutional Client Services

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

Investing & Lending

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

Investment Management

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

Note 2. Basis of Presentation

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

These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report on Form 10-K for the year ended December 31, 2010. References to “the firm’s Annual Report on Form 10-K” are to the firm’s Annual Report on Form 10-K for the year ended December 31, 2010. The condensed consolidated financial information as of December 31, 2010 has been derived from audited consolidated financial statements not included herein.

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

All references to March 2011 and March 2010, unless specifically stated otherwise, refer to the firm’s periods ended, or the dates, as the context requires, March 31, 2011 and March 31, 2010, respectively. All references to December 2010, unless specifically stated otherwise, refer to the date December 31, 2010. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Note 3. Significant Accounting Policies

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


Financial Instruments Owned, at Fair Value and Financial Instruments Sold, But Not Yet Purchased, at Fair Value		Note 4
Fair Value Measurements		Note 5
Cash Instruments		Note 6
Derivatives and Hedging Activities		Note 7
Fair Value Option		Note 8
Collateralized Agreements and Financings		Note 9
Securitization Activities		Note 10
Variable Interest Entities		Note 11
Other Assets		Note 12
Goodwill and Identifiable Intangible Assets		Note 13
Deposits		Note 14
Short-Term Borrowings		Note 15
Long-Term Borrowings		Note 16
Other Liabilities and Accrued Expenses		Note 17
Commitments, Contingencies and Guarantees		Note 18
Shareholders’ Equity		Note 19
Regulation and Capital Adequacy		Note 20
Earnings Per Common Share		Note 21
Transactions with Affiliated Funds		Note 22
Interest Income and Interest Expense		Note 23
Income Taxes		Note 24
Business Segments		Note 25
Credit Concentrations		Note 26
Legal Proceedings		Note 27

Consolidation

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

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

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

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

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

Use of Estimates

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

Revenue Recognition

Financial Assets and Financial Liabilities at Fair Value. Financial instruments owned, at fair value and Financial instruments sold, but not yet purchased, at fair value are recorded at fair value either under the fair value option or in accordance with other U.S. GAAP. In addition, the firm has elected to account for certain of its other financial assets and financial liabilities at fair value by electing the fair value option. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. Fair value gains or losses are generally included in “Market making” for positions in Institutional Client Services and “Other principal transactions” for positions in Investing & Lending. See Notes 5 through 8 for further information about fair value measurements.

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

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

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Transfers of Assets

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

Receivables from Customers and Counterparties

Receivables from customers and counterparties generally consist of collateralized receivables, primarily customer margin loans, related to client transactions. Certain of the firm’s receivables from customers and counterparties are accounted for at fair value under the fair value option, with changes in fair value generally included in “Market making” revenues. See Note 8 for further information about the fair values of these receivables. Receivables from customers and counterparties not accounted for at fair value are accounted for at amortized cost net of estimated uncollectible amounts, which generally approximates fair value. Interest on receivables from customers and counterparties is recognized over the life of the transaction and included in “Interest income.”

Insurance Activities

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

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

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 “Other expenses.”

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Share-based Compensation

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

The firm pays cash dividend equivalents on outstanding restricted stock units (RSUs). Dividend equivalents paid on RSUs are generally charged to retained earnings. Dividend equivalents paid on RSUs expected to be forfeited are included in compensation expense.

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

Foreign Currency Translation

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

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business. As of March 2011 and December 2010, “Cash and cash equivalents” included $3.23 billion and $5.75 billion, respectively, of cash and due from banks and $39.45 billion and $34.04 billion, respectively, of interest-bearing deposits with banks.

Recent Accounting Developments

Improving Disclosures about Fair Value Measurements. In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 provides amended disclosure requirements related to fair value measurements. Certain of these disclosure requirements became effective for the firm beginning in the first quarter of 2010, while others became effective for the firm beginning in the first quarter of 2011. Since these amended principles require only additional disclosures concerning fair value measurements, adoption did not affect the firm’s financial condition, results of operations or cash flows.

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

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

pledged as collateral, and financial instruments sold, but not yet purchased, at fair value. Financial instruments owned, at fair value included $3.41 billion and $3.67 billion as of March 2011 and December 2010, respectively, of securities accounted for as available-for-sale, substantially all of which are held in the firm’s insurance subsidiaries.

As of March 2011

As of December 2010

Financial

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

$ 13,100

—

$ 11,262

—

U.S. government and federal agency obligations

100,222

30,138

84,928

23,264

Non-U.S. government obligations

44,540

28,423

40,675

29,009

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

5,912

—

6,200

Loans and securities backed by residential real estate

8,426

9,404

Loan portfolios

1,314

—

1,438

—

Bank loans and bridge loans

18,063

1,428

⁴

18,039

1,487

⁴

Corporate debt securities

26,515

7,745

24,719

7,219

State and municipal obligations

2,718

—

2,792

—

Other debt obligations

3,599

—

3,232

—

Equities and convertible debentures

75,343

31,861

67,833

24,988

Commodities

5,911

13,138

Derivatives ¹

69,143

51,391

73,293

54,730

Total

$374,806

150,998

$356,953

140,717


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

2.	Includes $2.91 billion and $4.06 billion as of March 2011 and December 2010, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program. See Note 18 for further information about the William Street credit extension program.

3.	Consists of acquired portfolios of distressed loans, primarily backed by commercial and residential real estate.

4.	Includes the fair value of unfunded commitments to extend credit. The fair value of partially funded commitments is primarily included in “Financial instruments owned, at fair value.”

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Gains and Losses from Market Making and Other Principal Transactions

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

The gains/(losses) in the table are not representative of the manner in which the firm manages its business activities because many of the firm’s market making, client facilitation, and investing and lending strategies utilize financial instruments across various product types. Accordingly, gains or losses in one product type frequently offset gains or losses in other product types.

For example, most of the firm’s longer-term derivatives are sensitive to changes in interest rates and may be economically hedged with interest rate swaps. Similarly, a significant portion of the firm’s cash instruments and derivatives has exposure to foreign currencies and may be economically hedged with foreign currency contracts.



	Three Months Ended March
in millions	2011			2010

Interest rates	$	2,406		$	(1,932	)
Credit		2,051			4,233
Currencies		(1,606	)		3,439
Equities		2,850			1,381
Commodities		957			609
Other		416			536


Total	$	7,074		$	8,266

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 best evidence of fair value is a quoted price in an active market. If listed prices or quotations 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, as inputs, market-based or independently sourced parameters, including but not limited to interest rates, volatilities, equity or debt prices, foreign exchange rates, commodities prices and credit curves.

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 any 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.

See Notes 6 and 7 for further information about fair value measurements of cash instruments and derivatives, respectively.

The fair value of certain level 2 and level 3 financial assets and financial liabilities may include valuation adjustments for counterparty and the firm’s credit quality, transfer restrictions, large and/or concentrated positions, illiquidity and bid/offer inputs. See Notes 6 and 7 for further information about valuation adjustments.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 financial assets are summarized below.



	As of
	March		December
in millions	2011		2010

Total level 3 assets	$	45,843	$	45,377
Total assets	$	933,289	$	911,332
Total financial assets at fair value	$	641,556	$	637,514
Total level 3 assets as a percentage of Total assets		4.9%		5.0%
Total level 3 assets as a percentage of Total financial assets at fair value		7.1%		7.1%

Financial Assets and Financial Liabilities by Level

The tables below present, by level within the fair value hierarchy, financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value, and other financial assets and financial liabilities accounted for at fair value under the fair value option. See Notes 6 and 7 for further information on the assets

and liabilities included in cash instruments and derivatives, respectively, and their valuation methodologies and inputs. See Note 8 for the valuation methodologies and inputs for other financial assets and financial liabilities accounted for at fair value under the fair value option.

Financial Assets at Fair Value as of March 2011

Netting and

in millions

Level 1

Level 2

Level 3

Collateral

Total

Total cash instruments

132,377

139,760

33,526

—

305,663

Total derivatives

164,843

11,837

(107,580

) ³

69,143

Financial instruments owned, at fair value

132,420

304,603

45,363

(107,580

)

374,806

Securities segregated for regulatory and other purposes

19,584

14,741

—

34,325

Securities purchased under agreements to resell

—

161,936

158

—

162,094

Securities borrowed

—

62,236

—

62,236

Receivables from customers and counterparties

—

7,773

322

—

8,095

Total

152,004

551,289

45,843

(107,580

)

641,556

Financial Liabilities at Fair Value as of March 2011

Netting and

in millions

Level 1

Level 2

Level 3

Collateral

Total

Total cash instruments

88,633

10,492

482

—

99,607

Total derivatives

167

63,838

5,034

(17,648

) ³

51,391

Financial instruments sold, but not yet purchased, at fair value

88,800

74,330

5,516

(17,648

)

150,998

Deposits

—

1,914

—

1,914

Securities sold under agreements to repurchase

—

163,529

1,946

—

165,475

Securities loaned

—

1,430

—

1,430

Other secured financings

—

18,046

7,107

—

25,153

Unsecured short-term borrowings

—

19,003

3,209

—

22,212

Unsecured long-term borrowings

—

18,261

2,404

—

20,665

Other liabilities and accrued expenses

—

548

6,852

—

7,400

Total

88,800

297,061

27,034

⁴

(17,648

)

395,247


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

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

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

4.	Level 3 liabilities were 6.8% of total financial liabilities at fair value.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



	Financial Assets at Fair Value as of December 2010
									Netting and
in millions	Level 1			Level 2			Level 3		Collateral			Total

Total cash instruments	$	117,800		$	133,653		$	32,207	$	—		$	283,660
Total derivatives		93			172,513			12,772		(112,085	) ³		73,293


Financial instruments owned, at fair value		117,893			306,166			44,979		(112,085	)		356,953
Securities segregated for regulatory and other purposes		19,794	¹		16,388	²		—		—			36,182
Securities purchased under agreements to resell		—			188,255			100		—			188,355
Securities borrowed		—			48,822			—		—			48,822
Receivables from customers and counterparties		—			6,904			298		—			7,202


Total	$	137,687		$	566,535		$	45,377	$	(112,085	)	$	637,514



	Financial Liabilities at Fair Value as of December 2010
								Netting and
in millions	Level 1		Level 2		Level 3			Collateral			Total

Total cash instruments	$	75,668	$	9,873	$	446		$	—		$	85,987
Total derivatives		45		66,963		5,210			(17,488	) ³		54,730


Financial instruments sold, but not yet purchased, at fair value		75,713		76,836		5,656			(17,488	)		140,717
Deposits		—		1,975		—			—			1,975
Securities sold under agreements to repurchase		—		160,285		2,060			—			162,345
Securities loaned		—		1,514		—			—			1,514
Other secured financings		—		23,445		8,349			—			31,794
Unsecured short-term borrowings		—		18,640		3,476			—			22,116
Unsecured long-term borrowings		—		16,067		2,104			—			18,171
Other liabilities and accrued expenses		—		563		2,409			—			2,972


Total	$	75,713	$	299,325	$	24,054	⁴	$	(17,488	)	$	381,604


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

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

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

4.	Level 3 liabilities were 6.3% of total financial liabilities at fair value.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 Unrealized Gains/(Losses)

Cash Instruments. Level 3 cash instruments are frequently economically hedged with level 1 and level 2 cash instruments and/or level 1, level 2 and 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 and level 3 derivatives.

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


•	A derivative with level 1 and/or level 2 inputs is classified in level 3 in its entirety if it has at least one significant level 3 input.

•	If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2 inputs) is classified as level 3.


•	Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to level 1 or level 2 derivatives and/or level 1, level 2 and level 3 cash instruments.

The table below presents the unrealized gains/(losses) on level 3 financial assets and financial liabilities at fair value still held at the period-end. See Notes 6 and 7 for further information about level 3 cash instruments and derivatives, respectively. See Note 8 for further information about other financial assets and financial liabilities at fair value under the fair value option.



	Level 3 Unrealized
	Gains/(Losses)
	Three Months
	Ended March
in millions	2011			2010

Cash instruments — assets	$	1,262		$	833
Cash instruments — liabilities		(41	)		34


Net unrealized gains on level 3 cash instruments		1,221			867
Derivatives — net		(560	)		1,568
Receivables from customers and counterparties		16			(28	)
Other secured financings		(9	)		(10	)
Unsecured short-term borrowings		204			82
Unsecured long-term borrowings		(45	)		12
Other liabilities and accrued expenses		(152	)		64


Total	$	675		$	2,555

Gains and losses in the table above include:

Three Months Ended March 2011


•	A net unrealized gain on cash instruments of $1.22 billion primarily consisting of unrealized gains on bank loans and bridge loans, private equity investments, and corporate debt securities. Gains during the first quarter of 2011 reflected strengthening global credit markets and equity markets.


•	A net unrealized loss on derivatives of $560 million primarily attributable to increases in equity index prices, tighter credit spreads and changes in foreign exchange rates (all of which are level 2 observable inputs) on the underlying instruments.

Three Months Ended March 2010


•	A net unrealized gain on cash instruments of $867 million, primarily consisting of unrealized gains on corporate debt securities, bank loans and bridge loans, loans and securities backed by commercial real estate, and loans and securities backed by residential real estate reflecting a decrease in market yields evidenced by sales of similar assets during the period.

•

A net unrealized gain on derivatives of $1.57 billion, primarily attributable to changes in foreign exchange rates and interest rates (which are level 2 inputs) underlying certain credit derivatives. These unrealized gains were substantially offset by unrealized losses on currency, interest rate and credit derivatives which are classified within level 2 and are used to economically hedge derivatives classified within level 3.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 Rollforward

If a financial asset or financial liability 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 recognized at the beginning of the reporting period in which they occur.

See Notes 6 and 7 for further information about cash instruments and derivatives included in level 3,

respectively. See Note 8 for other financial assets and financial liabilities at fair value under the fair value option.

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

Level 3 Financial Assets at Fair Value for the Three Months Ended March 2011

Net unrealized

gains/(losses)

Net

relating to

transfers

Balance,

realized

instruments

in and/or

Balance,

beginning

gains/

still held at

(out) of

end of

in millions

of period

(losses)

period-end

Purchases

Sales

Settlements

level 3

period

Total cash instruments — assets

32,207

434

1,262

2,816

(1,944

)

(1,412

)

163

33,526

Total derivatives — net

7,562

(560

) ^{2,

3}

796

(945

)

(567

)

443

6,803

Securities purchased under agreements to resell

100

—

)

—

158

Receivables from customers and counterparties

298

—

)

—

322


1.	The aggregate amounts include approximately $1.26 billion and $432 million reported in “Non-interest revenues” (“Market making” and “Other principal transactions”) and “Interest income,” respectively.

2.	Substantially all is reported in “Non-interest revenues” (“Market making” and “Other principal transactions”).

3.	Principally resulted from changes in level 2 inputs.



	Level 3 Financial Liabilities at Fair Value for the Three Months Ended March 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 period		losses			period-end			Purchases			Sales		Issuances		Settlements			level 3			period

Total cash instruments — liabilities	$	446	$	(22	)	$	41		$	(59	)	$	90	$	—	$	8		$	(22	)	$	482
Securities sold under agreements to repurchase, at fair value		2,060		—			—			—			—		—		(114	)		—			1,946
Other secured financings		8,349		—			9			—			—		11		(1,262	)		—			7,107
Unsecured short-term borrowings		3,476		60			(204	)		—			—		562		(153	)		(532	)		3,209
Unsecured long-term borrowings		2,104		4			45			—			—		241		(72	)		82			2,404
Other liabilities and accrued expenses		2,409		—			152			4,337			—		—		(46	)		—			6,852

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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


•	Unsecured short-term borrowings and Unsecured long-term borrowings: net transfer out of level 3 of $532 million and net transfer into level 3 of $82 million, respectively, principally due to a transfer of approximately $230 million from level 3


	Unsecured short-term borrowings to level 3 Unsecured long-term borrowings related to an extension in the tenor of certain borrowings and the transfer to level 2 of certain short-term and long-term hybrid financial instruments due to improved transparency of the equity price inputs used to value these financial instruments.



	Level 3 Financial Assets at Fair Value for the Three Months Ended March 2010
						Net unrealized
						gains/(losses)			Net
			Net			relating to			purchases,			Net
	Balance,		realized			instruments			issuances			transfers in			Balance,
	beginning		gains/			still held at			and			and/or (out)			end of
in millions	of period		(losses)			period-end			settlements			of level 3			period

Total cash instruments — assets		$34,879	$	501	¹	$	833	¹	$	(2,064	)	$	(1,621	)	$	32,528
Total derivatives — net		5,196		369	²		1,568	^{2, 3}		(917	)		120			6,336
Securities purchased under agreements to resell		—		—			—			—			268			268
Receivables from customers and counterparties		—		6			(28	)		—			256			234


1.	The aggregate amounts include approximately $961 million and $373 million reported in “Non-interest revenues” (“Market making” and “Other principal transactions”) and “Interest income,” respectively.

2.	Substantially all is reported in “Non-interest revenues” (“Market making” and “Other principal transactions”).

3.	Principally resulted from changes in level 2 inputs.



	Level 3 Financial Liabilities at Fair Value for the Three Months Ended March 2010
						Net unrealized
						(gains)/losses			Net
			Net			relating to			purchases,			Net
	Balance,		realized			instruments			issuances			transfers in			Balance,
	beginning		(gains)/			still held at			and			and/or(out)			end of
in millions	of period		losses			period-end			settlements			of level 3			period

Total cash instruments — liabilities		$ 572	$	(14	)	$	(34	)	$	(10	)	$	(31	)	$	483
Securities sold under agreements to repurchase, at fair value		394		—			—			494			167			1,055
Other secured financings		6,756		9			10			1,172			192			8,139
Unsecured short-term borrowings		2,310		21			(82	)		(139	)		884			2,994
Unsecured long-term borrowings		3,077		13			(12	)		33			(1,396	)		1,715
Other liabilities and accrued expenses		1,913		3			(64	)		—			475			2,327

Significant transfers in or out of level 3 during the three months ended March 2010, which were principally due to the consolidation of certain VIEs upon adoption of ASU No. 2009-17 as of January 1, 2010, included:


•	Unsecured long-term borrowings: net transfer out of level 3 of $1.40 billion, principally due to the consolidation of certain VIEs which caused the firm’s borrowings from these VIEs to become intercompany borrowings which were eliminated in consolidation. Substantially all of these borrowings were level 3.


•	Unsecured short-term borrowings: net transfer into level 3 of $884 million, principally due to the consolidation of certain VIEs.

•	Other liabilities and accrued expenses: net transfer into level 3 of $475 million, principally due to an increase in subordinated liabilities issued by certain consolidated VIEs.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Note 6. Cash Instruments

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

Level 1 Cash Instruments

Level 1 cash instruments include U.S. government obligations and most non-U.S. government obligations, actively traded listed equities and certain 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.

The fair value of a level 1 instrument is calculated as quantity held multiplied by quoted market price. U.S. GAAP prohibits valuation adjustments being applied to level 1 instruments even in situations where the firm holds a large position and a sale could impact the quoted price.

Level 2 Cash Instruments

Level 2 cash instruments include commercial paper, certificates of deposit, time deposits, most government agency obligations, most corporate debt securities, commodities, certain mortgage-backed loans and securities, certain bank loans and bridge loans, less liquid publicly listed equities, certain state and municipal obligations and certain money market instruments and 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 discounts that a market participant would require to arrive at fair value. Valuation adjustments are generally based on market evidence.

Level 3 Cash Instruments

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

The table below presents the valuation techniques and the nature of significant inputs generally used to determine the fair values of each class of level 3 cash instrument.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Level 3 Cash Instrument			Valuation Techniques and Significant Inputs

Loans and securities backed by commercial real estate • Collateralized by a single commercial real estate property or a portfolio of properties • May include tranches of varying levels of subordination			Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs for these valuations include: • Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral • Current levels and changes in market indices such as the CMBX (an index that tracks the performance of commercial mortgage bonds) • Market yields implied by transactions of similar or related assets • Current performance of the underlying collateral • Capitalization rates and multiples


Loans and securities backed by residential real estate • Collateralized by portfolios of residential real estate • May include tranches of varying levels of subordination			Valuation techniques vary by instrument, but are generally based on relative value analyses, discounted cash flow techniques or a combination thereof. Significant inputs are determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles, including relevant indices such as the ABX (an index that tracks the performance of subprime residential mortgage bonds). Significant inputs include: • Home price projections, residential property liquidation timelines and related costs • Underlying loan prepayment, default and cumulative loss expectations • Transaction prices in both the underlying collateral and instruments with the same or similar underlying collateral • Market yields implied by transactions of similar or related assets


Loan portfolios • Acquired portfolios of distressed loans • Primarily backed by commercial and residential real estate collateral			Valuations are based on discounted cash flow techniques. Significant inputs are determined based on relative value analyses which incorporate comparisons to recent auction data for other similar loan portfolios. Significant inputs include: • Amount and timing of expected future cash flows • Market yields implied by transactions of similar or related assets


Bank loans and bridge loans Corporate debt securities State and municipal obligations Other debt obligations			Valuation techniques vary by instrument, but are generally based on discounted cash flow techniques. Significant inputs are generally determined based on relative value analyses, which incorporate comparisons both to prices of credit default swaps that reference the same or similar underlying credit risk and to other debt instruments for the same issuer for which observable prices or broker quotations are available. Significant inputs include: • Amount and timing of expected future cash flows • Current levels and trends of market indices such as CDX, LCDX and MCDX (indices that track the performance of corporate credit, loans and municipal obligations, respectively) • Market yields implied by transactions of similar or related assets • 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


Equities and convertible debentures • Private equity investments			Recent third-party investments or pending transactions are considered to be the best evidence for any change in fair value. When these are not available, the following valuation methodologies are used, as appropriate and available: • Transactions in similar instruments • Discounted cash flow techniques • Third-party appraisals • Industry multiples and public comparables Evidence includes recent or pending reorganizations (e.g., merger proposals, tender offers, debt restructurings) and significant changes in financial metrics, such as: • Current financial performance as compared to projected performance • Capitalization rates and multiples • Market yields implied by transactions of similar or related assets

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Cash Instruments by Level

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

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

Cash Instrument Assets at Fair Value as of March 2011

in millions

Level 1

Level 2

Level 3

Total

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

6,181

6,919

—

13,100

U.S. government and federal agency obligations

39,466

60,756

—

100,222

Non-U.S. government obligations

39,420

5,120

—

44,540

Mortgage and other asset-backed loans and securities ¹:

Loans and securities backed by commercial real estate

—

3,391

2,521

5,912

Loans and securities backed by residential real estate

—

5,790

2,636

8,426

Loan portfolios

—

1,312

1,314

Bank loans and bridge loans

—

8,134

9,929

18,063

Corporate debt securities ²

118

23,259

3,138

26,515

State and municipal obligations

—

1,976

742

2,718

Other debt obligations ²

—

2,116

1,483

3,599

Equities and convertible debentures

47,192

16,386

⁴

11,765

⁵

75,343

Commodities

—

5,911

—

5,911

Total

132,377

139,760

33,526

305,663

Cash Instrument Liabilities at Fair Value as of March 2011

in millions

Level 1

Level 2

Level 3

Total

U.S. government and federal agency obligations

29,933

205

—

30,138

Non-U.S. government obligations

27,860

563

—

28,423

Mortgage and other asset-backed loans and securities:

Loans and securities backed by residential real estate

—

Bank loans and bridge loans

—

987

441

1,428

Corporate debt securities ⁶

7,693

7,745

Equities and convertible debentures ⁷

30,813

1,036

31,861

Commodities

—

Total

88,633

10,492

482

99,607


1.	Includes $371 million and $607 million of collateralized debt obligations (CDOs) backed by real estate in level 2 and level 3, respectively.

2.	Includes $624 million and $1.61 billion of CDOs and collateralized loan obligations (CLOs) backed by corporate obligations in level 2 and level 3, respectively.

3.	Consists of publicly listed equity securities.

4.	Principally consists of restricted and less liquid publicly listed securities.

5.	Includes $10.54 billion of private equity investments, $1.13 billion of real estate investments and $93 million of convertible debentures.

6.	Includes $8 million and $19 million of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

7.	Substantially all consists of publicly listed equity securities.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



	Cash Instrument Assets at Fair Value as of December 2010
in millions	Level 1			Level 2			Level 3			Total

Commercial paper, certificates of deposit, time deposits and other money market instruments	$	4,344		$	6,918		$	—		$	11,262
U.S. government and federal agency obligations		36,184			48,744			—			84,928
Non-U.S. government obligations		35,504			5,171			—			40,675
Mortgage and other asset-backed loans and securities ¹:
Loans and securities backed by commercial real estate		—			3,381			2,819			6,200
Loans and securities backed by residential real estate		—			7,031			2,373			9,404
Loan portfolios		—			153			1,285			1,438
Bank loans and bridge loans		—			8,134			9,905			18,039
Corporate debt securities ²		108			21,874			2,737			24,719
State and municipal obligations		—			2,038			754			2,792
Other debt obligations		—			1,958			1,274			3,232
Equities and convertible debentures		41,660	³		15,113	⁴		11,060	⁵		67,833
Commodities		—			13,138			—			13,138


Total	$	117,800		$	133,653		$	32,207		$	283,660




	Cash Instrument Liabilities at Fair Value as of December 2010
in millions	Level 1			Level 2			Level 3			Total

U.S. government and federal agency obligations	$	23,191		$	73		$	—		$	23,264
Non-U.S. government obligations		28,168			841			—			29,009
Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate		—			5			—			5
Loans and securities backed by residential real estate		—			6			—			6
Bank loans and bridge loans		—			1,107			380			1,487
Corporate debt securities ⁶		26			7,133			60			7,219
Equities and convertible debentures ⁷		24,283			699			6			24,988
Commodities		—			9			—			9


Total	$	75,668		$	9,873		$	446		$	85,987


1.	Includes $212 million and $565 million of CDOs backed by real estate in level 2 and level 3, respectively.

2.	Includes $368 million and $1.07 billion of CDOs and CLOs backed by corporate obligations in level 2 and level 3, respectively.

3.	Consists of publicly listed equity securities.

4.	Substantially all consists of restricted and less liquid publicly listed securities.

5.	Includes $10.03 billion of private equity investments, $874 million of real estate investments and $156 million of convertible debentures.

6.	Includes $35 million of CDOs and CLOs backed by corporate obligations in level 3.

7.	Substantially all consists of publicly listed equity securities.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 Rollforward

If a cash instrument 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.

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

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

(losses)

period-end

Purchases ¹

Sales

Settlements

level 3

period

Mortgage and other asset-backed loans and securities:

Loans and securities backed by commercial real estate

$ 2,819

141

374

(504

)

(195

)

(152

)

2,521

Loans and securities backed by residential real estate

2,373

573

(215

)

(193

)

2,636

Loan portfolios

1,285

(38

)

(141

)

144

1,312

Bank loans and bridge loans

9,905

169

568

491

(274

)

(604

)

(326

)

9,929

Corporate debt securities

2,737

216

789

(459

)

(104

)

(133

)

3,138

State and municipal obligations

754

)

(29

)

742

Other debt obligations

1,274

297

(149

)

(53

)

1,483

Equities and convertible debentures

11,060

233

268

(302

)

(121

)

587

11,765

Total

$32,207

434

1,262

2,816

(1,944

)

(1,412

)

163

33,526

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

losses

period-end

Purchases

Sales

Settlements

level 3

period

Total

$446

(22

)

(59

)

(22

)

482


1.	Includes both originations and secondary market purchases.

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

•

Bank loans and bridge loans: net transfer out of level 3 of $326 million, principally due to transfers to level 2 of certain loans due to improved transparency of market prices as a result of market transactions in these financial instruments, partially offset by transfers to level 3 of certain loans due to reduced transparency of market prices as a result of less market activity in these financial instruments.

•

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



	Level 3 Cash Instrument Assets at Fair Value for the Three Months Ended March 2010
						Net unrealized
						gains/(losses)			Net			Net
						relating to			purchases,			transfers
	Balance,		Net			instruments			issuances			in and/or			Balance,
	beginning		realized			still held at			and			(out) of			end of
in millions	of period		gains/(losses)			period-end			settlements			level 3			period

Mortgage and other asset-backed loans and securities:
Loans and securities backed by commercial real estate	$	4,620	$	63		$	184		$	(506	)	$	(291	)	$	4,070
Loans and securities backed by residential real estate		1,880		37			102			(141	)		253			2,131
Loan portfolios		1,364		28			3			(116	)		12			1,291
Bank loans and bridge loans		9,560		180			202			(655	)		36			9,323
Corporate debt securities		2,235		82			260			707			(581	)		2,703
State and municipal obligations		1,114		1			5			(225	)		(25	)		870
Other debt obligations		2,235		(5	)		94			(75	)		(762	)		1,487
Equities and convertible debentures		11,871		115			(17	)		(1,053	)		(263	)		10,653


Total	$	34,879	$	501		$	833		$	(2,064	)	$	(1,621	)	$	32,528





	Level 3 Cash Instrument Liabilities at Fair Value for the Three Months Ended March 2010
						Net unrealized
						(gains)/losses			Net			Net
						relating to			purchases,			transfers
	Balance,		Net			instruments			issuances			in and/or			Balance,
	beginning		realized			still held at			and			(out) of			end of
in millions	of period		(gains)/losses			period-end			settlements			level 3			period

Total	$	572	$	(14	)	$	(34	)	$	(10	)	$	(31	)	$	483

Significant transfers in or out of level 3 during the three months ended March 2010 included:


•	Corporate debt securities: net transfer out of level 3 of $581 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE which holds intangible assets.


•	Other debt obligations: net transfer out of level 3 of $762 million, principally due to a reduction in financial instruments as a result of the consolidation of a VIE. The VIE holds real estate assets which are included in “Other assets.”

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Investments in Funds That Calculate Net Asset
Value Per Share

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

The firm’s investments in funds that calculate NAV primarily consist of investments in firm-sponsored funds where the firm co-invests with third-party investors. The private equity, private debt and real

estate funds are primarily closed-end funds in which the firm’s investments are not eligible for redemption. Distributions will be received from these funds as the underlying assets are liquidated and it is estimated that substantially all of the underlying assets of existing funds will be liquidated over the next 10 years. The firm’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 table below presents the fair value of the firm’s investments in, and unfunded commitments to, funds that calculate NAV.

As of March 2011

As of December 2010

Fair Value of

Unfunded

Fair Value of

Unfunded

in millions

Investments

Commitments

Investments

Commitments

Private equity funds ¹

$ 8,627

4,215

$ 7,911

4,816

Private debt funds ²

3,954

3,542

4,267

3,721

Hedge funds ³

3,280

—

3,169

—

Real estate and other funds ⁴

1,251

1,840

1,246

1,884

Total

$17,112

9,597

$16,593

10,421


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.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Note 7. Derivatives and Hedging Activities

Derivative Activities

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

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

Risk Management. The firm also enters into derivatives to actively manage risk exposures that arise from market-making and investing and lending activities in derivative and cash instruments. In addition, the firm may enter into derivatives designated as hedges under U.S. GAAP. These derivatives are used to manage foreign currency exposure on the net investment in certain non-U.S. operations and to manage interest rate exposure in certain fixed-rate unsecured long-term and short-term borrowings, and certificates of deposit.

The firm enters into various types of derivatives, including:


•	Futures and Forwards. Contracts that commit counterparties to purchase or sell financial instruments, commodities or currencies in the future.

•	Swaps. Contracts that require counterparties to exchange cash flows such as currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, financial instruments, commodities, currencies or indices.

•	Options. Contracts in which the option purchaser has the right but not the obligation to purchase from or sell to the option writer financial instruments, commodities or currencies within a defined time period for a specified price.

Derivatives are accounted for at fair value, net of cash collateral received or posted under credit support agreements. Derivatives are reported on a net-by-counterparty basis (i.e., the net payable or receivable for derivative assets and liabilities for a given counterparty) when a legal right of setoff exists under an enforceable netting agreement. Derivative assets and liabilities are included in “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” respectively.

Substantially all gains and losses on derivatives not designated as hedges under U.S. GAAP, are included in “Market making” and “Other principal transactions.”

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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

As of March 2011

As of December 2010

Derivative

in millions

Assets

Liabilities

Assets

Liabilities

Exchange-traded

6,221

3,888

7,601

2,794

Over-the-counter

62,922

47,503

65,692

51,936

Total

69,143

51,391

73,293

54,730

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

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




	As of March 2011								As of December 2010
	Derivative			Derivative			Number of		Derivative			Derivative			Number of
in millions, except number of contracts	Assets			Liabilities			Contracts		Assets			Liabilities			Contracts

Derivatives not accounted for as hedges
Interest rates	$	394,777		$	355,140			273,435	$	463,145		$	422,514			272,279
Credit		116,384			95,927			364,851		127,153			104,407			367,779
Currencies		84,190			68,064			305,920		87,959			70,273			222,706
Commodities		50,010			53,712			73,852		36,689			41,666			70,890
Equities		67,464			53,743			366,032		65,815			51,948			289,059


Subtotal		712,825			626,586			1,384,090		780,761			690,808			1,222,713


Derivatives accounted for as hedges
Interest rates		21,552			27			957		23,396			33			997
Currencies		2			82			73		6			162			72


Subtotal		21,554			109			1,030		23,402			195			1,069


Gross fair value of derivatives	$	734,379		$	626,695			1,385,120	$	804,163		$	691,003			1,223,782


Counterparty netting ¹		(559,990	)		(559,990	)				(620,553	)		(620,553	)
Cash collateral netting ²		(105,246	)		(15,314	)				(110,317	)		(15,720	)


Fair value included in financial instruments owned	$	69,143							$	73,293


Fair value included in financial instruments sold, but not yet purchased				$	51,391							$	54,730


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

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Valuation Techniques for Derivatives

See Note 5 for an overview of the firm’s fair value measurement policies and the fair value hierarchy.

Level 1 Derivatives

Exchange-traded derivatives fall within level 1 if they are actively traded and are valued at their quoted market price.

Level 2 Derivatives

Level 2 derivatives include exchange-traded derivatives that are not actively traded and OTC derivatives for which all significant valuation inputs are corroborated by market evidence.

Level 2 exchange-traded derivatives are valued using models that calibrate to market-clearing levels of OTC derivatives. Inputs to the valuations of level 2 OTC derivatives can be verified to market-clearing transactions, broker or dealer quotations or other alternative pricing sources with reasonable levels of price transparency. Consideration is given to the nature of the quotations (e.g., indicative or firm) and the relationship of recent market activity to the prices provided from alternative pricing sources.

Where models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of and specific risks inherent in the instrument, as well as the availability of pricing information in the market. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates, loss severity rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, model selection does not involve significant management judgment because outputs of models can be calibrated to market-clearing levels.

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

Interest Rate. In general, the prices and other inputs used to value interest rate derivatives are transparent, even for long-dated contracts. Interest rate swaps and options denominated in the currencies of leading industrialized nations are characterized by high trading volumes and tight bid/offer spreads. Interest rate derivatives that reference indices, such as an inflation index, or the shape of the yield curve (e.g., 10-year swap rate vs. 2-year swap rate), are more complex and are therefore less transparent, but the prices and other inputs are generally observable.

Credit. Price transparency for credit default swaps, including both single names and baskets of credits, varies by market and underlying reference entity or obligation. Credit default swaps that reference indices, large corporates and major sovereigns generally exhibit the most price transparency. For credit default swaps with other underliers, price transparency varies based on credit rating, the cost of borrowing the underlying reference obligations, and the availability of the underlying reference obligations for delivery upon the default of the issuer. Credit default swaps that reference loans, asset-backed securities and emerging market debt instruments tend to be less transparent than those that reference corporate bonds. In addition, more complex credit derivatives, such as those sensitive to the correlation between two or more underlying reference obligations, generally have less price transparency.

Currency. Prices for currency derivatives based on the exchange rates of leading industrialized nations, including those with longer tenors, are generally transparent. The primary difference between the transparency of developed and emerging market currency derivatives is that emerging markets tend to be observable for contracts with shorter tenors.

Commodity. Commodity derivatives include transactions referenced to energy (e.g., oil and natural gas), metals (e.g., precious and base) and soft commodities (e.g., agricultural). Price transparency varies based on the underlying commodity, delivery location, tenor and product quality (e.g., diesel fuel compared to unleaded gasoline). In general, price transparency for commodity derivatives is greater for contracts with shorter tenors and contracts that are more closely aligned with major and/or benchmark commodity indices.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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. Exchange-traded and OTC 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.

Level 3 Derivatives

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


•	For the majority of the firm’s interest rate and currency derivatives classified within level 3, the significant unobservable inputs are correlations of certain currencies and interest rates (e.g., the correlation of Japanese yen foreign exchange rates to U.S. dollar interest rates).

•	For credit derivatives classified within level 3, significant level 3 inputs include long-dated credit and funding spreads as well as certain correlation inputs required to value credit and mortgage derivatives (e.g., the likelihood of default of the underlying reference obligations relative to one another).


•	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 for two or more individual stocks.

•	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 for certain products for which the product quality is not aligned with benchmark indices.

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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 on large or illiquid positions and credit valuation adjustments (CVA) which account for the credit 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.

Fair Value of Derivatives by Level

The tables below present the fair value of derivatives on a gross basis by level and major product type. Gross fair values in the tables below exclude the effects of both netting under enforceable netting agreements and netting of cash received or posted under credit support agreements both in and across levels of the fair value hierarchy, and therefore are not representative of the firm’s exposure.



	Derivative Assets at Fair Value as of March 2011
									Cross-Level
in millions	Level 1		Level 2			Level 3			Netting			Total

Interest rates	$	16	$	416,216		$	97		$	—		$	416,329
Credit		—		105,737			10,647			—			116,384
Currencies		—		82,283			1,909			—			84,192
Commodities		—		48,095			1,915			—			50,010
Equities		27		65,825			1,612			—			67,464


Gross fair value of derivative assets		43		718,156			16,180			—			734,379
Counterparty netting ¹		—		(553,313	)		(4,343	)		(2,334	) ³		(559,990	)


Subtotal	$	43	$	164,843		$	11,837		$	(2,334	)	$	174,389
Cash collateral netting ²													(105,246	)


Fair value included in financial instruments owned												$	69,143

Derivative Liabilities at Fair Value as of March 2011

Cross-Level

in millions

Level 1

Level 2

Level 3

Netting

Total

Interest rates

354,964

194

—

355,167

Credit

—

91,871

4,056

—

95,927

Currencies

—

67,369

777

—

68,146

Commodities

—

51,990

1,722

—

53,712

Equities

158

50,957

2,628

—

53,743

Gross fair value of derivative liabilities

167

617,151

9,377

—

626,695

Counterparty netting ¹

—

(553,313

)

(4,343

)

(2,334

) ³

(559,990

)

Subtotal

167

63,838

5,034

(2,334

)

66,705

Cash collateral netting ²

(15,314

)

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

51,391


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

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

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



	Derivative Assets at Fair Value as of December 2010
									Cross-Level
in millions	Level 1		Level 2			Level 3			Netting			Total

Interest rates	$	49	$	486,037		$	455		$	—		$	486,541
Credit		—		115,519			11,634			—			127,153
Currencies		—		86,158			1,807			—			87,965
Commodities		—		34,511			2,178			—			36,689
Equities		44		64,267			1,504			—			65,815


Gross fair value of derivative assets		93		786,492			17,578			—			804,163
Counterparty netting ¹		—		(613,979	)		(4,806	)		(1,768	) ³		(620,553	)


Subtotal	$	93	$	172,513		$	12,772		$	(1,768	)	$	183,610
Cash collateral netting ²													(110,317	)


Fair value included in financial instruments owned												$	73,293




	Derivative Liabilities at Fair Value as of December 2010
									Cross-Level
in millions	Level 1		Level 2			Level 3			Netting			Total

Interest rates	$	18	$	422,267		$	262		$	—		$	422,547
Credit		—		99,813			4,594			—			104,407
Currencies		—		69,726			709			—			70,435
Commodities		—		39,709			1,957			—			41,666
Equities		27		49,427			2,494			—			51,948


Gross fair value of derivative liabilities		45		680,942			10,016			—			691,003
Counterparty netting ¹		—		(613,979	)		(4,806	)		(1,768	) ³		(620,553	)


Subtotal	$	45	$	66,963		$	5,210		$	(1,768	)	$	70,450
Cash collateral netting ²													(15,720	)


Fair value included in financial instruments sold, but not yet purchased												$	54,730


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

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

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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 Rollforward

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

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

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

(losses)

period-end

Purchases

Sales

Settlements

level 3

period

Interest rates — net

194

(26

)

(58

)

—

(221

)

(97

)

Credit — net

7,040

(104

)

(81

)

(722

)

385

6,591

Currencies — net

1,098

)

(194

)

(31

)

241

1,132

Commodities — net

220

(78

)

241

(233

)

115

(162

)

193

Equities — net

(990

)

176

(294

)

459

(625

)

200

(1,016

)

Total derivatives — net

7,562

(560

)

796

(945

)

(567

)

443

6,803



	Level 3 Derivative Assets and Liabilities at Fair Value for the Three Months Ended March 2010
							Net unrealized
	Asset/						gains/(losses)			Net			Net			Asset/
	(liability)			Net			relating to			purchases,			transfers			(liability)
	balance,			realized			instruments			issuances			in and/or			balance,
	beginning			gains/			still held at			and			(out) of			end of
in millions	of period			(losses)			period-end			settlements			level 3			period

Interest rates — net	$	(71	)	$	9		$	(43	)	$	(1	)	$	200		$	94
Credit — net		6,366			332			1,459			(755	)		(265	)		7,137
Currencies — net		215			(18	)		5			9			257			468
Commodities — net		(90	)		6			71			3			(234	)		(244	)
Equities — net		(1,224	)		40			76			(173	)		162			(1,119	)


Total derivatives — net	$	5,196		$	369		$	1,568		$	(917	)	$	120		$	6,336

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


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

There were no significant transfers in or out of level 3 during the three months ended March 2010.

Impact of Credit Spreads on Derivatives

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

The net gain/(loss) attributable to the impact of changes in credit exposure and credit spreads on derivatives

were $(25) million and $44 million for the three months ended March 2011 and March 2010, respectively.

Bifurcated Embedded Derivatives

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



	As of
in millions, except number	March		December
of contracts	2011		2010

Fair value of assets	$	393	$	383
Fair value of liabilities		276		267


Net	$	117	$	116


Number of contracts		358		338

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

OTC Derivatives

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

mortgage-related credit derivatives and generally on remaining contractual maturity for other derivatives.

in millions

OTC Derivatives as of March 2011

Assets

0-12

1-5

5 Years or

Product Type

Months

Years

Greater

Total

Interest rates

6,175

28,913

59,106

94,194

Credit

2,716

13,956

12,408

29,080

Currencies

9,528

11,746

14,472

35,746

Commodities

7,514

5,902

535

13,951

Equities

5,158

12,187

6,496

23,841

Netting across product types ¹

(2,503

)

(5,898

)

(4,500

)

(12,901

)

Subtotal

28,588

66,806

88,517

183,911

Cross maturity netting ²

(15,743

)

Cash collateral netting ³

(105,246

)

Total

62,922

Liabilities

0-12

1-5

5 Years or

Product Type

Months

Years

Greater

Total

Interest rates

3,885

12,663

16,495

33,043

Credit

1,029

4,329

3,265

8,623

Currencies

9,002

5,590

5,014

19,606

Commodities

8,185

7,889

1,718

17,792

Equities

4,240

4,869

3,288

12,397

Netting across product types ¹

(2,503

)

(5,898

)

(4,500

)

(12,901

)

Subtotal

23,838

29,442

25,280

78,560

Cross maturity netting ²

(15,743

)

Cash collateral netting ³

(15,314

)

Total

47,503


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.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



in millions	OTC Derivatives as of December 2010

Assets
	0-12			1-5			5 Years or
Product Type	Months			Years			Greater			Total

Interest rates	$	7,137		$	34,384		$	60,750		$	102,271
Credit		2,777			16,145			13,525			32,447
Currencies		9,968			10,696			14,868			35,532
Commodities		5,664			5,996			248			11,908
Equities		4,795			10,942			7,037			22,774
Netting across product types ¹		(2,937	)		(5,513	)		(5,077	)		(13,527	)


Subtotal	$	27,404		$	72,650		$	91,351		$	191,405
Cross maturity netting ²											(15,396	)
Cash collateral netting ³											(110,317	)


Total										$	65,692


Liabilities
	0-12			1-5			5 Years or
Product Type	Months			Years			Greater			Total

Interest rates	$	4,470		$	14,072		$	19,760		$	38,302
Credit		1,024			4,862			3,816			9,702
Currencies		8,036			5,219			4,986			18,241
Commodities		7,279			7,838			2,528			17,645
Equities		3,962			4,977			3,750			12,689
Netting across product types ¹		(2,937	)		(5,513	)		(5,077	)		(13,527	)


Subtotal	$	21,834		$	31,455		$	29,763		$	83,052
Cross maturity netting ²											(15,396	)
Cash collateral netting ³											(15,720	)


Total										$	51,936


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.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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 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
	March		December
in millions	2011		2010

Net derivative liabilities under bilateral agreements	$	21,498	$	23,843
Collateral posted		15,415		16,640
Additional collateral or termination payments for a one-notch downgrade		925		1,353
Additional collateral or termination payments for a two-notch downgrade		2,211		2,781

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, which is calculated in accordance with the terms of the contract, to the buyer of protection.

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.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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 not 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.

As of March 2011, written and purchased credit derivatives had total gross notional amounts of $2.09 trillion and $2.25 trillion, respectively, for total

net notional purchased protection of $156.69 billion. As of December 2010, written and purchased credit derivatives had total gross notional amounts of $2.05 trillion and $2.19 trillion, respectively, for total net notional purchased protection of $140.63 billion.

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


•	Fair values exclude the effects of both netting under enforceable netting agreements and netting of cash received or posted under credit support agreements, and therefore are not representative of the firm’s exposure;

•	Tenor is based on expected duration for mortgage-related credit derivatives and on remaining contractual maturity for other credit derivatives; and

•	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

Net

0 – 12

1 – 5

Credit

Asset/

$ in millions

Months

Years

Greater

Total

Derivatives ¹

Derivatives ²

Asset

Liability

(Liability)

As of March 2011

Credit spread on
underlying
(basis points)

0-250

259,213

1,140,722

316,731

1,716,666

1,605,632

265,675

33,580

12,853

20,727

251-500

8,950

120,985

48,707

178,642

145,696

26,657

7,620

4,184

3,436

501-1,000

7,959

81,869

31,846

121,674

102,500

21,578

2,212

11,498

(9,286

)

Greater than 1,000

7,848

57,459

11,770

77,077

63,395

19,620

621

28,974

(28,353

)

Total

283,970

1,401,035

409,054

2,094,059

1,917,223

333,530

44,033

57,509

(13,476

)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)



									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 2010
Credit spread on underlying (basis points)
0-250	$	235,798	$	1,094,308	$	288,851	$	1,618,957	$	1,511,113	$	232,506	$	32,071	$	14,780	$	17,291
251-500		14,412		144,448		52,072		210,932		183,613		36,713		7,368		7,739		(371	)
501-1,000		6,384		89,212		33,553		129,149		110,019		18,686		2,571		11,256		(8,685	)
Greater than 1,000		11,721		63,982		12,022		87,725		70,945		23,795		483		33,670		(33,187	)


Total	$	268,315	$	1,391,950	$	386,498	$	2,046,763	$	1,875,690	$	311,700	$	42,493	$	67,445	$	(24,952	)


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

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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.

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 the “long-haul method” in assessing the effectiveness of its fair value hedging relationships in achieving offsetting changes in the fair values of the hedging instrument and the risk being hedged (i.e., interest rate risk).

During the three months ended March 2010, the firm changed its method of prospectively and retrospectively assessing the effectiveness of all of its fair value hedging relationships from a dollar-offset method, which is a non-statistical method, to regression analysis, which is a statistical method.

An interest rate swap is considered highly effective in offsetting changes in fair value attributable to changes in the hedged risk when the regression analysis results in a coefficient of determination of 80% or greater and a slope between 80% and 125%.

The dollar-offset method compared the change in the fair value of the hedging instrument to the change in the fair value of the hedged item, excluding the effect of the passage of time. The prospective dollar-offset assessment used scenario analyses to test hedge effectiveness through simulations of numerous parallel and slope shifts of the relevant yield curve. Parallel shifts changed the interest rate of all maturities by identical amounts. Slope shifts changed the curvature of the yield curve. For both the prospective assessment, in response to each of the simulated yield curve shifts, and the retrospective assessment, a hedging relationship was considered effective if the fair value of the hedging instrument and the hedged item changed inversely within a range of 80% to 125%.

For qualifying fair value hedges, gains or losses on 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.” See Note 23 for further information about interest income and interest expense.

For the three months ended March 2011 and March 2010, the gain/(loss) recognized on interest rate derivatives accounted for as hedges was $(2.66) billion and $687 million, respectively, and the related gain/(loss) recognized on the hedged borrowings and bank deposits was $2.16 billion and $(1.10) billion, respectively. The hedge ineffectiveness recognized on these derivatives for the three months ended March 2011 and March 2010 was a loss of $495 million and a loss of $413 million, respectively. These losses consisted primarily of the amortization of prepaid credit spreads. The gain/(loss) excluded from the assessment of hedge effectiveness was not material for the three months ended March 2011 and March 2010.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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 the condensed consolidated statements of comprehensive income.

The table below presents the gains/(losses) from net investment hedging. The gains/(losses) below are included in “Currency translation adjustment, net of tax.”



	Three Months
	Ended March
in millions	2011			2010

Currency hedges	$	(225	)	$	121
Foreign currency-denominated debt		82			12

The gain/(loss) related to ineffectiveness and the gain/(loss) reclassified to earnings from accumulated other comprehensive income was not material for the three months ended March 2011 and March 2010.

As of March 2011 and December 2010, the firm had designated $2.88 billion and $3.88 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.

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:


•	reflect economic events in earnings on a timely basis;

•	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

•	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.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

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


•	resale and repurchase agreements;

•	securities borrowed and loaned within Fixed Income, Currency and Commodities Client Execution;

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

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

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

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

•	certain insurance and reinsurance contract assets and liabilities and certain guarantees;

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

•	certain subordinated liabilities issued by consolidated VIEs; and

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

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 counterparty and the firm’s credit quality.

Significant inputs for each category of other financial assets and financial liabilities at fair value are as follows:

Resale and Repurchase Agreements and Securities Borrowed and Loaned. The significant inputs to the valuation of resale and repurchase agreements and securities borrowed and loaned are the amount and timing of expected future cash flows, interest rates and collateral funding spreads. See Note 9 for further information.

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, the fair value of the collateral delivered by the firm (which is determined using the amount and timing of expected future cash flows, market yields and recovery assumptions), the frequency of additional collateral calls and the credit spreads of the firm. See Note 9 for further information.

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 and, for certain hybrid financial instruments, equity prices, inflation rates and index levels. See Notes 15 and 16 for further information.

Receivables from Customers and Counterparties. The significant inputs to the valuation of certain receivables from customers and counterparties are commodity prices, interest rates and the amount and timing of expected future cash flows.

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

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